Question 7 10 Marks (a) For each of the following situations, state the type of audit opinion which should be given. (4 marks) i Choo Limited is a large company that your firm has audited for the last five years. The directors refuse to include a cash flow statement in the financial report, stating that it is far too time consuming to obtain the necessary information, and that they do not believe a cash flow statement is necessary for a true and fair view. The effect of the non-disclosure is likely to render the financial report meaningless. ii You have received the draft annual report from Stanza Limited. On reading the 'Year in Review' you note the chairman states that revenues increased by 150%. On checking the accuracy of this information you note that revenues have actually fallen by 10%. Stanza Limited refuses to change anything in the annual report for fear of missing printing deadlines. iii The management of Rushing Enterprises Ltd has calculated its Provision for Doubtful Debts at $450,000. The company has indicated that bad debts written off in July should not be considered in the provision, as the financial failure of the debtor companies 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 shield 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. iv The client refuses to include all property plant and equipment in the balance sheet and the auditor believes that the effect of this action is material and pervasive on the financial reports Question 7 continued over next page Question 7 (continued) (b) Describe the two types of subsequent events that are required to be considered as part of the audit of a financial report. Provide one example of each type. (4 marks) Question 4 10 Marks (a) For each of the following situations, state the type of audit opinion that should be given in the circumstances. (8 marks) Type of Opinion i. ii. Situations The financial report of Ajax Ltd is prepared on the basis that the company is a going concern but does acknowledge in the annual report that the company is having some financial issues. After considering additional audit evidence the auditor's conclude that Ajax Ltd will not be able to continue as a going concern in the next financial year. Your client's solicitors representation letter reveals that the company is being sued by a major customer for a material amount for an event that occurred in a prior period. The client refuses to acknowledge this legal action in the financial statements as they are confident they can defeat the action. The directors of a company listed on the Australian Stock Exchange refuse to disclose in the annual report that its three directors' each receive an annual remuneration of $150,000 on the grounds that it is not material. Net profit after tax is $30 million and net assets are $60 million. A significant amount of the client's accounting records were destroyed by fire in the current financial year. The financial report of Simspon Ltd is prepared on the basis that the company is a going concern but does acknowledge in the annual report that the company is having some financial issues. After considering additional audit evidence the auditor's conclude that Simpson Ltd will be able to continue as a going concern in the next financial year. iii. iv. V Question 4 continued vi. vii. 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. You are currently engaged to audit Maloney Ltd. Your audit team has found an error in inventory to the value of $95,000. Overall planning materiality is $70,000. The client has not allowed the auditor to verify their material accounts receivable balance using positive confirmation requests. The auditor has been able to use alternative procedures to verify the accounts receivable balance. viii. (b) Explain the difference between an unmodified audit opinion and an adverse audit opinion. (2 Marks)