Question

for the following independent and material situations, assume you are the audit partner on different engagements. For each situation, analyse and explain how the situation would affect your audit report.

1.A computer system outrage caused a loss of some accounting records. The data was not backed up properly so the records cannot be re-constructed.

2.The auditor believes the audit client has incorrectly classified some short term investments as cash and cash equivalent. The audit client refuses to change the classification.

3.The auditor allows the audit client to make additional disclosures in the financial report even though the disclosures were not required by Accounting Standards.

4. Your audit client is experiencing some liquidity problems this year. The managers are negotiating with major creditors to defer some payments to gain more time to obtain additional funding. After evaluating the audit client’s situation, you believe the going concern assumption is still appropriate despite some uncertainties about the company’s future. How does this affect your audit report?

Answer 1

Hi

Please see the answers below for each independent situations:

1) A computer system outrage caused a loss of some accounting records. The data was not backed up properly so the records cannot be re-constructed :

Step 1 - Analysis and Explanation :

In the given case the Auditor is not in a postion to form an opinion on records since they are not available. The auditor has to encourage the management to re record all the transactions based on the information available, for example : based on the Bank transactions, based on the  vendors confirmations etc.

Step 2 -Conclusion:

But however, if the data is not complete and cannot be retrived totally, Auditor has to express Disclaimer of Opinion in his/her Audit report. This kind of opinion is issued when the Auditor do not have any sufficient and appropriate Audit evidence( in this case, Accounting records) to form an opinion the Books of accounts/Financial statements.

2.The auditor believes the audit client has incorrectly classified some short term investments as cash and cash equivalent. The audit client refuses to change the classification.

Step 1 - Analysis and Explanation : In the given case the shorterm investments have been wrongly classified as Cash and Cash equivalents. Cash and Cash equivalents must include only Cash and other equivalents which can be converted into cash immediately, examples : Cash equivalents include commercial paper, Treasury bills, and short-term govt bonds with maturity date of less than or equal to 3 months, Marketable securities and money market holdings.

Step 2 -Conclusion:

The given situation is materilal and hence a Qualified opinion (Unqualified + Additional language) has to be expressed in his/her Audit report. Qualified opinion is expressed when the Auditor is comfortable with all the details and thinks that everything in Financial statements are fairly presented except some specified areas( example in our question wrong classification of shortterm investments).

3.The auditor allows the audit client to make additional disclosures in the financial report even though the disclosures were not required by Accounting Standards.

Auditor in his professional judgement can decide whether any additional disclosures(apart from Accounting standards) that the client can make which could be useful for the understaning of the Financial report to the Stakeholders/Investors. Opinion of Auditor is not impacted in the given case, therefore Auditor can express Unqualified opinion( i.e clean opinion) in his/her Audit report.

4.Your audit client is experiencing some liquidity problems this year. The managers are negotiating with major creditors to defer some payments to gain more time to obtain additional funding. After evaluating the audit client’s situation, you believe the going concern assumption is still appropriate despite some uncertainties about the company’s future. How does this affect your audit report?

Step 1 - Analysis and Explanation:

The given question says that going concern assumption is still appropriate despite some uncertainties about the company’s future. If the going concern assumption is not appropriate the Auditor would have issued Adverse Opinion in his Audit report. Since the assumption is clear correct and assuming other things are fine, the auditor can issue a unqualified opinion.(i.e clean report). But however, certain matters has to be disclosed in the Financial statements such as : Liquidity matters, Settlement with creditors, Fund related aspects etc.

Step 2 -Conclusion:

Issue a unqualified opinion with a Emphasis matter paragraph in the audit report. The Emphasis paragraph must consists the significant matters that effect the decion making of Stakeholders/Investors. Examples: Liquiduity aspects, Funding, Creditors reconstruction etc.