- 15 Marks
Question
During the audit of fixed assets for Next Engineering Plc as of December 31, 2016, two issues were encountered:
- The cost calculations for direct labor on assets under construction were destroyed, with the direct labor cost totaling ₦20,000,000.
- A government grant of ₦50,000,000, received for plant and equipment purchased during the year, was fully credited to the income statement as an exceptional item, though the plant and equipment have a 10-year useful life.
Requirements:
a. Discuss the general forms of modifications available to auditors in drafting their report and specify circumstances for each form.
(6 Marks)
b. Assuming a modified audit report is necessary regarding the government grant treatment, draft the relevant section (entire report not required).
(5 Marks)
c. Analyze the auditor’s general responsibility concerning the directors’ report on land and building valuation.
(4 Marks)
Answer
a. General Forms of Modifications in the Auditor’s Report (per ISA 705):
The auditor may modify the audit report in the following ways:
- Qualified Opinion: Issued when there is a material misstatement in the financial statements, but the misstatement is not pervasive. This also applies when there is a limitation in scope where the auditor cannot obtain sufficient appropriate audit evidence, but the possible effect is not considered pervasive.
- Adverse Opinion: Issued when the financial statements are materially misstated, and the impact is pervasive. This opinion indicates that the financial statements do not present a true and fair view.
- Disclaimer of Opinion: Issued when the auditor is unable to obtain sufficient appropriate audit evidence and the potential impact of undetected misstatements is both material and pervasive. In this case, the auditor refrains from expressing an opinion.
b. Draft for Basis of Modified Opinion Section (for Government Grant Treatment):
“As explained in Note xx, an amount of ₦50,000,000 has been credited to the Income Statement and recorded as an exceptional item. International Financial Reporting Standards require that such government grants be recognized and amortized over the useful life of the related plant and equipment. Adjusting for this treatment would reduce operating profit to ₦yy instead of ₦zz, with a corresponding impact on shareholders’ funds.”
c. Auditor’s Responsibility Regarding Directors’ Report on Land and Building Valuation:
The directors are responsible for the content of the Directors’ Report, and auditors have no general responsibility for it. However, auditors must ensure that the information in the Directors’ Report aligns with the financial statements and any knowledge obtained during the audit. If the land and building valuation in the Directors’ Report conflicts with information in the financial statements, the auditor should either prompt the directors to make corrections or disclose the inconsistency in their report. Any dubious information in the Directors’ Report would prompt further inquiry by the auditor.
- Topic: Audit Reporting
- Series: NOV 2017
- Uploader: Dotse