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ACCA Applied Knowledge · Financial Accounting · The context and purpose of financial statements for external reporting

The directors of Zeta Co discover after the year end that a material misstatement exists in the draft financial statements. They ask the auditor to sign the audit report anyway, stating that the audit fee will be doubled. Which statement is correct?

The auditor should issue a modified opinion if the material misstatement is left uncorrected. The opinion must be independent and evidence-based, so neither director pressure nor a higher fee can justify an unmodified report. Directors' responsibility for preparation does not relieve the auditor of this duty.

  1. AThe auditor should accept because the directors are responsible for the financial statements
  2. BThe auditor should issue a modified opinion if the misstatement is not corrected, as the opinion must be independent of the directors' wishesCorrect
  3. CThe auditor should resign and the directors can then publish the statements without any report
  4. DThe auditor should issue an unmodified opinion and include a note on the fee

Explanation

The auditor's opinion must be independent and based on evidence. If a material misstatement remains uncorrected, a qualified or adverse opinion is needed regardless of pressure or fee offers. Directors' responsibility for preparation does not remove the auditor's duty. Resigning does not remove the legal audit requirement for a company needing one, and fee notes do not replace a proper opinion.

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