Chapter 4: Auditor’s Report & Types of Opinions

Question 1

List down essential elements of an Audit Report.

Answer 1

1. Title
2. Addressee
3. Auditor’s Opinion:
4. Basis for Opinion:
5. “Key Audit Matters” Paragraph
6. Other Information & Auditor’s Report Thereon
7. Responsibilities of Management for Financial Statements
8. Responsibilities of Auditor for Audit of Financial Statements
9. Other Legal and Regulatory Requirements:
10. Auditor’s Signature & Name
11. Date of Auditor’s Report
12. Auditor’s Address

[Chapter 4: LO 1]

Question 2

List down additional elements of an audit report which make report Modified.

Answer 2

1. Modified Opinion and Basis for Modified Opinion Paragraph.
2. “Material Uncertainty Relating to Going Concern” Paragraph.
3. “Emphasis of Matter” Paragraph.
4. “Other Matter” Paragraph.

[Chapter 4: LO 1]

Question 3

What should be the Title of an Audit Report?

Answer 3

 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.

[Chapter 4: LO 1]

Question 4

What should be the Addressee of an Audit Report?

Answer 4

 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).

[Chapter 4: LO 1]

Question 5

What information should be the included in Auditor’s Opinion Section of an Audit Report?

Answer 5

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

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.

[Chapter 4: LO 1]

Question 6

What information should be included in “Basis for Opinion” Section of an Audit Report?

Answer 6

Basis for Opinion section shall state that auditor has
 conducted audit in accordance with** ISAs,
 fulfilled ethical requirements** relating to independence.
 sufficient appropriate evidence for his opinion.
 Refer to the section that describes auditor’s responsibilities

[Chapter 4: LO 1]

Question 7

Draft the “Opinion Paragraph” of Auditor’s Report?

Answer 7

Opinion
We have audited the financial statements of ABC Company (the Company), which comprise the statement of financial position as at December 31, 20X1, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.

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.

[Chapter 4: LO 1]

Question 8

Draft the “Basis for Opinion Paragraph” of Auditor’s Report?

Answer 8

Basis for Opinion
We conducted our audit in accordance with International Standards on Auditing (ISAs). 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 are independent of the Company in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (the Code) and we have fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion

[Chapter 4: LO 1]

Question 9

What information should be included in “Responsibilities of Management for Financial Statements” Section of an Audit Report?.

Answer 9

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

[Chapter 4: LO 1]

Question 10

What information should be included in “Responsibilities of Auditor for Audit of Financial Statements” Section of an Audit Report?

Answer 10

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 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)

[Chapter 4: LO 1]

Question 11

State the location of description of Auditor’s Responsibilities in Auditor’s Report.

Answer 11

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.

[Chapter 4: LO 1]

Question 12

In addition to expressing opinion on financial statements, Companies Act 2017 requires auditor to express opinion on certain other matters. List those additional matters.

Answer 12

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

v. [Chapter 4: LO 1]

Question 13

How auditor’s report can be signed?

Answer 13

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.

[Chapter 4: LO 1]

Question 14

As per ISAs, when must name of engagement partner be disclosed in the auditor’s report?

Answer 14

Name of engagement partner is required for** listed entities**, unless there is significant personal security threat to engagement team members. If so, security threat shall be discussed with TCWG.

[Chapter 4: LO 1]

Question 15

What date should the auditor put on the audit report and what does it represent?

Answer 15

 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.

[Chapter 4: LO 1]

Question 16

What should be the mentioned in the Address section of auditor’s report.

Answer 16

In Address section, auditor’s report shall state the location (usually city name) where the auditor practices.

[Chapter 4: LO 1]

Question 17

What is the difference between an audit report of Listed Company and audit report of Unlisted Company.

Answer 17

In case of listed company, auditor is required to include following in audit report:
 Auditor’s Responsibility to** communicate** Statement of compliance with ethical requirements to TCWG.
 Key audit matter section (however, not included if disclaimer of opinion is expressed).
 Name of engagement partner (however, not included if there is a significant personal security threat).

[Chapter 4: LO 2]

Question 18

List down three categories of Misstatement as per ISA 705.

Answer 18

1. The appropriateness of the selected accounting policies.
2. The application of the selected accounting policies.
3. The appropriateness or adequacy of disclosures in the financial statements.

[Chapter 4: LO 3]

Question 19

List down examples of misstatements under the category “The appropriateness of the selected accounting policies”.

