As Engagement Partner at Fuller Llp, you are reviewing the audit evidence presented in relation to Puffin

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Question:

As Engagement Partner at Fuller Llp, you are reviewing the audit evidence presented in relation to Puffin Ltd.

Puffin has a year-end of 31^st January 2022. Turnover for the year ended 31^st January 2022 was £3.5m and net profit was £0.5m. The materiality level was set at the beginning of the audit at 5% of Revenue and there is no evidence to suggest that the materiality level should be amended.

In the course of the audit, the audit team identified the following:

Inventory with a book value of £20,000 was subject to flood damage and management believes that the full amount will require to be written off. The flood damage occurred on the 5^th of February 2022.
Inventory with an NRV of £350,000 was identified as having been sold and invoiced on the 28^th of January 2022 but the inventory was still included in the inventory figure as the inventory was physically still in the warehouse at the time the stock count was performed.
Puffin Ltd had been subject to a legal case by a supplier who was suing the company for substantial damages. The case was yet to conclude however, Puffins’ lawyers were fairly certain that the supplier had a strong case and the likely damages could be in the region of £3m. Puffin’s management is of the opinion that the case had no merit but they had noted the existence of the legal case in the annual report and commented that in the event that the supplier won the case then Puffin would be bankrupted.

Required:

The auditor can reach an opinion or a qualified opinion. Describe each opinion and the circumstances required in order to reach the different opinion.
Given the information above what action would you take to resolve each issue with the Puffin’s management?
Given that management refuse to make any amendments to the financial statements describe what audit opinion would be most appropriate, given the evidence collected, and what if any modifications to the audit report you would include.