Spinner Ltd is a bedding manufacturer that achieved a net profit before income tax of $1 842 000 for the year ended 30 June 2013. Spinner Ltd has a major loan from Greater Western Bank (GWB) for financing daily and other operations, carrying an interest rate of 7 per cent per annum. Spinner Ltd is required to adhere to financial covenants imposed by GWB and in the event that the covenants are breached the annual interest rate on the loan will increase to 10 per cent. Spinner Ltd has disclosed these details in the notes to the financial report. You are satisfied that the note in the financial report complies fully with the accounting standards; however, you form the view that your audit report should draw attention to this note. In addition, you have identified the following matters from your audit work: 1. Spinner Ltd.’s inventory amounted to $1 941 000 on 30 June 2013. In order to move some of its old stock, in July 2013 the company sold 25 per cent of its finished goods inventories held on 30 June 2013 for $82 189 below their original cost. Management has indicated that as the sales occurred after 30 June 2013, it believes that the value of finished goods at that date should remain at cost. The remainder of the inventory has only been purchased recently and is in great demand. 2. Spinner Ltd.’s accounts payable on 30 June 2013 amounted to $1 726 000. Subsequent payments testing revealed that in July 2013, invoices totalling $53 751 were paid that related to June 2013 purchases of inventories. The relevant invoices were omitted from the balance of accounts payables on 30 June 2013. Management has indicated that it does not intend to adjust the financial report in relation to this issue. 3. Spinner Ltd.’s accounts receivable balance on 30 June 2013 amounted to $2 540 000. Your testing has revealed that the accountant used an incorrect exchange rate to translate overseas debtors on 30 June 2013. As a result, the balance of the accounts receivable account was overstated by $75 650. Again, management has indicated that it does not intend to adjust the financial report in relation to this issue. Required: (a) What is the difference between modified and unmodified opinion? (b) Based on the above scenario, what kind of audit opinion will be issued? Explain the two (2) circumstances under which a modified audit opinion is issued. (c) Explain the three (3) different types of modified opinions.
Spinner Ltd is a bedding manufacturer that achieved a net profit before income tax of $1 842 000 for the year ended 30 June 2013. Spinner Ltd has a major loan from Greater Western Bank (GWB) for financing daily and other operations, carrying an interest rate of 7 per cent per annum.
Spinner Ltd is required to adhere to financial covenants imposed by GWB and in the event that the covenants are breached the annual interest rate on the loan will increase to 10 per cent. Spinner Ltd has disclosed these details in the notes to the financial report.
You are satisfied that the note in the financial report complies fully with the accounting standards; however, you form the view that your audit report should draw attention to this note.
In addition, you have identified the following matters from your audit work:
1. Spinner Ltd.’s inventory amounted to $1 941 000 on 30 June 2013. In order to move some of its old stock, in July 2013 the company sold 25 per cent of its finished goods inventories held on 30 June 2013 for $82 189 below their original cost. Management has indicated that as the sales occurred after 30 June 2013, it believes that the value of finished goods at that date should remain at cost. The remainder of the inventory has only been purchased recently and is in great demand.
2. Spinner Ltd.’s accounts payable on 30 June 2013 amounted to $1 726 000. Subsequent payments testing revealed that in July 2013, invoices totalling $53 751 were paid that related to June 2013 purchases of inventories. The relevant invoices were omitted from the balance of accounts payables on 30 June 2013. Management has indicated that it does not intend to adjust the financial report in relation to this issue.
3. Spinner Ltd.’s
Required:
(a) What is the difference between modified and unmodified opinion?
(b) Based on the above scenario, what kind of audit opinion will be issued? Explain the two (2) circumstances under which a modified audit opinion is issued.
(c) Explain the three (3) different types of modified opinions.
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