Professional Documents
Culture Documents
CFAP+6+Study+Manual+1 2+updated
CFAP+6+Study+Manual+1 2+updated
STUDY MANUAL
____________________________________________________________________________
Course Facilitator:
Hasnain R. Badami, ACA
Edition 1.2
Powered By:
Kns Institute of Business Studies
&
Table of contents
1 INTRODUCTION
1.1 ICAP Course outline PDF
1.2 Past paper analysis 6
1.3 Important Paragraphs 14
4 Audit Reporting
4.1 Drafting Modifications 79
4.2 Practical Audit Reports 84
4.3 Prospective Financial Information 102
2
Advanced Auditing & Assurance
Study Manual
3
Advanced Auditing & Assurance
Study Manual
Hasnain is a senior faculty member at KnS Institute of Business Studies with 8+ years teaching experience of
Advanced Auditing to CA final students. He has taught more than 2650 students with proud 1100+ CA qualified
alumni. He uses Socratic style of teaching and inquiry by not only focusing on the ‘whats’ and ‘hows’ of the
subject matter but, more importantly, on the ‘whys’ of it. He also served as an MBA visiting faculty member
at a business school in Karachi.
At corporate level, his core areas of training expertise are Thinking Skills (critical, creative, and collaborative
thinking), Corporate Ethics, Leadership skills, Business Acumen, and Internal Auditing. Notably, he has trained
professionals from Engro Corporation, Engro Fertilizer, Engro Foods, Bayer Crop Science, Bank Al Falah, NIB
Bank, Bank Al Habib Limited, Khaadi, Bayer Pakistan, Soneri Bank, Byco, Jubilee Insurance, Linde Pakistan, EFU
General Insurance, HUBCO, PPL, Aisha Steel, IBA, Aisha Steel LImited, KPMG, FINCA Microfinance Bank, NIFT,
Telenor Bank, K-Electric, SSGC, Ernst & Young, United Bank Limited, Habib Bank Limited, Getz Pharma, Fauji
Fertilizer, Atlas Honda, Lucky Cement, TCS Pvt. Limited etc.
Besides working with corporates and students, Hasnain devotes a substantial portion of his time
volunteering for empowerment of teachers. He is also on board of EDLAB Pakistan, a non-profit that works
on equipping teachers with 21st century pedagogical skills. Hasnain is also an elected member of the
prestigious Southern Regional Committee of Institute of Chartered Accountants of Pakistan (ICAP) that is
responsible to oversee CA members’ Continued Professional Development (CPD) and Student’s affairs.
4
Advanced Auditing & Assurance
Study Manual
CHAPTER 1:
INTRODUCTION
5
Advanced Auditing & Assurance
Study Manual
1.2 ICAP PAPERS ANALYSIS (of last 16 attempts till Winter 2019):
TIMES MARKS PERCENTAGE IMPACT
DESCRIPTION / AREA COMMENTS
TESTED TESTED TESTED (AVERAGE)
A B C = B / B-Total D=B/A
Acceptance and
continuance 4 26 2% 7 Often tested.
Engagement Proposals 1 8 1% 8
Ethics 38 248 16% 7 100%
Now
frequently
Group audit 8 65 4% 8 tested
Tested in
every
alternative
Internal Controls 8 57 4% 7 attempt
ISAE 3402 1 5 0% 5
ISRS 2400 & 2410 2 16 1% 8
Other assurance 1 10 1% 10
Prospective FI 9 66 4% 7 Often tested.
Risk assessment 6 56 4% 9
Strategy: Materiality
computation 1 10 1% 10
Grand Total 181 1500 100%
6
Advanced Auditing & Assurance
Study Manual
7
Advanced Auditing & Assurance
Study Manual
8
Advanced Auditing & Assurance
Study Manual
9
Advanced Auditing & Assurance
Study Manual
10
Advanced Auditing & Assurance
Study Manual
11
Advanced Auditing & Assurance
Study Manual
WINTER 2015
1(a) Winter 2015 Audit Risk - Narrative form 12
2(a) Winter 2015 Audit Risk - further explanation 7
2(b) Winter 2015 Risk assessment - Corporate governance 4
2(c) Winter 2015 Risk assessment - Corporate governance 5
3(a) Winter 2015 Ethics - Independence - Financial Interest 8
3(b) Winter 2015 Ethics - Independence - Compensation 6
and evaluation
3(c) Winter 2015 Ethics - Conflict of interest 7
4(a) Winter 2015 Internal Controls - assets IAS 40 ISA 315 9
4(b) Winter 2015 Audit Reporting - Drafting modification IAS 40 ISA 705 6
5(a) Winter 2015 Audit Reporting - Execution phase ISA 502, 15
Confirmations
5(b) Winter 2015 Risk assessment - Fraud 13
6(a) Winter 2015 Group audit ISA 600 8
WINTER 2016
1(a) Winter 2016 Audit Reporting - Conclusion phase ISA 701 11
2(a) Winter 2016 Due diligence and business plan ISA 570 12
2(b) Winter 2016 Due diligence and business plan ISA 570 5
3(a) Winter 2016 Risk assessment - Control environment 5
3(b) Winter 2016 Audit Risk - Mixed form 15
4(a) Winter 2016 Audit Reporting - Conclusion phase ISA 700 4
5(a) Winter 2016 Other assurance - Possible engagement ISAE 3000 6
6(a) Winter 2016 Other assurance - Possible engagement ISAE 3000 14
7(a) Winter 2016 Audit Reporting - Execution phase 7
7(b) Winter 2016 Audit Reporting - Execution phase 6
8(a) Winter 2016 Ethics - Independence - Long association 9
8(b) Winter 2016 Ethics - Independence - Non assurance 6
services
12
Advanced Auditing & Assurance
Study Manual
13
Advanced Auditing & Assurance
Study Manual
ISA 265 Communicating Deficiencies 6-11, A6, A7, A15, A20, A22-A24
in Internal Control to Those
14
Advanced Auditing & Assurance
Study Manual
15
Advanced Auditing & Assurance
Study Manual
16
Advanced Auditing & Assurance
Study Manual
CHAPTER 2:
17
Advanced Auditing & Assurance
Study Manual
ISA 200 objective and general principles governing an audit of financial statements states ‘that the auditor
should plan and perform the audit to reduce audit risk to an acceptably low level that is consistent with the
objective of an audit’.
Audit risk is the risk that auditors may give an inappropriate opinion on the financial statements. Audit
risk has two key components – the risk of material misstatement in financial statements (financial
statement risk) and the risk of the auditor not detecting the material misstatement in financial
statements (detection risk). Financial statement risk breaks down into inherent risk and control risk.
Detection risk is the risk that auditor’s substantive procedures do not detect a misstatement that
exists in an account balance or class of transactions that could be material, either individually or when
aggregated with misstatements in other balances or classes.
For instance, an oil company has abandoned one of its oil rigs. This abandonment is a financial statement risk
because the abandonment gave rise to impairment in the value of the rig, which might not have been
reflected in the financial statement. In other words, there is a risk that the financial statements were
misstated in respect of this oil rig.
18
Advanced Auditing & Assurance
Study Manual
Inherent risk is the risk that items will be misstated due to characteristics of those items, such as the fact
that they are estimates or that they are important items in the accounts. The auditors must use their
professional judgement and the understanding of the entity they have gained to assess inherent risk. If no
such information or knowledge is available then the inherent risk is assessed as high.
Control risk is the risk that client controls fail to detect material misstatement. A preliminary assessment of
control risk at the planning stage of the audit is required to determine that level of controls and substantive
testing to be carried out.
Detection risk is the risk that audit procedures will fail to detect material errors. Detection risk relates to the
inability of the auditors to examine all evidence. Audit evidence is usually persuasive rather than conclusive
so some detection risk is usually present, allowing the auditors to seek ‘reasonable assurance’.
19
Advanced Auditing & Assurance
Study Manual
The auditors’ inherent and control risk assessments influence the nature, timing and extent of substantive
procedures required to reduce detection risk and thereby audit risk.
Business risk is the risk inherent to the company in its operations. It is risk at all levels of the business.
It is split into three categories:
Financial risks are the risks arising from the financial activities or financial consequences of an
operation, for example, cash flow issues or overtrading.
Operational risks are the risk arising with regard to operations, for example, the risk that a major
supplier will be lost and the company will be unable to operate.
Compliance risk is the risk that arises from non-compliance with the laws and regulation that surround
the business.
The above components of business risk are the risks that the company should seek to mitigate and manage.
The process of risk management for the business is as follow:
Identify significant risks which could prevent the business achieving its objectives
Provide a framework to ensure that the business can met its objectives
Review the objectives and framework regularly to ensure that objectives are met
On the one hand, business risk and audit risk are completely unrelated:
In other ways, the two are strongly connected. The strong links between them can be seen in the inherent
and control aspects of audit risk. In audit risk these are limited to risks pertaining to the financial statements.
Business risk includes all risks facing the business. In other words, inherent audit risk may include business
risks.
In response to business risk, the directors institute a system of controls. These will include controls to
mitigate against the financial aspect of the business risk. These are the controls that audit control risk
incorporates.
Therefore, although audit risk is very financial statements focused, business risk does from part of the
inherent risk associated with the financial statements, not least, because if the risks materialise, the going
concern basis of the financial statements could be affected.
20
Advanced Auditing & Assurance
Study Manual
Auditors must assess their clients’ procedures for identifying and addressing these risks (ISA 315). Some main
considerations are:
2.1.2 E-commerce
IAPS 1013 Electronic commerce – effect on the audit of financial statement of emphasizes the importance of
risk identification where an entity undertakes e-commerce.
Audit procedures regarding the integrity of the information in the accounting system relating to e-
commerce transactions will be concerned with evaluating the reliability of the system for capturing and
processing transactions.
Therefore, in contrast to audit procedures for traditional business activities which focuses separately on
control process relating to each stage of transaction processing, audit procedures for sophisticated e-
commerce often focuses on automated controls.
21
Advanced Auditing & Assurance
Study Manual
In this case study, e-commerce has been used to illustrate the issue of risks. E-commerce is a topical area,
and you should be familiar with the issue arising for audit and assurance from e-commerce. However, you
need to be able to recognize issues for any business scenario you are given.
Try to learn to let key phrases trigger your thoughts about particular issues such as systems and going
concern, above all, think about the nature of the business in the scenario and the strengths and
weaknesses likely to exist within it.
