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In our days it is obvious that valid financial information is essential for the secure progress of our society. Many financial decisions concerning investments, banking, financial strategies e.t.c. have to be made with the necessary contribution of information provided mostly by others. In many cases these information have crucial effect in the decision making process. So, the existence of true, safe and valid information is absolutely necessary and the independent auditors are there to assure a fair picture of what is really going on.
The contribution of the independent auditor is to give credibility to financial statements. Credibility, in this usage, means that the financial statements can be believed; that is, they can be relied upon by outsiders, such as trade creditors, bankers, stockholders, government and other interested third parties. Audited financial statements are now the accepted means by which business corporations report their operating results and financial position. The word audit when applied to financial statements means that the balance sheet, statements of income and retained earnings, and statement of cash flows are accompanied by an audit report prepared by independent public accounts, expressing their professional opinion as to the fairness of the company's financial statements. The goal is to determine whether these statements have been prepared in conformity with generally accepted accounting principles (GAAP). Financial statement audits are normally performed by firms of certified public accountants; users of auditors' reports include trade creditors, management, investors, bankers, financial analysts and government agencies. (www.crfonline.org, 2009)
Although the auditor is responsible for his report a document created from the client's financial statements he has no responsibility over the company's financial statements. The adequateness of the accounting records and the preparation of proper financial statements are up to the management of the company. Naturally, some of the items on a financial statement cannot be subjected to exact measurement. Unfortunately, many of these are important in that they may materially affect either or both the condition of the company at a given point in time, or the results of operations over a period of time. By their very nature, certain of these items must represent estimates and approximations. However, the auditor is justified in looking to the certified public accountant for a value based on informed judgments
The auditors are required to assess the risk that errors and irregularities have occurred affecting the client's financial records. The audit is designed to provide reasonable assurance of detecting errors and irregularities that are material to the financial statements. (www.crfonline.org, 2009)
The standard unqualified report is regarded as a clean bill of health, the auditor made no exceptions and inserts no qualifications in the report. An unqualified opinion can only be expressed when the independent auditor has formed the opinion on the basis of an examination made in accordance with generally accepted accounting principles, applied in a consistent basis and includes all informative disclosures necessary to make the statements not misleading. The standard unqualified report consist of three paragraphs. The first paragraph clarifies the responsibilities of management and the auditors, and is referred to as the introductory paragraph. The second paragraph describes the nature of the audit and is called the scope paragraph. The final paragraph is the opinion paragraph, which is a concise statement of the auditor's opinion based on the audit. The auditors' report is addressed to the persons who retained the auditors. (www.crfonline.org, 2009)
In many cases auditors need to add explanatory language to an unqualified opinion to indicate whether a division of responsibility with another CPA firm or to indicate an inconsistency in the application of accounting principles, to emphasize a matter , in order to justify a departure from officially recognized accounting principles and finally to refer to an uncertainty that could have a material impact on the financial statements.
The introductory paragraph emphasizes that the client company is primarily responsible for the financial statements and that the auditors render a report on the financial statements, not on the accounting records.
This paragraph must state three things: "which financial statements are covered by the report, that the statements are the responsibility of management, and that the auditor has a responsibility to express an opinion" (Messier et al., 2006, p. 50).
The scope paragraph describes the nature of the audit that it was conducted in accordance with generally accepted auditing standards and provides reasonable assurance that the financial statements are free of material misstatement
For public companies the scope paragraph states that the audit was performed in accordance with Public Company Accounting Oversight Board (PCAOB) standards, and for nonpublic companies it states that the audit was performed in accordance with generally accepted auditing standards (GAAS). The scope paragraph must also state "that the audit provides only reasonable assurance that the financial statements contain no material misstatements and that an audit involves an examination of evidence on a test basis. (Melissa Bushman, 2007)
In the opinion paragraph, the auditors are expressing nothing more than an informed opinion. They do not guarantee or certify that the statements are accurate
Furthermore, the unqualified report consists of four more parts which mostly indicate some general information: these are the name of the auditor which is the name of the CPA firm that conducted the audit, along with a manual or printed signature of the auditor, the date of Report which according to Messier et al., 2006 is "the date on which the auditor has completed all significant auditing procedures, the title where the Public company reports are required to begin with a title that references the "Independent Registered Public Accounting Firm"(Reports for nonpublic companies may contain titles such as "Independent Auditors Report, or "Report of the Independent Auditor") and the addressee which is the individual, group, entity, board of directors, and/or stockholders who retained the services of the auditor.
