You are the technical partner of a medium-sized firm of auditors. Your senior partner has become concerned

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Question:

You are the technical partner of a medium-sized firm of auditors. Your senior partner has become concerned about the increased exposure to legal liability in the event that the firm issues an inappropriate audit opinion. You have been instructed to examine a random sample of audit files and to review the appropriateness of the opinion signed in each case by different audit partners.

Your selection included the following cases:

Client Alpha: certain disclosures required by the Companies Act in relation to the directors’ remuneration had been omitted. The audit partner considered that the total amount involved was not material and signed an unmodified opinion.

Client Bravo: inventory records relating to one of its depots could not be found. The depot accounted for 1% of Bravo’s sales and 0.5% of the total profit. The audit partner had modified the opinion on the financial statements using the ‘except for’ style and had modified the opinion on the keeping of proper books and records.

Client Charlie: minor errors had come to light at the very end of the audit. The effect of the errors was to understate non-current assets by 0.5% or 5% of the materiality threshold. The audit partner had signed an unmodified report.

Client Delta: Delta is in the middle of a lawsuit brought against it by one if its major customers demanding that extensive repairs be carried out to faulty equipment supplied by Delta. Delta’s directors made no mention of the case in their report or in the notes to the financial statements. The audit partner signed an unmodified report, after having seen correspondence from Delta’s lawyers to the effect that the customer’s case against Delta is weak.

Client Echo: faced with a liquidity crisis before its year-end, Echo’s directors were looking for sources of new finance. Their search had not proved successful by the time the accounts had to be signed off. The directors prepared the financial statements on a going concern basis but made a full and frank disclosure of the position and the effect if no further finance could be found. Nevertheless, the audit partner modified the opinion on the grounds of disagreement with the going concern assumption.

Required:

a) Assess the appropriateness of each of the audit opinions stating your reasons for agreeing or disagreeing with the style of opinion given.

b) Write a brief training memo for the firm’s new trainees explaining to them what ‘a true and fair view’ means and what an audit partner must consider before signing an unmodified opinion on financial statements.