Ch 4 ISA 700 series and ISA 570 ISA

Question 1

What are CORE elements of a Audit Report?

Answer 1

The basic elements of an unmodified audit report, as given in ISA 700 (Revised), are as follows:
1 Title
2 Addressee
3 Auditor’s opinion
4 Basis for opinion
5 Going Concern
6 Key Audit Matters
7 Other information
8 Responsibilities for the financial statements
9 Auditor’s responsibility for the audit of financial statements
10 Other reporting responsibilities (if any)
11 Name of the Engagement Partner
12 Auditor’s signature
13 Auditor’s address.
14 Date of the audit report
These elements are designed to achieve the objectives of ISA 700 (Revised), which are for the auditor to:
* form an opinion on the financial statements, based on an evaluation of the conclusions drawn from the audit evidence obtained, and
* express that opinion clearly through a written report that also describes the basis for that opinion

Question 2

Define TITLE of a Audit Report?

Answer 2

• The auditor’s report should have a title that clearly indicates that it is the report of an independent auditor.
• This is to distinguish this type of auditor’s report from other reports that might be issued by other auditors (who may not have to abide by the same ethical and requirement for independence as the independent auditor - for example, internal auditors).

Question 3

Define ADRESSEE of a Audit Report?

Answer 3

The report should be appropriately addressed, as required by national law and the circumstances of the engagement. The report is usually addressed to either:
* the shareholders of the entity ( in case of statutory audit) whose financial statements are being audited, or
* the board of directors (in case of non statutory audit) of the entity.

Question 4

Define AUDITOR’S OPINION of a Audit Report?

Answer 4

The first section of the auditor’s report shall include the auditor’s opinion, and shall have the heading “Opinion”. The Opinion section of the auditor’s report shall also:
* identify the entity whose financial statements have been audited
* state that the financial statements have been audited
* identify the title of each of statement that makes up the complete set of financial statements (e.g. statement of comprehensive income, statement of financial position, and so on)
* refer to notes, including the summary of significant accounting policies and other explanatory information
* specify the date or period covered by each statement.

A opinion will be expressed on either:
1. If financial statements are prepared in accordance with a Fair Presentation Framework
2. If financial statements are prepared in accordance with a Compliance Framework

Question 5

What addition in opinion will be expressed If financial statements are prepared in accordance with a Fair Presentation Framework?

Answer 5

An opinion will be expressed on whether the financial statements:
* conform with approved accounting standards as applicable in Pakistan (IFRS) and
* give the information required by the Companies Act, 2017

in the manner so required and respectively give a true and fair view of the state of the Company’s affairs.

Question 6

What addition in opinion will be expressed If financial statements are prepared in accordance with a Compliance Framework?

Answer 6

An opinion will be expressed on whether the financial statements are prepared in all material respects in accordance with:
* approved accounting standards as applicable in Pakistan (IFRS) and
* Companies Act, 2017

Where IFRSs are not used as the financial reporting framework, the reference to the financial reporting framework in the wording of the opinion should identify the jurisdiction of the financial reporting framework

Question 7

Define BASIS OF OPINION of a Audit Report?

Answer 7

This section shall be presented immediately after Opinion section. In this section, audite shal] state that he has
* conducted audit in accordance with ISAs,
* fulfilled ethical requirements relating to independence, and
* sufficient appropriate evidence for his opinion.
* Refer to the section that describes auditor’s responsibilities

Question 8

Define RESPONSIBILITIES FOR FINANCIAL STATEMENTS of a Audit Report?

Answer 8

This section shall describe management’s responsibility for:
* the preparation of the financial statements in accordance with the applicable financial reporting framework, and
* for such internal controls as deemed necessary to enable the preparation of financial statements which are free from material misstatement.
* assessing the entity’s ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate as well as disclosing, if applicable, matters relating to going concern

This section shall also identify those responsible for the oversight of the financial reporting process,
when those responsible for such oversight are different from the management..

Question 9

Define AUDITOR’S RESPONSIBILITY of a Audit Report?

