ACC302 Auditing and Assurance Assessment : Case Study.

Running head: ACC302 AUDITING AND ASSURANCE ASSESSMENT 3: CASE STUDY
ACC302 Auditing and assurance assessment 3: case study
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1ACC302 AUDITING AND ASSURANCE ASSESSMENT 3: CASE STUDY
Table of Contents
Answer A.........................................................................................................................................2
Scenario 1....................................................................................................................................2
Situation 2....................................................................................................................................2
Situation 3....................................................................................................................................2
Scenario 4....................................................................................................................................2
Answer B.........................................................................................................................................3
Scenario 1....................................................................................................................................3
Scenario 2....................................................................................................................................3
Scenario 3....................................................................................................................................4
Scenario 4....................................................................................................................................5
Reference.........................................................................................................................................6

2ACC302 AUDITING AND ASSURANCE ASSESSMENT 3: CASE STUDY
Answer A
Scenario 1
In the given situation the auditor shall issue adverse opinion. This type of opinion is
provided while the financial records of the entity are not complied with GAAP. Further, financial
records produced by the entity have been misrepresented grossly (Vichitsarawong and
Pornupatham 2015).
Situation 2
Under the given scenario the auditor shall express qualified opinion. This type of opinion
is provided while the entity dies not maintain financial records in conformation with the GAAP,
however, misrepresentation has not been recognized. Though the statement provided with
qualified opinion is similar to the unqualified opinion with only one addition that highlights the
reasons why unqualified opinion has not been provided (Tahinakis and Samarinas 2016).
Situation 3
In the given circumstance, the auditor shall express disclaimer of opinion. If in any case
the auditor is not able to complete the audit report accurately owing to reasons like inadequate
financial records, the auditor issues disclaimer of opinion with the statement in context of the
opinion on account of the fact that financial status of the firm could not be established
(Vichitsarawong and Pornupatham 2015).
Scenario 4
In the given scenario the auditor shall express qualified report. Such report is issued
where while the entity dies not maintain financial records as per the requirement of GAAP,

3ACC302 AUDITING AND ASSURANCE ASSESSMENT 3: CASE STUDY
however, no misrepresentation has been recognized. Statement provided with qualified opinion
is similar to the unqualified opinion and the only one addition is highlighting the reason why the
auditors could not provide unqualified opinion (Tahinakis and Samarinas 2016).
Answer B
Scenario 1
Under LIFO approach, last purchased inventory is presumed to be sold first. Hence,
ending inventory is presumed to be made from the purchases of earlier periods. Though the LIFO
approach follows matching principle most closely, it ends up with unrealistic valuation for
closing inventory while changing the costs. LIFO approach is prohibited under IAS after revising
the same in 2003 while preparing as well as presenting the financial statements. Major reason
behind it is that it leads to reduction in the tax burden under the inflationary economies (Li and
Sun 2016). This takes place as LIFO presumes that the inventories will be consumed under the
process of production. Owing to same, higher inventory value is included in COGS that in turn
will represent higher amount of costs and lower amount of profit as well as tax. In the given
scenario FairAudit’s client Beast Ltd uses LIFO method for valuing the closing inventories
which in turn has material impact on balance of closing inventory as there is significant
difference among closing inventories as per FIFO method and LIFO method. Hence, the auditor
in this scenario will provide adverse opinion (Muller 2019).
Scenario 2
In the given circumstance, SecondBite does not have sufficient control regarding
collection of the income that will allow the auditor to assure that all the received incomes were
reported. Effective internal control in context of income reduces risk associated with loss of

4ACC302 AUDITING AND ASSURANCE ASSESSMENT 3: CASE STUDY
income or non-consideration of any transaction associated with income. Further, it assures that
the information provided in the financial statements are accurate, reliable and are presented in
true and fair manner (Osadchy and Akhmetshin 2015). Further, in absence of adequate control
chances are there that the income from other period also considered under the concern period or
all the income related transactions have not been reported or have been reported in inaccurate
amount. For assuring that the entity considered all the income related transaction at accurate
amount and has not considered income from other period there shall be adequate level of internal
control. However, the auditor is satisfied that the entity accounted all the received income
accurately. Hence, the auditor here will express qualified opinion (Jaggi, Mitra and Hossain
2015)
Scenario 3
In given scenario, board of Golddiggers Pty Ltd is represented by Mr Smith along with
his sister. As stated by Ms Smith to the auditor that he suspects the mining business run by them
will last for 13 to 17 months. It has also been stated by her that the gold from the mine will be
extracted and eventually the mine will be closed. Exploration activities shall always be
accounted under income statement and the expenses are made with the expectation that
economic benefit in the future period will be there (Iasplus.com 2020). However, in case the
entire gold is removed from the mine there will be no economic benefit from the same in the
future period. The same shall be disclosed in the financial report as this treatment will increase
the value of inventories on account of extraction of gold and reduce the value of asset that is
mine as the gold will be extracted from the mine. However, it has not been disclosed under the
financial report and hence, disclaimer of opinion shall be expressed by the auditor (Iasplus.com
2020)

5ACC302 AUDITING AND ASSURANCE ASSESSMENT 3: CASE STUDY
Scenario 4
Major objective of AASB 124 is assuring that the financial statement of the entity
includes required disclosures for drawing attention with the likelihood that the financial position
as well as profit and loss may have been impacted by presence of related parties and through the
transaction as well as outstanding balances including the commitments with these parties.
Relationship among the parent and subsidiaries must be disclosed even if no transactions have
been taken place among them. The entity is required to disclose name of the parent and
controlling party, if the same is different from the parent (Aasb.gov.au 2020). However, if the
parent as well as controlling party both does not produce consolidated financial statement for the
usage of public, name of next senior most parents that produces consolidated financial statement
shall be disclosed. In the given circumstance, the finance director of Main Insurance refused
adopting AASB 124/IAS 24 that is related party disclosures. Information regarding related party
is required to disclose to keep the public familiar regarding the concerned parties. In absence of
related party disclosures public will not be able to recognize the entities those are incorporated
overseas. Hence, not adopting the same will lead to issuance of qualified report (Aasb.gov.au
2020).

6ACC302 AUDITING AND ASSURANCE ASSESSMENT 3: CASE STUDY
Reference
Aasb.gov.au. 2020. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB124_07-15.pdf [Accessed 12 Jan.
2020].
Iasplus.com. 2020. IFRS 6 — Exploration for and Evaluation of Mineral Resources. [online]
Available at: https://www.iasplus.com/en/standards/ifrs/ifrs6 [Accessed 12 Jan. 2020].
Jaggi, B., Mitra, S. and Hossain, M., 2015. Earnings quality, internal control weaknesses and
industry-specialist audits. Review of Quantitative Finance and Accounting, 45(1), pp.1-32.
Li, J. and Sun, M.Y., 2016. LIFO distortions in the manufacturing industry. Accounting and
Finance Research, 5(1), pp.191-201.
Muller, M., 2019. Essentials of inventory management. HarperCollins Leadership.
Osadchy, E.A. and Akhmetshin, E.M., 2015. Development of the financial control system in the
company in crisis. Mediterranean Journal of Social Sciences, 6(5), p.390.
Tahinakis, P. and Samarinas, M., 2016. The incremental information content of audit
opinion. Journal of Applied Accounting Research, 17(2), pp.139-169.
Vichitsarawong, T. and Pornupatham, S., 2015. Do audit opinions reflect earnings
persistence?. Managerial Auditing Journal, 30(3), pp.244-276.

7ACC302 AUDITING AND ASSURANCE ASSESSMENT 3: CASE STUDY