We will write a custom Assessment on Auditing Assignment: the Audit Opinion specifically for you
807 certified writers online
The audit opinion given by the auditors does not meet all the audit requirements in accordance to ASA 700 and ASA 701. The primary objective of ASA 700 is to ensure that the mandatory requirements when giving an unqualified audit opinion are met. These mandatory requirements are in relation to the audit format, it content in connection to the purpose of which the audit is being carried out, this is general purpose financial report (GPFR). Therefore the report should be reported in harmony with the laid out financial reporting guideline or frame work. When an audit follows this frame work, it should achieve fair presentation, auditors’ opinion, performance when carrying out the audit and his responsibilities in the audit. The main objectives of the ASA 701 Modifications to the Auditors report was to provide a frame work through which auditor would rely on in providing for opinions in relation to the financial opinion. These modifications were in relation to issuance of “other than unqualified” auditor’s report
The audit carried out has met some of the provisions of the ASA 700. Firstly, the audit began by identifying the financial entity on which the audit was carried out, this is, Highboury limited. In addition, the audit report has given its mandate whereby its states that the audit was carried out audit opinion whereby its states that the audit was carried out to provide reasonable assurance whether the audit was free from any material misstatements. In further states the procedures that were used in the preparation of the audit which includes, examination, on test basis of the financial records available and the evidence of all the transactions in the company. In addition the report stated the financial policies, accounting standards and other important estimates that were used in the process. At the end of the audit report the opinion of the auditors is given whereby they state that the audit was carried out with a view to give a fair presentation in accordance to the accounting standards and the statutory requirements in order to give an unqualified opinion which represents the financial records and position of the company’s operations and its cashflows ((CPA Australia, 2006).
Though the audit report identifies the company which it conducted the audit for in accordance with ASA 700, other audit frame work required to be used in the financial statements were not used. The audit report did not identify the each of the financial statements on which the audit was carried on but just gave a general opinion. According to ASA 700, the audit should have inspected all the financial statements of the company which included the balance sheets, income statements, and change in equity statements among others. After the audit on these statements, the report should have indicated the name of the financial statement and what was the opinion in the end separately before giving a general opinion at the end. After auditing the financial statements the auditors should then have given a summary of the various accounting and auditing policies used and other explanatory notes which explain in detail some of the financial issues in the statements, this should be done separately on all the financial statements separately and if possible the directors declaration. Though the audit report gave a date when the audit case carried out, it failed to give the financial period in which the audit covered which is a requirement of the ASA700. As an auditing requirement, ASA 700 should be used in conjunction with ASA 701 which provides guidelines and frame work for any upcoming modifications or changes to the audit report when the prevailing circumstances call for it.
The audit report should have indicated that the people who are in charge of governance of the reports shall also be accountable in ensuring that the audit gives a fair presentation. According to ASA 700 (2006), the responsibilities of those in charge of the governance of the report involves: “first, designing, implementing and maintaining the internal control systems which would be in harmony with the preparation and fair presentation of the financial reports which includes free from material errors and fraud, free from misstatement among others.” Secondly selecting and applying the appropriate accounting policies and finally creating accounting policies which are appropriate to the prevailing financial conditions. Hence the given audit report fails to show this framework.
According to the new requirements of ASA 701the report should have included a qualified, unqualified opinion, adverse or disclaimer, nevertheless it fails to provide for this. By failing to provide for the opinion, the auditors failed to fulfil the ethical duties as called for by the ASA 700 guidelines and frame work. In addition under the ASA 701 framework the audit report should have indicated that the audit was carried under the provisions of the regulatory requirements of the given country (CPA Australia, 2006).
Guy (2006) states that “An auditor’s report is a formal opinion, or disclaimer thereof, addressed by either an internal auditor or an external audit on evaluation performed on an organization or segment thereof.” The aim of the auditor’s report is allow the auditor to report his or her opinion as to whether the financial statements show a true and fair view of the firm’s financial position. The report is addressed to the shareholders for a statutory audit or to the individual or body that had requested the audit to be carried out for private audits. “An auditor’s report has three main components, which are auditor’s independence, responsibility and audit opinion” (Guy, 2006).
Auditor’s independence also referred to as the cornerstone of audit, is the most fundamental part of an audit process in determining the objectivity of the audit opinion. It is basically a state of mind shown by integrity and objectivity to the audit procedure. It is the independence of an internal or external auditor to perform his responsibilities in a free and objective way. In coming up with an auditor’s opinion, the auditor should be free from any biasness or coercion and do his or her work with due diligence. Taking into consideration that the aim of an audit is to enhance the reliability of the financial statement by showing a dependable assurance from an independent source that they show a true and fair view according to the auditing standards; however, this function cannot be achieved if the users of the audit report know that the audit process was not carried out in a credible manner and the auditor independence may have been undermined by other factors, such as the conflict of interest or coercion by other stakeholders of the business.
