ESSAY ON A CASE STUDY AND REPORT ON AUDITING
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The inventory valuation is done on cost basis,
while the NRV (Net realizable value) is 10% below the cost. As per the
accounting standards in Australia governed by the AASB, the inventory valuation
is done based on the basis of lower of cost or realizable value, whichever is
lower, which is as per the guidelines laid down under the provisions of AASB
102.
However, since the cost is of higher value in
comparison to the realizable value, the system followed here reflects the
inventory at higher value, which is not the fair value of inventory and
contravenes AASB 102. This is the just and fair opinion of independent auditor.
In view of this, the audit opinion expressed is fully justified. The inventory
should reflect the fair value of the inventory and the cost basis does not
reflect the fair value of the inventory as per acceptable accounting
principles. Hence the system of accounting followed should be subjected to fair
audit, and corrective measures should be taken for rectification. Further, the
opinion expressed by the auditor should be an adverse opinion, since the
accounting systems and practices followed by the company contravenes the
principles and concepts of accounting and the provisions as per AASB and the
Corporations Act, 2001 given the materiality of the information and facts
reported by the company and the fairness in the reporting of the financial
statements.
This essay is an example of a student's work
DisclaimerThe client has entered into a real estate
contract of purchasing some property and developing shopping complex, and
further selling the same to an unrelated third party at a “profit-based”
(cost-plus) basis of settlement price. As the real estate markets fell and the
rates had dropped, the purchaser sued the client on the basis that as he relied
on markets and rates forecasted by the client, he was not getting the
forecasted prices in the market because of recessionary conditions in the
market.
In view of the uncontrollable market conditions
resulted due to no fault of the client, the auditor opined that the client need
not pay any damages as he is not liable for any loss due to uncontrollable
factors in the market over which client has no control. In view of this, the
opinion of the auditor is just and fair. Moreover, when the transaction that
has taken place between the purchaser and the client, the client is supposed to
have information about the risks such transactions are exposed to. The market
risk is covered under AASB7, which deals with the various risks arising under
financial transactions. In view of the above, the auditor’s opinion with regard
to client liability for loss is fair and fully justified. However, sensitivity
analysis has to be conducted with respect to the variable parameters and the
methods followed for the sensitivity analysis. The impact of the price analysis
or forecasting is studied on the basis of the changes in these variables. In
this case, as the client is not part of the final transaction pertaining to the
sale after the completion of the deal, the client and its management is not
liable. The entire risk in this case is to be borne by the purchaser himself
who has to bear the entire market risk. Market risks are not part of any deal
between parties. Hence, the auditor’s opinion that the client is not liable for
the damages legally is fair and correct. Moreover, since there is always the
probability of (market) risk involved due to price fluctuations, it is the
presence of market forces which could have gone either way.
The probability of loss to the client in the
event of the markets falling could not be underestimated. Hence, the opinion
here of the auditor should be a disclaimer opinion (a category of Qualified
opinion) since the best forecast of the estimates could go wrong and hit either
side and the auditor could not be held liable for the estimation or forecasting
based on market factors (external), given the information and facts available
to the auditor for forming an opinion about the company’s accounting policy.
(iii)
In this case, there is a small NFP or
Not-for-profit organization, which can be characterized by a high %
(completion) of total revenue and, in such a organizational framework, the
internal control degree is low. In view of this, the % completeness of revenues
and the risks associated with auditing are also high. Larger the size of the
NFP organization, lower the completion % of total revenue and better control
over internal control and in turn, lower the risks associated with
As the degree of internal controls is low, the
auditor’s assertion of poor audit evidence and lack of control over the revenue
completeness is correct and fair. Hence, the opinion issued by the auditor is
one of disclaimer type in view of the limited scope or horizon and the
limitations of the auditor in terms of the audit evidence provided or made
available to the auditor to give the fair and independent opinion and the
materiality of the information given. So there is a limitation of scope of the
auditor’s examination.
(iv)
The company is follows the accounting policy of
not disclosing the director’s fees in its financial reports.
Since the disclosure of director’s fees is
mandatory as per Corporations Act, 2001, (Australian corporation and securities
legislation, 2001), the assertion and opinion of the auditor with regard to the
materiality or otherwise of the fees does not hold well. The Materiality arises
when it affects (i) decision making with regard to resource allocation (ii)
accountability of management. The point of materiality is covered under AASB
1031 of the Australian Accounting Standards Board. Since as per the Govt. of
Australia’s guidelines issued with respect to disclosure of director’s fees is
mandatory, non-compliance with the same or non-disclosure may lead to penalties
for non-compliance on the part of the management and the auditors of the
violating company. Hence, in view of contravention and non-compliance with the
acceptable financial reporting policies, the auditor needs to give a qualified
report.
