Question

Q5- Week 10
You are the audit partner at Parkville & Associates, a mid-tier audit firm. You are responsible for the
audits of the following four independent entities for the year ended 30 June 2018:
(a) Human Help Ltd is a non-profit entity. You have discovered that it has not kept substantiating
vouchers or receipts for more than 55 per cent of its expenses, excluding salaries and allowances
(2.5 marks)
(b) JJ King Ltd is a building contractor with a varying workload. In order to compensate for the
irregularity of its contracted building projects, JJ King also purchases large vacant blocks of land
that it later subdivides for the construction of houses and units. JJ King then sells these on its own
account. Your analysis strongly suggests that the apportionment of costs to houses and units sold
has been kept low to boost profits. In your opinion, this has resulted in the overvaluation of the
unsold properties. The directors of the company do not agree and hold to their view that the stock
of properties is correctly valued (2.5 marks)
(c) You have completed the audit of Grand Resort Ltd (Grand Resort) for the year ended 30 June 2015.
The audit partner suggested that the value of properties on the Gold Coast were overstated by
$16 million, a figure which was twice the level of materiality set for the audit. As a result of
discussions with the audit committee, the CEO of Grand Resort agreed to revise the valuations
downward by $10 million. All other issues were resolved to the satisfaction of the audit partner,
resulting in an overall misstatement of the financial report of $6 million. The audit partner is now
considering the effect of the misstatement on the auditor’s report. (2.5 marks)
(d) Grand Event Ltd arranges for popular overseas entertainment artists to perform in Australia. The
band Eclipse was booked by Grand Event to play in major cities across the country. Grand Event’s
written contract required the company to pay the band in US dollars but, in order to reduce costs,
it did not hedge the amounts. Subsequent to year end, the Australian dollar fell against the US
dollar and a substantial loss relating to the band’s tour was predicted. The management of Grand
Event tried unsuccessfully to renegotiate the band’s contract and has been unable to obtain
finance to cover the expected shortfall. Grand Event has now cancelled the tour and expects a
substantial claim from Eclipse. It is clear to you, as the auditor, that Grand Event does not have
the income, cash or other assets to sustain such a loss. (2.5 marks)
Required:
Assuming no amendments have been made, identify and explain the type of auditor’s opinion required
for each issue outlined above. (10 marks, maximum 300 words)

Issues	Audit Opinion (1 mark)	Explanation (1.5 marks)
(a)(/(b)/ Write 1 line about issue	Unqualified or Qualified or Adverse or Disclaimer Audit Opinion or Unqualified Audit opinion with emphasis of matter or Unqualified Audit Opinion with other matter paragraph	Here you will mention about why you have chosen this audit opinion and reason details

Answer 1

a) Qualify the audit - Since more than 55% of the expenses are not substantiated with vouchers / receipts, authenticity of the expenses booked in the financial statement is in doubt. As an auditor, the report should be disclaimed saying that we could not verify an expenses to the extent of XX value (55% of the expenses excluding salary and allowance) due to lack of evidence in the form of receipt or voucher.

b) Disclaim Audit opinion - The difference in valuation method and cost allocation method may arise during review. The auditor can disclaim saying what valuation method followed for the purpose of valuation of unsold unit of houses and management assertion on its valuation. The auditor should also mention the reference of valuation method ideal basis IFRS / US GAAP applicable.

c) Unqualified Audit opinion with emphasis of matter: Since the overstatement / misstatement of $6 million is within the materiality set for the audit, an auditor can not qualify the report. Thus, giving unqualified report with emphasis on the fact that the value of Gold coast was overstated to the tune of $6 million giving reference to the applicable method of valuation adopted by the auditor as per IFRS / US GAAP and also mention that it is within the audit materiallity.

d) Unqualified Audit Opinion with other matter paragraph: Information about contingency liability needs to be stated in the notes to accounts (below Financial statement) about possible dispute or claim which may arise in future from Eclipse band due to violation of contract terms. This is an event occured during the year which will have dispute and liability on the company at later year through suit in the court of law.