Auditing (BAC 3163)

The financial statements of a company for the current year show an operating profit after tax of RM300,000 and share capital and reserves total of RM3 million. Taking into account the following circumstances of the company given below, the auditors give an unqualified opinion in each case. Give possible reasons for such an opinion.

For each independent case, (a) through (d), give a possible reason why the auditor issued an unqualified audit opinion.

(a) The auditor was unable to attend the physical count of inventories totaling RM500,000 but was satisfied, by other means, of their existence and condition

(b) The company is the defendant in a lawsuit involving a claim against a company for RM150,000. No provision has been made in the financial report because the companys legal counsel is firmly of the opinion that the companys defense will prove successful.

(c). The company is the defendant in a lawsuit involving a claim against the company for RM50,000. Based on legal advice, the directors hope to settle out of court for RM10,000. However, no provision has been made for this eventuality in the financial report, as the directors feel it would prejudice their negotiations

(d) The provision for doubtful debts is understated by RM10,000