问题详情

YouareamanagerintheauditdepartmentofNidge&Co,afirmofCharteredCertifiedAccountants,responsiblefortheauditofDarrenCo,anewauditclientoperatingintheconstructionindustry.DarrenCo’sfinancialyearendedon31January2015,andthedraftfinancialstatementsrecogniseprofitbeforetaxof$22·5million(2014–$20million)andtotalassetsof$370million,includingcashof$3million.Thecompanytypicallyworksonthreeconstructioncontractsatatime.
Theauditisnearlycompleteandyouarereviewingtheauditworkingpapers.Theauditseniorhasbroughtseveralmatterstoyourattention:
(a)DarrenCoisworkingonamajorcontractrelatingtotheconstructionofabridgeforFlyoverCo.WorkstartedinJuly2014,anditisestimatedthatthecontractwillbecompletedinSeptember2015.Thecontractpriceis$20million,anditisestimatedthataprofitof$5millionwillbemadeoncompletionofthecontract.Thefullamountofthisprofithasbeenincludedinthestatementofprofitorlossfortheyearended31January2015.DarrenCo’smanagementbelievesthatthisaccountingtreatmentisappropriategiventhatthecontractwassignedduringthefinancialyear,andnoproblemshavearisenintheworkcarriedoutsofar.(8marks)
(b)AsignificantcontractwascompletedinSeptember2014forNewbuildCo.Thiscontractrelatedtotheconstructionofa20-milehighwayinaremotearea.InNovember2014,severallargecracksappearedintheroadsurfaceafteraperiodofunusuallyheavyrain,andtheroadhadtobeshutfortenweekswhilerepairworkwascarriedout.NewbuildCopaidfortheserepairs,buthastakenlegalactionagainstDarrenCotorecoverthecostsincurredof$40million.Disclosureonthismatterhasbeenmadeinthenotestothefinancialstatements.Auditevidence,includingawrittenstatementfromDarrenCo’slawyers,concludesthatthereisapossibility,butnotaprobability,ofDarrenCohavingtosettletheamountclaimed.(6marks)
(c)Forthefirsttimethisyear,thefinancialstatementsarepresentedaspartofanintegratedreport.Includedintheintegratedreportareseveralkeyperformanceindicators,oneofwhichstatesthatDarrenCo’sprofitbeforetaxhasincreasedby20%fromthepreviousyear.(6marks)
Required:
Discusstheimplicationsofthemattersdescribedaboveonthecompletionoftheauditandontheauditor’sreport,recommendinganyfurtheractionswhichshouldbetakenbytheauditor.
Note:Themarkallocationisshownnexttoeachofthemattersabove.


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