Answer 9

This section shall state that overall objective of auditor is to obtain reasonable assurance whether financial statements are free from material misstatements, and to issue report that includes atditor’s opinion.
Further description shall include responsibilities of auditor to:
i. Identify and assess the risks of material misstatement of the financial statements
ii. To perform audit procedures and obtain sufficient appropriate audit evidence
iii, To obtain understanding of internal control.
iv. To evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates
v. To conclude on the appropriateness of management’s use of the going concern basis of accounting
vi. To evaluate overall presentation, and whether financial statements achieve fair presentation.
vii. Auditor’s responsibility to communicate to TCWG:
* Planned scope and timing of audit
* Significant findings from audit
* Statement of compliance with ethical requirements (in case of listed company)
* Key Audit Matters (in case of listed company)
- Location of the description of the auditor’s responsibilities ;
Further description of the auditor’s responsibilities may be included: ;
(a) Within the body of the auditor’s report, or
(b) As an appendix to the auditor’s report, or
(c) on a website of an appropriate authority, (If expressly permitted by law or regulation).
In case of (b) and (c), reference to the location shall be Included In audit report

Question 10

Define OTHER REPORTING RESPONSIBILITIES of a Audit Report

Answer 10

If the auditor is required by local law toreport on additional mattters then his report will contain two separate sections
* Report on Audit of Financial Statements”; and
* Report on Other Legal and Regulatory Requirements ,
:

Question 11

What are OTHER REPORTING RESPONSIBILITIES required by the Companies Act 2017

Answer 11

In Pakistan, statutory auditor reports on following legal and Regulatory Requirements
i. Whether proper books of accounts have been kept as required by Companies Act 2017
ii. Whether financial statements are drawn up conformity with the companies act and are in agreement with the books of accounts and returns.
iii. Whether investment 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 12

What is AUDITOR’S SIGNATURE AND NAME ?

Answer 12

Depending on local requirements, audit report can be signed:
« inthename of audit firm, or
« inthe personal name of auditor, or
* both
as appropriate in the local jurisdiction.
Name of engagement partner. is required fon listed entities, unless there is significant personal security threat to engagement team members. Security threat shall be discussed with TCWG.

Question 13

What is DATE OF AUDITOR’S REPORT?

Answer 13

• The date of audit report should be on or after the date on which the auditor obtains sufficient appropriate evidence (including evidence that financial statements have been approved by appropriate authority i.e. board of directors)
• Date also indicates that auditor has considered the effect of subsequent events on financial statements upto that date.

Question 14

what is AUDITOR’S ADDRESS?

Answer 14

Auditor’s report shall state the location (usually city name) where the auditor practices.

Question 15

what is the difference between listed and unlisted audit report?

Answer 15

In case of listed company auditor is required to include the following in audit report,
i. auditor’s responsibility to communicate Statement of Compliance with Ethical requirements to TCWG
ii.Key Audit Matter section ( not included if Disclaimer of opinion is expessed
iii. Name of engagement partner (not included if there is a significant personal security threat)

Question 16

How auditor will decide type of opinion in FS?

Answer 16

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 17

What is misstatement”The appropriateness of the selected accounting policies?

Answer 17

|. 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 manner that achleve fair presentation.

Question 18

What is misstatement “The application of the selected accounting policies:” ?

Answer 18

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 19

What is misstatement “ The appropriateness or adequacy of disclosures In the financial statements “?

Answer 19

i. Financial statements do not provide all disclosures required by AFRF,
ii. Disclosures in financial statements are not In accordance with AFRF.
iii. FS do not provide the disclosures necessay to achieve true and fai view

Question 20

in how many circumstances, scope limitation can be arisen?

Answer 20

1. Circumstances beyond the control of entity:
2. Circumstances relating to nature or timing of auditor’s work:
3. Limitations imposed by management/ entity:

Question 21

example of scope limitation in case of 1, Circumstances beyond the control of entity:

Answer 21

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 22

example of scope limitation in case of 2, Circumstances relating to nature or timing of auditor’s work:

Answer 22

i. The timing of the auditor’s appointment is such that the auditor is unable to observe counting of 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 23

example of scope limitation in case of 3. Limitations imposed by management/ entity:

Answer 23

i, Management prevents the auditor from counting of the physical inventory,
ii, Management prevents the auditor from sending external confirmation to a party.
iii, Management does not provide written represe

Question 24

What is material?

