Auditor question for peugeot steve

cornflower

Hello Steve,

I am hoping you can help me with an embarrasing situation that has been raised by my financial controller. I work for a dental laboratory and we have just had the auditors in. The auditors have written to us highlighting a number of areas where they have found weaknesses. A particular weakness is with our branches. We have 4 branches who do their own ordering and run their own petty cash and the auditors have said that they have not followed the controls they understand to operate.

As you can understand my boss is not happy and has called an urgent meeting on Monday to discuss this. What is the worst thing that can happen here? We are all a bit worried. Trust this to happen on Friday!:sad:

Your thoughts would be appreciated as to what we can do about this.

Carrie.

peugeot

Hiya Carrie,

It would all depend on how "material" the failings are to the financial statements. If they are isolated instances, then the auditor will bring these to the attention of the directors by way of management letter (which they have done in this case). In terms of the auditors report, they could give either a clear opinion (unqualified) with (maybe) an emphasis of matter paragraph highlighting the failings they have found. Or, they could give an unclear (qualified) opinion or even a disclaimer. It would all depend on how serious the failings are and how satisfied the auditors are that they have got reasonable assurance that the financial statements give a true and fair view.

If there has been multiple failings in the internal controls at branch level, then this will more than likely give rise to fundamental uncertainty of whether or not the financial statements give a true and fair view. The auditors will only test various information in the accounts on a sampling basis and increase their sample if they come across failings. If the increased sample still has failings, this is where the problems start.

At worst the auditors may issue a disclaimer which basically means they can't form an opinion due to substantial failings in the internal controls so they are not giving an opinion here (this is the worst opinion). The auditors, however, should give your company the opportunity to put any errors in the financial statements correct - issuing a disclaimer is not a decision that the audit firm will take lightly. Your company must be given the opportunity to correct the financial statements - however if it is due to failings in internal controls, this could prove difficult and time-consuming.

It is worth mentioning that the Financial Reporting Review Panel have started reviewing smaller audits where the auditors report is qualified/adverse or disclaimer and the FRRP will write to the directors informing them of their responsibilities under the Companies Act. The FRRP also has the power to apply to the High Court to force the directors to correct the financial statements. The FRRP are doing this with companies in the SME sector so it might be worth mentioning this to your financial controller.

Kind regards
Steve

cornflower

Thank you for your reply steve. I have shown my boss and she is going to hold a discussion with the auditors on Wedneday next week to see what can be done about it. The auditors have said there is an uncertainty and we are all having a meeting on Monday with the CEO to go through the improvements.

This has caused us a lot of bad feeling in our company and people are blaming eachother!

Thanks again. I appreciate your advise and guidance.

Carrie.

cornflower

Hellosteve,

Sorry can I ask one more question.

How do we know that an audit opinion is appropriate. I mean we are subject to a lot of audit judgement so how do we know they are correct in what they say?

Thank you for your help.

Carrie.

peugeot

Hi,

If the audit firm have complied with the International Standards on Auditing (ISAs) which they have a legal obligation to do, then they should have gathered appropriate audit evidence (per ISA 500) to support their opinion which will stand up to scrutiny in a Court of Law.

I would therefore be surprised if their opinion is inappropriate. The opinion is arrived at by the audit senior/manager who will then discuss his/her conclusions for the opinion with the engagement partner (who issues the opinion).

If the directors dispute the opinion then they need to go through the complaints procedure adopted by the audit firm. The following is an overview of the opinions and reasons why they are given, just to help you:

Qualified opinion

Auditor disagrees with an accounting treatment/(non)disclosure of a transaction/event.

Adverse opinion

Auditor concludes the financial statements contain an inappropriate transaction or omits a transaction(s) that yields the accounts materially misstated.

Disclaimer

Auditor cannot form an opinion because (for example) substantial failings in the internal controls/accounting systems etc.

The audit firm should go through all their reasons for their opinion with the directors during the clearance meeting. However, please note my remarks in my first thread - adverse/disclaimers are not given lightly - plenty of opportunity is given to clients to avoid these opinions, as is the case with qualified opinions also.

