Part (c) Discuss the impact on the auditor’s report if no changes were made to the classification of the full outstanding amount of the lease liability as non-current liabilities in the FY2021 financial statements (see sections 3 and 5).
Answer
The auditor has two choices:
Give the company a clean report.
Give the company a warning.
Someone in a finance job made a mistake by putting a R343,874 loan payment in the wrong category. They marked it as a "long-term" debt instead of a "short-term" one.
This mistake is pretty small compared to the company's total money (the R4.2 million limit for mistakes).
But, even though it's a small number, it's a big problem. Why? Because it messes up a very important number that shows how healthy the company is right now (the "working capital ratio").
The auditor has two choices:
Give the company a clean report. The auditor can say the mistake isn't a big enough deal to warn anyone about, and everything looks okay. This is because the company's overall health isn't completely wrecked by the mistake.
Give the company a warning. The auditor can write a special note in the report saying the company's financial report has a problem. This is because the mistake, even though it's a small number, seriously affects how people look at the company's financial health.
The auditor faces a misclassification of a R343,874 current lease liability as non-current. While quantitatively below materiality (R4.2M), it qualitatively impacts the crucial working capital ratio. The suggested solution presents two paths:
Unmodified Opinion: If the impact on working capital isn't deemed materially pervasive, no audit report modification is needed.
Qualified Opinion: If the qualitative impact (non-compliance with IFRS and effect on key ratios) is considered significant, a qualified opinion for material misstatement of classification would be issued.
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