You have just been appointed as a junior Audit Partner in Smedley Partners, an audit firm. Smedley Partners is in reality a sole practitioner, Mr Smedley, who has been auditing businesses in your suburb for 30 years. He is considered by locals to be a very nice man with a strong reputation for honesty.

In late April, the firm is approached by Mr Shark, the Chairman of the Board of Betrger Ltd (BL) a small manufacturing business, to conduct the audit of BL. Mr Shark explains that the previous auditor had retired, and they are looking for a replacement audit. Mr Smedley asks you to undertake the preliminary review.

As part of your review of BL you undertake enquiries of businessmen in the neighbourhood. There is nothing directly adverse known about BL, and Mr Shark is considered to be a very astute businessman. However one person who you know who worked with Mr Shark previously had a short private conversation with you. From this conversation it becomes clear than Mr Shark is only interested in BL looking good and is happy to leave it to his executives to run BL provided that the company presents him as being a multi-millionaire. He will not accept suggestions counter this and so the company accounts must present in this fashion regardless of the true state of affairs. In fact there was a feeling within the Accounting Department of BL that Mr Shark would resort to criminal activities to maintain the appearance that he was a super wealthy smart individual.

On behalf of Mr Smedley, you approach Mr Shark to obtain a letter of authority to the previous auditor to discuss the audit history with you. Mr Shark explains that he used Drum and Co. Auditors. You establish that Drum and Co. Auditors was deregistered by the Auditors Disciplinary Board following an application by ASIC because they had failed to lodge their application for re-registration for five years. Mr Drum has left the country. You inform Mr Smedley of this and he says: The fees are good so we will accept the audit!

Mr Shark has been asking Mr Smedley daily when he might be ready to sign the audit report. As the accounts seem to be in order, Mr Smedley is putting pressure on you to finish the working papers and hand them to him so that he can sign off the audit. Mr Shark has contacted you and explained that he does not consider the fire to be of material consequence and will not allow the accounts to be adjusted for its outcome. This is despite your being aware that there were many items in the store that were recorded in the accounts at extremely material high values.

Required:

Write a detailed report to Mr Smedley explaining what type of audit report he should give.