1. You are the audit partner in charge of five audits which have recently been completed....

 

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1. You are the audit partner in charge of five audits which have recently been completed. You are reviewing the files and you now only have to decide which form of audit report you will sign off. Company A is an insurance company. Management has changed the method of calculating the number of expected claims on its insurance policies but has refused to add a note explaining the reason and effect of the change. The effect is to reduce the provision by 10%, equivalent to 1% of revenue. Company B became an audit client after its year end. The previous auditors resigned after a dispute with management. Your firm was therefore unable to perform checks on the inventory and other balances at the year end. There are no alternative, independent sources of audit evidence to support the year end figures. Company C is in severe financial difficulties. Its bankers have refused to extend any more credit and have demanded repayment of the existing loans. No alternative sources of debt or equity finance are available. The directors have made a full and fair disclosure of the situation in the financial statements and the accompanying narratives. Company D is a parent company with an overseas subsidiary which accounts for 15% of the group's business. The government of that country has been deposed in a military coup and no communications with outsiders are now permitted. Consequently Company D cannot include the subsidiary's results in its consolidated financial statements. Company E is a retail concern. Low-scale theft by employees and customers is common in the industry but the company seems to have suffered more than usual this year. The management estimates that 1% (by cost) of the inventory has been stolen as compared to 0.5% in the past. The typical mark-up on the goods is 300%. Required: a) Indicate the type of auditors' report which you think should be used in each case and explain your decisions. (15 marks) b) Outline the major questions auditors must consider when forming an auditors' opinion. (10 marks) 1. You are the audit partner in charge of five audits which have recently been completed. You are reviewing the files and you now only have to decide which form of audit report you will sign off. Company A is an insurance company. Management has changed the method of calculating the number of expected claims on its insurance policies but has refused to add a note explaining the reason and effect of the change. The effect is to reduce the provision by 10%, equivalent to 1% of revenue. Company B became an audit client after its year end. The previous auditors resigned after a dispute with management. Your firm was therefore unable to perform checks on the inventory and other balances at the year end. There are no alternative, independent sources of audit evidence to support the year end figures. Company C is in severe financial difficulties. Its bankers have refused to extend any more credit and have demanded repayment of the existing loans. No alternative sources of debt or equity finance are available. The directors have made a full and fair disclosure of the situation in the financial statements and the accompanying narratives. Company D is a parent company with an overseas subsidiary which accounts for 15% of the group's business. The government of that country has been deposed in a military coup and no communications with outsiders are now permitted. Consequently Company D cannot include the subsidiary's results in its consolidated financial statements. Company E is a retail concern. Low-scale theft by employees and customers is common in the industry but the company seems to have suffered more than usual this year. The management estimates that 1% (by cost) of the inventory has been stolen as compared to 0.5% in the past. The typical mark-up on the goods is 300%. Required: a) Indicate the type of auditors' report which you think should be used in each case and explain your decisions. (15 marks) b) Outline the major questions auditors must consider when forming an auditors' opinion. (10 marks)

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a Answer First case Company A In this case Adverse Audit Report will be given by the auditor Adverse Audit Report is a type of audit report issued to the financial statements when auditors found that ... View the full answer