Question 1.

Imaginary Services Co Pty. Ltd started trading last year, and has undergone a recent surge of growth due to increased demand for their Imaginary Service. Your firm was appointed auditor for Imaginary Services Co Pty. Ltd in August 2010. As a result of this timing, you did not get the opportunity to observe the physical inventory count as of 30 June 2010 as it was done prior to your appointment. Owing to the nature of the company's records, you have not been able to satisfy yourself as to inventory quantities.

The inventory balance is material, however, you have found that controls over inventory are good, and that there is a low risk of misstatement for this asset. What type of audit report would you issue, and why?

If the company was Imaginary Consumables Co Pty Ltd, and the controls over inventory were not so good, would this affect the audit report, and why?

Question 2.

Clements & Partners are the audit firm of Manufacturing Co. and have been for 3 years. The audit firm is considering if there are any ethical or legal requirements that would prevent them from accepting the audit engagement of Manufacturing Co. again this year. The audit partner has noted the following information which may be relevant to this decision.

I. One of the junior staff members of the audit firm is related to a supervisor at Manufacturing Co.

II. One of the audit partners owns 100 shares in Manufacturing Co.

III. Clements & Partners provided taxation services to Manufacturing Co. in the last financial year.

IV. Frank Thomas, one of the audit partners at the firm, is the Uncle of one of the new directors of Manufacturing Co.

V. The audit partner on this engagement for the last 3 years has been James Underwood.

Identify if any of the above would prevent the audit firm from accepting the engagement.