Question 6 Audit Report

Before the audit report was signed, the audit team encountered the following situation. Treat each situation independently and assume the remaining financial statements are fine.

1) A property owned by Cooks Furniture Ltd was sold to Lidia Preston, the wife of Howard Cook in June 2020 (refer to case description in part A). The property has a market value of four million and was sold at 3.2 million. Management did not disclose this in the financial statement because they believed this was a private matter. The disposal of this asset has been appropriately accounted for on the financial statements (e.g. the asset was removed from PPE and the loss of disposal was correctly recognized as an expense).

2) The subsequent selling price of the ready-made furniture range suggests the inventory valuation as of 30 June 2020 should be written down by $48,000 but management only wrote $38,000 off as per the financial statements because they were confident that they can increase the selling price again in 2021 after people settling back to normality.

3) Carl Cook decided to retire in 2021 due to health reasons, Carl is willing to sell his shareholding to the remaining shareholders. However, the BoD decided to explore the potential of selling the business. By the time to sign the 2020 financial statements, the company has not commenced negotiations with any potential buyer. The BoD said to the auditor that they may not sell the business if they cannot get a good deal. Carls retirement decision is disclosed on the financial statements, but not the intention to sell the business.

REQUIRED: For each of the above situation:

a) Discuss the audit procedure that the auditor needs to perform in relation to each situation. (6 marks)

b) Explain which audit opinion is appropriate for each situation. (7 marks)