- June 13, 2020
Last name 1
Theaction taken by the management at amounts to manipulationof the books of account. It is the duty of the company to presentfinancial statements that indicate a true and fair value of theentity. Manipulation occurs when the accountant purposely altersentries or prepares the statement in a manner that does not conformto accepted accounting standards. These mechanisms are implementedwith the intention of deceiving or misleading the end users who mayinclude shareholders, investors or creditors. In the above scenario,the company’s accountant deliberately altered the reporting formatby computing the taxable profit without accounting for the loss intrade investments. This action had significant ramification as itmade the company appear to have made profits while in reality, itmade losses.
Whenan auditor comes across such information, he is expected to conduct atest for materiality and decide whether or not to qualify the report.In the case of Vista, the action by the account amounts to materialmisrepresentation because it resulted in converting losses intoprofits. Before issuing a verdict, the auditor is required to enquirefrom the management the reason why they presented financialstatements that failed to present a true account of the state ofaffairs. If the management fails to come up with an acceptable reasonfor the action and alter the misrepresentation, then the auditor isobliged to issue an adverse opinion.
Anadverse opinion will have some ramifications for the company.Firstly, it will put into question all the transactions that theentity had engaged in during the financial period that ended on 30thSeptember 2016. Additionally, it will be impossible for theorganization to acquire any credit as most investors rely on auditedfinancial statements to make up their mind about investing in VistaPLC.
Theauditor has a responsibility to carry out some test to ensure thatthe reports presented to him are accurate. Stock taking is a vitalcomponent of an auditor`s work as it enables him to compare theactual amount to what has been reported. At Expo Limited, the stocksat the overseas distribution centre are vital to the audit as theypresent 75% of total inventories. If the auditor fails to attainaccess to the stocks, he should issue a disclaimer given that he isunable to acquire material information for the audit.
However,there are several actions that are available to the auditor before heissues a disclaimer. Firstly, he should inquire and find out whetherthere is an internal auditor who is positioned in the same country asthe distribution centre and require them to conduct the stock take onhis behalf. He may also subcontract the work to another auditor andengage in a joint audit. In both cases, he must obtain enoughevidence that shows the work conducted by the other auditor wasaccurate. If these two options fail to produce results, the auditorwill have no choice but issue the disclaimer. However, it isimportant to note that there are provisions that allow the auditor toissue an unqualified report even when he cannot access someinformation, but the same does not apply to Expo limited as themateriality of the stock held overseas is beyond acceptable levels.
Thedisclaimer issued for Expo Limited will not have significantramifications because of the fact that the issues which made itimpossible for the auditor to conduct his test were completely out ofhis control. Thus, he will be required to note the issue of thetravel restrictions in the emphasis of matter paragraph which must beincluded in this report.
PharmPLC is experiencing going concern challenges. The situation ariseswhen the management is unsure of its continued operations in theforeseeable future due to developments that are out of theleadership’s control. In the case of Pharm PLC, the challenges inregulations on pharmaceutical entities have made the future of theentity uncertain. However, the fact that the management hasacknowledged the matter in the financial reports and the proposalthey have to award shares to members of the public is evidence thatthey are in control of the situation. Thus, it is reasonable for theauditor to issue an unqualified report for the entity.
However,before the report is issued, the auditor needs to conduct some auditprocedures which will enable him ascertain that the issue stated bythe management are valid. Firstly, he must conduct tests to verifythat there are enough resources to keep the company afloat for oneyear as declared by the management. Additionally, he should conduct asurvey into regulatory issues in the overseas nation where Pharm PLCis looking to set up to ensure that the laws are the actual reasonwhy the company has failed to set up. Lastly, he should inquire fromthe management about the mechanisms used to arrive at the conclusionthat issuing shares to support operations of the entity is a viableoption. He must also conduct his independent evaluation and ensurethat it is possible to issue shares and get the capital to keep thecompany operational.
Issuingan unqualified report may have some consequences especially, if itturns out that the company cannot continue to operate. Thus, it willbe important for the auditor to include an emphasis of matterparagraph in his report. The report should highlight to going concernissues and his opinion on the strategy of the management to ensurethe entity remains afloat during the period.
Similarto the case of , Starburst PLC is engaged in an issue ofaccounting manipulation in the form of omissions. The company hasfailed to account for the depreciation of its inventories. Though themanagement has a reason for not including the issue in their report,the omission should warrant the auditor to conduct tests. This noted,it would be advisable for the auditor to issue an unqualified reportas the value of the goods that are overvalued is not material.
Auditingregulations require that any omissions identified by the auditorshould be subjected to an evaluation to establish its materiality.The overstated amount could have an impact on both profits and netassets values. Thus, the auditor is required to conduct tests toascertain the materiality of the depreciation. In the above case, theomitted value is 4% of the total profit and 0.3% of total assets, andthese are below the 5% and 1% threshold respectively required by theinternational auditing standards. (IAS). The auditor should alsoconduct tests to ensure the claims by the management that the entitywill recover the value in the future are founded on truth.
Issuingan unqualified report will be of little importance in the case aboveas the figure that has been omitted is insignificant to the overallreport. However, the auditor should include an opinion in his notesthat will state that he is aware of the omission and that he is inagreement with the assumptions made by the management about thefuture appreciation in the value of inventories.
Thecompany is experiencing a contingent liability concern. This occurswhen there is an issue facing the organization which may or may notoccur depending on how the development of the matter ends. Theactualization of the concern leading to the matter gives rise to aliability for the company. Thus, a company is expected to provide aprovision if there is a chance for actualization in the future. Thisis a requirement by both the Company’s Act of 2006 and the IAS. Inthe above scenario, it would be advisable for the auditor to issue aqualified opinion on the company. This is because the liability claimis material, and it has not been provided for by the Sigma limited.
Beforequalifying the report, the auditor is required to conduct some testsand procedures which are aimed at helping him/her make a moreinformed decision. Therefore, the auditor needs to conduct andindependent review of the contingent liability and evaluate thepossibility of it actualizing. He should also inquire from themanagement the reasons why they have failed to provide for theliability in the financial statements.
Issuinga qualified audit report for Sigma limited will have seriousramifications. Firstly, it will affect the opinion of investorstowards to company. This is because there is no investor who wouldwish to invest in an entity that may be faced with a legal tussle inthe near future. The entity will also have difficulties when tryingto acquire loans because of the fear that it may be unable to meetits obligations if and when the continent liability materializes.Thus, the auditor will be required to include in his emphasis ofmatter paragraph these issues and how they will impact futureoperations in the entity.