Question

Before the audit report was signed, the audit team encountered the following situation. Treat each situation independently and assume the remaining financial statements are fine. The audit report was signed on 5 August 2020, The financial statements were signed by the BoD on the same day, which was subsequently released to shareholders on 12 August 2020.

1) A property owned by Cook’s Furniture Ltd was sold to Lidia Preston, the wife of Howard Cook in June 2020 (refer to case description in part A). The property has a market value of four million and was sold at 3.2 million. Management did not disclose this in the financial statement because they believed this was a private matter. The disposal of this asset has been appropriately accounted for on the financial statements (e.g. the asset was removed from PPE and the loss of disposal was correctly recognised as an expense).

2) The subsequent selling price of the ready-made furniture range suggests the inventory valuation as at 30 June 2020 should be written down by $48,000 but management only wrote $38,000 off as per the financial statements because they were confident that they can increase the selling price again in 2021 after people settling back to normality.

3) Carl Cook decided to retire in 2021 due to health reasons, Carl is willing to sell his shareholding to the remaining shareholders. However, the BoD decided to explore the potential of selling the business. By the time to sign the 2020 financial statements, the company has not commenced a negotiation with any potential buyer. The BoD said to the auditor that they may not sell the business if they cannot get a good deal. Carl’s retirement decision is disclosed on the financial statements, but not the intention to sell the business.

REQUIRED:

For each of the above situation:

a) Discuss the audit procedure that the auditor needs to perform in relation to each situation.

b) Explain which audit opinion is appropriate for each situation.

