Question

Consider each of the following material independent situations. In each case assume that the client is a reporting entity and that general purpose financial statements have been prepared for the year ended the 30th June 20X9. You (as the auditor) have conducted your audit testing and are ready to prepare the audit report. Also assume that in each case management will not take any further action should you request such.
a) Green Ltd (Green) is a furniture wholesaler. The recent downturn in the economy has made trading very difficult for Green. Profit margins are very tight and suppliers are requesting cash payments when deliveries are made. However, Green is still able to operate. The directors have decided to insert a note in the financial statements that there are some going concern issues. You agree with the directors. Overall, you are satisfied with the preparation and presentation of the financial report.
b) Tough Ltd (Tough) is a manufacturer of tools. With the exception of one item noted by your assistant, you are satisfied with the financial statements prepared by Tough. Your assistant’s note stated:
“The new financial controller has reconsidered the method used to review the useful lives of the plant and machinery, and has determined that the old policy is no longer appropriate. Consequently, he has implemented a new policy for the current financial year, which is adequately disclosed in the accounts. However I am not satisfied that the new policy is appropriate because it extends the useful lives of the assets, without apparent justification

Required:
For each situation:
(i) What is the critical circumstance described in the situation below.
(ii) Can you provide an unmodified audit opinion? Give reasons for your answer.
(iii) If not, what two possible opinions could you provide?
(iv) If applicable, what is the level of materiality in this situation?
(v) When you consider your answers to (ii), (iii) and (iv) above, what opinion should
you provide?
(vi) Is there an additional issue you would disclose in the audit report? If so, what is it
and what is the title of the paragraph in which it is disclosed?

Answer 1

(i), (ii) & (iii)
a) With reference to Green Ltd., company's growth has effected, earning getting effected does not
mean suddenly will not be able to satisfy "Going concern Assumption". So inadequate reason for
going concern assumption will influence me as an Auditor to give Qualified Opnion as accounting
principal gettiong compromised.
b) With reference to Tough Ltd., As comppany has extended useful life and disclosed the same
but proper justification for extending useful life could not be provided. So As an Auditor shall
express Adverse Opinion with respect to this issue as financial statement getting misstated.
In both the above situation unmodified opinion not to be issed as justified above.
(iv) & (v)
As an Auditor, we will consider level of materiality in case of Tough Ltd., before expressing
an adverse opinion. If amount of capital assets is not material then instead of adverse
opinion, Qualified opinion is to express.
(vi) If Auditor think any thing need to be focus for stakeholders then a pragraph called
" Emphasis of Matter paragraph" shall be inserted to report the same.
In the case of Tough Ltd, supposed there is no materiality and auditor express unmodified
opinion then sumultaneously he can insert "Emphasis of matter paragraph" and report the
detail of useful life as estimated by company and objection as raised by you.