Question

Consider each of the following independent and material situations. In each case:

• The balance date is 31 October 20X7.
• The fieldwork was completed on 5 December 20X7.
• The financial report and audit report were signed on 12 December 20X7.
• The financial report and audit report were mailed to members on 20 December 20X7.

1. Your client, Red-back Mining, owns a mineral exploration licence in Western Australia. At 31 October this licence was valued by an independent expert at $60,000,000. This valuation is reflected in the financial report. On 8 December Red-back Mining received notice that a claim was being lodged under the Native Titles Act for land which included that subject to the exploration licence. If the claim is successful, the exploration licence will be worthless.

2. Your client, Eagle Pty Limited, derives approximately 15% of revenues from selling aviary supplies to city-based bird breeders. A draft copy of a government report, leaked to the press and reported in the media on 11 November, recommends that strict limits be placed on the number of birds that are allowed to be kept in suburban areas. Eagle Pty Limited estimates that if the recommendations are enacted, about 75% of its customers will have to cut their flocks by 50% or more. This would affect not only future sales but also their ability to pay existing debts. No further information, other than the draft report, is available as at 12 December.

3. Your client, Diamond Pty Limited, made an out of court settlement on 1 December 20X7 of $400,000. The settlement related to a litigation case dating back 4 years. A provision of $150,000 was recorded in the 31 October 20X7 financial report.

4. On 15 December 20X7, you discover that a debtor of your client, Mercury Ltd, was placed in provisional liquidation on 8 December. The debtor owed $600,000 as at 31 October; a specific provision of $300,000 of this amount was made at this date. On very preliminary information, the likely payout to unsecured creditors is zero.

For each of the five events above (i) to (iv), state the appropriate action (A) to (D) that the auditor would require in order to issue an unqualified opinion for the situation and justify your response. The alternative actions are as follows:

1. Client to adjust the 31 October 20X7 financial report.
2. Client to disclose the information in the notes to the 31 October 20X7 financial report.
3. Client to recall the 31 October 20X7 financial report for revision.
4. No action is required.

Please provide your response in the table below and give reasons.

Client

Audit Opinion

Justification

Answer 1

Client	Audit Opinion	Justification
Red - Back Mining	B. Client to disclose the information in the notes to the 31 October 20X7 financial report.	Because, This will impact the License holding right. Hence need to be disclosed for true and fair view of the financial Statement.
Eagle Pty Limited	D. No action is required.	Because the information is Leaked from Govt. offices which may be true hence , No actiosn is required against the same in Financial Statement.
Diamond Pty Limited	A. Client to adjust the 31 October 20X7 financial report.	As the Trasaction is Adjusting event need to be adjusted before signing the Report.
Mercury Ltd	C. Client to recall the 31 October 20X7 financial report for revision.	here on 15 Decemeber but before mailing to Member information of bankruptcy emerged hence Financial Statement need to be recalled and adjsuted accordingly.