Auditing Opinions and Assurance

Questions: Indicate the type of opinion that should be expressed in each of the following situations,providing reasons for your choice-1.The auditor was unable to obtain confirmations from three of the clients major customers that were included in the sample .The auditor was able to satisfy himself about the balances of these accounts using other audit procedures? 2.The client restricted the auditor from observing the property ,plant and equipment .The property, plant and equipment is a material part of the assets making up 20% of total assets?3.Management have excluded from the financial report the necessary disclosures in relation to a contingent liability .If this becomes an actual liability it will have a material effect on the financial report?4.A significant proportion of a retailers sales are on a cash basis and inadequate records have been maintained. There are no audit tests that can be done to assure yourself that cash sales are accurate? 5.You have been asked to do the audit for a new client this financial year .While you are satisfied that there appears to be no material misstatements for the information during the current financial year the client will not provide any information about the opening balances of accounts at the start of the financial year?6.You have just started auditing the financial statements of a client which has not been following the Australian Accounting Standards since it began operating five years ago?7.A client has been using the LIFO method of accounting for inventory which is disallowed under the Australian Accounting Standards.This has had a material effect on the financial statements however its effect is currently limited to the effect on the Inventory value?8.The auditor of Numark has just completed the audit and is satisfied that there are no material misstatements however the clients continuation as a going concern is in extreme doubt as its major customer has gone into liquidation and it appears very unlikely that other customers will take its place due to the highly specialised nature of its products? Answers: Introduction Auditing is the process of checking and verifying books of accounts of the business organisation. Audit is conducted by qualified auditors only and after checking and verifying financial statements, auditors are required to express its opinion. Audit opinion is the verdict of auditors on the financial statements and state of business operations of business organisation. There are four types of audit opinions i.e. qualified opinion, unqualified opinion, adverse opinion and disclaimer (Types of audit opinions, 2011). Following are different independent case of audit opinion: 1. In this case, auditor is not able to obtain confirmation from some customers regarding account balance but on the other hand, auditor has performed another procedure to satisfy himself about correctness of account balances. In this case, since auditor is satisfied therefore auditor can express unqualified opinion (Cipriano et al., 2016). As all reservations related to balances is cleared from other audit procedures therefore unqualified audit opinion will be expressed by auditors. Under unqualified audit opinion, financial statements and books of accounts are clear from any defect. 2. In the given case, auditor is restricted by the management or client in performing its duties or undertaking audit process. Since property, plant and equipments are integral part of any financial statements therefore it shall be examined in detailed manner. In this case, auditor shall express disclaimer of opinion. Disclaimer of opinion is the type of auditor opinion under which auditor is not able to audit financial statements of business entity. Since in this case, auditor is restrained from observing or auditing the property, plant and equipments of the business entity. Therefore auditor is not able to comment on amount of property, plant and equipments and should issue disclaimer of opinion (Davis, 2004). 3. In this case, since management or account of the business organisation is not able to disclose contingent liabilities which can become actual liabilities in future. In this case, auditor shall express qualified opinion. Unqualified opinion is the audit opinion under which, financial statements or financial records of the business organisation is not maintained according to accounting standards. Accounting standards are those standards which accountant of business organisation has to follow while preparing and presenting financial statements. Under qualified audit opinion, there is no misrepresentation in financial statements of books of accounts are identified by auditor (Li et al., 2012). But there are issue or issues in presentation of financial statements or preparation of books of accounts. 