We were appointed as auditors after the year end and therefore we did not attend the inventory count. Inventory is around 75% of the company’s assets, so we think the issue is pervasive and therefore we are anticipating a disclaimer of opinion. In that case, do we have to perform any audit work at all?

First, you should consider other procedures that may be performed to gain sufficient appropriate audit evidence over inventory, despite you not being able to attend the inventory count. You would not simply modify the audit report without looking at the possibility of alternative evidence. Perhaps you could attend an inventory count now, and roll back the figures? Or if the client has a continuous inventory system, could you test the controls around that system and place some reliance on that?

However, if the level of evidence you can obtain is not sufficient to give you comfort over the inventory position, you will need to consider the impact on your audit report which may involve disclaiming your opinion. 

Knowing you plan on issuing a disclaimer of opinion as a result of inventory being material and pervasive, even though this represents 75% of the company’s assets, does not mean that no further audit work needs to be performed on the rest of the financial statements.

When you disclaim your opinion, you are required to give details as to why you are doing so, as part of the basis for the disclaimer of opinion. We would expect this to include some mention of both inventory closing balance and also cost of sales. Here you would include any other modifications that would have been in your audit opinion.

Although you plan to issue a disclaimer of opinion, you should complete the remaining audit work as far as possible. That’s because you need to obtain as much audit evidence as you can over the financial statements, and so that you can identify any other modifications or limitations that would have been in your opinion. That said, it will still need to be clear in the disclaimer of opinion that you are not providing any assurance over the financial statements. 

Key link

Preparing an audit report with a disclaimer of opinion

This question and answer first appeared in July 2023

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 an 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 (ie, 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.

Para 6, ISA (UK) 510 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. 

This question and answer first appeared in March 2024

We have been approached by a company to perform its audit. It has received a letter from Companies House saying that if accounts are not filed within a week, it will start the process to strike the company off. The accounts are more than two years overdue and filing extensions have already been provided.

Can we file an audit opinion with a disclaimer of opinion, then revise the audit opinion and refile the financial statements later?

Issuing a disclaimer of opinion is a position of last resort; you need to show that you have done everything possible to be able to issue an opinion. This is not the case here. 

Equally, the route to filing revised accounts under s454 of Companies Act 2006 can be used where the accounts did not comply with the law. This would also not be the case here.

You need to consider if you have preconditions for audit (per ISA 210 para 6&7).

There is a strong argument that this is a management-imposed limitation of scope because they are not providing you with enough time to perform the audit. Even though this latest deadline has been set by Companies House, management have delayed appointing an auditor, which has meant the timeframe is severely restricted. As you are anticipating a disclaimer of opinion, you should not accept the audit (per ISA 210 para 7).

This question and answer appeared in March 2023