Question 1

SECTION B: ADVISORY REPORT

It is 15 August 202X. You are an audit manager responsible for the audit of AeroGrid Utilities Co, a listed company operating offshore wind farms and regional power grids. The audit for the year ended 30 June 202X is nearing completion. The draft financial statements recognize profit before tax of $18 million and total assets of $320 million.

You are reviewing the audit working papers and have noted the following two unresolved matters:

Matter 1: Storm Damage and Impairment
In May 202X, a severe cyclone caused significant structural damage to 'Grid-Alpha', one of AeroGrid's oldest offshore wind farms. The carrying amount of Grid-Alpha in the draft financial statements is $45 million. Management has performed an impairment review and concluded that no impairment is necessary, arguing that the turbines can be repaired and will continue to generate cash flows for another 10 years. The audit senior has noted that the repair estimates provided by management seem unusually low compared to industry averages.

Matter 2: Going Concern and Government Subsidies
Historically, 30% of AeroGrid's revenue has come from a government 'Green Feed-in Tariff' subsidy. On 10 August 202X, the government abruptly announced the immediate termination of this subsidy program due to national budget cuts. Management has prepared a revised cash flow forecast showing that the company will maintain positive cash flow for the next 12 months, but only if they secure a $20 million emergency bank loan, which is currently under negotiation. Management has included a brief note in the financial statements stating that 'the loss of subsidies may impact future margins', but they have not explicitly disclosed a material uncertainty related to going concern.

Requirements:
(a) In respect of Matter 1 (Storm Damage), comment on the matters you should consider and describe the audit evidence you should expect to find in your review of the audit working papers. (12 marks)
(b) In respect of Matter 2 (Going Concern), evaluate the implications for the auditor's report if management refuses to amend the disclosures regarding the going concern status of the company. (13 marks)

Accepted Answer

For part (a), split your answer into 'Matters to consider' (materiality, risk, accounting standards) and 'Evidence expected' (specific documents, expert reports, recalculations). For part (b), logically step through the ISA 570 requirements: identify the material uncertainty, evaluate the disclosure, determine the type of modified opinion (Qualified or Adverse), and explain the structural changes to the audit report.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

A very common mistake in part (b) is stating the auditor should include a 'Material Uncertainty Related to Going Concern' paragraph. This paragraph is ONLY used when disclosures are adequate. Because disclosures here are inadequate, the opinion itself must be modified (Qualified/Adverse).

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