Answer 24

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 25

What is pervasive?

Answer 25

Pervasive Means effects on the financial statements are those that, in the auditor’s judgments:
i. Are not confined to accounts/elements of the F/S.
ii. if so confined represent substantive proportion of the FS;
iii. In relation to disclosures are fundamental to users’ understandIng of F/S,

Question 25

When to Include Emphasis of Matter Paragraph in Auditor’s Report / Definition: (relates to F/S)

Answer 25

Emphasis of Matter paragraph is included in auditor’s report if:
* auditor considers it necessary to draw users’ attention to *matter adequately disclosed in F/S and
* is fundamental to users’ understanding of the F/S;
* provided:
i. matter is not a misstatement or scope limitation requiring modified opinion
ii. matter is not a Key Audit Matter.

Question 25

What are the circumstances when emphasis of matter paragraph is included in auditor’s report?

Answer 25

i. If there is material uncertainty relating to the exceptional litigation or regulatory action.
ii. A significant subsequent event occurs (eg. a fire after the year-end destroying one of production facilities)
iii. If financial statements are re-issued, or corresponding figures are re-stated.
iv. When a major disaster significantly affects entity’s financial position. ;
v. Early application (when permitted) of a new accounting standard that has a material effect
vi. If AFRF is unacceptable but is prescribed by law or regulation.
vii. If FS are prepared on special purpose framework.
viii, Going concern assumption is not appropriate and F/S are prepared on liquidation basis.

Question 26

How EOM para is included in auditor’s report?

Answer 26

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 27

Examples of Drafting Emphasis of Matter Paragraphs

Answer 27

Emphasis of Matter (Exceptional litigation)
We draw your attention to Note X of the financial statements, which describe the uncertainty related to the outcome of the lawsuit filed against the company by XYZ Company. Our opinion Is not modifled In respect of this matter,
Emphasts of Matter (Subsequent Event)
We draw attention to Note X of the financial statements, which describes the effects of a fire In the Company’s _production facilities. Our opinion is not modified in respect of this matter.

Question 28

where EOM is placed in auditor report?

Answer 28

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

Exam Tips
Excessive use of Emphasis of Matter paragraph should be avoided,

Question 29

When to Include Other Matter Paragraph in Auditor’s Report / Definition: (relates to Audit)

Answer 29

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

Question 30

What are the circumstances when other matter paragraph is included in auditor’s report?

Answer 30

1. If financial statements of prior period were not audited or were audited by another auditor, .
2. If auditor issues reports on more than one sets of financial statements (eg. entity prepared one set of F/S under IFRS and other set under national framework and auditor issue reports separately on each set of F/S).
3. if 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 by management whose effect is pervasive, and withdrawal is not possible/practicable. (Here Other Matter Is given In addition to Disclalmer of Opinton)

Question 31

Presentation of Other Matter Paragraph:
Other Matter will be separately presented in a paragraph, with heading.
Examples of Drafting of Other Matter Paragraph

Answer 31

Other Matter: (Prior year financial statements audited by predecessor auditor)
“The financial statements of ABC Company for the year ended December 31, 20X0 were audited by another auditor who expressed an unmodified opinion on those statements on March 31, 20X1.”

Other Matter: (Two sets of financial statements audited by same auditor)
The Company has prepared a separate set of financial statements for the year ended December 31, 20X1 In accordance with International Financial Reporting Standards on which we issued a separate auditor’s report to the shareholders of the Company dated March 31, 20X2.

Question 32

where Other Matter paragraph is placed in auditor report?

Answer 32

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” to differentiate it from matters described in KAM Section.

Question 33

What is Going concern basis and the Financial Statements?

Answer 33

The financial statements of the entity are normally prepared on a going concern basis. In the going concern basis it is assumed that the entity will continue to be in existence for foreseeable future (at least 12 months as per IAS 1).
IAS 1 requires management to make an assessment of the entity’s ability to continue as a going concern. If management has some significant concerns about the entity’s ability to continue as a going concern due to some material uncertainties, the uncertainties must be disclosed in a note to the financial statements. If management concludes that the entity is not a going concern, the financial statements should not be prepared on a going concern basis.

