Question B3 Part I You are auditing the financial statements of Lee Company Limited for the year ended 31 March 2019. Before commencing the audit engagement, Windy, the audit trainee, asked you the types of audit opinions. You explained what type of opinion formed depends on certain criteria and possible effects of the matter on the financial statements. Required: Using the table below to illustrate how the levels of materiality affect the financial statements as a whole and the circumstances lead to qualification will affect the decision of using different audit opinions. (3 marks) Page 9 of 13 Materiality Level Cir- cumstances lead to qualification Part II For the following independent situations, assume you are the auditor in-charge of the audit: (1) Your audit client is experiencing going concern problems. Client has disclosed the issue in detail in the notes to financial statements. (2) The client has changed from using the FIFO method of inventory in previous years to the LIFO basis for valuing inventory in the current year. In fact, LIFO inventory method is unacceptable under Hong Kong accounting standards. The amount involved is material but not pervasive. (3) During the course of audit examination on Lau Limited, you suspect that a pervasive material amount of the assets has been misappropriated through fraud. Lau Limited refuses to allow you to expand the scope of audit examination sufficiently to confirm these suspicions. (4) The market value of your client's investment held for trading on a Hong Kong listed company has dropped significantly after the year-end. You consider the amount of decrease is material and the client has not made any adjustment to the year-end figure of the investment or even not adequately disclosed the event in the notes to the financial statement. You consider the non-adjusting event as unacceptable treatment. (5) In reviewing the subsequent events, you learned of heavy damage to your audit client's warehouse due to a fire occurred after the year-end; the loss will partly be reimbursed by insurance. The newspaper described the event in detail. The financial statements and appended footnotes as prepared by the client have adequately disclosed the loss caused by the fire. Required: For each of the above situations, indicate the type of audit report that would be issued and why. Consider each situation independently of the others. You are required to determine the appropriate audit opinion for situation (1) to (5) by using the table as shown below. (15 marks) Situation Type of audit opinion Incident Reason