We have a client that is unable to provide us with information relating to some large contracts and the recoverability of a debtor balance. What are the implications for our audit work and audit report?

The implications can be wide-ranging, depending on the specifics. The following considerations are key. 

• Are the balances related to the contracts and the debtor material only, or both material and pervasive? 
• Is this limit on the availability of information out of the hands of the directors, or is there a management-imposed limitation of scope? 

The first step would be to identify all the balances related to these accounts. 

If the balances are material only, this will likely lead to a limitation of scope qualification in your audit report if you are able to provide an opinion on the rest of the accounts, except for these balances. 

If the balances are material and pervasive, it is more likely that the limitation is going to lead to a disclaimer of your opinion.

ISA 705 para 5 states that pervasive effects on the financial statements are those that, in the auditor’s judgement:

1. are not confined to specific elements, accounts or items of the financial statements;
2. if so confined, represent or could represent a substantial proportion of the financial statements; or
3. in relation to disclosures, are fundamental to users’ understanding of the financial statements. 

This is where a consideration of whether there is a management-imposed limitation is key, because ISA 705 para 13 states that if management is limiting the work of the auditor in a way that will lead to a disclaimer, the auditor should withdraw from the audit if practicable and possible. 

We would only continue and issue that disclaimer if withdrawal is not appropriate, for example, if a majority of the audit work had already been completed and the upcoming financial statements filing deadline meant that a newly appointed auditor could not reasonably expect to be able to complete the work in the relevant timeframe.

Should the auditor continue and not withdraw from the audit then they would need to consider the impact of this management-imposed limitation on the other risks identified, such as fraud risk. Does this limitation call into question the integrity of management and those charged with governance? Are there perhaps other instances of incomplete books and records that have not yet been detected? 

The auditor would want to consider and document any additional or heightened risks and perform additional audit procedures as required to address these risks.

In all cases, the auditor needs to make efforts to have the limitation removed, or to find other ways to obtain sufficient appropriate audit evidence. The auditor will be documenting these efforts on their file, to support their decision that either a qualification or a disclaimer of opinion was the appropriate route. 

Key links

Audit reports – modified opinions, emphasis of matter and other matter paragraphs

Preparing an audit report with a disclaimer of opinion

If we know early in an audit that we will have to disclaim our opinion, can we simply cease work at that point? We are already disclaiming so it doesn’t feel like further audit work is really adding any value.

It would be very difficult for an auditor to defend an incomplete audit file regardless of the nature of the opinion issued. 

It may be a material and pervasive issue which is leading to that disclaimer, but without completing the rest of the audit work on those financial statements the auditor cannot be comfortable whether there are further errors that would require correction or attention or indeed a qualification that should be disclosed.

We are carrying out an audit of invoices prior to a grant claim being submitted and we have come across some manipulated invoices. Do we have any reporting obligations? Can we carry on with the engagement or do we need to resign?

You may have reporting obligations under the Money Laundering Regulations. 

The requirement to submit a suspicious activity report kicks in where you have information that comes to you in the ordinary course of your business that gives you a reasonable suspicion of a crime with proceeds. 

To have a crime, something must have already happened. If the claim has not been submitted and any erroneous invoices are removed prior to submission, there is an argument that no crime has been committed at this point, so on the face of it there would be no reporting obligation at this time. 

As this is a complex area, it is well worth calling ICAEW’s Technical Advisory Service to speak to an anti-money laundering adviser on an anonymous basis. 

In terms of your work, the firm would need to assess whether it can effectively continue with the engagement. Has trust and confidence been damaged to such an extent that you cannot continue? You would need to assess the risk that there had been further manipulation or that other data had been falsified or hidden. 

It would however be worth revisiting the assessed risk of fraud under ISA 240 and re-assessing work programmes in order to address this heightened fraud risk and ensure sufficient appropriate evidence is obtained and documented.

If you feel you can continue, you will be able to distance yourself from any misleading information, because you would be able to qualify your report if full corrections were not made. 

If you do decide that you do need to resign, be honest but brief with the client, and remain conscious of what you can and cannot say without falling foul of tipping off. 

Equally, apply these considerations when replying to any future professional enquiry that you receive. State something brief and factual. Perhaps a “breakdown in trust and confidence” or “a lack of information over certain invoices to be included in the claim”. 

If the audited entity is a charity, you may have additional reporting obligations to charity regulators. Reportable matters of material significance include dishonesty or fraud, and money laundering.

Key links

Anti-money laundering tipping off

Change of professional appointment - outgoing accountant

Matters of Material Significance reportable to UK charity regulators – guidance for auditors and independent examiners