4.Auditor's report and Types of opinions

Question 1

What are the key features of audit report?

Answer 1

1. It is produced by the auditor who is independent from directors and management.
2. It includes auditor’s opinion whether financial statements give true and fair view.
3. Opinion is expressed only on material items.

Question 2

Who are the addressees in auditor’s report?

Answer 2

The auditor’s report shall be addressed according to requirements of law or circumstances.
Report is usually addressed to:
Members in case of statutory audit
Board of directors in case of non-statutory audit.

Question 3

What is Basis of opinion paragraph?

Answer 3

This section shall be presented immediately after Opinion section. In this section, the auditor shall state that he has:
conducted audit in accordance with ISAs,
fulfilled ethical requirements,
reasonable basis of opinion.

Question 4

Explain Responsibilities of Auditor?

Answer 4

This section will state the overall objective that is to obtain reasonable assurance whether financial statements are free from material misstatement and to issue report that includes auditor’s opinion.
It shall further include:
Discussion on reasonable assurance, materiality and scope of audit
Responsibility to communicate to TCWG.

Question 5

Where are auditor’s responsibilities located?

Answer 5

1. within the body of auditor’s report OR
2. as an appendix to auditor’s report OR
3. on the website.
   In case of 2 and 3, reference shall be included in audit report.

Question 6

What to state if the auditor is required to report on additional matters by law?

Answer 6

If auditor is required by local laws to report on additional matters, then auditor’s report will
have 2 separate sections:
i. “Report on Audit of Financial Statements”; and
ii. “Report on Other Legal and Regulatory Requirements”.

Question 7

What are the other reporting responsibilities of auditor as required by law?

Answer 7

i. Whether proper books of accounts have been kept as required by Companies Act.
ii. Whether financial statements are drawn up conformity with the Companies Act and are in
agreement with the books of account and returns.
iii. Whether investments made, expenditure incurred and guarantees extended during the year were
for the purpose of the Company’s business.
iv. Whether Zakat deductible at source, was deducted by the company and deposited in the Central
Zakat Fund.

Question 8

Enlist the additional elements of audit report?

Answer 8

1. Basis for modified opinion
2. Material uncertainty relating to going concern
3. Emphasis of matter
4. Other matter

Question 9

What is included in case of listed company in audit report?

Answer 9

In case of listed company, auditor is required to include following in audit report:
 Key audit matter section.
 Auditor’s Responsibility to communicate Statement of compliance with ethical
requirements to TCWG.
 Name of engagement partner.

Question 10

what should the auditor evaluate before reaching the opinion?

Answer 10

Before reaching an opinion, auditor shall evaluate:

1) Whether there is a misstatement or scope limitation.
2) Whether effect of misstatements or scope limitation is immaterial, material or pervasive.

Question 11

Explain The appropriateness of the selected accounting policies in case of misstatement?

Answer 11

i. The selected accounting policies are not in accordance with the AFRF.
ii. The financial statements do not correctly describe an accounting policy
iii. Financial statements do not represent or disclose transactions and events in a
manner that achieve fair presentation.

Question 12

Explain in context of misstatement The application of the selected accounting policies?

Answer 12

i. Selected accounting policies are not applied correctly (i.e. errors in application of
accounting policies)
ii. Selected accounting policies are not applied consistently (i.e. not consistent with
prior year or with other similar items) and auditor does not concur with change.

Question 13

Explain appropriateness or adequacy of disclosures in the financial statements in misstatement?

Answer 13

i. Financial statements do not provide all disclosures required by AFRF.
ii. Disclosures in financial statements are not in accordance with AFRF.
iii. Financial statements do not provide the disclosures necessary to achieve fair
presentation

Question 14

Explain Auditor’s course of action if a misstatement is identified?

Answer 14

Auditor accumulates all misstatements identified during audit, communicates them to management on
timely basis, and requests management to correct them.
If management does not correct a misstatement,
auditor shall communicate these misstatements to TCWG, and shall request them to correct it.
If misstatements are corrected before signing of auditor’s report, auditor shall express unmodified
opinion. If misstatements are not corrected, auditor shall express qualified opinion (if effect is material)
or adverse opinion (if effect is pervasive).

Question 15

Define Scope Limitation?

Answer 15

Scope limitation arises when auditor is unable to obtain sufficient appropriate audit evidence on which to base his opinion.

Question 16

Tell about circumstances beyond the control of entity in context of scope limitation?

Answer 16

i. Accounting records of entity have been destroyed (e.g. by fire, computer virus or
other natural disaster).
ii. Accounting records of entity have been seized indefinitely by govt. authorities.

Question 17

What are Circumstances relating to nature or timing of auditor’s work as in scope limitation?

Answer 17

i. The timing of the auditor’s appointment is such that the auditor is unable to observe
the counting of the physical inventories.
ii. Entity is required to use “equity method” of accounting for an associated entity, but
auditor is unable to obtain financial information of associated entity.
iii. Substantive procedures alone do not provide sufficient evidence and entity’s
internal controls are also weak.

