AB & Co chartered accountant have been requested by their client XYZ Ltd. not to confirm accounts receivables because of concerns about creasing conflicts with customers over amounts owed. The auditors were satisfied concerning receivables after applying alternative audit procedures AB & Co.’s auditors report likely contained

 Options:

a) Qualified opinion b) Disclaimer of opinion c) Unqualified I opinion with an explanatory paragraph d) Unqualified opinion

The Correct Answer Is:

c) Unqualified I opinion with an explanatory paragraph

Correct Answer Explanation: c) Unqualified I opinion with an explanatory paragraph

When AB & Co., the chartered accountants, were requested by their client XYZ Ltd. not to confirm accounts receivables due to concerns about potential conflicts with customers over amounts owed, they had to resort to alternative audit procedures to verify the receivables.

This action taken by the auditors does affect their report, but it doesn’t necessarily lead to a qualified opinion or a disclaimer of opinion. Let’s break down why the correct answer is an unqualified opinion with an explanatory paragraph and why the other options wouldn’t be suitable.

An unqualified opinion is issued when the financial statements are free from material misstatements and are in accordance with the applicable financial reporting framework.

However, when there is a departure from the standard audit procedures or there’s a limitation in obtaining sufficient appropriate audit evidence, auditors may include an explanatory paragraph to provide additional context and clarity in their report.

In this scenario, AB & Co. were satisfied concerning receivables but had to use alternative procedures due to the client’s request. This deviation from the normal audit process doesn’t necessarily indicate any misstatement or discrepancy in the financial records of XYZ Ltd. As a result, an unqualified opinion with an explanatory paragraph is appropriate.

The explanatory paragraph would clarify the reason for not confirming accounts receivables and highlight that the alternative procedures were applied, ensuring transparency in the audit process.

Now, let’s explore why the other options wouldn’t be the likely outcome:

a) Qualified opinion:

A qualified opinion is issued when the auditors have identified certain issues in the financial statements that are material but not pervasive enough to warrant a disclaimer of opinion.

In this case, the auditors were satisfied with their alternative procedures, so there’s no indication of material misstatement in the financial records that would lead to a qualified opinion.

b) Disclaimer of opinion:

A disclaimer of opinion occurs when the auditors cannot form an opinion on the financial statements due to significant limitations or lack of evidence.

Here, although AB & Co. couldn’t confirm accounts receivables due to client constraints, they were able to conduct alternative procedures and were satisfied with their findings. This doesn’t imply a complete inability to form an opinion, hence a disclaimer of opinion wouldn’t be appropriate.

d) Unqualified opinion:

An unqualified opinion signifies that the financial statements are free from material misstatements and are in compliance with the reporting framework.

However, in this case, while the financial statements might not have any apparent misstatements, the deviation from standard audit procedures requires an explanatory paragraph to provide context and transparency.

Therefore, an unqualified opinion without an explanatory paragraph would not fully address the deviation in the audit process.

In summary, the most suitable option considering the circumstances would be an unqualified opinion with an explanatory paragraph. This allows for transparency in the audit report by explaining the deviation from standard procedures while affirming the overall accuracy and compliance of the financial statements.

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