Exercise for Topic 6

Question 1:
a. During an audit completion of a manufacturer of advanced electrical components, the
auditor identified that the changes in the market resulted in a significant decrease in the
demand for their products, which are now being sold significantly below cost. However,
management refuses to write-off the products or to increase the reserve for obsolescence.
Auditor consider that this decreasing of the inventory account was material and pervasive.
 ADVERSE

 post year-end slaes incoive

b. Subsequent to the date of the FS as part of his post-balance sheet date audit procedures, a
CPA learned that a recent fire caused heavy damage to one of a client's two plants; the loss
will not be reimbursed by insurance. The newspapers described the event in detail. The
financial statements and appended notes as prepared by the client did not disclose the loss
caused by the fire.
 ADVERSE (MM and pervasive)
The subsequent event needs to be disclosed in financial reporting but it was not.

Required: For the above situation, please identify the most appropriate “type of audit opinion”
that auditor would issue. Explain and write out the reasons for your choosing.

Question 2

The following are independent and material situations:

a. An auditor is engaged to audit a client’s financial statements after the annual physical
inventory count. The accounting records are not sufficiently reliable to enable the auditor
to become satisfied as to the year-end inventory balances.
 QUALIFIED except for the inv acc :
Because the situation shows a scope limitation and the amount of inv is material.
+ if the inv is not pervasive, a qualified/modified opinion (inv account) would be
issued;
+ if the inv is pervasive, a disclaimer of opinion would be issued

b. The client changes its method of accounting for the cost of inventories from FIFO to
weighted average. The auditor does not agree with the change. Furthermore, it has a
material effect on the financial statements and has not been disclosed.
 QUALIFIED
Because there are disagreements between the auditor and the client and the client on
the MM.
c. The client fails to record an immaterial amount of prepaid insurance as an asset.
 UNMODIFIED

d. There is substantial doubt about the client's ability to continue as a going concern.
 ADVERSE / UNMODIFIED opinion with emphasis matter
- MM
- if client agrees to disclose : UNMODIFIED opinion with emphasis matter
- if client does not disclose : ADVERSE

Required: For each of the above situations you are required to indicate the type of audit
opinion you would issue and explain your reasons.