Introduction
Every auditor should express his opinion after auditing company financial statement. The audit opinion expressed depends on findings obtained in the audit process. There are four types of opinions which can be expressed by an auditor. They include express unqualified opinion, unqualified report with explanatory paragraph, qualified opinion, or even an adverse opinion. The opinion selected depends on how a company has: abided by GAAPS, material misstatement of value of assets and whether the scope of audit has been limited. In carrying out of audit both the auditor and the management are expected to observe some ethics to ensure the success of audit process.
Part one
Auditors are required to give their opinion in regard to whether financial statements audited were prepared in accordance to generally accepted accounting principles and whether the principles were consistently applied. It’s the GAAPS which form basis of determining whether the financial statements reflect true and fair financial position of a company. The auditor can express unqualified opinion, unqualified report with explanatory paragraph, qualified opinion, or even an adverse opinion (Jeffrey, 2007).
Auditors expresses unqualified opinion if the audit process reveals that, companies financial statement provided by the management reflect a true and fair view of the company’s financial position. This opinion is issued when the audited financial statement do not have any material misstatement. The opinion therefore indicates that, financial statements have been prepared according to GAAPS and the GAAPS were applied consistently, the statements are in compliance with relevant state laws, the company has effective internal controls, all material matters which can affect the company financial position have been disclosed, and changes from one accounting principle to another and its effects have been determined and disclosed (Jeffrey, 2007).
Unqualified report with explanatory paragraph is almost the same as that of unqualified report however; a paragraph is added before opinion paragraph. This paragraph indicates inconsistency in application of GAAPS, and states any uncertainty that may materially impact company’s financial statements.
Qualified opinion is expressed in case were the auditor has encountered cases where preparation of financial statements was against GAAPS. It is also expressed in case of limited scope i.e. the auditor could not audit some areas of financial statement. The limitation of scope could probably be as a result of management interference or any issue beyond auditor’s control.
Adverse opinion is expressed in case financial statements are materially misstated and GAAPS have not been followed in preparation of the financial statements. Therefore, it states that the statements are incorrect, inaccurate, and unreliable. The auditor can also express a disclaimer opinion when he auditor finds it impossible to form any opinion in regard to the company’s financial statement. This opinion is appropriate when auditor finds material uncertainties within the company, or doubts about going concern of the company, or the company management hindered the auditor’s work in either obtaining evidence or performing procedures, or material conflict of interests in carrying out the audit fairly (Bruynseels, 2006).
Part 2
The client’s refusal to procure an audit of internal controls is a violation of Sarbanes-Oxley. This is because the act requires companies to allow the auditing of its internal controls in the same time when external auditors are auditing financial statements. This is because the effectiveness of internal controls influences auditors in expressing their audit opinion. In addition, past opinions may not necessarily influence the present opinion expressed by an auditor (Jeffrey, 2007).
Part 3
A qualified report should be expressed in this case. This is because the client did not apply GAAPS in accounting of an asset (stock) which forms substantial share of the company asset base. The company failed to give a concrete reason for changing from LIFO to FIFO. Finally, the auditor’s scope was limited because he was disallowed to audit the company’s internal controls just because of previous reputation of the company. The change of the stock policy from LIFO to FIFO could have adversely affected both trading profit and loss account and the balance sheet. Therefore, it is likely that the financial statements were materially influenced and this could negatively affect the users of financial statements in making decision regarding the company (Jeffrey, 2007).
Part 4
There are several ethical issues involved in this case study. First and foremost, it is susceptible that ABC Corporation was in some way intimidating the auditor. This is because the management restricted auditing of its internal controls on basis of its company size and past reputation. This is unethical because it limited the scope of audit (Bruynseels, 2006).
It is also probable that the company management lacked adequate education on ethics. This is because it is ignorant to restrict the auditing of internal control on basis of firms past good reputation. It seems the management was not aware of ethics of auditing practices and how the benefit of cooperating with the auditor to enhance effective auditing process (Jeffrey, 2007).
Conclusion
The management failed to obey GAAPS in accounting for stock. This move materially altered both the income statement and statement of financial position. In addition, the management limited the scope of audit by restricting the auditing of company’s internal controls. This was substantial basis of expressing a qualified opinion. The restriction of auditing internal controls was against Sarbanes-Oxley and proved the unethical nature of the company’s management.
References
Bruynseels, L. (2006). Client strategic actions, going-concern audit opinions and audit reporting errors. Leuven: Katholieke Universiteit Leuven.
Jeffrey, C. (2007). Research on professional responsibility and ethics in accounting. Amsterdam: Elsevier JAI.
