Question

Assume you are the partner in charge of audit quality in your firm. There are five audit partners in the firm and you have reviewed the completed audit files of one client for each audit partner. In each case, an unmodified audit opinion was issued. You found the following:

Client A: faced severe cashflow problems just before the end of the financial year but the financial statements had been drawn up on the going concern basis. The directors had been in negotiations with the bank to seek additional funding. The negotiations were on-going at the time the financial statements were finalised. The directors refused to disclose anything about the liquidity crisis in the notes to the financial statements.

Client B: a computer hacker had accessed and corrupted the accounting data in the accounts payable/suppliers’ ledger. There was no way of recovering the lost data. The audit partner had been persuaded that given this year’s high profit figure, the amount of possible misstatement of accounts payable would not be material.

Client C: was in need of capital investment and the major shareholders had agreed in principle to inject new capital. The directors therefore produced the financial statements on the going concern basis; they have made full disclosure in the notes to the financial statements. The audit partner was satisfied that the additional information was sufficient.

Client D: the audit team discovered a number of minor discrepancies that together would suggest that reported income might be overstated by 0.01%.

Client E: your firm was appointed during the year following the sudden death of the previous auditor, a sole practitioner. Although it had not been possible to find evidence to support this year’s opening balances, the audit partner considered that the previous auditor was highly professional and therefore last year’s figures could be relied on.

Required:

a) For each client, indicate the extent to which you agree with the issuing of an unmodified audit opinion and explain why. Where you disagree, explain your reasoning and suggest a more appropriate form of audit opinion. (15 marks)

b) In addition to the auditors’ opinion, what other messages would readers expect to see in an audit report on a company’s financial statements? (10 marks)