Bad Eyesight Auditing Limited has been engaged by Witch-of-the-North Limited to conduct a financial statement audit for

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Question:

Bad Eyesight Auditing Limited has been engaged by Witch-of-the-North Limited to conduct a financial statement audit for the financial year ending December 31, 2021. Bad Eyesight Auditing Limited were required to conduct a full audit of all the operations of Witch-of-the-North Limited.

Witch-of-the-North Limited is a ‘group’ of companies with Witch-of-the-North Limited being the parent entity. Due to distance to a major subsidiary, it was uneconomical for Bad Eyesight Auditing Limited to review the financial statements of the subsidiary. This review was completed by Bad Breath Auditing Limited.

The audit partner of Bad Eyesight Auditing Limited found that Bad Breath Auditing Limited had a reasonable reputation for the completeness of its work but had never been the subject of legal action in the past. The partner of Bad Breath Auditing Limited presented evidence of a complete audit of the subsidiary and concluded no evidence of material differences.

Of the audit work conducted by Bad Eyesight Auditing Limited the audit partner reported all but 1% of tests planned had been conducted due to lack of existing documentation. The tests conducted had not found any material discrepancies.

The audit partner noted that company had decided to capitalize all its operational and finance leases for 2020. The total amount of operational leases capitalized totalled $35,000,000 and finance leases $5,000,000. The total assets of the company at the end of 2020 is $50,000,000 and net income of $30,000,000. As the financial statements prepared by Witch-of-the-North Limited are based on IFRS the audit partner of Bad Eyesight Auditing Limited informed the CFO of Witch-of-the-North Limited that some of the capitalization of leases was not in accordance. The CFO of Witch-of-the-North Limited declined to make changes.

Required: What type of audit opinion should be issued? Justify.