Ethical Issues and Planning the Audit

The audit revealed certain flaws in the internal control. If after the auditor has undertaken alternative procedures to assure himself on the reliability of the report there is no assurance that the financial statement is reliable for use by any user. John the auditor may have discovered the poor internal control procedures of the company on inventories and he believes that the valuation method used in estimating the inventories will compromise the integrity of the report and a potential investor to take a risk beyond what he is willing to take if he knew the true values of the inventories.
The use of estimates in the valuation of inventories instead of the cost or market which ever is lower rule is a violation of the generally accepted standard. The deviation from the standard must be disclosed and it is the duty of the auditing firm to show the effect on the inventory and on the overall reliability of the financial condition of the company under audit. Is the inventory material in relation to the overall assets of the firm, or of the current assets Was there a physical count made and was the auditor present during the physical count and such count was used in th computation of the inventory These are all considered in assessing whether the opinion of the auditor is unqualified, or a disclosure is necessary. Despite these once there is deviation from the standard of reporting is presenting the inventory values that materially affect the accuracy of the values reported it is the auditor’s duty to report.
John should submit his report and the outcome of his meeting with Chandler on the matter of substitution by Chandler to the firm’s quality assurance board. The report should clearly state that John’s findings and the alternative procedures he did, considering the poor internal and complaints of customers on merchandise defects, etc., have not cured the unreliability of the financial report. The Board will be the final arbiter that will decide whether indeed a disclosure is necessary in the report in the "Notes to financial statements" section, or a qualified opinion. Chandler may have ulterior motives in making an unqualified opinion and scope of work, etc.
Question 2: Planning the Audit
To: Audit Partner
Re: Potential problem areas and their impact on the audit plan for Moss Green Ltd.
We have undertaken the initial steps in our audit of the above-mentioned client through interviews of their key management officers who might likely be our sources of vital information and approval on items that will be included in the audited financial reports. The officers are Mr. Tom Green the managing director and Wendy Chong who is in charge of the financial affairs of the client particularly the management of the investments and foreign funds that are hedged to secure foreign currency fluctuations.
We are concerned on possible problems in the presentation and disclosures of accounts. We learned from the previous auditor that Tom Gross does not have much interest on the financial affairs and he has delegated these to Wendy Chong. The possible problem with Wendy Chong is her refusal to allow disclosures on certain investments that has implications on valuation and contingent liabilities, particularly on hedged accounts. The concern is much more because Wendy enjoys a incentive compensation scheme which my tempt