b. Your firm audits the following two companies and you have been asked to consider the form of qualified or unqualified audit report which should be given. Gamston Burgers plc has a loss-making branch and it has included fixed assets relating to this branch at 710.000 after deducting a provision for permanent diminution in value of 250.000. The directors believe that if operating changes are made and economic conditions improve there is a reasonable probability of the branch trading satisfactory which will result in the current value of tangible fixed assets exceeding 710.000. However under the circumstances the directors consider the extend of any permanent diminution in value to be uncertain you have obtained all the evidence you will have reasonably expected to be available. If trading conditions do not improve your audit investigations have concluded that the branch will have to close. If the branch closes the tangible fixed assets will be worthless as the property is leased and the cost of moving any tangible fixed assets will be more than their net realizable value. if the tangible fixed assets are worthless you have concluded that the effect will be material , but it will not result in the financial statements being misleading.
Keyworth supermarket limited sells food to the general public and customers pay in cash or by cheque. Your audit tests reveal that controls over cash takings and the custody of stock are weak and you have not been able to obtain sufficient evidence to quantify the effect of any misappropriation of stock or cash takings. You have concluded that:
If the uncertainty relates to all the company's sales it could result in the financial statements being misleading.
If the uncertainty relates to only the sale of fresh fruit and vegetables comprise ten percent of the company's it will have the material effect on the financial statements but it will not result in the being misleading.
Consider and describe the form of an unqualified or qualified audit report you would give in each of the following situations:
On Gamston burgers plc's financial statements if you agree with the directors statements about the uncertainty relating to the value of the tangible fixed assets of the branch.
On gamston plc's financial statements if you have come to the conclusion that trading conditions will not improve and the company will have to close the branch. Thus the tangible fixed assets will be worthless
On Keyworth supermarket Limited's financial statements if the uncertainty about the misappropriation of stock and cash takings relates to all the company's sales.
On Keyworth supermarket Limited's financial statements if the uncertainty about the misappropriation of stock and cash takings relates only to the sale of fresh fruit and vegetables which comprise 10 per cent of the company's sales.
In the first case concerning Gamston Burgers plc there is an uncertainty and the data collected come to the same conclusion to this of the administration of Gamston Burgers plc . In this case we should give a qualify report in which we will highlight the existence of risk via a note to the financial statements.
In the second case we disagree with the Administration as to the possibility of the store to continue it's operation. We believe that under the current economic conditions the shop must stop it's function.
Our view as auditors is to outline whether the financial statements give a true and fair view. That means that they picture the actual image of the company with a limited number of exceptions which have a limited effect in the view of the financial statements and does not invalidate the overall validity.
Thus we have the following alternatives as auditors give the Financial statements a true and fair view or a turn down. According to the text the amount of the value of assets is a relatively small part of the value of the assets of the company so we will give a positive view but with one exception: the financial statements gives a true and fair view with the exception that fixed value of 710.000 will be debased directly and should be deleted.
According to the sample data collected for examination we cannot express an opinion. So in this case and from the data that are available the precise calculation of sales and receipts of the company cannot be accurate. Since the sales are a key component of financial statements the weakness for accurate estimation of the amount of revenue and reserve requirements. So should formulate weakness for the formation of opinion. That conclusion should be substantiated by evidence to support the weakness expression of our opinion as it is very serious.
Our conclusions should be substantiated by evidence that would relate to the way to hold stocks in the recording of sales revenue and to monitor recovery of claims.
Because misstatements involving small part of the financial statements will not be expressing total weakness, but we should try to estimate the effect of small circuit misappropriation in sales to the overall picture of the financial statements of the company. So we will formulate true and fair view with the exception of the limited weakness for checking the 10% of sales channels.