ample Co. (STC) is a small and medium enterprise (SME) listed on the local stock exchange. It imports high quality textile goods manufactured in Philippines and sells them to domestic users in neighbouring countries. sample started business in the year 2015 and has been profitable from the year 2016 onwards.

The financial statements for the years 2015 to 2018 were audited by Lily, Chartered Accountants. Since the sole proprietor of lily died in 2019, sampleappointed joe Chartered Accountants to audit the financial statements for the year ended 31 December 2019.

You are the audit manager at joewith responsibility for this audit. Twelve junior auditors have been assigned to you and you have formed four groups to handle different segments as below-

Group 1- Purchases/ accounts payable Group 2- Sales/ accounts receivable Group 3- Warehousing/ inventory Group 4- Expenses/ non-current assets

It is now March 2020 and the groups have completed their field work. You are having a meeting with them to analyse their findings, consider if more work would be necessary and also decide the type of audit report to be issued. Sales and profit before tax for the year and total assets as at year-end are $10m, $2.8m, $12m respectively.

Materiality threshold was set at 5% of profit before tax and 1% of total assets at the planning stage. Based on the inputs received from the four groups at the meeting, there is no need for any revision to this threshold at the conclusion stage of the audit.

A summary of all misstatements identified by the four groups reveals overstatement of profit by $270,000 and overstatement of assets by $204,000. STC's profit before tax of

$2.8m fell short of target profit of $3.7m and the directors decided not to provide depreciation on non-current assets this year. They have however verbally agreed to

provide depreciation on these assets for 2 years if there is sufficient profit next year. No provision has been made for doubtful debts as the directors felt all receivables will be recovered in full. However, after reviewing individual customer balances and consistent with prior years' practice, Group 2 felt a provision of $85,000 would be necessary. The directors are not in agreement and would not make any adjustment in the accounts.

Group 3 observed that inventory has been valued at cost without any consideration for net realisable value. Also, cut-off procedures were not properly followed which resulted in overstatement of inventory. Your team members attended the stock-take at year-end and, apart from valuation and cut-off issues, there were no other significant observations. Significant weakness in internal controls were noted in almost every area. It was observed that many of the misstatements could have been prevented if adequate internal controls were implemented and complied with.

You plan to discuss with the management these observations in the exit interview to be held next week but do not think they will be very keen to listen to these observations and make any changes in the financial statements. Your audit team members have a very poor impression about management attitude and integrity. They even think that joe may not be appointed as the auditor for subsequent years if it insists on amending the financial statements as indicated in the observations stated above.

Required:

1) Decide on the type of audit opinion you plan to express and explain the basis for the opinion. (Note: You are NOT required to draft the audit report.)

2) If the directors threaten not to appoint DoubleCheck as auditors for next year, will you make any change in the type of audit opinion? Why or why not?