Question 2 (12 marks)

Consider each of the following independent situations concerning companies incorporated under the Corporations Act 2001. In all cases, assume that the amounts involved are material and that the audit is for the 30 June 2020 year. Also assume that in each situation the auditors have no concerns other than those prescribed:

1. B&B were appointed auditors of XY Limited on 1 July 2019. The audit report prepared by the previous auditor, T&A, for the year ended 30 June 2019 was unmodified. B&B reviewed that work papers of T&A in order to satisfy themselves that the opening balances for the year ended 30 June 2020 were fairly stated. In reviewing the predecessor auditors work papers, B&B found that T&A had not performed a debtors circularisation or any other procedures to confirm the amount of trade receivables at 30 June 2019. B&B were able to confirm some of the trade receivables by alternative procedures but had still doubts about the existence of certain debtors as at 30 June 2019. B&B were satisfied with all other aspects of T&As audit procedures and had no other concerns. B&B performed a debtors circularisation at 30 June 2020 and the results were satisfactory.

2. You are the auditor of Dawn Limited (Dawn) for the year ended 30 June 2020. The audit of Dawn was extremely difficult this year, as the company did not keep appropriate books and records. As the accounting department was chronically understaffed, transactions were not entered promptly, and reconciliations not performed. In an attempt to sort out the mess, a temporary accountant was employed; however, she was unable to even reconcile the bank account at year end. You are not satisfied all transactions that occurred during the year are reflected in the financial report.

3. T&T are the auditors of JDE Limited (JDE), and have been the auditors for a number of years. JDE has incurred losses from ordinary activities for the past three years. As at 30 June 2020, the audited accounts show current liabilities exceeding current assets. T&T are concerned that JDE is in financial difficulties. The directors of JDE, however, are optimistic that the company will become profitable and have provided optimistic sales projections to the auditors. T&T are not convinced that these sales projections are achievable; they believe that the viability of JDE is dependent on the continued support of JDEs parent entity, LLK Limited (LLK). At the date of signing the financial report, LLK had provided JDE with a letter guaranteeing support and subordinating its loan to JDE. The guarantee of support and the fact that the loan is subordinated are disclosed in the notes to the financial report. The directors declaration is not qualified in any manner.

4. You are auditing a listed client. In the previous financial year your client purchased property and entered into a contract to develop a shopping complex and then sell the developed real estate to an unrelated third party for a cost-plus settlement price. Following the sale early in the financial year, an economic recession resulted in rentals and occupancy rates being well below forecasts prepared by your client. Just before year end, the purchaser threatened to sue for damages, alleging they relied on your clients forecasts when entering into the contract. The amount of damages being claimed is highly material to your client. Your client has obtained an opinion from a well-known Senior Counsel which concludes that no damages should be payable. The directors have therefore included no reference to the matter in the financial report to be released next week. However, you have heard that the purchaser has also obtained advice from a Senior Counsel which supports its case.

Required:

For each of the above situations (A-D), determine the appropriate audit opinion to be issued and explain providing the appropriate reasons.

(4*3= 12 marks)

You may wish to present your answer in the form of a table as follows:

Situation	Appropriate audit opinion (4 situations*1= 4 marks)	Reason (4 situations*2 = 8 marks)
(A)
(B)
(C)
(D)