Question 4 10 Marks

For each of the following ten (10) independent situations, state the type of audit opinion that should be given in the circumstances.

	Situations	Type of Opinion
i.	You are currently engaged to audit Redman Limited. Your audit team has found errors in accounts receivables to the value of $20,000. The auditors preliminary judgement about materiality is $450,000 while performance materiality for accounts receivables is $24,000.
ii.	Your client is in a major legal dispute with one of its customers over the supply of faulty materials. The amount is material. Your clients solicitors have acknowledged this dispute in their solicitors representation letter however the client refuses to acknowledge this legal action in the financial statements as they are confident, they can defeat the action.
iii.	The client has not allowed the auditor to verify material accounts receivable balances using positive confirmation requests. The auditor has been able to use alternative procedures to verify the accounts receivable balance.
iv.	The management of Samson Limited has calculated its Provision for Doubtful Debts at $470,000. The company has indicated that bad debts written off in July (i.e., after balance date) should not be considered in the provision at balance date 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 believes that the provision should be closer to $610,000. 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 $700,000.
v	The Directors Report states the company made a $4 million profit however the audited financial statements show a profit figure of $3 million.

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vi	During the audit of Virat Limited the auditor observed that all costs attributable to the research and development of a new motor had been accounted for as an expense. In discussing the matter with the companys manager of research it was established that the outcome of the project showed potential and that major technical obstacles seem to have been overcome during the development stage and the product is now destined for commercial prodection. The companys financial controller has expensed the costs associated with the project, stating: We want to expense all development cost as they are trying to keep profits down. The research and development costs associated with the project amount to $500,000. As per the draft financial statements, net assets are $23 million and operating profit $3 million.
vii.	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 companys new product range. The situation facing the client is adequately described in the footnotes.
viii.	A significant amount of the clients accounting records were destroyed by fire before the end of the current financial year and no alternative means of preparing factual financial statements exists. The client has prepared a set of financial statements based on best estimates.
ix.	The auditors of Elite Ltd were refused access to six months of the minutes of the directors meetings (held monthly) because they contained discussions of a highly confidential matter. No alternative procedures could be performed.
x.	The management of Tran Limited prepared the 2020 financial statements on the basis that the company is a going concern. Before the audit of the 2020 financial year was finalised the auditor now believes Tran Limited will not be able to continue as a going concern in the next financial year. The company has made no reference to these concerns in the financial statements.