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Assurance Report for Apricot Co's Cash Flow

The document describes an audit client, Apricot Co, that is purchasing a new warehouse for $500,000, financed through a director's loan. It provides a cash flow forecast for the next three months and relevant information about Apricot Co's operations. The questions ask (a) to recommend procedures for providing assurance on the cash flow forecast and (b) to explain the contents of the assurance report that would be issued.

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Hafizi Amin Abd Rasid
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23 views3 pages

Assurance Report for Apricot Co's Cash Flow

The document describes an audit client, Apricot Co, that is purchasing a new warehouse for $500,000, financed through a director's loan. It provides a cash flow forecast for the next three months and relevant information about Apricot Co's operations. The questions ask (a) to recommend procedures for providing assurance on the cash flow forecast and (b) to explain the contents of the assurance report that would be issued.

Uploaded by

Hafizi Amin Abd Rasid
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Dec 2009 Q3

Section B – TWO questions ONLY to be attempted

3 Your audit client, Apricot Co, is intending to purchase a new warehouse at a cost of $500,000. One of the directors
of the company, Pik Choi, has agreed to make the necessary finance available through a director’s loan to the
company. This arrangement has been approved by the other directors, and the cash will be provided on 30 March
2010, one day before the purchase is due to be completed. Pik’s financial advisor has asked to see a cash flow
projection of Apricot Co for the next three months. Your firm has been asked to provide an assurance report to Pik’s
financial advisor on this prospective financial information.
The cash flow forecast is shown below:
January 2010 February 2010 March 2010
$’000 $’000 $’000
Operating cash receipts:
Cash sales 125 135 140
Receipts from credit sales 580 600 625
Operating cash payments:
Purchases of inventory (410) (425) (425)
Salaries (100) (100) (100)
Overheads (175) (175) (175)
Other cash flows:
Dividend payment (80)
Purchase of new licence (35)
Fixtures for new warehouse (60)
Loan receipt 500
Payment for warehouse (500)
–––– –––– ––––
Cash flow for the month (15) (45) 5
Opening cash 100 85 40
–––– –––– ––––
Closing cash 85 40 45
–––– –––– ––––
The following information is relevant:
1. Apricot Co is a wholesaler of catering equipment and frozen food. Its customers are mostly restaurant chains and
fast food outlets.
2. Customers who pay in cash receive a 10% discount. Analysis has been provided showing that for sales made
on credit, 20% of customers pay in the month of the sale, 60% pay after 45 days, 10% after 65 days, 5% after
90 days, and the remainder are bad debts. sales invoice
3. Apricot Co pays for all purchases within 30 days in order to take advantage of a 12% discount from suppliers.
4. Overheads are mainly property rentals, utility bills, insurance premiums and general office expenses.
5. Apricot Co needs to have a health and safety licence as it sells food. Each licence is valid for one year and is
issued once an inspection has taken place.
6. A profit forecast has also been prepared for the year ending 31 December 2010 to help with internal planning
and budgeting.
This is the first time that Apricot Co has requested an assurance report, and the directors are unsure about the
contents of the report that your firm will issue. They understand that it is similar in format to an audit report, but that
the specific contents are not the same.

Required:
(a) Recommend the procedures that should be performed on the cash flow forecast for the three months ending
31 March 2010 in order to provide an assurance report as requested by Apricot Co. (11 marks)

(b) Explain the main contents of the report that will be issued on the prospective financial information.
(5 marks)

(16 marks)

6
MJ2017 Q5

5 You are a manager at Thyme & Co, a firm of Chartered Certified Accountants. You are currently involved in the
completion stage of two engagements relating to different clients. Both engagements have raised issues that require
your attention.

(a) Rocket Co is a listed client operating in the engineering industry. The company manufactures machinery for use
in the aircraft, defence and marine sectors. The audit for the year ended 30 April 2017 is almost complete. The
revenue and profit before tax figures recognised in the draft financial statements are $1,437 million and
$139 million, respectively (2016 – $1,489 million and $175 million respectively).
Audit procedures identified two sales transactions in the final quarter of the year that related to two different
customers but where the goods were delivered to the same location. Further investigations revealed that the
goods were delivered to a third party, who agreed to store them until the customers were ready to receive delivery.
The goods have yet to be delivered to the customers because they are both building new facilities and neither is
sufficiently progressed to receive the new machinery. The contract terms explicitly state that Rocket Co is obliged
to deliver the goods to the customers for final inspection and acceptance and the client has not agreed to any
consequent amendments to these terms. The sales invoices were raised and the revenue recognised upon
despatch of the goods to the storage facility. During discussions with the audit team, the finance director stated
that the company had fulfilled its contractual obligations to provide the goods by a specified date. The revenue
attributable to the two transactions totalled $17 million.