Tipper Co. is a travel agency operating in three adjacent towns. The directors have recently taken the decision
that they should cease their operations and convert into a dot.com. The new operations, Tippers.com, will
benefits from enlarge markets and reduced overheads, as they will be able to operate from single, cheaper
premises.
Such a business decision has opened Tripper Co up to significant new business risks.
Customers
Converting to a dot.com company in this way enforces a loss of ‘personal touch’ with customers. Trippers
stall will no longer meet the customers face to face. In a business such as a travel agency, this could be a
significant factor. Customers may have appreciated the service given in branches and may feel that this level
of service has been lost if it is now redirected through computers and telephones. Trippers should be aware of
the possibility of, and mitigate against, loss of customers due to perceived reduction in service.
Competition
Be leaving the local area and entering a wider market, Trippers is opening itself up to much more substantial
competition. Whereas previously, Trippers competed with other local travel agents, it will now be competing
theoretically with travel agents everywhere that have Internet facilities.
Technology issues
As Trippers has moved into a market that necessitates high technological capabilities, a number of business
risks are raised in relation to technological issues:
Viruses
There is a threat of business being severely interrupted by computer viruses, particularly if the staff of
Trippers are not very computer literate or the system the company invests in is not up to the standard
required.
Viruses could cause interrupted sales and loss of customer goodwill, which could have a significant impact on
the going concern status of the company.
Technology could be another reason for loss of existing customers. Their existing customers might not have
Internet access or ability to use computers. We do not know that Trippers’ demographic was prior to
conversion.
22
Advanced Auditing & Assurance
Study Manual
However, if conversion means that Trippers lose their existing client base completely and have to rebuild
sales, the potential cost in advertising could be excessive.
Technology is a fact moving area and it will be ital that Trippers’ website is kept up to current standards. The
cost of upgrade, both in terms of money and business interruption, could be substantial.
Trippers may keep existing links with holiday companies and operators. However, the will have new suppliers,
such as Internet Service Providers to contend with.
Personnel
Due to the conversion, Trippers.com will require technical staff and experts. They may not currently have
these staff. If this is the case, they could be at risk of serve business interruption and customer dissatisfaction.
If the directors are not computer literate, they may find that they are relying on staff who are far more expert
than they are to ensure that their business runs efficiently.
Legislation
There are a number of issues to consider here. The first is data protection and the necessity to comply with
the law when personal details are given over the computer. It is important that the website is secure.
E-commerce is also likely to an area where there is fact moving legislation as the law seeks to keep up with
developments. Trippers must also keep up with developments in the law.
Lastly, trading over the Internet may create complications as to what domain. Trippers are trading in for the
Purposes of law and tax.
Fraud exposure
The company may find that it is increasingly exposed to fraud in the following ways.
Credit card fraud relating from transactions not being face to face
Hacking and fraud relating from the website not being source
Over-reliance on computer expert personnel could lead to those people committing fraud
Trippers’ auditors will be regarding the conversion with interest. The conversion will also severely affect audit
risk.
Inherent risk
Many of the business risks identified above could have significant impacts on going concern.
Control risk
The new operations will require new systems, many of which may be specialized computer systems.
23
Advanced Auditing & Assurance
Study Manual
Detection risk
Create a ‘paperless office’ as all transactions are carried out outline – this may make use of CAATs
essential
The auditors may have no experience in e-commerce which may increase detection risk
There are likely to be significant impacts on analytical review as results under the new operations are
unlikely to be very comparable to the old
There may be a significant need to use the work of experts to obtain sufficient, appropriate audit
evidence
1.3.1 Definition
This is the risk that the financial statements are materially misstated. The material misstatement could
involve:
Errors in the amounts recorded in the statement of comprehensive income or statement of financial
position
Errors in or omission from the disclosure notes
Many, if not all, business risk will produce a financial statement risk.
In scenario questions you could be asked to explain either business or financial statement risks. It is
important to use the scenario in the correct way and answer the exact question that is being asked.
Using the information in the previous case study to illustrate the link:
24
Advanced Auditing & Assurance
Study Manual
BUSINESS STRATEGIES
• Operations in regions that are economically unstable;
• Operations exposed to volatile markets;
• Developing or offering new products or services, or moving into new lines of business;
• Entering into business areas/transactions with which the entity has little experience;
• Setting of inappropriate or unrealistic objectives and strategies;
• Aggressive expansion into new locations;
• Acquisitions and divestitures;
• Complex alliances and joint ventures;
• Use of complex financing arrangements;
• Corporate restructurings; and
• Significant transactions with related parties.
ENTITY’S ORGANIZATION
• Poor corporate culture and governance;
• Incompetent personnel in key positions;
• Changes in key personnel including departure of key executives;
• Complexity in operations, organization structure and products;
• Failure to recognize the need for change such as in skills required or the use of
technology;
• Response to rapid growth or decline in sales that can strain internal control systems &
people’s skills;
• Lack of personnel with appropriate accounting and financial reporting skills;
• Weaknesses in internal control, especially those not addressed by management; and
• Inconsistencies between the entity’s IT strategy and its business strategies.
OTHER
• Product or service flaws that may result in liabilities and reputation risk;
• Relationships with external funders, such as banks;
• Going-concern and liquidity issues including loss of significant customers; and
• Installation of significant new IT systems related to financial reporting.
25
Advanced Auditing & Assurance
Study Manual
2. GROSS MARGIN
When gross margin % rises significantly as compared to the previous year. This is indicative
of overstatement of revenue or understatement of purchases.
3. WORK-IN-PROGRESS
When increase in WIP % is greater than the increase in Revenue %. This is indicative of
overstatement of WIP.
4. PURCHASES/ PAYABLES
When increase in Purchase/ Direct cost % is less than the increase in accounts payables %.
This is indicative of the understatement of purchases.
26
Advanced Auditing & Assurance
Study Manual
5. DAYS RECEIVABLE
Increase in days receivable compared with the normal trading terms or the preceding period.
This is indicative of the overstatement of debtors.
6. DAYS PAYABLE
Reduction in days payable as compared with the previous year. This is indicative of
understatement of purchases/payables.
7. INTEREST VS LOANS
Increase in interest expense compared to increase in loans
9. CURRENT RATIO
Current Ratio = Current asset .
Current Liabilities
Liquidity ratios are used as a basis for liquidity problems and to establish going concern issues
27
Advanced Auditing & Assurance
Study Manual
29
Advanced Auditing & Assurance
Study Manual
30
Advanced Auditing & Assurance
Study Manual
Payroll expense Trace selected amounts to the payroll register and to prior year
working papers otherwise those tested in payroll cycle.
Scan the payroll register for unusual balances or amounts.
If the department-wise figure of an expense account is not equal
to the balance of the account, obtain an explanation of the nature
and approximate amounts of the other categories of entries that
have affected the account balance.
Compute the ratios of material amounts of fringe benefits to the
total compensation earned by covered employees or other data.
Compare with the comparable ratios for the preceding period and
investigate significant or unusual fluctuations.
Perform following procedures for a sample of employees from the
payroll register:
o Inspect time cards or other records to support hours
worked/attendance record.
o Inspect wage/salary authorization or agreements to support
the rates paid.
o Inspect authorization forms to support amounts withheld.
o Inspect personal files for appropriate documentation and
evidence for the existence of employees.
o Test the calculations of net pay and the clerical accuracy of
payroll register cumulative amounts.
o Inspect board minutes for approval of slab increments, and
bonus awarded.
Ensure payment through cross cheques/bank transfers as per the
provision of the Income Tax Ordinance.
Depreciation or amortization Examine the Company’s procedures for reviewing the useful life
expense and carrying value of property, plant and equipment and note
down any action taken by the management for change in the
estimate of the useful life of the asset and carrying value. Also
check any impairment in the value of assets.
Perform a predictive test of depreciation expense. Compare to
actual and investigate significant differences. Compare expense to
prior year.
Compare the provision for depreciation, depletion and
amortization, by class of property, with comparable amounts for
prior periods and with budgeted amounts for the current period.
Investigate significant or unusual fluctuations after considering
the effects of additions, retirements and fully depreciated assets.
Compare the ratio of the provision for depreciation, depletion and
amortization to total cost of property, plant and equipment with
comparable ratios for prior periods and with industry averages.
Investigate significant or unusual fluctuations.
32
Advanced Auditing & Assurance
Study Manual
33
Advanced Auditing & Assurance
Study Manual
34
Advanced Auditing & Assurance
Study Manual
Property, plant & equipment Obtain a listing of all sales or other asset dispositions over a
(Disposals) certain amount, indicating the accounting treatment for each, and
review propriety of accounting. Inquire if there are any
unrecorded retirements.
Tie gain/loss on disposition to lead schedule.
Examine cash receipts for all retirements over a certain amount
and determine that proper cost and accumulated depreciation
were removed from the books.
For material disposals, determine that proper authorization to
dispose was obtained.
Obtain a copy of Board’s approval for disposals.
Examine and scan relevant supporting subsidiary ledger or other
similar records to ensure that all dispositions over a listing scope
are properly included in the disposition schedule.
Obtain listings of any abandoned assets or any assets destroyed
during the year.
For significant disposition, review the supporting subsidiary
records and determine whether the cost basis, accumulated
depreciation are properly removed from the records.
Inquire about any related party sales and cross refer the
disposition with transaction with related parties.
Property, plant & equipment Tour the plant facilities before physical verification preferably
(Physical verification procedures) atleast 15 days earlier to the year-end/inventory observation date.
36
Advanced Auditing & Assurance
Study Manual
Property, plant & equipment Obtain a schedule of Revaluation of fixed assets showing assets
(Revaluation surplus) wise detail, cost of the assets, revalued amount, name of valuer.
Test the summarization of the schedule.
Trace totals to the general ledger.
Examine the valuer’s report to ensure the correctness of revalued
amount of the fixed assets and ensure independence of the valuer
and checked appropriateness of assumptions used by valuer.
Check that the surplus on revaluation of the fixed assets has been
applied:
o Only to the extent actually realized on disposal of revalued
assets.
o On setting –off any deficit arising from the revaluation of any
other fixed assets of the company.
Check incremental depreciation transferred from surplus to
unappropriated profit / accumulated loss.
Check compliance with the requirement of IFRS 12 “Income Taxes
(Revised)” in respect of deferred Tax on surplus on revaluation of
fixed assets.
