F8 - Audit and Assurance Flashcards
Rights of Auditors (3)
The Companies Act have provided legal rights to auditors to enable the auditors to be effective in
their audit of the companies’ financial statements, including:
1. The right to have access to accounting records and other documents that are required for the
purpose of audit;
2. The right to information and explanation from the management and those charged with
governance (TCWG = directors) for the purpose of audit;
3. The right to attend general meetings (i.e. shareholders meetings such as the annual general
meeting [AGM] and extraordinary general meeting [EGM])
Responsibilities of Auditor (3)
It is the responsibility of auditor to:
1. Perform an audit on the financial statements prepared by management
2. Perform the audit in accordance with applicable auditing standards (e.g. Singapore Standards on
Auditing [SSA] in Singapore or International Standards on Auditing [ISA]); and
3. Issue an audit report on the financial statements stating whether the financial statements, in the
auditor’s opinion, are true and fair [or fairly presented in all material respects]
Concept of TRUE and FAIR representation
•TRUE
o Information is factual and conforms with reality in that there are no factual errors; and
o Information is in compliance with accounting standards and any relevant legislation.
• FAIR
o Information is clear, impartial, and unbiased; and
o Reflects the commercial substance of the transactions of the entity.
Elements of an unmodified auditor’s report (12) - Part 1
1.Title
• The title is “Independent Auditor’s Report
• To differentiate from reports issued by others, e.g. internal auditor’s report
2.Addressee
• Usually addressed to the shareholders of the company
• To identify who may rely on the audit report
3.Opinion
To inform users of audit report that the in the opinion of the auditor, the financial
statements are true and fair 9or are fairly presented in all material respects)
4.Basis for Opinion
To inform users that audit opinion is based on sufficient and appropriate evidence
obtained through the performance of an audit in accordance to International Standards on
Auditing.
5.Key Audit Matter [KAM]
To communicate those matters, in auditor’s judgment, that are of most significance during
the audit.
6.Other Information[OI]
To communicate whether there are material inconsistencies between the annual report
and the audited financial statements
Elements of an unmodified auditor’s report (12) - Part 2
- Management Responsibilities
To clarify it is the responsibilities of management to:
• Prepare true and fair financial statements in accordance to International
inancial Reporting Standards (IFRS); and
• Design and implement internal controls
8.Auditor’s Responsibilities
To clarify that it is the responsibilities of auditor to audit the financial statements in accordance to Internal Standards on Auditing (ISA) and to give an opinion on the
financial statements, i.e. whether the financial statements are true and fair. - Other Reporting Responsibilities [ORR]
If auditor is required by local law to give an opinion on another matter besides the
financial statements, auditor will state the opinion in this ORR section. - Date
The date of audit report means audit evidence, including those on subsequent events, were gathered and evaluated up to this date. - Signature
• Auditor signs the audit report in the name of the firm or in the personal name of
the audit engagement partner
• This is inform users who which audit firm performed the audit
10.Address
The address refers to the location where the audit engagement partner practises.
What is a KAM
Key audit matters (KAM) are those matters which, in the auditor’s professional judgement, were of
most significance in the audit of the financial statements of the current period.
Key audit matters are selected from matters communicated with those charged with governance
How auditor determines a KAM
In determining key audit matters the auditor should take the following into account:
• Areas of higher assessed risk of material misstatement, or significant risks.
• Significant auditor judgements relating to areas in the financial statements which involved
significant management judgement
• The effect on the audit of significant events or transactions which occurred during the
period
How auditor communicates a KAM
The description of each KAM in the Key Audit Matters section of the auditor’s report should:
• Refer to the related disclosures in the financial statements
• Explain why the matter was considered to be one of most significance in the audit and
therefore was determined to be a KAM; and
• Describe how the key audit matter was addressed in the audi
3 types of modified opinion
• Qualified opinion ➔ except for some problems, the FS are T&F
• Adverse opinion ➔ the FS are NOT T&F
• Disclaimer of opinion ➔ auditor is not able to give an opinion on whether FS are T&F or
not
?Modified opinion 1 – Qualified Opinion
Two different situations when an auditor will modify the opinion to a qualified opinion:
• Misstatements that are material but not pervasive;
• Pervasive ➔ substantial proportion of the FS are misstated, e.g. more than 50% of
assets
• Not pervasive ➔ misstatements do not affect substantial proportion of the FS
• Limitations (i.e. lack evidence) that are material but not pervasive
• Not able to attend year end stock count and thus could not verify existence of inventories
Modified Opinion 2 - Adverse Opinion
Audit opinion is modified to an adverse opinion because of material and pervasive misstatements
• Pervasive ➔ substantial proportion of the FS are misstated, e.g. more than 50% of assets
• Example = when the entity is not a going concern, management should NOT use the going basis
to prepare financial statements. If management still prepared the financial statements using
going concern basis, the misstatements in the financial statements are material and pervasive
Modified Opinion 3 – Disclaimer of Opinion
Audit opinion is modified to a disclaimer of opinion when there is a lack of evidence to verify
balances that are material and pervasive.
• Pervasive ➔ auditor is not able to obtain evidence in relation to substantial proportion of the
FS, e.g. more than 50% of assets
• Example = when most accounting records are destroyed by fire and auditor is not able to
perform substantive procedures to verify the balances ➔ material and pervasive limitation
Reliability of Evidence
Auditor does not rely on just one evidence. Auditor relies on a package of evidence. Some evidence
is more reliable than other evidence. If multiple evidence provides the same conclusion, then the
reliability is enhanced.
The following factors or generalisations can be made when assessing the reliability of audit
evidence:
1. The reliability of audit evidence is increased when it is obtained from independent sources
outside the entity.
2. The reliability of audit evidence which is generated internally is increased when the related
controls are effective.
3. Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained
indirectly or by inference.
4. Audit evidence in documentary form is more reliable than evidence obtained orally.
5. Audit evidence provided by original documents is more reliable than audit evidence provided by photocopies or facsimiles.
Reliability of Evidence
Most reliable ➔ External and written
2nd most reliable ➔ auditor generated
3rd most reliable ➔ Internal and written
Least reliable ➔ Internal and oral
Audit procedure (8)
- Analytical: consists of Evaluation and Investigation
- Enquiry
- External confirmation
4.Inspection of documents
5.Inspection of assets
6.Observation
7.Recalculation
8.Reperformance
Based on objectives that auditor want to achieve, audit procedures can be categorised as:
- Risk assessment procedures
- Test of controls
- Substantive procedures
1.Risk assessment procedures are audit procedures performed by auditor to identify and evaluate the
risk of material misstatements that could occur.
2.Test of controls are audit procedures performed by auditor to verify whether the entity’s internal
controls are operating effectively in preventing material misstatements or detecting and correcting
material misstatements.
3.Substantive procedures are audit procedures performed by auditor to detect material
misstatements in the financial statements
