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5-19 Solution

Auditing solution

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Masilo Ramafemo
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10 views

5-19 Solution

Auditing solution

Uploaded by

Masilo Ramafemo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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CASE 5 : 19 SUGGESTED SOLUTION

Page 1 of 2 pages
1. The title of the opinion section should be modified to clearly state that the auditor expresses an
adverse opinion (assuming the appropriate audit opinion has been expressed – see point 5
below) (in terms of ISA 705.16). (1)
1.1 Similarly, the title of the “basis for opinion” section should be modified to include the
word “adverse”. (1)
2. In the “Opinion” section of the report, the following information has been omitted:
2.1 An identification of the company’s financial statements that have been audited; (½)
2.2 A statement that the financial statements have been audited; (½)
2.3 An identification of the title of each statement comprising the financial statements; (½)
2.4 Reference to the notes, including material accounting policy information; (½)
2.5 A specification of the date of, or the period covered by, each financial statement
comprising the financial statements. (ISA 700.24) (½)
3. The use of the phrase “true and fair view” in the auditor’s opinion is not consistent with South
African legislation (e.g. section 44 of the Auditing Profession Act) - which requires that when
expressing an audit opinion, it must be stated that the financial statements “fairly present, in all
material respects”. (1)
4. In the “Basis for Opinion” section, the following information has been omitted:
4.1 A statement that the audit was conducted in accordance with International Standards on
Auditing; (½)
4.2 A reference to the section of the auditor’s report that describes the auditor’s
responsibilities under the ISAs; (½)
4.3 A statement that the auditor is independent of the company and has fulfilled all the other
ethical responsibilities required by the Code of Professional Conduct; (½)
4.3.1 This should also include disclosure that the independence requirements
applicable to the audits of financial statements of public interest entities were
applied. (1)
4.4 A statement on whether the auditor believes the audit evidence obtained is sufficient and
appropriate to provide a basis for the auditor’s opinion (ISA700.28). (½)
5. ISA 705 states that a clear description of all substantive reasons for any modification to the
opinion should be included in the auditor’s report (as part of the basis for qualified opinion
section), including, where practicable, an estimate of the financial effect. The proposed audit
report partially explains the uncorrected misstatement but does not go into sufficient detail. (1)
5.1 Specifically, no estimate of the financial effect (on profits, liabilities) has been provided.
A quantification of the amount of the omitted provision must be available, as this is the
basis of the disagreement with management. (2)
5.2 To aid the readers’ understanding of the breach of financial reporting standards, it would
be helpful to state the title of IAS 37 Provisions, Contingent Liabilities and Contingent
Assets in full. (1)
5.3 The paragraph refers to a note to the financial statements where “the matter is more fully
explained”. This is ambiguous. Does the note explain the reason why the directors feel
unable to quantify the value of the provision? Does the note describe the situation as a
contingent liability (which appears to be how the directors have treated the item)? The
paragraph should be more precise in referring to what the note actually contains. (1)
5.4 The paragraph ends with an observation that profits are overstated as a result of the non-
recognition of the provision. There should also be a comment on the impact on the
statement of financial position, in which liabilities are understated. The effect should be
quantified, as discussed above. (1)
6. Finally, and most importantly, whether the uncorrected misstatement (failing to raise a
provision) should give rise to an adverse opinion is debatable. An adverse opinion should be
given when the effect is either (i) not confined to specific elements, items or accounts in the
CASE 5 : 19 SUGGESTED SOLUTION
Page 2 of 2 pages

financial statements or (ii), if confined, represents a substantial proportion of the financial


statements. (1)
6.1 Without any figures being provided, it is not possible to comment on materiality.
However, the provision would have to be a very large amount (i.e. “substantial”) for the
effects of its omission to have a pervasive effect on the financial statements. (1)
6.2 The report itself could appear contradictory, as it states that the omission has caused a
‘material misstatement’, implying a material but not a pervasive impact on the financial
statements. In this case, a qualified audit opinion would likely be sufficient. (1)
7. As Alpha Co Ltd is a listed entity, ISA 701 applies, and the auditor is required to describe each
key audit matter, using appropriate subheadings, in a separate section of the auditor’s report
under the heading “Key Audit Matters” (after the basis for opinion paragraph). (1)
7.1 No such section has been included in the draft auditor’s report, and it is possible that this
was due to an oversight on the auditor’s part rather than the exclusions in ISA 701 para
14 and 15 being applicable. (1)
7.2 Each key audit matter should be described in a manner that addresses the following:
7.2.1 Reference to the related disclosures in the financial statements; (½)
7.2.2 Why the matter was considered to be one of the most significant in the audit
and therefore was determined to be a key audit matter; and (½)
7.2.3 How the matter was addressed in the audit. (½)
8. The emphasis of matter paragraph should not be used to highlight situations where the directors
have decided not to include a matter in the financial statements. The paragraph is to be used to
draw users’ attention to a matter(s) appropriately presented or disclosed in the financial
statements, but which are of such importance that they are fundamental to users’ understanding
of the financial statements. (1)
8.1 IAS 33 Earnings per Share requires that listed companies disclose basic and diluted
earnings per share figures, including comparatives, on the face of the financial
statements. The fact that the directors have decided not to disclose is a clear
misapplication of the standard. (1)
8.2 Earnings per share is material by nature, so its omission represents a material
misstatement in the financial statements. (1)
8.3 The audit opinion should be modified in respect of this, with a qualified opinion
appearing to be the more appropriate modification. (1)
8.4 Therefore, a paragraph discussing the factual uncorrected misstatement should be
included as part of the basis for the qualified opinion section of the auditor’s report,
including an estimate of the financial effect, and a reference to a note to the financial
statements if this has been provided. (1)
8.5 Moreover, the paragraph does not state whether the prior year’s earnings per share figure
has been disclosed. A comparative is required by IAS 33, potentially adding to the
uncorrected material misstatements in the financial statements. (1)
9. In any event, the emphasis of matter section has been included in the wrong place in the
auditor’s report – it should have been included before the “other information” section of the
report. (1)
10. No mention has been made in the auditor’s report of the name of the engagement partner
responsible for this audit – in contravention of the requirement of ISA700.45. (1)
11. No consideration has been given to the ‘IRBA Rule on Enhanced Auditor Reporting for the
Audit of Financial Statements of Public Interest Entities’, which requires disclosure of
numerous additional matters, such as the final materiality amount determined by the auditor for
the financial statements as a whole and the fees paid to the firm and the network firm (if not
disclosed by the client in its annual financial statements). (2)
Maximum (22)

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