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.

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.

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.
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.
c. The client fails to record an immaterial amount of prepaid insurance as an asset.
d. There is substantial doubt about the client's ability to continue as a going concern.

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