Property, plant & equipment - Obtain a copy of the valuation report and consider the reliability
Evaluating Expert’s Work of valuation after taking account of:
(Property valuer) o the basis of valuation; and
o in respect of the valuer:
independence/ objectivity,
qualifications,
experience/ competence/ expertise,
reputation.
Compare the value attributed to the company’s property to the
value of other similar assets.
Reperform calculation of revaluation adjustments and ensure that
they have accounted for correctly.
Ensure the depreciation is based on the revalued amount.
Inspect notes to the financial statements to ensure appropriate
disclosures.
Ensure all the assets in class are revalued.
Subsequent events should be monitored for any additional
evidence provided on the valuation of the properties.
For example, the sale of an investment property shortly after the
year end may provide additional evidence relating to the fair value
measurement.
Obtain a management representation regarding the
reasonableness of any significant assumptions, where relevant, to
fair value measurements or disclosures.
37
Advanced Auditing & Assurance
Study Manual
38
Advanced Auditing & Assurance
Study Manual
39
Advanced Auditing & Assurance
Study Manual
41
Advanced Auditing & Assurance
Study Manual
42
Advanced Auditing & Assurance
Study Manual
43
Advanced Auditing & Assurance
Study Manual
44
Advanced Auditing & Assurance
Study Manual
Review the cash book and bank statements for any unusual items
or large transfers around the year end, as this could be evidence
of window dressing.
Examine the bank confirmation letter for details of any security
provided by the company or any legal right of set-off as this may
require disclosure.
Inventory Evaluate and test controls over:
o inventory count procedures
o updates to the perpetual inventory records o updates to
component costs
o the interface between inventory and cost accounting systems
Review reports of previous inventory counts, evaluate the level of
discrepancies and consider the implications for the reliability of
the inventory system
Perform test counts of inventory at a periodic count
Match dispatch records with entries on the parts inventory system
Identify slow-moving or obsolete items by reviewing the age
analysis of inventory
Compare fixed selling prices to costs of parts to determine
whether NRV is less than carrying value
Compare the inventory of parts with the number of engines still in
use and assess whether the parts will be used
Discuss the basis of provision with management
Obtain standard cost specifications for each part and for a sample
of parts:
o test cost of components to suppliers’ invoices
o vouch labor costs to payroll
o ascertain the basis of overhead allocation
o ensure overhead allocation is based on normal level of activity
o reperform calculations o reperform a sample of foreign
currency translations and check rates to a reliable source.
Valuation of Work in Progress For the contract costing system:
discuss functionality issues with management
ascertain controls over the transfer of data to new system
test the transfer of a sample of balances from the old system
to the new system
evaluate and test the controls over
o the interface between the purchases and payroll systems
and the contract costing system
o the initial recording of purchase and payroll costs.
For a sample of contracts underway at the year-end:
vouch entries for labor to payroll records
vouch entries for components to suppliers’ invoices
physically inspect WIP.
45
Advanced Auditing & Assurance
Study Manual
46
Advanced Auditing & Assurance
Study Manual
47
Advanced Auditing & Assurance
Study Manual
48
Advanced Auditing & Assurance
Study Manual
49
Advanced Auditing & Assurance
Study Manual
50
Advanced Auditing & Assurance
Study Manual
51
Advanced Auditing & Assurance
Study Manual
52
Advanced Auditing & Assurance
Study Manual
53
Advanced Auditing & Assurance
Study Manual
54
Advanced Auditing & Assurance
Study Manual
55
Advanced Auditing & Assurance
Study Manual
56
Advanced Auditing & Assurance
Study Manual
57
Advanced Auditing & Assurance
Study Manual
Recently appointed auditor Check opening balances are properly brought forward and
(Opening balances) corresponding amounts are correctly classified and disclosed.
Perform test of controls over Financial Statement Closing Process.
Consider reliability of opening balances by reviewing accounting
records and controls procedures and discuss with management.
Ensure sufficient staff in place to complete the audit work
effectively.
Independent QCR of subjective and judgmental areas.
Request to review PY working papers of previous auditors to gain
understanding of the business and assurance over the PY figures.
Perform substantive procedures on opening balances if they can’t
be verified from other means.
58
Advanced Auditing & Assurance
Study Manual
59
Advanced Auditing & Assurance
Study Manual
The auditor may obtain the assistance of client personnel to perform certain tasks (e.g., prepare schedules)
providing the auditor adequately tests the work performed by these individuals.
TYPES OF PROCEDURES:
Audit procedures (acts to be performed) are used as risk assessment procedures, tests of controls, and
substantive procedures. The following is a list of types of procedures:
Inspection of records or documents (e.g., invoice for an equipment purchase transaction) Inspection
of tangible assets (e.g., inventory items)
Observation (e.g. observation of inventory count, observation of control activities)
Inquiry (e.g., written inquiries and oral inquiries)
Confirmation (e.g., accounts receivable)
Recalculation (e.g., checking the mathematical accuracy of documents or records.)
Reperformance (e.g., reperforming the aging of accounts receivable)
Analytical procedures (e.g., scanning numbers for reasonableness, calculating ratios)
60
Advanced Auditing & Assurance
Study Manual
FS ACCOUNT: ____________________________________
Description Existence or Accuracy / Completeness/ Cut-off/ Rights Classification / Pres. &
occurrence valuation Cut-off & obligation allocation Disclosure
Inquiry
Observation /
Physical
count
Inspection or
review
Confirmation
Recalculati-
on or
Reperforma-
nce
Vouching or
Tracing
Analytical
procedures
61
Advanced Auditing & Assurance
Study Manual
FS ACCOUNT: ____________________________________
Description Existence or Accuracy / Completeness/ Cut-off/ Rights Classification / Pres. &
occurrence valuation Cut-off & obligation allocation Disclosure
Inquiry
Observation /
Physical
count
Inspection or
review
Confirmation
Recalculati-
on or
Reperforma-
nce
Vouching or
Tracing
Analytical
procedures
62
Advanced Auditing & Assurance
Study Manual
FS ACCOUNT: ____________________________________
Description Existence or Accuracy / Completeness/ Cut-off/ Rights Classification / Pres. &
occurrence valuation Cut-off & obligation allocation Disclosure
Inquiry
Observation /
Physical
count
Inspection or
review
Confirmation
Recalculati-
on or
Reperforma-
nce
Vouching or
Tracing
Analytical
procedures
63
Advanced Auditing & Assurance
Study Manual
FS ACCOUNT: ____________________________________
Description Existence or Accuracy / Completeness/ Cut-off/ Rights Classification / Pres. &
occurrence valuation Cut-off & obligation allocation Disclosure
Inquiry
Observation /
Physical
count
Inspection or
review
Confirmation
Recalculati-
on or
Reperforma-
nce
Vouching or
Tracing
Analytical
procedures
64
Advanced Auditing & Assurance
Study Manual
FS ACCOUNT: ____________________________________
Description Existence or Accuracy / Completeness/ Cut-off/ Rights Classification / Pres. &
occurrence valuation Cut-off & obligation allocation Disclosure
Inquiry
Observation /
Physical
count
Inspection or
review
Confirmation
Recalculati-
on or
Reperforma-
nce
Vouching or
Tracing
Analytical
procedures
65
Advanced Auditing & Assurance
Study Manual
FS ACCOUNT: ____________________________________
Description Existence or Accuracy / Completeness/ Cut-off/ Rights Classification / Pres. &
occurrence valuation Cut-off & obligation allocation Disclosure
Inquiry
Observation /
Physical
count
Inspection or
review
Confirmation
Recalculati-
on or
Reperforma-
nce
Vouching or
Tracing
Analytical
procedures
66
Advanced Auditing & Assurance
Study Manual
FS ACCOUNT: ____________________________________
Description Existence or Accuracy / Completeness/ Cut-off/ Rights Classification / Pres. &
occurrence valuation Cut-off & obligation allocation Disclosure
Inquiry
Observation /
Physical
count
Inspection or
review
Confirmation
Recalculati-
on or
Reperforma-
nce
Vouching or
Tracing
Analytical
procedures
67
Advanced Auditing & Assurance
Study Manual
FS ACCOUNT: ____________________________________
Description Existence or Accuracy / Completeness/ Cut-off/ Rights Classification / Pres. &
occurrence valuation Cut-off & obligation allocation Disclosure
Inquiry
Observation /
Physical
count
Inspection or
review
Confirmation
Recalculati-
on or
Reperforma-
nce
Vouching or
Tracing
Analytical
procedures
68
Module 4: Responding to Risk Assessment: Evidence Accumulation and Evaluation 239
Presentation 1. Review disclosures for com- 1. Review disclosures for compliance 1. Review disclosures for com-
and pliance with GAAP with GAAP pliance with GAAP
Disclosure 2. Inquire about compensating 2. Inquire about pledging, dis- 2. Inquire about pledging
balance requirements and re- counting 3. Review purchase commit-
strictions 3. Review loan agreements for ments
pledging, factoring
Existence or 3. Confirmation 4. Confirmation 4. Confirmation of consigned
Occurrence 4. Count cash on hand 5. Inspect notes inventory and inventory in
5. Prepare bank transfer schedule 6. Vouch (examine shipping docu- warehouses
ments, invoices, credit memos) 5. Observe inventory count
Rights and 6. Review bank statements 7. Inquire about factoring of receiv- 6. Inquire about inventory from
Obligations ables vendors on consignment
Completeness 7. Review cutoffs (receipts and 8. Review cutoffs (sales, cash 7. Review cutoffs (sales, sales
and Cutoff disbursements) receipts, sales returns) returns, purchases, purchase
8. Perform analytical procedures 9. Perform analytical procedures returns)
9. Review bank reconciliation 8. Perform test counts and com-
10. Obtain bank cutoff statement pare with client’s counts/
to verify reconciling items on summary
bank reconciliation 9. Inquire about consigned in-
ventory
10. Perform analytical
procedures
11. Account for all inventory
tags and count sheets
Valuation, 11. Foot summary schedules 10. Foot subsidiary ledger 12. Foot and extend summary
Allocation 12. Reconcile summary schedules 11. Reconcile subsidiary ledger to schedules
and Accuracy to general ledger general ledger 13. Reconcile summary
13. Test translation of any foreign 12. Examine subsequent cash receipts schedules to general ledger
currencies 13. Age receivables to test adequacy 14. Test inventory costing
of allowance for doubtful ac- method
counts 15. Determine that inventory is
14. Discuss adequacy of allowance valued at lower of cost or
for doubtful accounts with man- market
agement and compare to historical 16. Examine inventory quality
experience (salable condition)
17. Test inventory obsolescence
Presentation 1. Review disclosures for com- 1. Review disclosures for com- 1. Review disclosures for com-
and Disclosure pliance with GAAP pliance with GAAP pliance with GAAP
2. Inquire about pledging 2. Inquire about liens and restric- 2. Review adequacy of
3. Review loan agreements for tions insurance coverage
pledging 3. Review loan agreements for
4. Review management’s liens and restrictions
classification of securities
1
Audit procedures are described in detail in Section C.
