ASA700 covers the professional responsibility of the External Auditor in expressing an opinion. IN particular ASA705 and ASA706 describe the types of modified audit opinion to be given in various situations. The following events are material.

a) You are the external auditor of EMG Ltd, a manufacturing company. For the financial year ended 31 December 2012, EMG wrote down its inventory from $140 million to $111million. Management explained to you that the $111 million represents the inventory’s neutralizable value. Australian accounting standards specify that inventory should be valued at the lower of cost and net realizable value at balance date.

b) You are the auditor of UTF Ltd, a manufacturing company. Your request to visit the company's main warehouse was refused. Management’s explanation was that there was a chemical spill on 29 December 2012, 3 days before the end of the financial year, which caused the warehouse to be contaminated. The clean-up is currently underway and nonessential personnel have been told to stay away. Inventory kept in the warehouse was estimated to be $45 million.

c) You are the auditor of MLS Ltd, a private educational provider. MLS provides a range of courses catering for international students. For the financial year ended 31 December 2012,MLS disclosed in its financial statements that revenue will decrease materially in 2013 due to changes in the government’s immigration laws. Specifically, MLS estimated that revenue would decrease from $144 million in 2012 to $103 million in 2013 and $87 million in 2014.

d) You are the auditor of LUO Ltd, a manufacturing company. For the year ended 31December 2012, LUO excluded from its balance sheet a liability of $12 million. Management’s explanation was that the $12 million related to a lawsuit LUO recently lost. However, as the company has lodged an appeal, management decided not the include the$12 million in the balance sheet pending the outcome of the appeal. The appeal is scheduled to be heard in June 2013.

e) You are the auditor of MCT Ltd. For the year ended 31 December 2012, MCT disclosed in its financial statements, that the recent flood destroyed its inventory with an estimated value of $126 million. Management believed that the company would experience inventory shortage for the first 6 months of 2013 and that the situation would return to normal in the second half of 2013.

Required:

Taking each of the preceding situations separately, select which form of opinion you would consider the most appropriate to use. Give reasons.

Answer rating: 100% (QA)

Answer A modified opinion is appropriate for situations a b c d and e The most appropriate type of opinion would depend on the specific facts and circ... View the full answer