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

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.

REPORT TO MANAGEMENT

The Directors

Bibini Co. Ltd

10 Wansema Lane, Somewhere City
15th September, 2015.

Dear Sirs,
Following our recent audit of your company, we are writing to advise you of various matters which came to our attention.
We have set below the areas of significant deficiency which we noted, together with our recommendations. These recommendations have already been discussed with the Managing Director and his comments have been included.
As the purpose of the audit is to form an opinion on the company’s financial statements, you will appreciate that our examination cannot necessarily be expected to disclose all shortcomings of the system and for this reason, the matters raised may not be the only ones which exist.

Deficiencies
Preparation of payroll and maintenance of personnel records.
Under your present system, just two members of staff are entirely and equally responsible for the maintenance of personnel records and preparation of the payroll. Furthermore, the only independent check of any nature on the payroll is that the chief accountant confirms that the amount of the wages cheque presented to him for signature agrees with the total of the net wages column in the payroll. This latter check does not involve any consideration of the reasonableness of the amount of the total net wages cheque or the monies being shown as due to individual employees.

Implications
It is a serious deficiency of your present system, that so much responsibility is vested in the hands of just two people. This situation is made worse by the fact that there is no clearly defined division of duties between the two of them. In our opinion, it would be far too easy for fraud to take place in this area (for example, by inserting the names of ghost employees into the personnel records and hence on to the payroll) and/or for clerical errors to go undetected.

Recommendations
i. A person other than the two clerks should be made responsible for maintaining the personnel records and for periodically (but on surprise basis) checking them against the details on the payroll.
ii. The two wages clerks should be allocated specific duties in relation to the preparation of the payroll, with each clerk independently reviewing the work of the other.
iii. When the payroll is presented in support of the cheque for signature to the chief accountant, he should be responsible for assessing the reasonableness of the overall charge for wages that week.

We should appreciate your comments as to how you propose to deal with the matters raised in this letter. If you require any further information or advice, please contact us.
We have prepared this letter for your use only. It should not be disclosed to a third party and we can assume no responsibility to any third party to whom it is disclosed without our written consent.
We would like to take this opportunity to thank you and your staff for your help and co-operation during the course of our audit.

Yours faithfully,
Broni and Co.

An Emphasis of Matter (EoM) paragraph is a paragraph in the auditor’s report that is appropriately presented or disclosed, but which is so important that special emphasis is needed for users.

An EoM is different from a modification to the auditor’s opinion. An EoM paragraph does not modify the opinion; indeed it should state clearly that this is the case. An auditor should only include an EoM if s/he has sufficient appropriate audit evidence that the matter is not materially misstated.

The EoM should provide a clear reference to the matter, and to where the appropriate disclosures and other information can be found in the financial statements.

Examples of when an EoM should be used include:

• An uncertainty relating to the future outcome of exceptional litigation
• Early application of a new accounting standard that has a pervasive effect on the financial statements.
• A major catastrophe that has had a significant effect on the entity’s financial position
• Significant going concern issues

An Other Matter (OM) paragraph has in common with the EoM the fact that it does not modify the auditor’s opinion. However, whereas the EoM refers to a matter within the financial statements, and OM refers to information that is rightly not present in the financial statements, but which is so important for users’ understanding of them that it needs to be highlighted in the auditor’s report.

Examples of situations include:

• Law, regulation or generally accepted practice may require or permit the auditor to elaborate on matters that provide further explanation of the auditor’s responsibilities or report.
• The auditor may be reporting on more than one set of financial statements (eg a set of statements prepared under national reporting framework, and a set of statements prepared under International Financial reporting standards).
• Any restriction on the distribution of the auditor’s report

The OM is thus a means for the auditor to communicate with users, and should state explicitly that the matter referred to is not required to be included in the financial statements.