QUESTION 1

1. Upon the completion of the audit of Lovejoy Company Ltd, the Engagement Partner reviewed the audit working papers and came across the following;

• There was material inconsistency between the financial information and other information in documents containing the financial statements and the auditors report thereon. The material inconsistency has been traced to the financial information but management has refused to effect any change when requested to do so.
• Stocks worth GH5 million were valued at cost in the financial statements. The review of the post balance sheet events indicated that not all the stocks could be sold in the normal course of business. Some were damaged and some have become obsolete and slow moving. The total assets of the company is GH20 million. If the stocks were valued at net realizable value, the value would have reduced by GH2.0 million. The Directors have refused to allow the stocks to be valued at lower of cost and net realizable value and valued all the stocks at cost.
• Management refused to allow auditors to carry out circularization of debtors. The receivables figure was material in the financial statements. In addition, the auditors have not received a reply to the letter of enquiry sent to the companys solicitors in respect of a major litigation affecting the company. The auditors assessed that the effect of the two items is both material and pervasive.
• Subsequent events indicated that a major debtor has become insolvent. The amount involved was material. The directors refused to recognize the provision for a write- off of the amount.

Required:

i) For each of the items, recommend the type of audit opinion to be issued.

ii) Consider what action the auditors should take in view of management refusal to accept the recommendations and/or allowed the auditor to carry out the necessary audit procedures.