Question

In: Accounting

Phillips & Craig LLP was hired by Richards Manufacturing, a public company, to perform an integrated...

Phillips & Craig LLP was hired by Richards Manufacturing, a public company, to perform an integrated audit of the December 31, 2022, financial statements and internal controls. Phillips & Craig was hired just after yearend, on January 3, 2023. Because of the tight deadline to complete the audit before the SEC filing deadline, Phillips & Craig focused more time on performing substantive procedures for the financial statement audit and was not able to complete a full audit of ICFR. The tests of controls that were completed provided evidence that internal controls were effective. The audit manager for Phillips & Craig tells the partner, “I feel certain if we had the time to complete all of the planned tests of controls, we wouldn’t identify any material weaknesses. We already decided to issue an unqualified opinion on the financial statements based on the evidence gathered from our substantive procedures, so I’m sure the internal controls are effective.”

What type of opinion on the effectiveness of ICFR should Phillips & Craig issue? Evaluate the situation and provide support for the type of opinion selected.

Solutions

Expert Solution

Phillips & Craig LLP is the auditor of the Public Company i.e. Richard Manufacturing ("the Company"). The auditor was appointed for the year ending December 31 i.e. on 3 Jan 2023.

The Company is a listed Company and hence auditors are required to comment upon the internal control of the Company as well. The auditor needs to state the fact in their report whether the internal controls were working effectively at year end or not. Additionally management also needs to confirm this fact in their director's statement in the annual report.

Here the engagement is for a Listed Company and hence it carries a high level of risk for the audit firm. Its their utmost responsibility to perform their work effectively upon internal control testing before giving their opinion.

In the present case, the auditors has got very stringent deadlines for completion of the assignment. The audit team was not able to test internal controls and only substantive procedures were performed. Internal Control report can't be given based upon the work performed on substantive procedures. Substantive procedures are not a substitute for internal control testing. Audit manger is incorrect in saying that we should give opinion on the basis of work performed based on substantive procedures. Hence on the basis of no control testing done, audit team should give disclaimer of opinion rather than unqualified report. They should modify the report and include a para on disclaimer of opinion. Issuance of unqualified report will be against the professional standards. Many times during the audit we see that internal control fails while substantive procedures has not highlighted any material weakness.


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