QUESTION 4(24 marks) The following are independent situations for which you will

Question

QUESTION 4(24 marks) The following are independent situations for which you will recommend an appropriate audit report State the appropriate audit report from the following alternatives: .Unqualified .Qualified opiniorn .Disclaimer of opinion .Adverse opinion And explain the reasoning for your answer. Kindly present your answer in the table format: Audit Reason(s) b) a) The auditor was unable to obtain confirmation from two of the client's major customers that were included in the sample. These customers wrote on the confirmation letters that they were unable to confirm the balances because of their accounting systems. The auditor was able to achieve satisfaction through other audit procedures. b) The client treated a lease as an operating lease, but the auditor believes it should have been accounted for as a capital lease. The effects are material. c) The client restricted the auditor from observing the physical inventory. Inventory is a material item d) The client is engaged in a product liability lawsuit that is properly accounted for and adequately described in the footnotes. The lawsuit does not threaten the going concem assumption, but an adverse decision by the court could create a material obligation for the client. e) The status of the client as a going concern is extremely doubtful. The problems are properly described in the footnotes f One of your client's subsidiaries was audited by another audit firm, whose opinion was qualified because of FRS violation. You do not believe that the FRS violation is material to the consolidated financial statements on which you are expressing an opinion. You are convinced that your client is violating another company's patent in the process of manufacturing its only product. The client will not disclose this because it does not want to wave a red flag and bring his violation to the other company's attention. A preliminary estimate is that the royalty payments required would be material to the financial g)

Explanation / Answer

A) The auditor will perform other audit procedures and conclude accordingly. If auditor didn’t perform other audit procedures or unable to get evidence through alternative audit procedure then auditor will give A Disclaimer of OPINION. That indicates that auditor can’t express an unqualified or qualified opinion because INFORMATION/EVIDENCE were not available to form those opinions. This will be done if the balance are classified material items ie the effect of unavailablity of information is pervasive.

But we would answer it assuming that the auditor performed alternative procedure because auditing standards mandated it. After performing alternative audit procedure auditor will have agreement or dis agreement with management. If the auditor is agree with those assertions in financial statement he will give AN UNQUALIFIED OPINION if there are NO MATERIAL MISSTATEMENTS IN FINANCIAL STATEMENT. And if auditor is disagreed with management’s assertions and these disagreements have MATERIAL AND PERVASIVE EFFECT ON FINANCIAL STATEMENT the auditor will give A QUALIFIED OPINION.

B) QUALIFIED OPINION: Because the wrong classification of lease has material effect on financial statement. Thus the FS are not presenting the True and fair view of affairs of business. The auditor will not give an adverse opinion because this wrong classification is not so pervasive .

C ) Disclaimer of opinion: As the client limits the auditor, prevent the auditor from performing a specific audit procedures . The auditor is unable to form an opinion and the inventory is a material item so auditor will give disclaimer opinion.

D) Unqualified opinion: As the entity provided for the loss and disclose the fact in financial statement the FS are presenting True and fair position, the auditor will give an unqualified opinion.

E) Unqualified opinion: As the entity properly disclosed the fact the users are able to have information about position of business. As the auditor concludes there is substantial doubt, he should consider the adequacy of disclosure about the entity's possible inability to continue as a going concern for a reasonable period of time,( as given in question that entity’s disclosures were proper ) and include an explanatory paragraph (following the opinion paragraph) in his audit report.

F) UNQUALIFIED OPINION AS THE EFFECT IS IMMATERIAL ON CONSOLIDATED FS.

G ) ADVERSE OPINION: As the client is violating the regulatory/ Legislative provisions , There is possibility of a huge penalty imposition and also THE ONLY PRODUCT MAY BE PROHIBITED TO PRODUCE,Its an indication of disability of going concern.

The client neither disclosed the fact nor provided for possible losses. The management has no plans to continue if the production of only product will prohibited.

The auditor is totally in disagreement with management, Client ‘s FS ARE NOT PRESENTING THE ACTUAL POSITION OF BUSINESS AND PERFORMANCE OF BUSINESS , so the effects of this conflict are high enough to impact the decisions of the users of the financial statements, the auditor may need to take an action more severe than to give a qualified opinion.So will give an adverse opinion.

H ) QUALIFIED OPINION: The auditor is in disagreement with management although the effect is not sop material to give an adverse opinion in current year. Auditor took an exception of certain accounting application and not able to minimise the potential misstatements as management denied to disclose the fact the auditor will give a qualified opinion.

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