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Disclaimer
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(v)
The management of the company estimates the
provision for bad debts at $550000. The audit arrives at the fair and
reasonable estimate at 655000. The management of the company has refused to
accept the figures of estimated given by the company for it would reduce the ne
profit to the extent of $105000. Bad and doubtful debts are classified into
recoverable and irrecoverable debts. Under the accounting norms for bad debts
as per the Corporations Act, 2001, the irrecoverable debts are written off. The
recoverable debts are those which are likely to be recovered and provision in
respect of which is make in the financial statements of the year. Provision for
Doubtful debts is under Section 237 of the Corporations Act, 2001 and AASB 124.
In the Income Statement, the provision for doubtful debts is shown as a loss,
while in the Balance Sheet, the provision is reduced from the Trade debtors as
Net Debtors and is shown under current liability on its own (Current
liabilities and provisions). Audit of accounting estimation follows the
procedure – collection of audit evidence, ascertaining and assessing the
reasonability or otherwise of the accounting estimates, revising and renewing
the estimates, and reviewing the subsequent events. As the materiality factor
is involved in the accounting for the estimated figure of provision for
doubtful debts, the report would not give a fair view of the financial report
for the period and hence the auditor should give an adverse report indicating
that the accounts do not reflect fairness in its state of affairs and financial
position.
ACCG 224 Intermediate Financial Accounting
(vi)
Introduction to Current Liabilities
In the case, the company has cash balances
maintained in a foreign bank account situated in a foreign country or location.
In this case, since there is no substantial
audit evidence to enable the auditor to form an unbiased, independent opinion,
the auditor can only give a subjective, qualified (limited scope) opinion on
the reasonable grounds of his best professional expert judgment and experience,
which may even be based on reasonable assumptions born out of facts available.
Since the materiality figure is given, and the cash balance in the foreign
account is just close to that figure, quantitative figures of materiality in
the case do not hold good. Hence, the classification by the auditor of the entire
cash balance held in the foreign account in the foreign location as current
asset (asset required to meet short term obligation) is fully justified and the
opinion given by him would be classified as disclaimer opinion, since the
opinion does only reflect the best under the given circumstances and the facts.
PART- B
Introduction
The auditor gives opinion of three types, in
case of audit reports, namely, adverse, disclaimer, and qualified opinion in
respect of the company’s accounting norms, procedure and systems. Further, the
audit of accounting estimates of the company’s accounting procedure and
practices would be generating modified, unqualified and qualified audit reports
Executive Summary
Under this report, we shall locate three annual
reports from the appropriate sources mentioned in respect of three Australian
companies listed in the ASX (Australian Stock Exchange) and also available in
the CQU website. In these audited reports, the auditor’s opinions – qualified
opinions, unqualified opinions, and modified opinion with a “Matter of
emphasis” as expressed by the auditors in these reports are shown. The detailed
opinions are written in respect of the three companies’ annual reports
considered for reporting on the “Audit analysis of the financial reports of
companies”. Finally, conclusions are drawn based on the analysis of these
reports.
Report
Now let us discuss the various opinions
expressed by the auditors in respect of the three annual reports of the
companies (Refer Appendix) as under:
QUALIFIED OPINION:
A Qualified opinion may be issued where there is
a disagreement with management concerning appropriate accounting policies, a
conflict between applicable financial reporting frameworks, or a limitation on
the scope of the audit. A Qualified opinion can be used only when the auditor
believes that the overall financial report is fairly satisfied. (Arens, at.al,
2010)
I have found the following company with the
Qualified Audit opinion.
Gerard Lighting Group Ltd:
Gerard Lighting is a listed Australian Company
in the power sector. As it is the major company in its product line, I have
taken this company as an assignment subject so that the company’s accounting
policies and practices, a strong company in the infrastructure sector can be
thoroughly studied and reviewed.
The annual report of the company for Year ended
2009 has been studied and the features of its auditor’s report are as under:
Audit of its accounting estimates of expenses
(Fielder, 2010) incurred during the period.
Evaluation and assessment of efficiency and
adequacy of its processes and controls
Independence of the external auditor has been
certified and ensured despite the auditor being engaged in the non-audit
professional activities
A review of the director’s forecast (historical),
historical pro-forma financial statements and best estimates assumptions, based
on external factors (judgmental and subjective) beyond one’s control and scope,
has been carried by the auditors, which is done as per the audit evidence and
financial data available to the auditors which is insufficient for the purpose
of audit, hence the auditors clearly state that this is just a review of the
management activities and forecasting based on its core performance factors,
not a complete full-fledged audit. Hence there is no opinion made by the
auditors on the audit report in view of insufficient audit evidence with the
auditor as per information provided by the company for the purpose of audit
which indicates that the auditor does not undertake any responsibility and the
auditor’s opinion is known as disclaimer opinion, (Arens, et. al, 2010) a
classification of qualified opinion, having insufficient audit evidence to form
unbiased, clear opinion.
The independent external auditor KPMG of Gerard
Lighting Group Ltd has expressed their satisfaction over the financial report
prepared and presented by the board of directors. The auditors have assessed
and verified the statement of comprehensive income of the group, change in
equity and statement of cash flow on date of year ending as well as the summary
of all the significant accounting policies that has been followed by the
company and the notes presented by the company. The auditors have found that
the board of directors has discharged their duties in fair way. They have
ensured that company follows the appropriate policies. As an overall view of
the auditor this report is true, fair and free from any material misstatement.
