Question

Assume 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 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.

Required:

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

As per SA 705 “Modifications to the Opinion in the Independent Auditor’s Report” a modified opinion may be expressed in the following circumstances:

(a) The auditor concludes that, based on the audit evidence obtained, the F.S. as a whole are not free from material misstatement, may be due to following reasons:

➢ Inappropriate method of selection of Accounting Policies;

➢ Accounting policies are not consistent with applicable FRF;

➢ Disclosure as required by FRF are not given.

(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement, may be due to following reasons:

➢ Limitations imposed by management

➢ Circumstances beyond entity control (For Ex.: Accounting records destroyed by fire)

➢ Circumstances related to Nature and Timing of auditor’s work.

Types of Modified Opinion:

(a) Qualified opinion: It is issued under following circumstances:

· Financial statements are materially misstated which in the auditor’s judgments are not pervasive.

· Auditor is unable to obtain Sufficient and appropriate audit evidence which in the auditor judgment are not pervasive

(b) Adverse Opinion: It is issued when financial statements are materially misstated which in the auditor’s judgments is having pervasive effect.

(c) Disclaimer of Opinion: It is issued when auditor is unable to obtain Sufficient and appropriate audit evidence which in the auditor judgment are having pervasive effect.

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 refused to disclose anything about the liquidity crisis in the notes to the financial statements.

The auditor concludes that, based on the audit evidence obtained, the F.S. as a whole are not free from material misstatement because of Disclosure as required by FRF are not given.

The auditor shall express a qualified opinion.

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.

The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement because of loss of data.

The auditor shall express a qualified opinion.

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.

The auditor shall express a unmodified opinion as additional information provided by client is satisfactory.

Client D: the audit team discovered a number of minor discrepancies that together would suggest that reported income might be overstated by 0.01%.

The auditor shall express a unmodified opinion as discrepancies discovered in the financial statements is below the materiality level and hence will not effect the opinion of auditor.

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.

The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement as auditor is unable to obtain sufficient appropriate evidence in regard to opening balance. If the auditor concludes it material and pervasive, the auditor shall express a disclaimer of opinion

Presentation in audit report:

(a) Special consideration required for expressing Qualified Opinion:

When the auditor expresses a qualified opinion due to a material misstatement in the financial statements, the auditor shall state that, in the auditor’s opinion, except for the effects of the matter(s) described in the Basis for Qualified Opinion section:

(i) When reporting in accordance with a fair presentation framework, the accompanying financial statements present fairly, in all material respects (or give a true and fair view of) […] in accordance with [the applicable FRF]; or

(ii) When reporting in accordance with a compliance framework, the accompanying financial statements have been prepared, in all material respects, in accordance with [the applicable FRF].

(b) Special consideration needed for expressing Adverse Opinion:

When the auditor expresses an adverse opinion, the auditor shall state that, in the auditor’s opinion, because of the significance of the matter(s) described in the Basis for Adverse Opinion section:

(i) When reporting in accordance with a fair presentation framework, the accompanying financial statements do not present fairly (or give a true and fair view of) […] in accordance with [the applicable FRF]; or

(ii) When reporting in accordance with a compliance framework, the accompanying financial statements have not been prepared, in all material respects, in accordance with [the applicable FRF].

(c) Special consideration is required for expressing Disclaimer of Opinion: When the auditor disclaims an opinion due to an inability to obtain sufficient appropriate audit evidence, the auditor shall:

(i) State that the auditor does not express an opinion on the accompanying financial statements;

(ii) State that, because of the significance of the matter(s) described in the Basis for Disclaimer of Opinion section, the auditor has not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the financial statements; and

(iii) Amend the statement required in SA 700 (Revised), which indicates that the financial statements have been audited, to state that the auditor was engaged to audit the financial statements.

Note: The answer is given from india's point of view. However the answer is still relevant for other country, subject to change in number of standard.