In accordance with IAS 37: Provisions, Contingent Liabilities and Contingent Assets, if the economic outflow to discharge the obligation is probable, then a provision must be recognised in the financial statements.
Logistics Limited has under-declared a provision for employee redundancy by GH¢ 230,000, which represents 8.5% of profit before tax (230k/2.6 million) and hence is material but not pervasive to the financial statements.
According to ISA 705 (revised): Modification of the Auditor’s Opinion, the Auditor, should bring the refusal of the Financial Director to those charged with Governance and should issue a qualified opinion if the provision is not amended.
The Auditor should include in the Basis for Opinion section a description and quantification of the financial effects of the under-declared provision, unless impracticable. If it is not practicable to quantify the financial effects, the Auditor should indicate so in this section.

(Any 2 points @ 2 marks each and 1 mark for opinion =5 marks)

An employee is suing logistics Ltd for wrongful dismissal. This matter has been disclosed as a contingent liability. In accordance with IAS 37: Provisions, Contingent Liabilities and Contingent Assets, if the economic outflow is possible, then a contingent liability must be recognised as the provision is material but not pervasive to the financial statements.
The basis for the qualified opinion should be placed immediately before the opinion paragraph in accordance with the requirements of ISA 705 (revised): Modification of the Auditor’s opinion in an independent auditor’s report.
The lawsuit is for GH¢1.2 million, which represents 46% of profit before tax (1.2 million/2.6 million) and hence is a material matter. This is an important matter which needs to be brought to the attention of the users of the financial statements. The outcome of the case must be considered and it impact on the financial statements.

(Any 2 points @ 2 marks each and 1 mark for opinion =5 marks)

There is no formal (legal or professional) definition of the term true and fair view. However, from general usage, the meaning of the term can be looked at from its components, namely:

• True: The accounts are free from material misstatements and therefore reflects the underlying records.
• Fair: Implies there is no undue bias in the financial statements or the way in which they have been presented.

Additionally, it connotes that judgement exercised in the preparation and auditing of the financial statements are properly exercised in line with appropriate financial reporting standards.
Judgment is used both by directors of the company in preparing financial statements and auditors in performing they work. However “True and Fair” or “ present fairly” assures that the judgment are fair and are in line with financial standards and that the Financial Statements can be relied upon.

• A qualified opinion should be expressed when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with management, is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion. A qualified opinion should be expressed as being ‘except for’ the effects of the matter to which the qualification relates.
• An adverse opinion should be expressed when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that an ‘except for’ qualification of the report, is not adequate to disclose the misleading or incomplete nature of the financial statements.

Adverse opinion is issue where there is disagreement between the auditor and the client on issues such as

• Inappropriate accounting policies.
• Regarding fact or amount (example failure to provide a material bad debt )
• Compliance with legislation or other requirements.
• If the above issues are found to be pervasive, then the auditor can give an adverse opinion.
• In the case under consideration, there is a pervasive uncertainty relating to the scope of the audit. The unavailability of the cash book, general ledger and debtor’s ledger will have an impact so great to render the financial statement as a whole meaningless. From the above, the auditors should have given a disclaimer of opinion.
• The issues at stake led to limitations of scope of the auditors work.
• Adverse opinion is therefore not appropriate in these circumstances.
                                                                                                                                                                                  (Any 5 points)

Lawsuit

• Lexon Institute is being sued by the Regulator for breach for non-compliance with rules and regulations for running tuition provision. This matter has been disclosed as a contingent liability. In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, if the economic outflow to discharge the obligation is probable, then a provision must be recognised in the financial statements. If the economic outflow is possible, then a contingent liability must be recognised as the provision is material. A qualified opinion “except for” opinion should be given for non-recognition of provision or non-disclosure of contingent liability.
• Basis for qualified opinion should be placed immediately before the opinion paragraph in accordance with the requirements of ISA 705 Modification to the opinion in an independent auditor’s report, but after the opinion paragraph in line ISA 701 Key audit matters. This should explain the material misstatement in relation to either non-recognition of provision or non-disclosure of contingent liability.
• The lawsuit is for GH¢3.9m which represents 39% of profit before tax (3.9m/10m) and hence is a material matter. This is an important matter which needs to be brought to the attention of the users of the financial statements. The outcome of the case must be considered and it impact on the financial statements.

• Depreciation has been provided on the land element of property, plant and equipment and this is contrary to IAS 16 Property, Plant and Equipment, as depreciation should only be charged on buildings.
• The error is material as it represents 20% of profit before tax (2m/10m) and hence management should remove this from the financial statements. If management refuse to amend this error then the audit report will need to be modified. As management has not complied with IAS 16 and the error is material but not pervasive then a qualified opinion would be necessary.
• A basis for qualified opinion paragraph would need to be included explaining the material misstatement in relation to the provision of depreciation on land and the effect on the financial statements. The opinion paragraph would be qualified ‘except for’ – due to material misstatement.
• Basis for qualified opinion should be placed immediately before the opinion paragraph in accordance with the requirements of ISA 705 Modification to the opinion in an independent auditor’s report, but after the opinion paragraph in line ISA 701 Key audit matters.

• Lexon Institute’s purchases program has been corrupted leading to a loss of purchases data for a period of three months. The auditors should attempt to verify purchase in an alternative manner. If they are unable to do this then purchase for the whole year would not have been verified.
• Purchases for the three month period represents 40% of profit before tax (4m/10m) and therefore is a material balance for which audit evidence has not been available.
• The auditors will need to modify the audit report as they are unable to obtain sufficient appropriate evidence in relation to a material, but not pervasive, element of purchases and therefore a qualified opinion will be required.
• A basis for qualified opinion paragraph will be required to explain the limitation in relation to the lack of evidence over three months of purchase records. The opinion paragraph will be qualified ‘except for’ – due to insufficient appropriate audit evidence.

• Misstatements in the financial statements where the effect is only material but not pervasive. The misstatement may be done to.
• Selection of accounting policies used in the preparation of the financial statements.
• The application of the accounting policies in the preparation of the financial statements.
• Presentation and disclosure of information in the financial statements.
• Inability to obtain sufficient appropriate audit evidence. This may be due to
• Circumstances beyond the control of both management and the auditors, for example timing of the appointment of the auditors which makes it impossible for them to attend stock –taking
• Management imposed scope limitations. For example prohibiting the auditor from carrying out circularisation of debtors.
• Auditors own inability to perform necessary audit procedures to obtain the evidence due to time constraints as cost of doing it.                                                                                                                                                                          (Any 2 points)

• Qualified opinion where effect of misstatements in the financial statements or inability to obtain sufficient appropriate audit evidence is only material but not pervasive.
• Adverse opinion where the effect of misstatements in the financial statements is both material and pervasive.
• Disclaimer of opinion is where the effect of reliability to obtain sufficient appropriate audit evidence is both material and pervasive