Case Study 5
1. Explain WHY not appropriate with authority?
2. Identify controversial issue(s),
3. Support your arguments
4. Answer the question - State your opinion/ conclusion
Case Study 5
The answer is adapted from HKICPA FE (December 2003) Paper II Case Question 4.
There is an inconsistency in the auditor’s report. The Qualified Opinion paragraph indicates that the opinion is qualified on the basis of scope limitation, while the Basis for Qualified Opinion paragraph suggests that the uncertain results of Lam’s negotiations with potential buyers is the reason of the qualification. HKSA 705 requires that when there has been a limitation on the scope of the auditor's work that prevents the auditor from obtaining sufficient evidence to express an unqualified opinion, the auditor shall issue a qualified (except for limitation) opinion or a disclaimer of opinion as appropriate.
In considering whether the scope of limitation results in a lack of evidence necessary to form an opinion, the auditor shall assess the quantity and type of evidence which may reasonably be expected to be available to support the particular figure or disclosure in the financial statements.
A scope limitation is usually imposed by circumstances and sometimes imposed by the reporting entity. In both cases, the auditor is prevented from carrying out a particular audit procedure that is considered necessary to obtain evidence that reasonably can be expected to be available.
Inherent uncertainties about the outcome of future events do not arise from, or give rise to, a limitation on the auditor’s work since it is not possible for the directors or the auditor to remove the uncertainty by obtaining more information at the date they approve the financial statements.
In this case, there is sufficient evidence for the auditor to conclude that it is not appropriate to state the inventories at cost since the inventories, which were ordered specifically for a customer who...
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