Question

In: Accounting

In issuing the final audit report the auditor must faithfully execute his/her responsibilities to a number...

In issuing the final audit report the auditor must faithfully execute his/her responsibilities to a number of parties whose interests may be in conflict, especially if the report is qualified or adverse. The auditor has a duty to the owners, management, and creditors of the organization being audited as well as the auditor’s employer and himself/herself. Enormous pressure may be brought to bear on the auditor including threats, accusations of incompetence, legal action, and intimidation. Assume you are about to issue an adverse report on a company that has an openly hostile CEO (management), a creditor (Bank) that has considerable money at risk, an owner who is in another state and your employer (a partner in a CPA Firm) is a friend of the controller. Describe your duties to each and what you might say to the CEO.

Solutions

Expert Solution

An adverse opinion refers to the auditor finding one or both of the following.

  • Statements do not fairly represent the entity's accounts.
  • The audited statements do not comply with GAAP.

Before publishing an adverse opinion, auditors advise the firm's accountants and officers of such problems. And, auditors then work with them to correct problems, insofar as they can. They do this hoping to describe the outcome as "unqualified" or "qualified" opinion, instead of "adverse," if possible.

When auditors do report an adverse opinion, they give specific reasons for the opinion. As a result, auditors may point out specific accounting errors or departures from GAAP.

In any case, an Adverse opinion has serious consequences for the reporting entity. At a minimum, the opinion ensures that investors, regulators, lenders, and governments will reject the reports. In addition, if the audit reveals illegalities, corporate officers may be held personally accountable.

Duties of Auditors:

An auditor is an independently qualified person who is appointed to give shareholders an independent, professional and informed opinion on the financial statements prepared by the directors. An audit can also be of benefit to third parties wishing to engage in business with the company as it helps to assess the reliability of the information provided.

Provide An Audit Report

The main responsibility of an auditor is to report to the members. The report must state whether, in the opinion of the auditor, the financial statements give a true and fair view of the state of the company’s affairs and whether they have been prepared in accordance with relevant provisions of the Companies Acts and other relevant legislation and accounting standards.

The auditors’ report must be made available to every member and be read at the AGM.

If the auditor cannot give a positive opinion, they may give:

  • A qualified opinion – this states that the financial statements give a true and fair view of the company’s state of affairs except for certain stated circumstances;

  • A disclaimer of opinion– this states that the auditor is unable to form an opinion as they were unable to gather a sufficient amount of competent evidence; and

  • An adverse opinion – this states that the financial statements do not give a true and fair view.

Report Failure To Maintain Proper Books Of Account

If an auditor discovers that a company has not kept proper books of account, they must notify the company of this opinion. If the directors do not take the necessary steps to correct this situation within seven days, auditors must notify the Companies Registration Office of their opinion.

Duty To Report Indictable Offences

If auditors discover information during an audit that leads them to believe that the company or anyone associated with it has committed an indictable offence under the Companies Acts, they must report this to the Office of the Director of Corporate Enforcement (“ODCE”) and help the ODCE with their investigation of the report.

Duty To Exercise Professional Integrity

Auditors must carry out an audit with professional integrity. If they do not comply with their duty to exercise reasonable skill and care, they may be liable for damages to the company or to its members in particular. The independent auditor also has a responsibility to his profession to comply with the standards accepted by his fellow practitioners.

Auditors’ Responsibilities

The auditor’s responsibility is to express an opinion on whether management has fairly presented the information in the financial statements. To do so, the auditor collects evidence to obtain reasonable assurance that the accounts are free of material misstatement.


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