Question 18

In scope limitation, what will be limitations imposed by entity / management?

Answer 18

i. Management prevents the auditor from observing the counting of the physical
inventory.
ii. Management prevents the auditor from requesting external confirmation of specific
account balances.
iii. Management does not provide written representations to auditor.

Question 19

Explain Auditor’s course of action if a scope limitation is faced?

Answer 19

Auditor shall perform alternative audit procedures to obtain evidence. If evidence is not obtained, auditor
shall express qualified opinion (if effect is material) or Disclaimer of opinion (if effect is pervasive).
If scope limitation is imposed by Management, this will also affect other aspects of audit, i.e. auditor shall
re-assess integrity of management, increase risk of misstatement. If effect is pervasive, auditor shall
withdraw from engagement. If withdrawal is not possible (i.e. auditor is required by law to continue the
engagement) or practicable (i.e. audit substantially completed), auditor shall express Disclaimer of opinion.

Question 20

Define material?

Answer 20

Items are considered material if they, individually or in aggregate, could reasonably be expected to
influence the economic decisions of users taken on the basis of financial statements.
Materiality depends on size as well as nature of misstatement.

Question 21

Define pervasive?

Answer 21

Pervasive effects on the financial statements are those that, in the auditor’s judgments:

i. Are not confined to specific accounts/elements of the financial statements;
ii. If so confined, represent substantial proportion of the financial statements; or
iii. In relation to disclosures, are fundamental to users’ understanding of F/S.

Question 22

When is Emphasis of Matter paragraph included in the report?

Answer 22

Emphasis of Matter paragraph is included in auditor’s report if:
 auditor considers it necessary to draw users’ attention to matter adequately disclosed in
financial statements; and
 is fundamental to users’ understanding of the financial statements;
 provided:
i. auditor is not required to modify his opinion because of the matter; and
ii. matter is not a Key Audit Matter.

Question 23

Tell Examples of Situations/ Circumstance when Emphasis of Matter is included in Audit Report?

Answer 23

1. If there is material uncertainty relating to the exceptional litigation or regulatory action.
2. A significant subsequent event occurs (e.g. a fire after the year-end destroying production facilities).
3. When a major disaster significantly affects entity’s financial position.
4. Early application (when permitted) of a new accounting standard that has a material effect.
5. Where a financial reporting framework is unacceptable but is prescribed by law or
   regulation.
6. If financial statements are prepared on special purpose framework.

Question 24

How EOM Paragraph is included/presented in report?

Answer 24

This paragraph is presented as a separate section under the heading Emphasis of Matter in audit report. Auditor may add further context to the heading e.g. Emphasis of Matter - Subsequent Event.
In this paragraph auditor shall state:
 the matter being emphasized.
 the reference to the notes in financial statements which fully describes the matter.
 that auditor’s opinion is not modified in respect of the matter emphasized.

Question 25

What is the placement of EOM para?

Answer 25

When Emphasis of Matter paragraph relates to AFRF, it is placed immediately after the Basis for opinion Section to provide appropriate context to the auditor’s opinion.
If a Key Audit Matter section is presented in the auditor’s report, Emphasis of Matter paragraph may be presented before or after the Key Audit Matters section based on relative significance of the
information.

Question 26

When to Include Other Matter Paragraph in Auditor’s Report?

Answer 26

Other Matter paragraph is included in auditor’s report if:
 auditor considers it necessary to communicate a matter which is not required to be disclosed in financial statements,
 but is relevant to users’ understanding of the audit, auditor’s report, or auditor’s responsibilities;
 provided:
i. communication is not prohibited by law or regulation or professional standards; and
ii. matter is not a Key Audit Matter.

Question 27

Write down Examples of Situations/Circumstances when Other Matter is included in Audit Report?

Answer 27

1. When financial statements of prior period were not audited or were audited by another auditor.
2. When auditor reports on more than one sets of financial statements (e.g. entity prepared one set of F/S under IFRS and other set under national framework and auditor is engaged to report on both set of F/S).
3. When auditor restricts distribution of auditor’s report (e.g. when F/S and audit report are prepared for specified users).
4. If there is scope limitation imposed by management whose effect is pervasive and it is not possible/practicable to withdraw from engagement.

Question 28

Where is Other Matter Paragraph placed?

Answer 28

Other Matter Paragraph is placed after the “Report on Audit of Financial Statements” and “Report on Other Legal and Regulatory Requirements”. If a Key Audit Matter section is presented in the
auditor’s report, Other Matter paragraph may add further context to the heading e.g. Other Matter –Scope of the Audit.

Question 29

What is the meaning of going concern?

Answer 29

Going concern means entity will continue to operate in foreseeable future (i.e. 12 months).
 If there is material uncertainty related to going concern, it should be adequately disclosed in F/S.
 If going concern assumption is not appropriate, management should prepare F/S on alternate basis.

