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Audit > Chapter 4 > Flashcards

Chapter 4 Flashcards

1
Q

What are the elements of an Auditor’s Report

A
  1. Title (independent auditor’s report)
  2. Addressee (Members or Others e.g. BOD)
  3. Opinion (identifying information + Opinion)
  4. Basis for Opinion (ISAs, Ethics, Evidence)
  5. Key Audit Matter Section
  6. Other Information
  7. Responsibilities of Management (F/S, Internal Control, Going Concern)
  8. Responsibilities of Auditor (Location = Within report, Appendix, Website)
    i. Overall objective.
    ii. Discussion assurance, materiality and scope of audit.
    iii. Responsibility to communicate to TCWG.
  9. Other Legal and Regulatory Requirements (Books of Account, F/S drawn up, Investment, Zakat)
  10. Signature (in firm name, personal name or both)
  11. Date (on/after evidence completed and subsequent events considered).
  12. Address (city name).
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2
Q

Define Title of an Auditor’s Report.

A

Title:
 The auditor’s report shall have a title that clearly indicates that it is “independent
auditor’s report”.
 Title is necessary to differentiate auditor’s report from other reports e.g. director’s report
and internal auditor’s report.

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3
Q

Explain element of Addressee in an Audit Report.

A

Addressee
 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), or Board of Directors
(in case of non-statutory audit)

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4
Q

Explain Auditor’s Opinion section in an Audit Report.

A

Auditor’s Opinion:
This section shall state identifying information i.e.
 auditor has audited; and
 the entity, financial statements (identifying title of each statement) and period covered
by financial statements;
Then, this section shall state auditor’s opinion i.e. whether financial statements have been
prepared in accordance with AFRF, and give true and fair view

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5
Q

Explain Basis for Opinion section in an Auditor’s Report.

A

Basis for Opinion:
This section shall be presented immediately after Opinion section. In this section, auditor
shall state that he has
 conducted audit in accordance with ISAs,
 fulfilled ethical requirements relating to independence, and
 sufficient appropriate evidence for his opinion

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6
Q

Explain Section of MGT Responsibilities in an Auditor’s report.

A

Responsibilities of Management for Financial Statements
This section shall describe management’s responsibility for:
 Financial Statements, Internal Control (as stated in LO 4 of Chapter 2) and
 Assessing entity’s ability to continue as Going Concern.
This section shall also identify responsibility of TCWG (for oversight of financial reporting
process)

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7
Q

Explain Section of Auditors Responsibilities in an Auditor’s report.

A

Responsibilities of Auditor for Audit of Financial Statements:
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 auditor’s opinion.
Further description of auditor’s responsibility shall include:
 Discussion on reasonable assurance, materiality and scope of audit.
 Auditor’s responsibility to communicate to TCWG:
i. Planned scope and timing of audit
ii. Significant findings from audit
iii. Key Audit Matters (in case of listed company)
iv. Statement of compliance with ethical requirements (in case of listed company)

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8
Q

What is the Location of the description of the auditor’s responsibilities in Audit Report.

A

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.

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9
Q

What information is included in Other Legal and Regulatory Section of an Audit Report.

A

In Pakistan, statutory auditor reports on following Other Legal and Regulatory Requirements include:
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

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10
Q

Who can sign the report and whose name shall be included in report.

A

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

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11
Q

What is an appropriate date for an audit report.

A

 The date of audit report should not be earlier than the date on which the auditor obtains
sufficient appropriate evidence on which his report is based
 Date also indicates that auditor has considered the effect of subsequent events on
financial statements upto that date.

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12
Q

What information is required to be included in audit report of a listed company.

A
  1. Key Audit Matter Section.
  2. Auditor’s responsibility to communicate Statement of Compliance with ethical requirements to TCWG.
  3. Name of Engagement Partner (unless there is a significant personal security threat).
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13
Q

What an Auditor shall consider before expressing an Opinion in Auditor’s Report.

A

Auditor shall evaluate:

  1. Whether there is a misstatement or a scope limitation.
  2. Whether the effect of this misstatement or scope limitation is immaterial, material or pervasive
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14
Q

Define Misstatement with examples.

A

Misstatement means difference b/w what AFRF require and what is presented in F/S.
1. Pending litigation is not correctly accounted for or
disclosed.
2. Related party transactions or Going Concern Issues are not
disclosed.
3. Obsolete inventory or bad debts are not provided for.
4. Depreciation or Impairment is not properly recorded.
5. Subsequent Adjusting events are not recorded in financial statements (e.g. Bankruptcy of debtor/recovery of doubtful debt, Decision of legal cases, Sale of inventory below cost).

