chapter 4(Audit Repot and types of opinion)

Question 1

what are elements of auditor’s report.

Answer 1

1.title
2.addressee
3.auditors’ opinion
4.basis for opinion
5.key auditor mattes(paragraph)
6. other information and auditors report thereon
7.responsibilities of management for financial statements
8. responsibilities of auditor for audit
of financial statement.
9. other legal and regulatory requirements
10.auditors’ signature and name
11. dare of auditor’s report.
12. auditors address.

Question 2

what are additional elements of auditor’s report?

Answer 2

1. modified opinion and basis for modified opinion.
   2.material uncertainty related to going concern(paragraph)
   3.

Question 3

what is title of auditor’s report?

Answer 3

1.auditors report shall have title that clearly indicates that it is an independent auditor report.
2. title is necessary to differentiate auditors report from other reports e.g., directors report or external auditors report.

Question 4

how an auditor’s report should be addressed?

Answer 4

1.an auditor’s report should be addressed according to law or circumstances.
2. report is usually addressed to members (in case of statutory audit) or board of directors (in case oof non statutory audit)

Question 5

what is auditors’ opinion in auditors report?

Answer 5

section of auditor’s opinion an auditor report shall state identifying information i.e.,
1. auditor has audited; and
2. the entity, financial statement (identifying title of each statement) and period covered by financial statements.

Question 6

what is basis for opinion in auditors report?

Answer 6

basis for opinion is a section of auditor’s report which should be presented right after the auditor’s opinion.
auditor shall state that it has.
1. he has conducted the audit according to ISAs.
he has fulfilled requirements relating to independence, and
3. sufficient appropriate evidence for his opinion.
4. refer to the section that describes auditor’s responsibilities.

Question 7

what are responsibilities of management for financial statement in an auditor’s report?

Answer 7

this section describes responsibilities of management for.
1. financial statements, internal controls
2.assessing entity’s ability to continue as going concern.

this section also identifies responsibilities of TCWG (for oversight of financial reporting process)

Question 8

what is responsibility of auditor for audit of financial statements?

Answer 8

this section contains overall objectives of auditor to obtain reasonable assurance whether financial statements ae free from misstatements and to issue report that includes auditors’ opinion.

Question 9

describe in detail the responsibilities of auditor for audit of financial statement.

Answer 9

1. identify and assess the risks of material misstatement of financial statements
2. to perform audit procedure and obtain sufficient appropriate audit evidence.
   3.to obtain understanding of internal control
3. to evaluate the appropriateness of accounting policies used and the reasonableness accounting estimates.
   5.to conduce on appropriateness of managements use of going concern basis of accounting.
4. to evaluate overall presentation, and whether financial statements achieve fair presentation.
5. auditor has also responsibility to communicate to TCWG.

Question 10

In case of listed companies what is required by auditor to include in audit report?

Answer 10

1) Auditors’ responsibility to communicate statement of compliance with ethical requirement
2) Key audit matter section (not included if disclaimer of opinion is expressed)
3) Name of engagement partner (not included there is a significant personnel security threat)

Question 11

Before reaching an opinion, auditor shall evaluate:

Answer 11

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

Question 12

Name the relations in which misstatements may arise in financial statements.

Answer 12

1) The appropriateness of the selected accounting policies
2) The financial statements may not correctly describe an accounting policy
3) The appropriateness or adequacy of disclosures in the financial statements

Question 13

what would be the auditor’s course of action if a misstatement is identified.

Answer 13

1. auditor accumulates all misstatements identified during audit, communicates them to management.
2. if management does not correct a misstatement, auditor shall communicate them to TCWG.
3. if misstatements are correct before signing of auditor’s report auditor shall express unmodified opinion. if misstatements are not corrected then auditor shall express qualified or adverse or disclaimer of opinion.
4. If misstatements are intentional, it will also effects other aspects of audit

Question 14

Name the relations in which scope limitation may arise.

Answer 14

1) Circumstances beyond the entity control.
2) Circumstances relating to nature or timing difference.
3) Limitations imposed by management.

Question 15

What is the auditor course of action if a scope limitation is faced by auditor?

Answer 15

Auditor shall perform alternative audit procedures to obtain evidence. If evidence is not obtained, then auditor shall express Qualified opinion (if effect is material) and Disclaimer of opinion (if effect is pervasive)

Question 16

What is the auditor course of action if a scope limitation is imposed by Managment?

Answer 16

Auditor shall perform alternative audit procedures to obtain evidence. If evidence is not obtained, then auditor shall express Qualified opinion (if effect is material) and Disclaimer of opinion (if effect is pervasive)
this will also effects other aspects of audit i.e. auditor shall re-assess integrity of management, increase risk of misstatements.
If effect is pervasive auditor shall withdraw from engagement. if withdrawal is not possible then auditor shall express disclaimer of opinioin .

Question 17

what are the pervasive effects on the financial statements?

