You are the audit manager in JonArc & Co. One of your new clients this year is Galartha Co, a company having net assets of $15 million. The audit work has been completed, but there is one outstanding matter you are currently investigating; the directors have decided not to provide depreciation on buildings in the financial statements, although International Accounting Standards suggest that depreciation should be provided.
Unfortunately, you have been unable to resolve the matter regarding depreciation of buildings; the directors insist on not providing depreciation. You have therefore drafted the following extracts for your proposed audit report.
1. ‘We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement (remaining words are the same as a normal unmodified report).
2. As discussed in Note 15 to the financial statements, no depreciation has been provided in the financial statements which practice, in our opinion, is not in accordance with International Accounting Standards.
3. The charge for the year ended 30 September 2007, should be $420,000 based on the straight-line
method of depreciation using an annual rate of 5% for the buildings.
4. Accordingly, the non-current assets should be reduced by accumulated depreciation of $1,200,000 and the profit for the year and accumulated reserve should be decreased by $420,000 and $1,200,000, respectively.
5. In our opinion, except for the effect on the financial statements of the matter referred to in the preceding paragraph, the financial statements give a true and fair view ... (remaining words are the same as for an unmodified opinion paragraph).’
The extracts have been numbered to help you refer to them in your answer.
Depreciation had not been provided on any non-current asset for a number of years, the effect of which if corrected would be to turn an accumulated profit into a significant accumulated loss.
State the effect on your audit report