(b) You are an audit manager in a firm of Chartered Certified Accountants currently assign

Question

(b) You are an audit manager in a firm of Chartered Certified Accountants currently assigned to the audit of Cleeves

Co for the year ended 30 September 2006. During the year Cleeves acquired a 100% interest in Howard Co.

Howard is material to Cleeves and audited by another firm, Parr & Co. You have just received Parr’s draft

auditor’s report for the year ended 30 September 2006. The wording is that of an unmodified report except for

the opinion paragraph which is as follows:

Audit opinion

As more fully explained in notes 11 and 15 impairment losses on non-current assets have not been

recognised in profit or loss as the directors are unable to quantify the amounts.

In our opinion, provision should be made for these as required by International Accounting Standard 36

(Impairment). If the provision had been so recognised the effect would have been to increase the loss before

and after tax for the year and to reduce the value of tangible and intangible non-current assets. However,

as the directors are unable to quantify the amounts we are unable to indicate the financial effect of such

omissions.

In view of the failure to provide for the impairments referred to above, in our opinion the financial statements

do not present fairly in all material respects the financial position of Howard Co as of 30 September 2006

and of its loss and its cash flows for the year then ended in accordance with International Financial Reporting

Standards.

Your review of the prior year auditor’s report shows that the 2005 audit opinion was worded identically.

Required:

(i) Critically appraise the appropriateness of the audit opinion given by Parr & Co on the financial

statements of Howard Co, for the years ended 30 September 2006 and 2005. (7 marks)

Answer 1

正确答案：

(b) (i) Appropriateness of audit opinion given
Tutorial note: The answer points suggested by the marking scheme are listed in roughly the order in which they might
be extracted from the information presented in the question. The suggested answer groups together some of these
points under headings to give the analysis of the situation a possible structure.
Heading
■ The opinion paragraph is not properly headed. It does not state the form. of the opinion that has been given nor
the grounds for qualification.
■ The opinion ‘the financial statements do not give a true and fair view’ is an ‘adverse’ opinion.
■ That ‘provision should be made’, but has not, is a matter of disagreement that should be clearly stated as noncompliance
with IAS 36. The title of IAS 36 Impairment of Assets should be given in full.
■ The opinion should be headed ‘Disagreement on Accounting Policies – Inappropriate Accounting Method – Adverse
Opinion’.
1 ISA 250 does not specify with whom agreement should be reached but presumably with those charged with corporate governance (e.g audit committee or
2 other supervisory board).
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6D–INTBA
Paper 3.1INT
Content
■ It is appropriate that the opinion paragraph should refer to the note(s) in the financial statements where the matter
giving rise to the modification is more fully explained. However, this is not an excuse for the audit opinion being
‘light’ on detail. For example, the reason for impairment could be summarised in the auditor’s report.
■ The effects have not been quantified, but they should be quantifiable. The maximum possible loss would be the
carrying amount of the non-current assets identified as impaired.
■ It is not clear why the directors have been ‘unable to quantify the amounts’. Since impairments should be
quantifiable any ‘inability’ suggest a limitation in scope of the audit, in which case the opinion should be disclaimed
(or ‘except for’) on grounds of lack of evidence rather than disagreement.
■ The wording is confusing. ‘Failure to provide’ suggests disagreement. However, there must be sufficient evidence
to support any disagreement. Although the directors cannot quantify the amounts it seems the auditors must have
been able to (estimate at least) in order to form. an opinion that the amounts involved are sufficiently material to
warrant a qualification.
■ The first paragraph refers to ‘non-current assets’. The second paragraph specifies ‘tangible and intangible assets’.
There is no explanation why or how both tangible and intangible assets are impaired.
■ The first paragraph refers to ‘profit or loss’ and the second and third paragraphs to ‘loss’. It may be clearer if the
first paragraph were to refer to recognition in the income statement.
■ It is not clear why the failure to recognise impairment warrants an adverse opinion rather than ‘except for’. The
effects of non-compliance with IAS 36 are to overstate the carrying amount(s) of non-current assets (that can be
specified) and to understate the loss. The matter does not appear to be pervasive and so an adverse opinion looks
unsuitable as the financial statements as a whole are not incomplete or misleading. A loss is already being reported
so it is not that a reported profit would be turned into a loss (which is sometimes judged to be ‘pervasive’).
Prior year
■ As the 2005 auditor’s report, as previously issued, included an adverse opinion and the matter that gave rise to
the modification:
– is unresolved; and
– results in a modification of the 2006 auditor’s report,
the 2006 auditor’s report should also be modified regarding the corresponding figures (ISA 710 Comparatives).
■ The 2006 auditor’s report does not refer to the prior period modification nor highlight that the matter resulting in
the current period modification is not new. For example, the report could say ‘As previously reported and as more
fully explained in notes ….’ and state ‘increase the loss by $x (2005 – $y)’.