If we are unable to physically attend a stocktake for an entity being audited, do we need to qualify the audit report?

Where inventory is material to an entity, ISA (UK) 501 tells us that the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by attending a physical inventory counting, unless impracticable. The ISA gives examples of factors that would be considered impracticable, however, in line with ISA (UK) 200, it is made clear that the matter of general inconvenience, difficulty, time or cost to the auditor are not considered impracticable factors. 

ISA (UK) 501 does allow physical inventory counts to be conducted at a date other than the financial statements reporting date. Where this option is taken, the auditor will need to perform additional audit procedures to obtain sufficient appropriate audit evidence about whether changes in inventory between the count date and the reporting date are properly recorded. This approach is likely more appropriate for those clients with lower volume, slower moving stock and is likely to be more reliable if there is no significant time between such a count date and the period end date. If this is used for higher volume, faster moving stock then the auditor’s evidence on operating and effectiveness of controls is likely to need to be more significant.

Auditors need to be mindful of the requirements of ISA (UK) 220 and the need to ensure that there are sufficient and appropriate resources, such as sufficient staff to attend a stocktake or sufficient geographical cover, to perform the engagement. If such resources are not available, the engagement partner needs to take appropriate action, including withdrawing from the audit engagement where additional or alternative resources are not available.

If attendance at the physical inventory count is determined to be impracticable or not possible due to unforeseen circumstances, then the auditor will need to consider whether alternative sufficient appropriate audit evidence is available. If it is not available, and inventory is material to the financial statements, then this may result in a limitation of scope in the audit report that recurs for multiple reporting periods.

Guidance on the potential impact on the audit report in the year of non-attendance, as well as the impact on the audit reports for the second and third years can be found in the ICAEW Know-How Guide Limitation on the scope of the audit. 

I have been asked to audit a set of revised accounts. Is this possible, and what do I need to be aware of?

In accordance with UK company law, directors are permitted to revise their financial statements where the financial statements previously prepared were defective and not compliant with the requirements of the Companies Act 2006 and relevant accounting standards.

Non-compliance in the accounts, the directors’ report (or directors’ remuneration report) or the strategic report could all be addressed through these provisions.

An audit report for revised accounts has a number of changes that are summarised in the ICAEW guide: Audit report on defective financial statements. One of the key changes is the requirement for the auditor to express an opinion on whether the revisions made by the directors are appropriate and have been properly made.

Where the original accounts included a material misstatement and were audited, the revised accounts will need an audit report. The auditor will need to perform work to ensure that they have sufficient appropriate audit evidence to support their conclusion that the revisions made by the directors are appropriate and have been properly made. Guidance from the FRC sets out the procedures that the auditor shall perform.

It is important to note that the audit report on the revised accounts gives an opinion on whether, at the date the original financial statements were approved, they presented a true and fair view. Events that have taken place between this date and the date of signing the revised audit report are not considered in this instance and should not be reflected in the financial statements.

The revised audit report must be dated on the actual date it is signed, not the date of approval of the original financial statements or the date of the original audit report.

Auditors may also want to consider alerting their provider of professional indemnity insurance to the fact that an audit report has been issued on non-compliant financial statements. 

It is also encouraged for the auditor to engage with management, to understand how management plans to communicate the revision of the financial statements to known users of the accounts, particularly those that may have been provided with a copy of the original, non-compliant financial statements.

It is also worth taking time to understand how the original error was missed, and then considering whether planned audit approaches for other engagements need to be revised to address similar risks.

Additional key links

• Defective accounts and reports
• FRC Bulletin: Auditor’s Reports on Revised Accounts and Reports in the United Kingdom

We’ve just been appointed as auditor. The previous year’s accounts were not audited. Do we need to audit the opening balances?

ISA (UK) 510 sets out the work the auditor needs to perform on opening balances in an initial audit engagement. An initial audit engagement is either an engagement where the comparative figures were unaudited, or an engagement where the comparative figures were audited by a predecessor auditor (an auditor from a different audit firm). 

It is important to note that the work performed by the auditor does not mean that an audit opinion is being issued on the comparative figures. Instead, the objective of ISA (UK) 510 is to obtain sufficient appropriate audit evidence about whether opening balances contain misstatements that materially affect the current period’s financial statements, and whether appropriate accounting policies reflected in the opening balances have been consistently applied in the current period’s financial statements.

ISA (UK) 510 paragraph 6 sets out the tests that an auditor must perform on opening balances.

If sufficient appropriate evidence cannot be obtained over one or more opening balances, then the auditor will need to consider if the impact is material, or material and pervasive. The audit report should be qualified with a limitation of scope (where the impact is material) or a disclaimer of opinion issued (where the impact is both material and pervasive).

An example of the form of a qualification on opening stock can be found in the appendix to the ICAEW Know-How Guide Limitation on the scope of the audit.

ISA (UK) 710 requires the auditor to include an ‘Other Matters’ paragraph in the auditor’s report that the comparative figures are unaudited. This statement doesn’t remove the requirement for the auditor to obtain sufficient appropriate audit evidence over the opening balances. There is no requirement for the auditor to explain why the comparative balances were unaudited.