Answer 17

Pervasive effects on the financial statements are those that, in auditor’s judgements:
1. Are not confined to specific accounts/elements of financial statements.
2. If so confined, representsubstantial portion of financial statements.or
3. In relation to disclosures, are fundamental to users’ understanding of FS.

Question 18

If there is misstatement in FS what should be auditor opinion if effect of this is immaterial?

Answer 18

UNMODIFIED OPINION

Question 19

If there is misstatement in FS what should be auditor opinion if effect of this is material?

Answer 19

QUALIFIED OPINION

Question 20

If there is misstatement in FS what should be auditor opinion if effect of this is pervasive?

Answer 20

ADVERSE OPINION

Question 21

If there is Scope limitation in FS what should be auditor opinion if effect of this is immaterial?

Answer 21

UNMODIFIED OPINION

Question 21

If there is Scope limitation in FS what should be auditor opinion if effect of this is material?

Answer 21

QUALIFIED OPINION

Question 21

If there is Scope limitation in FS what should be auditor opinion if effect of this is pervasive?

Answer 21

Disclaimer of opinion

Question 21

If misstatements are immaterial then auditor express unmodified opinion, what else required by auditor in this regard?

Answer 21

Auditor shall also obtain written representation from management that effect of uncorrected misstatements are immaterial individually or in aggregate, to the FS as a whole.

Question 21

What else required by auditor other than qualified, adverse or disclaimer of opinion in auditor report in case of misstatements or scope limitation?

Answer 21

Auditor is required to describe nature of misstatements or scope limitation, in “basis of opinion paragraph”.

Question 21

Define emphasis of matter paragraph.

Answer 21

emphasis of matter paragraph is included in auditor’s report if:
1) Auditor considers it necessary to DRAW user attention to matter adequately DISCLOSED in FS.
2) is fundamental to user’s understanding of the FS
3) provided:
a) Matter is not a misstatement or scope limitation requiring modified opinion.
b) Matter is not a key audit matter

Question 21

What are the Circumstances when emphasis of matter paragraph is included in Audit report

Answer 21

1. If there is material uncertainty relating to exceptional litigation or regulatory authority.
2. A significant subsequent event occurs.
3. If FS are re-issued or comparatively re-stated.
4. When a major disaster significantly affects entity’s financial position.
5. Early application of new accounting standard.
6. If a financial reporting framework is unacceptable but is prescribed by law or regulation.
7. If a FS are prepared on special purpose framework.
8. Going concern assumption is not appropriate, and FS are prepared on liquidation basis.

Question 21

emphasis of matter paragraph shall state

Answer 21

1) matter
2) reference to the notes to FS
3) Auditor’s opinion is not modified

Question 21

If there are routine tax contingencies, these will be included in

Answer 21

Key audit matter

Question 21

If there is single major tax investigation against the company, it may be included in

Answer 21

Emphasis of matter paragraph

Question 22

When to include other matter paragraph in Auditor’s report?

Answer 22

IF:
1) Auditor considers it necessary to communicate a matter which is not srequired to be disclosed in FS
2) But is relevant to user’s understanding of the audit report, or auditor’s responsibility
3) Provided:
a) communication is not prohibited by law or regulation or professional standards and
b) matter is not a key audit matter.

Question 23

what would be the circumstances when other matter is included in audit report?

Answer 23

1. if financial statements of prior period were not audited or were not audited by another auditor.
2. if auditor issues report 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 issue reports separately on each set of F/S)
3. if auditor restricts distribution of auditor’s report (e.g., when F/S and auditor report are prepared for specific user.
4. if there is scope limitation by management whose effect persuasive and withdrawal is not possible/practicable. (Here other matter is given in addition to disclaimer of opinion.

Question 24

what are risk management procedures to identify events/conditions?

Answer 24

auditor shall perform following risks 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:
1. when performing risk assessment procedures required by (ISA 315), consider whether events or conditions exist.
2. remain alert through the audit.
3. discuss whether management has identified any events or conditions during preliminary assessment of going concern status, and.
4.ensures management’s assessment :
a. covers at least 12 monts
b. considers all information of which auditor is aware.
5. inquire about events /conditions beyond period of assessment.

Question 25

what are the conditions which cast doubt on going concern?

Answer 25

1. financial conditions
2. operating conditions.
3. legal and other conditions.

Question 26

which financial conditions cast doubt on going concern?

Answer 26

1. substantial losses or negative entity.
2. net liability or net current liability position (i.e., liabilities exceeding assets)
3. negative operating cash flow (indicates by historical perspective financial statements)
   liability to pay debts or comply with terms of loan agreement.
4. arears or discontinuance of dividends.
5. adverse key financial ratios.

Question 27

which operation conditions cast doubt on going concern?

Answer 27

1. management intentions to liquidate entity or to cease operations.
2. loss of key management.
3. loss of major market, license, franchise.
4. loss of largest customer /supplier (&no substitutes)
5. labour difficulties
6. shortage of important supplies.
7. entry of highly successful competitor.
   `

Question 28

which legal and other conditions cast doubt on going concern?

