1. During your audit of Raceway, Inc., you conclude that there is a probability that inventory is materially overstated. The client refuses to permit you to expand the scope of your audit adequately to verify whether the balance is actually misstated.
2. You do the audit of Munich Department Store, and in your view the financial statements are fairly shown. On the last day of the audit, you find out that one of your supervisors assigned to the audit has a material investment in Munich.
3. Auto Delivery Company has a fleet of various delivery trucks. In the past, Auto Delivery had followed the policy of purchasing all equipment. In the present year, they determined to lease the trucks. The method of accounting for the trucks is thus changed to lease capitalization. This change in policy is completely disclosed in footnotes.
4. You are auditing Deep Clean Services for the 1st time. Deep Clean has been in business for subsequent years but over the last two years has struggled to stay afloat provided the economic conditions. Based on your audit work, you have considerable doubt that Deep Clean may be in business by the end of its next fiscal year.
5. One of your audit clients has a material investment in a privately-held biosciences company. Your audit firm engaged a business valuation specialist to help in computing the client's estimation of the investment's fair value. You refer that the valuation specialist's work gives sufficient appropriate audit evidence.
6. Four weeks after the year-end date, a main customer of Prince Construction Co. declared bankruptcy. Because the customer had definite the balance due to Prince at the balance sheet date, management refuses to charge off the account or otherwise disclose the information. The receivable represents just about 10% of accounts receivable and 20% of net earnings before taxes.
For each situation, do the subsequent:
a. Check which of the conditions requiring a modification of or a deviation from an unqualified standard report is appropriate.
b. State the level of materiality as immaterial, highly material or material. If you cannot select the level of materiality, state the extra information needed to make a decision.
c. Given your answers in parts a and b, state the kind of audit report that should be issued. If you have not decided on one level of materiality in part b, state the related report for each alternative materiality level.