• 10 Marks

AAA – May 2024 – L3 – SB – Q3a – Audit Reporting

Discuss forming an appropriate opinion due to scope limitations and evaluate drafted audit report extracts.

You are the Manager-in-charge of the audit of Moonshine Limited. Your auditor’s report for the financial year ended December 31, 2019, was signed without modification in February 2020. The scope of the audit for the year ended December 31, 2020, has been limited because the company’s Chief Executive Officer fled the country in April 2020, taking the accounting records with him.

You have identified a valuable training opportunity for Richard, a member of your audit team. As a training exercise, you have asked Richard to draft the extracts for the basis of opinion and opinion paragraphs that may not be standard wording in an unmodified auditor’s report.

Richard’s draft extracts were produced as follows:

  • Basis of Opinion (extract)
    “However, the evidence available to us was limited because accounting records were missing from early in the year and it was not possible to reconstruct them completely.”
  • Opinion (extract)
    “Because of the possible effect of the limitations in the information available to us, we do not express an opinion on the financial statements.”

Required:

  1. Discuss the principal matters relevant to forming an appropriate opinion on the financial statements of Moonshine for the year ended December 31, 2020. (8 Marks)
  2. Evaluate the suitability of Richard’s draft extracts. (2 Marks)

1. Principal Matters in Forming an Appropriate Opinion: The auditor should consider the following key aspects when forming an opinion due to the scope limitation:

  • Scope Limitation: The CEO’s actions led to a restriction in the auditor’s ability to obtain sufficient, appropriate audit evidence for the year ended December 31, 2020, which may prevent the auditor from forming a clear opinion.
  • Material and Pervasive Impact: The missing records significantly impact the ability to assess key financial information, likely making the limitation material and pervasive.
  • Qualified or Disclaimer of Opinion: Given the inability to access or reconstruct necessary records, the appropriate opinion may be a disclaimer rather than a qualified opinion. A disclaimer is suitable when the limitation is pervasive enough to prevent the auditor from expressing any opinion.
  • Documentation: It’s essential to document all attempts to retrieve or reconstruct records, showing due diligence and justifying the limitation’s impact on the audit.
  • Communications with Management and Governance: Document any discussions or formal communications with the board or audit committee about the limitation.

2. Evaluation of Richard’s Draft Extracts: Richard’s draft includes wording suitable for a disclaimer of opinion but lacks clarity and adherence to formal auditing standards:

  • Basis of Opinion: The statement “it was not possible to reconstruct [the records] completely” is appropriate; however, Richard should explicitly state that these missing records impact the entirety of the financial statements and prevent forming an opinion.
  • Opinion Wording: The phrase “we do not express an opinion on the financial statements” is appropriate for a disclaimer. However, Richard should clarify the pervasiveness of the limitation, explicitly stating that it affects all material aspects of the financial statements.
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