Question

Assume that you are the audit partner on the engagement. Company is manufacturer of racing cars. During the year, the changes in the market resulted in a significant decrease in the demand for the product, which are now being sold significant below cost. Management refuses to write off the products and not disclose this information in the footnotes

1. Identify which of the condition requiring a deviation from a standard unmodified opinion audit report is applicable, if any

2. State the level of materiality as immaterial, material or highly material. If you cannot decide the level of materiality, state the condition information needed to make decision

3. Give the type of audit report that should be issued. If you have not decided on one level of materiality in part 2, state the appropriate report for each alternative materiality level. Describe in detail the type of audit opinion selected

Answer 1

1. As per given details , company sales may decreased due to decrease in demand for the cars

So th company has to disclose it in notes to accounts and also seperstely in Directors report

But if it doesnt do so it may result in non disclosure

As per SA 705 considering the reasons of the directors the company should express an modified opinion if it is material or pervaisive

2) TheFinancial statement items are material if they could influence the economic decisions of users. The materiality concept is the universally accepted auditing and accounting principle that all material matters are to be disclosed.

In this case the change in the demand for the cars is material effect as it effects the net profit of the company as a whole and the shareholders or investors can change their opinion on investing in company

3) If it is not material express a clean or unmodifies opinion as per SA 700 but mention the matter in emphasis of matter paragraph