Reference no: EM132602543

Question - The following are independent and significant situations.

(i) An auditor has hired a lawyer to advise on a challenging legal matter facing the company being audited, who is the defendant in the case. Based on the advice of the lawyer, no contingent liability is required and the company has a strong chance of winning the legal dispute. However, shortly after the auditor's report was signed and dated with an unqualified audit opinion, the plaintiff in the case has provided new evidence to show that the lawyer falsified information and provided erroneous documents. This new information is likely to have an impact on the financial statements of the company.

(ii) As at 30 June, a client holds a note receivable consisting of principal and accrued interest receivable. On 20 September, the note's maker filed a voluntary bankruptcy petition. Whilst this will affect the 30 June balance sheet, the client does not intend to reduce the recorded value of the note to its net realisable value. This is approximately 20% of the recorded amount because the financial reports and the auditor's report have already been signed and dated by the auditor, but the financial report has not been issued yet.

(iii) An auditor is engaged to audit a client's financial report after the annual physical inventory count. The accounting records are not sufficiently reliable to enable the auditor to become satisfied as to the year-end inventory balances. In response, the client has offered to perform a second physical inventory count based on a small sample of selected items in a smaller suburban warehouse.

(iv) A client changes its method of accounting for the cost of inventory from FIFO to LIFO. The inventory balance accounts for 75% of total assets. The auditor does not concur with the change even though there is no material effect on the inventory balance in the financial reports. Furthermore, the new valuation method has not been disclosed because Management does not consider this a significant change, in spite of the advice from the auditor.

(v) It is the 28 September, two days before the company's Annual reports are due to be distributed. Whilst the Director's declaration has been signed the auditor's report is due to be signed on the 29 September by the Partner, who is currently overseas. However, based on your preview of the finalised annual report, it is clear that a material subsequent event which affected the year end balances has not yet been adjusted for in the financial statements, as advised by the auditor.

Required - For each of the five (5) situations above, indicate the type of audit opinion, which you consider appropriate, as well as the reasons for issuing the particular audit opinion.