You are the audit senior attending a meeting with Jay Farnham (the Chairman and CEO) on the 12^th of February, 2021 to discuss issues that need to be finalised before the audit report can be signed for House of WAXX Music Ltd (WAXX) which specialises in selling merchandise in the music industry. WAXX is 100% Australian owned and has no offices outside of Australia. The adjusted financial statements disclose a profit after tax for the year ended 31^st December 2020 of $60 million and annual turnover of $320 million. The following matters arose from the audit or have come to your attention at the end of the reporting period, and need to be resolved with Jay Farnham before the financial reports can be finalised:

1. You have found concerns regarding the finalising of the inventory balance. A number of shipments of merchandise purchased on credit worth approximately $3 million in total were delayed in transit late December 2020. Documentation indicates that the merchandise is currently in quarantine overseas and will not arrive until the middle of January 2021. Jay is arguing that because the goods have not arrived, the inventory balance and the liability associated with the purchase should not be recognised in the balance sheet. Jay has instructed the accountants for WAXX to record the inventory and the associated liability once the inventory is delivered in January 2021.
2. WAXX undertook some major capital works during 2020 including the building of a new warehouse to store merchandise at a cost of $15 million. The old warehouse was found to have a number of safety issues and as a result, once the new warehouse was completed, the old warehouse was left vacant. Jay has indicated that the warehouse might be used again in the future and as such, the carrying amount for the old warehouse ($2,500,000) should be reflected in the financial reports. Jay disagrees with your assessment to apply impairment tests on the warehouse which value the warehouse at $500,000.
3. The legal department for WAXX have indicated to your audit team that WAXX is initiating legal proceedings against one of WAXX’s major customers alleging a breach of contract. WAXX is seeking damages of $20 million and strongly believes that once the action is filed in court, it is expected that the case will be successful. Jay has therefore instructed the accountants for WAXX to record a contingent asset for $20 million in the balance sheet for the year ending 31^st December 2020 and refuses to accept any alternative accounting treatment.

Required:

(a)     In relation to each of the items (1) to (3) above, what additional audit evidence would you seek to allow you to form your audit opinion on these events?

(b)     Taking into consideration the issues identified above by the auditor what type of audit report would you issue if management refused to accept your advice in relation to the issues identified above and the finalising of the financial reports? (Consider the items collectively in coming to your decision).

Answer rating: 100% (QA)

a In relation to each of the items 1 to 3 above what additional audit evidence would you seek to all... View the full answer