However, auditor’s independence and objective of the audit can be compromised in the following grounds: self interest, where an auditor’s has personal interest in the entity; self review threat arises when the auditor had undertaken an audit-related service to the entity earlier and the auditor reviews his or her work; advocacy threat, arises where the auditor promoted the client’s position irrationally; in as case where the auditor is involved in disagreement with the client or management; familiarity threat, which arises due to over contact of the auditor with the client for a long period may undermine the independence of the audit; and intimidation threat of the auditor by the client.
Reporting independence guarantees the auditor’s responsibility to disclose to the users of financial statement any information they deem ought to be revealed. If an organization’s management has been misleading stakeholders by manipulating financial information, they will try all means to ensure that the auditor does not report their acts. It is in these of cases where the auditor’s independence is likely to be undermined. Auditor’s independence can be enhanced by putting in place the five pillars of auditing, which are, competence, objectivity, professional competence, confidentiality and professional behaviour.
An independent auditor is able to detect misconduct by the management in an entity which would otherwise not have been detected, removing directors’ biasness in presentation of accounting statements about the firm’s financial position, hence they play a big role in boosting good corporate governance.
Auditing processes should be undertaken with professional scepticism, and in accordance with the accepted regulations of practice within the auditing profession. To attain this level of performance, an auditor should take responsibility for the completion of the stated responsibilities in a professional way. Thus, the auditor’s responsibility in an audit report include: disclosing any compromise or objectiveness of the audit that arise; undertaking allocated duties in an independent and self-driven way; planning and carrying out the actual audit exercise and preparing the auditor’s report on time and as per stated.
ASA 700.37 states that “The auditor’s report shall state that the responsibility of the auditor is to express an opinion on the financial report based on the audit.” ASA 700 requires the auditors to acquire the necessary information of the risks involved in an organization’s regulatory framework and the business environment standards and essentials. In addition, ASAs requires the auditor to assess the internal controls of the entity to measure the extent of the credibility of the financial reporting; the auditor should measure the relevant controls if they are effective and efficient in operations of the firm; and check if the controls in place are compliant with the standards and regulations (Tomasic, 1992).
Users of the auditor’s report should also understand the auditor’s responsibility towards the report so as to avoid any interference of opinions, that is, to bridge the expectation gap between the users of the auditor’s report and the auditor. It occurs mostly that the users believe that it is the duty of the auditors to prevent fraud and errors whereas it is the duty of the management; this creates a conflict of perception.
The auditor’s opinion
“The purpose of auditing financial statements is to allow the auditor to show an opinion whether the financial statements are prepared, in all material respects, according to the Generally Accepted Accounting Principles and UIG Consensus views.” An audit undertaken according to the SASs is aimed at providing a reasonable assurance that the accounting statement taken wholly or partly does not have any material misstatements and the SAS expects after the audit process, the auditor to give an opinion on the financial statements in the auditor’s report.
Get your first paper with 15% OFF
Therefore, an auditor’s opinion is a qualification that accompanies accounting statements provided by the independent auditor after carrying out an auditing process. The auditor’s opinion shows the scope of the audit, the auditor’s opinion on the adherence of generally accepted accounting principles and information used in the audit, and the auditor’s opinion on whether the accounting statements reflect a true and fair position of the entity’s situation.
The auditor’s opinion on the accounting statements is based on the principle of acquiring reasonable assurance; thus, in an auditing process, the auditor does not assure that a material misstatement, arising from fraud or error, will be discovered. Hence, the consequent detection of material misstatements in accounting financial statements does not show: failure to obtain reasonable assurance; inadequacy in planning, performance or judgment; the lack of professional competence and due care; or failure to comply with SAS.
An auditor can give either of the four types of audit opinions: first, an unqualified opinion, this makes no reservations about the accounting statements and holds that they give a true and fair view in accordance with the relevant accounting reporting standards; second a qualified opinion, expressed when the auditor is not able to ascertain the possible cause of the materials misstatements may be due to limitation in scope of his or her work, disagreement with the management, or there are significant uncertainties affecting the financial statements; third a disclaimer of opinion, this is expressed when the auditor is unable to form an opinion due to insufficient audit evidence; and fourth an adverse opinion, issued when the effects of disagreements are so material and pervasive to the financial statements that the auditor concludes that the financial statements do not show a true and fair view.
An independent auditor’s opinions can be helpful to users of financial statements in ascertaining the reliability and credibility of financial statements. This helps stakeholders of an entity to make informed decision on the firm concerning its going concern assumption, firm’s management and the overall operation of the entity. Auditor’s opinion helps in identifying the weakness in an entity’s control system and opinions on what needs to be done to provide a more secure operating system (CPA Australia, 2006).
CPA Australia (2006). ASA 700 The Auditor’s Report on a General Purpose Financial Report. Melbourne: CPA Australia.
Guy, D. (2006). Auditors’ reports. Menomonee Falls, WI: Tax Management Inc.
Tomasic, R. (1992). Auditors and the reporting of illegality and financial fraud, Australian Business Law Review, 20, 150-198.