When is an audit not an audit? Answer: When the auditor signs off his audit report with a disclaimer of opinion.
A disclaimed opinion report says – because of limited evidence – that it is not possible to say whether financial statements give a true and fair view of the company’s affairs. The audit opinion is, in effect, that there is no audit opinion.
Although such a disclaimer is rare, last month the Auditing Practices Board (Accountancy Age, 19 November) took the unusual step of trying to outlaw disclaimer-of-opinion audit reports when the restriction which stopped the auditor doing his job has been imposed by the directors of the company.
It appears the Joint Monitoring Unit (JMU) has come across some publicly unidentified auditors whom, it is alleged, have a habit of signing off on off-shore companies without doing an audit.
These companies give their auditors draft accounts and tell them there will be no more information forthcoming. If you can’t get backing documentation, you can’t do an audit. If you can’t do an audit you can’t form an opinion.
The auditors of these companies are conniving with the directors in a cynical wheeze which circumvents the legal and regulatory framework.
The JMU deserves praise for spotting the wheeze as does the APB for acting on the tip-off.
Previous guidance discouraged auditors from taking on, or continuing, an assignment when they knew they would not be allowed to do a proper job, but now it is being spelt out.
The draft Statement of Auditing Standards: ‘Imposed limitation of audit scope’ – when it comes into force – should crackdown on the abuse. If the auditors aren’t given access to the underlying records, then they resign. In theory, the company should find it impossible to hire a replacement who will do the work knowing the restrictions. No doubt the JMU will be following up the cases that it is aware of to see that the SAS is followed to the letter.
There is no public record of how many of these director-imposed limited-scope audits there are, or whether they have increased in the past few years. But it seems likely that they are confined to a small number of audit firms that have found a lucrative income stream in signing disclaimer opinions.
True, the fees aren’t as high as for conducting a proper audit, but for the amount of work involved – no more than adding up the figures and obtaining a letter of representation from the directors – it is probably a nice little source of income. And one, quite rightly, that should soon dry up.
Peter Williams, chartered accountant, is editor of the newsletter Electronic Finance
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