For the following independent situations, assume that you are the audit partner on the engagement:

1. You found that the depreciation is calculated on the total of land and buildings. In previous years it was only charged on buildings. Total depreciation is $5m and the element charged to land only is $1.4m. Profit before tax is $20m.

2. Fortune Co has 20% inventory held by Just Department Store on a consignment basis. Confirmation request has been already sent to them after the year end. However, no reply has been received after repeated follow-ups. Total Inventory represents 30% of the total asset.

3. Your client, Harrison Automotive, has changed from straight-line to sum-of-the years’ digits depreciation. The effect on this year’s income is material, and no information is disclosed in footnotes related to the change. You believed the change aligns with change in usage pattern of the automobile.

4. The client has a subsidiary in the USA and another in Canada, which this year together accounted for 8% of the group’s revenue, profits and net assets. Neither subsidiary is audited although both use external professional accountant to prepare the financial statements. The client’s management was unwilling to ask local accountants to perform a full audit.

5. The client has inventory costing $300,000 in the warehouse that is held for over 2 years. Management determined that the inventory would be sold next year in the big sale of the company. It is expected that the inventory would be sold to the customers at only 50% of the cost. The client has a net income of $100,000. Management claimed that the inventory has not been sold and therefore it should be continued to record at cost.

6. If all things are the same as situation 3, except that adequate disclosure is made relating to the change of depreciation method after your advice, will your opinion be different?

Discuss the most appropriate type of opinion the auditor should issue. Explain briefly the reason for the opinion.

For the situations 1 and 2, draft the opinion paragraph and any corresponding basis of opinion paragraph (if any).

Answer rating: 100% (QA)

only charged on buildings Total depreciation is 5m and the element charged to land only is 14m Profit before tax is 20m Qualified opinionqualified rep... View the full answer