Audit question

Gill Gittings

Think this is a question for steve but one of our clients sales have gone over the audit threshold. My boss says that it doesn't need an audit because it is only 1 out of the 3 criteria for audit that has been broken is that right and if we do have to undertake an audit will it be an automatic qualified report because we didn't audit last year?

Gill

Steve Collings

Your client will need an audit because it has breached 1 of the 3 audit exemption criteria. If you are reporting under the Companies Act 2006 these are - sales: £6.5m balance sheet total: £3.26 million and employees 50. If you are reporting under Companies Act 1985 these are: turnover £5.6m, balance sheet total £2.8m and employees 50. The 2 out of 3 criteria for 2 years is for companies being eligible to be classed as 'small' and being able to file abbreviated accounts.

Automatic audit qualification on a new assignment is not a default. Audit qualification should always be the last resort. You need to try to obtain sufficient and appropriate audit evidence to support the opening balances. ISA 510 is the specific standard on this issue. If you cannot generate sufficient and appropriate evidence then you will have a limitation of scope which will result in the report being qualified 'except for'.

Regards
Steve

beverly hudson

I'm not entirely sure of Steve's reply to be honest. Surely if the previous years figures were not audited then you cannot give an unqualified opinion because the opening balances have not been verified. The whole point of auditing is to make sure the figures are free from error.

I would say the audit report has to be qualified on the basis that you cannot rely on the previous years fugures.

Steve Collings

Hi Beverley,

I take it you have not undertaken an audit under the ISA regime or taught students under the ISA rules.

Even under the (now defunct) SAS regime, the auditor would always try where possible to issue an unqualified opinion without impeding on independence. What you are suggesting is that an entity's opening balances are materially incorrect before even starting the audit.

Under the principles of ISA 510 an auditor must always try to satisfy themselves that the opening balances are fairly stated. If they cannot gather sufficient audit evidence to satisfy themselves of this then they qualify their report - (though management must always be given the opportunity to give the auditor this evidence) whether this be through tests of detail/control and via management representation (though management representation cannot - in its entirety - be audit evidence).

Clearly if the opening balances (where material) can be verified through audit procedures and those procedures do not reveal any material misstatements within the opening balances, then why should they be subject to a qualified opnion? For example, where opening debtors are material why qualify the audit report if you can satisfy yourself that the opening debtors are valid by implementing after-date cash procedures? Clearly if the debtors pay after-date then this gives credibility to the trade debtors in the balance sheet at the year end, does it not?

I think the only matter which would invariably give rise to a qualification would be where the auditor did not attend the previous years stock take (where the client was outside the scope of audit at that balance sheet date) and thus the 'existence' of stock at the balance sheet date could not be physically verified. In any event ISA 501 covers such issues and the OP should refer to these. There is also guidance within the ISA's to suggest alternative procedures that could verify the existence of opening stock (eg roll-back procedures).

There are many, many ways in which a first year audit can be given a clear audit opinion by adopting alternative procedures. Knowing which procedures to implement and what to look out for whilst knowing what the standards require are all key. Qualified reports are always issued as a last resort and certainly not by default.

Steve

Julia

hello,

I have been reading this thread with interest however I agree with everything Steve has said.

I am an audit and FR tutor for BPP and have previously been an examiner as well as an ICAEW external file reviewer, and Steve's advice is always spot on. In terms of first year audits you must always seek to minimise the risk of misstatement by gaining appropriate evidence.

Simply stating audit qualification must occur is utter nonsense. Such a situation may even give rise to an imposed limitation where some professional institutes demand their members resign from the engagement. In all situations an audit firm will always seek not to qualify their report.

Gill my advice is to take heed of Steve's advice as this advice is sound.

Regards

Julia