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(a) Four situations under which the Act requires auditors to qualify their report.
1. If the auditors are unable to obtain all the information and explanations they consider
necessary for the purpose of their audit, for example, if they are unable to obtain satisfactory evidence:
• Of the existence of ownership of material assets or of the amounts at which they have been stated on the basis adopted.
• Of the validity of payments
• That the records properly reflect all transactions of the business because the evidence has been lost or destroyed or is otherwise not forthcoming or has never existed.
2. If in the opinion of the auditors:
• Proper books of accounts have not been kept in accordance with the Companies Act;
• Proper returns adequate for their audit have not been received from branches nor visited by them.
• The balance sheet and the profit and loss account are not in agreement with the accounting books and returns.
3. If in the opinion of the auditors the accounts though based on proper books of account
fail to give the information required by the act for example, a failure to comply with specific disclosure requirements of the Companies Act in material respects.
4. If in the opinion of the auditors the accounts though otherwise complying with the
disclosure requirements fail to disclose a true and fair view for example.
Because in the auditor’s opinion the underlying accounting policies do no conform to accounting principles appropriate to the circumstances and nature of the business;
• Because they are prepared on principles inconsistent with those previously adopted and without adequate explanation and disclosure of the effects of the change;
• Because the auditors are unable to agree with the amounts at which an asset or a liability is stated;
• Because the auditors are unable to agree with the amount at which income or expenditure or profit is stated;
• Because the accounts do not disclose information though not specifically required by the companies act, is necessary for the presentation of a true and fair view;
• Because the additional information given in a note or in the director’s report materially alters the view otherwise given by the accounts.
(b) Circumstances in which the auditors may qualify their report owing to inherent uncertainty.
Uncertainty: this was described earlier in the study pack.
Uncertainty of 2 levels material and not fundamental and material and fundamental.
• Material and not Fundamental
If the auditor has reservations on only a particular aspect of the accounts and not on the accounts as a whole. In this situation the auditor is able to form an opinion on the accounts as a whole with particular reservation on a specific matter. He therefore disclaims opinion on only an aspect of the accounts and not the accounts taken as a whole.
• Material and Fundamental
This is when the impact on the accounts taken as a whole is to make them meaningless for any decision making purposes and to reduce their informational value. In this situation, the auditor is unable to form an opinion on the accounts taken as a whole and he therefore disclaims his opinion altogether by stating he is unable to form an opinion as to when the financial statements give a true and fair view.
(c) Four circumstances in which the auditors may qualify their report as a result of disagreement with directors.
Departure from accepted accounting practices where:
• There has been failure to comply with the relevant IAS and the auditor does not concur.
• An accounting policy not the subject of a IAS is adopted which auditor’s opinion is not appropriate to the circumstances of the business or;
• Exceptionally an IAS has been followed with the result that financial statements do not present a true and fair view.
• Disagreement as to the facts or amounts included in the financial statements
• Disagreements as to the manner or extent of disclosure of facts or amounts in the financial statements
• Failure to comply with the relevant legislation or other requirements.
Disagreements is material but not fundamental
Indicate that the auditor indicates that he has exceptions against reservations noted under
uncertainty and he will mention in his report that to the extent of the exception the accounts do
not give a true and fair view.
Disagreement is material and fundamental.
Its impact on financial statements is to make them misleading as a whole. In this situation
the auditor will state that the accounts taken as a whole do not give a true and fair view.
Musyoxx answered the question on March 16, 2018 at 16:45
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