Discuss how a company’s stockholders (or potential stockholders) would use the information contained in an audit report produced from an independent accounting firm.
A stockholder in a company is one who owns shares in a company. Stockholders of companies would use the information contained in an audit report to demand access to corporation’s books and records. Hence, to analyze what is going on in the company financial base and its growth. The proper purpose for the stockholder is to view procedural requirements of the company and to help the company meet its goals through the procedural requirements. The individual stockholders do have the will to effect changes in overall company management via vote (Bragg, 2010).
The stockholders are the major part of checks and balances that keep the company or corporation turning a profit. The use of the audit report will keep them updated on what is happening within their corporation, and they have the obligation to lay down strategies to capitalize on profits and cater for viable losses. The other aspect is audit report helps them monitor liquid assets that will help in assessing the companies’ performance. Stockholders are mere investors therefore, their say and vote against management of the company they have invested in is handled by the companies CEO. They have no right to fire any employee of a company. Moreover, their versatility on progress of stock and growth of a company enable them to change company policies indirectly (Bragg, 2010).
When a stockholder requests to scrutinize the company’s stock ledger, the burden of proof is on the company to institute that the scrutiny is for an inappropriate purpose. When the stockholder seeks to inspect the company’s financial statements, the burden of proof lies on the stockholder to show a suitable principle. Stockholders will be entitled to scrutinize documents that are necessary and adequate to the achievement of the proper purpose (Bragg, 2010).
In conclusion, the stockholders have a say in liquid assets and monitoring of profits. They use audit reports to assess performance of the company and alteration of company policies. Stockholders help in management of checks and balances of the company through audits. Finally, they are allowed to scrutinize the stock ledger and analyze performance of board members of the company and termination or renewal of their contracts.
Assume that you are a CPA working in a public accounting firm. You need to discuss the “‘going concern’” issue with your client and are uncertain of the reaction. Discuss how you would approach the conversation with your client, the information that you would discuss, and how you would make your final decision on what type of audit report to issue.
In my own opinion, I would first enlighten my client about ‘going concern’ concept in accounting. ‘Going concern’ in accounting is the assumption that business will continue to exist for the near future. Therefore, I, as an accountant, adopt this concept to prepare financial reports. I would also let the client know that initially, without the ‘going concern’ concept, accountants used to write off all assets in the current period and long-term assets that still have an economic value for future periods (McLaney &Atrill, 2009).
I would let my client know and understand that ‘going concern’ allows us prepare financial statements assuming that the business is not to be liquidated unless there is significant evidence to the contrary. Our valuations and financial data reports on the assumption will usually mean the business will remain in existent for an indefinite period. Therefore, the concepts assumption that business will remain in existent long enough for all business assets to be utilized (Bragg, 2010).
I would enlighten my client further that the concept supports the assumption when business buys assets like land, buildings; it does so with the intent that these assets will generate income over a number of years. This would mean the business did not purchase the land with intent to incur loses but gain assets value. On the other hand, the business can cease trading shortly, and all assets sold off in the current year (McLaney &Atrill, 2009).
My client has to understand the significant implications for asset valuation and business liabilities existent. Therefore, by applying the ‘going concern’ concept, I have the ability to value and include long-term assets in a Statement of Financial Position. If the ‘‘going concern’’ assumption were not applied, I would need to write off these assets as costs in the year of their purchase. Application of the ‘going concern’ concept allows me to allocate transactions that overlap in two or more consecutive years, and I am able to record assets at historical costs. This would mean I would not need to assess the liquidated value of business assets whenever I prepare financial statements (McLaney &Atrill, 2009).
Finally, I would let my client know how the ‘going concern’ concept affects companies’ directors. Corporations require that company directors’ should make a declaration that business continues to be a ‘going concern’. That means, directors believe their business is able to pay its bills as they are incurred. Thus, the directors will be required to disclose to shareholders if there are possible factors that put in doubt the company’s status as a ‘going concern’ (McLaney &Atrill, 2009).
In conclusion, the type of audit report to issue would be the going concern report. This is because; auditors can reduce their risk of being sued when auditing a financially stressed client. The other reason would be to lower the likelihood that financially stressed investors will sue the auditor. These two give a viable reason for the client to give a thought to the choices initially intended (Eisen, 2000).
When issuing a “qualified” audit opinion, discuss what representations you would expect to receive from the company’s Board of Directors and Senior Management
Qualified opinion reports are issued when auditors encounter two types of situations that do not comply with the general accepted accounting principles –GAAP, though financial statements are comparatively represented. The accounts of companies listed are rarely qualified, and it would seriously undermine confidence in the management (Eisen, 2000).
When the auditor is not able to give a qualified opinion, it means there is something wrong. Public companies go to extraordinary lengths to evade a qualified audit report. This causes reactions from directors and managers to be uncomfortable since the auditor cannot agree on the manner in which the companies’ state is reported. Senior managers are the most uncomfortable in such an occurrence, that is, when auditors’ state there is some material shortcoming in the accounting ledgers. Shareholders and regulators are in sheer worry because they need the accounts to be right since they have an enormous investment in the company and secondly, they want the image of the company to be constantly protected. Therefore, tarnishing the company image would mean direct incurrence of losses and liquefied viable assets (Bragg, 2010).
To financial statement users, a qualified audit report often sparks crises of their confidence in the organization. The paragraph scope is usually edited to include the phrase in the first sentence, in order for the user is aware of the immediate qualification. The placement informs the user that the rest of the audit was performed without any of the qualifications. Likened to this aspect is the clean report. Its opinion is that the firm’s auditor is fairly presented in accordance with generally accepted accounting principles. It does not necessarily mean that the firm is financially strong and favorable (Bragg, 2010).