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Homework answers / question archive / You are engaged to perform an audit
You are engaged to perform an audit. The controller tells you that they are too busy to shut down production for you to perform test counts of inventory. They are happy to provide you with any other information you need, but they cannot have production interrupted close to year-end. Inventory is material and though you perform cutoff tests, sales and purchase tests, and shipping tests, you do not feel the evidence is sufficient to conclude the balance is fairly stated.
During receivables testing, you note that the client does not have a reserve for bad debts. Based upon the aging schedule, you conclude an allowance of $17,000 should be recorded for the $450,000 of receivables. However, after speaking with management, they inform you that they have not had a bad debt in 12 years, and they prefer to use the direct write-off method. They will not consider making the audit entry. There were no issues during the rest of the audit, and, in all other areas of the audit, you feel there was sufficient appropriate evidence to justify the reasonableness of the financial information.
Problems in restricting test counts of Inventory and Not creating provision for Bad Debts:
Restricting counts of Inventory -
* An auditor cannot provide True and Fair Audit Report without performing all duties need to be done while Auditing.
* Restriction from the Client's side will result into insufficient and inappropriate Audit evidence.
* An auditor will conclude the possible effects of these restricted areas that might contain and will end up in Disclaimer of Opinion.
Not creating provision for Bad Debts -
* Creating Provision is the Prudence/Conservatism concept of Accounting.
* Violating the concept will lead to reporting of the Violation of Concept in the Report of Financial Statements.
Type of Audit that I will Issue:
DISCLAIMER OF OPINION - An Auditor will disclaim an opinion if he is not able to obtain sufficient and appropriate audit evidence. To verify inventory is one of the important steps to be followed to obtain audit evidence. Without physical verification of stock(Inventory) the evidence obtained will be insufficient.
Reason for Choosing Disclaimer of Opinion:-
An auditing by its very meaning is called the 'Independent examination of Financial Statements'. An auditor should have the authority to verify the audit matters according to his will. If anyone is restricting from any of his audit procedures, he has the right to express his opinion on the financial statements. Disclaimer of Opinion can be given if an auditor is unable to obtain sufficient and appropriate audit evidence while conducting the Audit.
If a business is not providing for possible losses even if they have not had a bad debt in past 12 years, they are violating an Accounting Concept called Prudence/Conservatism Concept. So it should also be reported in the audit report.
