Audit Issues

In: Business and Management

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Audit Issues
1. Many large companies hire their law firm(s) to provide tax opinions that certain tax planning strategies have a reasonable of being sustained on an audit. Can the auditor rely on representation letters from third parties to avoid auditing these opinions? Briefly explain why or why not.
No, the auditor cannot rely on representation letters from law firms to avoid auditing these opinions. The auditor can only rely on the tax opinion of a specialist as defined in AU Section 326 Part 2.18, which defines a specialist as “a person (or firm) possessing special skill or knowledge in a particular field other than accounting or auditing." Therefore, in a situation when the auditor needs assistance with “special knowledge of matters about which the auditor does not have adequate technical training and proficiency.” However, this is not the case regarding tax planning strategies since the auditor is in fact knowledgeable concerning income tax matters that the legal counsel does not possess. The opinion of legal counsel on specific tax issues can be helpful to the auditor in forming their own opinion, but should not be relied on by the auditor.

2. Suppose an audit client refuses to allow you (the auditor’s senior manager) to see the tax accrual work papers. How does this action affect your audit opinion?
The auditor is required to obtain sufficient competent evidential matter through, among other things, inspection and inquiries to afford a reasonable basis for an opinion on the financial statements. If the client denies the auditor access to tax accrual work papers necessary, this will affect the auditor's ability to issue an unqualified opinion on the financial statements. The client should have these records and make them available to auditor, as stated in AU Section 326 Part 2.09 the “client is responsible for its tax accrual, the underlying…...

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