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The Opinion section may have additional opinions in it, due to national requirements.
Disadvantages
= It guarantees no more than the minimum level of content! = In being standardised, the language may be seen as overly technical = It may restrict an auditors ability to say what they really wish to say.
3. Adverse opinion
This is a form of misstatement that is so strong, it affects the opinion of the Financial Statements as a whole (pervasive). The most common form of this in the exam is a disagreement that the company is a going concern. As such, the auditor is disagreeing with the entire basis of preparation of the Financial Statements, which is likely to result in disagreement with many of the figures in the Financial Statements. The auditor reports that the Financial Statements do not give a true and fair view.
4. Disclaimer of opinion
This is when a fundamental amount of evidence is missing and the auditor feels unable to report on the overall truth and fairness of the Financial Statements. Imagine turning up to an audit client to be told that all of the accounting record were lost the previous day in a fire, and that there are no backups. Without any evidence, the auditor is unable to do an audit, so cannot give an opinion. The auditor reports that we are unable to form an opinion.
5. Emphasis of matter
Sometimes the auditor is happy that the Financial Statements are true and fair, and that all evidence has been received. However, there remains something fundamental and uncertain that the auditor wishes to draw to the attention of those reading the Financial Statements:
= There is a very important Disclosure Note which the shareholders must ensure they have read (typically involving going concern threats)
2
Indications of going concern problems The possibilities are extensive but auditors should look out for potential indicators such as:
= Net liabilities = Operating losses = Major debt repayments due = Loss of major customers or suppliers = Loss of key staff = Withdrawal of financing such as overdrafts = Cash flow problems = Technological advancements causing clients product to become obsolete = Major litigation
3
Audit procedures The actual procedures that auditors will carry out will vary from client to client depending upon the exact circumstances but will tend to involve procedures such as:
= Review and discuss cash-flow forecasts to ensure company has enough cash to continue in operation for the next year = Review budgets and interim financial statements to assess projected results over the next year and identify any concerns over profitability = Inspect correspondence with the companys bankers to assess the availability of financing such as overdrafts and loans = Inspect business plans to assess companys efforts to expand into new areas to replace unprofitable operations = Inspect employee contracts to ensure company is replacing key staff and providing incentives for current staff = Inspect correspondence to understand possible consequences of legal action being brought against the company = Inspect new sales contracts to ensure company is replacing customers who have been lost = Consider managements process for identifying going concern problems and how they propose to respond to those problems.
2
Matters included in a management representation letter General matters Directors confirm that:
= They are responsible for the financial statements = They have provided the auditor with all relevant information and access as agreed in the terms of the audit engagement = All transactions have been recorded in the financial statements = They are responsible for internal controls and for preventing and detecting fraud = The going concern basis is appropriate = All related party transactions have been disclosed = There are no undisclosed subsequent events that require adjustment or disclosure.
Specific matters
Included here is anything else that the auditor would like a representation on for example:
= That a certain debt is recoverable = All bank accounts have been disclosed = Any plans to reorganise the business or discontinue product lines have already been disclosed.