Problem 4:
For the following independent situations, assume you are the audit partner on the engagement.
1. During your examination of Debold Batteries Ltd., you conclude there is a possibility that inventory is materially overstated. The client refuses to allow you to expand the scope of your examination sufficiently to verify whether the balance is actually misstated.
2. You are auditing Woodcolt Linen Services, Inc., for the first time. Woodcolt has been in business for several years but has never had an audit before. After the audit is completed, you conclude that the current year balance sheet is stated correctly in accordance with GAAP. The client did not authorize you to do test work for any of the previous years.
3. You were engaged to examine Cutter Steel Corp.'s financial statements after the close of the corporation's fiscal year. Because you were not engaged until after the balance sheet date, you were not able to physically observe inventory, which is very material. On the completion of your audit, you are satisfied that Cutter's financial statements present fairly, including inventory about which you were able to satisfy yourself by the use of alternative procedures.
4. Four weeks after the year-end date, a major customer of Prince Construction Ltd. declared bankruptcy. Because the customer had confirmed 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 approximately 10 percent of the accounts receivable and 20 percent of net income before taxes.
5. You complete the audit of Johnson Department Store ltd., and , in your opinion, the financial statements are fairly presented. On the last day of the examination, you discover that one of your supervisors assigned to the audit had a material investment in Johnson.
6. Auto Delivery Company Ltd., has a fleet of several delivery trucks. In the past, Auto Delivery has followed the policy of purchasing all equipment, In the current year, they decided to lease the trucks. This change in policy is fully disclosed in the footnotes.
Required: For each situation, state the type of auditors report that should be issued. If your decision depends on additional information, state the alternative reports you are considering and the additional information you need to make the decision.