Auditing Case

Read the following cases which are independent circumstances related to the findings of audit processes.

I. At the end of prior period year XYZ Pty Ltd, a chemical importer valued a portion of its stock at a pre-sold value (i.e, the price of orders received prior to year end) in an attempt to improve the company’s poor profit performance. The company’s management refused to follow your suggestion to value the stock at the lower of cost and net realizable value, $115,000 lower than the recorded amount of $2,475,000 (reported profit is $160,000)

During the current year, the client has again used pre-sold value to value its ending inventory. In your view, this overstates inventory by $220,000. These figures are extracted from current accounts:

Ending inventory $2,500,000

Profit before tax $425,000

II. In reviewing the consolidated accounts of ABC Ltd, you notice that the accounts of a small mining subsidiary in Perth have been qualified by the local chartered accountant. The reason for the qualification was non compliance with AASB7 (Exploration and Evaluation of Mineral Resources). An exception opinion was given because the client would not write off carried forward expenditure for one of the mines which was abandoned during the year. The amount involved ($500,000), while being material to the subsidiary, is not material to the group.

III. Your client SP Pty Ltd has, in its debtor’s ledger, at year end an account receivable with the amount of $1.2 million (which is material). The audit senior has been unable to find details of sales relating to this account. He has been told by the client that he cannot confirm the balance with the debtor, due to the confidential nature of the sale. The client also told the auditor that it was a sale of shoe phones to an unnamed government department. The debt has since been received; however, the auditor reiterates that it will not be possible to confirm the debt at year end.

For each of the above circumstances (I to III), explain:

a) What you would do prior to issuing the audit report?

b) The type of audit opinion you would issue and why (with referencing to the appropriate Accounting and/ or Auditing standard)?