Your audit client has recorded all lease payments relating to a new lease of a manufacturing machine signed during the year as an expense. Having reviewed the terms of the lease contract, the lease should be recorded as a finance lease in your opinion. Your client refuses to record the lease asset and liability on its balance sheet as management believes that it is simpler to expense all lease payments, and that the amounts in question are immaterial at 0.25% of the company's revenues. If you are satisfied in all other material respects except for the matter described above, the type of audit opinion for the engagement should be:

a) Unmodified.

b) Disclaimer of opinion.

c) Qualified.

d) Adverse.

8. Which of the following describes circumstances in which an external auditor is LEAST likely to rely on the work of a client's internal audit function?

1. a)The chief audit executive reports to the CFO and the CEO occasionally as necessary and meets with the audit committee chairperson informally and frequently.
2. b)The internal audit function has transitioned from an assurance role to a predominantly consulting role focused on identifying opportunities to improve operating efficiencies.
3. c)The board has approved increased resourcing for the internal audit function to increase its staffing to obtain greater coverage on risk management and controls testing.
4. d)The internal audit function is staffed with experienced staff who adapt audit programs sourced from online knowledge banks to suit the organisation's operations and risks.

The information below applies to questions 9 - 10.

You are the auditor of Dubo Ltd (Dubo) for the financial year ending 31 December 2017. The fieldwork for the Dubo audit was completed on 21 February 2018 and the audit report is due to be signed on 12 March 2018. On 8 March 2018, you discovered that Dubo settled a material lawsuit out of court that had originated in 2015 and has been listed as a contingent liability in the financial report since 2015.

9. Which of the following describes the MOST appropriate action, if any, you would require Dubo's management to undertake in relation to the financial report?

1. a)Adjust the financial report.
2. b)No action required.
3. c)Disclose by way of subsequent event note to the financial report.
4. d)Reissue the 2015 financial report with the adjustment to the contingent liability.

10. On 11 March 2018, you discover that because of the payout of the material lawsuit, there is material uncertainty as to whether Dubo will remain as a going concern. Dubo's management are confident that they will be able to obtain a bank loan to keep the company afloat and have accordingly not amended the basis of accounting in the financial report. However, they have included a note to the financial report discussing the issue which you believe adequately draws users' attention to the material uncertainty. Which would be the MOST appropriate audit report for the Dubo engagement?

1. a)Qualified with other matter section.
2. b)Disclaimer of opinion.
3. c) Adverse.
4. d) Unmodified with material uncertainty section.

11. Your audit client Subo Limited (Subo) holds inventory at a number of warehouses operated by third parties across Australia. You were able to attend the stocktakes at a number of warehouse located in NSW and ACT, but had to rely on external confirmation to verify the quantity of inventory on hand at other locations. Your attendance at stocktakes and responses from external confirmations account for 90% of Subo's year-end inventory balance and contain minimal errors. You have not been able to obtain confirmation of the remaining inventory but are of the opinion that the amount represented by this inventory is immaterial to the Subo audit. The audit opinion you will issue for Subo will be:

a) Unmodified.

b) Adverse.

c) Qualified.

d) Disclaimer of opinion.

12. Your audit client's draft financial report is compiled in an annual report containing various other information including a section on management's discussion and analysis (MDA). You have noted that the MDA section contains discussion of the company's research and development (R&D) efforts coming to fruition during the year with the commencement of the development phase for a number of new products. Based on your audit, the claims in the MDA section are not consistent with the accounting treatment of the company's R&D activities during the year as market testing has yet to commence for any of the planned new products. With the exception of the matter above, you are satisfied in all material respects including with the treatment of the R&D activities in the financial report. The type of audit report for the engagement should be:

1. a)Unmodified.
2. b)Unmodified with other matter paragraph outlining the inconsistency.
3. c)Unmodified with emphasis of matter paragraph outlining the inconsistency.
4. d)Unmodified with other information section outlining the inconsistency.