A departure from recognized accounting principle is disclosed in a note to the financial statements. The auditor should
|a) issue a standard unqualified audit report|
b) issue a qualified report
c) issue an unqualified report with ‘emphasis of matter’ paragraph
d) disclaim opinion
The Correct Answer Is:
b) issue a qualified report
Departure from Recognized Accounting Principle and Auditor’s Reporting
When a departure from recognized accounting principles is identified and disclosed in a note to the financial statements, it signifies a significant deviation from the standard practices and procedures followed in financial reporting.
In such cases, the auditor’s role is crucial in ensuring transparency and providing an accurate assessment of the financial statements.
This response will detail why option (b) – issuing a qualified report – is the correct course of action, followed by explanations for why the other options are not appropriate.
Explanation of Correct Answer :b) issue a qualified report
Issuing a qualified report is the appropriate response when a departure from recognized accounting principles is disclosed in the financial statements. A qualified report indicates that the auditor believes the financial statements are fairly presented, with the exception of a specific issue.
In this case, the departure from recognized accounting principles would be highlighted as a qualification in the report.
The qualification serves to draw attention to the specific departure and informs users of the financial statements that there is an issue that needs to be taken into consideration when interpreting the information. It ensures transparency and helps users make informed decisions about the financial health and performance of the entity.
Explanation of the Incorrect Answers
Reasons why the other options are not correct:
a) Issue a standard unqualified audit report:
This option is not appropriate when a departure from recognized accounting principles is disclosed. Issuing an unqualified report would imply that the financial statements are presented fairly in all material respects, which is not the case when a departure from recognized accounting principles is identified.
Failing to address the departure would mislead users and compromise the integrity of the audit process.
c) Issue an unqualified report with an ’emphasis of matter’ paragraph:
While an emphasis of matter paragraph is used to draw attention to a specific matter in the financial statements, it is typically employed for situations where there is uncertainty or significant judgment involved, but not for departures from recognized accounting principles.
In this scenario, a departure constitutes a deviation from standard accounting practices, which necessitates a qualified report rather than an unqualified report with an emphasis of matter paragraph.
d) Disclaim opinion:
Disclaiming an opinion is appropriate when the auditor is unable to obtain sufficient evidence or encounters significant limitations that prevent them from forming an opinion on the financial statements. In the case of a departure from recognized accounting principles, there is no indication that the auditor is unable to form an opinion.
The departure is acknowledged, but it does not render the financial statements entirely unreliable. Therefore, a disclaimer of opinion is not warranted in this situation.
In conclusion, when a departure from recognized accounting principles is disclosed in the financial statements, the appropriate course of action for the auditor is to issue a qualified report. This ensures transparency and provides users with the necessary information to assess the impact of the departure on the financial statements.
The other options (a, c, and d) are not suitable in this context as they do not accurately address the specific situation at hand.