You are the manager responsible for the audit of Obeyeyie Co. Ltd (OCL), a manufacturing company with a year ended 31 December 2018. The audit work has been completed and reviewed and you are due to issue the audit report in three days. The draft audit opinion is unmodified. The financial statements show revenue for the year ended 31 December 2018 of GH¢ 15 million, net profit of GH¢ 3 million, and total assets at the year-end are GH¢ 80 million.
The finance director of OCL e-mailed you this morning in addition to a whatsapp message to tell you about the announcement yesterday, of a significant restructuring of OCL, which will take place over the next six months. The restructuring will involve the closure of a factory, and its relocation to another part of the country. There will be some redundancies and the estimated cost of closure is GH¢ 250,000. The financial statements have not been amended in respect of this matter.
Required:
Recommend the actions to be taken by the auditor if the financial statements are not amended. (4 marks)
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• If no note is provided to the financial statements, then there is a breach of IAS 10. In this case there is insufficient disclosure provided in the notes to the financial statements regarding a material non-adjusting event after the reporting date.
• According to ISA 701: Modifications to the Independent Auditor’s Report, in cases where the auditor is in disagreement(material misstatement) with management regarding the application of a financial reporting standard and where the disagreement is material to the financial statements, the auditor should express a qualified or an adverse opinion. Here, the matter is material (as discussed in (b)(i) above) but is not pervasive to the financial statements, so a qualified ‘except for’ opinion should be given.
• The audit report should contain a paragraph which explains the reason for the qualification, specifying the breach of accounting standards, and stating the relevant financial amount. It would also be best practice for the auditor to clarify that the profit for the year is not affected by the breach of accounting standards, and that the disagreement is solely due to inadequate disclosure in the notes to the financial statements.
• The auditors should ensure that the matter, and the potential consequence for the audit report, has been made known to those charged with governance. This will allow the highest level of management (including executive and non-executive directors) the opportunity to discuss the matter, having reference to all relevant facts of the disagreement and implications thereof.
• Finally, the auditors could choose to raise this issue at the annual general meeting, where the matter leading to the qualified audit opinion should be explained to the shareholders of the company.