Case Study Analysis: Auditing and Assurance - ACC302 Assessment

This case study analysis delves into various auditing scenarios, examining the application of audit opinions under different circumstances. It explores the implications of using the last-in, first-out (LIFO) inventory valuation method, the impact of inadequate internal controls in a non-profit organization, and the uncertainties surrounding a company's ability to continue as a going concern. The analysis also addresses the refusal to comply with related party disclosure standards. The study provides detailed justifications for the appropriate audit opinions—adverse, qualified, or unmodified with an emphasis-of-matter paragraph—based on the specific facts presented in each scenario, referencing relevant accounting standards and their impact on financial statement users. The analysis emphasizes the importance of materiality, pervasive misstatements, and the auditor's responsibility in forming and communicating an opinion on the fairness of financial statements.

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

1AUDITING AND ASSURANCE
Table of Contents
Question 1..................................................................................................................................2
Answer to Requirement A......................................................................................................2
Answer to Requirement B......................................................................................................2
Question 2..................................................................................................................................2
Answer to Requirement A......................................................................................................2
Answer to Requirement B......................................................................................................3
Question 3..................................................................................................................................3
Answer to Requirement A......................................................................................................3
Answer to Requirement B......................................................................................................4
Question 4..................................................................................................................................4
Answer to Requirement A......................................................................................................4
Answer to Requirement B......................................................................................................5
References..................................................................................................................................6

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Question 1
Answer to Requirement A
Last-in first-out inventory valuation method is used by Beast Ltd for the valuation of
ending inventory that is one of the key balance sheet account of the company. There is a
material impact on the ending inventory balance due to the difference between first-in first-
out and last-in last-out. Since there is the presence of material misstatement, unmodified audit
opinion cannot be issued. Thus, the audit manager needs to issue adverse audit opinion to
Beast Ltd (Tahinakis and Samarinas 2016).
Answer to Requirement B
There has been a material effect on the balance of ending inventory of Beast Ltd as
there is a material difference between first-in first-out and last-in first-out. Since ending
inventory is a significant balance sheet account of Beast Ltd, this material impact needs to be
considered as pervasive and therefore, this material misstatement will create impact on the
financial statements of Beast Ltd as a whole. It implies that the financial statements of Beast
Ltd are not free from material misstatement which requires the issue of qualified audit
opinion. At the same time, it is also observable that the material misstatement in pervasive in
nature that is affecting the financial statements of Beast Ltd as a whole because ending
inventory is a significant balance sheet account of the company. This eliminates the scope to
issue qualified audit opinion (Chen, Zhang and Zhou 2017). Therefore, the audit manager
should issue adverse audit opinion to Beast Ltd.
Question 2
Answer to Requirement A
SecondBite Foundation is a non-for-profit entity as well as non-reporting entity that
did not have adequate internal control mechanism on the collection of income and this did not

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satisfy the audit manager on the fact that all income received was recorded. This means the
financial statements of SecondBite Foundation are not fully free from material misstatements
which eliminates the scope to issue unmodified audit opinion. Under the modified audit
opinion, it is required for the audit manager to issue qualified audit opinion to the financial
statements of SecondBite Foundation (Omid 2015).
Answer to Requirement B
It is clearly stated that SecondBite Foundation is a non-reporting entity which means
the company does not have any external parties depending on its financial statements to make
and evaluate decision on its resources. Due to the absence of adequate internal control over
the collection of income, the auditors was not satisfied whether all income received has been
recorded or not. It means there is material misstatement in the financial statements of
SecondBite Foundation that restricts the issue of unembodied audit opinion. It is also stated
that all the income recorded has been appropriately accounted for by SecondBite Foundation.
It means the material misstatements in income have not affected the financial statements of
the company as a whole and it indicates that the nature of the material misstatement in not
pervasive which eliminates the scope to issue adverse audit opinion (Vichitsarawong and
Pornupatham 2015). Therefore, the audit manager should issue qualified audit opinion to
SecondBite Foundation.
Question 3
Answer to Requirement A
Golddiggers Pty Ltd involves in the operation of a small goldmine and the audit
manager has been informed by one of the board members as well as stakeholders of the
company that the vein will last for 13 to 17 months; and the management will let the license
expire. This prevents the audit manager in issuing unmodified audit opinion; and since, there