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15
Q

Explain effect on auditor’s report if a misstatement is identified.

A

Effect on Report:

  1. Qualified Opinion (if effect is material), or
  2. Adverse Opinion (if effect is pervasive).
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16
Q

Define Scope Limitation with example.

A

Scope Limitation means that auditor is unable to obtain sufficient and appropriate evidence on which his opinion is based.

  1. Records destroyed or seized by govt.
  2. No inventory count, confirmation, written representation
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17
Q

Explain effect on auditor’s report if a Scope Limitation is identified.

A
  1. Qualified Opinion (if effect is material), or
  2. Disclaimer of Opinion (if effect is pervasive).
    If misstatement or scope limitation is intentional, it will affect Opinion + Other aspects (e.g. Integrity, Risk, Procedures, Withdrawal)
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18
Q

Define materiality.

A

Items are considered material when they individually or in aggregate would reasonably be expected to influence the economic decisions of users taken on the basis of F/S.
Materiality depends on size as well as nature of misstatement.

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19
Q

How a Scope Limitation or Misstatement can be pervasive.

A

Misstatement or Scope Limitations :

  1. Are not confined to specific accounts/elements of F/S.
  2. If so confined, represent substantial portion of F/S.
  3. In relation to disclosure, are fundamental to users understanding of F/S.
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20
Q

Define Emphasis of Matter Paragraph(EOM).

A

EOM is included if:

  1. Auditor consider it necessary to draw users’ attention to a matter adequately disclosed in F/S,
  2. which is fundamental to understanding of the F/S,
  3. provided:
    - matter is not a misstatement or scope limitation not requires modified opinion, and
    - matter is not a KAM.
21
Q

Provide Examples of EOM Paragraph.

A
  1. Material Uncertainty relation to Exceptional litigation or Regulatory action.
  2. Subsequent non-adjusting event.
  3. F/S are re-issued, or corresponding figures are re-stated
  4. Major disaster during the year
  5. Early application of a new accounting standard
  6. Financial reporting framework is unacceptable but is required by law
  7. Special Purpose Framework is used.

Adjusting events are not included in EOM Paragraph.

22
Q

Where an EOM Paragraph is placed in Auditor Report.

A

After basis of opinion , before Key Audit Matter

23
Q

How an EOM Paragraph is presented in auditor’s report.

A

It shall be included under a separate section under heading “Emphasis of Matter” in Auditor’s report.
This paragraph shall state:
1. Reference to notes in F/S in which this matter is disclosed.
2. Matter being emphasized.
3. Opinion not modified in this matter emphasized .

24
Q

Draft an EOM Paragraph for Exceptional Litigation.

A

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 modified in respect of this matter.

25
Q

Define Other Matter Paragraph (OM) in an Auditor’s Report

A

Other Matter Paragraph is include if:

  1. auditor consider it necessary to communicate a matter which is not required to be disclosed in F/S.
  2. but is relevant to users’ understanding of audit, auditor’s report, or auditor’s responsibilities.
  3. provided:
    i. communication is not prohibited by law or regulation or professional standards.
    ii. matter is not a KAM.
26
Q

Examples of an Situations in which Other Matter Paragraph is included.

A
  1. Prior period not audited or audited by another auditor.
  2. Auditor expresses opinion on two sets of
    financial statements.
  3. Restriction on distribution of report.
  4. Pervasive scope limitation by management, and withdrawal is not possible.
27
Q

Where an OM paragraph is placed in an auditor’s report.

A

Within the section to which it relates, or at end of report.

28
Q

Draft an OM paragraph relating to situation when Prior year F/S were audited by andother audiotr.

A

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

29
Q

Explain responsibilities of MGT relating to Going Concern.

A

– To assess (at least for 12 months) ability of entity to continue as Going Concern (whether or not AFRF requires).
– If there are events or conditions casting doubt, disclose them.
–If there is material uncertainty, disclose it.
– If Going concern not appropriate, prepare F/S on non-going concern basis.

30
Q

Explain responsibility of Auditor relating to Going Concern.

A

– To perform Risk Assessment Procedures to identify events/conditions.
– If events/conditions are identified, perform procedures to confirm whether going concern assumption is appropriate, or material uncertainty exists.
– To report in accordance with his findings

31
Q

Explain Risk Assessment procedures to identify events casting doubt on going concern assumption.

