Auditing – The Case Book Chapter 4: Auditor’s Report & Types of Opinions
CHAPTER 4 ASSIGNMENT – Lecture # 24 QUESTIONS
Q.1 Items (i) to (xiv) listed below present various situations an auditor might encounter in conducting an audit of financial statements . For each situation, identify the impact on audit report i.e. unqualified opinion, emphasis of matter, other matter, qualified opinion, disclaimer of opinion, adverse opinion. Do not draft qualifications.
(i) The financial statements of a listed company do not disclose significant related party transactions. (ii) A client changes its accounting policy for valuation of inventories from FIFO to Average Cost Method. The auditor concurs with the change. (iii) An auditor is appointed to audit a client’s financial statements after the annual physical inventory count. The accounting records are not sufficiently reliable to enable the auditor to become satisfied as to the year end inventory balances. (iv) A client has significant amount of deposit in a bank which is under liquidation. Pending completion of liquidation proceedings of the bank, no provision has been made in the accounts. This matter is adequately disclosed in the financial statements. (v) The financial statements of a listed company do not disclose remuneration paid to chief executive, directors and executives of the company. (vi) Due to losses and adverse key financial ratios, an auditor has substantial doubt about a client’s ability to continue as a going concern for a reasonable period of time. The client has adequately disclosed its financial difficulties in a note to its financial statements. (vii) The chief executive officer refuses the auditor access to minutes of board of directors’ meetings. (viii) The auditor is unable to obtain financial statements of a consolidated subsidiary. (ix) Previous year’s financial statements were audited by another firm of chartered accountants who issued an unqualified audit opinion thereon. (x) Certain material transactions cannot be tested because of management’s retention policy related to records. (xi) Management changes its accounting policy from Cost model to Revaluation model. The auditor does not concur with the change. (xii) The client refuses to permit the auditor to confirm certain significant accounts receivable or apply alternative procedures to verify these balances. (xiii) The chief executive officer is unwilling to sign the management representation letter . (13) (ICAP, CFAP 06 Level – Summer 2002)
Q.2 As the engagement partner, you have reviewed the audit working papers of Samarkand Limited (SL). The audit team has highlighted the following matters in the working papers. (a) Twenty percent of the company’s recorded turnover (revenue) comprises of cash sales. Proper records of cash sales have not been maintained. Consequently, the audit team was unable to design audit procedures to verify the cash sales. (b) During the current year, the company changed the method of charging depreciation on its fixed assets from the straight line to the diminishing balance method. However, all the required disclosures have been included in the notes to the financial statements. (c) The previous year’s financial statements were audited by another firm of chartered accountants which has issued an un-modified opinion on those financial statements.
Required: Discuss the impact of each of the above matters on your audit report. (07) (ICAP, CAF 09 Level – Autumn 2012) (Adapted from ICAP’s Official Question Bank)
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Q.3 You have encountered following independent situations in conducting an audit of a manufacturing company. For each situation select the type of opinion you consider suitable and give reasons for your choice. Assume that each situation has a material impact on the financial statements. (a) You were appointed as auditor after the year end date and the accounting records are not sufficiently reliable to ensure accuracy of the year end inventory balances. (02) (b) A term deposit of Rs. 10 million with a bank has been carried in the financial statements at cost. The bank has filed a voluntary liquidation petition subsequent to the year-end date and the net realisable value of the deposit is not more than 20% of cost. (02) (c) The company changed its method of inventory valuation from FIFO to average. You concur with the change. (02) (d) Financial statements do not include certain long-term obligations (02) (ICAP, CFAP 06 Level – Summer 2004)
SUGGESTED SOLUTIONS
A.1 (i) Qualified Opinion (if effect is material), or Adverse Opinion (if effect is pervasive). (ii) Unmodified Opinion. Matter should be discussed as Key Audit Matter in report. (iii) Qualified Opinion (if effect is material), or Disclaimer of opinion (if effect is pervasive). Auditor shall also include “Other matter paragraph”. (iv) Qualified Opinion (if effect is material), or Adverse Opinion (if effect is pervasive). (v) Qualified Opinion (if effect is material), or Adverse Opinion (if effect is pervasive). (vi) Unmodified opinion. Auditor shall also include “Material uncertainty relating to Going Concern”. (vii) Qualified Opinion (if effect is material), or Disclaimer of opinion (if effect is pervasive). (viii) Disclaimer of Opinion (because effect is likely to be pervasive as it would affect entire financial statements, almost all account balances included therein). (ix) Unmodified Opinion. Auditor shall also include “Other matter paragraph”. (x) Qualified Opinion (if effect is material). (xi) Qualified Opinion (if effect is material), or Adverse Opinion (if effect is pervasive). (xii) Qualified Opinion (if effect is material), or Disclaimer of opinion (if effect is pervasive). (xiii) Disclaimer of opinion.
A.2 (a) 1. This is scope limitation. 2. Auditor shall express qualified opinion (if effect is material), or disclaimer of opinion (if effect is pervasive). 3. Auditor shall also state in report that “proper books of account have NOT been kept by the Company as required by the Companies Act, 2017 in respect of this matter”.
(b) This is a change in estimate (not a change in accounting policy). If change in estimate is appropriately disclosed and recorded, auditor shall express unmodified opinion on F/S. If change in estimate is not appropriately disclosed and recorded, this will be a misstatement. Auditor shall express qualified opinion on F/S (if effect is material) or adverse opinion (if effect is pervasive).
(c) 1. Auditor shall express unmodified opinion on financial statements. 2. Auditor shall include Other Matter Paragraph in his report to communicate that prior period were audited by the predecessor auditor who express unmodified opinion.
A.3 (a) This is a scope limitation. Auditor shall express qualified opinion on financial statements. Auditor shall also include “other matter paragraph” as previous year’s financial statements have been audited by another auditor. (b) Bankruptcy of bank after B/S date is an adjusting event. Provision should be recorded for estimated amount of bad debt (i.e. 80% of cost). If management does not adjust this event: This will be a misstatement. Auditor shall express Qualified Opinion on financial statements. (c) This is a change in accounting policy. There is no misstatement if change is appropriately accounted for retrospectively, and disclosed. Auditor shall express unmodified opinion on financial statements. Auditor may include it as “Key Audit Matter” in his report. (d) 1. This is a misstatement in financial statements. 2. Auditor shall express qualified opinion on financial statements.