Answer 19

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

[Chapter 4: LO 3]

Question 20

List down examples of misstatements under the category “The application of the selected accounting policies”.

Answer 20

1. Selected accounting policies are not applied** correctly** (i.e. errors in application of accounting policies)
2. 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.

[Chapter 4: LO 3]

Question 21

List down examples of misstatements under the category “The appropriateness or adequacy of disclosures in the financial statements”.

Answer 21

1. Financial statements do not provide all disclosures required by AFRF.
2. Disclosures in financial statements are** not in accordance with AFRF.**
3. Financial statements do not provide the disclosures necessary to achieve fair presentation.

[Chapter 4: LO 3]

Question 22

What shall be Auditor’s “Course of Action” if a Misstatement is identified. Describe his Action as well as impact on Report.

Answer 22

1. 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.
2. 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).
3. If misstatements are intentional, this will also affect other aspects of audit, i.e. auditor shall re-assess integrity of management, increase risk of misstatement. In extreme case, auditor shall withdraw from engagement if withdrawal is possible and practicable.

[Chapter 4: LO 3]

Question 23

List down three categories of Scope Limitation as per ISA 705.

Answer 23

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

[Chapter 4: LO 3]

Question 24

List down examples of misstatements under the category “Circumstances beyond the control of entity”.

Answer 24

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.

[Chapter 4: LO 3]

Question 25

List down examples of misstatements under the category “Circumstances relating to nature or timing of auditor’s work”.

Answer 25

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.

[Chapter 4: LO 3]

Question 26

List down examples of misstatements under the category “Limitations imposed by management/ entity”.

Answer 26

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 representations **to auditor.

[Chapter 4: LO 3]

Question 27

What shall be Auditor’s “Course of Action” if a Scope Limitation is identified. Describe his Action as well as impact on Report.

Answer 27

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. In extreme case, auditor shall withdraw from engagement if withdrawal is possible and practicable.

[Chapter 4: LO 3]

Question 28

Which items are considered “Material” in audit?

Answer 28

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.

[Chapter 4: LO 3]

Question 29

Which items are considered “Pervasive” in audit?

Answer 29

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.

[Chapter 4: LO 3]

Question 30

What shall be impact on Audit Report if there is a Misstatement whose effect is Material.

Answer 30

1. Auditor shall express Qualified Opinion on financial statements.
2. Auditor shall explain nature of misstatement in “Basis for Qualified Opinion Paragraph”.
3. Qualified opinion is by nature a Key Audit Matter. Therefore, a reference to the Basis for Qualified Opinion should be included in the Key Audit Matters section.

[Chapter 4: LO 3]

Question 31

What shall be impact on Audit Report if there is a Misstatement whose effect is Pervasive.

Answer 31

1. Auditor shall express Adverse Opinion on financial statements.
2. Auditor shall explain nature of misstatement in “Basis for Adverse Opinion Paragraph”.
3. Adverse opinion is by nature a Key Audit Matter. Therefore, a reference to the Basis for Adverse Opinion should be included in the Key Audit Matters section.

[Chapter 4: LO 3]

Question 32

What shall be impact on Audit Report if there is a Scope Limitation whose effect is Material.

Answer 32

1. Auditor shall express Qualified Opinion on financial statements.
2. Auditor shall explain nature of scope limitation in “Basis for Qualified Opinion Paragraph”.
3. Qualified opinion is by nature a Key Audit Matter. Therefore, a reference to the Basis for Qualified Opinion should be included in the Key Audit Matters section.

[Chapter 4: LO 3]

Question 33

What shall be impact on Audit Report if there is a Scope Limitation whose effect is Pervasive.

Answer 33

1. Auditor shall express Disclaimer of Opinion on financial statements.
2. Auditor shall explain nature of scope limitation in “Basis for Disclaimer of Opinion Paragraph”.
3. As Disclaimer of Opinion Paragraph is given, Key Audit Matter Paragraph shall not be included in Audit Report unless required by Law.

[Chapter 4: LO 3]

Question 34

What shall be Auditor’s Course of Action if there is a Misstatement whose effect is Immaterial.

Answer 34

1. Auditor shall obtain written representation form management that effect of uncorrected misstatements is immaterial, both individually and in aggregate, to the financial statements as a whole.
2. Auditor shall express Unmodified Opinion on financial statements, provided misstatement is immaterial on Aggregate basis as well as on Qualitative basis.

