The entire North Island operations of one of the clients are under investigation by the Inland Revenue Department for alleged failure to pay the appropriate amount of tax. The client mentioned the Inland Revenue Department investigation in the notes to the financial statements. The auditors preliminary investigations reveal that the Inland Revenue Department has a strong case against the client.

Question)State what type of opinion should be formed by the auditor for this situation and briefly describe the basis of issuing such opinion.

A qualified opinion 

Step-by-step explanation

  
This type of audit, opinion is given when auditors in their engagement process realize a limited scope of operations during their engagement with the client. This is based on the fact that when they are not able to access the entire resources necessary to the engagement process, the reliability of the final opinion would easily lead to misrepresentation of the business's financial performance. Auditors will therefore give a qualified opinion when the impeding factors such as limitations on the scope, convoluted accounts, and unavailability of documents for substantive analysis would not be material to warrant an adverse opinion. Such limitations are however material hence the absence of unqualified opinion. This would be given by the auditing firm. did not in its work unravel tax evasion either due to due to a limited scope.
The auditor should therefore indicate the case of the company being investigated under the emphasis matter paragraph. It is the paragraph that the users of financial statements mostly focus on in understanding the future financial position of the company.