Question 34

What are risk assessment procedues to identify events and conditions?

Answer 34

Auditor shall perform following risk assessment procedures and related activities to identify events or conditions which, individually or collectively may cast significant doubt on entity’s ability to continue as going concern.
* When performing risk assessment procedures ( as required by ISA 315) consider whether events or conditions exist.
* Remain alert throughout the audit
* Discuss whether management has identified any events or conditions during Preliminary assessment of Going Concern Status, and.
* Ensure that Management’s Assessment:
o Covers atleast 12 months. .
o Considers all information of which auditor is aware.
* Inquire about events/conditions beyond period of assessment.

Question 35

What are additional PROCEDURES IF EVENTS/CONDITIONS ARE IDENTIFIED?

Answer 35

Auditor shall perform following procedures to confirm whether material uncertainty exists and whether going concern assumption is appropriate:
1. Evaluating management’s plans for future action, and whether it is feasible. Obtain representation from management regarding future plans and their feasibility.
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.
d. Reports of regulatory actions.
5. Inquire legal counsel regarding existence of litigations and claims.
6. Confirm existence and adequacy of borrowing facilities (eg. support from directors/holding company).

Question 36

What auditor shall communicate to TCWG with respect to ISA 570?

Answer 36

Auditor shall communicate with TCWG Events/Conditions casting doubt on going concern, and SHALL ALSO COMMUNICATE
* whether going concern assumption is appropriate or not.
* Whether events or conditions constitute material uncertainty;
* adequacy of related disclosures in financial statements;
* Implications for the auditor’s report (if any).

Emphasis of Matter paragraph is not a substitute for Material Uncertainty relating to Going Concern paragraph, or other modification

Question 37

WHEN TO INCLUDE KEY AUDIT MATTER SECTION IN REPORT?

Answer 37

• For Listed Company:
  Key Audit Matter Section is required.
• For Unlisted Company: Key Audit Matter Section may be included if it is required by law or is considered necessary by auditor (e.g. in case of public interest entities like banks, insurance companies, pension: funds and charities),

If auditor expresses disclaimer of opinion, Key Audit Matter Section will not be Included In auditor’s report, unless required by law.

Question 38

What are KAMs?

Answer 38

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

Question 39

How to detemine Key Auit Matter

Answer 39

Determining Key Audit Matter involve two steps
* From Matters communicated with TCWG
* Determine which matters are most significant ( threfore are Key Audit Matter)

Question 40

What factors are to be considered to determine matters which require significant auditor attention?

Answer 40

Areas of higher risks or significant risks as per ISA 315
1. Areas of significant auditor judgments
2. Significant events or transactions that occurred during the period. ;
3. Areas of complexity and significant management judgment.
4. Nature and extent of audit efforts needed to address the matter e.g.
* Extent of specialized knowledge or skill needed (particularly if expert is used)
* Nature of consultation outside the engagement team.
5. Significant transactions with related parties or transactions outside the normal course of business.
6. Importance of matter to users’ understanding.

Question 40

how COMMUNICATING KEY AUDIT MATTERS (KAM) IN REPORT is done?

Answer 40

KEY AUDIT MATTER (MAIN HEADING)
introductory language in this section shall state that:
“Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements of current period. These matters were addressed in the context of audit of the financial statements as a whole, and in forming the auditor’s opinion thereon, and we do not provide a separate opinion on these matters.
We have determined the matters described below to be Key Audit Matters to be communicate in our
report.

Question 41

What is description of individual Key Auidt Matter ( for each KAM?

Answer 41

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 alongwith reference to related
disclosure in F/S (if any)*
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. anindication of the outcome of the auditor’s procedures, or
c. key observations with respect to the matter.
* Management may decide (or auditor may encourage management) to include new/additional disclosures relating to KAM in F/S. A reference helps users to better understand key aspects of the matter and how management addressed It.

Question 44

What auditor shall communicate with TCWG regarding KAM?

Answer 44

Auditor shall communicate with TCWG:
* “Matters which auditor has determined to be KAM, or
* Auditor’s determination that there are no KAM to communicate in audit report.