[Chapter 4: LO 3]

Question 35

What is meant by an Emphasis of Matter paragraph in the auditor’s report?

Answer 35

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. matter is not a misstatement or scope limitation requiring modified opinion.
ii. matter is not a Key Audit Matter.

[Chapter 4: LO 4]

Question 36

Identify the circumstances under which an auditor includes “Emphasis of Matter” paragraph in auditor’s report.

Answer 36

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 one of production facilities).
3. If financial statements are** re-issued**, or corresponding figures are re-stated.
4. When a major disaster significantly affects entity’s financial position.
5. Early application (when permitted) of a new accounting standard that has a material effect.
6. If a financial reporting framework is unacceptable but is prescribed by law or regulation.
7. If financial statements are prepared on special purpose framework.
8. Going Concern assumption is not appropriate, and F/S are prepared on liquidation basis.

[Chapter 4: LO 4]

Question 37

How Emphasis of Matter Paragraph is Presented in Auditor’s Report?

Answer 37

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.

[Chapter 4: LO 4]

Question 38

Draft an Emphasis of Matter Paragraph in case of Exceptional Litigation.

Answer 38

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 modified in respect of this matter.

[Chapter 4: LO 4]

Question 39

Draft an Emphasis of Matter Paragraph in case of Subsequent Event.

Answer 39

Emphasis 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.

[Chapter 4: LO 4]

Question 40

Where Emphasis of Matter Paragraph is Placed in Auditor’s Report?

Answer 40

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 the Key Audit Matters section based on relative significance of the information.

[Chapter 4: LO 4]

Question 41

What is meant by an Other Matter paragraph in the auditor’s report?

Answer 41

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.**

[Chapter 4: LO 5]

Question 42

Identify the circumstances under which an auditor includes an “Other Matter” paragraph in auditor’s report.

Answer 42

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 (e.g. entity prepared one set of F/S under general purpose framework, and other set under special purpose framework).
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 Disclaimer of Opinion)

[Chapter 4: LO 5]

Question 43

Draft an Other Matter Paragraph in case prior year financial statements audited by predecessor auditor.

Answer 43

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.”

[Chapter 4: LO 5]

Question 44

Where Other Matter Paragraph is Placed in Auditor’s Report?

Answer 44

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.

[Chapter 4: LO 5]

Question 45

List down Risk Assessment Procedures to identify events or conditions casting doubt on entity’s ability to continue as Going Concern.

Answer 45

1. When performing risk assessment procedures (required by ISA 315), consider whether events or conditions exist.
2. Remain alert throughout the audit.
3. Discuss whether management has identified any events or conditions during preliminary assessment of Going Concern Status, and.
4. Ensure that Management’s Assessment:
   o Covers atleast 12 months.
   o Considers all information of which auditor is aware.
5. Inquire about events/conditions beyond period of assessment.

[Chapter 4: LO 6]

Question 46

List down Three Main Categories of events or conditions which cast doubt on Going Concern.

Answer 46

1. Financial Condition.
2. Operating Conditions.
3. Legal and Other Conditions.

[Chapter 4: LO 6]

Question 47

List down examples of events or conditions casting doubt on Going Concern under the category “Financial Conditions”.

Answer 47

 Substantial losses or negative equity.
 Net liability or Net current liability position (i.e. liabilities exceeding assets).
 Negative operating cash flows (indicated by historical or prospective financial statements).
 Inability to pay debts or comply with terms of loan agreements
 Arrears or discontinuance of dividends
 Adverse key financial ratios.

[Chapter 4: LO 6]

Question 48

List down examples of events or conditions casting doubt on Going Concern under the category “Operating Conditions”.

Answer 48

 Management intentions to liquidate entity or to cease operations.
 Loss of key management.
 Loss of a major market, franchise, license.
 Loss of largest customer/supplier (& no substitutes).
 Labor difficulties.
 Shortages of important supplies.
 Entry of a highly successful competitor.

[Chapter 4: LO 6]

Question 49

List down examples of events or conditions casting doubt on Going Concern under the category “Legal and Other Conditions.”.

Answer 49

 Non-compliance with legal requirements.
 Changes in law or government policy expected to adversely affect the entity.
 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.
 Uninsured or underinsured catastrophes of major production facility.

[Chapter 4: LO 6]

Question 50

List down Additional Procedures if events or conditions casting doubt on entity’s ability to continue as Going Concern are identified by Auditor.

Answer 50

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 (e.g. support from directors/holding company).

