If an auditor disagrees with the treatment of a material item in the financial statements and the directors refuse to change their treatment, the auditor will in most situations:
(A) Issue a qualified audit report using the ‘except for’ qualification
(B) Issue an unqualified audit report
(C) Issue a qualified audit report using the ‘adverse opinion’ qualification
(D) Issue a qualified audit report using the ‘disagreement of treatment’ qualification
You are the partner in charge of the audit of G, a major quoted company. You are making a final review of the financial statements before finalizing the audit report. The following matters have been marked for your attention:
(i) The draft financial statements indicate a turnover of $500m and a profit of $50m.
(ii) The directors have made no provision for the costs that are likely to be incurred as a result of a damages claim for $2.4m, which is being pursued by one of the company’s customers. G’s legal department and its lawyers are quite sure that this claim will have to be met in full.
(iii) The directors have not provided for a sum of $2.3m which ought to be written off in respect of debts that are almost certainly irrecoverable.
(a) Explain the implications for your audit report of the matters described in (ii) and (iii) above.
Your answer should make a clear statement of the type of report which you consider appropriate, although a full audit report is not required. (5 marks)
(b) It has been suggested that the quality of audit reporting could be improved enormously if accounting standards were clearer and auditors had more explicit guidance on issues such as materiality. Discuss this suggestion, making it clear how improved guidance on financial reporting might support the auditor.