Since they are based only on estimations and does not have probable effect, auditor is not required to take any action. The auditor opinion in this will remain unmodified.
In the given case, the company is not willing to make backdated adjustments. Therefore it is a scope limitation and its effect is material. It is the responsibility of auditor to ask management to correct the errors if they refused to do so the auditor shall determine its implications on audit report. And shall give Modified opinion.
But if the company’s policy is to recognize it when the goods are in transit then it should be reflected and recognized in financial statements. Considering the goods purchased is of material amount, it needs to adjusted and reflected in F/S by the management. But it is not shown in financial statements. Therefore it is a material misstatement. Auditor’s responsibility in this regard is to ask the management to make necessary adjustments. If they refused to do so auditor shall express qualified opinion.
Auditor’s responsibility in this is to discuss the matter with the management and request them to adjust it in financial statements. If they refuses to do so, auditor shall consider its implications on audit report and shall give modified opinion (qualified opinion because it is the scope limitation whose effect is material).
In the given case auditor is unable to conduct the stock take due to flood. Therefore shall try to perform alternative procedures. If auditor is unable to obtain the evidence from alternative procedures also Auditor shall then consider its effect on audit report. And he shall express qualified opinion as the effect is material.
Management has the responsibility to make assessment whether material uncertainty exists or going concern assumption is accurate. If uncertainty exists it should be disclosed appropriately.
Auditor shall perform procedures to obtain evidence whether material uncertainty exists or not and shall consider its implications on audit report.
In the given scenario client has disclosed adequately. But it is difficult for the entity to continue its operation as the profit is declining. Therefore it is the responsibility of auditor whether going concern assumption is accurate. Financial statements are prepared on going concern basis therefore auditor shall give adverse opinion.
Therefore reconciliation of stock has to be made to identify correct amount of stock held.
Procedures: Investigate: the receipt In and out for 20 days. And check the stock after 20 days. Calculate the amount of stock by working backwards.
Recalculation: Calculate again and identify errors.
Scan Ledger: Scan ledger to identify unusual entries and possible misclassification.
Inquiry: Inquiry/discuss with the management.
Inspection/Vouching: Examination of transactions with its supporting documentary evidence.
Therefore the auditor has to increase the risk assessment procedures. The auditor will rely more on test of details.
Procedures: They may include:
Recalculation: consists of checking the mathematical accuracy of documents and records that can be done electronically/ manually.
Re-performance: Auditor will perform independently procedures or controls that were originally performed by the client as a part of their internal control system.
Procedures: Control testing of new process. Check cut-off (transactions and events belong to correct accounting period).
Going Concern: High competition and decline in sales may result in going concern issue. Therefore auditor needs to check the going concern assumption.
Self Interest Threat: Threat that judgment of a team member will be inappropriately influence because of a financial interest held by an assurance team member.
Self-Review Threat: Threat that assurance team member will not appropriately evaluate result of previous service performed by himself or by another individual of his firm. In the given case:
Familiarity Threat: Threat that assurance team member will be too sympathetic to the interest of client because of long or close relationship with client.
Intimidation Threat: Threat that assurance team member is deterred from acting objectively.
Auditors must comply with the code of ethics established under ISA. Auditors should exercise professional and moral assessment when carrying out professional task. These include:
Integrity: Auditor should be straight forward, honest, fair and truthful in his professional dealings and business relationship.
Professional competence and due care: It imposes that auditor should act diligently in accordance with the applicable standards and requirements on timely basis, strives for improvement of skills.
Objectivity: Auditor should not compromise his professional judgment because of bias, undue influence or conflict of interest.
In the given case it is the ethical duty of auditor to reveal that Big Dumper & Pharma Ltd has no contract. If any irregularity exists company must have to pay a large penalty that will ultimately affect the financial performance. Therefore they should disclose this fact.
Johari, R. J., Mohd‐Sanusi, Z., & Chong, V. K. (2017). Effects of auditors' ethical orientation and self‐interest independence threat on the mediating role of moral intensity and ethical decision‐making process. International Journal of Auditing, 21(1), 38-58.
Kranacher, M. J., & Riley, R. (2019). Forensic accounting and fraud examination. John Wiley & Sons.
Nacif, S. S. (2018). Disclosure level and compliance with IAS 37: is there any residual legal tradition effect among companies cross-listed in the US? (Doctoral dissertation).
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