Question 30

What to do if there is delay in approval of financial statements?

Answer 30

If there is significant delay in approval of financial statements, auditor shall inquire reason of delay. If auditor believes that delay could be related to going concern issues, auditor shall perform additional
audit procedures.

Question 31

Write the procedures to confirm whether material uncertainty exists and whether going concern assumption is appropriate?

Answer 31

1. Evaluating management’s plans for future action, and whether it is feasible. Obtain representation from management regarding future plans.
2. If management has prepared a cash flow forecast, evaluate:
   a. Data used is reliable., and
   b. Assumptions used are adequately supportable.
3. Consider effects of subsequent event on going concern assessment.
4. Read:
   a. Minutes of the meeting of shareholders/directors regarding financial difficulties.
   b. Loan agreements, and compliance with their terms.
   c. Latest available financial information.
5. Inquire legal counsel.
6. Confirm existence and adequacy of borrowing facilities.

Question 32

What will be the effect if going concern is appropriate?

Answer 32

Auditor shall express unmodified opinion, provided events or conditions are adequately disclosed in financial statements.
However, auditor may determine one or more of these events to be Key Audit Matter.

Question 33

What to do if Going Concern is appropriate but material uncertainty exists and adequate disclosure is included in the financial statements?

Answer 33

Auditor shall express an unmodified opinion, and shall include “Material Uncertainty Related to Going Concern” paragraph in his report to:
 Draw user’s attention to note that discloses the events/conditions.
 State that these events/conditions indicate that material uncertainty exists.
 Auditor’s opinion is not modified in respect of this matter.
This paragraph should be included after opinion and basis for opinion section.

Question 34

What to do if Going Concern is appropriate but material uncertainty exists and adequate disclosure is not included in the financial statements?

Answer 34

Auditor shall express a qualified opinion (if effect is material) or adverse opinion (if effect is pervasive). Auditor shall also state in “Basis for Qualified/Adverse Opinion” paragraph that material uncertainty exists and that the financial statements do not adequately disclose this
matter.

Question 35

WHEN TO INCLUDE KEY AUDIT MATTER SECTION IN REPORT?

Answer 35

Key Audit Matter Section is required to be included for audits of complete sets of general purpose financial statements of listed entities.
However, KAM Section can also be included in audit report of unlisted company if it is required by law or is considered necessary by auditor (e.g. in case of public interest entities

Question 36

What are “Key audit matters”?

Answer 36

Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with TCWG.

Question 37

How to determine Key audit matters?

Answer 37

Determining Key Audit Matter involves Three steps:

1. From matters communicated with TCWG,
2. Auditor determines which matters required significant auditor attention in performing audit. (factors to consider are listed below)
3. Auditor determines which of the above matters (determined in ‘2’ above) are most significant, and therefore, are key audit matters.

Question 38

What are the Factors to consider in determining matters which require significant auditor attention?

Answer 38

 Areas of higher risks or significant risks
 Areas of significant auditor judgments
 Significant events or transactions that occurred during the period.
 Areas of complexity and significant management judgment.
 Nature and extent of audit efforts needed to address the matter e.g.
Extent of specialized knowledge or skill needed
Nature of consultation outside the engagement team.
 Significant transactions with related parties or transactions outside the normal course of business.

Question 39

How should the auditor describe each Key Audit Matter?

Answer 39

Auditor shall give a sub-heading for each individual KAM and shall describe:

1. What is the KAM i.e. auditor shall briefly describe matter along with reference to related disclosure in F/S
2. Why the matter was considered most significant in audit.
3. How the matter was addressed in audit e.g.
   a. a brief overview of procedures performed, or
   b. an indication of the outcome of the auditor’s procedures, or
   c. key observations with respect to the matter.

Question 40

What are the examples of KAM?

Answer 40

1. Goodwill, Intangible Assets, Deferred Tax.
2. Assets carried at revalued amounts
3. Impairment loss.
4. Valuation of liabilities
5. Significant accounting policies
6. Areas where work of Expert or Component auditor is used.
7. Acquisition and disposals of business units,
8. Restructuring of business
9. Significant number of litigations and tax contingencies.
10. Significant related party transactions.
    Other areas (e.g. Revenue, additions to PPE, Inventory, Debtors, Long-term loan) may also be KAM if they meet criteria.

Question 41

What are the rules of communicating modifications to TCWG?

Answer 41

If the auditor expects to include “Modified Opinion” or “Emphasis of Matter” or an “Other Matter” or “Key Audit Matter” or “Material Uncertainty related to Going Concern” paragraph in his report, the
auditor shall communicate with TCWG the circumstances that led to such modification and the proposed wording to be included in report.
This communication enables:
 TCWG to be aware of modification that auditor intends to include in audit report.
 TCWG to have an opportunity to obtain further clarification from auditor or to provide further information to auditor regarding the matter causing modification.
 Auditor to obtain agreement of TCWG regarding facts of the matter.