Question 3

Consider each of the following independent situations:

A. Inventory on hand at year-end has been valued at cost in the financial report of your client. However, net realisable value is 10% below cost according to the audit findings. The difference is a material amount.

B. 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 the 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 (SC) 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 an SC which supports its case.

C. Same as scenario B, except that the purchaser threatened action after the end of the financial year, rather than during the financial year.

D. You are auditing PF Limited, where net income is generally about 50% of gross revenues. Due to the small size of the charitys staff, there is a lack of control over the completeness of revenue. Despite your best efforts, you feel that you do not have enough evidence to conclude that revenue is complete.

E. Management of WER Limited has decided not to disclose directors fees in the accounts, as they are not material. You cannot convince management to change its decision. However, you do agree that the amounts are not quantitatively material.

F. Management of JFL Limited has estimated that the allowance for doubtful debts should be $540,000. As auditor you believe that the allowance should be $650,000. Management will not change its estimate. Profit before tax for the year is $440,000.

G. Your client has several bank accounts, one of which is in foreign country. Cash balances total $740,000 with the account maintained in the foreign country totalling some $528,750. You have been unable to obtain a bank audit certificate or any thirdparty confirmation with respect to the foreign bank account. The client has been unable to supply you with bank statements or other supporting documentation in relation to this bank account. Materiality for the client has been set at $480,000. All cash balances are classified as current assets in the clients financial statements.

H. Would your answer to scenario G be different if the clients only asset and liability was the asset of cash balances totalling $740,000 (that is, the client is a cash box)?

For each of the above situations, A-H, determine the appropriate audit opinion to be issued and justify your answer.