Question

You are working on an audit of a manufacturing company which makes widgets. These widgets are colored purple and orange (alternating stripes of purple and orange), plus big polka dots which are teal. (Note to students: Aquamarine is a blue which has green shading. Teal is a green which has blue shading.)

While you are doing your observation of physical inventory, you notice that the client has some very dusty widgets which are solid colors: light brown, light blue, black, and white. The client says that nobody would buy them; customers want the traditional striped/polka-dotted widgets.

Practically all the assets are in either the inventory account or the accounts receivable account. The accounts receivable account ($750,000) is composed 85% of balances from years ago when the customers bought the brown, blue, black, or white widgets but never paid for them after the audit client refused to sell any more to those customers-or to anybody else, for that matter. The inventory account ($400,000) is composed about 50% of old, solid-color widgets and about 50% striped/polka-dotted widgets.

The client company's pre-tax income for the year, according to the client-prepared financial statements, was $23,100.

Required:

a. What kind of audit report should be rendered?

b. Support your answer to part a.

Answer 1

a) Audit report should be qualified report.

b) we have to give the qualified report because in accounts receivable of $ 750000, out of which 85% ( i.e. 637500) is old and probability of receiving these accounts receivables would be nil because they are not paying the amount since long. Hence accounts receivable of $ 637500 is bad debts and should be deducted from the profit.

Further stock of $ 400000 out of which stock $ 200000 is comprised of old stock which is not salable items. Hence these stocks is obsolete stock and have no value because its not salable in the market and its market value is nil. Hence this stock should be deducted from the closing stock.

Profit after considering the above points= $23100-$637500-$200000

= -$ 814400

Hence profit would be negative if we considered the above points. Hence Auditor should give the qualified report