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(iii) AJ Co – receivable
The balance of $4,500,000 has been confirmed in the year end confirmation and so audit evidence has been gained in relation to the existence of and rights and obligations to the debt.
However no monies have been received post year end and so the valuation of the amount has not been verified.
Given that the customer is suffering extremely serious financial difficulties, it is unlikely that much of the debt can be recovered.
At 75% of profit before tax ($4,500,000 / $6,000,000) the error is certainly material and is likely to be material and pervasive.
If management refuse to amend this error then the auditor’s report would be modified. As management has not written down the debt to its recoverable amount and the error is likely to be material and pervasive then an adverse opinion would be necessary.
A basis for adverse opinion paragraph would need to be included explaining the material misstatement in relation to the overstatement of receivables and the effect on the financial statements.
The adverse opinion paragraph would state that the financial statements “do not present fairly” - due to material misstatement.