Question

In: Accounting

. What type of audit opinion (unmodified, unmodified with emphasis of matter paragraph, disclaimer, qualified or...

. What type of audit opinion (unmodified, unmodified with emphasis of matter paragraph, disclaimer, qualified or adverse) would be appropriate for each of the following independent scenarios?

(a)  There is an uncertainty related to a pending exceptional litigation matter that is adequately disclosed in the notes to the financial statements.

(b) The client’s records are inadequate and the auditor is unable to obtain sufficient and appropriate audit evidence.

(c)   There is a material uncertainty that casts a significant doubt on the entity’s ability to continue as a going concern and the uncertainty is adequately disclosed.

(d) There is a GAAP departure concerning a highly material ledger balance.

(e) The client will not allow the auditor to contact the client’s legal counsel regarding a pending legal matter.

(f)    The client’s accounting records have been destroyed by a flood.

(g) There is a misstatement in the client’s inventory account - the misstatement is deemed to be material but not pervasive to the financial statements.

Solutions

Expert Solution

a. A matter is appropriately presented in the financial statement but, the auditor in his opinion feels that he should draw the user's attention to such information by way of an additional communication. In such case, an emphasis of matter paragraph is included in the auditor's report. Here, an uncertainty related to pending exceptional litigation matter is appropriately disclosed. But, a separate disclosure or drawing attention over the issue separately is important. So, in this case, unmodified opinion with an emphasis of matter paragraph shall be given.

b. The auditor shall disclaim is opinion if he is unable to obtain sufficient appropriate audit evidence, and the he concludes that the possible effects on the financial statements of undetected misstatements could be both material & pervasive. Hence, in this case, he shall pass a disclaimer of opinion.

c. Here, the auditor shall give an umodified opinion adding a emphasis of matter paragraph. As, this matter is though already presented but, it is of such importance that it is fundamental to user's understanding of financial statements.

d. There is a GAAP departure here. Here, in the financial statements, the GAAP departure is made concerning a high material ledger balance, which is obviously material. But, may not be pervasive. Except for the effect of this matter, the financial statements are true and fair. Hence, the auditor shall express a qualified opinion. But if the GAAP departure has a pervasive effect, then a adverse opinion may be given.

e. Here, in this case a limitation is put on the scope of audit. If this casts such an effect that the auditor is unable to obtain sufficient appropriate audit evidence, & also the effect is material and pervasive. then a disclaimer of opinion shall be passed. But, if the matter is material but not pervasive in effect, a qualified opinion stating true and fair except for the possible effect of tge following matter shall be expressed.

f. Here, the clients accounting records are destroyed by floods, which makes it impossible to obtain any audit evidence & this matter is material as well as pervasive, hence, disclaimer of opinion shall be given.

g. Here, the misstatement is material but not pervasive, hence, auditor shall give a qualified opinion.


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