Question 2 (8 marks)

Consider the following independent situations found during audit testing of CD Ltd, which has a balance date of 30 June 20X7. Assume that all the situations are material.

(i) Recent industrial action has seen trade unions win a pay increase of 4% for all their members. Under the terms of the agreement, the pay increase will be backdated to 1 January 20X7, resulting in a charge equal to 10 % of profit. Management have agreed to the pay increase, however, they have not made any adjustments to the 30 June 20X7 financial report.

(ii) A large order from an overseas supplier was shipped FOB (free on board) from its port of origin on 1 June 20X7. The order arrived on 20 July 20X7. The purchase is not reflected in the 30 June 20X7 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 CD Ltds operations.

Required:

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