Bludger Ltd's auditors were appointed after the end of the financial year and discovered that the company had also changed banks shortly after the year end. The directors refused permission for the auditors to contact the previous bankers for confirmation of the year end bank balance without giving any good reason. The total of net current assets was £1.2m of which the bank balance amounted to £123,000 overdrawn. Which of the following options should the auditors take when considering their audit report?

Not modified

Modified

‘Except for’ – limitation of audit scope

Except for – material disagreement

Disclaimer – pervasive limitation of audit scope

Adverse opinion – pervasive disagreement

Question

Bludger Ltd's auditors were appointed after the end of the financial year and discovered that the company had also changed banks shortly after the year end. The directors refused permission for the auditors to contact the previous bankers for confirmation of the year end bank balance without giving any good reason. The total of net current assets was £1.2m of which the bank balance amounted to £123,000 overdrawn.
Which of the following options should the auditors take when considering their audit report?

Not modified
Modified
‘Except for’ – limitation of audit scope
Except for – material disagreement
Disclaimer – pervasive limitation of audit scope
Adverse opinion – pervasive disagreement

Quizplus · Accepted Answer

The Answer is The report should be as clear and informative as possible to assist the shareholders in understanding the reasons for the qualification and its effects.
Wherever possible it should quantify the effect of the matter being qualified upon the financial statements.
Matters of significance which have arisen during the audit can be referred to in the 'Key Audit Matters section of the audit report. However in this case the refusal of the directors to allow the auditors to contact the bank is far too significant to be ignored or simply mentioned in passing so will result in a modified audit report.
In this case, assuming this is the only issue, there is no disagreement so the 'Except for' material disagreement and the Adverse opinion options aren't available to the auditor. Consequently this is a limitation of scope qualification.
The bank letter is used for more than simply verifying the bank balance - it is also used to request additional information from the bank regarding such matters as security for borrowings, overdraft limits, other bank accounts etc.
The auditors should be able to satisfy themselves as to the bank balance from other sources - principally a bank statement - so validating the Statement of Financial Position isn't a huge problem -even if the bank balance is material at 10% of net current assets - the problem for the auditors is what is not disclosed.
Accordingly the audit report will have to be modified for an 'except for' limitation of scope with a full explanation of the effect of the modification on the financial statements and the reasons for modifying the report.

Bludger Ltd's Auditors Were Appointed After the End of the Financial