Question

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

Types of Audit Opinion:

1. Qualified Opinion:

The auditor shall express a qualified opinion, when

- he has obtained sufficient and approporiate audit evidence and concludes that mistatements in the financial statements (individually and in aggregate) are material but not pervasive OR

- he is unable to obtain sufficient and approporiate audit evidence to form opinion on financial statements, but he concludes that such undetected misstatements are material but not pervasive.

2. Adverse Opinion:

The auditor shall express an adverse opinion when, after obtaining sufficient and approporiate audit evidence he concludes that mistatements in the financial statements (individually and in aggregate) are both material and pervasive.

3. Disclaimer Opinion:

The auditor shall disclaim his report when he is unable to obtain sufficient and approporiate audit evidence on which he can base his opinion. He also concludes that possible misstatements in financial statements are both material and pervasive. Thus, when auditor is unable to form an opinion on the finanical statements due to potential uncertanities and possible cumulative effect on financial statements.

Identifying the types of audit opinion in each of the following cases

A) Audit Opinion for Human Help Ltd.

The auditor shall issue a qualified opinion as he is unable to obtain sufficient and approporite audit evidence in respect to 55% of the expenses incurred by Human Help Ltd. Also these misstatements are material (individually or in aggregate) but not pervasive to financial statements.

B) Audit opinion for JJ King Ltd

The auditor shall express an advese opinion as he obtained sufficient and approporiate audit evidence that properties are overvalued. Also he concludes that such mistatements in the financial statements (individually and in aggregate) are both material and pervasive.

C) Audit opinion for Grand Resort Ltd.

The auditor shall issue an unqualified opinion as the amount of mistatements left, after discussions with the management is $6 million (since all the other issues are resloved to the satisfication of the auditor). This amount is well below the materiality limit set by the auditor i.e; $8 million. Since the mistatements (individually or in aggregate) are not material, auditor can express an unqualified / clean report.

D) Audit Opinion of Grand Event Ltd.

Here, the auditor is certain, based on audit evidence obtained and on discussions with management, that there is a significant doubt on entity's ability to continue as going concern (since it is mentioned in case that income, cash and other assets are not sufficient to substain the losses to be incurred due to foreign exchange loss). If such material uncertanity exists, the auditor is required to make adequate disclosures in financial statements. However, if such disclosures are inadequate then the auditor should consider issuing qualified audit opinion.