Question 6

Kangaroo Bedding Ltd is a bedding manufacturer that achieved a net profit before income tax of $1 842 000 for the year ended 30 June 2019. Kangaroo Bedding Ltd has a major loan from Westpac Bank (WB) for financing daily and other operations, carrying an interest rate of 7 per cent per annum.

Kangaroo Bedding Ltd is required to adhere to financial covenants imposed by WB, and in the event that the covenants are breached, the annual interest rate on loan will increase to 10 per cent. Kangaroo Bedding Ltd has disclosed these details in the notes to the financial report.

You are satisfied that the note in the financial report complies fully with the accounting standards; however, you form the view that your audit report should draw attention to this note.

In addition, you have identified the following matters from your audit work:

1. Kangaroo Bedding Ltds inventory amounted to $1 941 000 on 30 June 2019. In order to move some of its old stock, in July 2019, the company sold 25 per cent of its finished goods inventories held on 30 June 2019 for $82 189 below their original cost. Management has indicated that as the sales occurred after 30 June 2019, it believes that the value of finished goods at that date should remain at cost. The remainder of the inventory has only been purchased recently and is in great demand.
2. Kangaroo Bedding Ltds accounts payable on 30 June 2019 amounted to $1 726 000. Subsequent payments testing revealed that in July 2019, invoices totalling $53 751 were paid that related to June 2019 purchases of inventories. The relevant invoices were omitted from the balance of accounts payables on 30 June 2019. Management has indicated that it does not intend to adjust the financial report in relation to this issue.
3. Kangaroo Bedding Ltds accounts receivable balance on 30 June 2019 amounted to $2 540 000. Your testing has revealed that the accountant used an incorrect exchange rate to translate overseas debtors on 30 June 2019. As a result, the balance of the accounts receivable account was overstated by $75 650. Again, management has indicated that it does not intend to adjust the financial report in relation to this issue.

Required:

1. Explain whether drawing attention to the note will result in the expression of a modified audit opinion. Justify your answer. (2 marks)
2. Explain whether the issues arising from your audit work (matters 1 to 3 above) will individually have any effect on your audit opinion. Justify your answer, using calculations (6 marks)
3. Identify the type of audit opinion that you will include in your auditors report for Kangaroo Bedding Ltd for the year ended 30 June 2019. Justify your answer (3 marks).