Rights and (See Existence or Occurrence) 8. Review minutes for approval of (See Existence or Occurrence)
Obligations additions
Completeness 8. Review cutoffs (examine trans- 9. Perform analytical procedures 5. Review cutoffs
and Cutoff actions near year-end) 10. Vouch major entries to repairs 6. Perform analytical
9. Perform analytical procedures and maintenance expense procedures
10. Reconcile dividends received
to publish records
Valuation, 11. Foot summary schedules 11. Foot summary schedules 7. Foot summary schedules
Allocation and 12. Reconcile summary schedules 12. Reconcile summary schedules 8. Reconcile summary
Accuracy to general ledger to general ledger schedules to general ledger
13. Test amortization of premiums 13. Recalculate depreciation 9. Recalculate prepaid portions
and discounts
14. Determine the market value for
trading and available-for-sale
securities
15. Review audited financial state-
ments of major investees
Presentation 1. Review disclosures for com- 1. Review disclosures for com- 1. Review disclosures for com-
and Disclosure pliance with GAAP pliance with GAAP pliance with GAAP
2. Review purchase commitments 2. Inquire about pledging of assets 2. Review information on stock
3. Review debt agreements for options, dividend restrictions
pledging and events causing de-
fault
Rights and (See Existence or Occurrence) 7. Review minutes for proper au- 6. Review minutes for proper
Obligations thorization authorization
7. Inquire of legal counsel on
legal issues
8. Review Articles of Incorpora-
tion and bylaws for propriety
of equity securities
Completeness 6. Review cutoffs (purchases, 8. Review cutoffs (examine trans- 9. Perform analytical
and Cutoff purchase returns, actions near year-end) procedures
disbursements) 9. Perform analytical procedures 10. Inspect treasury stock
7. Perform analytical procedures 10. Inquire of management as to certificates
8. Perform search for unrecorded completeness
payables (examine unrecorded 11. Review bank confirmations for
invoices, receiving reports, unrecorded debt
purchase orders)
9. Inquire of management as to
completeness
Valuation, 10. Foot subsidiary ledger 12. Foot summary schedules 11. Agree amounts to general
Allocation and 11. Reconcile subsidiary ledger to 13. Reconcile summary schedules ledger
Accuracy general ledger to general ledger 12. Vouch dividend payments
12. Recalculate interest expense 14. Vouch entries to account 13. Vouch all entries to retained
(if any) 15. Recalculate interest expense and earnings
13. For payroll, review year-end accrued interest payable 14. Recalculate treasury stock
accrual transactions
14. Recalculate other accrued
liabilities
3. Documentation (AU-C 230 and PCAOB 3). Make certain that you are familiar with the information in the
outline of AU-C 230. You should know that
a. The overall objective of audit documentation is to provide (1) a sufficient and appropriate record of the
basis for the auditor’s report and (2) evidence that the audit was planned and performed in accordance with
GAAS (and applicable legal and regulatory requirements).
b. Audit documentation should be prepared so as to enable an experienced auditor, with no previous
connection to the audit, to understand procedures performed, audit evidence obtained, and conclusions
reached.
c. While it is not necessary to document every matter considered during an audit, oral explanations alone
(absent working paper documentation) are not sufficient to support the work of the auditor.
d. Audit documentation should include the overall audit strategy and an audit plan for every audit.
e. Documentation relating to documents inspected by the auditor should allow an experienced auditor to deter-
mine which ones were tested.
f. The auditor should identify any information that contradicts or is inconsistent with auditor’s final conclusion
regarding significant matter and how the matter was addressed in forming a conclusion, but need not retain
documentation that is incorrect or superseded. Documentation of the contradiction or inconsistency may
include procedures performed, records documenting consultations, differences in professional judgment
among team members or between team members and others consulted.
g. If information is added to the working papers after the issuance of the audit report, documentation should
include (1) when and by whom changes were made and reviewed, (2) specific reasons for changes, and
(3) the effect, if any, of the changes on the auditor’s conclusion.
h. The documentation completion period is 60 days following the report release date. That means that changes
resulting from the process of assembling and completing the audit file may be made within 60 days
following the date the audit report was released to the client. The fact that these changes have been made
need not be documented. Examples of such changes include routine file-assembling procedures, deleting
discarded documentation, sorting, and signing off file completion checklists. However, the auditor may not
add new information to the working papers unless it is documented per g. above.
i. After the documentation completion date, the auditor should not delete or discard audit documentation.
Additions are treated as per g. above.
j. The retention period (how long audit documentation should be kept) should not be less than five years from
the report release date (longer if legal and regulatory requirements so require).
k. Audit documentation is the property of the auditor and is confidential.
2. Examine a. Consider laws and a. SEC filings a. SEC filings a. Correspondence and a. Compare with financial a. Latest interim
regulations b. Minutes of Board of b. Pensions, other trusts, and invoices from lawyers statements and other statements
b. Normal tests of controls Directors and others identify officers thereof b. Minutes— information b. Minutes of
(compliance tests) and c. Conflict of interest c. Stockholder listings (for stockholders, directors, stockholders,
substantive test examination statements closely held firms) others directors, etc.
procedures d. Prior year audit workpapers c. Read contracts,
agreements, etc.
d. Other documents.
3. Other a. Coordinate with loss a. Review business with a. Contact predecessor and a. Letters of audit inquiry a. Add to representation a. Include in
Procedures contingency procedures major customers, other auditors to clients’s lawyers letter representation letter
b. Consideration of internal suppliers, etc. b. Review material b. Perform further inquiries b. Coordinate with loss
control b. Consider services investment transactions if information seems contingency
c. Read minutes being provided c. Know that such incorrect procedures
d. Overall substantive tests (received) at transactions are more likely c. Apply any other c. Cutoff procedures
e. Include in representation unreasonable prices for firms in financial required procedures for (sales, purchases)
letter c. Review accounting difficulty specific area being
records for large, considered
unusual transactions
d. Review confirmations
e. Review invoices from
lawyers
f. Consideration of
internal control
g. Provide audit
personnel with names
of known related
parties
242
Payables
Inventory
Long-term loan
69
Advanced Auditing & Assurance
Study Manual
Sales
Fixed assets
Current year vs last year (category wise) and consider the reasonableness of differences in
the light of budgeted capital expenditure, recent acquisitions, disposals of assets, new
product lines, discontinuance of products, etc.
Actual expense vs budget (category wise)
Compare balance of each significant category of repairs and maintenance with budgeted
amount
70
Advanced Auditing & Assurance
Study Manual
Expenses
Compare individual account balances with those of the prior year, and with current year
budget (if available)
Current year vs last year at account head level
Compare expense with related account (interest exp as a %, allowance as a %, depreciation
as a %)
Payroll expense
Predictive analysis of via new hires, firing, bonus, increment (completeness and valuation)
Monthly analysis and investigate variance
Region wise payroll analysis
Investment
71
Advanced Auditing & Assurance
Study Manual
CHAPTER 3:
72
Advanced Auditing & Assurance
Study Manual
Receivables
19 Periodic customer balance reconciliations
20 Approval by credit controller on write-offs, should be independent of sales function
73
Advanced Auditing & Assurance
Study Manual
3.1.8 PAYROLL
1 Absence of checks on payroll
2 Increments must be added by a senior person
3 Overtime or absences must be authorized
4 Record of leave availed to be maintained
5 Hiring staffs / leaving details must be adjusted by an independent person
6 Tax computations, labor compliance to be reviewed
7 Time clock
75
Advanced Auditing & Assurance
Study Manual
3.1.10 INVENTORY
76
Module 3: Understanding Internal Control and Assessing Control Risk 187
Asset retirements are recorded by removing the asset and accumulated depreciation from the general ledger—a gain
(loss) may occur on the transaction. In the case of an exchange of assets, the firm has policies to determine that GAAP
is properly followed in recording the transaction.
Major Property, Plant, and Equipment Controls Frequently Missing in CPA Exam Questions
(1) Major asset acquisitions are properly approved by the firm’s board of directors and properly controlled through
capital budgeting techniques.
(2) Detailed records are available for property assets and accumulated depreciation.
(3) Written policies exist for capitalization vs. expensing decisions.
(4) Depreciation properly calculated.
(5) Retirements approved by an appropriate level of management.
(6) Physical control over assets to prevent theft.
(7) Periodic physical inspection of plant and equipment by individuals who are otherwise independent of property,
plant, and equipment (e.g., internal auditors).
7. Overall Internal Control Questionnaires (Checklists). The following internal control questionnaires (in
checklist form) outline the controls that are typically necessary in various transaction cycles and accounts.
While the lists are clearly too lengthy to memorize, review them and obtain a general familiarity. Candidates
with little actual business experience will probably find them especially helpful for questions that require
analysis of internal control deficiencies. Study in detail the questionnaire checklists on cash receipts (#3),
cash disbursements (#4), and on payroll (#14)—as indicated above, a large percentage of the internal control
weakness type questions relate to these three areas.
The checklists are organized into subtopics—generally by category of balance sheet account (e.g., cash,
receivables, fixed assets, liabilities, shareholders’ equity, etc.). The related nominal accounts should be
considered with the real accounts (e.g., depreciation and fixed assets, sales and accounts receivable).
D. Other Considerations
1. Communication of internal control–related matters. AU-C 265 requires auditors to communicate significant defi-
ciencies and material weaknesses to management and to those charged with governance.2 At this point study the
outline of AU-C 265 in Appendix A. This and the communication in the following section are referred to as
“by-product” reports since they result from an audit, but are not the primary report of an audit (i.e., they are not the
audit report). Make certain that you know the following points related to the AU-C 265 communication:
r 4VNNBSZPGMJLFMJIPPEBOEQPUFOUJBMBNPVOUJOWPMWFE
2
Those charged with governance are the person(s) with responsibility for overseeing the strategic direction of the entity and obligations
related to the accountability of the entity. This often is the audit committee.
