5  You are the audit manager of Daffy & Co and you are briefing your team on the approach to adopt in undertaking the review and finalisation stage of the audit. In particular, your audit senior is unsure about the steps to take in relation to uncorrected misstatements.

During the audit of Minnie Co the following uncorrected misstatement has been noted.

The property balance was revalued during the year by an independent expert valuer and an error was made in relation to the assumptions provided to the valuer.

Required:

(a)   Explain the term ‘misstatement’ and describe the auditor’s responsibility in relation to misstatements.

(b)   Describe the factors Daffy & Co should consider when placing reliance on the work of the independent valuer.

(c)   The following additional issues have arisen during the course of the audit of Minnie Co. Profit before tax is $10m.

(i)   Depreciation has been calculated on the total of land and buildings. In previous years it has only been charged on buildings. Total depreciation is $2·5m and the element charged to land only is $0·7m.

(ii)  Minnie Co’s computerised wages program is backed up daily, however for a period of two months the wages records and the back-ups have been corrupted, and therefore cannot be accessed. Wages and salaries for these two months are $1·1m.  

(iii) Minnie Co’s main competitor has filed a lawsuit for $5m against them alleging a breach of copyright; this case   is   ongoing   and   will   not   be   resolved   prior   to   the   audit   report   being   signed.   The   matter   is   correctly disclosed as a contingent liability.                                                                     

Required:

Discuss   each   of   these   issues   and   describe   the   impact   on   the   audit   report   if   the   above   issues   remain unresolved.

Note: The mark allocation is shown against each of the three issues above. Audit report extracts are NOT required.