Question

Assume you are an auditor and you are facing the following separate circumstances, the effects of all the items below are material:

1. The provision for the stock is inadequate
2. A retailer values inventory at sale price less an allowance for sales margin.
3. A manufacturing company is currently negotiating with the bank an extension of a loan facility that is due for repayment shortly after the AGM; without this refinancing the business will not be able to continue operations.
4. A significant proportion of a retailer’s sales are on a cash basis and inadequate records have been maintained; there are no audit tests that can be done to satisfy yourself that the cash sales are accurate.
5. Management has excluded from the financial report the necessary disclosures in relation to a contingent liability.

Required: Indicate the effect of the above circumstances on your auditor’s report if management were to refuse to make any changes you feel necessary in order that the financial report gives a true and fair view.

Answer 1

While drafting Audit report , we need to highlight following points to maintain true and fair view of the company :

1. Company based on Inventory , Revenue ( mostly on cash basis of accounting ).
2. Company need additional fund ( working capital) to expand the business
3. Company presently having some major dispute which still not accounted as Liability and parked under “ Contingent Liability”

We noticed that Inventory position is not in good shape . Old Inventory has been piled up and company not making additional provision for the same . Company needs additional working capital loan from bank for further expansion . Company wants to disclose only rosy picture to bank to get additional loan . Company presently not valuing Inventory in correct way . They are undervalued stock to improve company Net Margin .

A significant portion of retailer sales are on cash basis and inadequate maintain of record . Company never maintain any audit record to prove that all documentation are in place and to justify that company is following correct process and all control are in place .

Current management has excluded from the financial report the necessary disclosure in relation to a contingent liability , this is also not correct financial disclosure . From Contingent liability status Inventor can understand whether any major contingent liability going to mature as liability in near future . If it will happen then we need to see whether company can able to pay off this liability ( major item under contingent liability – any pending disputed law tax issue , any legal matter not yet settled etc, )

As a Auditor , they need to highlight all weak point in their audited financial and highlighted that company is not following prudence business policy , process as well as they are also not adhering correct accounting principle , standard while preparing financial statement . To avail more working capital loan for further expansion of company . Company is not highlighting any negative factor in their financial statement which will stop them to get additional loan amount for business expansion .