Question

Case 2: You have been hired as audit supervisor of KMR co. During the meeting you have been informed about the issues found in the organization after the process of audit risk assessment. You have been assigned for the audit of work in progress. You are also going to be a part of the team which will attend the year-end inventory count along with the final audit. The work in progress contains the cars which are partly assembled and the value of this is anticipated to be material. The company values work in progress in accordance with the percentage of completion. The standard costs are then considered and applied to the percentages calculated. The company hires an independent valuer for the valuation of work in progress. The partly assembled cars are then shipped to its subsidiary unit in America for completion and sales. The said inventory is in transit for 2 weeks.

Keeping in view case 2; During the audit, your team has identified an error in the valuation of work in progress, as a number of the assumptions contain out of date information. The directors of the company have indicated that they do not wish to amend the financial statements.

Required: Explain the steps auditor should now take and the impact on the audit report in relation to the directors’ refusal to amend the financial statements (Marks 5+5)

Answer 1

Answer:

Discuss with the management of KMR Co why they are refusing to make the amendment to WIP.
Evaluate the materiality of the error; if immaterial, it should be supplementary to the schedule of unadjusted differences. The auditor ought to then evaluate whether this error consequences in the total of unadjusted differences becoming material; if so, this should be conversed with management; if not, there would be no influence on the auditor’s report.
If the mistake is material and management declines to alter the financial statements, then the audit opinion will need to be
modified. It is improbable that any mistake would be universal as although WIP in total is material, it would not have a prevalent effect on the financial statements as a complete. As management has not obeyed with IAS 2 Inventories and if the mistake is material but not universal, then a qualified opinion would be essential. The opinion paragraph would be qualified ‘except for’.A basis for qualified opinion paragraph would need to be included after the opinion paragraph. This would clarify the material misstatement in relation to the estimation of WIP and the outcome on the financial statements.