Question 3

Consider each of the following independent situations.In each case, assume the client is a reporting entity and that a general purpose financial report has been prepared and audited for the financial year ended 30 June 2020.

Required

For each independent situation, a) through d), you need to decide:

a)the type of audit report to be issued and,

(8 marks]

b)if the audit report is to be modified, identify the nature of the matter that gives rise to that type of auditmodification.

(12 marks]

[Total for Question 3 = 20 marks]

Independent Situation

Type of audit report to be issued

(2 marks]

If modified, identify the nature of the matter giving rise to the type of audit modification to be issued

[3 marks]

a)Crazy Joe's Ltd, a discount toy wholesaler, has incurred operating losses and negative cash flows for the last three years.A note disclosure to the financial statements indicates that the current ratio for the current year is 0.80 and a material bank loan is subject to re-financing negotiations.During the year Crazy Joe's Ltd lost one of its major online retail customers.In additional, Toys 4 U Ltd, Crazy Joe's Ltd's parent company, injected significant capital into the company and has provided the auditors with a letter of comfort.Crazy Joe's Ltd has disclosed its concerns regarding its uncertainty as a going concern in the financial report and the directors declaration.The auditor has concluded that the going concern basis is appropriate.

Independent Situation

Type of audit report to be issued

[2 marks]

If modified, identify the nature of the matter giving rise to the type of audit modification to be issued

[3 marks]

b)A subsidiary of a major gas production company is under investigation for tax fraud as they have not paid the required amount of PAYG tax for the last three financial years.The auditor obtained a solicitor's representation letter from the subsidiary's legal counsel which indicated that the Australian Tax office has a strong case against the subsidiary.The fraud case is not disclosed in either the subsidiary's financial report or the consolidated financial statements.

Independent Situation

Type of audit report to be issued

[2 marks]

If modified, identify the nature of the matter giving rise to the type of audit modification to be issued

[3 marks]

c)A client has lost their appeal against an unfair dismissal lawsuit in the Supreme Court and has to pay damages of $4.5 million dollars plus legal costs of $1.9 million dollars.The client's net assets are $1.8 million dollars and the financial report has been prepared on the going concern basis.

Independent Situation

Type of audit report to be issued

[2 marks]

If modified, identify the nature of the matter giving rise to the type of audit modification to be issued

[3 marks]

d)A major Tasmanian investment company lost $160 million dollars on Investments in CFD's during this year's stock-market collapse.The company's net assets are $450 million dollars.The financial report presents a true and fair view of the company's financial position.