(d) Discuss the issue and describe the impact on the auditor’s report, if any, should this issue remain unresolved.
(5 marks)
(20 marks)
(d) Auditor's report
The financial statements contain a provision for legal claims of $0.5m, however, audit work has identified that the provision should be $0.8m. Hence the provision is understated and profits overstated by $0.3m. The argument that the provision is a reasonable estimate is not valid.
The error of $0.3m represents 7.3% of profit before tax(0.3m/4.1m) and hence is a material matter.
If the finance director refuses to increase the provision, the audit opinion will be modified due to a material misstatement. As provisions are understated and the error is material but not pervasive, a qualified opinion would be necessary.
A basis for qualified opinion paragraph would be needed subsequent to the opinion paragraph and would explain the material misstatement in relation to the understated provision for the legal claims and the effect on the financial statements. The opinion paragraph would be qualified 'except for'.
