You are the audit partner of Merit Chartered Accountants ("MCA"), working on the audit of Darwin Tourist Buses ("DTB") for the 2017 financial year. DTB is a provider of luxury bus trips all around Australia, including both interstate capital city travel and conference and holiday packages.

The net profit before tax of DTB for the 2017 financial year is $14.5M while net assets total $232M.

You are due to sign the auditor's opinion on 22 August 2017. DTB will issue the financial statements on 28 August 2017.

On 16 August 2017, the following situations come to your attention:

Situation 1

Jolly Holidays, one of DTB's largest wholesale travel agents that purchased travel packages in bulk from DTB, went into liquidation on 3 July 2017. A letter from the liquidator dated 31 July 2017 indicates that creditors are likely to receive $0.10 in the dollar. As at 30 June 2017, Jolly Holidays owed DTB $2,301,000.

Situation 2

On 15 August 2017, a bus travelling from Brisbane to Sydney crashed. It is alleged that the bus driver was distracted by a call on his mobile telephone. 5 passengers died and 17 were injured. The passengers had paid their fares during the 2017 financial year. (An account "Unearned Income" was credited in the prior year when monies were received). It is likely that a law suit will be brought against the company due to the driver's negligence.

Question:

Assume there are no issues other than those described in Situations 1 and 2, and that going concern is not an issue. Also, assume that in response to each material situation above, management could either adjust the amounts in the financial statements or take no action.

Treating Situations 1 and 2 independently when answering this question:

(a) For Situation 1:

(i) Identify the appropriate treatment in the financial statements. Justify your answer.

(ii) Identify the appropriate auditor's opinion if management adjusts the amounts in the financial statements. Justify your answer.

(iii) Identify the appropriate auditor's opinion if management takes no action. Justify your answer.

(b) For Situation 2,:

(i) Identify the appropriate treatment in the financial statements. Justify your answer.

(ii) Identify the appropriate auditor's opinion if management adjusts the amounts in the financial statements. Justify your answer.

(iii) Identify the appropriate auditor's opinion if management takes no action. Justify your answer.