Question 4 10 Marks For each of the following situations, state the type of audit opinion that should be given in the circumstances. Type of Opinion i. ii. iii. Situations You are currently engaged to audit Freedom Limited. Your audit team has found an error in accounts receivables to the value of $160,000. Overall planning materiality is $120,000. Your client is in a major legal dispute with one of its customers over the supply of faulty materials. The amount is material. Your client's solicitors have acknowledged this dispute in their solicitor's representation letter however the client refuses to acknowledge this legal action in the financial statements as they are confident they can defeat the action. The client has not allowed the auditor to verify material accounts receivable balances using positive confirmation requests. The auditor has not been able to use alternative procedures to verify the accounts receivable balance. The management of Ajax Limited has calculated its Provision for Doubtful Debts at $450,000 as at 30 June 2017. The company has indicated that bad debts written off in July 2017 should not be considered in the provision, as the financial failure of the debtor company did not occur until after the balance date. Your audit manager has reviewed the aging and potential collectability of debtors and she believes that the provision should be closer to $620,000. Management's response to the audit manager's estimation is that they have a better understanding of their customer's and disagree with the inclusion of bad debt write offs in the provision and are, therefore, unwilling to alter the provision. Reported profit before tax is $750,000. Before you sign the audit opinion you receive a draft of the client's annual report that contains additional information that is inconsistent with the figures contained in the financial statements. iv. V Question 4 continued over next page Question 4 continued vi vii. During the audit of Nisson Limited the auditor observed that all costs attributable to the research and development of a new motor had been accounted for as an asset. In discussing the matter with the company's manager of research it was established that the outcome of the project was very uncertain and that major technical obstacles needed to be overcome before a commercial product could be developed. The likelihood of these technical obstacles being overcome was no better than a possibility'. In spite of this, the company's financial controller has refused to expense the costs associated with the project, stating: 'We don't employ top research scientists just to produce expenses'. The research and development costs associated with the project amount to $1 million. As per the draft financial report net assets are $38 million and operating profit $5 million. The auditor believes there is a risk that their client will not continue as a going concern. Management has indicated their plans to undertake a major restructure which will substantially reduce operating costs and lay the foundation for sales growth of the company's new product range. The situation facing the client is adequately described in the footnotes. A significant amount of the client's accounting records were destroyed by fire in the current financial year. The management of Cisco Limited prepared the 2017 financial statements on the basis that the company is a going concern. Before the audit of the 2017 financial year was finalised the auditor now believes Cisco Limited will not be able to continue as a going concern in the next financial year. The auditor believes that the client's financial report presents a true and fair view of its financial position and performance, and the report is in accordance with the Corporations Act. viii. ix. X. Question 3 8 Marks A new client has been paying its suppliers late consistently - well in excess of the suppliers' agreed credit terms. As a result, some suppliers have begun demanding cash on delivery from the client. You are also aware that a review of correspondence between the new client and its banks reveals that the new client has been experiencing cash flow problems for two years. Required (a) Discuss whether there are any events or conditions that may cast significant doubt on the new client's ability to continue as a going concern. (4 marks) (b) List and explain this situation. alternative audit opinion options available to the auditor in (4 marks)