CASE 5 : 11 SUGGESTED SOLUTION
Page 1 of 2 pages
QUERY 1: Help Me Industries Ltd
Failure to disclose material uncertainty regarding going concern:
1. In terms of IAS 1.25, when material uncertainties related to events and conditions that
may cast significant doubt on the entity’s ability to continue as a going concern exist, the
entity shall disclose those uncertainties. (1)
2. By not disclosing the going concern uncertainty, a factual uncorrected misstatement
(disagreement) has arisen. (1)
3. Given that the misstatement relates to inadequate disclosure regarding going concern, it
will be qualitatively material as these disclosures are likely to influence the economic
decisions of users. (1)
4. As the failure to disclose the going concern uncertainty is fundamental to users’
understanding of the financial statements, the effect of the uncorrected misstatement is
considered to be pervasive 1. (1)
5. As such, an adverse audit opinion should be expressed on the financial statements, and (1)
6. A “basis for adverse opinion” section must be inserted into the auditor’s report to follow
the “adverse opinion” section, to explain the going concern uncertainty, and to provide
the disclosures, if practicable. (1)
Chairman’s report comments regarding the company’s financial situation
7. The Chairman’s report does not form part of the annual financial statements subject to
audit (per the Companies Act and IFRS). (1)
8. Given that the statements made in the Chairman’s report contradict the information
contained in the audited financial statements, this gives rise to a “material inconsistency”
in terms of ISA 720. (1)
9. Accordingly, should management / the Chairman refuse to amend the Chairman’s report,
this must first be raised with those charged with governance with the request that it be
corrected. (1)
9.1 If no such corrections are made, a statement must be included in the “Other
information” section of the auditor’s report describing the uncorrected misstatement
in the other information. (1)
9.2 Consideration should also be given to whether a reportable irregularity has arisen,
given the chairman / other directors’ refusal to correct clearly false / misleading
statements in the company’s annual report. (1)
9.2.1 Should the auditor conclude that a reportable irregularity exists, this would
impact the auditor’s report – i.e. the details relating to the reporting of the
irregularity would be explained in the report, in a section entitled “Report on
Legal and Other Regulatory Responsibilities”. (2)
Maximum (9)
1
The candidate can also conclude, but with the necessary arguments, that this matter is not pervasive, in which
case the audit opinion should be qualified.
CASE 5 : 11 SUGGESTED SOLUTION
Page 2 of 2 pages
QUERY 2: Happy Holdings Ltd Group
1. Although the new auditors of Sadd & Gloom (Pty) Ltd could not obtain sufficient
appropriate evidence about the existence of the company’s opening inventory balance, it
is unlikely that this will cause a material misstatement in the consolidated financial
statements due to the unmodified opinion that was expressed on the consolidated financial
statements in the prior financial year (i.e. it would appear that the principal auditor is
satisfied that the inventory balance will not cause material misstatements in the
consolidated financial statements). (2)
2. Regarding the CCMA judgement in August 2024, should the directors of Happy Holdings
Ltd also have reflected this matter as a contingent liability in the consolidated financial
statements, and refuse to make any corrections to it: (1)
2.1. As the outflow of economic benefits now appears probable and a reliable estimate
can be made of the amount, the amount should be recorded as a provision – not
disclosed as a contingent liability. (1)
2.2. Failure to recognise the damages of R1.3 million will give rise to a factual
uncorrected misstatement. (1)
2.3. As the reported profit figure will decline by nearly 70% due to recognising the
provision, it is submitted that the misstatement is quantitatively material. (1)
2.4. The effect of this material misstatement is not considered to be pervasive, as it does
not represent a substantial proportion of the financial statements. (1)
2.5. Accordingly, a qualified audit opinion should be expressed. (1)
3. Should the directors of Happy Holdings Ltd have recognised, measured and disclosed a
provision of R1.3 million in respect of the CCMA judgement in accordance with the
requirements of IAS 37 when preparing the 2024 consolidated financial statements, an
unmodified audit opinion can be expressed. (1)
Maximum (6)
QUERY 3: Export Kings Ltd
1. The hijacking is an event that occurred between the end of the reporting period and the
date when the financial statements are authorised for issue, which is indicative of a
condition that arose after the reporting period. (1)
2. Further, the event is considered to be a qualitatively material non-adjusting event, which
is likely to influence the economic decisions of users because: (1)
• A large shipment of inventory was hijacked – which exposes the company to the
risk of loss of the inventory, the costs of settling part of the ransom demanded,
and/or penalties from the late delivery of inventory to customers. (1)
3. The amounts involved are well in excess of the materiality figure of R7.5 million set for
the 2024 audit, i.e. the misstatement is quantitatively material. (1)
4. In terms of IAS 10.21, if non-adjusting events after the reporting period are material, an
entity shall disclose the nature of the event and an estimate of its financial effect, or a
statement that such an estimate cannot be made. (1)
4.1. Due to this departure from the requirements of IAS 10, a material known
uncorrected misstatement arises. (1)
5. As the failure to disclose the information is unlikely to be fundamental to users’
understanding of the financial statements (e.g. it does not affect going concern), its effects
are not pervasive. (1)
6. As such, a qualified audit opinion should be issued with respect to this uncorrected
misstatement. (1)
Maximum (6)
Communication skills (logical argument) (1)