Answer 1

REQUIRED: for every of the higher than situation: a) Discuss the audit procedure that the auditor must perform in regard to every scenario. b) justify that audit opinion is suitable for every scenario. SOLUTION:- Part(A.) Step one – establish the assertion tested Audit procedures area unit performed so as to check plan assertions. Therefore, the primary step in explaining Associate in Nursing audit procedure is to spot the assertion that must be tested. The assertions embodied within the monetary statements, as employed by the auditor to think about the various sorts of potential misstatements which will occur, might take the subsequent forms: Transactions and events Account balances at the period-end Presentation and disclosure Occurrence Completeness Accuracy Cutoff Classification Existence Rights and obligations Completeness Valuation and allocation Occurrence and rights and obligations Completeness Classification and understandability Accuracy and valuation A brief rationalization of the varied assertions is as follows: Completeness This means that each one transactions are recorded within the monetary statements – that is all assets, liabilities, equity interests (capital and reserves) and alternative disclosures are enclosed within the monetary statements. Occurrence This assertion means transactions and events and alternative matters that are recorded truly passed off – and relate to the current organisation. Valuation and allocation This means that each one things are enclosed within the monetary statements at acceptable amounts consistent with company policy and therefore the relevant monetary news framework. what is more, any allocations or valuation changes needed (like impairment) are created and monetary and alternative data is disclosed fairly and at acceptable amounts. Classification and quality Financial data is fittingly bestowed and disclosed, and disclosures area unit clearly expressed thus on build them perceivable to the users. For this, the disclosures ought to use straightforward language and state matters clearly and shortly. Accuracy Accuracy means amounts and alternative knowledge with reference to transactions and events are recorded at the proper amounts – that is at the amounts showing within the supply documents. Rights and obligations This means that the entity features a right to its assets – that is it's unengaged to use or lose the assets because it sees match. what is more, the entity is obligated to pay off the liabilities that area unit shown within the statement of economic position. Existence This means that assets, liabilities and equity interests (capital and reserves) area unit physically present/belong to the entity on the news date. Cutoff This means that transactions and events are recorded within the correct accounting amount – for instance, if merchandise area unit delivered before year finish, they're enclosed within the value of products sold , not inventory. Step 2: establish the audit procedure Explanation Example of substantive procedure with reference to valuation of property, plant and instrumentation (PPE) 1 Choose the assertion which will be tested Choose Associate in Nursing assertion from Completeness, Valuation and allocation, Rights and obligations and Existence if you're testing the period-end balance of PPE; valuation of non-current assets is that the assertion tested 2 Identify the chance which will cause a cloth statement within the monetary statements – the audit risk is that the total worth of PPE which will be misstated thanks to over-valuation/ evaluation of PPE One risk relates to the revalued assets not representing honest values, so under/overstating PPE 3 Think of the audit procedures that ought to be performed so as to avoid the chance mentioned in step one (refer to ‘AEIOU’ below) The auditor can agree the provision of a review report (a supply document for the revaluation) and ensure that the worth mentioned within the valuation report matches the number at that the PPE is revalued and shown within the monetary statements. Furthermore, the auditor can compute the review surplus in accordance with the provisions of IAS sixteen, Property, Plant and instrumentation to substantiate the correctness of the accounting entries with reference to review surplus. the number additional to review surplus ought to be the distinction between information superhighway value of PPE and therefore the revalued amounts. The auditor ought to agree the assumptions employed in the report for reasonableness. for instance, the worth per sq. feet within the valuation report ought to be the same as the worth per sq. feet of alternative similar properties in this section. There area unit more procedures which will apply to the current risk. Follow the higher than technique for testing alternative assertions too. Choose audit procedures from AEIOU A: Analytical procedures E: Enquiry and confirmation directly from a 3rd party – that is inquiry I: scrutiny of records and assets O: Observation U: computation and reperformance Step 3: Note the subsequent whereas writing down the audit procedure 1 Write it clearly Audit procedures ought to be written in such the way that even a junior auditor are going to be ready to perceive what's to be done. for instance, avoid imprecise procedures like ‘check merchandise received notes’. this can be imprecise because it doesn't justify what's to be examined within the merchandise received notes. Is it the outline of things received, the number received or the name of the vendor? 2 Write down the rationale for playing the audit procedure The audit procedure ‘check merchandise received notes’ doesn't mention why the products received notes area unit to be checked. Instead, write the audit procedure as: ‘agree the outline of things and therefore the quantities ordered mentioned on the products received note with the descriptions on the acquisition orders raised on the vendor’. This confirms that the entity has procured merchandise supported Associate in Nursing authorised commercial instrument. 3 Use audit nomenclature Use nomenclature with reference to audit like ‘cast’, ‘agree’, ‘trace’, etc. Use the word ‘cast’ to mean totalling up a listing – for instance, ‘cast the trial balance’. Use the words ‘agree’ or ‘trace’ to mean matching data from 2 documents/ records – for instance, ‘agree the whole sales of the sales day book to the final ledger account’; or ‘trace a sample of trade liabilities to the acquisition invoices, to substantiate the existence of the rights to the products purchased’. A complete audit procedure would browse as follows: The auditor can agree a sample of things from the inventory sheets to the stuff inventory (1) to confirm that the inventory recorded on the sheets truly exists (2). this may make sure the assertion of existence of inventory as Associate in Nursing plus within the monetary statements (3). (1 = the audit procedure; a pair of = the rationale for the audit procedure; three = the assertion). If the higher than mentioned procedure is written as ‘The auditor can check a sample of things from the inventory sheets to the stuff inventory’, it's incomplete because it doesn't mention why the audit procedure is being performed. Common errors that has to be avoided The examiner’s reports mention varied errors that candidates build whereas writing audit procedures. Here could be a outline of the common errors. While writing audit procedures, avoid the following: Writing Associate in Nursing audit procedure while not explaining the rationale for the procedure – for instance, ‘The auditor can check a sample of things from the inventory sheets to the inventory.’ Stating Associate in Nursing assertion word as a reason for playing a procedure – for instance, ‘confirming the incidence of sales’. Writing what the inner system ought to do instead of stating the audit procedure – for instance, ‘for all merchandise received, there ought to be a merchandise received note raised’. Writing imprecise procedures – for instance, ‘check the invoice’, ‘check the products received note’, etc. These procedures area unit inappropriate as they are doing not mention what's to be checked and therefore the reason for checking them. Quoting incorrect assertions – for instance, ‘tracing details from the acquisition orders to the products received notes so as to substantiate existence of the goods’ – the completeness assertion would apply here. Including procedures that can't be dole out – for instance, ‘agree individual things of physical inventory to the sales invoice’. {it can|it'll} not be attainable to agree the physical merchandise to the sales invoice because the merchandise will already be sold . Including procedures that area unit incorrect – for instance, ‘agree details from the acquisition orders (like description of things ordered, quantities ordered) to the products command within the inventory store’. this can be Associate in Nursing incorrect audit procedure as merchandise received notes (not purchase orders) area unit wont to update inventory. Writing impractical procedures – for instance, suggesting a segregation of duties between the person authorising fund vouchers, recording fund vouchers and dispensing the fund. Writing irrelevant audit procedures – for instance, once you area unit asked to put in writing audit procedures with reference to depreciation of a non-current plus, it'll be inappropriate to produce general audit procedures with reference to audit of non-current assets. Part(B.) An auditor needs to make Associate in Nursing audit opinion on whether or not the entity prepares monetary statements considering all the fabric aspects. the fabric aspects shall be in accordance with the applicable monetary news framework. Associate in Nursing auditor shall conclude whether or not the monetary statements area unit free from material misstatements, fraud or error. Auditor Shall value the subsequent Factors Whether the entity fittingly follows and applies vital accounting policies whereas getting ready monetary statements. He additionally must value that it makes acceptable revealing concerning identical. It follows the accounting policies on a uniform basis with the applicable monetary news framework. Estimates created by the management area unit affordable or not. The monetary statements of Associate in Nursing entity shall give relevant, reliable straightforward to grasp and comparable data. Proper disclosures created for material transactions for an improved understanding of meant users. Terms employed in monetary statements area unit acceptable or not. The auditor ought to state within the opinion paragraph whether or not the entity prepares the monetary statements altogether material respects. Also, it shall state whether or not it complies with the applicable monetary news framework. The auditor ought to state whether or not he has obtained spare and acceptable audit proof. He ought to categorical his audit opinion on the monetary statements of Associate in Nursing entity on whether or not the monetary statements provides a true and honest read in accordance with the applicable monetary news framework and statutory needs. Types of Audit Opinion Unqualified opinion Qualified opinion Disclaimer of opinion Adverse opinion Unqualified Opinion An auditor expresses Associate in Nursing unqualified audit opinion once he concludes that the monetary statements of Associate in Nursing entity area unit ready in accordance with the applicable monetary news framework, considering all the fabric aspects. Auditor expresses Associate in Nursing unqualified audit opinion once in his opinion Associate in Nursingd supported the knowledge provided to him and audit proof obtained by he considers that the monetary statements of an entity provides a true and honest read. An unqualified audit opinion assures that any changes created within the accounting policies or technique followed by the entity on endless basis and their effects are thought of and disclosed within the monetary statements fittingly. Modified Opinion When Associate in Nursing auditor expresses his opinion apart from Associate in Nursing unqualified audit opinion it's aforementioned he's modifying his opinion. once Associate in Nursing auditor expresses a professional opinion or disclaimer of opinion or Associate in Nursing view it's aforementioned he has changed his opinion. Audit Report is taken into account to be changed once Matters that don't have an effect on the Auditor’s Opinion There area unit some matters enclosed within the monetary statements that within the auditor’s opinion area unit of such importance that it's terribly helpful for the users understanding of the monetary statements. In such cases, Associate in Nursing auditor might modify his report by adding a stress of matter paragraph to spotlight such matter for users understanding. Adding a stress of matter paragraph doesn't have an effect on the auditor’s opinion. Associate in Nursing auditor modifies his opinion by adding a stress of matter paragraph if he considers that the going concern of Associate in Nursing entity is questionable, uncertainty concerning future events which can have an effect on the monetary statements. For Example: once there's uncertainty concerning unfinished judicial proceeding matters, such matters is disclosed within the stress of matter paragraph. Matters that have an effect on the Auditor’s Opinion

