Edward Ltd (Edward)

Edward has suffered a fire in its head office and many of its accounting records up to the date of the fire in May 20X1 were destroyed. The company's year-end is 31 July 20X1 and the financial statements are being prepared on the basis of estimates and by using the salvageable information.

Henry Ltd (Henry)

Henry is a construction company that has paid 40,000 to a consulting engineer for advice on the structural viability of a project. The engineer is the brother of the managing director (the majority shareholder). The managing director does not wish to disclose this transaction. The company's profit for the year is 3 million.

Gordon Plc (Gordon)

Gordon has traditionally provided many of its services to customers by subcontracting to a pool of self-employed individuals and making payments gross without deducting income tax.

Gordon has been experiencing cash shortages in recent months and has found it difficult to make interest payments on its borrowings.

The tax authorities have questioned whether the individuals that are sub-contracted to Gordon are, in reality, employed. This would mean that income tax should be deducted from payments to them (salaries), and then paid over to the tax authorities. In this case Gordon would become liable to pay additional tax backdated for six years plus possible interest and penalties. An official investigation is underway. The directors of Gordon are fully co-operating with the tax authorities. Gordon has fully disclosed the situation in the financial statements, including the existence of a material uncertainty in relation to the going concern basis of accounting.

An expert has advised your audit team that if the tax authorities rule that these individuals have the status of employees and not sub-contractors, the ultimate liability to the tax authorities could be between nil and 5 million. However, the advice is that the outcome cannot be calculated with any degree of accuracy and that Gordon could appeal against any unfavourable ruling.

The engagement partner agrees with this treatment and is satisfied that all the necessary disclosures have been made.

James Ltd (James)

James has included in trade receivables a balance of 50,000 relating to a company at which a liquidator was appointed shortly after the year end. You believe that this debt is irrecoverable. James have made no allowances against this debt.

1. Explain and distinguish between the following three types of modified auditors opinion. Your answer should include how each of these opinions are presented.
   • Qualified opinion
   • Adverse opinion
   • Disclaimer opinion
2. For each of the four situations outlined above state whether or not the auditor should modify their opinion. Justify your answer, and outline the modifications, if any to each auditors report.