Regards
Steve

cornflower

Steve,

Just thought I'd keep you informed. We had a meeting last week about our audit and as you said the auditors have issued a disclaimed oppinion based on failings. Our finance director was not happy - he is considering having the audit opinion verified by another auditor.

Three of our staff were sacked and my boss was given a warning because of the failings! We had a really bad week last week!:mad2:

Do you know what will happen when the other firm will come in to check it - I don't want to go through that again.

Thank you
Carrie.

peugeot

Hi Carrie,

Sorry you had a bad week last week! Audit time is always a stressful time especially when it does not go well.

Without wishing to sound disrespectful, I am somewhat at a loss as to why your FD wants to commission another audit firm to verify the opinion. If the internal controls have failed duruing the year under audit, then they have failed - it is as simple as that. Your auditors will have gathered sufficient evidence to support their opinion.

I presume the audit report has been signed - if so then any disputes of the opinion should have been discussed BEFORE signing the audit report and financial statements. If the FD has (substantiated) grounds for disputing the opinion then the audit firm should implement their quality control procedures, part of which should include the file being independently reviewed. This must be done before the audit report is issued (a hot review).

This sounds to me to be pretty clear cut - controls have failed and the auditors cannot form an opinion and the FD is disgruntled. The engagement partner will have reviewed the file prior to issuing the report and your company will have been warned about the disclaimer some time before it being issued in an attempt to correct the issues (see ISA 260).

Commissioning another audit is just unheard of and I would be surprised if another audit firm would accept the engagement under these circumstances (due to ethical rules). Your FD should just accept the opinion and move on and make sure the controls operate as they should to avoid this in the future.

Kind wishes
Steve

DaveP

Not entirely unheard of..

I know many a disgruntled client who went to another firm who were less strict over the application of auditing standards.

As prescriptive as those standards are there is still some room for judgement on the auditors behalf and, just as accountants opinions vary greatly from one to another, so to do auditors.

However, after going through the time and cost of finding a 'friendlier' auditor and commissioning a further audit your FD is going to look pretty stupid if they come to the same opinion!

I'm sure the FD will calm down and see sense eventually. Just keep your head down and ride it out!

cornflower

Hello Dave,

I was speaking to a friend of my mothers yesterday who used to be an audit partner in a relatively large practice and she also said the same as Steve in that it is unheard of to get a second audit done on the same year and more or less said that she would issue the same oppinion if our controls had failed like they had done. My FD is wanting to have another audit rather than move auditors as we are a group company and the auditors are appointed by our head office.

peugeot

Hiya,

DaveP is right in that clients do often go to other audit firms if they are not satisfied with their other auditors - I am currently in the process of mediating between one of our new audit clients and their predecessor auditors where relations have broken down. However, to have another audit firm audit the same year that has just been subject to audit IS unheard of. As I mentioned above, at the least the audit firm could have had a hot review.

The auditing standards are prescriptive and different auditors do interpret them differently. Judgement in audits is always prevalent but the ISA's are pretty clear on what an auditor needs to do in terms of failing controls and I am sure (and hope) that all auditors would come to the same opinion in that if substantial failings in internal controls have occurred during the year.

Hopefully your FD will have calmed down by now!!

Kind wishes
Steve

DaveP

Certainly very rare...

..but if someone has experienced it then it is not 'unheard of'. Of course now we are splitting hairs!

I also admire Steve's faith in the professionalism of all auditors. It's almost heart-warming!

Cornflower, you have stated that "My FD is wanting to have another audit rather than move auditors as we are a group company and the auditors are appointed by our head office."

That's interesting. Is your FD hoping that the same auditors will miraculously come to a different opinion if they conduct another audit?!

It will be interesting to see how this one pans out but, as Steve suggests, I think the FD is just letting off steam and will have to accept the situation as it stands.

cornflower

Thank you Dave for your reply. I was not saying that my FD has experienced this I was merely stating that my FD has said he wants to approach another audit firm and get their oppinion.
I think we have more or less finalised all this issue now. The partner and manager of our auditors has been involved in a conference call with our department today and they explained to all of us what happened for them to give their report. It was quite embarrassing for us because the list of failings seemed endless.:blushing::thumbdown:

The FD did not mention to them about getting another audit firm in to audit the accounts as he had spoken to some technical helpline and they had also apparently said two audits for the same financial year is highly impractical and we should use the audit opinion to improve things going forward, so I doubt he is going to go down that route now.
I think he is just worried because our group FD is coming in this week and they are also meeting with our auditors.:crying:

peugeot

Hiya,

It would be advisable for the FD to accept the disclaimer and move on with a view to improving the internal controls in time for the next audit.

