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ASA 700 is essentially the auditing standard that is propounded and issued by the Auditing and Assurance Standard Board to safeguard the interest of the public at the highest possible level. The standard centres round forming opinion & reporting financial report of companies that are in accordance with manifold legislative & strategic requirements as well as their provisions. It bears strong resemblance with ISA 700 & takes into account the duty & responsibilities of the auditors while forming opinion relating to the financial report of the companies. In addition, the standard tends to relate to the various forms as well as contents relating to the report of the auditor with respect to financial audit reports (Azim, 2013). The main requirements of ASA 700 can be enumerated as follows:-
Main requirements of ASA 700
Audit opinion is reflected in the report of the auditor & they are given with respect to the financial statements of the entity. The main requirements of ASA 700 can be mentioned as follows:-
i) Formation of opinion based on company’s financial statements.
It is required to ensure that financial report has been prepared in conformation with regulatory framework.
ii) Formation of opinion.
Under this, the auditor is required to present an opinion stating clearly that the company’s financial statements are present in a true & fair manner complying fully with GAAP.
iii) Report of the auditor.
The report is usually in written form & includes the opinion of the auditor & the basis of such opinion along with other important parameters (Gilbert et. al, 2005).
iv) Additional information included in company’s financial report.
Additional information those are under the purview of regulatory framework are only required to be included in audit opinion of the company’s financial report.
Different types of audit opinions & their causes.
Audit opinion can be refer to as an authentication by the auditor supporting financial statements of the company made largely based on audit concerning the opinion of the accountant. It ensures and takes into account all financial data, records & methods that have been followed to arrive at the report. Further, auditor opinion also tends to disregard the existence of all material misstatements appearing in company’s financial statements. Now, audit opinion can be manifold and can be broadly classify under four major heads namely qualified, unqualified, adverse & disclaimer opinion (Sanderson, 2013).
This category of audit opinion is generally found to be given in the audit report wherein there is a notable deviation found in the presentation of the financial statements & records of the company from the rules & guidelines of Generally Accepted Accounting Principles or the GAAP (Gilbert et. al, 2005). The exclusions are generally mentioned by the auditor in separate paragraph giving clear indication of the reasons behind the report being labelled Qualified.
This category of audit opinion is generally found to be offered by the auditor in the audit report wherein it is supposed that the financial statements of the company are devoid of material misstatements. Further, this type of opinion is found to be awarded on the basis of company’s internal control mechanism. However, to acquire such opinion the company management has to claim accountability ensuring sound & effective formation as well as preservation of such internal control mechanism. Moreover, it is the responsibility of the auditor to examine & analyze the productivity and success of the company’s internal controls before giving unqualified opinion (Amin & Harris, 2015).
This category of audit opinion generally signifies that the company’s financial data & records do not conform to the provisions of GAAP. It also assumes that the financial records of the company have been fabricated at its highest level (Baldwin, 2010). Adverse opinion can therefore reflect serious frauds which in turn can hamper the growth & success of a company to a great extent. Hence, the entities with adverse audit opinion need to make immediate rectification of all financial statements & arrange for fresh audit of the same. Further, it is found that the different stakeholders of the company usually turn down financial statements that have been given adverse opinion (Niemi & Sundgren, 2012).
This category refers to a particular category of audit opinion wherein the auditor fails to finish the audit of the company because of inadequate financial data & lack of cooperation from the part of the company management (Brooks, 2014). Further, this type of opinion involves incomplete audit of financial statements of the company that do not comply with auditing standards.
a) Connor company has been depending on the bank overdraft to pay off its outstanding debts. It is clear from the details that the negative cash flow has disturbed the company and unable to arrange finances. This proved to be of immense difficulty because the credit crunch will disrupt the ability of the company to repay the overdraft. Therefore, in the present case study I would offer an adverse opinion because the financial statements of the company do not reflect its current financial position. Further, the result of operation and the changes in the financial position are also not considered. Moreover, the financial statements do not comply with GAAP (Cappelleto, 2010).
b) In this case study of the local company having a American Parent Company , I would offer an unqualified opinion to the local company because it has got no reservation concerning the financial statements &the financial statements can be presented in a fair manner in accordance with GAAP.
