Question 3 6 marks The following independent situations cov

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

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.