On reviewing the published financial statements of RRK Limited, their auditors, Ahmad Mobeen and Company, Chartered Accountants, noted the following.
(i) It has been mentioned in the directors’ report 1hat a material amount which was provided as a bad debt had been recovered after year end.
(ii) Director’s report states that decline in sales, was due to general economic conditions. However, the auditors’ feel that it was due to inappropriate strategies adopted by the management.
(iii) A graph in the published report depicted the value of last year’s inventory at Rs. 326 million, which according to the correspondlng figures given in audited financial statements
amounted to Rs. 250 million.
(iv) Directors’ report stated that negotiations for expansion’ of production facilities by acquiring a sick unit had been finalized. whereas the auditors have definite information that the company could not strike the deal.
Explain how the auditor should resolve each of the above issues. What steps would the auditor need to take in case the client does not agree with his recommendations?
(i) Recovery of debt written off after year end is an adjusting even:
If the management does not revise financial statements, report will be qualified. If the information in the director’s report is incorrect, the management will be asked to correct directors report. If the directors; report is not corrected, the audit report will be modified by adding “another matter paragraph”.
(ii) There is no inconsistency between financial statements and the directors’ report. The audit report need not be modified.
(iii) If the graph is wrong and the management reuses to correct the graph ‘the audit report will be modified by adding “another matter paragraph”.
(iv) There is no inconsistency between financial statements and the directors’ report. The audit report need not be modified.