Your PA firm has been auditing Ontario Pulp Company for three years.Two years ago,a letter was received from the provincial government informing them that they needed to reduce the level of contaminants that they were releasing into the air and into local waterways.The deadline for this reduction is three months from today.The letter indicates significant fines (several hundred thousand dollars)if the targets are not met.Alternatively,the Company will need to shut down operations until the targets are met.During your audit planning process,management informed you that they have not taken any action but plan to start construction of the new pollution devices next month.
Required:
Explain the impact the above situation has on your audit planning process.

Question

Quizplus · Accepted Answer

The Answer is •The above situation seems to indicate that management does not take the letter from the provincial government seriously.
•This could affect the ability of the company to continue as a going concern,and as a minimum would require disclosure in the financial statements,possibly with a qualification.
•The audit planning process would need to include gathering knowledge about other companies in this sector-have they also received such letters and have they complied? Have there been charges laid by the provinces where compliance did not occur? The answers to these questions will help assess the potential impact on the client.
•The auditor should also look at any proposals that the company has received about implementing the anti-pollution equipment to see how quickly it can be implemented.
•The negative attitude about the anti-pollution equipment may also apply to other areas of the business.
•The auditor will need to assess the quality of corporate governance and of management integrity and assess the effect upon the engagement.Why has management really decided to wait so long?

Your PA Firm Has Been Auditing Ontario Pulp Company for Three