Answer 28

1. non-compliance with legal requirements.
2. changes in law or government policy expected to adversely affect the entity.
3. pending legal or regulatory proceedings against the entity that may if successful result in claims that the entity is unlikely to be able to satisfy.
4. uninsured or underinsured catastrophes of major production facility.

Question 29

what would be the additional procedures if events or conditions are identified?

Answer 29

auditor shall perform following procedures whether material uncertainty exists and whether going concern assumption is appropriate.
1. evaluating managements 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.
b. assumptions use re adequately supportable.
3. consider effects of subsequent event on going statement concern assessment.
4. read
a. minutes of 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 litigation and claims.
6.confirm exitance and adequacy of borrowing facilities (e.g., support from directors /holdings company)

Question 30

if conclusion is

“Going concern is appropriate (no material uncertainty)”

then what would be its effect on audit report?

Answer 30

auditor shall express unmodified opinion, provides 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 31

if conclusion is

“Going concern is appropriate, but material uncertainty exist.”

then what would be its effect on audit report?

Answer 31

there would be two different procedures.

1. if adequate disclosure is included in financial statement?
2. if adequate disclosure is not found in financial statement.

Question 32

what would be the procedure “if adequate disclosure is included in financial statement”?

Answer 32

auditor shall express an unmodified opinion and shall include “material uncertainty related to going concern” paragraph in his report to:
1. draw users’ attention to note that discloses the events/conditions.
2. state that these events/conditions indicate the material uncertainty exists.
3. auditors’ opinion is not modified in respect of this matter.

Question 33

what would be the procedure “if adequate disclosure is not included in financial statement”?

Answer 33

auditor shall express a qualified opinion (if effect is material) or adverse opinion (if effect is persuasive). auditor shall also state in basis of qualified/adverse opinion” paragraph that material uncertainty exists and that the financial statements do not adequately discloses this matter.

Question 34

if conclusion is

” Going concern assumption is not appropriate.”

then what would be the procedure?

Answer 34

there would be different procedures.

1. if financial statements are prepared on going concern basis.
2. if financial statement is prepared on alternate basis?

Question 35

what would be the procedure if

“if financial statements are prepared on going concern basis”.

Answer 35

auditor shall express adverse opinion.

Question 36

what would be the procedure if

“If financial statements are prepared on alternate basis” i.e.,
(Liquidation basis, break-up value basis)

Answer 36

auditor shall express unmodified opinion and shall include emphasis of matter paragraph in his report to draw users’ attention.

Question 37

what would be communication of auditor with TCWG?

Answer 37

auditing shall communicate with TCWG events/conditions casting doubt on going concern, and shall also communicate:
1.whether going concern assumption is appropriate or not.
2. whether events or conditions constitute material uncertainty 3. adequacy of related discourses in financial statements.
4. implications for auditor’s report
(If any)

Question 38

exam tip page 52

Answer 38

see page

Question 39

what are key audit matters?

Answer 39

those matters that “in the professional judgment” were the most significant in the in the audit of financial statements of current period.
key audit matters are selected from matter communicated with TCWG.

Question 40

how key audit matters are determined?

Answer 40

determination of key audit matters involves two steps:
1. from matters communicated with TCWG.
2. determine which matters are most significant (and therefore key audit matters)

Question 41

which factors to consider in determining matters which require significant auditor attention?

Answer 41

1. areas of higher risks or significant risks as per ISA 315
   2.areas of significant auditor judgement.
2. significant events or transactions that occurred during the period.
3. areas of complexity and significant management judgement.
4. nature and extent of audit efforts needed to address the matters.
   a. extent of specialised knowledge or skills (particularly if expert is needed)
   b. nature of consultation outside the engagement team.
5. significant transactions with related parties or transactions outside the normal course of business.
6. importance of matters to users understanding.

Question 42

what are examples of key audit matter: (provided these are properly accounted for and disclosed)

Answer 42

1. goodwill, intangible assets, deferred tax, leases, self-constructed assets.
2. assess carried at revalued amounts e.g., property, investments, specialized inventory.
3. impairment loss.
4. valuation of liabilities e.g., financial instruments, retirement obligations (pension or graduality).
5. significant accounting policies, or changes therein.
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.

Question 43

how key audit matters are communicated in auditors report?

Answer 43

key audit matters are described in audit report under the heading “key audit matters”(using appropriate subheading for each key audit matter)

Question 44

what would be the main headings of key audit matters? (Main headings)

Answer 44

introductory language in this section shall state that:

key audit matters are those matters that, in our professional judgement, were of most significance in the audit of financial statement of current period. These matters were addressed in the context of audit of the financial statements of current period.these matters were addressed in the context of audit of 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 45

what would be the description of individual key audit matters (for each KAM).

Answer 45

Auditor shall give a subheading for each key audit matter and shall describe:

1. what is KAM i.e., auditor shall briefly describe matter along with reference to related disclosure in F/S (if any)
2. why the matter was considered more significant in audit.
3. how the matter was addressed in the audit e.g.,
   a. a brief overview of producers
   performed, or
   b. an indication of 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.