[Chapter 4: LO 7]

Question 51

What will be impact on audit report if there is material uncertainty related to going concern which is adequately disclosed in financial statements?

Answer 51

Auditor shall express an unmodified opinion, and shall include “Material Uncertainty Related to Going Concern” paragraph in his report which shall state:
 events/conditions that indicate material uncertainty.
 reference to the notes in F/S which fully describes the events/conditions.
 that auditor’s opinion is not modified in respect of the matter emphasized.
This paragraph should be included after opinion and basis for opinion section.

[Chapter 4: LO 8]

Question 52

What will be impact on audit report if there is material uncertainty related to going concern which is NOT adequately disclosed in financial statements?

Answer 52

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.

[Chapter 4: LO 8]

Question 53

What will be impact on audit report if going concern assumption is NOT appropriate, and financial statements are prepared on Alternate Basis (e.g. liquidation basis, break-up value basis)?

Answer 53

Auditor shall express unmodified opinion and shall include Emphasis of Matter paragraph in his report to draw users’ attention to the fact that financial statements are prepared on non-going concern basis.

[Chapter 4: LO 8]

Question 54

What will be impact on audit report if going concern assumption is NOT appropriate, and financial statements are prepared on Going Concern Basis?

Answer 54

1. Auditor shall express adverse opinion on financial statements.
2. Auditor shall explain nature of misstatement in Basis of Adverse Opinion section.
3. Adverse opinion is by nature a Key Audit Matter. Therefore, a reference to the Basis for Adverse Opinion should be included in the Key Audit Matters section.

[Chapter 4: LO 8]

Question 55

Draft a Material Uncertainty Related to Going Concern paragraph.

Answer 55

Material Uncertainty Related to Going Concern:
We draw attention to Note XXX in the financial statements, which indicates that the Company incurred a net loss of ZZZ during the year ended December 31, 20X1 and, as of that date, the Company’s current liabilities exceeded its total assets by YYY. As stated in Note 6, these events or conditions, along with other matters as set forth in Note 6, indicate that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.

[Chapter 4: LO 8]

Question 56

Which matters are required to be communicated by Auditor to TCWG regarding Going Concern Assumption.

Answer 56

i. Whether going concern assumption is appropriate or not.
ii. Whether events or conditions constitute material uncertainty;
iii. adequacy of related disclosures in financial statements;
iv. Implications for the auditor’s report (if any).

[Chapter 4: LO 8]

Question 57

When is Key Audit Matter Paragraph included in Auditor’s Report?

Answer 57

1. For Listed Company:
Key Audit Matter Section is required in case of listed company. However, if auditor expresses disclaimer of opinion, Key Audit Matter Section is not be included, unless required by law.

2. For Unlisted Company:
Key Audit Matter Section is not required in case of unlisted company. However, it 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).

[Chapter 4: LO 9]

Question 58

What are “Key audit matters”?

Answer 58

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.

[Chapter 4: LO 10]

Question 59

Which factors are considered by auditor in determining whether a matter is KAM?

Answer 59

Determining Key Audit Matter involves Two steps:
1. From matters communicated with TCWG,
2. Determine which matters are most significant (and therefore Key Audit Matter).
**Factors to consider in determining matters requiring significant auditor attention **
1. Areas of higher risks or significant risks as per ISA 315
2. Areas of significant auditor judgments
3. Significant events or transactions that occurred during the period.
4. Areas of complexity and significant management judgment.
5. Nature and extent of audit efforts needed to address the matter e.g.
o Extent of specialized knowledge or skill needed (particularly if expert is used)
o Nature of consultation outside the engagement team.
6. Significant transactions with related parties or transactions outside the normal course of business.
7. Importance of matter to users’ understanding.

[Chapter 4: LO 10]

Question 60

Give some examples of areas which are often considered as Key Audit Matter in auditor’s report.

Answer 60

1. Goodwill, Intangible Assets, Deferred Tax, Leases, Self-constructed assets,
2. Assets 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 Gratuity).
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.

Other areas (e.g. Revenue, additions to PPE, Inventory, Debtors, Long-term loan) may also be KAM if they meet criteria.

[Chapter 4: LO 10]

Question 61

How an individual Key Audit Matter is presented/described in auditor report?

Answer 61

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. an indication of the outcome of the auditor’s procedures, or
c. key observations with respect to the matter.
Auditor should avoid the expression that a separate opinion is being given on Key Audit Matters.

