Task C Question 1

As the audit progresses, some important subsequent events come to light that could affect the financial statements:

1. August 15, 2024: GizmoTech Innovations experiences a major fire at one of its key manufacturing plants. While insurance is expected to cover some of the damages, the full financial impact is still being assessed. This event occurred after the financial year-end but before the issuance of the financial statements.
2. September 2, 2024: One of GizmoTech's customers, FutureGadgets Inc. files for bankruptcy. GizmoTech's outstanding receivables from FutureGadgets total $1 million, and the entire amount is now irrecoverable.

Do you, as the auditor, have any responsibilities arising from the above events?

Task C Question 2:

You are almost at the end of the audit. You have come across some information that suggests that company has been recording sales on consignment as final sales. These consignment goods have not been delivered to customers, and the risks and rewards of ownership have not transferred. By recognizing these sales prematurely, management is inflating revenue figures, which impacts the overall profitability for the financial year ending June 2024.

In addition to the inflated revenue, there is evidence that deferred expenses have been shifted to later periods to minimize current expenses and boost net income. The management claims these practices are in line with their strategy to showcase stronger financials to investors and creditors, especially since they are seeking new funding for expansion.

You have raised these concerns with the CFO and the audit committee. However, management has refused to adjust the financial statements or provide adequate disclosure, arguing that the impact of these practices is immaterial and not misleading to users of the financial statements.

What impact will this finding have on the reporting of the audit?

Task C Question 3:

You decide to consult the revenue recognition and expense deferral issue with your your audit team's senior manager, Mr. Edward "Ed" Balance. Ed informs you that he is a close friend of Rob Ledger, the CFO of GizmoTech Innovations. They've known each other since their university days and often meet up socially. However, neither Ed nor Rob have disclosed this relationship to the audit team, creating potential concerns about independence.

To complicate matters, during one of your site visits, Rob Ledger gifted you a high-end smart watch from GizmoTech's new product line as a 'thank you' for your hard work. You accepted the gift without thinking much of it at the time, but now you're beginning to question whether it was the right thing to do.

Explain the implications of the above on the audit independence.