Reference no: EM132567370

Question 1 - Audit Opinions

You are an external auditor and you are facing the following separate situation, the effects of all items below are material:

1. Your audit client has not written inventory down to net realisable value in accordance with approved accounting standards. The write-down would reduce current assets by 8% and net profit before income tax by 12%. The client is unwilling to change the value of its inventory even after you advised that the misstatement is material. The misstatement is limited to the effect on the Inventory and the current profit. Other assets appeared to be fairly stated.

2. You are the auditor of Big Joy Ltd (BJL). The audit for BJL was extremely difficult this year, as the company did not keep appropriate books and records. As the accounting department was chronically understaffed, transactions were not entered promptly and reconciliations not performed. In an attempt to sort out the mess, a temporary accountant was employed; however, she was unable to even reconcile the bank account at year end. You are not satisfied all transactions that occurred during the year are reflected in the financial report.

Questions 2 - Auditing and Assurance

1. You have discovered that your audit client has incorrectly calculated the salary and bonus with the effect of material understatement of salaries and related provisions for bonus. The client refuse to made the necessary adjustments to the financial accounts. There is no other item expected to have any other material effect on the financial statements.

2. A company that runs a dairy farm has prepared the financial report on a going concern basis; shortly after the year-end the company's contract with a major supermarket was cancelled. Without this customer you expect the business to cease trading within six months and it is unlikely that the company will be able to secure any new contracts in that time.

3. Your audit client Fairy Meadow Ltd (FML) has changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year's financial report but is reasonably certain to have a substantial effect in later years. FML has adequately disclosed in the notes to the financial accounts of the effect of the change.

Required - For each of the separate situations (1-5) above:

(a) Identify the type of Audit Opinion required.

(b) Briefly explain the basis of your answer.