Question 2 (10 marks)

Consider the following independent situations found during audit testing of Faran Ltd, which has a balance date of 30 June 2019. Assume that all the situations are material.

(i)Recent industrial action has seen trade unions win a pay increase of 5% for all their members. Under the terms of the agreement, the pay increase will be backdated to 1 January 2019, resulting in a charge equal to 12 % of profit. Management have agreed to the pay increase, however, they have not made any adjustments to the 30 June 2019 financial report.

(ii)A large order from an overseas supplier was shipped FOB (free on board) from its port of origin on 1 June 2019. The order arrived on 20 July 2019. The purchase is not reflected in the 30 June 2019 financial report.

(iii)The draft chairmans report to go with the financial report states that the profits of a particular segment of the companys operations increased by 70% during the period. On checking the figures, you found profits increased by only 4%.

(iv)Your New Zealand branch office disclaimed responsibility for the inventory figures in the New Zealand divisions reporting package. This is because sudden flooding prevented the auditors from attending the stocktake, and destroyed documentation which would have enabled them to substantiate inventory by other means. The New Zealand division represents about 10% of Faran Ltds operations.

(v)The entire Queensland operations of the company are under investigation by the Tax Office for alleged failure to pay the appropriate amount of PAYG tax. Your preliminary investigations reveal that the Tax Office has a strong case against the company. No mention of the dispute is made in the financial report and the effect on profit is considered extremely difficult to estimate .

Required:

Assume that no adjustments are made. For each situation, identify the type of audit opinion required and explain the basis of your answers.