Items 1-5 present various audit situations. For each situation, indicate which t
ID: 2563873 • Letter: I
Question
Items 1-5 present various audit situations. For each situation, indicate which type of audit report will most likely be issued based ONLY on the information provided in the situation.
Unmodified opinion – standard report.
Unmodified opinion – explanatory paragraph
Qualified opinion
Adverse Opinion
Disclaimer of opinion.
Simply record the letter corresponding to the opinion type IN CAPITAL LETTERS. Each opinion may be used once, more than once or not at all.
ABC electronics manufactures electrical components. During the year, market conditions resulted in a significant reduction in the demand for these products. These products are now being sold below cost. Management refuses to write off the products or increase the allowance for obsolescence.
You were unable to observe the inventory counting at Stevens industries due to circumstances. The amount of inventory is material to the overall financial statements. However, you were able to satisfy yourself to the existence and amount of inventory through alternative procedures.
Auto Company has a fleet of delivery trucks. In the past, the company has purchased all equipment. This year they decided to lease the trucks. As compared to previous years, trucks are now recorded as capital leases. This new policy is fully disclosed in the footnote disclosures.
You complete the audit of New England Department Store. In your opinion, the financial statements are fairly stated. However, on the last day of the audit, you discover that one of the supervisors assigned to the audit has a material investment in New England Department Store.
Your client YummyYogurt has experienced significant decline if customer traffic over the past several months due to increased competition from other frozen yogurt stores. You have substantial doubt the company’s ability to continue as a going concern. You believe the financial statements are fairly stated.
Explanation / Answer
1. As the Management refuses to write off the products or, increase the allowance for obsolescence, the Inventory value would have got overstated, above the realizable value. The auditor should give “Qualified Opinion”.
2. Inventory is significant to the overall financial statement. Auditor must physically check the inventories so that he can verify the existence of the stock & its completeness and accuracy in the records. Even if auditor is unable to attend on the inventory counting date, he should be present on a subsequent date and verify the movement of goods from the stock count date to the date of verification. If satisfied based on these tests, the auditor would issue unqualified standard report.
3. If the lease is of long term basis (for the majority years of useful life of the trucks taken on lease), then it is appropriate to classify the lease as capital lease. The auditor may issue standard unqualified report, if the disclosure is complete as per the requirements of disclosure by Accounting Standard (with regard to the Terms of the lease, Present value of future lease payments, disclosure of principal & interest component etc.,)
4. The key audit staff involved in the audit has material investment in client’s business. This could have affected the objectivity of the audit work being carried out. As it has impaired the independence & objectivity of the audit work, the auditor should issue disclaimer of opinion report.
5. If in auditors opinion, there is substantial doubt about the company’s ability to continue as a going concern, and if the Management’s disclosure does not provide complete information about this concern, the auditor should issue Qualified report and state that Assets and state that financial statements do not include any adjustments that might result from the outcome of this uncertainity.
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