Solve all parts of Question $2.$ It is audit problem under advance acounting.

You are an audit manager of Chan & Co and have been allocated to the audit of Woody Production Limited $($Woody$)$ for the year ended $31$ March $2024.$ Woody is a listed company which has been an audit client for many years and is the biggest sports wear and accessories wholesaler and retailer in Hong Kong.

Woody is one of the firm's crown$-$jewel audit clients. The total of the last year's audit fee received from this client and the proposed audit fee for the current year audit represents more than $15\%$ of the firm's total fees revenue. The engagement audit partner, Walter Lee, has served Woody for $6$ years and the current quality review partner assigned to this engagement will retire one month before the expected report date of the engagement.

Required:

$($a$)$ Using the information above, identify and explain the independence and quality management issues to be considered in the audit planning stage and propose the relevant actions to address each issue.

$(9$ marks$)$

$($b$)$ You noticed that there was a mega sale conducted by Woody right after the year end date from $1$ April $2024$ to $5$ April $2024$ at its own warehouse. Products with a total cost of HK$$1\mathrm{.}5$ million were sold for HK$$1$ million. The management did not make any adjustment on the inventory value with the reason that the goods were sold after the financial year$-$end date.

Required:

$($i$)$ List out all types of modified audit opinions and the nature of matter giving rise to each of the modifications.

$(5$ marks$)$

$($ii$)$ The management's reason for not adjusting the inventory value is as follows: "The mega sale is conducted after the year end date. In addition, the amount of HK$$0\mathrm{.}5$ million is clearly immaterial as it is much less than $1\%$ of the total assets. It is unnecessary to write down the value of the inventories". The total assets of the company are HK$$150$ million and the profit before tax is HK$$1$ million.

Required:

Explain your opinion on the management's statement that the amount of HK $$0\mathrm{.}5$ million is immaterial.

$(7$ marks$)$

$($iii$)$ The engagement team disagreed with the management's statement and considered that the inventory value is overstated by HK $$0\mathrm{.}5$ million.

Explain the impact on the audit report if the management refused to amend the financial statement.

$(4$ marks$)$

$($Total $=25$ marks$)$