Upon the completion of the audit of Zealow Company Ltd, the Engagement Partner reviewed the audit working papers and came across the following;
- There was material inconsistency between the financial information and other information in documents containing the financial statements and the auditor’s report thereon. The material inconsistency has been traced to the financial information but management has refused to effect any change when requested to do so.
- Stocks worth GH¢5 million were valued at cost in the financial statements. The review of the post balance sheet events indicated that not all the stocks could be sold in the normal course of business. Some were damaged and some have become obsolete and slow moving. The total assets of the company is GH¢20 million. If the stocks were valued at net realizable value, the value would have reduced by GH¢2.0 million. The Directors have refused to allow the stocks to be valued at lower of cost and net realizable value and valued all the stocks at cost.
- Management refused to allow auditors to carry out circularization of debtors. The receivables figure was material in the financial statements. In addition, the auditors have not received a reply to the letter of enquiry sent to the company’s solicitors in respect of a major litigation affecting the company. The auditors assessed that the effect of the two items is both material and pervasive.
- Subsequent events indicated that a major debtor has become insolvent. The amount involved was material. The directors refused to recognize the provision for a write- off of the amount.
Required:
i) For each of the items, recommend the type of audit opinion to be issued. (8 marks)
View Solution
The following audit opinions are recommended.
1) Since the inconsistency is traced to the financial statements, it may be considered that the financial statements are materially misstated. The pervasiveness of the effect of the matter will be considered and if it is only material, a qualified opinion “except for” will be issued. On the other hand, if the effect is considered as being both material and pervasive, an adverse opinion will be appropriate.
2) GHS2.0 million reduction in the value of stocks amount to 10% of the total assets of the company. This is material. This amounts to material misstatement of the financial statement and non-compliance with applicable financial reporting framework. The recommended audit opinion will be a “qualified opinion”.
3) Since the auditors consider the effect of the matter to be both material and pervasive, it means that there was a significant inability to obtain sufficient appropriate audit evidence to determine misstatements in the financial statements. The auditors will be unable to express an opinion and therefore a disclaimer of opinion will be appropriate.
4) Since management refused to make a provision for the write-off of the debtor, the requirement of IAS 37 have not been complied and thus will be materially misstated. A qualified opinion is recommended
ii) Consider what action the auditors should take in view of management refusal to accept the recommendations and/or allowed the auditor to carry out the necessary audit procedures. (2 marks)
View Solution
The auditor may consider the reason behind the directors’ refusal to effect the changes and determine whether it borders on the directors wanting to commit fraudulent financial reporting which will reflect on their integrity. It could also mean the directors are difficult and just do not want to co-operate with the auditor’s. Whatever the case, the auditors may want to bring this to the attention of the shareholders in the annual general meeting.