Auditing and Assurance 2: Analysis of Audit Opinions in Various Cases

This report analyzes four different scenarios related to audit opinions in Auditing and Assurance 2. The first case examines Beast Ltd's use of the LIFO method, leading to a material misstatement in inventory valuation and an adverse audit report. The second scenario discusses SecondBite Foundation, a non-profit organization with inadequate internal controls, resulting in a qualified audit opinion due to uncertainties in revenue recording. The third case involves Golddiggers Pty, where the auditor issues an unmodified opinion with an emphasis-of-matter paragraph because of uncertainties regarding the company's future operations and the limited life of the gold vein. The final case deals with Main Insurance's non-compliance with AASB 124/IAS 24 regarding related party disclosures, leading to a disclaimer of opinion due to the auditor's inability to assess the impact of the non-disclosure. The report references relevant auditing standards and emphasizes the importance of accurate financial reporting and adherence to accounting standards.

Running head: AUDITING AND ASSURANCE
AUDITING AND ASSURANCE
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Table of Contents
Question 1..................................................................................................................................2
Question 2..................................................................................................................................3
Question 3..................................................................................................................................4
Question 4..................................................................................................................................5
Reference....................................................................................................................................6

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Question 1
A. As Inventory, account is one of the significant item in balance sheet any misstatement
relating to this account will not show appropriate financial position of the company.
Beast Ltd has used last-in-first-out (LIFO) method of inventory valuation. A
materiality affect has been seen on the closing balance of the inventory, as there is a
difference between first-in-first-out and last-in-last-out. To provide an unmodified
audit report there should not be any material misstatement in any of the accounts
however in the inventory account there is some impact of material misstatement thus,
the auditor cannot issue unmodified audit report opinion for the company. The auditor
will issue an adverse audit report on behalf of the company (Stanisic 2014). As per
ASA 700 (10), it is the duty of the auditor to give an opinion regarding the financial
statements that the statements are prepared in accordance with all material aspects
(auasb.gov.au 2020).
B. Due to some difference in the inventory account of Beast Ltd, there is a materiality
impact on the closing balance of the stock account. Correct valuation of inventory is
extremely important for balance sheet as it is one of the significant items of tangible
assets and any kind of falsification in this account will result in material misstatement
thus the financial statement will not show the exact position of the company. This
material impact is pervasive in nature and needs to be corrected. The material impact
is on the closing stock that is required to calculate the profit and provides a clear view
of income statement and position statement of the company thus a qualified audit
report opinion is not possible to issue. As the financial statements are not as per the
requirement, the auditor should issue adverse audit report to the company (Newton
2016).

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Question 2
A. In a non-profit organization and non-reporting organization, internal control
mechanism is not adequate, SecondBite Foundation is one of such company where
there is absence of adequate mechanism of internal control relating to collection of
revenue due to which the audit manager can concludes that all revenue received
during a financial year was not properly recorded in the books of accounts. This
shows that the financial annual report of the company is not free from material
falsification due to which the scope of issuing an unmodified audit report is not
possible. A qualified audit report opinion is issued to SecondBite Foundation
(Tsipouridou and Spathis 2014). ASA 700 (17) states that if the auditor is not able to
obtain adequate audit evidence to conclude that the annual reports is free from
material misstatement then auditor shall issue qualified opinion with respect to ASA
705 (auasb.gov.au 2020).
B. As SecondBite Foundation is one type of non-reporting firm, it does not have any
external stakeholders who are interested in its financial statements nor are they
evaluating or taking any decision relating to the company resources. Even due to the
negligence of internal control system, auditor is not sure whether all revenue received
has been properly allocated to the accounts or not. As if revenues are not recorded
properly then there will be material misstatement in the financial statement, which
eliminates the issue of unmodified audit report. It is clearly mentioned that
SecondBite Foundation has properly recorded for all the revenues generated during
the accounting year. From the above statement it concludes that material misstatement
arising out of income did not affect the financial report of the company largely and
thus the materiality impact is not pervasive due to which adverse audit opinion is not
issued. Therefore, SecondBite Foundation is issued with a qualified audit report

