Question 1

SECTION B: ADVISORY REPORT

You are an audit manager at Cura Audit Partners. You are currently reviewing the audit files for NovaGen Therapeutics Co (NovaGen), a late-stage biotechnology company, for the year ended 30 September 20X6. The audit is nearing completion, and the auditor's report is due to be signed next week. The audit senior has left the following two unresolved matters for your attention:

Matter 1: Capitalized Research & Development (R&D)
NovaGen has capitalized $8 million of development costs relating to a new drug, 'NeuroVax', intended to treat neurodegenerative diseases. The total assets of NovaGen are $45 million, and profit before tax is $5 million. In August 20X6, Phase 3 clinical trials for NeuroVax yielded mixed results, failing to meet two of the five primary efficacy endpoints required by the medical regulator. The medical director believes they can adjust the formula and conduct a supplementary trial, but this will delay potential market launch by at least two years. Management has refused to impair the $8 million capitalized balance, arguing the drug will eventually be profitable.

Matter 2: Going Concern and Subsequent Event
In November 20X6, 'PharmaGlobal', a major pharmaceutical partner that had committed to funding 50% of NovaGen's ongoing operational costs for the next three years, abruptly withdrew from their joint funding agreement due to their own internal restructuring. NovaGen's updated cash flow forecast shows a severe cash deficit by May 20X7 unless alternative funding is secured. Management has added a brief note to the financial statements mentioning the loss of the partner but states they are 'confident in securing alternative funding'. They have prepared the financial statements on a going concern basis and refuse to expand the disclosure to explicitly state that a material uncertainty exists.

Required:
(a) In respect of Matter 1 (Capitalized R&D), comment on the matters you should consider, and explain the audit evidence you would expect to find on the audit file. (10 marks)

(b) In respect of Matter 2 (Going Concern), evaluate the implications for the auditor's report if management refuses to amend the financial statements or expand the disclosures. (15 marks)

Accepted Answer

For part (a), split your answer into 'Matters to consider' (materiality, accounting standards IAS 38/IAS 36, risk of misstatement) and 'Audit evidence' (specific documents, reports, and calculations you want to see). For part (b), follow a logical flow: 1. Identify the issue (Material Uncertainty). 2. Evaluate management's action (Inadequate disclosure). 3. Determine the impact on the report (Modified opinion). 4. Specify the type of modification (Qualified or Adverse) and explain where it goes in the report (Basis for Opinion paragraph, NOT a MURGC paragraph).

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

1. In part (a), listing generic audit evidence (e.g., 'check bank statements') instead of evidence specific to R&D impairment.
2. In part (b), incorrectly suggesting an 'Emphasis of Matter' paragraph. EoMs are never used for going concern issues.
3. In part (b), suggesting a MURGC paragraph despite management's refusal to adequately disclose the uncertainty.

How to approach this question

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