This suggested solution has been prepared using the format required by ASA 700/705 that you were prompted to use. For example, you should have included sub-headings for various sections of the report. You should have located the example in Appendix 1.
The important matter for you to consider at this stage of your studies is that you have included a modification paragraph describing the relevant circumstance and decided on a “qualified” type of opinion (not an adverse type) because the circumstance is material, but not pervasive.
So … how did you determine this was what was needed? Well, let’s step you through how to read the standard (DO NOT expect this hereafter … the same technique needs to be practiced as you use different standards).
ASA705.2 refers you to a very useful summary at ASA 705.A1 (see the cross reference at the end of paragraph 2). You might also have checked the Definitions (paragraph 5) to see what pervasive means so you can be clear that the facts presented do not indicate a pervasive effect on the financial report of Lakeside.
Next check the Requirements section of the standard (starting at ASA705.6) and you should recognise that part (a) is applicable … we have the evidence on which to base our opinion, it is just that we disagree with the way management has reported the matter. Notice that part (a) is cross-referenced to paras A2-A7 … and from there we can see that King & Co were not satisfied about the application of a selected accounting policy (the valuation of Store 6).
Next, we go back to have a look at 705.7(a) to identify the type of modification required for this circumstance (a qualified opinion). Then we skip over to find out about what wording (“form and content” is needed for this type of opinion … so work your way through from 705.16 and follow the cross references for detail (in the Application and Other Explanatory Material paragraphs).
You will (ideally) have found your way to 705.A23 which provides an illustrative example for you to adapt. My effort at that adaptation is set out below … hopefully yours is somewhat similar (The only part I would hope might be different is the Basis for the Qualified Opinion – I would expect you might be rather more wordy … so long as your message is clear that is OK!).
And as you will hopefully come to appreciate, as with so many of the ASAs, there are useful examples for guidance in Appendices.
Note: DO NOT be daunted by the convoluted written sequence you have just read through … with practice you will find your way around the standards much more quickly than the written path suggests – this is why so few people bother to read instruction manuals J.
To the Shareholders of the Lakeside Company
Report on the Audit of the Financial Report
We have audited the financial report of the Lakeside Company. which comprises the statement of financial position as at 31 December 2011, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, and the directors’ declaration.
In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion section of our report, the accompanying financial report of the Lakeside Company, is in accordance with the Corporations Act 2001, including:
During 2010, the company made a $186,000 investment in a retail store (Store 6) located in the eastern sector of Richmond, Virginia. This store has failed to reach a break-even sales point to date and total recovery of the Company's investment is highly uncertain. In our opinion, the chances are reasonably possible that the asset's value has been permanently impaired and should be reduced to the net realizable value in conformity with generally accepted accounting principles.
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
[Omitted from this sample as the focus is on the opinion]
The directors are responsible for the other information. The other information comprises the information included in the Company’s annual report for the year ended 31 December 2011, but does not include the financial report and our auditor’s report thereon.
Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error.
In preparing the financial report, the directors are responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report.
King and Company, CPAs
[Date of the auditor’s report … last day of fieldwork]
[Auditor’s address]