Required:
(i) Comment upon the matter described above and explain the further actions necessary before the
auditor’s report can be signed. (7 marks)
(ii) Discuss the implications for the auditor’s report if no adjustments are made to the financial statements.
(5 marks)

(b) You are reviewing the draft assurance report in relation to the examination of a forecast for Tulip Co. The forecast
is included in a proposal due to be sent to Tulip Co’s lenders as part of an effort to secure a new loan. Audit
procedures concluded that there is no reason to believe that the forecast is unrealistic or that it has not been
properly prepared. You are currently reviewing the draft assurance report, which is provided below:

Independent auditor’s report on the forecast of Tulip Co


To the shareholders of Tulip Co:
We have examined the forecast information of Tulip Co contained in the loan proposal in accordance with the
relevant standards on assurance engagements applicable to the examination of prospective financial
information. Thyme & Co is not responsible for the forecast, including the assumptions on which it is based.
Based on our examination of the evidence supporting the assumptions, we believe that these assumptions
provide a reasonable basis for the forecast. Further, in our opinion the forecast is properly prepared on the basis
of the assumptions and is presented in accordance with IFRS.
Actual results are likely to be different from the forecast since the assumptions on which the forecast is based
are unlikely to be accurate.
Signed by assurance engagement partner, Thyme & Co

Required:
Critically appraise the proposed assurance report extract of Tulip Co.
Note: You are NOT required to re-draft the assurance report. (8 marks)

(20 marks)

End of Question Paper

10

Common questions

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When examining a forecast, the auditor’s role focuses on evaluating the assumptions and methodologies used in the projection to ensure they are reasonable and based on sound judgment. This involves applying professional skepticism and verifying that the forecast fits market trends and company policies. In contrast, auditing historical financial information primarily involves ensuring accuracy, completeness, and compliance with accounting standards, verifying documented transactions, and detecting any anomalies or fraud. Both roles require upholding standards of objectivity and integrity, though the former involves more judgment calls on probable future events .

Key elements in preparing a cash flow forecast report for assurance purposes include accurately identifying operating cash receipts, such as sales (factoring in any discounts for early payment), and cash outflows, such as inventory purchases and overheads. It is crucial to base these items on realistic and historically validated assumptions. Additionally, significant cash inflows or outflows not directly related to operations, such as loans or large capital expenditures, must be included. For Apricot Co, it is especially important to include financial details specific to proposed transactions, like the warehouse purchase financed through a director’s loan, ensuring all cash flows align with corporate financial practices and terms .

Auditors should investigate further by reviewing contract terms, seeking formal confirmation from Rocket Co regarding the delivery conditions, and verifying whether the revenue recognition criteria, as per IAS 18, have been met. This includes checking whether risks and rewards have been transferred to the customers. They should also inspect any correspondence or agreements with the third-party storage facility to corroborate the timing and terms under which the goods were stored. If the revenue recognition is inappropriate, adjustments must be recommended before finalizing the audit report .

The assurance report on Tulip Co’s forecast should be appraised based on standards that ensure it appropriately disclaims responsibility for the forecast while assessing the reasonableness of assumptions upon which it is based. The report needs to express a clear opinion regarding whether the assumptions used provide a reasonable basis for the forecast and affirm that it is prepared according to relevant financial reporting standards such as IFRS. Additionally, the report should highlight the inherent uncertainties in forecast outcomes and the possibility that actual results may vary significantly, maintaining transparency and integrity .

If Rocket Co does not amend its financial statements, the auditor may need to issue a qualified opinion or an adverse opinion, indicating that the financial statements are materially misstated. A qualified opinion would be appropriate if the misstatement is material but not pervasive, while an adverse opinion would be issued if the misstatement is both material and pervasive, suggesting that the financial statements do not present a true and fair view. These reports can severely affect the company's credibility and market reputation, impacting investor confidence and share price .

To provide an assurance report on Apricot Co's cash flow forecast, procedures should include: verifying the assumptions underlying the forecast by comparing past cash flow performance, assessing the reasonableness of the forecasts, and ensuring compliance with applicable accounting standards. Additionally, the report must evaluate whether Apricot Co can feasibly meet its financial commitments given the projected cash flows and ensure that all significant elements influencing the cash flows, such as operating receipts and payments, are accurately represented and reasonable in relation to historical performance .

The assurance report on prospective financial information differs from a typical audit report as it focuses on the reasonableness of the financial forecasts and the assumptions they are based upon, rather than the accuracy of historical financial statements. It involves evaluating the credibility of estimates in comparison to historical data and ensuring they are in line with financial standards. While an audit report provides an opinion on whether financial statements are free from material misstatement, an assurance report provides an opinion on whether the forecast has been prepared on a reasonable basis .

The assurance report for Apricot Co should include a statement of responsibility disclaiming ownership of the forecast while affirming the reasonable basis of the underlying assumptions. It must evaluate whether the forecast adheres to international financial reporting standards (IFRS). The report should succinctly express the auditor's opinion on the forecast's feasibility and accuracy, noting the inherent uncertainty in financial forecasts and clarifying that actual results may materially differ from projections. Additionally, it should advise on the methods and procedures employed in the examination facilitated for rational conclusions .

The criteria for evaluating the realism and preparation of a financial forecast involve assessing the assumptions used, ensuring they are consistent with current market conditions and company operations, and determining whether they are supported by reliable historical data. The report must also confirm that the forecast is prepared according to applicable international financial reporting standards (IFRS). Additionally, sensitivity analysis may be conducted to understand the potential variance in outcomes under different scenarios, which highlights the report's conclusion about the forecast being properly prepared despite potential deviations from actual results .

If Rocket Co does not make adjustments for the sales transactions where revenue was prematurely recognized, it would lead to overstated revenue and profits for the financial year, violating accounting principles. The financial statements would fail to reflect the true financial position and performance of the company, potentially misleading stakeholders. The auditor's report would likely include a qualification or emphasis of matter to highlight the discrepancy, impacting shareholder and investor confidence .

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