A
  1. When performing risk assessment procedures, auditor shall consider where event / conditions exists.
  2. Remain alert throughout the audit.
  3. Discuss with MGT whether it has performed preliminary assessment of Going concern status and identified any events or conditions.
  4. Evaluate whether MGT Assessment:
    i. cover period not less than 12 months.
    ii. Consider all information of which auditor is aware.
  5. Inquire about events or conditions beyond period of assessment.
32
Q

Examples of events/conditions casting doubt on going concern

A

Financial conditions:

 1. Substantial loses or negative equity.
 2. Net liability position.
 3. Liquidity issues.
 4. Adverse key financial ratios.

Operating Conditions:

 1. Loss of key MGT.
 2. Loss of major customer.
 3. Non-availability of production resources.

Legal and Other conditions:

 1. Non-compliance with laws or regulations.
 2. Change in law or govt. policy expected to affect entity adversely.
 3. Uninsured or underinsured catastrophes.
33
Q

Additional Procedures if events/conditions are identified casting doubt on going concern assumption.

A
  1. Evaluating management’s plans for future actions and whether they are feasible. Obtain representation from MGT/TCWG regarding future plans and their feasibility.
  2. Evaluate Cash Flow Forecast:
    i. Data used is reliable.
    ii. Assumptions used are reasonable.
  3. . Consider effect of subsequent events on going concern assumption.
  4. Read minutes, loan agreements, financial information, report of regulatory actions.
  5. Inquire legal counsel regarding existence of litigations and claims.
  6. Consider availability and adequacy of financial support.
34
Q

Implication on auditor’s report for Going Concern assumption.

A 
Event/Condition exists (but no material uncertainty exists):
  1. If matter is disclosed in F/S:
   – Unmodified Opinion
   – Key Audit Matter
  2. If matter is not disclosed in F/S:
   –Qualified opinion (if material), or 
   –Adverse opinion (if pervasive).

Going Concern Assumption is appropriate but material uncertainty exists:
1. Adequately disclosed in F/S:
– Unmodified Opinion
– Material Uncertainty relating to Going Concern Paragraph.
2. Not adequately disclosed in F/S:
–Qualified opinion (if material), or
–Adverse opinion (if pervasive) and shall also include Basis for Qualified/Adverse Opinion Section.

Going Concern Assumption is not appropriate:
1. F/S prepared on non-going concern basis:
– Unmodified Opinion
– Emphasis of Matter Paragraph (Special Basis of Accounting).
2. F/S prepared on Going Concern Basis:
– Adverse Opinion

35
Q

What is included in Material Uncertainty relating to Going Concern Paragraph.

A
  1. Reference to notes in F/S that discloses the events/conditions.
  2. State those events/conditions that indicates material uncertainty.
  3. Auditor’s opinion is not modified in respect of this matter.

This paragraph shall be included after opinion and basis for opinion section in report.

36
Q

Draft a Material Uncertainty relating to Going Concern Paragraph

A

We draw attention to Note XXX in F/S, which indicates that company incurred a net loss of XYZ, during the year ended 31, Dec, 2021 and, as of that date, the company’s current liabilities exceeded its total assets by YYY. As stated in Note 6, indicate that a material uncertainty exists that may cast significant doubt on the company’s ability to continue as going concern. Our opinion is not modified in respect of this matter.

37
Q

What matters shall an auditor communicate to TCWG relating to Going Concern Assumption.

A
  1. Whether going concern assumption is appropriate or not.
  2. Whether events or conditions constitute material uncertainty.
  3. Adequacy of related disclosure in F/S.
  4. Implications for auditor’s report.
38
Q

When to include KAM Section in Auditor’s report.

A

For listed company:

  1. Included,
  2. Not included, if disclaimer of opinion is given (unless required by law).

For unlisted company:
1. Included if required by law or is considered necessary by auditor.

39
Q

What are Key Audit MatterS.

A

Matters that in auditor’s professional judgment were of most significant in the audit of the F/S of current period. Key audit matters are selected from matters communicated with TCWG.

40
Q

Examples of Key Audit Matters.

A
  1. Goodwill, Intangible Assets, Deferred Tax.
  2. Assets carried at revalued amounts.
  3. Impairment loss.
  4. Valuation of liabilities e.g. financial instruments, retirement obligations (Pension or
    Gratuity).
  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 (Non-current assets held for sale, Restructuring provision)
  9. Significant number of litigations and tax contingencies.
  10. Significant related party transactions.
41
Q

Draft a key audit matter paragraph on Revaluation of PPE.

A
  1. Revaluation of PPE:
    Refer to note X of F/S, company has revalued its land, building and machinery at revalued amount.

We identified this matter as Key Audit Matter because its amount is material to the F/S. In addition, process of valuation is a highly complex and judgmental process which involves assumptions and methods affected by future economic and market conditions.

