Q3 – August 2011 – P1 AUDITING – Audit Report

(a)

Type of Audit Report / Circumstances when issued / Example of Circumstance
  1. Unmodifed Report
/ In the Auditor’s opinion, the accounts give a true and fair view. / Auditor has gathered sufficient and appropriate audit evidence to support their opinion that the accounts as prepared by the directors give a true and fair view
  1. Qualified Audit Opinion – “Except For”
/ The financial statements are materially misstated, but the misstatement is not judged to be pervasive / The carrying amount of Investments is materially misstated, but the misstatement is not prevasive.
  1. Qualified Audit Opinion – “Except For”
/ When the auditor has been unable to gather sufficient and appropriate audit evidence and the misstatements which could be present in the item for which audit evidence is limited, are judged to be material , but not prevasive. / Where the auditor is unable to attend an inventory count at one of the client locations. The inventory counted at this location is material, but not pervasive to the financial statements.
  1. Adverse Opinion
/ When the auditor reaches the opinion that the misstatements in the accounts being audited are both material and pervasive , then the auditor’s opinion is that the financial statements, as prepared by the directors, do not give a true and fair view. / Where the directors incorrectly use the going concern basis of preparing the financial statements being audited.
  1. Disclaimer of Opinion
/ When the external auditor has been unable to gather sufficient and appropriate audit evidence about a matter which is both material and pervasive to the accounts being audited. The auditor is unable to provide an opinion on the financial statements. / Where the clients accounting records for the last 5 months of the current accounting year, are unavailable, and alternative audit procedures do not provide sufficient and appropriate audit evidence
6. Emphasis of Matter Paragraph - / The external auditor will emphasis , in their audit report (via an additional paragraph), a matter which has been appropriately accounted for by the directors, but it is a matter which is fundamental to the users understanding of the financial statements. / Early Application of a new accounting standard

(b)

(i)– the issue appears to be the unreasonable extension of the useful life of the caravans.

Is this a material matter? Yes, as caravans, as an asset are likely to be a material balance in the accounts of a caravan company, and furthermore, depreciation expense may be materially understated

Is this a material material misstatement or an inability to gather sufficient and appropriate audit evidence?

A material misstatement, as it appears that the depreciation expense for caravans will be understated.

Is the matter pervasive?? No

Unlikely that the effect of extending the useful life of caravans will render the view by the accounts (Y/e 30 June 2011) to be seriously misleading

Material mistatement which is not pervasive – “Except For”

(ii)- Without securing additional funding, Turnvale Ltd will be unable to expand. Therefore, perhaps the ability of the client to continue as a going concern is in doubt.

Is this a material matter? Yes

Is this a material material misstatement or an inability to gather sufficient and appropriate audit evidence?

-It is a material misstatement, if, the directors fail to make proper disclosure about the inability to obtain funding and its potential impact of Turnvale Ltd ability to continue as a going concern.

Is the matter pervasive?? Depends on the auditor judgement of the situation, but it appears not to be pervasive based on the information in the case study.

Hence, an “except for” audit report would be issued.

- If the management correctly disclose the doubts around Turnvales inability to secure additional funding and hence the potential impact on going concern, then you as the external auditor will include an “emphasis of matter paragraph” in the audit report, which will highlight to the shareholders the doubts about securing additional funding, but will make it clear that your opinion on the financial statements is not qualified in respect of this matter.