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Consider the following independent and material situations: (0) During your audit of a large manufacturing company, you were not able to observe all locations of
Consider the following independent and material situations: (0) During your audit of a large manufacturing company, you were not able to observe all locations of physical inventory. You chose a random number of sites to visit, and the company's internal auditors visited the other sites. You have confidence in the competence and objectivity of the internal auditors. You personally observed only about 20% of the total inventory, but neither you nor the internal auditors noted any exceptions in the inventory process. (ii) Uranus Ltd has been very profitable. It recently received notice of a 10% price increase for a significant portion of its inventory. The company believes it is important to manage its products wisely and has a policy of writing all inventory up to current replacement cost. This ensures that profits will be recognised on sales sufficient to replace the assets and realise a normal profit. This operating philosophy has been very successful, and all salespeople reference current cost, not historical cost, in making sales. Only inventory has been written up to replacement cost, but inventory is material because the company carries a wide range of products. The company's policy of writing up the inventory and its dollar effects is adequately described in a footnote to the financial statements. For the current year, the net effect of the inventory write-up increased reported income by only 3%, and assets by 15% above historical cost. You are convinced that your client is violating another company's patent in the process of manufacturing its only product. The client will not disclose this, because it does not want to wave a red flag and bring this violation to the other company's attention. Required: For each of the situations (i) to (iii) above: (a) Indicate the type of audit opinion you would issue. (3 marks) (b) Give reasons for issuing the particular audit opinion. (6 marks)
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