1 Assume that the auditors encountered the following separate situations when deciding on the report to issue for the current year financial statements. 1. 2. 3. 4. 5. 6. The auditors decided that sufficient appropriate evidence could not be obtained to complete the audit of significant investments the entity held in a foreign entity. The entity failed to capitalize assets and obligations but explained them fully in the notes to the financial statements. The entity is defending a lawsuit on product liability claims. Customers allege that power saw safety guards were improperly installed. All facts about the lawsuit are disclosed in the notes to the financial statements, but the auditors believe the entity should record a loss based on a probable settlement mentioned by the entity's attorneys. The entity hired the auditors after taking inventory on December 31. The accounting records and other evidence are not reliable enough the auditors to have sufficient evidence about the proper inventory amount. The oil company is required by the FASB to present supplementary oil and gas reserve information outside the basic financial statements. The auditors find that this information, which is not required as part of the basic financial statements, has been omitted. The entity changed its depreciation method from units of production to straight line method, and its auditors believe the straight line method is the more appropriate method in the circumstances. The change, fully explained in the notes to the financial statements, has a material effect on the year-to-year comparability of the comparative financial statements. Because the entity has experienced significant operating losses and has had to obtain waivers of debt payment requirements form its lenders, the auditors decide that there is substantial doubt that the entity can continue as a going concern. The entity has fully described all problems in a note in the financial statements and the auditors believe that, while material, the uncertainty is not serious enough to warrant a disclaimer of opinion. Required: 7. (a) What kind of opinion should the auditors express in each separate case? (b) What other modification(s) or addition(s) to the standard report is (are) required for each separate case? Question 2 (JAN2018) (a) Described below are situations which have arisen in independent external audit clients: (i) (ii) (iii) (iv) (v) Management wanted to reduce the allowance for doubtful debts by RM5 million. The auditors did not agree and felt that it should stay at its current level. The auditor was engaged to audit the client after the entity's year end, so the auditor could not observe the inventory count that was held at year-end. The entity is a defendant in a major litigation (relating to a faulty product) that has not been settled as of the date of signing the auditor's report. A fire in the company's office because of a faulty photocopier has destroyed all records of accounts receivable as at year-end. The company changed its method of depreciation from straight line method to reducing balance method, necessitating a restatement of previous year's statements. Required: Assume that the above separate circumstances could be sufficiently material to require the expression of a qualified opinion. Indicate the effect of these circumstances on the auditor's report with relevant explanation. (20 marks) (b) Identify ALL the important elements of the auditors' standard report. Question 3 (MAY 2017) (c) (i) Described below are situations which have arisen in independent external audit clients: Entity A is subject to a going-concern uncertainty and has properly disclosed this uncertainty in its financial statements. (ii) (iii) (iv) (v) (vi) (vii) Entity B has changed from an accounting principle in conformity with generally accepted accounting principles (GAAP) to an accounting principle not in conformity with GAAP. The auditors encounter a material but not pervasive scope limitation that has not been imposed by client C. Entity D's financial statements are presented in conformity with GAAP. Entity E has changed from one accounting principle in conformity with GAAP to another principle in conformity with GAAP. This change has been reported by properly restating prior financial statements. After accepting the engagement, the auditors determine that they are not independent from client F. The entity G's financial statements contain a material and pervasive departure from GAAP. Required: For each situation, indicate all the possible type(s) of audit report. Assume any amount in the circumstances above is material on an overall basis (but not pervasive) unless otherwise stated. State your assumption(s). (20 marks) (d) Identify ALL the important elements of the auditors' standard report