4. In this case, since business organisation is not able to perform audit test to satisfy him to her (auditor) regarding correctness and accurateness of cash sales during the year. Since cash sales to the retailer is the significant portion of the cash sales. In this case, auditor shall express disclaimer opinion on the preparation and presentation of financial statements. In this case, disclaimer audit opinion will be given by auditor because; in this case there is no misrepresentation in the financial statements (Gaganis et al., 2013). But sales figures are not able to be checked or verified by the auditor since there are no adequate supporting records. In this case, additional paragraph is required in audit report that will highlight the reason of disclaimer opinion of auditor. 5. In this case, since new business organisation is required to be audited by the auditor. Therefore there shall be initial engagement between auditor and client (business organisation). In initial engagement, auditors are required to check and verify correctness of opening balances of the current period. Then only audit procedure shall be initiated. In this case, management are not able to provide any evidence and auditor is not able to examine the correctness of opening balance. Therefore auditor shall express disclaimer audit opinion related to opening balances of the financial statements of client. In this case, there is no possible way to examine opening balance therefore auditor shall not comment on the same. 6. In this case, client has not been following Australian Accounting Standards from the beginning of its business operations. Since in this case business organization has not followed Australian Accounting Standards therefore auditor shall issue adverse audit opinion or disclaimer opinion if auditor is not able to verify financial statements. Under adverse auditor opinion, auditors feel that business organization is not able to follow accounting standards while preparing financial statements. In addition to that adverse auditor opinion is expressed when financial statements reflect misrepresentation (Lopez et al., 2009). Therefore in this case, business organization or client has not followed Australian accounting standards therefore in this case auditor shall express adverse audit opinion. 7. In this case, since business organisation or client has been following Last in Last out inventory management method which is disallowed under Australian accounting standard. In this case, business organisation or client has violated Australian accounting standards and this has brought in the notice of auditor. In this case, auditor shall express adverse audit opinion. Under adverse audit opinion, business organisation has not followed Australian accounting standards and is misrepresented to stakeholders. Same is the case with the current client or business organisation, then had not followed Australian accounting standard under accounting for inventory. Only FIFO and weighted average method of accounting is allowed (Sarath, 2016). Therefore adverse audit opinion shall be expressed by auditor. 8. In this case, since financial statements reflects no adverse situation and there is no material misstatement in the financial statements of the business organisation i.e. Numark. In other words, financial statements of Numark deserve unqualified audit report. But on the other hand, auditor came across situation under which major customer of Numark had gone into liquidation and this will impact business operations or business situation of Numark. Therefore auditor need to reconsider the case, since this liquidation of clients major customer will impact going concern therefore auditor cannot issue unqualified audit report to business organisation or client. In this case, auditor shall issue disclaimer audit report (Mao et al., 2015). Since auditor is not able to analyse how and up to what extend liquidation of major customer of Numark will impact its business in real terms. Therefore auditor shall issue disclaimer audit opinion. References Cipriano, M., Hamilton, E.L. Vandervelde, S.D. 2016, "Has the lack of use of the qualified audit opinion turned it into the Rotten Kid threat?", Critical Perspectives on Accounting, . Davis, R.R. 2004, "Using Disclaimers in Audit Reports",The CPA Journal,vol. 74, no. 4, pp. 26. Gaganis, C., Pasiouras, F. Spathis, C. 2013, "Regulations and Audit Opinions: Evidence from EU Banking Institutions", Computational Economics, vol. 41, no. 3, pp. 387-405. Li, L., Tian, G. Qi, B. 2012, "Auditors' unqualified opinions on internal controls and accrual quality", Nankai Business Review International, vol. 3, no. 4, pp. 332-353. Lopez, T.J., Vandervelde, S.D. Wu, Y. 2009, "Investor perceptions of an auditor's adverse internal control opinion",Journal of Accounting and Public Policy,vol. 28, no. 3, pp. 231-250. Mao, M.Q. Yu, Y. 2015, "Analysts' Cash Flow Forecasts, Audit Effort, and Audit Opinions on Internal Control",Journal of Business Finance Accounting,vol. 42, no. 5-6, pp. 635-664. Sarath, B. 2016, "Audit quality within adverse selection markets",Asian Review of Accounting,vol. 24, no. 1, pp. 2-18. Types of audit opinions 2011, , Singapore Press Holdings Limited, Singapore.