Question

You are the senior technical partner in a large firm of accountants. You have been asked to advise the relevant audit partners on the form of auditors’ report that they should give in each of the following clients:

Company A suffered a fire in an office which housed the inventory records including the inventory count conducted at the year-end. The audit team were planning to visit to inspect the inventory shortly after the year-end but the loss of the records made this a pointless task so they did not attend at all. Inventory usually amounts to about 20% of total assets which is considered material.

Company B has had financial difficulties and is in the process of negotiating new loan facilities with its bankers. The management has made a full and frank disclosure of the position and the audit team do not disagree with the tone or extent of the disclosures in the notes to the financial statements.

Company C has also had financial difficulties and it too has tried to find new sources of finance with no success. Management refuse to make any reference to the company’s difficulties for fear that disclosure in the notes to the accounts will spell the end of the company.

Company D uses a depreciation rate for its non-current assets which, in the audit partner’s opinion, is too optimistic. Audit tests on asset disposals have shown that of the items tested in the last five years all were disposed of about 50% earlier than allowed for by the depreciation policy. Depreciation amounts to $20m, revenue is $150m and net profit $15m which is considered material.

Company E is headquartered in the UK but its operations take place in the Middle East in a country which has just undergone major civil unrest with complete breakdown of law and order and significant damage to infrastructure. It is unsafe to visit the country. Management in London have attempted to construct financial statements based on monthly management accounts but it will be impossible for the auditors to obtain any independent evidence for most of the items in the accounts.

Required: In not more than 500 words:

1. For each of the five companies suggest the form that the auditors’ opinion should take.

2. Write a memo to explain to new trainees what other issues in addition to the opinion, are included in the typical auditors’ report on financial statements.

Answer 1

1.

Company A :- As inventory is 20% of total assets it is material for taking decision by stakeholder. As all document related to inventory are fired up here auditor is unable to comment on same. So auditor should give disclaimer opinion and also mention reason behind providing such opinion.

Company B:- Auditor should give unqualified opinion as company has made full disclosure and audit team also agree with same so unqualified opinion should be formed.

Company C:- Here auditor should give qualified opinion as there is question on continuation of company. So auditor should also mention about doubt on going concern of company.

Company D :- auditor should issue qualify report as organization is not following accounting policy. Policy can only be changed if specified condition is satisfied. Auditor should mention in notes to account of financial statement about change in accounting policy and reason of same and impact on company due to same should be mentioned.

Company E:- Auditor should form adverse opinion because here auditor is unable to get information so it is difficult for the auditor to form opinion on financial statement where information is not being provided.

2.

Following items are added in auditor report on financial statement

a) Title

b) Addressee

c) The responsibility of auditor and the management of company

d) The scope of audit

e) The opinion of auditor

f) Basis of opinion

g) Signature of auditor

h) Place of signature

i) Date of audit report

j) Date of signature

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