Question 1 (6 marks) For the following independent situations, assume that you are the audit partner on the engagement: 1. Auto Delivery Company has a fleet of several delivery trucks. In the past, Auto Delivery had followed the policy of purchasing all equipment. In the current year, they decided to lease the trucks. The method of accounting for the trucks is therefore changed to lease capitalization. This change in policy is fully disclosed in footnotes. 2. You are auditing Deep Clean Services for the first time. Deep Clean has been in business for several years but over the last two years has struggled to stay afloat given the economic conditions. Based on your audit work, you have substantial doubt that Deep Clean will be in business by the end of its next fiscal year. 3. One of your audit clients has a material investment in a privately held biosciences company. Your audit firm engaged a business valuation specialist to assist in evaluating the client's estimation of the investment's fair value. You conclude that the valuation specialist's work provides sufficient appropriate audit evidence. 4. Four weeks after the year-end date, a major customer of Prince Construction Company declared bankruptcy. Because the customer had confirmed the balance due to Prince at the balance sheet date, management refuses to charge off the account or otherwise disclose the information. The receivable represents approximately 10% of accounts receivable and 20% of net earnings before taxes. 5. During your audit of Raceway Company, you conclude that there is a possibility that inventory is materially overstated. The client refuses to allow you to expand the scope of your audit sufficiently to verify whether the balance is actually misstated. 6. You complete the audit of Munich Department Store, and in your opinion, the financial statements are fairly presented. On the last day of the audit, you discover that one of your supervisors assigned to the audit has a material investment in Munich. Required: For each situation, you are required to do the following: 1. Identify which of the conditions requiring a deviation from a standard unmodified opinion audit report is applicable, if any. 2. State the level of materiality as immaterial, material, or highly material. If you cannot decide the level of materiality, state the additional information needed to make a decision. 3. Given your answers in requirements 1 and 2, state the type of audit report that should be issued. If you have not decided on one level of materiality in requirement 2, state the appropriate report for each alternative materiality level. 4. Provide a justification for each type of audit report you state. Answer to Question 1 (6 marks) Requirement Situation Requirement Requirement 2: 1: Condition Materiality level 3: Type of Requirement 4: Justification audit report 1 2 3 5