Question B3 Part1 For the following independent situations, assume you are the auditor in-charge of the audit engagement: (1) (2) (3) (4) During the course of audit examination on ABC Limited, you suspect that a material amount of the assets has been misappropriated through fraud. The company refuses to allow you to expand the scope of audit examination sufciently to conrm these suspicions. Subsequent to the date of the nancial statements as part of your subsequent review procedures, you learned that your audit client's warehouse was heavily damaged due to a recent re. The damage caused over 90% inventory loss. The loss will not be reimbursed by insurance. The newspaper described the event in detail. The nancial statements and appended footnotes as prepared by the client did not disclose the loss caused by the re. Your audit client's nancial statements are prepared as prescribed by a regulatory agency of the Hong Kong SAR Government but some items are not presented in accordance with Hong Kong Accounting Standards. The amounts involved in those items are material and are only adequately disclosed in the notes to the nancial statements. XY Z Corporation, your audit client, is engaged in a hazardous trade and cannot obtain insurance coverage from any source. A material portion of the corporation's assets could be destroyed by a serious accident, but such uncertainty was disclosed by way of note in the nancial statements. The corporation has an excellent safety record and has never suffered a catastrophe. Required: For each of the above situations, indicate the type of audit report that would be issued and state the reason. Consider each situation independently of the others. You are required to determine the appropriate audit opinion with reason for situation (1) to (4) by using the table as shown below. Situation Type of audit opinion Reason (1) (2) (3) (4) (8 marks) Part II The concept of materiality is fundamental to the work of auditors. Matters that are immaterial are not reported in financial statements. Materiality is related to risk and is used in calculation of sample size and tolerable error, and in the performance of analytical procedures. Required: (a) Explain the concept of materiality. (3 marks) (b) Discuss the roles of materiality limit in performing audit engagement. (3 marks) (c) Using the following diagram to illustrate the relationship from (i) to (viii) among the tolerable misstatements, risk, and planned evidence. (Note: your answer must be neatly presented in a diagram form. NO marks will be given if it is failed to do so.) (4 marks) Acceptable audit risk (ii) (v) (vii) Inherent risk Planned Planned (i) Detection risk (iv) audit evidence Control (iii) risk (vi) (viii) Tolerable misstatement