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let’s say a startup company is having their first statutory audit done after 25 months after incorporation, and they give u you a trial balance for 25 months for which the auditors are required to draft and audit. The directors of the company are unaware that the jurisdiction of the country they are in only allows an 18 month threshold. The company would have been required to split the trial balance into 2 separate ones and each of the two financials would have a separate audit done. The auditors are aware of this, but decide that they will simply qualify the audit report and later solicit the directors after the financials are submitted to the authorities to amend the financials. The company is liable to face penalties bcoz it has violated the companies act
Is there anything the directors can do now to avert responsibility? What action can the directors take now?
It’s not going to happen!
One of the forms to be submitted (to the taxman if nowhere else) asks for the name of the auditors. No auditors can be appointed without the audit firm’s knowledge.
If the first audit is taking place after 25 months, the audit firm should check to ensure that their professional indemnity insurance is up to date.
Your question is along the lines of “What would happen if, just at the precise moment the auditors we’re signing their report, a bomb made a direct hit on the audit firm’s office and all the audit firm’s staff were killed. What would happen?”
It’s a non-starter as a scenario. If the P7 examiner were to ask such a question, I would eat my metaphorical hat!
I have seen such a situation happening. The partner of the audit firm has qualified the accounts, and included a section “The company failed to comply with section 486 of the companies act”
The directors did not see this section in the auditors report and have signed the financials.
The financials have been submitted to the taxman.
Now the consulting firm is requesting for money to amend the financials.
The directors have become indignant and have moved to another audit firm.
However, what action can they take now, against the audit firm, if any. Or the audit firm is not responsible for that, even though they knew from the onset what had to be done.
What action can the directors take? None, I suspect. It is their statutory responsibility to prepare proper financial statements in compliance with all legal requirements.
The auditors really should have discussed their audit report and opinion qualification with the directors but I still doubt that the directors have any recourse
Thanks,
My second query:
I’ve seen a situation where my audit firm undertook an audit for financial year 2014. However, once the auditors went onto the field, the auditors observed that there were transactions in the accounting system for 2013. However, as the engagement was only for 2014, we issued a qualified modified opinion on the financials since the “opening balances were not audited”.
However, if each opening balance Is not audited, doesn’t that constitute a pervasive effect on the financials.
The easy way out for me is to say “it depends”
If last year werer the first year and if there were few transactions / assets / liabilities last year then I suppose it could be argued that the figures we immaterial.
Equally, during this year’s audit the firm could have gained a degree of confidence that last year’s amounts as stated in this year as comparatives appeared to be reasonable / plausible
Otherwise, yes, I can see a good argument for claiming pervasiveness.
Why not suggest to your senior partner that you are querying the wisdom of a qualified modified opinion instead of a disclaimer?
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