Consider each of the following independent situations a) You are auditing a char

Question

Consider each of the following independent situations

a) You are auditing a charity where net income is generally about 50% of gross revenues. Due to the small size of the charity’s staff, there is a lack of control over the completeness of inventory. Despite your best efforts you feel that you do not have enough evidence to conclude that revenue is complete.

b) Inventory on hand at year end has been valued by the client at cost in the financial statements. However, net realisable value is 10% below cost according to the audit findings.

c) Your client has several bank accounts, one of which is in a foreign country. Cash balances total $740,000 with the account maintained in the foreign country totaling $528,740. You have been unable to obtain a bank audit certificate or any third party confirmation with respect to the foreign bank account. The client has been unable to supply you with bank statements or other supporting documentation in relation to this bank account. Materiality for the client has been set at $480,000. All cash balances are classified as current assets in the client’s financial statements.

For each of the situations above :Identify the appropriate audit opinion to be issued by the audit partner. Give reasons as to why the particular audit opinion should be issued and any action that the auditor should undertake prior to giving the audit opinion.

Explanation / Answer

(A) You are auditing a charity where net income is generally about 50% of gross revenues. Due to the small size of the charity’s staff, there is a lack of control over the completeness of inventory. Despite your best efforts you feel that you do not have enough evidence to conclude that revenue is complete.

QUALIFIED OPINION

In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements on pages X to Y present fairly, in all material respects, the financial position of trust/society name as at Balance Date, and its financial performance and its cash flows for the year/period then ended in accordance with generally accepted accounting practice.

BASIS FOR QUALIFIED OPINION

The financial statements include revenue of over which limited controls exist prior to the cash received being recorded in the accounting records. There were no practical procedures available to us to confirm the completeness of this revenue, and accordingly, we were unable to obtain sufficient appropriate audit evidence in this regard. Consequently, we were unable to determine whether any adjustments to the revenue recorded was necessary.

(B) Inventory on hand at year end has been valued by the client at cost in the financial statements. However, net realisable value is 10% below cost according to the audit findings.

This falls under subsequent event after the balance sheet date. There are two types of Subsequent Events.

Type - 1 Susequent Events - Provide evidence about conditons that existed at the balance sheet. The Financial Statements numbers should be adjusted to reflect this information. Footnote disclosure may also be necessary to provide additional information.

(C) Your client has several bank accounts, one of which is in a foreign country. Cash balances total $740,000 with the account maintained in the foreign country totaling $528,740. You have been unable to obtain a bank audit certificate or any third party confirmation with respect to the foreign bank account. The client has been unable to supply you with bank statements or other supporting documentation in relation to this bank account. Materiality for the client has been set at $480,000. All cash balances are classified as current assets in the client’s financial statements.

If the auditor concludes that management’s refusal to allow the auditor to send a confirmation request is unreasonable, or the auditor is unable to obtain relevant and reliable audit evidence from alternative audit procedures, the auditor shall communicate with those charged with governance. The auditor also shall determine the implications for the audit and the auditor’s opinion.

Hence Auditor is unable to obtain confirmation, the amount in question is more than the threshold limit of materiality. Auditor should qualify the report.  

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