How the Matter was resolved in audit:

  1. Assessed competence, capability and objectivity of the expert.
  2. Checked relevance, reasonableness and accuracy of source data and assumptions used.
  3. Ensure that appropriate disclosure has been included in F/S.
42
Q

What shall auditor communicate to TCWG regarding KAM.

A
  1. Matters which auditor has determined to be KAM.

2. Auditor’s determination that there is no KAM to communicate in report.

43
Q

Explain the description of individual KAM in report

A

Auditor shall describe:

  1. What is the KAM . Auditor shall briefly describe matter along with reference to related disclosure in F/S.
  2. Why matter is considered a KAM.
  3. How the matter was addressed during audit:
    i. a brief overview of procedures performed.
    ii. An indication of outcome of auditor’s procedures.
    iii. key observation with respect to the auditor.
44
Q

Draft an unmodified Opinion.

A

Opinion:
We have audited the financial statements of ABC Company , which comprise the statement of financial position as at December 31, 20X1 and the statement of profit or loss and other comprehensive income, the statement of changes in equity, the statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies and other explanatory information, and we state that we have obtained all the information and explanations which, to the best of our knowledge were necessary for the purposes of the audit.

In our opinion, financial statements give true and fair view of financial position of ABC Limited at
December 31, 20X1 and its financial performance and cash flow for the year then ended in accordance
with IFRS.

Basis For Opinion:
We conducted our audit in accordance with International Standards on Auditing (ISAs) as applicable in Pakistan.
Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit
of the Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion

45
Q

Draft a Qualified Opinion in case of a Misstatement.

A

Qualified Opinion:
We have audited the ……………….
In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion section of our report, financial statements give true and fair view of financial position of ABC Limited at December 31, 2020 and its financial performance and cash flow for the year then ended in accordance with IFRS.

Basis for Qualified Opinion:
Management has not stated the inventories at the lower of cost and net realizable value but has stated them solely at cost, which is a departure from IFRS. Had management stated the inventories at the lower of cost and net realizable value, inventories would have been written down by xxx, cost of sales would have been increased by xxx, and income tax, net income and shareholders’ equity would have been reduced by
xxx, xxx and xxx, respectively.
We conducted our audit in accordance with …

46
Q

Draft a Qualified Opinion in case of a Scope Limitation.

A

Qualified Opinion:
We have audited the ……………….
In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion section of our report, financial statements give true and fair view of financial position of ABC Limited at December 31, 2020 and its financial performance and cash flow for the year then ended in accordance with IFRS.

Basis for Qualified Opinion:
We did not observe the counting of the physical stock as of December 31, 20X1 because we were appointed after the year end. We were unable to obtain sufficient appropriate audit evidence by performing alternative audit procedures. Consequently, we were unable to verify whether inventory is stated fairly in financial statements.
We conducted our audit in accordance with ………

47
Q

Draft an Adverse Opinion

A

Adverse Opinion
We have audited the ……………….
In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion section of our report, financial statements do not give true and fair view of financial position of ABC Limited at December 31, 2020 and its financial performance and cash flow for the year then ended in accordance with IFRS.

Basis for Adverse Opinion
The company has not consolidated the financial statements of subsidiary XYZ Company which it acquired during 20X1, because it has not yet been able to ascertain the fair values of certain of the subsidiary’s assets and liabilities at the acquisition date. Under IFRS, the subsidiary should have been consolidated because it is controlled by the company.
We conducted our audit in accordance with ………

48
Q

Draft a Disclaimer of Opinion.

A

Disclaimer of Opinion
We were engaged to audit the ……………….
Because of the significance of the matter described in the Basis for Disclaimer of Opinion section of our report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these financial statements. Consequently, we do not express an opinion on the accompanying financial statements of the
company.

Basis for Disclaimer of Opinion
We were unable to obtain sufficient appropriate audit evidence about the carrying amount of ABC’s inventory as at December 31, 20X1 because we did not observe the counting of the physical stock as of December 31, 20X1 since that date was prior to our appointment as auditor of the company.
We were also unable to obtain sufficient appropriate audit evidence about the carrying amount of company’s accounts receivables amounting Rs. XXX million because we were prohibited to obtain confirmation of certain accounts receivables due to introduction of a new computerized accounts receivable system during the year which resulted in numerous errors in accounts receivable.
We were unable to obtain sufficient appropriate audit evidence by using other alternative procedures. Consequently, we were unable to verify whether these amounts are stated fairly in financial statements

Audit (15 decks)

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