ISA 705 Flashcards
Whats is ISA 705?
This ISA has two main concepts:
a) When to modify openion on F/s.
b) How to draft opinion.
When to modify opinion?
and what is modified opinion?
Modified Openion means:
a) Qualified.
b) Adverse
c) Disclaimer of openion.
Auditor shall express modified openion:
a) When there is Misstatement and scope limitation.
b) Effect of scope limitation is Material and Pervasive.
What is missatement?
Mistatment means difference B/w :
a) Amount, Classisfication, Presentation and Disclosure required by AFRF. AND
b) Amount, Classification, Presentation and disclosure repoted in F/s.
Requiement(AFRF) is different from Report (F/s)
What are the main examples of misstatement?
a) Inventory ( Demage and obsolete) not recorded lower of cost and NRV.
b) Impairmrnt loss not recorded.
c) Not recording of any type of provisions.
d) Selective or no reveluation of asset when revaluation modle is used.
e) Debt convenant breach but management still classify it as long term loan.
f) Litigations pending against company not appropriately receorded or disclosed.
g) Subsequently adjusting event not receorded in F/s.
h) Contingent asset are discosed in F/s.
i) Research cost and repair expense is capitallised.
j) Not include required discloseure.
whats is the scope limitation?
Scope limitation arises when auditor is unable to obtain a sufficient appropriate evidence on which opinion is based.
What are the examples of scope limitation?
A) Limitation by circumstances beyond the control of entity or relating to nature/timing of audit work.
1) Accounting records of entity has been destroyed.
2) Accounting records has been seized by govt.
3) If auditor is appoined after year end and is unable to observe the physical count.
4) Inventry is at location where there is threat of life.
5) Inventory is mixed with someone else inventory
6) No explaination for negative balance of inventory.
B) Limitation imposed by Mgt.
1) Mgt prevent the for observing the count of physical inventory.
2) Mgt prevent auditor for sending external confirmation.
3) Mgt doesnot provide written representationn to Auditor.
4) Manager doesnot provide minutes of meeting to TCWG to auditor.
What is materiality and dependance of materiality?
- This term is used to describe the effect of misstatement and scope limitation.
- Items are considered material if they are individual and in aggregate could reasonably be expected to influence the economic decision of users taken on the basis of finncial statement.
- Materiality depends on:
1) Size.
2) Nature of F/s.
What is pervasive?
- The Term is used to describe the misstatement and scope limitation.
- pervasive effect on F/s are those that are not confined to specific element of F/s .
- If so confined represent the substatancial portion of F/s.
- in relation to disclure fundamental to user understanding of F/s.
What are the consequences of scope limitation y management after accepting enagement?
If scope limitation is imposed by management and in-appropriate.
Auditor shall request the menagement to remove limitation.
If management refuses auditor shall communivate matter to directors and determine whether it is possible to perform alternative procedures to Obtain evidence.
If matter remain unresolved:
A) If effect is material
Auditor shall revise the assesment of risk of fraud (includung integrity of Mgt) ANd shall express qualified openion.
B) If effect is pervasive
Auditor shall with draw from engaement if possile and practicable.In such situation auditor shall consider to communicate reason of withdrawl to stakeholder and Regulators.
if Withdrawl is not possible and practicable auditor shall give Disclaimer of opinion.
What we will communicate to director after modification?
If auditor expect to “modify openion” or “Emphasis of matter” or an “Other matter” or “Key audit matter” or “Going concern” paragraph in his report.
Auditor shall communicate the matter eith directors that led to modification and proposed wording to be included in report.
What communication about modification enables the director?
- TCWG to be aware of modification that auditor intends to include in report.
- TCWG have opportunity to obtain further clarification from auditor or to provide further information and explanantion to auditor regarding matter causing modification.
- Auditors to obtain concurrence of TCWG regarding fact of matter
what are the types of openion in case of multiple Mistatement/Scopelimitation?
When mistatement and scope limitation both have material effect:
* Qualified opinion
* Both explained in basis for qualified opinion
when mistatement is material and scope limitation is pervasive:
* Disclaimer of opinion
* Both to be explaned in basis for Disclaimer of opinion.
When misstatement is pervasive and scopelimitation is material.
* Adverse opinion
* Both explained in basis for adverse opinion.
When both are pervasive
* Not possible
What paraghraphs are not included in report when Disclaimer of opinion is expressed?
Auditor shall not include:
* Key audit matter ( ISA 701)
* Other infornation system (ISA 720).
* Unmodified opinion on F/s or Element (ISA 805).
* Specific information in Basis for opinion section,and auditor responsibility section.
What Paragraph auditor will include when there is scope limitation imposed by Management?
Auditor shall include Other matter paragraph to state: “why he did not withdraw”.
Can auditor give two opinion in one audit report?
In following situation auditor can give express multiple opinion in one report:
* F/s are prepared on basis of two AFRFs (ISA 700).
* Auditor is also engaged to express opinion on single F/s or element in report (ISA 805).
In following situation auditor can split opinion:
* Modified opinion on operations
* Unmosified when on financial position (ISA 510).