Qualified opinion The auditor shall specific a certified opinion once he concludes that unqualified opinion can't be expressed and also the misstatements AN individual basis} or in combination ar material however not pervasive on need an opinion or the limitation of scope isn't material on need a disclaimer of opinion. The auditor ought to specific a certified opinion as being “subject to” or “Except for” the results of fabric things that ar qualified. For example: once AN auditor is unable to get spare and applicable audit proof concerning investment created in an exceedingly foreign company. we tend to take into account the auditor’s inability to get spare and applicable audit proof material however not pervasive. Auditor’s opinion is Qualified for the statement. Disclaimer of opinion An auditor expresses a disclaimer of opinion once he's unable to get spare and applicable audit proof. another excuse is that he considers that the undiscovered misstatements might be each material and pervasive. The auditor ought to disclaim AN opinion once there's a limitation on the scope impact of that is each material and pervasive and he's unable to get spare and applicable audit proof. Adverse opinion An auditor expresses AN opinion once he considers that the statement is therefore material and pervasive that a qualification of the report isn't capable disclose such misstatements of economic statements. The auditor shall specific AN opinion when getting spare and applicable audit proof. Thus, on the idea of such proof, he concludes that the misstatements, separately or in combination ar material and pervasive to the money statements. Solved Example For You Question: Differentiate between qualified opinion and opinion. Ans: AN auditor expresses a certified opinion once he considers that AN unqualified opinion can't be expressed and also the misstatements separately or in combination don't seem to be therefore material and pervasive to the money statements of the entity. An auditor expresses opinion once he considers that the misstatements either separately or in combination ar each material and pervasive to the money statements of the entity.

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