Question

You are auditing Osakis Electronics Ltd, a subsidiary of a Japanese company, and will issue an audit report covering the balance sheets as of 31 December 2008 and 2007, and the income statements and cash flow statements for the two years then ended. The company's ordinary shares are traded on the Fiji and Tokyo stock exchanges. Each of the following is an independent audit reporting situation. Required: 1 Osakis does not disclose segment information, because Japanese accounting standards do not require it. Indicate the effect on your audit report, which will be widely used in Fiji. 2 Osakis reports its inventory, non-current assets, depreciation, and cost of goods sold on a current -value basis. Such accounting violates the accounting standards of both Japan and Australia. There is disclosure of the pertinent facts, including the effect on key financial statement amounts, in Note 13. 3. a What factors should you consider in deciding whether to issue a qualified or an adverse opinion? b Draft the explanatory and opinion paragraphs for: 1 a qualified opinion 2 an adverse opinion

Answer 1

The Standards on Auditing gives guidance about the reporting requirements of an auditor regarding their report on the true and fair view of the accounts of an organisation.
The standards on Auditing talks about modification of the report in case of any departure from the general accounting principles.
An auditor can qualify his report by giving either a qualified opinion, adverse opinion, or disclaimer of opinion depending on the severity of the the underlying problem.
In the given case as an auditor we need to see how pervasive the effect of non reporting of segment in financial report is to the overall financial statement. If this departure pervasively affects the other parts of financial overall then we need to give an adverse opinion and if the effects is not so pervasive to the overall financial statement then we need to give a qualified opinion.

Draft for qualified opinion :

We have audited the financial statements and profit and loss account of Osakis Electronics Ltd and subject to the reporting of stocks and depreciation on current value and non disclosure of segment information the financial statement give a true and fair view of the affairs of the company.

Draft opinion paragraph in case of adverse opinion :

We have audited the financial statement and profit and loss accounts of Osakis Ltd and found that they have defaulted in the segment reporting and also they value their inventory and depreciation on current value which is a major departure for the accepted accounting principles and this affects the overall credibility of the financials and hence we cannot say that the books of accounts of Osakis give us a true and fair view.