Auditing and Assurance Scenarios

This assignment focuses on three independent situations encountered by auditors in daily practice. It requires students to analyze each scenario, determine the appropriate audit opinion (qualified, unqualified, or adverse), and justify their decisions based on the identified material misstatements and compliance issues. The scenarios cover topics like inventory valuation methods, bank overdrafts, and factory valuations.

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Table of Contents
Question 3:.......................................................................................................................................2
Answer to Part (a):.......................................................................................................................2
Answer to Part (b):.......................................................................................................................3
Answer to Part (c):.......................................................................................................................3
References:......................................................................................................................................5

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Question 3:
This section provides various independent situations, which the auditors often encounter
in their day-to-day activities. The auditors are often required to issue qualified and unqualified
audit reports based on the financial information provided on the part of the organisations. Thus,
this section would aim to evaluate three independent situations, in which the auditors are needed
to provide their audit opinion along with explanation of the issued opinion.
Answer to Part (a):
Based on the provided case study, it could be stated that the Connor Company is
encountering increased complexities to repay its debts during the past financial year. The
auditors have the primary responsibility of examining the financial statements of the
organisations, which would enable in assuring that the financial statements of such organisations
do not contain material misstatements and they have been developed by adhering to the crucial
regulations. However, the auditors are not allowed to make comments on the financial positions
of the organisations; in case, there are no frauds (Farooq et al. 2017). For Connor Company, it
could be observed that the organisation is reliant largely on bank overdraft in paying its loans,
since no finance alternative is available to the organisation.
Along with this, the bank needs repayment within a month. It depicts the poor financial
position of the Connor Company. However, this aspect has not developed any materiality effect.
The auditor has not identified any material misstatement in any of the financial statements of the
Connor Company. This signifies that the organisation is not involved in manipulating any of its
financial statements in hiding its poor debt-paying condition. Hence, the auditor, in this case,
would issue unqualified audit opinion for the Connor Company (Junior, Best and Cotter 2014).

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Answer to Part (b):
The organisations have the responsibility of preparing and presenting their financial
statements depending on the “International Financial Reporting Standards (IFRS)”. Along with
this, the organisations are needed to conform to the accounting regulations of the nation, in
which they are involved to operate (Knechel and Salterio 2016). According to the given
situation, FIFO method is supposed to be followed on the part of the organisation for valuing
inventory. However, it has been identified that the organisation is following the LIFO method,
which is followed in its American parent company.
Due to this reason, the differential effect between the enforcement of FIFO and LIFO has
influenced the inventory valuation contributing to material misstatement. Even though the effects
are limited on inventory and there is no effect on the other financial statements of the
organisation. Hence, in this specific area, the auditor has the right of issuing adverse opinion,
since there are material misstatements as well as compliance issue. However, besides inventory,
there is no signal of material misstatement in any of the financial statements of the organisation
and there is not any issue of compliance. Due to this reason, there would be issuance of qualified
audit opinion on the part of the auditor. The qualified audit opinion is almost identical to the
unqualified audit opinion. However, in case of unqualified audit opinion, the auditor needs to
include another paragraph, which would depict the reason for which the report is unqualified
(Louwers et al. 2015).
Answer to Part (c):
According to the provided information, the Victorian Manufacturing Company is
involved in manufacturing prefabricated concrete in its factories. It has been found out that the
organisation has included its factories in the balance sheet statement at market value minus

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accumulated depreciation. The organisations are needed to conduct the valuation of their non-
current assets like land, plant, building, machinery and others regularly because of the change in
market price.
In case of Victorian Manufacturing Company, it could be evaluated that it has not carried
out its factory valuation located in Melbourne for the past five years, since the directors might
perceive that the market value has remained the same (William Jr, Glover and Prawitt 2016).
Hence, the directors have made some primary assumptions, which might not be suitable and this
could result in main material misstatement. When the audit operations are carried out, the
auditors are required to obtain the existing fair value of building and land. However, if the fair
value is absent, it would not be possible for the auditors to provide accurate audit opinion, since
it hinders their process of examination (Simnett, Carson and Vanstraelen 2016). Due to this
reason, the auditors would issue opinion disclaimer, since it is not possible for them to provide
the correct report of audit.

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References:
Farooq, M.B., Farooq, M.B., De Villiers, C. and De Villiers, C., 2017. The market for
sustainability assurance services: A comprehensive literature review and future avenues for
research. Pacific Accounting Review, 29(1), pp.79-106.
Junior, R.M., Best, P.J. and Cotter, J., 2014. Sustainability reporting and assurance: A historical
analysis on a world-wide phenomenon. Journal of Business Ethics, 120(1), pp.1-11.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.
Louwers, T.J., Ramsay, R.J., Sinason, D.H., Strawser, J.R. and Thibodeau, J.C., 2015. Auditing
& assurance services. McGraw-Hill Education.
Simnett, R., Carson, E. and Vanstraelen, A., 2016. International Archival Auditing and
Assurance Research: Trends, Methodological Issues, and Opportunities. Auditing: A Journal of
Practice & Theory, 35(3), pp.1-32.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A systematic
approach. McGraw-Hill Education.