Question 3 ( 6 marks)
The following independent situations cover different situations
which Auditors may encounter.You are asked to state which Audit
opinion should be given and briefly explain why.
(a)The Connor company has been having increasing difficulty paying
its debts during the last financial year and has been relying on
its bank overdraft to pay debts . It has just been advised that the
bank want repayment of the bank overdraft within one month. All
other efforts to obtain finance have been unsuccessful .You have
found no material misstatements in the company’s financial
statements.
(b)A local company has an American parent company and so it uses
the same inventory valuation method of LIFO instead of FIFO. The
difference between LIFO and FIFO has been calculated and its
effects calculated and while it has lead to a material misstatement
the effects are limited to their effect on the Inventory and do not
have a material effect on the rest of the financial
statements.
(c)The Victorian Manufacturing company manufactures prefabricated
concrete in its factories It includes its factories in the balance
sheet at market value less accumulated depreciation.The Factory in
Melbourne is included in the balance sheet based on a valuation
carried out five years
ago .The directors have not asked for another valuation because
they have believed that the market
values have remained fairly stable over the past five years
Solution A :- since the auditor has not come across any misstatement in the financial satements therefore he shall express an unqualified opinion .
SOLUTION B:- since the auditor has come across a misstatement but it is not material , therefore he shall express an qualified opinion rather than the adverse opinion because adverse opinion is expressed when misstaements is material and pervasive.
SOLUTION C:- the auditor shall express an disclaimer of opinion because he could not obtain the adequate information regarding change in the market values of the factories.
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