Consider the following independent and material situations:

(i) 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 companys 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 companys 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.

(iii) You are convinced that your client is violating another companys 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

companys 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)