You are the auditor of Pacific Foods Limited (PFL), a company that provides food for major corporate
Question:
You are the auditor of Pacific Foods Limited (PFL), a company that provides food for major corporate events throughout South Australia. The balance date for PFL is 31st December 2022. On the 15th of January 2022, PFL was contacted by the legal team of one of their clients, Adelaide Holdings (AHL). AHL alleged that PFL had obtained information from AHL without permission from AHL that allowed Pacific to gain a significant commercial advantage in contract negotiations between Pacific and Adelaide for a major contract. The legal team for AHL has advised that civil proceedings will be launched against PFL, claiming $10 million in damages as compensation. An internal investigation by PFL has uncovered evidence that information was obtained fraudulently by an employee of PFL (without the knowledge of PFL management) and this information proved instrumental in assisting PFL in their negotiations with AHL. This employee was subsequently fired by PFL.
In the event of a successful action against PFL by AHL, AHL is also intent on recovering future losses associated with the court case from PFL. The balance sheet of PFL discloses net assets of $20 million. The board of PFL advise you that they are relieved that although PFL was contacted by AHL, and court proceedings have already begun, they believe the court action does not need to be disclosed to the shareholders until the next financial year. Management of PFL have therefore decided that the court case will not be disclosed in the financial reports at all as they feel it will mislead investors.
In addition to the class action, you are aware of a major restructure undertaken by PFL during the reporting period ended 31st December 2022. During this restructure, a property in Adelaide owned by PFL has been decommissioned (ie. will no longer be used). PFL would like to sell the property (the likely selling price will be $5 Million) however, a buyer has not yet been found. In the meantime, the property will no longer be used by PFL and will remain vacant until a suitable buyer can be found. The property has been valued and disclosed in the financial reports at its fair value ($8 Million). The board of ACL are very clear in their opinion that the property in Melbourne must be recognised in the balance sheet at its fair value until such time it is sold to a third party.
Required:
Using the facts contained in the case study above and with reference to appropriate Auditing Standards, what type of audit report would you issue if management refused to accept your advice in relation to the issues identified above?
Intermediate Accounting
ISBN: 978-0470161012
9th Canadian Edition, Volume 2
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield.