Auditors Reports

​​Discuss the FOUR audit opinions that the auditor could express and their implications on the organisation that the auditor reports on.

​​Kemikali Ltd. manufactures various industrial chemicals. You are the audit supervisor in the firm that audits Kemikali Ltd. At the inventory count at the year-end, you were responsible for work-in-progress (WIP) and were part of the team attending the count as well as the final audit. Work-in-progress constitute partly manufactured chemicals at the year-end, and this balance is material. Kemikali Ltd. values work-in-progress according to percentage of completion and standard costs are then applied to these percentages. During the audit, your team has identified an error in the valuation of work-in-progress, as a number of assumptions contain out of date information. The directors of Kemikali Ltd. have indicated that they do not wish to amend the financial statements. 

​​You have been the partner in charge of the audit of Bora Ltd., a company dealing with the sale of electronic items countrywide. During the year ended 30 September 2024, the company made a profit before tax of Sh.80,000,000. 

​​In May 2024, the office building of Daraja Ltd. was damaged by a fire. Many of the company’s accounting records were destroyed before the audit for the year ended 30 June 2024 took place. The company’s financial accountant prepared financial statements for the year ended 30 June 2024 on the basis of estimates and the information he was able to salvage. You were the lead auditor in the audit of Daraja Ltd. and have completed the audit of these financial statements. 

​​In relation to an audit report, explain the following terms: 

​​In accordance with International Standard on Auditing (ISA)-700 Forming an Opinion and Reporting on Financial Statements, the auditor is required to evaluate whether the financial statements are prepared, in all material respects, with the applicable financial reporting framework. 

​​Outline two benefits of the auditor communicating with those charged With governance.

​​International Standard on Auditing (ISA): 560 - Subsequent Event defines subsequent events as events occurring between the date of the financial statements and the date of the auditor’s report, and facts that become known to the auditor after the date of the auditor’s report. 

​​Explain four items of information that the auditor should disclose in the opinion section of the auditor’s report.

​​Describe five Auditor’s responsibilities for the Audit of Financial Statements as provided by the International Standard on Auditing 700 (Revised): Forming an opinion and Reporting on Financial Statements.

​​With reference to ISA 700 (Forming an Opinion and Reporting on Financial Statements); distinguish between an "adverse opinion" and a "disclaimer of opinion"

​​You are an auditor of Baraka Constructers Limited, a listed company which distributes materials to the real estate industry. You are finalising the audit for the year ended 31 March 2021. Your audit junior has identified the following matters and brought them to your attention: 

​​The International Standards on Auditing 700 (Revised) Forming an opinion and Reporting on financial statements deals with the auditors responsibility to form an opinion on the financial statements.

Required:
(i) Describe five auditor's responsibilities for the audit of the financial statements section of the auditors report,

(ii) Itemise three additional auditors responsibilities for audit of financial statements when auditing accounts for a group of companies.

(iii) Summarise four matters that an auditor should include in the "Basis of opinion" section of the auditors report.

​​The form and content of an auditor's report will depend on the nature of the audit, the intended users, and the applicable standards and requirements".
In light of the above statement, explain how the auditor's report may differ between "attestation engagements" and "direct reporting engagements".

​​International Standard on Auditing (ISA) 705, "Modifications to the Opinion in the independent Auditor's Report", sets out the different types of modified opinions.

Required:
With reference to the above Standard, discuss three ways in which an auditor's opinion may be modified

​​At the end of the audit process, an auditor prepares an audit report expressing his opinion on the financial statements. As an auditor, summarise four matters that you would include in the introductory paragraph of your audit report

​​In terms of International Standard on Auditing (ISA) 700 - Forming an opinion and reporting on financial statements; in evaluating whether the financial statements are presented fairly in the context of the financial reporting framework, the auditor should evaluate important aspects of the financial statements. 

​​Your firm, JM and Associates, has just concluded an external audit on Familia Medical Services Ltd. Based on the audit findings, JM and Associates issued an unqualified report to the company. 

​​With reference to an auditor's report, examine the matters that are included in the following paragraphs:

(i) Basis for opinion.

(ii) Key audit matters.

​​In the context of modifying an audit opinion, the auditor might either conclude that: 

​​During the audit of Health Care Limited, the audit team discovers that intangible assets balance includes Sh.4,000,000 related to one of their ten development projects. This expenditure does not meet the criteria for capitalisation. As this project is ongoing, the finance director has suggested that no adjustment should be made in this year's financial statements. He is confident that the project will meet the criteria for capitalisation in the following year.

Materiality considerations have established that the amount represents 7% of profit before tax and 1.2% of net assets.

Required:

Discuss the audit issues applicable in the above case.

​​With reference to an auditor's report, discuss five matters that should be included in the "auditor's responsibilities for the audit of the financial statements" paragraph.

​​You are the audit manager in charge of the audit of Lenga Ltd. You have come across the following matters which you  consider to be material. Explain how you would report each matter in the audit report:

(i) A major customer owing the company a substantial amount, has filed for bankruptcy. No provision for this has been made in the financial statements.

(ii) Some of the company's inventory is of a special nature. The expert you were relying on to value them might not be available to carry out the valuation in time for issuance of an audit report. You have to rely on management representation.

(iii) A major supplier has gone out of business and there is no immediate alternative for the raw material question.in

(iv) After the financial year end, a major fire broke out destroying machinery that had been purchased at the end of the year. 

​​Analyse five circumstances that might lead to qualification of financial statements.

​​State the opinions you would give in each of the following situations:

(i) The books of the client were taken away by the regulator for investigations and were not available for audit.

(ii) The provision for doubtful debts was not adequate. The debtors in the financial statement were misstated but the financial statements gave a true and fair view.

(iii) There was no provision for depreciation and the directors were unwilling to provide for any amounts during the financial year. The amount if provided for would reduce the reported profit by 30%.

(iv) There was a legal suit filed by a customer who was unsatisfied with the goods supplied but no provisions were made in the books. The assessment of the case by the company lawyers indicate that the customer has very slim chances of success. 

​​Explain the following terms as used in auditing:

(i) Emphasis of matter paragraph.

(ii) Contingent liability.

(iii) Audit committee.

(iv) Assurance engagement risk.

​​Discuss five disclosure requirements that should be made in an audit report as specified in the Companies Act.

​​Highlight four matters that an auditor is likely to include in a management letter.

​​Describe four types of audit opinions that an auditor could issue.