Question # 4. (10)

You are the auditor of Mehran Builders and Suppliers, a listed company which distributes materials to the construction industry from eight depots in the south of the country, and you are currently finalizing the audit for the year ended 30 June 2020. Your audits tests have proved satisfactory with the exception of the following four matters.

(a) The physical inventory count sheets for one of the depots were lost before they were made available to you, and you have not been able to confirm the inventory quantities and values for this depot by alternative methods. The directors have valued this part of the inventory at $75,000 and this figure is included in the overall inventory valuation of $640,000.

(b) Included in trade receivables, which total $580,000, is a debt amounting to $45,000 from a customer which went into liquidation on 15 July 2020. You have ascertained from the liquidator that your client is unlikely to receive a distribution. The statement of comprehensive income for the year shows a pre-tax profit of $100,000 but the directors are not prepared to provide for this debt.

(c) A substantial claim has been lodged against the company by a major customer. The matter is fully explained in the notes to the accounts, but no provision has been made for legal costs or compensation payable as it is not possible to determine with reasonable accuracy the amounts, if any, which may become payable. The directors have received legal advice which appears to be reliable in indicating that the claim can be successfully defended.

Required:

Explain how the above items will influence the auditor's report you will issue.