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 that has just undergone major civil unrest with a complete breakdown of law and order and significant damage to infrastructure. It is unsafe to visit the country. Management in London has 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

Company Name	Auditors Opinion
Company A	It is duty of first management to do physical inventory count then also it is duty of Auditors to physical count of inventory even if there is loss of records So Auditors should write in his report about that because inventory is material.
Company B	The Auditor duty is to check that the statement of position is prepared as true and fair view or not & also check the fairness of accounts if they believe any discrepancy in accounts, they should report to bankers by way of qualifying the Audit Report.
Company C	The management has decided not t0 disclose the financial difficulties due to fear of end of company is not correct. The Auditor while going through the accounts must notice this point & report to management to disclose the fact in notes to accounts, otherwise he should give adverse remark in his Audit Report as a Qualified Opinion.
Company D	The Auditor should check thoroughly what is method of charging depreciation in the company if any change is found he should correct the figures of net profit by correcting deprecation as it is showing that company has disposed off last 5 years assets earlier as per policy he need to change that by asking management in accounts of current year otherwise he qualify the report.
Company E	If it is impossible to attend the branch of the company Auditor has to rely on branch accounts. So as per given case Auditor may rely on financial statements of middle east prepared by management of London but it is showing there is breakdown of law & order which Auditor has to Report in his Audit Report.