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is not any material mistsement in the financial statements of Golddiggers Pty Ltd, modified
opinions cannot be issued (Sirois et al. 2014). Therefore, unmodified audit opinion with
emphasis on matter paragraph needs to be issued.
Answer to Requirement B
There is not any material misstatement mentioned in the financial statements of
Golddiggers Pty Ltd. Since it is mentioned that the mining vein will not last for more than 17
months and the management will let the license expire, this creates major uncertainty that
may have significant impact on Golddiggers Pty Ltd’s financial position in future. More
precisely, this develops major doubts on the ability of the company to continue as a going
concern in future. Since this prohibits the auditor from issuing modified audit opinion, it is
needed for the audit manager to issue unmodified audit opinion with emphasis of matter.
Under this report, without qualifying the audit report, the audit manager of Golddiggers Pty
Ltd will mention in a separate paragraph about the issue associated with the lasting of vein
and expire of license that creates significant doubt on the ability of the company to continue
as a going concern (Cordoş and Fülöp 2015). This additional paragraph needs to be included
in the audit report of Golddiggers Pty Ltd.
Question 4
Answer to Requirement A
The finance director of Main Insurance has refused to adopt AASB 124/IAS 24 –
Related Party Disclosures because of the reason that he does not want to disclose information
associated with family in public. This eliminates the scope to issue unmodified opinion as
materially misstatement is there in the absence of business information. It is required for the
audit manager to issue disclaimer of opinion as it is not possible to issue qualified or adverse
opinion (Provasi and Riva 2015).

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Answer to Requirement B
It is clearly stated that the financial statement of Main Insurance is materially correct
apart from the non-compliance with AASB 124/IAS 24. As per AASB 124/IAS 24,
transactions between the parent and subsidiary companies need to be disclosed. Since, this
information is not disclosed by the finance director of Main Insurance due to the non-
compliance with AASB 124/IAS 24, it is not possible for the audit manager to ascertain the
fact that whether the undisclosed information has pervasive material misstatement or non-
pervasive material misstatement on the financial statement of Main Insurance. This
eliminates the issue of qualified or adverse audit opinion. Since the audit manager is unable
in acquiring adequate appropriate audit evidence for providing basis for an audit report, it is
required for him to issue a disclaimer of audit opinion (Tahinakis and Samarinas 2016).

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References
Chen, T.T., Zhang, F. and Zhou, G., 2017. Secrecy culture and audit opinion: Some
international evidence. Journal of International Financial Management & Accounting, 28(3),
pp.274-307.
Cordoş, G.S. and Fülöp, M.T., 2015. Understanding audit reporting changes: introduction of
Key Audit Matters. Accounting & Management Information Systems/Contabilitate si
Informatica de Gestiune, 14(1).
Omid, A.M., 2015. Qualified audit opinion, accounting earnings management and real
earnings management: Evidence from Iran. Asian Economic and Financial Review, 5(1),
pp.46-57.
Provasi, R. and Riva, P., 2015. Assessment of going concern for the Italian listed companies:
An empirical study. Review of Business & Finance Studies, 6(1), pp.27-34.
Sirois, L., Bédard, J., Bera, P. and Jha, A., 2014. The informational value of emphasis of
matter paragraphs and auditor commentaries: Evidence from an eye-tracking study.
In Auditing Midyear Conference. Available at: http://www. isarhq.
org/2014_downloads/papers/ISAR2014_Sirois_Bedard_Bera. pdf[Google Scholar].
Tahinakis, P. and Samarinas, M., 2016. The incremental information content of audit
opinion. Journal of Applied Accounting Research.
Tahinakis, P. and Samarinas, M., 2016. The incremental information content of audit
opinion. Journal of Applied Accounting Research.
Vichitsarawong, T. and Pornupatham, S., 2015. Do audit opinions reflect earnings
persistence?. Managerial Auditing Journal.