The auditor has serious concern about the going concern of the company. It is dependent on company’s obtaining a working capital loan from a bank which has been applied for. The management of the company has made full disclosure of these facts in the notes to the balance sheet. The auditor is satisfied with the level of disclosure. He should issue_

 Options:

a) unqualified opinion b) unqualified opinion with reference to notes to the accounts c) qualified opinion d) disclaimer of opinion

The Correct Answer Is:

b) unqualified opinion with reference to notes to the accounts

In this scenario, the auditor has identified a significant issue regarding the company’s going concern specifically, its dependence on obtaining a working capital loan from a bank. However, the management has made full disclosure of these facts in the notes to the balance sheet.

Let’s delve into why the correct answer is an unqualified opinion with reference to notes to the accounts (option b) and why the other options are not the most suitable in this case.

Why Option B (Unqualified Opinion with Reference to Notes to the Accounts) is Correct:

An unqualified opinion implies that the financial statements present a true and fair view of the company’s financial position and comply with accounting standards. However, the auditor needs to draw attention to a matter that is adequately disclosed in the notes to the accounts.

Here’s why this option is the most fitting:

• Disclosure in Notes to the Accounts: The management has provided full disclosure of the dependence on the working capital loan in the notes to the balance sheet. This is crucial because it ensures transparency and informs stakeholders about the company’s reliance on external financing.
• Satisfaction of Disclosure: The auditor is satisfied with the level of disclosure made by the management. This implies that despite the concern regarding the company’s going concern, the auditor believes that the notes sufficiently inform users of the financial statements about this situation.
• No Modification to the Opinion: An unqualified opinion allows the auditor to express confidence in the financial statements’ accuracy and compliance. However, it necessitates referencing the notes to ensure users are aware of material information affecting the company’s operations.

Why Other Options Are Not Correct:

a) Unqualified Opinion Without Reference to Notes:

This option implies issuing an unqualified opinion without any reference or emphasis on the notes to the financial statements.

The concern regarding the company’s going concern, hinging on the working capital loan, is a significant issue. Ignoring the disclosure in the notes would fail to inform stakeholders about this crucial aspect.

Stakeholders who rely solely on the financial statements without reviewing the notes may not be adequately informed about the potential risks associated with the company’s reliance on the loan. Hence, this option might mislead users about the true financial situation.

c) Qualified Opinion:

A qualified opinion is issued when the auditor agrees with the financial statements overall, but there is a specific issue that doesn’t comply with accounting standards or adequate disclosure.

In this scenario, the management has made full disclosure of the company’s dependence on the working capital loan in the notes to the balance sheet.

The auditor is satisfied with the level of disclosure provided. Thus, there isn’t any discrepancy or non-compliance in the financial statements that would warrant a qualification.

d) Disclaimer of Opinion:

A disclaimer of opinion is the most severe form of expressing uncertainty. It implies that the auditor cannot form an opinion on the financial statements due to insufficient information or scope limitations.

However, in this scenario, the auditor has been provided with all necessary information and is satisfied with the level of disclosure made by the management in the notes to the accounts.

Issuing a disclaimer would be excessive and inappropriate, as it would imply a lack of ability to form an opinion despite the available information.

The critical factor here is that while there is a concern about the company’s going concern due to its dependency on the working capital loan, the management has transparently disclosed this in the notes to the financial statements.

The auditor, being satisfied with this disclosure, can issue an unqualified opinion but should emphasize referencing the notes to ensure stakeholders are aware of this crucial aspect impacting the company’s operations.

The aim is to strike a balance between acknowledging the concern and maintaining transparency for stakeholders, which an unqualified opinion with reference to the notes accomplishes effectively.

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