Question

3-25 (OBJECTIVES 3-4, 3-5, 3-6, 3-7, 3-8) For the following independent situations, assume that you are the audit partner on the engagement: 1. Auto Delivery Company has a fleet of several delivery trucks. In the past, Auto Delivery had followed the policy of purchasing all equipment. In the current year, they decided to lease the trucks. The method of accounting for the trucks is therefore changed to lease capitalization. This change in policy is fully disclosed in footnotes. 2. You are auditing Deep Clean Services for the first time. Deep Clean has been in busi- ness for several years but over the last two years has struggled to stay afloat given the economic conditions. Based on your audit work, you have substantial doubt that Deep Clean will be in business by the end of its next fiscal year. 3. One of your audit clients has a material investment in a privately held biosciences company. Your audit firm engaged a business valuation specialist to assist in evaluat- ing the client's estimation of the investment's fair value. You conclude that the valua- tion specialist's work provides sufficient appropriate audit evidence. 4. Four weeks after the year-end date, a major customer of Prince Construction Co. declared bankruptcy. Because the customer had confirmed the balance due to Prince

Answer 1

Ans. Case1: No need to deviate from standard unmodified opinion audit report. As Auto Delivery company is fully disclosing change in policy in its footnotes.

Case2: Here in case of Deep Clean, issue need to be reported and deviation from standard unmodified opinion audit report is needed. Because fact of not being in business by end of next fiscal year is highly material as there is threat of Continuity. So disclosure in report is needed. Qualified report would be issued.

Case3: There is no need to deviate from standard unmodified opinion audit report as hired business valuation specialist is performing to the best of his skill and for audit sufficient audit evidences are available.

Case4: Here in this, full disclosure of bankruptcy of major customer is required to be made in audit report by qualifying. As amount receivable from bankrupted customer is approximately 10% of total receivable and 20% of net earning before taxes.

Case5: Qualified Audit report is needed to issue as overstated inventory is having impact on PnL as well as in Balance Sheet. So disclosing the fact in Audit report is to be done. This information is material to reader of audit report.

Case6: Supervisor's interest in Munich Department store is material information as on reliance of audit duty performed by supervisor audit is concluding. So disclosure of this fact is material information for reader of audit report.