In respect of each of the situations outlined below, reach a conclusion on whether or not you would modify your audit report. Give reasons for your conclusion and describe the effect on your audit report. 

The year end in each scenario is 31 March 2021.

(A) Symphony Gifts

Symphony Gifts is a web-based retailer that delivers flowers, chocolates and luxury gifts. The year end is 31 March 2021. The year end audit is almost complete, and the statements are due to be signed shortly. Year end revenue is £9.8m and profit before tax and interest is £1.3m.

A key customer with a year end receivables balance of £225,000 has notified Symphony Gifts on the 20^th May 2021 that they are experiencing cash flow difficulties due to the Covid-19 pandemic and are unable to make any payments in the near future.

The Finance Director has notified the Audit Partner that the outstanding balance will be written off as an irrecoverable debt next year in the 2021/22 financial statements.

(B) Enterprise Manufacturing Ltd

HMRC commenced a major enquiry into all aspects of the tax affairs of Enterprise Manufacturing Ltd on the 7^th May 2021.

Until the enquiry is completed it is not possible to estimate with any reasonable degree of certainty any ultimate liability which may fall upon the company. Consequently, no liability in respect of this matter has been included in the financial statements. The directors have included a note to the accounts explaining the situation. 

(C) Zammit Developments

Included in the Statement of Financial Position at 31 March 2021 are Non Current Assets at cost of £4.2m. This new property which has been constructed by the company during the year, includes capitalised project management fees of £350,000.

The project management fees have been calculated using the Finance Director’s estimate of time taken by project managers who were involved with management of the construction work. This estimate has not been supported by time records or any detailed evidence to support the calculations. No satisfactory audit procedures have been undertaken to confirm that the project management labour costs have been appropriately calculated or capitalised.

The pre-tax profit of Zammitt Developments Ltd for the year ended 31 March 2021 is £825,000.

(D) Shark Fin Ltd

Shark Fin Ltd is a manufacturer of sports equipment and exports a significant amount of its products globally.

Shark Fin Ltd has a major warehouse and distribution centre in an overseas country. Due to the Covid 19 pandemic, the audit team has not been able to travel to the warehouse to complete the year end inventory audit. As a result of government imposed travel restrictions, it was not possible for the audit team to attend the year end stocktake. It is estimated following the work completed during our interim audit that inventory held at the overseas warehouse and distribution centre represented £2.1m (70%) of Shark Fin Ltd’s total inventory.

Shark Fin Ltd’s forecast profit is £0.8m and materiality is £1.1m.

Answer rating: 100% (QA)

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