This question is based on an ACCA question in their Advanced Audit and Assurance Paper P7, December 2010.

(a) You are the manager responsible for the audit of Willis Ltd, a large client of your audit firm, operating in the pharmaceutical industry. The audit work for the year ended 31 August 2018 is nearly complete, and you are reviewing the draft audit report which has been prepared by the audit senior. You are aware that Willis Ltd is developing a new drug and has incurred significant research and development costs during the year, most of which have been capitalized as an intangible asset. The asset is recognized at a value of £4.4 million, the total assets recognized on the draft balance sheet are £55 million, and Willis Ltd has a draft profit before tax of £3.1 million.

Having reviewed the audit working papers, you are also aware that management has not allowed the audit team access to the results of scientific tests and trials performed on the new drug being developed.
An extract from the draft audit report is shown below.

Basis for opinion (extract)
Evidence available to us in respect of the intangible asset capitalized was limited because of restrictions imposed on our work by management. As a result of this we have been unable to verify the appropriateness of the amount capitalized, and we are worried that the asset may be overvalued. Because of the significance of the item and the lack of integrity shown by management, we have been unable to form a view on the financial statements as a whole.

Opinion (extract): disclaimer on view given by financial statements
Because of the lack of evidence that we could gain over the intangible asset, we are unable to form an opinion as to whether the financial statements are properly prepared in accordance with the relevant financial reporting framework.

Required:
1 Critically appraise the draft audit report of Willis Ltd for the year ended 31 August 2018, prepared by the audit senior.
Note: You are NOT required to re-draft the extracts from the audit report.
2 Identify and explain any other matters to be considered and the actions to be taken by the auditor, in respect of the managementimposed limitation on scope.

(b) You are also responsible for the audit of Moore Ltd, with a year ended 30 September 2018. The following notes have been left for your attention by the audit senior:
‘Our audit testing performed so far on trade payables revealed some internal control deficiencies.
Supplier statement reconciliations have not always been performed by the client, and invoices were often not approved before payment.
We have found a few errors in the purchase ledger and the individual accounts of suppliers making up the trade creditors balance, the total of which is material to the balance sheet’.

Required:
Recommend the further actions that should be taken by the auditor, and outline any reporting requirements in respect of the internal control deficiencies identified.