Question

Question 3 – Audit Reports 12 Marks The following are three independent situations. For each case, state the type of audit opinion that should be expressed and provide a brief explanation to justify your choice: a) A significant proportion of a retailer’s sales are on a cash basis and inadequate records have been maintained; there are no audit tests that can be done to satisfy yourself that the cash sales are accurate ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ b) The company that runs a dairy farm has prepared the financial report on a going concern basis; shortly after the year end the company’s contract with a major supermarket was cancelled. Without this customer you expect the business to cease trading within six months and it is unlikely that the company will be able to secure any new contracts in that time ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ c) A wholesaler has a policy of including all of its buildings in the balance sheet at cost less depreciation. You establish that one of the warehouses included in the balance sheet at a value of $20m has an actual market value of $23m

Answer 1

(a): In this case the audit opinion that should be provided should be either a qualified audit opinion or a disclaimer audit opinion depending on the circumstances. This is because there is a scope limitation in this case.

(b): In this case the audit opinion that should be provided should be an adverse audit opinion. The facts of the case indicate that the chances of business not continuing is very high and as such the financial report should not be prepared on a going concern basis.

(c ): In this case the audit opinion that should be provided should be an unmodified opinion. This is because the policy of the company is to include all its buildings in the balance sheet at cost less depreciation. As such the accounts of the company requires no changes and hence an unmodified opinion will be apt.