Transaction cycles
Introduction
Revenue and receivables
Purchases and payables
Payroll
Bank and cash
Inventories
Non-current assets
9 Transaction cycles
9.1 Introduction
For your examination, you may be expected to apply your auditing knowledge to
the main transaction cycles of an entity. These are:
the revenue (sales) and receivables cycle
the purchases and payables cycle
the payroll cycle.
You may also be required to show an understanding of controls and audit tests in
relation to:
bank and cash transactions
inventory
non-current assets.
This section of the chapter provides you with checklists, for each of these audit
areas. The checklists set out:
the control objectives
the key internal controls
tests of control that might be applied
substantive tests that might be carried out (usually on a sampling basis).
If you are not familiar with the items in the checklists, you should revise tests of
control and substantive testing in your study material for basic audit and assurance.
Table continues
Control objectives Key controls Tests of control Substantive tests
Sales returns and
allowances
(discounts) should
be checked and
authorised.
Credit notes must
be recorded
accurately.
The control
account for
receivables in the
main ledger
should be
reconciled
regularly with
account balances
in the receivables
ledger.
Statements should
be sent regularly
(monthly) to
credit customers.
Debt collection
procedures
should be
followed
systematically, in
accordance with
debt collection
policy.
Writing off any
bad debts must be
authorised.
Table continues
Control objectives
Key controls Tests of control Substantive tests
Procedures Review other
should exist for audit areas and
analysing prior year working
purchase papers for
invoices and evidence of
recording them possible
in the correct unrecorded
expense or asset liabilities.
accounts.
Use of control
accounts and
batch totals to
ensure
completeness
and accuracy of
processing.
Accurate records
should be kept
of purchases
returns, and
these should be
matched with
credit notes from
the supplier.
9.4 Payroll
Control objectives Key controls Tests of control Substantive tests
Gross pay is Segregation of Check: Check:
calculated at duties that payroll the accuracy of
the correct (establishing pay information is the arithmetic
rates. rates, calculating reconciled in payroll
Employees are pay, recording between calculations
paid only for pay). periods and and payroll
work done. Maintenance of any changes records
up-to-date between postings to
personnel records. periods are ledger
explained accounts
Authorisation of
joiners and entries in the that correct
leavers, pay rates, wages control pay rates are
overtime, account, if used
voluntary used
deductions from
pay.
Table continues
Control objectives Key controls Tests of control Substantive tests
Gross pay, net Regular the accuracy that correct,
pay and management and authorised
deductions are review of overall completeness rates are used
recorded cost of payroll. of ledger for statutory
completely and Establishment of account entries deductions
accurately in standard the accuracy of (such as tax)
the payroll, procedures, the arithmetic and voluntary
cash records timetables and in payroll deductions
and ledger systems for records that overtime,
accounts. processing bonuses and
that the payroll
The correct payroll. records agree similar
employees are Approval of with payments have
paid the payroll, once cash/bank been properly
correct prepared. records authorised
amounts. that joiners are
Use of a control Agree payroll
The correct account for amounts to properly
amount of payroll expenses/ bank records. authorised
deductions are liabilities. that employees
paid to the tax Review payroll
Safe custody of for unusual have not been
authorities and paid for
other cash, where amounts.
employees are periods before
authorities. they join or
paid in cash. When employees after they leave
Verification of the are paid in cash:
identity of the pay for
check that hours worked
employees, when unclaimed
payment is in or output
wages are kept produced
cash. safe and should be
Signature received reasons for not checked
for pay, when claiming wages against the
payment is in are explained. authorised
cash. attend and documentation
Custody and observe a that payments
investigation of distribution of of deductions
unclaimed pay pay. have been
packets, when compare made to the
payment is in names on appropriate
cash. payroll to authorities
Use of a separate names on pay the signed
bank account for packets. receipts for
payroll. examine wages paid in
signed receipts cash
for pay.
Table continues
Control objectives Key controls Tests of control Substantive tests
Authorisation of check that no that the correct
cheques/bank employee entries have
transfers, when receives more been made in
employees are than one pay the wages
paid by these packet. control account
methods. Also:
Verify the
existence of a
sample of
employees on
the payroll.
When wages
are paid in
cash, observe
the distribution
of pay packets.
Carry out
analytical
procedures, such
as trend analysis,
average pay per
employee.
Table continues
Control objectives Key controls Tests of control Substantive tests
Bank
There are Review Review large or
sufficient payments for round-sum
physical evidence of amounts just
custody authorisation. before and just
controls over after the
cheques and reporting
cash. period.
Carry out
analytical
procedures.
Cash
As for bank above. As for bank above. Observe that Attend/carry
procedures for out cash counts.
opening mail Check that
and handling postings are
cash are being made correctly
followed. to ledger
Check amounts accounts.
recorded as Analytical
receipts against procedures.
remittance
advices from
customers.
Check the
amounts in
receipt books or
on till rolls
against paying-
in slips (paying
in cash to the
bank), the cash
book and bank
statements.
Check whether
cash is banked
daily.
Check
payments out of
cash takings, if
any.
Check petty
cash payments
for
authorisation.
Table continues
Control objectives Key controls Tests of control Substantive tests
Cash
Check the
documents that
support any
cash payments
(for example,
receipts).
9.6 Inventories
Many of the points listed above in relation to the purchases cycle (for example, in
relation to the receipt of goods) and the sales cycle (for example, in relation to the
despatch of goods) should also apply to the inventory system. For example, the
requirement for authorisation procedures and segregation of duties are the same.
The table below focuses on additional points.
Table continues
Control objectives Key controls Tests of control Substantive tests
Appropriate Check that Check the
physical physical treatment of
custody custody inventory held
procedures procedures are on the client’s
should be in operational (= premises but
place. applied in owned by a
practice). third party.
CHAPTER 4:
AUDIT REPORTING
78
Advanced Auditing & Assurance
Study Manual
Modification # 2:
• The balance sheet date being audited is 31 December 20X1.
• In assessing whether the going concern assumption is appropriate the directors have taken into
account the period up to 30 November 20X2 which is only 11 months from the balance sheet date
i.e. less than the 12 months from the balance sheet date.
• The directors have refused to either extend their assessment period to a period of more than
twelve months from the balance sheet date.
Modification # 3:
• The balance sheet date being audited is 31 December 2008.
• The Company has not provided impairment review of an equipment despite a major damage
caused to one its parts costing Rs. 20 million (WDV 15 million). The matter is material but not
pervasive.
Modification # 4:
• The balance sheet date being audited is 31 December 20X1.
• Investments (Held for trading securities) in money market made by the Company have not been
marked to market by the Directors of the Company. The cost exceeds market value of investments
by Rs. 32 million. PBT is 302 million. Short-term investments cost Rs. 122 million.
79
Advanced Auditing & Assurance
Study Manual
Modification # 5:
• The balance sheet date being audited is 31 December 20X1.
• Law suit by ABC Industries has been filed against the Company in 1998 for claiming the sum
disclosed in FS, the knowledge of which is fundamental to users’ understanding. The matter has
been adequately disclosed by the management in note 32.4 of the financial statements. No
decision has been yet given by the court.
Modification # 6:
• The balance sheet date being audited is 31 December 20X1.
• The Company has revalued its brand “Papa Johns” during the year without having any reference
to an ‘active market’. Cost of “Papa Johns” is Rs. 5 million while the revalued amount as per
management is Rs. 25 million. The matter is material but not pervasive.
80
Advanced Auditing & Assurance
Study Manual
SUGGESTED ANSWERS
Modification # 1
Adverse opinion on financial statements
As explained in note x to the financial statements the company’s financing arrangements expired
and the amount outstanding was payable on 31 December 20X1. The company has been unable to
re-negotiate or obtain replacement financing and is considering entering insolvency proceedings.
These events indicate a material uncertainty which may cast significant doubt on the company’s
ability to continue as a going concern and therefore it may be unable to realise its assets and
discharge its liabilities in the normal course of business. The financial statements (and notes
thereto) do not disclose this fact and have been prepared on the going concern basis.
In our opinion, because of the omission of the information referred to above, the financial
statements do not give a true and fair view, in accordance with International Financial Reporting
Standards, of the state of the company’s affairs as at 31 December 20X1 and of its profit [loss] for
the year then ended.
[In case of a material uncertainty due to net negative equity, current assets < current liabilities, then
use them]
Modification # 2
Qualified opinion arising from departure from IAS 1 ‘Presentation of Financial Statements’
Option 1: In assessing whether it is appropriate to prepare the financial statements on a going
concern basis, the Directors/ Company has provided us an assessment of its going concern
assumption for 11 months period ending on 30 November 20X2 which is less than twelve months
from the balance sheet date. This is contrary to the requirements of International Accounting
Standard 1 ‘Presentation of Financial Statements’.
Owing to the absence of above, the effects thereof on the accompanying financial statements
cannot presently be determined.
81
Advanced Auditing & Assurance
Study Manual
Owing to the absence of above, the effects thereof on the accompanying financial statements
cannot presently be determined.
Modification # 3
Inability to obtain SAAE
As explained in note x to the accompanying financial statements, we have not been provided an
impairment review of equipment X1C of the Company despite major damage has been caused to
its part costing Rs. 20 million (Written Down Value amounting to Rs. 15 million) during the year
ended 31 December 20X1 indicating impairment in the value of said asset, which under such
circumstances, requires an impairment review as stipulated under IAS 36 “Impairment of Assets”.
Owing to the absence of above, the effects thereof on the accompanying financial statements
cannot presently be determined.
Modification # 4
Misstatement arising from departure from IFRS 9 ‘Financial Instruments’
as explained/ disclosed in note x to the financial statements, the Directors/ Company has not
marked its held-for-trading investments costing Rs. 122 million to their fair market values to Rs. 90
million, which is contrary/ in contravention to the requirements of International Financial Reporting
Standard 9 - ‘Financial Instruments’.
Had the Company incorporated/ made the above referred impairment in the accompanying
financial statements, the profit before tax and short-term investments would have been reduced
by Rs. 32 million.