[Chapter 4: LO 11]

Question 62

Can auditor include a reference of notes to accounts in Key Audit Matter?

Answer 62

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.

[Chapter 4: LO 11]

Question 63

Draft a Key Audit Matter Paragraph to be included in Audit Report..

Answer 63

1. Revaluation of PPE:
   **What: **
   Refer note xxx to the financial statements. Company has recorded its land, building and machinery at revalued amounts.

**Why: **
We identified Revaluation of PPE as a Key Audit Matter because its amount is material to the financial statements. 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:
 Assessed competence, capability and objectivity of expert.
 Obtained revaluation report from valuer and discussed with management and expert appropriateness of assumptions and methodologies used.
 Checked relevance, completeness and accuracy of source data.
 Ensured that revaluation is properly accounted for and disclosed in financial statements.

[Chapter 4: LO 11]

Question 64

What will be impact on report if there are no Key Audit Matters on an audit of a listed company.

Answer 64

If there are no key audit matters in audit, the auditor shall include KAM section in report and shall state therein “We have determined that there are no key audit matters to communicate in our report.”

[Chapter 4: LO 11]

Question 65

What will be auditor’s response if he is asked not to include a Key Audit Matter in his KAM Section.

Answer 65

A matter determined to be KAM is NOT communicated in report if ①Law or regulation precludes public disclosure about a specific matter (e.g. when a public communication may prejudice investigation of illegal act), or ②in rare cases, auditor determines that adverse consequences of communication will outweigh the public interest benefits.

[Chapter 4: LO 11]

Question 66

Which matters are required to be communicated by Auditor to TCWG regarding Key Audit Matter.

Answer 66

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.

[Chapter 4: LO 11]

Question 67

What information is included in Basis for Qualified/Adverse Opinion Section in case of misstatement relating to amount.

Answer 67

Auditor shall explain nature of misstatement, and quantification* of misstatement (if practicable). If quantification is not practicable, auditor shall state so in this section.

• An example of quantification is effect on expenses, profit, assets and equity.

[Chapter 4: LO 12]

Question 68

What information is included in Basis for Qualified/Adverse Opinion Section in case of misstatement relating to disclosure.

Answer 68

Auditor shall explain nature of wrong or omitted disclosure, and include omitted disclosure (if practicable).

Including the omitted disclosure would be impracticable if disclosure is not prepared by management, or disclosure is not readily available to auditor, or disclosure is unduly lengthy in relation to audit report.
**

[Chapter 4: LO 12]

Question 69

What information is included in Basis for Qualified/Disclaimer of Opinion Section in case of Scope Limitation.

Answer 69

Auditor shall explain:
 Which procedures was not performed, and why.
 Statement that “auditor was unable to obtain evidence from alternative procedures too; and therefore, auditor is unable to verify whether this amount is fairly stated in F/S”.

[Chapter 4: LO 12]

Question 70

Draft a “Qualified Opinion” paragraph.

Answer 70

Qualified Opinion:
We have audited the ………………. [Reproduce as in LO 1]

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.

[Chapter 4: LO 12]

Question 71

Draft a “Basis for Qualified Opinion” paragraph in case of Misstatement.

Answer 71

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 ………… [Reproduce as in LO 1]

[Chapter 4: LO 12]

Question 72

Draft a “Basis for Qualified Opinion” paragraph in case of Scope Limitation.

Answer 72

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 ………… [Reproduce as in LO 1]

[Chapter 4: LO 12]

Question 73

Draft an “Adverse Opinion” paragraph.

Answer 73

**Adverse Opinion **
We have audited the ………………. [Reproduce as in LO 1]

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.

[Chapter 4: LO 12]

Question 74

Draft a “Basis for Adverse Opinion” paragraph.

Answer 74

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 ………… [Reproduce as in LO 1]

[Chapter 4: LO 12]

Question 75

Draft a “Disclaimer of Opinion” paragraph.

Answer 75

Disclaimer of Opinion
We were engaged to audit the ………………. [Reproduce as in LO 1]

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.

[Chapter 4: LO 12]

Question 76

Draft a “Basis for Disclaimer of Opinion” paragraph.

Answer 76

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.

[Chapter 4: LO 12]

Question 77

Why is it necessary to communicate any modification in report to TCWG before including in audit report.

Answer 77

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 and explanation to auditor regarding the matter causing modification.
 Auditor to obtain concurrence of TCWG regarding facts of the matter.

[Chapter 4: LO 13]