Question

You are the partner in charge of audit quality in your firm. There are five audit partners in the firm and you have reviewed the completed audit files of one client for each audit partner. In each case, an unmodified audit opinion was issued. You have found the following:
Client A: faced severe cashflow problems just before the end of the financial year but the financial statements had been drawn up on the going concern basis. The directors had been in negotiations with the bank to seek additional funding. The negotiations were on-going at the time the financial statements were finalised. The directors refused to disclose anything about the liquidity crisis in the notes to the financial statements.
Client B: a computer hacker had accessed and corrupted the accounting data in the accounts payable/suppliers’ ledger. There was no way of recovering the lost data. The audit partner had been persuaded that given this year’s high profit figure, the amount of possible misstatement of accounts payable would not be material.
Client C: was in need of capital investment and the major shareholders had agreed in principle to inject new capital. The directors therefore produced the financial statements on the going concern basis; they have made full disclosure in the notes to the financial statements. The audit partner was satisfied that the additional information was sufficient.
Client D: the audit team discovered a number of minor discrepancies that together would suggest that reported income might be overstated by 0.01%.
Client E: your firm was appointed during the year following the sudden death of the previous auditor, a sole practitioner. Although it had not been possible to find evidence to support this year’s opening balances, the audit partner considered that the previous auditor was highly professional and therefore last year’s figures could be relied on.

a) For each client, indicate the extent to which you agree with the issuing of an unmodified audit opinion and explain why. Where you disagree, explain your reasoning and suggest a more appropriate form of audit opinion.

b) In addition to the auditors’ opinion, what other messages would readers expect to see in an audit report on a company’s financial statements?

Answer 1

a)

Client A : the auditor should have included a emphasis of matter paragroh in the audit report. As liquidity crisis will affect the interest payments, debt redemption, dividend payments etc. This is of importance to the investors who expect regular and timely payment of their dues. The auditor should have included a paragraph that though the financial statements are correct but internally the company is suffering from liquidity crisis .

Client B : The auditor should have given a disclamier opinion that because of hack of the data, he wasn't able to retrieve the lost data and thus cannot give an opinion on the statements as complete information is not available.

Client C: since the financial statements has been made according to the provided norms and full disclosure about the investment has also been made, the auditor is right in his opinion.

Client D: the auditor should have given a modified opinion that though the financial statements are fairly presented but there are number of minor errors and the items should be specified.

However if the company is very large , 0.01% would also mean a very large amount and in that case, adverse opinion is suitable. .

client E: if the experience of the previous auditor and the reliability on him has been properly assessed and the auditor has enough proof to explain that the previous auditor was trustworthy, the auditor is right in his opinion.

Else , a disclaimer opinion should have been given.

b) other than auditor's opinion , the readers also like to read additional comments on strength and financial position of the company. Beacuse other than financial records , there are several other factors beacuse of which the stakeholders could be affected. If any such situation internal to the company, and unknown to the readers is there, the auditor should disclose such information, if within law, to uphold the interest of the stakeholders.