c)In this particular case, I would like to offer qualified opinion to The Victorian Manufacturing Company due to the fact that here the auditor has taken a exception standpoint i.e. expecting that the market value remained constant during last five years. As a result the financial statements of the company fail to present a fair view and are also inconsistent with the prevalent provisions of GAAP (Wang and Liu, 2014).
a) Internal control weaknesses in The Adel’s Company’s procedures can be mentioned as follows:-
i) The foreman manually writes the hourly rate of pay for new recruits in the corner of the same form prepared for income tax instalment declaration.
ii) The foreman verbally advises the payroll department of pay rate adjustments which has no documentary evidence.
iii) Each worker fills their name and notes in pencil their arrival & departure time on the timesheet. The writing in pencil may be illegible & can be erased easily if any changes required to be made to manipulate data intentionally.
iv) The box containing the timesheets of the new employees is kept near the factory door. It is certainly not a safe place to keep the box.
v) Two payroll clerks divide the card in alphabetical order between them that certainly results in unequal distribution.
vi) A statement of cheque details should be prepared and to be given to the foreman a with signature of foreman on the receiving of cheques in the copy of same statement. This will create proper evidence and helps in establishing a record (Brown et al,2014).
b) Test of control for each errors identified in part (a)
i) To test the first error of part (a) the hourly pay rate of the new recruits should be maintained by the foreman in a separate formal statement or sheet in writing & it should also be signed and dated by the foreman before it is given to payroll clerk as notice. It would help in maintaining records. Moreover, it will enable a sharp evaluation can be done when this method is used in operation.
ii) To test the second error, the foreman should produce similar document in writing to the payroll department duly dated and signed by him. It would certainly help to tally the data. Tallying will help in tracing any difficulties and will enable reconciliation (Heeler, 2009).
iii)To test the third error mentioned above, the employees should use pen instead of pencil for writing their names, arrival and departure time etc. The records would be then more legible &long lasting. Further, it can also help in preventing manipulations (Heeler, 2009).
iv) To test the fourth error, the box containing the timesheets submitted by the employees can be kept under the supervision of a responsible person to prevent mishandling.
v) To deal with the fifth error, the payroll clerks should divide the cards based on numbers and not alphabetically. That would ensure equal distribution of job and responsibility between them. This is to keep track of all the cheques delivered to the foreman. Having a strong assessment of the payment system is an important consideration and will enable to have a smooth progress. Moreover, the responsibility sharing will be more defined in nature (Nicolaescu, 2013).
Amin, K & Harris, E.E 2015, ‘Non-profit Stakeholder Response to Going-Concern Audit Opinions’, Journal of Accounting, Auditing & Finance, vol. 12, pp. 3016-352
Azim, M.I 2013, ‘Independent Auditors Report: Australian Trends from 1996 to 2010’, Journal of Modern Accounting and Auditing, vol. 9, no. 3, pp. 356.
Baldwin, S 2010, Doing a content audit or inventory, Pearson Press.
Brooks, M 2014, Essays examining the association between going concern audit opinions, subsequent earnings management and engagement office audit and reporting quality, Texas University
Brown, L.H., Mason, S. & Shelton, S 2014, The effect of reliance on third-party specialists under varying levels of internal control effectiveness on the audit of fair value measurements, Working paper, Rutgers, The State University of New Jersey.
Cappelleto, G. 2010, Challenges Facing Accounting Education in Australia, AFAANZ, Melbourne
Gilbert, W. Joseph J & Terry J. E 2005, The Use of Control Self-Assessment by Independent Auditors, The CPA Journal, vol.3, pp. 66-92
Heeler, D 2009, Audit Principles, Risk Assessment & Effective Reporting, Pearson Press
Nicolaescu, E., 2013, ‘ Understanding Risk Factors for Weaknesses in Internal Controls over Financial Reporting’, Psychosociological Issues in Human Resource Management, vol. 1, no. 3, pp.38-44.
Niemi, L. & Sundgren, S 2012, ‘Are modified audit opinions related to the availability of credit? Evidence from Finnish SMEs’, European Accounting Review, vol. 21, no. 4, pp.767-796.
Sanderson, J 2013, Audit issues, SMSF Guide: Current Issues and Strategies for the Self-Managed Superannuation Funds Adviser, Oxford Press
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