a. Effect of the Loss of the Audit Journals on the Financial Statements and Factors to Consider in Drafting the Report

The loss of audit journals, which are critical to understanding the adjustments and corrections made to the financial statements during the previous audit, creates several potential issues:

1. Effect on Audit Evidence:
   • The loss of journals means there is a lack of detailed audit documentation to support the adjustments made to the financial statements. This undermines the reliability of the financial statements as the journals provide crucial evidence regarding the transactions and adjustments.
2. Potential Misstatements:
   • Without the journals, there is an increased risk of material misstatements in the current financial statements, as there may be discrepancies between the unadjusted figures and the final figures approved by the previous auditor.
3. Uncertainty in Financial Performance:
   • The absence of the journals makes it difficult to assess how much of the financial performance was influenced by previous audit adjustments and whether these adjustments were properly accounted for in the current year.
4. Factors to Consider in the Auditor’s Report:
   • Reliability of Financial Statements: The auditor must evaluate whether the current financial statements are free from material misstatement in light of the lost audit journals.
   • Management’s Response: The auditor should consider whether management has made appropriate efforts to reconstruct the lost journals and properly adjust the financial statements.
   • Effect on Audit Opinion: If the missing journals affect the auditor’s ability to obtain sufficient audit evidence, a qualified opinion or disclaimer may be warranted.

b. Actions Required of the Auditors in Relation to the Observed Misstatement (ISA 570)

According to ISA 570 (Going Concern), the auditor must take specific actions when there are doubts about an entity’s ability to continue as a going concern or if there are material misstatements resulting from loss of documentation:

1. Evaluate the Impact on Going Concern Assumption:
   • The auditor must assess whether the misstatements or missing information related to the lost journals affect the entity’s ability to continue as a going concern. This is critical, especially if the financial performance is unexpectedly poor.
2. Obtain Sufficient Audit Evidence:
   • The auditor should attempt to obtain alternative audit evidence to replace the lost journals, such as reviewing other available documentation (e.g., trial balances, bank statements, or internal financial records) to ensure that the accounts reflect a true and fair view.
3. Identify the Nature and Extent of Misstatements:
   • The auditor must identify if the missing journals led to material misstatements in the current financial statements and determine their effect on the accuracy and fairness of the financial statements.
4. Consultation with Management and Legal Advisors:
   • If the loss of the journals has a significant impact, the auditor should discuss the matter with management and legal advisors, especially if it affects the financial position or the company’s operations.
5. Consider the Impact on the Audit Opinion:
   • Based on the auditor’s findings, they must consider issuing a qualified opinion or even a disclaimer of opinion if they cannot obtain sufficient appropriate audit evidence.

c. Content of the Communication Expected of the Auditors to the Client Before and After the Audit, Other than the Auditor’s Report

1. Before the Audit:
   • Engagement Letter:
     • The auditor should send an engagement letter outlining the terms and scope of the audit, the auditor’s responsibilities, the client’s responsibilities, and the expected deliverables. This includes informing the client about the possible effects of the lost journals and how the audit will proceed despite the loss.
   • Pre-Audit Discussion:
     • The auditor should have a discussion with management to understand the challenges regarding the lost journals and ensure that management is taking the necessary steps to rectify the issue before the audit begins.
2. During the Audit:
   • Interim Reports/Updates:
     • The auditor should provide periodic updates to management about the progress of the audit, particularly regarding issues related to the lost audit journals. This keeps management informed of potential audit delays or findings.
   • Request for Additional Information:
     • If needed, the auditor should request management to provide additional documentation or explanations to replace the lost journals, ensuring that all material transactions are adequately supported.
3. After the Audit:
   • Management Letter:
     • The auditor should communicate key audit findings in a management letter, including any deficiencies identified during the audit, especially concerning internal controls or record-keeping processes related to the loss of audit journals.
   • Discussion of Audit Opinion:
     • Before issuing the final audit opinion, the auditor should discuss any potential misstatements or issues that could affect the opinion with management and ensure that appropriate disclosures are made in the financial statements.