Question

Question 7. Audit Reporting (15 marks)

1. There are three ASAs that provide primary guidance to the auditor about the different types of audit opinions that might be expressed. For example, ASA700 provides guidance about unqualified and unmodified audit opinions.

Identify the other two ASA numbers and their titles and for each ASA number, indicate which specific type(s) of opinion the standard provides guidance about.   (3 marks)

2. Key Audit Matters (KAMs) are identified and explained for ALL types of audit opinion that may be expressed in the independent auditor’s report for financial statements. Is that statement TRUE or FALSE? (that is, choose True, or False) (1 mark)

3. During your attendance at the annual stocktake and undertaking of normal required follow-up procedures, you identify a series of obsolete inventory (stock) items. This was brought to the attention of your audit client, GPP Limited. Their follow-up investigation revealed that under the lower of cost and net realisable (NRV) rule, inventory was in fact overstated by $10 million. GPP directors decided not to adjust the value because the reports were close to being issued and they considered the overstatement to be immaterial. GPP’s draft financial statements disclose (unadjusted) inventory balance is $385 million and profit before tax is $695 million. Your subsequent testing of the GPP’s overstatement analysis shows you are 95% confident the overstatement is in the range of $6-16 million.

What type of audit opinion would you issue, and briefly explain why (indicate the nature of the matter giving rise to any modification … if there is one)? (3 marks)

4. You are auditing UHire Limited (UHL) for the year ended 30 November, 2018. Your procedures adopted for auditing the property, plant & equipment (PPE) account has identified a material misstatement. The misstatement is not pervasive. You have noted that UHL has not changed depreciation rates for the last 4 years despite significant recent technological developments in their industry. It is your auditing professional judgement that these significant recent technological developments require PPE useful lives to be reduced, resulting in increased depreciation expenses. UHL’s directors do not accept your judgement that not making the changes result in a breach of impairment test requirements of Australian Accounting standards. They have refused to change the depreciation rates.

What type of audit opinion would you issue, and briefly explain why (indicate the nature of the matter giving rise to any modification … if there is one)? (3 marks)

5. Your audit of BTI Limited was extremely challenging this past year ended 31 December, 2019. The BTI accounting department was grossly understaffed meaning transactions were not processed promptly and associated account reconciliations were not performed resulting in the company not keeping and having appropriate books and records available for the entire period under audit. A temporary accountant was employed by BTI in an effort by the directors to sort out the mess but by year end she had not even been able to reconcile the bank account. You are not satisfied all transactions for the year ending 31 December, 2019 are reflected in the financial report.

What type of audit opinion would you issue, and briefly explain why (indicate the nature of the matter giving rise to any modification … if there is one)? (3 marks)

6. In the Lakeside Company case study, what was the name of the previous auditor and what type of opinion did that previous auditor express to the Lakeside Company? What was the reason for the type of audit opinion they expressed? (2 marks)

Answer 1

7

(a)

ASA number	Title	Guidance in ASA
ASA-700	Forming an Opinion and Reporting on a Financial Report	This Auditing Standard deals with the auditor’s responsibility to form an opinion on the financial report. It also deals with the form and content of the auditor’s report issued as a result of an audit of a financial report.
ASA-701	Communicating Key Audit Matters in the Independent Auditor’s Report	This Auditing Standard establishes mandatory requirements and provides explanatory guidance on the circumstances when the auditor‟s report is modified and the form and the content of the modifications to the auditor‟s report in those circumstances.
ASA-705	Modifications to the Opinion in the Independent Auditor's Report	This Auditing Standard deals with the auditor’s responsibility to issue an appropriate report in circumstances when, in forming an opinion in accordance with ASA 700,1 the auditor concludes that a modification to the auditor’s opinion on the financial report is necessary. This Auditing Standard also deals with how the form and content of the auditor’s report is affected when the auditor expresses a modified opinion
ASA-706	Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report	This Auditing Standard deals with additional communication in the auditor’s report when the auditor considers it necessary to: (a) Draw users’ attention to a matter or matters presented or disclosed in the financial report that are of such importance that they are fundamental to users’ understanding of the financial report; or (b) Draw users’ attention to any matter or matters other than those presented or disclosed in the financial report that are relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.

(a) KAM's

Ans: False

a. GPP limited

In the case of GPP limited, if the only issue is about the inventory, then the auditor can issue the UNMODIFIED OPINION as per ASA-700. But, as per ASA-706, the auditor have to mentaion such Inventory matter in the EMPHASIS OF MATTER PARAGARAPH, if he finds the matter is materaial and should be taken to the notice of Shareholders and others.

a.UHL

A qualified opinion shall be expressed when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with those charged with governance, a conflict between applicable financial reporting frameworks or limitation on scope is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion. A qualified opinion shall be expressed as being “except for” the effects of the matter to which the qualification relates.

In UHL case, material misstatement identified in PPE account, where the misstaement is not pervasive to go for adverse opinion and hence the auditor has to issue the Qualified opinion as per ASA-705.

a.BTI limited

An adverse opinion shall be expressed when the effect of a disagreement or a conflict between applicable financial reporting frameworks is so material and pervasive to the financial report that the auditor concludes that a qualification of the auditor’s report is not adequate to disclose the misleading or incomplete nature of the financial report. The opinion paragraph shall be headed “Adverse Auditor’s Opinion”.

In BTI limited, the accounts has not been maintained as per the required framework and are incomplete. Therefore, the auditor will issue the ADVERSE OPINION in the Auditor's Report.