I hope it all goes well with the meeting this week.

Kind regards
Steve

DaveP

Sorry for the confusion cornflower, I was suggesting that I had experienced a re-audit, not your FD!

Poodle

cornflower wrote: »

Our finance director was not happy - he is considering having the audit opinion verified by another auditor.

Three of our staff were sacked and my boss was given a warning because of the failings! We had a really bad week last week!:mad2:

I am really struggling with this one. If the FD thinks so strongly to get another auditor involved then why did he not do that before sacking staff. Will he re employ them if the second opinion reveals a more favourable opinion?

Steve, is it not normally the shareholders who appoint the auditors at the AGM? is this allowable under the CA?

Poodle

peugeot

Hi Poodle,

You are correct - the auditors are appointed by the shareholders and the issue that complicates this thread further is the fact that it is a group audit.

I am not entirely sure as to how big Cornflower's group actually is. However, on the assumption that the group is not exempt from the S248 requirements (therefore the group has to publish consolidated accounts), then there will be much bigger issues that have been addressed and discussed other than those on this thread.

If the group has to consolidate Cornflower's subsidiary, then ISA 600 (the Audit of Group Financial Statements) will have to be followed. This standard relates to those audits where the group has more than one firm of auditors (which is often the case in a group where the parent and its subsidiaries are long distances apart), and assists the group engagement partner in forming the correct opinion. There would have been a lot of discussion and correspondence entered into in respect of this disclaimer.

The FD's response is not uncommon here (though I must admit sacking staff is quite severe) and there could be repercussions here as well for him.

If auditors did everything to please their client (thus not acting independently), then problems arise when the ICAEW or ACCA (or other body) do a cold file review, which they often do. Firms who do this risk having mandatory hot file reviews imposed on them (this is where another firm or a training organisation will review the file prior to the audit report being signed to make sure things are in order) because in previous audits they have either cut corners (often because of fee overruns), acted independently or failed to comply with the standards. They can also face the professional bodies disciplinary committee, be struck off and fined (even imprisoned). Auditors nowadays have to be so careful and it makes things harder if the director(s) wants a clean opinion, and you know that you can't give it. You get the reaction of the FD in this thread.

In addition, the Financial Reporting and Review Panel (FRRP) have started to write to companies where their audit reports are qualified/adverse/disclaimed reminding the directors of their responsibilities under the Companies Acts. The FRRP can even obtain a High Court Order to force the directors to put right the failings - so Big Brother is definitely out there on audit firms!

Therefore, the issuance of a disclaimer in this case is not something entered into lightly and the FD in this case will have been given lots of warning about the potential impact, so it should not have come as a surprise. I think he could be worried about the impact this could have on his job.

Kind regards
Steve

cornflower

Hello Poodle and steve,

Thankfully we have been told to day that as far as we are concerned in the finance department it is business as usual. It has been a really hard few weeks and we are glad to put it at the back of us. We are all being trained on our new procedures and systems in the next couple of weeks so that will be something to look forward to. Our FD is still walking round with a face like thunder, but that's nothing out of the ordinary anway.:laugh:

Steve you are correct that we are part of a group, but how did you know? There have been lots of meetings, discussions and closed door meetings with auditors over the last few weeks so its anyones guess what they were talking about.

Thank you for all your help during this.

Carrie.:001_smile:

peugeot

cornflower wrote: »

Steve you are correct that we are part of a group, but how did you know? :

You said that your Group FD was coming in this week on a previous thread.

Poodle

peugeot wrote: »

Auditors nowadays have to be so careful and it makes things harder if the director(s) wants a clean opinion, and you know that you can't give it.

"Enron"!!!