Case Study 5 1 . Explain WHY not appropriate with authority? 2. Identify controversial issue(s), 3. Support your arguments 4. Answer the question – State your opinion/ conclusion The answer is adapted from HKICPA FE (December 2003) Paper II Case Question 4. There is an inconsistency in the auditor’s report. The Qualified Opinion paragraph indicates that the opinion is qualified on the basis of scope limitation, while the Basis for Qualified Opinion paragraph suggests that the uncertain results of Lam’s negotiations with potential buyers is the reason of the qualification.
HKSA 705 requires that when there has been a limitation on the scope of the auditor’s work that prevents the auditor from obtaining sufficient evidence to express an unqualified opinion, the auditor shall issue a qualified (except for limitation) opinion or a disclaimer of opinion as appropriate. In considering whether the scope of limitation results in a lack of evidence necessary to form an opinion, the auditor shall assess the quantity and type of evidence which may reasonably be expected to be available to support the particular figure or isclosure in the financial statements.
Need essay sample on Audit opinion ?We will write a custom essay samplespecifically for you for only $12.90/pageorder now
A scope limitation is usually imposed by circumstances and sometimes imposed by the reporting entity. In both cases, the auditor is prevented from carrying out a particular audit procedure that is considered necessary to obtain evidence that reasonably can be expected to be available. Inherent uncertainties about the outcome of future events do not arise from, or give rise to, a limitation on the auditor’s work since it is not possible for the directors or the auditor to remove the uncertainty by obtaining more information at the date they pprove the financial statements.
In this case, there is sufficient evidence for the auditor to conclude that it is not appropriate to state the inventories at cost since the inventories, which were ordered specifically for a customer who declined delivery, were at an age of more than 6 months at the balance sheet day and should have been written off in accordance with the established accounting policy. HKSA 705 requires that where the auditor disagrees with the accounting treatment or disclosure of a matter in the financial statements, and in the auditor’s opinion the ssue a qualified (except for disagreement) opinion or an adverse opinion as appropriate.
A qualified opinion based on disagreement of accounting treatment would be considered more appropriate in this case. The Qualified Opinion and Basis for Qualified Opinion paragraphs should read as follows: Basis for Qualified Opinion (fact first! ) Included in inventories shown on the balance sheet is an amount of HK$8 million which represents inventories with an inventory age of over six months.
In our opinion the company is unlikely to recover the carrying amount of the inventories and cost of riting off the inventories of HK$8 million should have been recognized, reducing profit before taxation for the year and net assets at 30 September 2012 by that amount. Qualified Opinion In our opinion, except for the effects of the matters described in the Basis for Qualified Opinion paragraph, the financial statements give a true and fair view of the state of the company’s affairs as at 30 September 2012 and of its profit and cash flows for the year then ended and have been properly prepared in accordance with the Companies Ordinance.