You are a manager in the Quality Control Review department of Integritas & Co, and are currently responsible for reviewing the appropriateness of your firm’s proposed auditor’s reports on financial statements. The draft financial statements of Lamptey Group for the year to 30 June 2017 disclose the following notes.
Notes
i) Significant event
During the year, Lamptey Group sold a significant amount of its business and certain assets (plant and equipment and inventory) and commenced a systematic winding down of its operations. The Group’s remaining assets (including property, trade receivables and cash) were sufficient to meet the group’s liabilities, as at 30 June 2017.
ii) Accounting policies
The consolidated financial statements have been prepared under the historical cost convention and in accordance with applicable accounting standards. As described in Note (i), the group has commenced the winding down of its operations and remaining assets have been restated to their net realisable values.
There are no other disclosures relating to the going concern basis although the ‘significant event’ is referred to in the directors’ report under the heading ‘principal activities and business review’. Lamptey Group ceased to trade in October 2017. The auditor’s report on Lamptey Group’s financial statements for the year ended 30 June 2016 was unmodified.
Required:
Comment on the suitability or otherwise of an unmodified auditor’s report for Lamptey Group for the year ended 30 June 2017. Your answer should discuss the appropriateness of alternative audit opinions. (10 marks)
View Solution
Unmodified report
From the information in the disclosure notes it is apparent that the company is not a going concern. However it is not clear on which basis the financial statements have been prepared. They may have been prepared:
- On the going concern basis: or
- On an alternative basis.
An unmodified auditor’s report means that:
- The accounts give a true and fair view
- They have been prepared in accordance with statute
If the accounts have been prepared on a going concern basis, an unmodified opinion would not be appropriate as this does not reflect the true position of the company. The results would be misleading as the readers would make assumptions about the company’s ability to continue, which are clearly not the case. In addition to the inappropriate basis of preparation, disclosure is inadequate as the notes to the accounts do not highlight the significant problems the company is facing. In this respect they are not properly prepared.
If the accounts have been prepared on an alternative basis an unmodified opinion would still not be valid. This is due to the inadequacy of disclosure. The going concern assumption is a fundamental principle. Readers of accounts assume the company is viable unless it is clearly stated otherwise. In this case even though the basis of preparation is correct the lack of disclosure means that they are not properly prepared. (5 marks)
Alternative opinions
The ‘except for’ or disclaimer of opinion would not be appropriate irrespective of the basis of preparation as the issue is not one of uncertainty. The company has liquidated assets and we are told that the company has ceased to trade in October.
If the financial statements have been prepared on a going concern basis an adverse opinion should be expressed. This would be due to a material and pervasive misstatement as a result of the basis of preparation. For example assets and liabilities are likely to be misclassified as non-current, when they should be classified as current. The opinion would be adverse as the misstatement is pervasive to the overall true and fair view.
If the accounts have been prepared on an alternative basis reflecting that the company is not a going concern, for example the break-up basis, provided that this has been applied correctly the auditor would agree with this treatment. However a qualified ‘except for’ auditor’s opinion should be issued on the grounds of a material misstatement in respect of the adequacy of the disclosure regarding the basis of preparation. (5 marks)