- 10 Marks
AAA – L3 – Q62 – Audit-related services
Question
You are the manager responsible for the audit of two, unrelated, audit clients. In each case you are currently reviewing the audit working papers and the audit seniors’ recommendations for the type of auditor’s report to be issued. Details are as follows:
(1) PrimeTech Laptops is a subsidiary of CoreTech Computers. Serious going concern problems have been noted during this year’s audit. PrimeTech Laptops will be unable to trade for the foreseeable future unless it continues to receive financial support from CoreTech Computers. A letter of support has been received and a copy is filed on the current audit file.
The audit senior has suggested that, due to the seriousness of the situation, the audit opinion should be modified.
(2) During the year, Rania Textiles has made a small loan to one of its directors but this has not been disclosed in the financial statements. Such disclosure is required by local legislation. Your auditor’s report gives an opinion on compliance with such legislation.
The audit senior has suggested that, as the amount involved is small, an unmodified opinion should be issued.
Required:
For each client, comment on the suitability or otherwise of the seniors’ proposals for the auditor’s reports. Where you disagree, indicate what kind of modification (if any) should be given instead
Answer
(1) PrimeTech Laptops
Assuming that the letter of support from CoreTech Computers is sufficient appropriate audit evidence that financial support will continue to be provided for the foreseeable future, the going concern basis of accounting is likely to be appropriate. Assuming also that the financial statements adequately disclose the situation (i.e. that PrimeTech Laptops is dependent on CoreTech Computers’ support, and that such support has been promised), then there is no material misstatement. In this situation, the audit opinion need not be modified. However, as there is a material uncertainty in respect of going concern (i.e. the company’s ability to continue as a going concern depends on the continuation of the financial support), a Material Uncertainty Relating to Going Concern paragraph will need to be added after the Basis of Opinion paragraph. This paragraph draws attention to the relevant note in the financial statements and states that a material uncertainty exists but the auditor’s opinion is not modified in respect of the matter.
Conclusion
The audit senior’s proposal is unsuitable. Assuming that disclosures are adequate and evidence is sufficient, the opinion should be unmodified.
(2) Rania Textiles
In this situation, local legislation requires any such loans to be disclosed (however small the amounts involved). If such disclosure is not made then the auditor will need to qualify his audit opinion on the grounds of a material misstatement (disagreement – the financial statements comply with local legislation ‘except for’ the non-disclosure of a loan to a director).
Whether the non-disclosure also affects the true and fair view is more difficult. On the one hand, the amount is immaterial by size, but it could be considered to be material by nature – i.e. however small, the amount the users of the financial statements would want to know about such a loan and therefore the report should also be qualified on the grounds of true and fair.
Conclusion
The audit senior’s proposal is unsuitable. Unless the appropriate disclosures are made, the opinion should be qualified – at the very least on the grounds of non-compliance with local legislation.
- Topic: Audit-Related Services
- Uploader: Salamat Hamid