82
Advanced Auditing & Assurance
Study Manual
Modification # 5:
We draw attention to note 32.4 of the accompanying financial statements, with regard to a law suit
filed by ABC Industries against the Company during the year ended 31 December 1998. Pending a
decision of the court in this respect, the Company has not made any provision for the amount
claimed by ABC Industries in the accompanying financial statements. Our opinion is not qualified in
respect of the said matter.
Modification # 6:
As disclosed in note x to the accompanying financial statements, the Company has revalued one of
its brand name “Papa John’s” during the year ended 31 December 20X1. However, the said value
has not been determined with reference to an ‘active market’, as defined under IAS 38 “Intangible
Assets” which, in case of an absence of an active market, requires such assets to be carried at cost
less accumulated depreciation and impairment losses, if any.
Had the Company not revalued the above referred intangible asset in the accompanying financial
statements, the total assets and the related revaluation surplus would have been reduced by Rs. 20
million.
83
Advanced Auditing & Assurance
Study Manual
We have separately expressed unqualified opinions on the financial statements of the Firm and the
Company for the year ended 30 June 2009. These financial statements have been prepared and
presented in accordance with the accounting policies which are consistent with the audited
financial statements of the Firm and the Company for the year ended 30 June 2009.
The preparation of these amalgamated summarised financial statements is the responsibility of the
Company’s management. Our responsibility is to express an opinion on these amalgamated
summarised financial statements based on our examination.
In our opinion, the accompanying amalgamated summarised financial statements are consistent, in
all material respects, with the audited financial statements from which they have been derived.
For a better understanding of the Company’s financial position and of the scope of our
examination, the amalgamated summarised financial statements should be read in conjunction
with separate audited financial statements from which these amalgamated summarised financial
statements have been derived.
Chartered Accountants
Audit Engagement Partner’s Name: DEF
Date:
Place: Karachi
RAFT
84
Advanced Auditing & Assurance
Study Manual
(a) the Company has not followed the requirement of IAS – 40 “Investment Property” with
regard to the disclosure of the fair value of its investment property for the reasons
discussed by the management in note 5 to the accompanying financial statements.
Accordingly, the effects thereof on the accompanying financial statements cannot presently
be determined;
(b) in our opinion, proper books of account have been kept by the company as required by the
Companies Ordinance, 1984;
(c) in our opinion:
(i) the balance sheet and profit and loss account together with the notes thereon have
been drawn up in conformity with the Companies Ordinance, 1984, and are in
agreement with the books of account and are further in accordance with accounting
policies consistently applied;
(ii) the expenditure incurred during the year was for the purpose of the company's
business; and
(iii) the business conducted, investments made and the expenditure incurred during the
year were in accordance with the objects of the company;
(d) in our opinion, except for the effects of such adjustments, if any, as might have been
determined to be necessary had the Company followed the IAS, referred to in (a) above,
and to the best of our information and according to the explanations given to us, the
balance sheet, profit and loss and cash flow statement, together with the notes forming
part thereof conform with approved accounting standards as applicable in Pakistan, and,
give the information required by the Companies Ordinance, 1984, in the manner so
required and respectively give a true and fair view of the state of the company's affairs as at
30 June 2009 and of the profit, its cash flows and changes in equity for the year then ended;
and
(e) in our opinion, no Zakat was deductible at source under the Zakat and Ushr Ordinance,
1980 (XVIII of 1980).
Chartered Accountants
Date: 08 October 2009
Place: Karachi
(a) the Company has not followed the requirements of International Accounting Standard - 36
“Impairment of Assets” with respect to the impairment testing of Goodwill, as disclosed in
note 6 to the accompanying financial statements. Accordingly, the effects thereof on the
accompanying financial statements of the Company cannot presently be determined;
85
Advanced Auditing & Assurance
Study Manual
(b) in our opinion, proper books of account have been kept by the Company as required by the
Companies Ordinance, 1984;
(i) the balance sheet and profit and loss account together with the notes thereon have
been drawn up in conformity with the Companies Ordinance, 1984, and are in
agreement with the books of account and are further in accordance with accounting
policies consistently applied except for the changes in accounting policies and
disclosures as stated in note 4.2 to the financial statements with which we concur;
(ii) the expenditure incurred during the year was for the purpose of the
Company's business; and
(iii) the business conducted, investments made and the expenditure incurred during the
year were in accordance with the objects of the Company.
(d) in our opinion, except for the effects on the accompanying financial statements of such
adjustments, if any, as might have been determined to be necessary had the Company
followed the requirements of International Accounting Standard 36, as stated in paragraph
(a) above, and to the best of our information and according to the explanations given to us,
the balance sheet, profit and loss account, statement of comprehensive income, cash flow
statement and statement of changes in equity together with the notes forming part thereof
conform with approved accounting standards as applicable in Pakistan, and, give the
information required by the Companies Ordinance, 1984, in the manner so required and
respectively give a true and fair view of the state of the Company's affairs as at 30 June
2010 and of the profit, total comprehensive income, its cash flows and changes in equity for
the year then ended; and
(e) in our opinion, no Zakat was deductible at source under the Zakat and Ushr Ordinance,
1980 (XVIII of 1980).
Chartered Accountants
Audit Engagement Partner’s Name: XYZ
Date: 15 October 2010
Place: Karachi
DRAFT
(a) in our opinion, proper books of accounts have been kept by the company as required by the
Companies Ordinance, 1984;
86
Advanced Auditing & Assurance
Study Manual
(i) the balance sheet and profit and loss account together with the notes thereon
have been drawn up in conformity with the Companies Ordinance, 1984, and are in
agreement with the books of account and are further in accordance with
accounting policies consistently applied;
(ii) the expenditure incurred during the year was for the purpose of the company's
business; and
(iii) the business conducted, investments made and the expenditure incurred during the
year were in accordance with the objects of the company;
(c) in our opinion and to the best of our information and according to the explanations given to
us, the balance sheet, profit and loss account and cash flow statement together with the
notes forming part thereof conform with approved accounting standards as applicable in
Pakistan, and give the information required by the Companies Ordinance, 1984, in the
manner so required and respectively give a true and fair view of the state of the company's
affairs as at 30 June 2009 and of the loss and its cash flows, for the year then ended;
(d) in our opinion, no Zakat was deductible at source under the Zakat and Ushr Ordinance,
1980 (XVIII of 1980); and
(e) Without qualifying our opinion, we draw attention to the contents of note 2 to the financial
statements which indicates that the company incurred a net loss of Rs.0.033 (2008: Rs.
2.354) million during the year ended 30 June 2009 as a result of which its accumulated loss
at the end of the year amounted to the Rs.2.387 million. This condition, along with other
matters as set forth in the above referred note, indicate the existence of a material
uncertainty which may cast significant doubt about the company’s ability to continue as a
going concern.
Chartered Accountants
Audit Engagement Partner’s Name: ABC
Date: 24 September 2009
Place: Karachi
We have audited the annexed balance sheet of ABC Limited as at 30 June 2010 and the related
profit and loss account, cash flow statement and statement of changes in equity together with the
notes forming part thereof for the year then ended and we state that, we have obtained all the
information and explanations which, to the best of our knowledge and belief, were necessary for
the purposes of our audit.
87
Advanced Auditing & Assurance
Study Manual
It is the responsibility of the Company’s management to establish and maintain a system of internal
control, and prepare and present the above said statements in conformity with the approved
accounting standards and the requirements of the Companies Ordinance, 1984. Our responsibility
is to express an opinion on these statements based on our audit.
Except as discussed in paragraph(i) below, we conducted our audit in accordance with the auditing
standards as applicable in Pakistan. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the above said statements are free of any material
misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the above said statements. An audit also includes assessing the accounting
policies and significant estimates made by management, as well as, evaluating the overall
presentation of the above said statements. We believe that our audit provides a reasonable basis
for our opinion and, after due verification, we report that:
(i) we could not physically verify cash-in-hand, aggregating to Rs.1.346 million, as shown in
note 16, as the same was not made available to us for our verification at the close of the
year. Accordingly, the effects thereof on the accompanying financial statements cannot
presently be determined.
We further report that the Company has not followed the requirements of the following
International Accounting Standards (IASs):
(a) IAS -36 “Impairment of Assets” in respect of impairment in the value of investment in
the Associated Company, amounting to Rs.______ (2009: Rs.26.343)million, as shown in
note 7, which has not been recorded in the accompanying financial statements during the
current year;
Had the Company recorded the above referred impairment, profit before taxation would
have turned into loss before taxation of Rs.21.511 whereas long term investment would
have been reduced by the same sum;
(b) IAS – 28 ‘Investment in Associates’ with regard to the use of “equity method” of accounting
for its investment in its associated undertaking, as shown in note 7 to the accompanying
financial statements nor has the Company determined the effects of the said departure
from the IAS on the accompanying financial statements;
(c) IAS – 19 “ Employee Benefits” with regard to the measurement and disclosures relating to
the defined benefit plans (staff gratuity scheme) in the accompanying financial statements
for the reasons disclosed by the management in note 20.2.1. The effects thereof on the
accompanying financial statements of the Company cannot presently be determined;
(d) in our opinion, proper books of accounts have been kept by the Company as required by
the Companies Ordinance, 1984.
88
Advanced Auditing & Assurance
Study Manual
Chartered Accountants
Audit Engagement Partner’s Name: AYX
Date:
Place: Karachi
89
Advanced Auditing & Assurance
Study Manual
We were engaged to audit the annexed balance sheet of ABC Limited (the Company) as at 30 June
2010 and the related profit and loss account, statement of comprehensive income, cash flow
statement and statement of changes in equity together with the notes forming part thereof, for the
year then ended and we state that except as stated in paragraphs (a) to (d) below, we have obtained
all the information and explanations which to the best of our knowledge and belief, were necessary
for the purposes of our audit.
It is the responsibility of the Company’s management to establish and maintain a system of internal
control, and prepare and present the above said statements in conformity with the approved
accounting standards and the requirements of the Companies Ordinance, 1984. Our responsibility
is to express an opinion on these statements based on our audit.
