Question

What are key audit matters? How do these affect the format of the audit report?


Explain the effect of the misstatement on the auditor’s report and the audit opinion in each scenario stated below:



(i) You have completed the audit of Saibal Resort Ltd (Saibal Resort) for the year ended 30 June 2015.
The audit partner suggested that the value of properties on the West Coast were overstated by
$16 million, a figure which was twice the level of materiality set for the audit. As a result of
discussions with the audit committee, the CEO of Saibal Resort agreed to revise the valuations
downward by $10 million. All other issues were resolved to the satisfaction of the audit partner,
resulting in an overall misstatement of the financial report of $6 million.
The audit partner is now considering the effect of the misstatement on the auditor’s report.




(ii) Jason King Ltd is a building contractor with a varying workload. In order to compensate for the
irregularity of its contracted building projects, Jason King also purchases large vacant blocks
of land that it later subdivides for the construction of houses and units. Jason King then sells
these on its own account. Your analysis strongly suggests that the apportionment of costs to
houses and units sold has been kept low to boost profits. In your opinion, this has resulted in
the overvaluation of the unsold properties. The directors of the company do not agree and
hold to their view that the stock of properties is correctly valued.

Answer 1

The key audit matter is for the auditor to opine on the true and fair veiw of financial statements and that all necessary disclosures as required under law and also to enable the readers of the financial statements to get an understanding on the financial position of the company being audited.

If there are any material issues in the financial statements and the same are not corrected by the company under audit then the auditor will have to give a qualified audit report as part of the auditors report. Thus in a normal case the format of the audit report would be a clean report without any qualificiation and in case there are material issues unadressed by the company then the format of auditors report will include the qualified opinion.

1. As per the fact given, Saibal Resort had overstated the value of properties by $ 16 million and thereafter have agreed to overstate the value by only $ 6 million.It is also provided that the materialy limit for the purpose of audit is $ 8 million. Thus the overstatement of profit is 75% of the materiality threshold and also considering that the auditor is fully aware that there has been mistatement, the auditors report should be qualified for this fact.

2. The audit has revealed that the unsold inventory is overvalued and considering that the Directors of Jason King are not agreeing to rectify the same, the auditors report will have be qualified stating that the unsold inventory is overvalued and according the profits of the company is overstated by XX Dollars.