Sample auditors' reports for Financial statements are materially misstated / Adverse Opinion:
The Company's inventories are carried in the statement of financial position at xxx. The directors have not stated the inventories at the lower of cost and net realizable value but have stated them solely at cost, which constitutes a departure from HKFRSs. The Company's records indicate that, had the directors stated the inventories at the lower of cost and net realizable value, an amount of xxx would have been required to write the inventories down to their net realizable value. Accordingly, cost of sales would have been increased by xxx, and income tax, net income and shareholders' equity would have been reduced by xxx, xxx and xxx, respectively.
[Source: HKSA 705 (Revised) - June 2017]
As explained in Note X, the Group has not consolidated subsidiary DEF Company that the Group acquired during 20X1 because it has not yet been able to determine the fair values of certain of the subsidiary's material assets and liabilities at the acquisition date. This investment is therefore accounted for on a cost basis. Under HKFRSs, the Company should have consolidated this subsidiary and accounted for the acquisition based on provisional amounts. Had DEF Company been consolidated, many elements in the consolidated financial statements would have been materially affected. The effects on the consolidated financial statements of the failure to consolidate have not been determined.
[Source: HKSA 705 (Revised) - June 2017]
Disagreement arising from non-compliance with [Hong Kong Accounting Standard 36 “Impairment of Assets” issued by the Hong Kong Institute of Certified Accountants (“HKAS 36”)] disclosed in note [#] to the financial statements, an impairment assessment was carried out by the management of the Company on the Company’s [property, plant and equipment, lease prepayments, intangible assets and non-current prepayments] with carrying amounts of [HK$XX,XXX, HK$XX,XXX, respectively]. For assets which the management considers are likely to be recoverable through continuing use, the Company assessed the recoverable amount of each cash-generating unit (“CGU”) to which these assets belong based on value-in-use calculations. These value-in-use calculations use cash flow projections based on the most recent financial forecasts approved by the board of directors based on their best estimates. The key assumptions are stated in note [#] to the consolidated financial statements.
As a result of the assessment, the management has assessed that the recoverable amounts of certain CGUs based on the estimated value-in-use calculation were lower than their carrying amounts as at [DD MM YYYY]. Accordingly, provision for impairment losses on property, plant and equipment and lease prepayments of approximately [HK$XX,XXX, HK$XX,XXX] were recognised in the statement of profit or loss for the [year/period] ended [DD MM YYYY] for assets which the management considers are likely to be recoverable through continuing use.
In our opinion, the discount rates, one of the key assumptions, applied to arrive at present values of cash flows are too low as they do not adequately take into account the challenges in operating and financing activities that the Company faces recently. Therefore
in our opinion, this impairment assessment is not in accordance with [HKAS 36]. Accordingly, in our opinion, the discount rates applied had resulted in the recoverable amount of these assets being materially overstated.
[(Or) In the absence of a determination of the recoverable amounts of these assets based on the requirements of [HKAS 36], we were unable to assess the amount of impairment loss to be recognised in respect of property, plant and equipment and prepaid lease payment, thereby affecting the loss for the year ended [DD MM YYYY] and the Group’s net liabilities as at that date.]
Disagreement about accounting treatments
- The financial statements do not contain a statement of cash flows for the year ended [DD MM YYYY]. This is not in accordance with the requirements of Hong Kong Accounting Standard 7 “Cash Flow Statements” issued by the HKICPA.
- The financial statements do not contain the financial information by segments for the year ended [DD MM YYYY]. This is not in accordance with the requirements of Hong Kong Accounting Standard 14 “Segment Reporting” issued by the HKICPA.
- The following disclosures have not been made in the financial statements:
- (i) information about the extent and nature of the financial instruments as required by HKAS 32: “Financial Instruments: Disclosure and Presentation”;
- (ii) details of the Group’s policy in respect of the financial risk management as required by HKAS 32: “Financial Instruments: Disclosure and Presentation”;
- (iii) information of deferred taxation and taxation charge reconciliation as required by HKAS 12: “Income Taxes”.