- 10 Marks
AAA – May 2024 – L3 – SB – Q3b – Audit Reporting
Determine if the opinion should be unmodified, assess if it requires a Material Uncertainty paragraph, and discuss modified report form and content.
Question
A client company has prepared draft financial statements for the year ending December 31, 2020. In February 2021, a legal claim was made against the company, claiming substantial damages. The company’s lawyers have advised that the claim has less than a 50% chance of success. If the claim succeeds, the company would have sufficient cash resources to meet the claim in full.
The matter is disclosed in the draft financial statements in a note, as a material contingent liability.
Required:
- Advise if the audit opinion should be unmodified, and if so, should the report contain a ‘Material Uncertainty Related to Going Concern’ paragraph? (3 Marks)
- Discuss the form and content of a modified auditor’s report. (7 Marks)
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