- 10 Marks
Question
You are part of the audit team auditing a client in the retail business. During your risk assessment procedures, you were informed by management that accounts receivable records in one of the company’s branches were destroyed in a fire. The company is in the process of obtaining these accounts receivable records but was not able to do so prior to the approval of the financial statements. The fire incident happened on 31 December 2023 and the estimated amount involved is GH¢20 million. The audit team assessed that they are unable to obtain sufficient appropriate audit evidence due to inadequate accounting records. Possible effects are deemed material but not pervasive.
Required:
i) Justify the type of audit report to be issued in the above scenario.
ii) Draft the basis for the above opinion section of the auditor’s report.
Answer
i) Justification for the Type of Audit Report:
- The company’s accounts receivable records were destroyed, and alternative audit procedures could not provide sufficient appropriate audit evidence.
- The possible misstatements are material but not pervasive, meaning they affect only a portion of the financial statements rather than the overall financial position.
- Therefore, the appropriate audit opinion is a Qualified Opinion, as there is a limitation of scope in verifying the accuracy of accounts receivable.
ii) Draft Basis for Qualified Opinion Section:
Basis for Qualified Opinion
Because of a fire in a branch office on 31 December 2023 that destroyed its accounts receivable records, we were unable to confirm or verify by alternative means the carrying amount of accounts receivable included in the financial statements as at 31 December 2023, stated at GH¢20 million.
The Company is in the process of reconstructing these accounts receivable records but was not able to do so prior to the approval of the financial statements. Accordingly, we were not able to determine whether any adjustments might be necessary to the amounts shown in the financial statements for accounts receivable, sales, income taxes, net profit, and retained earnings as at and for the year ended 31 December 2023.
- Topic: Completion Procedures and Reporting
- Series: Nov 2024
- Uploader: Salamat Hamid