Except as stated in paragraphs (a) to (d) below, we conducted our audit in accordance with the
auditing standards as applicable in Pakistan. These standards require that we plan and perform the
audit to obtain reasonable assurance about whether the above said statements are free of any
material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the above said statements. An audit also includes assessing the
accounting policies and significant estimates made by management, as well as, evaluating the
overall presentation of the above said statements. We believe that our audit provides a reasonable
basis for our opinion and, after due verification, we report that:
(a) as referred to in notes 7 and 31.2 to the accompanying financial statements, the investment
in WTC (Private) Limited (WTC), an associated company, amounted to Rs.50.00 (2009:
50.00) million whereas long-term loans and advances, trade debts, accrued mark-up and
current account balances due from WTC, M Limited (ML) and SG (Private) Limited (SGPL),
associated companies, amounted to Rs.344.82 (2009: Rs.411.96) million, Rs.5.74 (2009:
Rs.5.52) million and Rs.84.95 (2009: Rs.84.94) million, respectively, aggregating to Rs.
435.51 (2009: Rs.502.42) million, as of the date of the balance sheet. The auditors of WTC
and SGPL have expressed adverse opinions on the financial statements of these entities on
account of impairment of investments in an associated company not recorded by these
entities, amounting to Rs.579.12 (2009: Rs.638.26) million and Rs.237.79 ( 2009: Rs.290.50)
million, respectively, at the end of the current year.
Further, an emphasis of matter paragraph has been added by the auditors in their report on
the financial statements of these entities for the year ended 30 June 2010 in respect of the
going concern issue. Furthermore, the auditors of ML had modified their report for the year
ended 30 June 2008, stating that the financial statements of ML for the said year were
prepared on a going concern basis which would be valid only if the entity was able to start
its business and generate revenue.
90
Advanced Auditing & Assurance
Study Manual
In view of the above, in our opinion, the above referred investment and financial assets
should be tested for impairment by the management in accordance with the requirements
of International Accounting Standard (IAS) -36 “Impairment of Assets” and IAS-39 “Financial
Instruments: Recognition and Measurement”. As we have not been provided with any
evidence regarding such impairment test in respect of the above investment and financial
assets, we are unable to satisfy ourselves as to whether the same have been stated at their
respective recoverable amount;
(b) as referred to in note 6.1 to the accompanying financial statements, during the year ended
30 June 2003, the management bifurcated the cost of land and building in respect of WTC
building acquired during the year ended 30 June 1988 and reversed the depreciation of
Rs.7.39 million, charged in years prior to the year ended 30 June 2003, on the basis of said
bifurcation. In the absence of any independent professional valuation in support of the
above bifurcation of cost of WTC land and building, we were unable to satisfy ourselves in
respect of the accuracy of the carrying amounts of land and building amounting to Rs.24.50
(2009: Rs.24.50) million and Rs.74.46 (2009: Rs.76.31) million, respectively (note 6), and
the depreciation charged on such building during the current year, amounting to Rs.4.31
million;
(c) as referred to in note 31.2.1 to the accompanying financial statements, we have not been
provided with the audited financial statements of A I (Private) Limited, ML and AY Services
(Private) Limited, associated companies, for the year ended 30 June 2010.
Similarly, we have not been provided with the audited financial statements of AH City
(Private) Limited, for the year ended 30 June 2010.
Owing to the absence of the aforementioned audited financial statements, we could not
(a) confirm the balances outstanding in the corresponding financial statements and (b)
ascertain the break-up value of the investee company. Accordingly, the effects thereof on
the accompanying financial statements cannot presently be determined;
(d) due to significant time lag, i.e. over a year between the close of the financial year and the
issuance of these financial statements, and the non-availability of required information such
as interim financial statements, we have not been able to review the events subsequent to
the balance sheet date. However, we have been provided management’s representation
that no events and transactions have occurred after the balance sheet date to the present
time which would materially affect the financial statements and the related disclosures for
the year ended 30 June 2010;
(e) the Company has not followed the requirements of IAS – 40 ‘Investment Property’ with
regard to the non-disclosure of the fair value of investment property for the reasons
discussed by the management in note 6.3 to the accompanying financial statements nor has
91
Advanced Auditing & Assurance
Study Manual
the Company determined the effects of the said departure from the IAS on the
accompanying financial statements;
Accordingly, the effects of the departure from the above IAS, as stated in paragraph (e) above, on
the accompanying financial statements cannot presently be determined;
(f) in our opinion, proper books of account have been kept by the Company as required by the
Companies Ordinance, 1984;
(g) in our opinion:
i) except for the effects on the financial statements, if any, of the matters stated in
paragraphs (a) to (e) above, the balance sheet and profit and loss account together
with the notes thereon have been drawn up in conformity with the Companies
Ordinance, 1984, and are in agreement with the books of account and are further
in accordance with accounting policies consistently applied except for the changes,
as stated in note 4.2, with which we concur;
ii) the expenditure incurred during the year was for the purpose of the Company's
business; and
iii) the business conducted, investments made and the expenditure incurred during
the year were in accordance with the objects of the Company;
(h) because of the significance of the matters stated in paragraph (a) above, we have not been
able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion
that whether the balance sheet, profit and loss account, statement of comprehensive
income, cash flow statement and statement of changes in equity together with the notes
forming part thereof conform with approved accounting standards as applicable in Pakistan,
and, give the information required by the Companies Ordinance, 1984, in the manner so
required and whether respectively give a true and fair view of the state of the Company’s
affairs as at 30 June 2010 and of the profit, total comprehensive income, its cash flows and
changes in equity for the year then ended. Accordingly, we do not express an opinion on
the accompanying financial statements; and
(i) in our opinion, no zakat was deductible at source under the Zakat and Ushr Ordinance, 1980
(XVIII of 1980).
(i) note 1.2 to the accompanying financial statements, which states that the accompanying
financial statements are separate financial statements of the Company and the Company is
in the process of preparing consolidated financial statements of the Group;
(ii) note 31.2.2 to the accompanying financial statements, which states that the auditors of A I
(Private) Limited – an associated company, have qualified their initialed report for the year
ended 30 June 2008 in respect of the matter stated therein; and
92
Advanced Auditing & Assurance
Study Manual
(iii) note 24.1.1 to the financial statements which provides details relating to contingencies with
respect to tax matters, the ultimate outcome of which cannot presently be determined and,
hence pending the resolution thereof, no provision has been made thereagainst in the
accompanying financial statements.
Chartered Accountants
Audit Engagement Partner’s Name: ABC
Date: 19 August 2011
Place: Karachi
(i) the balance sheet and profit and loss account together with the notes thereon have
been drawn up in conformity with the Companies Ordinance, 1984, and are in
agreement with the books of account and are further in accordance with accounting
policies consistently applied except for the changes, as discussed in the note 4.2, to
the financial statements with which we concur;
(ii) the expenditure incurred during the year was for the purpose of the Company's
business; and
(iii) the business conducted, investments made and the expenditure incurred during the
year were in accordance with the objects of the Company;
(c) in our opinion and to the best of our information and according to the explanations given to
us the balance sheet, profit and loss account, statement of comprehensive income, cash
flow statement and statement of changes in equity together with the notes forming part
thereof conform with approved accounting standards as applicable in Pakistan, and, give
the information required by the Companies Ordinance, 1984, in the manner so required
and respectively give a true and fair view of the state of the Company's affairs as at 30 June
2010 and of the profit, total comprehensive income, its cash flows and changes in equity for
the year then ended;
(d) in our opinion, Zakat deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII
of 1980), was deducted by the Company and deposited in the Central Zakat Fund
established under Section 7 of that Ordinance; and
93
Advanced Auditing & Assurance
Study Manual
i) notes 14.2(a) and 14.3 to the accompanying financial statements in respect of the
lawsuit filed by the Company during the year ended 30 June 2000 in the High Court
of Sindh (the Court) with regard to the recovery of Karachi Relief Rebate,
Interconnect discount and other related amounts from Pakistan Telecommunication
Company Limited (PTCL). On an application filed by the Company, the Court passed
an interim order in favour of the Company and appointed a firm of Chartered
Accountants to determine the actual amount due from the PTCL in this regard. The
said firm submitted its report to the Court during the year ended 30 June 2002,
containing various amounts determined under various alternatives, for the period
commencing January 1997 to August 2001. Accordingly, pending a final decision by
the Court in this matter, no provision for any amount that may not be recoverable
has been made in the accompanying financial statements;
ii) note 14.2(b) to the accompanying financial statements with regard to a lawsuit filed
by the PTCL against the Company during the year ended 30 June 2002. Pending a
decision of the Court in this respect, the Company has not made any provision for
the amount claimed by the PTCL in the accompanying financial statements;
iii) note 14.6 to the accompanying financial statements in respect of the Pakistan
Telecommunication Authority’s (PTA) claim for Access Promotion Contribution for
Universal Service Fund of Rs.2,269.148 million, out of which the Company paid a
sum of Rs.2,111.115 million to the PTA up to the end of the current year under
protest. The Islamabad High Court, however, decided the case in favour of the PTA
during the current year. As a result, the Company has filed an appeal in the Supreme
Court of Pakistan, and, hence, pending a final decision in this matter, no adjustment
has been made to the above referred sum of Rs.2,111.115 million shown by the
Company under other receivables (note 14.6) nor any provision has been made for
the remaining sum of Rs.158.033 in the accompany financial statements;
iv) notes 32.1 to 32.12 to the accompanying financial statements in respect of
contingencies the ultimate outcome of which cannot presently be determined and,
hence, pending the resolution thereof, no provision has been made for any liability
that may arise therefrom in the accompanying financial statements;
94
Advanced Auditing & Assurance
Study Manual
vii) note 26 in respect of amount due to PTA shown under non-current liabilities, as a
result of a Writ Petition instituted by the WLL Industry, including the Company,
subsequent to the end of the current year.
We have audited the annexed balance sheet of SMX (PRIVATE) LIMITED … we report that:
(a) in our opinion, proper books of accounts have been kept by the Company as required by
the Companies Ordinance, 1984;
(b) in our opinion:
(i) the balance sheet and profit and loss account together with the notes thereon
have been drawn up in conformity with the Companies Ordinance, 1984, and are in
agreement with the books of account and are further in accordance with
accounting policies consistently applied;
(ii) the expenditure incurred during the year was for the purpose of the Company's
business; and
(iii) the business conducted and the expenditure incurred during the year were in
accordance with the objects of the Company;
(c) in our opinion and to the best of our information and according to the explanations given to
us, the balance sheet, profit and loss account, cash flow statement and statement of
changes in equity together with the notes forming part thereof conform with approved
accounting standards as applicable in Pakistan, and, give the information required by the
Companies Ordinance, 1984, in the manner so required and respectively give a true and fair
view of the state of the Company's affairs as at 30 June 2009 and of the loss, its cash flows
and changes in equity, for the year then ended;
(d) in our opinion, no Zakat was deductible at source under the Zakat and Ushr Ordinance,
1980 (XVIII of 1980); and
(e) without qualifying our opinion, we draw attention to the contents of:
(i) note 2 to the accompanying financial statements wherein the matter set forth in the
said note indicate the existence of a material uncertainty which may cast significant
doubt about the Company’s ability to continue as a going concern;
(ii) note 36.1 to the accompanying financial statements relating to contingencies. The
ultimate outcome thereof cannot presently be determined and, hence, pending the
resolution of the same, no provision has been made for any liability that may arise
as a result of the said resolution in the accompanying financial statements.
