External Audit: Factors Forming an Opinion on the Financial Statements
Risk-based there are Requirements of UK versions of ISA 700/705/706 in the auditing of Home Retail Group plc financial statements (The Auditing Practices Board, 2011).
The final report on financial statements should have a clear explanation of opinion and must be based on evaluation and conclusion should be drawn from evidence obtained thereof; Financial statements are free from misstatement, misstatement is individual or total, financial statements give a true and fair view and financial statements have been prepared by the relevant internationally recognized accounting standards (The Auditing Practices Board, 2011).
My auditing team is required to evaluate if Home Retail Group plc financial statements describe relevant financial reporting standards, disclose significant accounting policies selected and applied, and are consistent with reporting framework in appropriate circumstances (Helmkamp et al, 1986). I will also evaluate if the accounting statements are reasonable, the information presented is relevant, understandable, and comparable. Furthermore, the statements must disclose sufficiently for users to understand the resulting reaction to the information and the terms used are appropriate (The Auditing Practices Board, 2011).
We will express an unqualified opinion on Home Retail Group plc financial statements after concluding that they were prepared concerning the laid down financial frameworks which are applicable by law (The Auditing Practices Board, 2011). Finally, we will express an unqualified opinion on Home Retail Group plc’s financial statement is the true and fair view after concluding that they were prepared according to the laid down framework which is applicable by law (Gray, Manson, 2008).
Findings from audits conducted on financial statements can influence the opinion to be given for Home Retail Group plc. We will give varied opinions based on financial variables found in financial statements. Liquidity of the company finances, solvency, and profitability can influence varied opinions of Home Retail Group plc. Other aspects such as operating capital, cash flow rights, and investment earnings would help auditing personnel to draw a qualified or unqualified opinion after Home Retail Group plc financial statements have been audited.
The earnings of Home Retail Group plc management might have undue influence on auditors into making an opinion Home Retail Group plc. The unqualified opinion would still be given if all the financial statements are in agreement and management influence might not be of great influence (Hasnah et al. 2009). Where financial transactions are disclosed but not documented, the management has to give their assertions which would influence the final opinion.
If there is a likelihood of a qualified or disclaimer opinion, management may want to influence auditors to hide the reality of the company’s financial statements. Management of Companies with bigger earnings may want to influence the opinion of auditors depending on the possible outcome. For Home Retail Group plc, management might exercise discretion and adjust opinion materially downwards (Francis and Krishnan, 1999). This would happen when there is more evidence pointing problem’s ongoing concern.
Audit opinion will face likely influence from sections of ownership or stock owners. Since Home Retail Group plc has many shareholders, a section or all would want the audit opinion to be skewed towards a certain direction based on the intention. It would be possible that the stock owners would want to portray the company as making either losses or profit contrary to the real situation (Hasnah et al. 2009). An audited financial report may be used to secure credit or file returns. This would jeopardize our independence (Cosserat. G.W, Rodda, N, 2009).
As for Home Retail Group plc, I would give an unqualified opinion based on the evidence obtained (Sukhraj, 2010). This is because although several problems are affecting going concern reasonable assertions from the management have been obtained. Sales have dropped as a result of challenging and competitive times. Operating profits and net cash too have reduced in the previous years as a result of the expansion of stores. Value price of shares has gone down and benchmark pre-tax return on capital reduced in the year 2011 but this is accompanied with the high dividend to the shareholders. All these financial statements are agreeable and reasonable (Messier et al. 2010).
Cosserat, W & Rodda, N 2009, Modern Auditing Third Edition Wiley and Sons Ltd.
Francis, J & Krishnan, J 1999, Accounting accruals and auditor reporting conservatism. Contemporary Accounting Research 16, 135–165.
Gray, I & Manson, S 2008, The Audit Process. 4th edn, Thomson, London.
Hasnah, H, Bambang, Hi, Mahfooz, A, and Ishak, I. 2009. ‘Factors Influencing Auditors’ Going Concern Opinion’, Asian Academy of Management Journal, vol. 14 no. 1, pp.1–19.
Helmkamp, J, Imdieke, F & Smith, R, 1986, Principles of Accounting, John Wiley & Sons, New York.
Messier Jr., Eilifsen, Glover & Prawitt 2010. Auditing and Assurance. Services Second International Edition, McGraw Hill.
Sukhraj, P. 2010, ‘The elephant in the room’, Accountancy, August, pp. 24-26.
The Auditing Practices Board. 2011. International Standard on Auditing (UK and Ireland): The Auditor’s Report on Financial Statements.