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Mr. Omar a recently appointed as an audit partner at an audit firm RF & Co. Mr. Omar delighted that is now he is a
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Mr. Omar a recently appointed as an audit partner at an audit firm RF & Co. Mr. Omar delighted that is now he is a partner and cannot wait to sign off for first set of accounts. The firm recently won an audit tender for a medium-sized family owned company, Alternate Ltd, and the firm's managing partner has allocated the client to you. The managing partner is reasonably close to the family, which owns Alternate Ltd. and Mr. Omar believe that this is at least part of the reason why the company decided to appoint RF & Co. As is normal, Mr. Omar go through all the firm's new client procedures, which include writing to the previous auditors and obtaining sets of statutory accounts for the previous 3 years. When he receive the written reply from the previous auditors, he note that they have nothing to report other than any matters addressed in their audit report. This seems strange, so he quickly review the company's set of financial statements for the previous year and note that the company's audit report was qualified on the basis of non-compliance with an accounting standard. The audit report highlights that the company owns a property and advises that the directors, on cost grounds, decided not to have an FRS 16 valuation performed. The audit opinion adds that the auditor is unable to quantify the impact of this non-compliance with FRS 16. Mr. Omar wish that he had access to the working papers of the predecessor auditors but the relevant audit regulation was not applicable at this time. Mr Omar are considering the impact of this issue when Mr. Murad, the Managing Partner, comes into office. He provides Mr. Omar with an oral briefing on Alternate Ltd. and then asks him whether he have any queries. Mr. Omar inform Mr. Murad what have he found. Mr. Murad replies: "I do not see any problems; if the client does not believe that it is worth paying for this information then who are we to tell them otherwise: it is a family business after all. If we have to, we can adopt the same approach as the previous auditors and qualify the audit report on the same grounds." That is when Mr. Omar inform Mr. Murad that have doubts as to whether the audit qualification issued was appropriate in the circumstances. The previous auditors issued an "except for - disagreement with accounting treatment - due to non-compliance with an accounting standard" and he believe that a "limitation of scope" opinion may have been more appropriate. Mr. Omar not sure but surmise that this may be because of the requirement that if a client places a limitation of scope on the work of the auditors which will require the auditor to issue a disclaimer of opinion, in advance of the auditors accepting that appointment, then unless the restriction is removed, the auditor should not continue in office for that particular client. Mr. Murad replies that Mr. Omar should go ahead and reassess the position once team has completed the audit fieldwork. However, he adds: "Bear in mind that although the Managing Director (MD), is an acquaintance it has taken me a number of years to get him to use our firm as auditors - I do not want to do anything that would upset him unnecessarily and jeopardise our business relationship." after taking account of the proposed audit adjustments. However, he notice that the directors have once again refused to obtain an FRS 16 valuation and therefore no gain or loss on revaluation is reflected in the accounts. Mr. Omar realise that the lack of an FRS 16 valuation will mean that he will have to qualify his first audit opinion. Whilst this concerns, what really worries is the type of qualification that will be required i.e. a limitation of scope. If the extent of this limitation leads him to issue a disclaimer of opinion, then firm would not be able to act for this client going forward unless the client changes its stance on obtaining FRS 16 valuations. Mr. Murad will be furious if Mr. Omar adopt this approach. Help Mr. Omar to perform his duties as an auditor in conjunction this case. Support your answer with the related section and cases
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