P. Industries Pty Ltd carries on a crop-dusting business. Its financial statements for the year ended 30 June 20X0 disclose by way of note a claim for compensation of $750 000 from a customer's neighbour for crop damage that occurred during the year. The directors haven't recognised the liability in the financial report as they believe the claim can be successfully defended.

Independent legal advice to the auditors has been that the case could be decided either way and that the amount of compensation is uncertain. The case is due for hearing in February 20X1.

The financial report of P. Industries Pty Ltd at 30 June 20X0 shows the following:

You should assume that the company won't receive a tax deduction for any damages paid.
REQUIRED
a. Prepare the audit report for P. Industries Pty Ltd for the year ended 30 June 20X0.
b. Provide reasons for the opinion given in the audit report.
c. Would a different opinion be given if the compensation claim was $200 000? Justify whatever answer you give with appropriate references.

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Share capital and reserves $1 250 000 Represented by.: Non-current assets Current assets $3 600 000 600 000 3 150 000 800 000 5200 000 Non-current liabilities Current liabilities Net assets 3 950 000 $1 250 000 Profit from ordinary activities before income tax Income tax expense relating to ordinary activities Profit from ordinary activities after income tax Extraordinary items (net of income tax) Net profit Accumulated losses at 30 June 20X9 Retained earnings at 30 June 20x0 $4 400 000 1400 000 3000 000 (1500 000) 1500 000 900 000) $600 000