Question

For the following independent situations, assume you are the audit partner and have raised these issues with management as appropriate.

What audit opinion would you recommend (unmodified, qualified, adverse, or disclaimer), and explain what factors have caused this recommendation.

1. The financial controller of Easy Lumber Ltd won’t allow you to attend the stocktake to be held on 30 June 2020 due to safety reasons. The value of inventory is highly material in relation to Easy’s financial statements. You are unable to satisfy yourself as to the inventory balance by alternative procedures.
Recommended audit opinion	Explanation of relevant factors

2. Subsequent to the year-end of 30 June 2020 but prior to the signing of the audit report, the auditor became aware of significant damage to one of a client’s two locations due to a recent flood. This will result in a significant loss to the company. Local media has described the event in detail. The financial statements and appended notes as prepared by management haven’t disclosed the loss caused by the flood.
Recommended audit opinion	Explanation of relevant factors

Question 5 continued next page

Question 5 (continued)

3. The auditor has completed an examination of the financial statements and notes of a transport company for the year ended 30 June 2020. Prior to the current year, the company had been depreciating its trucks over an 8-year period. During the current year, the company determined that a more realistic estimated life for its trucks was 10 years and calculated the 2020 depreciation on the basis of the revised estimate. The auditor is satisfied that the 10-year life is reasonable. The company has adequately disclosed the change in estimated useful lives of its trucks and the effect of the change on 2020 profit in a note to the financial statements.
Recommended audit opinion	Explanation of relevant factors

4. On 25 August 2020, ABC Company Ltd received notice from its primary supplier that, effective immediately, all wholesale prices would be increased by 10%. On the basis of the notice, ABC revalued its 30 June 2020 inventory to reflect the higher costs. The inventory constituted a material proportion of total assets; however, the effect of the revaluation was material to current assets but not to total assets or profit. The increase in valuation is adequately disclosed in the footnotes.
Recommended audit opinion	Explanation of relevant factors

5. An online retailer of electrical appliances records revenue at the time customer orders are placed on the website, rather than when the goods are shipped, which is usually two days after the order is placed. The auditor determines that the amount of orders placed but not shipped as at the financial report date isn’t material.
Recommended audit opinion	Explanation of relevant factors

Answer 1

1. Qualified opinion

Since the valuation of inventory is mandatory and the auditor could not get the level of comfort even after applying further audit procedures , auditor need to qualify the opinion

2. Unqualified opinion

Since debtor becoming bad debt or loss arising from debtor is due to non-adjusting event. Auditor should ask management to disclose the event in the disclosure part of the financial statements.
If not qualify the opinion.

3. Unqualified opinion

Since the auditor is satisfied with the procedures management followed

4.Adveres opinion

When the financial statements are materially misstated and they are material and pervasive, auditor should give adverse opinion.

Here inventory formed the largest part of assets, hence qualify it as adverse opinion

5. Qualified opinion

Under IFRS for revenue, it is to be recognised when performance obligation is met.

Hence to be recognised when they are shipped.