5 You are the audit manager for three clients of Bertie & Co, a firm of Chartered Certified Accountants. The financial year end for each client is 30 September 2007. You are reviewing the audit senior’s proposed audit reports for two clients, Alpha Co and Deema Co. Alpha Co, a listed company, permanently closed several factories in May 2007, with all costs of closure finalised and paid in August 2007. The factories all produced the same item, which contributed 10% of Alpha Co’s total revenue for the year ended 30 September 2007 (2006 – 23%). The closure has been discussed accurately and fully in the chairman’s statement and Directors’ Report. However, the closure is not mentioned in the notes to the financial statements, nor separately disclosed on the financial statements. The audit senior has proposed an unmodified audit opinion for Alpha Co as the matter has been fully addressed in the chairman’s statement and Directors’ Report. In October 2007 a legal claim was filed against Deema Co, a retailer of toys. The claim is from a customer who slipped on a greasy step outside one of the retail outlets. The matter has been fully disclosed as a material contingent liability in the notes to the financial statements, and audit working papers provide sufficient evidence that no provision is necessary as Deema Co’s lawyers have stated in writing that the likelihood of the claim succeeding is only possible. The amount of the claim is fixed and is adequately covered by cash resources. The audit senior proposes that the audit opinion for Deema Co should not be qualified, but that an emphasis of matter paragraph should be included after the audit opinion to highlight the situation. Hugh Co was incorporated in October 2006, using a bank loan for finance. Revenue for the first year of trading is $750,000, and there are hopes of rapid growth in the next few years. The business retails luxury hand made wooden toys, currently in a single retail outlet. The two directors (who also own all of the shares in Hugh Co) are aware that due to the small size of the company, the financial statements do not have to be subject to annual external audit, but they are unsure whether there would be any benefit in a voluntary audit of the first year financial statements. The directors are also aware that a review of the financial statements could be performed as an alternative to a full audit. Hugh Co currently employs a part-time, part-qualified accountant, Monty Parkes, who has prepared a year end balance sheet and income statement, and who produces summary management accounts every three months. Required: (a) Evaluate whether the audit senior’s proposed audit report is appropriate, and where you disagree with the proposed report, recommend the amendment necessary to the audit report of: (i) Alpha Co (6 marks)