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This assignment is based on the following Auditing questions –
Auditor’s opinion regarding company’s financial statements, conditions and performance are based on mandatory requirements under the Corporations Act 2001. Specific auditing standards provide guidance to auditors in planning an audit and forming audit opinions. Refer to the following independent situations:
i. Inventory on hand at year end has been valued at cost in the financial report of your client. However, net realisable value is 10% below cost according to the audit findings. The difference is a material amount.
ii. In the previous financial year your client purchased property and entered into a contract to develop a shopping complex and then sell the developed real estate to an unrelated third party for a “cost plus” settlement price. Following the sale early in the financial year, an economic recession resulted in rentals and occupancy rates being well below forecasts prepared by your client. Just before year end, the purchaser threatened to sue for damages alleging they relied on your client’s forecasts when entering into the contact. The amount of damages being claimed is highly material to your client. Your client has obtained an opinion from a well-known legal advisor which concludes that no damages should be payable. The directors have therefore included no reference to the matter in the financial report to be released next week. However, you have heard that the purchaser has also obtained legal advice which supports its case.
iii. You are auditing a charity where net income is generally about 55% of gross revenues. Due to the small number of the charity’s staff, there is a lack of control over completeness of revenue. Despite your best efforts, you conclude that you do not have enough evidence to support the completeness assertion.
iv. Management of ABC Limited has decided not to disclose directors’ fees in the accounts as they are not material. You cannot convince management to change its decision. However, you agree that the amounts are not material.
v. Management of XYZ Limited has estimated that allowance for doubtful debts should be $550,000. As auditor you believe that the allowance should be $655,000. Management will not change its estimate.
Profit before tax for the year is $445,000.
vi. Your client has several bank accounts one of which is in a foreign country. Cash balances total $760,000 with the account maintained in the foreign country totalling some $530,000. You have been unable to obtain a bank audit certificate or any third party confirmation with respect to the foreign bank account. The client has been unable to supply you with bank statements or other supporting documentation in relation to this bank account. Materiality for the client has been set at $470,000. All cash balances are classified as current assets in the client’s financial statements.