For each of the three circumstances above state whether or not the auditor should modify their report. Justify your answer, and outline the modifications, if any, to each auditor’s report. You should include the presentation of the audit opinion in each case.
Described below are situations which have arisen in three unrelated external audit clients of your firm. The year-end in each case is 31 March 20X1.
Jade Ltd (Jade)
Jade builds and operates fibre optic networks. During the year ended 31 March 20X1, the company incorrectly capitalised costs of £3 million in respect of repairs and maintenance to its networks and included these costs in non-current assets. The directors refuse to make any adjustments in respect of this matter as such an adjustment would cause the company to breach a loan covenant. The total assets of Jade at 31 March 20X1 are £525 million and the profit before tax for the year ended 31 March 20X1 is £71.3 million.
Pearl Ltd (Pearl)
Pearl maintains continuous inventory records and consequently the company does not perform a physical count at the year end. On 5 May 20X1, a fire in the office at Pearl's warehouse destroyed the company's inventory records and despatch records. The physical inventory was not damaged. There were no satisfactory alternative
Beryl Plc (Beryl)
Beryl is reliant on the continuing support of its bank to fund its operations. The current loan facility expires on 31 December 20X1 and, although the directors expect to be able to renew the facility on similar terms, they have no binding agreement with the bank. The directors have prepared cash flow
Q: For each of the three circumstances above state whether or not the auditor should modify their report. Justify your answer, and outline the modifications, if any, to each auditor’s report. You should include the presentation of the audit opinion in each case.
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