UNQUALIFIED OPINION:
An Unqualified opinion is the most common type
of auditor’s report. An unqualified opinion is issued when the independent
auditor believes that the company’s financial statements are sound; that is,
the statements are free from material misstatements. This is different from a
qualified opinion which is issued when the independent auditor discover
something in the financial statements that is subject to major concern.
Harvey Norman Holdings
This is a leading Australian listed company in
the product segments – integrated retail, banking and franchise. As a company
based on very sound policies, principles and practices, we have considered it
for the study. The annual report of the company for the Year ended 2009 have
been studied. The features of its annual report are as under:
The audit of the financial position for the year
has been made as per the audit procedure and carried in terms of provisions
laid down under the Corporations Act, 2010 (Australian corporation and
securities legislation, 2001)and the Australian Accounting Standards Board.
The independence of the auditor being certified
and ensured despite the auditor engaged in non-audit professional activities.
The compliance with the standards and opinion
about the fairness of the financial position by the auditor.
Given the sufficiency of audit evidence and
financial information, the audit carried represents a full and fair position of
the financial standing of the company, in the opinion of the auditor with
regard to the auditor’s report.
This is an unqualified report expressed with
regard to the unbiased independent opinion of the auditor on the financial
position of the company.
Finally, the auditor gives an unconditional,
unqualified opinion based on data made available for forming an independent
opinion and has classified the reports as unqualified reports
The Independent auditor Ernst and Young of
Harvey Norman Holdings have found that the financial report for the year ending
30 June 2009 has been satisfactory under various rules and have expressed an
unqualified opinion on the report. The auditors have found enough audit
evidences from various judgments and procedures that the financial report
prepared and presented by the management is true. As a whole the auditors has
expressed their opinion that this financial report is true, fair and free from
any material misstatements and has been prepared by complying with all the
relevant rules and laws of land.
This essay is an
MODIFIED OPINION:
An Unqualified audit report with an emphasis of
matter is appropriate for an audit with satisfactory results and a financial
report that is fairly presented, but where the auditor is required to provide
additional information (Arens, et. al, 2010)
The company with Modified opinion with an
emphasis of matter
AXA Asia Pacific holdings:
This is a major listed Australian company in the
financial (insurance) sector and is considered for the purpose of the study due
to its key market position and sound financial practices. The annual report of
the company for Year ended 2009 has been studied and following are the features
of its auditor’s report are:
Audit of its accounting systems and procedures.
Evaluation and assessment of sufficiency of
audit evidence.
Independence (Roebuuck & Martinov-Bennie,
2010) of the external auditor has been certified and ensured despite the
auditor being engaged in the non-audit professional activities.
The auditor has expresses an unqualified report
on the financial position and expressed compliance with the AASB1039
(Australian accounting standards board). (Audit of Accounting estimates issued
by AARF on behalf of ASCPA & ICAA - AUS516, 1995)
Materiality (Pflugrath, 2010) with regard to the
facts and figures presented has been checked and ascertained by the auditor and
their conformance with the Australian accounting standards has been ensured.
The forecast data based on judgmental assumptions and the subjective decisions
made by directors of the company have not been reviewed or subjected to any
kind of review. Hence, this is an aspect of a modified opinion with matter of
emphasis.
Considering the adequacy of sufficient
information for giving true position of the financial state of affairs of the
company, unqualified opinion has been given in the auditor’s report.
The auditor Price Waterhouse Cooper has
expressed their satisfaction over the independence of the external auditors and
the financial reports of the AXA Asia Pacific prepared by the management under
the Corporations Act 2001 and Australian accounting Standards as well as
International Financial Reporting Standards. The auditors has found enough
auditing evidences those indicates that this financial report of AXA Asia
Pacific is true and has been complied with all the ethical and regulatory norms
stated under Corporation Act 2001, Australian Accounting Standards while
preparing financial reports. The auditors have said that this report is free
from any material misstatement.
On overall basis the auditors have found the
financial report true, fair and free of any material misstatement and has
complied all the rules and laws that governs and are relevant for a corporation
having business in Australia (Annual Report, 2009 AXA Asia Pacific Holdings
Limited).
Conclusions
We have studied a report based on the audit
opinions expressed by the auditors with regard to the accounting records based
on the sufficiency of the audit evidence supplied and the audit plans carried
out by the auditor. In all the cases, to the extent of the information
supplied, they (auditors) have made independent opinions with regard to
compliance with the Accounting standards of Australia (AASB) and compliance
with the Corporations Act, 2001 and have qualified their opinions to the extent
of the forecast and best estimates made by the management based on their
subjective judgment and perception and also made opinions with regard to the
fairness of these financial reports.
From the analysis and review of the above
companies, we can draw the following brief inferences with regard to Qualified,
Unqualified, and Modified reports:
GLG - Qualified opinion
HRH - Unqualified opinion
AAPH- Modified opinion with matter of emphasis.
you should also read it :
Introduction of Balance Sheet
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