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Dear Sir,
During the audit we found that inventory is materially misstated and revenue, and is also materially understated and there is no disclosure about the contingency liability. Rest of the components of SOFP and SOCI are correctly stated,
In this case, we may issue “except for” audit report or another form of qualified reports.
Please also suggest me, forthe condition of issuing emphasis of other matter of paragraph audit report.For your last point, please read my response to Anoopej in the thread just below this one headed “P7”
Now for the report question where inventory, revenue and contingent liabilities have been inappropriately treated
Just ask yourself, how much more needs to be wrong before these matters become describable as pervasive?
Revenue wrong, cost of sales wrong, gross and net profit wrong, tax calculation based on wrong figures, current assets wrong, retained earnings wrong, current liabilities wrong, auditors’ reputation potentially severely harmed.
Personally, I’m thinking pervasive here. Aren’t you?
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Hi
I have few questions.
When an ISA is not followed but the result of non compliance is not material does Audit report need to be modified?
if there are 3 misstatements which are not material INDIVIDUALLY but becomes material when combined. whats the impact on Audit report if any.“When an ISA is not followed but the result of non compliance is not material does Audit report need to be modified?” – are you seriously asking these questions?
Is your first question about ISAs or IASs?
And let me turn your second question back to you – what do you think is the position where the aggregation of immaterial errors becomes material?
Give me your answers to my two questions and I’ll comment on your answers 🙂
Dear Tutor,
When conducting an audit for year 2, it comes to light that there was fraud in year 1 and this fraud was discovered by management. The fraud figure is material (quantitatively) which means that figures for year 1 were misstated and have to be revised.
The auditors did not modify their report for year 2, arguing that the fraud has been adequately disclosed in the financials and the notes.
My personal view is that the report should have been modified with an emphasis of matter, as fraud is by nature material and points to either a collapse or a serious breach of controls. By definition, an emphasis applies to a matter which has already been disclosed in the financials or notes.
If my view is correct, is the audit firm not derelict? Was the audit firm’s objectivity and duty of due care eclipsed by commercial considerations? Supposing this was a scenario question in the exam, would my view score marks?
“the fraud has been adequately disclosed in the financials and the notes.” In practice I suppose it depends upon one’s opinion of “adequately disclosed”
However, I would tend to agree with you that, following a deep and serious consideration of “adequately disclosed”, as a bare minimum I would expect an emphasis of matter paragraph
As for dereliction ….. there really should be some excellent reason why the auditors failed to discover the fraud last year. You say “When conducting an audit for year 2, ….” Do you really mean that this is the second year of the company’s existence? That would suggest even more that the auditors should have had discovered the fraud – inherent risk in a company’s first year of operations?
Where’s the question from? I don’t recognise it
Dear Mike,
This is a real life situation that took place in one of the companies I’m dealing with. I used “year 1” to mean the previous year and “year 2” to mean current year.
When I scrutinised the management letter for year 1, the external auditors did raise a finding on weak controls and a possibility of fraud or theft. Management responded by assuring the auditors that the company is so small and they have very few suppliers to a point where they know how much should be paid to each supplier per week or per month. In responding to the finding, management did not say something like “we will improve controls by doing abc and xyz”, they implied that the controls are adequate and effective.
It turned out that payments were released without checking supporting documentation and the junior staff member then presented the same invoice several times, changing banking details of the beneficiary, replacing them with his.
In my advise to shareholders, I stated that to the extent that management misled the external auditors in their responses to the auditors’ findings, the blame should fall squarely at the door of the CEO and the CFO considering the amounts involved and the period over which the fraud took place.
I thought this would be an interesting case study, in terms of auditors’ liability.
But I felt an emphasis of matter would have been appropriate regardless.
This still doesn’t explain why the auditors failed to find the fraud in year 1 (ie last year) particularly when you actually pointed out the possibility.
When an auditor suspects fraud, he should probe it to the bottom
What’s the point of “the external auditors did raise a finding on weak controls and a possibility of fraud or theft” if they then do nothing to extend their tests to see whether that weakness has been abused
How much effort is involved in crossing a line through an invoice or marking it as paid ….
“that the company is so small and they have very few suppliers to a point where they know how much should be paid to each supplier per week or per month”
Thanks.
But let us suppose this question is in the exam:
1. I would obviously lose marks for not mentioning that they should have extended their tests in the light of the suspicion and not relied entirely on management responses (lack of professional skepticism).
2. Will I score marks by saying management’s response has exonerated the auditor’s liability because it turned out that response was not honest? (one invoice was paid several times and this happened over two years and several suppliers’ invoices were used)
3. If the case study does not use the word “suspect” I can’t assume that the auditors suspected fraud, perhaps they pointed a possibility. The management letter always has a paragraph of “Risk” for every finding. If a finding is on inventory and the risk is that inventory can be over-valued, are auditors supposed to check whether inventory was actually over-valued?
A fundamental approach to auditing (according to the Society of Internal Auditors, it’s the only approach) is to identify the risks and then target those risks that you have identified.
In this case, the risk is so simply identifiable that there really is no defence
And, no, the directors’ statement hardly exonerates the auditors at all
In answer to 3, yes, one of the checks is to confirm that inventory is not overvalued
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