Question

This is an auditing question.

Lane Cove Classic Automobiles Ltd sells rare and expensive vintage cars. As your audit firm has no expertise in valuing such cars, you employ Chloe Smith, a recognised expert on vintage cars, to value them for you and give you a report. Chloe’s report indicates that the inventory of cars is worth $8.3m while the accounts show inventory at the cost price of $6.4m. The client refuses to adjust the figures as they believe the market for vintage cars is volatile and they do not want to risk overvaluing the cars. Materiality for the client is $800,000. How should you deal with this issue in the audit report?

A. Issue a qualified audit opinion with an emphasis of matter paragraph to draw the users’ attention to the inventory valuation issue

B. Issue an unqualified audit opinion with an emphasis of matter paragraph to draw the users’ attention to the inventory valuation issue

C. Issue an unqualified audit opinion

D. Issue a qualified audit opinion

What should be the answer and WHY?

I thought it was A, but answer said C, cant understand

Answer 1

Correct answer is option C: "ssue an unqualified audit opinion"

Ans: Correct answer is option C. Issue an unqualified audit report, because here the company is correct mainly due to the nature of the business, since the business of selling vintage cars is highly volatile and also company is choosing to be more conservative while valuing their inventories, hence, company is following accounting concept of conservatism which tells that your should show your loss which are expected or probable and not show the income which are probable.

Here since company is trying to mitigate the risk of volatility in assessment of inventory's valuation hence company is presenting the fact rightly and is not doing any thing unethical. Hence being an auditor I would see there is no risk involved in showing the value of inventory lessor, hence I would rather go for giving unqualified report.

Unqualified opinions are that opinion of the auditors that confirms that company’s financial statement are fairly presented and also without any exception and at the same time following all the accounting standards.