Question

The following are independent and material situations:
(0) An auditor hires an expert to review the net-realisable value of a client's highly
specialised inventory at year end. Inventory on hand accounts for 25 percent of
the client's current assets and 10 percent of total assets. The expert reports
that a material impairment to the inventory value would be appropriate. The
client disagrees and refuses to make an adjustment.
(ii) A customer of your audit client recently filed a voluntary bankruptcy petition.
Your client refused to make the necessary adjustment to the customer balance
owing to reduce the recorded value to its estimated recoverable amount. Your
audit procedures discovered that the appointed liquidator estimated the
recoverable amount to be approximately 20 percent of the recorded amount.
You are of the opinion the event will cause substantial cash flow problems to
your client.
(iii) An auditor is engaged after year end to audit a client's financial report. As a
result, the auditor could not attend the physical year-end inventory count. The
accounting records are not sufficiently reliable to enable the auditor to perform
alternative audit procedures to satisfy themselves as to the year-end inventory
balances.
(iv) A client changes its method of ac unting for the cost of Work-In-Progress
inventories from FIFO to the weighted average. The auditor's audit procures
found that the weighted average method of valuation does approximate the
FIFO method of valuation. However, the change has a material effect on the
financial report and has not been disclosed.
(v) As a result of the Covid-19 pandemic, an auditor has decided that a Tasmanian
client in the tourism industry will not be able to continue as a going concern
after the government incentives are discontinued. The client has adequately
disclosed its financial difficulties in a note to its financial report as well as the
director's report. The financial statements do not include any adjustments that
might result from the client going insolvent or ceasing to trade.
Required
Using Table 5 below, for each of the above situations:
a.
Evaluate the results of the audit procedures in each instance, and explain the
type of audit opinion you would issue (refer to relevant auditing standards)
b.
Interpret the auditing standards and provide reasons for issuing the particular
'level of audit opinion (refer to relevant auditing standards).

Answer 1

Answer :

a.

1.      Auditor always strives to achieve reasonable assurance by obtaining sufficient and appropriate audit evidence that financial statements are free from material misstatements. In this inventory is material to the financial statements and it has been assured through an independent expert that material misstatement does exist because of lower realizable value as compared to inventory's cost. As a result, the adjustment is required in financial statements. Due to disagreement with management, there is risk that company's stakeholder's would be misled if the adjustment is not incorporated. Therefore auditor is bound to qualify the audit opinion, due to disagreement with management by giving qualification discussing the materiality of the event and its impact on the financial statements.

2.      The receivable amount is material to the financial statements. The auditor is of the opinion that this may cause cash flow and liquidity issues to the client. Due to disagreement with management, the auditor shall qualify the audit opinion. The auditor may add an emphasis of matter paragraph highlight the liquidity issues being faced by the company and assessing the going concern assumption. Management shall be required to provide mitigating measures that validate its going concern assumption.

3.      The inventory count is substantive audit procedures that need to be done. As the client's internal control are not reliable through which auditor may be able to obtain corroborative audit evidence that inventory is not materially misstated. Due to scope limitation and materiality of inventory, the auditor shall issue qualified audit opinion.

4.      The FIFO and average give approximate result and there is no material misstatement due to change in inventory valuation method, therefore auditor shall discuss the matter with management and asset them to disclose the change in inventory valuation method. If the management does not disclose the matter, the matter may as$ an emphasis of matter paragraph. Please note that emphasis of matter paragraph does not indicate that audit opinion is qualified in this respect.

5.      The going concern assumption of the client is not valid. Further the client has not disclosed adjustments of insolvency. There is risk that users of financial statements will be misled due to financial statements being materially misstated. As a result of this, the audit shall not issue any audit opinion as the impact of going concern is material as well as pervasive to the financial statements.

b.

1. In question 1. The inventory is materially misstated which is not being adjusted. Therefore financial statements are not giving true and fair view. Therefore for inventory head, the audit opinion shall be qualified as the matter is no pervasive.

2. As the accounts receivable amount is material but not pervasive therefore audit opinion is qualified by giving highlighting the accounts receivable issue. For going concern assumption an Emphasis of matter paragraph shall be given.

3. As the matter is material but not pervasive and there is disagreement with management therefore audit opinion is modified by giving qualification.

4. The change in inventory valuation does not result in material misstatement therefore audit opinion shall not be modified in this respect.

5. Going concern assumption being invalid is material as well as pervasive therefore auditor will not issue any opinion.

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