Lecture 11 –Case Questions 7.21 Effect of circumstances on audit opinion Assume you are an auditor and you are facing the following separate circumstances, the effects of all the items below are material: 1.The provision for stock is inadequate. 2.A retailer values inventory at sales price less an allowance for sales margin. 3.A manufacturing company is currently negotiating with the bank an extension of a loan facility that is due for repayment shortly after the AGM; without this refinancing the business will not be able to continue operations. 4.A significant proportion of a retailer’s sales are on a cash basis and inadequate records have been maintained; there are no audit tests that can be done to satisfy yourself that the cash sales are accurate. 5.Management have excluded from the financial report the necessary disclosures in relation to a contingent liability. 6.The company that runs a dairy farm has prepared the financial report on a going concern basis; shortly after the year end the company’s contract with a major supermarket was cancelled. Without this customer you expect the business to cease trading within six months and it is unlikely that the company will be able to secure any new contracts in that time. 7.The directors of a construction company refuse to give you access to reports produced by an independent quantity surveyor in relation to the value of work done on some of their construction projects. 8.A wholesaler has a policy of including all its buildings in the balance sheet at cost less depreciation. You establish that one of the warehouses included in the balance sheet at a value of $20m has an actual market value of $23m. Required: Indicate the effect of the above circumstances on your auditor’s report if management were to refuse to make any changes you feel necessary in order that the financial report gives a true and fair view. Answers 1.This is a disagreement with management. The audit report would be qualified if the issue is material but not extreme, or an adverse opinion in extreme cases.