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opinion (Yaşar, Yakut and Gutnu 2015). ASA 700 (17) states that sufficient audit
evidence is not available by which the auditor can claim that company is free from
any type of material falsification.
Question 3
A. Golddiggers Pty is a company, which is involved in small goldmine business. The
stakeholders of the company and even one of the board members of the company
informed the auditor regarding the contract of the company that the vein will extends
for at most thirteen to seventeen months and after that, the management will
discontinue the license. Due to this reason the audit manager did not issue an
unmodified audit opinion. As the financial statements are also not affected by any
material falsification, a modified report is not possible to issue. Therefore, the auditor
is left with only one option that is to issue an unmodified audit report with
significance on matter paragraph (Czerney, Schmidt and Thompson 2019). According
to ASA 700 (16), the auditor issue an unmodified opinion when the financial
statements are prepared with respect to all material aspects and also within the proper
framework of financial reporting (auasb.gov.au 2020).
B. Due to the fact that Golddiggers Pty Ltd vein will continue only for seventeen months
and after that the management will expire the license. This identifies an uncertainty
that what will be the financial position of the company in future time. Even the going
concern concept of the company is being questioned. The auditor doubts that the
company will not operate for a long period, because of this the auditor issued an
unmodified report by giving significant emphasis on the matter (Suwanda 2015). This
audit report requires an additional section addressing the issue relating to vein and the
expiry of license that arises the question on the going concern concept of the
company.

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Question 4
A. AASB 124/IAS 24 deals with Related Party Disclosures and the finance director of
the Main Insurance do not want to comply with this standard because he is not
interested in disclosing the information relating to his family in society. As all the
required standards are not taken into consideration material misstatement will arise in
the accounting statements due to which unmodified audit opinion will not be possible
to issue by the auditor, as some of the business information is not mentioned in the
books of accounts. In this situation, it is favorable to issue disclaimer of opinion rather
than qualified or adverse report (Kachelmeier, Schmidt and Valentine 2017). ASA
700 (13) states that all disclosures done by the management are reasonable and even
the financial policies applied are within the framework of the company (auasb.gov.au
2020).
B. In the financial statement of Main Insurance there is non-compliance with AASB
124/IAS 24. Any type of material misstatement is not seen in the statements. As there
is, no evidence about the information that has not been disclosed, what will be the
impact of non-compliance in the financial report and the auditor is not able to decide
whether it is a pervasive or non-perv asive material misstatement. Due to this, the
auditor has to issue disclaimer of opinion (Bava and di Trana 2014). As per ASA 700
(13), the auditor should make sure that the financial report of the company discloses
relevant accounting policies consistent with the applicable financial reporting
structure.

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Reference
Auasb.gov.au. 2020. Auditing Standard ASA 700 Forming an Opinion and Reporting on a
Financial Report. [online] Available at:
https://www.auasb.gov.au/admin/file/content102/c3/ASA_700_Compiled_2019-FRL.pdf
[Accessed 24 Jan. 2020].
Bava, F. and di Trana, M.G., 2014. Going-Concern Assumption and Disclaimer Opinion: The
Italian Case. GSTF Journal on Business Review (GBR), 2(4).
Czerney, K., Schmidt, J.J. and Thompson, A.M., 2019. Do investors respond to explanatory
language included in unqualified audit reports?. Contemporary Accounting Research, 36(1),
pp.198-229.
Kachelmeier, S.J., Schmidt, J.J. and Valentine, K.R.I.S.T.E.N., 2017. The disclaimer effect of
disclosing critical audit matters in the auditor’s report. Working paper.
Newton, N.J., Persellin, J.S., Wang, D. and Wilkins, M.S., 2016. Internal control opinion
shopping and audit market competition. The Accounting Review, 91(2), pp.603-623.
Stanisic, N., Petrovic, Z., Vicentijevic, K. and Mizdrakovic, V., 2014, April. Auditor
Switching and Qualified Audit Opinion: Evidence from Serbia. In The 2014 Proceedings of
The first international Conference Sinteza, Belgrade.
Suwanda, D., 2015. Factors affecting quality of local government financial statements to get
unqualified opinion (WTP) of audit board of the Republic of Indonesia (BPK). Research
Journal of Finance and Accounting, 6(4), pp.139-157.
Tsipouridou, M. and Spathis, C., 2014, March. Audit opinion and earnings management:
Evidence from Greece. In Accounting Forum (Vol. 38, No. 1, pp. 38-54). Taylor & Francis.

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Yaşar, A., Yakut, E. and Gutnu, M.M., 2015. Predicting qualified audit opinions using
financial ratios: Evidence from the Istanbul Stock Exchange. International Journal of
Business and Social Science, 6(8), pp.57-67.