Feedback for Text 12.32 Audit reports and other communication at the end of an audit

Required

(a) Discuss Sven’s audit report options and recommend the appropriate wording for the audit report.

(b) What matters would Sven include in the letter to those charged with governance at Cantwell Catering?

(a) The missing files create a limitation on the scope of the audit. There is the possibility that the auditor is not able to gather sufficient appropriate evidence on which to base his audit opinion. It appears that the circumstances were beyond the control of the client and mainly affect sales revenue and debtors receivables.

The reporting possibilities in these circumstances are:

• Unqualified report if the lack of evidence affecting sales revenue and debtor is not material
• Qualified report if the loss of sales records and debtors receivables records cause the auditor not to be able to obtain sufficient appropriate evidence and the effect is material but not pervasive
• Disclaimer of opinion report if the loss of sales records and debtors receivables records cause the auditor not to be able to obtain sufficient appropriate evidence and the effect is material but pervasive.

Critical issues considered for the audit opinion decision include:

• Evidence that the problem was confined to a defined period- The information is that the problem began four months into the year, and appears to be corrected.
• Ability to perform alternative procedures, such as using subsequent cash receipts to verify sales for the period.
• Confidence in the value of debtors at the end of the financial period – This is if the problem has corrected the debtors at the end of the period, then should be unaffected by problems which occurred at the start of the year.

Given the circumstances of Cantwell Catering, the most likely audit opinion is qualified because of the above reason

The audit report will include a Key Audit Matter discussion for the problems with the records (ASA 701(ISA 701) outlines the required elements that must be included in each KAM). The description of a KAM is always required to include a reference to the related disclosures, if any, in the financial statements and address:

• Why the matter was considered to be one of most significance in the audit and therefore determined to be a KAM; and
• How the matter was addressed in the audit.

As a result of the revisions to ASA 700 (Revised) (ISA 700(Revised)) and the new auditing standard ASA 701 (ISA 701) for all audits include:

• The Opinion section is required to be presented first, followed by the Basis for Opinion section.
• Affirmative statement about the auditor’s independence and fulfilment of relevant ethical responsibilities, and the identification of the relevant ethical requirements applicable within Australia.
• Enhanced description of the responsibilities of the auditor and key features of an audit, together with the provision that certain components of this description may be presented in an appendix to the auditor’s report.

The audit report would contain the usual paragraphs identifying the subject of the audit, management and auditor’s responsibilities, then the following:

Qualified opinion

In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph, the financial report of Cantwell Catering is in accordance with the Corporations Act 2001, including:

(a) giving a true and fair view of the company’s financial position as at 30 June 20XX and of its performance for the year ended on that date; and

(b) complying with Australian Accounting Standards and the Corporations Regulations 2001

Basis for qualified opinion

As disclosed in Note xx to the financial report, the entity’s sales for the eight months to the end of the year are stated at $xxx and for the first four months of the year are stated at $xxx. We were unable to obtain sufficient appropriate audit evidence about the sales for the first four months of the year because we were unable to gain access to the financial records for this period. Consequently, we were unable to determine whether any adjustments to these amounts were necessary.

Statement of independence and other auditor’s details are the last items found at the bottom of the Independent Auditor’s Report.Auditor’s Signature

(b) As per ASA 260.19 (Communication with Those Charged with Governance), the auditor shall communicate in writing with those charged with governance regarding significant findings from the audit. The letter to those charged with governance would contain a full description of the matter giving rise to the audit qualification and explain reasons for the modification of audit opinion.

The auditor would also communicate deficiencies from the previous internal controls (i.e. such lack of IT General and Application Control) and make a recommendation for improvements to internal control. Deficiencies on efficient and effective back up system consequently loosing important company’s business information is a significant matter which needs to be communicated. As per ASA 265 (Communicating Deficiencies in Internal Control to Those Charged with Governance and Management), the auditor communicates appropriately to those charged with governance and management the deficiencies in the internal control that the auditor has identified during the audit.

Other matters would include the usual explanation of other significant audit findings, views on appropriateness of accounting policies, independence issues if any, and other supplementary matters (see ASA 260.A24) that are relevant to current and future conduct of audits.