We have been re-appointed auditors very close to a client’s filing deadline. The client would like to file accounts on time and is therefore happy to accept a qualified audit report for filing purposes. Can we then complete the audit and then re-file with an amended audit opinion once we have had sufficient time to complete the audit work?

In short, this would not be an appropriate course of action.

ISA (UK) 700 para 6 states that the objectives of the auditor are to form an opinion on the financial statements based on an evaluation of the conclusions drawn from the audit evidence obtained and to clearly express that opinion through a written report.

In forming that opinion, para 11 states that the auditor shall conclude whether they have obtained reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. That conclusion shall take into account the auditor’s conclusion, in accordance with ISA (UK) 330, on whether sufficient appropriate audit evidence has been obtained.

ISA (UK) 330 para 27 requires that where the auditor has not obtained sufficient appropriate audit evidence related to a relevant assertion about a class of transactions, account balance or disclosure, the auditor shall attempt to obtain further audit evidence. If the auditor is unable to obtain sufficient audit evidence the auditor shall express a qualified opinion or disclaim an opinion.

These ISAs therefore show that audit evidence needs to be obtained wherever possible and not attempting to obtain such evidence before issuing an audit opinion would not satisfy this requirement.

Further to the ISA requirements, there are limited mechanisms for re-issuing and re-filing an entity’s financial statements, the main one being that those previously filed financial statements are defective, as they fail to comply with company law.

The defective accounts regime as detailed in s454 of CA2006 is a voluntary regime available to directors to correct non-compliance with the CA2006 in the company’s annual accounts, the directors’ report, the strategic report and directors’ remuneration report (where presented). As the audit report is not one of the items listed that can be corrected, the option to re-prepare and re-file amended financial statements under the defective accounts regime would not be available as a mechanism to change the originally issued audit report.

In addition to the re-filing of accounts not being an available option, the suggested approach could not be accepted by auditors because ISA (UK) 210 para 7 states that an auditor shall not accept an engagement where the directors have limited the scope of the engagement such that the auditor considers, from the outset, that they will need to disclaim their opinion as a result of a management-imposed limitation of scope.

Directors are required to comply with their directors’ duties under company law and knowingly approving defective accounts would be an offence under the Companies Act 2006 (CA2006 s414). Directors may wish to seek legal advice on this matter before taking any further action.

We are trying to accept a new audit appointment, but the previous auditors are refusing to resign until the client pays their overrun fees. What can we do? Are they allowed to refuse resignation?

As the incoming auditor, there is no real action you can take here because the disagreement is one that your prospective client and its outgoing auditor need to resolve.

However, it may well be that the outgoing auditors ceasing to hold office does not amount to a resignation if the client has appointed new auditors within the period for appointing auditors (CA2006 s485). In this instance no official resignation or section 519 statement are required from the outgoing auditor and there is nothing preventing you as incoming auditor from starting the process of accepting the engagement, sending a professional enquiry letter and issuing engagement letters.

Care should be taken though, as deemed reappointment may apply and should therefore be considered. ICAEW’s Auditor resignation – Auditor responsibilities helpsheet may be useful. 

Auditors are under no obligation to resign their position, however the client company may be able to implement procedures under the CA2006 s510 to remove them from office. It is worth noting that this will not remove the auditors right to compensation or damages in respect of that appointment, so the dispute regarding overrun fees will not be resolved as a result of these procedures being implemented.

As incoming auditor, understanding the reasons for the overruns suffered by the outgoing auditor may be an opportunity to understand the audit risks and audit work that will be required to address those risks.

In the Financial Reporting Council’s Ethical Standard (ES) paras 4.1-4.4 indicate that the fees for an engagement should ordinarily reflect the time spent, the skills and expertise of the engagement team and the competitive situation in the market. The ES also requires that there are sufficient partners and staff with appropriate time and skill to perform the engagement and to ensure that the auditor’s independence is maintained. The overrun fees of the outgoing auditor could indicate that this audit engagement may be more complex than anticipated and that further time or staff may be required. 

We have an IFRS client holding material trade investments that are not held at fair value because of a restriction on public information due to an impending listing on a national securities exchange in the US. What type of modification should I be issuing?

The type of modification to an audit report will depend on the reason and particular circumstances surrounding the non-compliant accounting treatment.

Where the client is unwilling to use the accounting treatment as prescribed by the relevant accounting standards or there is a disagreement about the correct accounting treatment for a transaction, account balance or disclosure, this may lead to either an adverse or qualified opinion, subject to whether the auditor considers the issue to be pervasive or not pervasive – ISA (UK) 705.

However, in this case, it would appear there is no disagreement on the accounting treatment but instead, the information needed to apply that accounting treatment is simply not available or has not been provided to the auditor. If this is the case then we may instead be considering this a limitation on the scope of the audit, which would lead to either a disclaimer of opinion or qualified opinion, again, subject to whether the auditor considers the issue to be pervasive or not pervasive – ISA (UK) 705.

ISA (UK) 330 para 27 requires that where the auditor has not obtained sufficient appropriate audit evidence, the auditor shall attempt to obtain further audit evidence. It could be explored whether the client is able to prepare or obtain a valuation with data and information that is publicly available, perhaps through having a specialist valuation conducted. If all options are explored but the auditor is still unable to obtain audit evidence to conclude whether the trade investments are materially misstated or not, then this would be considered a limitation on the scope of the engagement rather than a disagreement over valuation or presentation.

For further guidance, ICAEW’s Audit reports – modified opinions, emphasis of matter and other matter paragraphs helpsheet may be useful.