Question

You are the audit partner in each of the following independent and material scenarios.

1. The audit client’s financing arrangements are about to expire, and the firm has not as yet been able to secure replacement financing. If they are unsuccessful in arranging replacement financing the client firm may have to consider filing for bankruptcy. After evaluating the audit client’s situation, you believe that the going concern assumption may no longer be appropriate. You have advised the client that they should use liquidation values in the preparation of their financial statements. The client has followed your advice in using liquidated values and included the relevant disclosures required by accounting standards in this situation. You have reviewed their financial statements and believe that the disclosure is adequate.

2. You are auditing Franklin Ltd which manufactures electrical supplies. During your examination of the lease expense account you believe there is a possibility that there is a material overstatement. Unfortunately, management refuses to allow you to expand your audit work to verify whether the account is actually misstated.

Required:

In each scenario, analyse and explain how the situation would affect your audit report.

Answer 1

Part - A:

We believe that the going concern assumption may no longer be appropriate.

The Financials has to be prepared in liquidated values.

The auditor needs to provide an adverse audit opinion if the client won't prepare the financial statements as per liquidated values & he should state the same in the auditor's responsibility that the going concern assumption is no longer appropriate.

In this case, the audit client has prepared the financials in accordance with accounting standards for liquidated values.

Hence the auditor opinion should not be qualified in this respect.

But, he should report the reason for preparation of financials in liquidated values.

Part - B:

The audtior should express an disclaimer of opinion as he was restricted from performing further audit procedures.

He should state that the management has not allowed us to do the procedures required to state the materiality & pervasiveness of a misstatement. So, expressing an Disclamier of opinion on the financial statements.