Chartered Accountants
95
Advanced Auditing & Assurance
Study Manual
Place: Karachi
96
Advanced Auditing & Assurance
Study Manual
(a) in our opinion, proper books of accounts have been kept by the Company as required by
the Companies Ordinance, 1984;
(i) the balance sheet and profit and loss account together with the notes thereon have
been drawn up in conformity with the Companies Ordinance, 1984, and are in
agreement with the books of account and are further in accordance with accounting
policies consistently applied except for the changes, as stated in note 3.3, with
which we concur;
(ii) the expenditure incurred during the year was for the purpose of the Company's
business; and
(iii) the business conducted, investments made and the expenditure incurred during the
year were in accordance with the objects of the Company;
in our opinion and to the best of our information and according to the explanations given to us, the
balance sheet, profit and loss account, statement of comprehensive income, cash flow
statement and statement of changes in equity, together with the notes forming part
thereof conform with approved accounting standards as applicable in Pakistan, and, give
the information required by the Companies Ordinance, 1984, in the manner so required
and respectively give a true and fair view of the state of the Company's affairs as at 30 June
2010 and of the loss, total comprehensive loss its cash flows and changes in equity for the
year then ended;
(d) in our opinion, no Zakat was deductible at source under the Zakat and Ushr Ordinance,
1980(XVIII of 1980); and
(e) without qualifying our opinion, we draw attention to note 1.2 in the accompanying financial
statements which indicates that the Company incurred a net loss of Rs.45.695 (2009:
Rs.36.215) million during the year ended 30 June 2010, resulting in a negative equity of
Rs.195.119 (2009: Rs.149.424) million and as of that date, the Company’s current liabilities
exceeded its total assets by Rs.194.291 (2009: Rs.147.429) million. These conditions, along
with other matters as set forth in the above referred note, indicate the existence of a
material uncertainty which may cast significant doubt about the Company’s ability to
continue as a going concern.
97
Advanced Auditing & Assurance
Study Manual
4.1.10 AUDITORS' REPORT TO THE MEMBERS
We have audited the annexed balance sheet of ABC Microfinance Bank Limited (the ‘Bank’) as at
December 31, 2008 and the related profit and loss account, cash flow statement and statement
of changes in equity together with the notes forming part thereof (here-in-after referred to as the
'financial statements') for the year then ended and we state that we have obtained all the
information and explanations which, to the best of our knowledge and belief, were necessary for
the purposes of our audit.
It is the responsibility of the Bank’s management to establish and maintain a system of internal
control, and prepare and present the above said statements in conformity with the approved
accounting standards and the requirements of the Companies Ordinance, 1984 and the
Microfinance Institutions Ordinance, 2001. Our responsibility is to express an opinion on these
statements based on our audit.
We conducted our audit in accordance with the auditing standards as applicable in Pakistan.
These standards require that we plan and perform the audit to obtain reasonable assurance
about whether the above said statements are free of any material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting policies and significant
estimates made by management, as well as, evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis for our opinion and, after due
verification, we report that:
1. As more fully explained in note 32.3.1 to the accompanying financial statements, BSD Circular
No. 7 of 2008 dated March 20, 2008 issued by the State Bank of Pakistan requires that
Microfinance Banks (MFBs) licensed to operate nationally shall maintain a minimum paid up
capital, free of losses, of not less than five hundred million rupees. The circular further
requires all MFBs to maintain at all times the minimum paid up capital (free of losses).
Section 10 of Microfinance Institutions Ordinance, 2001 states that no microfinance bank shall
operate unless it has a minimum paid-up capital as the State Bank may, from time to time,
prescribe.
The Bank was incorporated on March 9, 2006 as a public limited company under the
Companies Ordinance, 1984 with a paid-up capital of Rs 500 million. During the year ended
December 31, 2008 the Bank incurred a loss of Rs 22,859,437 and its total accumulated losses
as at that date amounted to Rs 68,912,788. Consequently, the net equity of the Bank as at
December 31, 2008 has depleted to Rs 431,087,212.
The above non-compliance may result in cancellation of the Bank’s license to operate. Further,
(i) the balance sheet and profit and loss account together with the notes thereon have
been drawn up in conformity with the Companies Ordinance, 1984 and the
Microfinance Institutions Ordinance, 2001 and are in agreement with the books of
account and are further in accordance with accounting policies consistently applied;
(ii) the expenditure incurred during the year was for the purpose of the Bank's business;
and
(iii) the business conducted, investments made and the expenditure incurred during the
year were in accordance with the objects of the Bank;
(c) In our opinion and to the best of our information and according to the explanations given
to us, except for the possible effects of the matter referred to in paragraph 1 above, the
balance sheet, profit and loss account, cash flow statement and statement of changes in
equity together with the notes forming part thereof conform with approved accounting
standards as applicable in Pakistan, and give the information required by the Companies
Ordinance, 1984 and the Microfinance Institutions Ordinance, 2001, in the manner so
required and respectively give a true and fair view of the state of the Bank's affairs as at
December 31, 2008 and of the loss, its cash flows and changes in equity for the year then
ended; and
(d) In our opinion, Zakat deductible at source under the Zakat and Ushr Ordinance, 1980,
was deducted by the Bank and deposited in the Central Zakat Fund established under
Section 7 of that Ordinance.
Chartered Accountants
Karachi
Dated:
We have audited the accompanying financial statements of ABC Energy Fund (here in after
referred to as “the Fund”), which comprise the statement of assets and liabilities as at June 30,
2012, and the related income statement, distribution statement, statement of movement in
certificate holders’ fund - per certificate, statement of changes in equity and cash flow statement
Auditor’s responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We
conducted our audit in accordance with the International Standards on Auditing as applicable in
Pakistan. Those standards require that we comply with ethical requirements and plan and perform
the audit to obtain reasonable assurance whether the financial statements are free from material
misstatements.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor considers
internal control relevant to the entity’s preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An
audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements give a true and fair view of the financial position of the
Fund as at June 30, 2012, and of its financial performance, cash flows and transactions for the year
then ended in accordance with approved accounting standards as applicable in Pakistan.
Chartered Accountants
Engagement Partner: XYZ
Dated: October 9, 2012
Karachi
Obtain the company’s cash flow forecast and review the cash in and out flows. Assess the
assumptions for reasonableness and discuss the findings with management to understand if
the company will have sufficient cash flows.
Perform a sensitivity analysis on the cash flows to understand the margin of safety the
company has in terms of its net cash.
RECEIPTS
Inflows reflect the gradual increase in receipts and take into account the seasonal
fluctuation;
Growth expectations are feasible, considering market research and economic climate;
Inflows are subject to sensitivity analysis;
Loan from bank is shown in forecast prior to any major outflow of cash and is sufficient to
fund expansion and respect payments.
Verify that discounts have been accounted for in cash sales-receipts;
PAYMENTS
Agree the opening cash position to cash book / signed financial statements and bank recon/
statement;
Check the arithmetical accuracy of the forecast;
Payment for furniture and fixtures are complete, supported by quotations and included
prior to opening of outlets;
Payment for advertising, recruitment and training are reflected prior to the opening of
outlets;
Payment to suppliers reflect the company’s payment policy and exchange rates used to
translate payments are subject to sensitivity analysis;
Rent is included quarterly in advance from the date of acquisition of lease & with regular
rent reviews;
Interest payments reflect the level of borrowing & are in line with the market expectations
& subject to sensitivity analysis, paid on due dates;
Taxes are consistent with the profit forecast & are paid on due dates;
Payments reflect additional cost of operations, shipping cost, etc
Recalculate the pattern of receipts from credit customers by applying stated credit terms to
credit sales;
ADDITIONAL PROCEDURES
Review any current agreements with the bank to determine whether any key ratios have
been breached.
Review any bank correspondence to assess the likelihood of the bank renewing the
overdraft facility.
Discuss with the directors whether they have contacted any alternative banks for finance to
assess whether they have any other means of repaying the bank overdraft.
Review the company’s post yearend sales and order book to assess if the levels of trade are
likely to increase and if the revenue figures in the cash flow forecast are reasonable.
Review post year end correspondence with suppliers to identify if any further restrictions in
credit have arisen, and if so ensure that the cash flow forecast reflects an immediate
payment for trade payables.
Inquire of the lawyers of the Company as to the existence of litigation and claims, if any exist
then consider their materiality and impact on the going concern basis.
Perform audit tests in relation to subsequent events to identify any items that might
indicate or mitigate the risk of going concern not being appropriate.
Review the post year end board minutes to identify any other issues that might indicate
financial difficulties for the Company.
Review post year end management accounts to assess if in line with cash flow forecast.
Consider whether any additional disclosures as required by IAS 1 Presentation of Financial
Statements in relation to material uncertainties over going concern should be made in the
financial statements.
We have examined the projection made in annexed Projected Balance Sheet, Projected Profit and Loss
Account, Projected Cash Flow Statement of _________________for the period from April 30, 2007 to
June 30, 2011 in accordance with International Standard on Assurance Engagements 3400 applicable
to the examination of prospective financial information. Management is responsible for the Projection
including the assumptions set out in note 2 to on which these are based.
This projection has been prepared for reflecting company’s ability to settle its liabilities due to financial
institutions over the period of projection based on its liquidity and solvency. The projection has been
prepared using a set of assumptions that include hypothetical assumptions about future events and
management’s actions that are not necessarily expected to occur. Consequently, readers are cautioned
that this projection may not be appropriate for the purpose other than that described above.
Based on our examination of the evidence supporting the assumptions, nothing has come to our
attention, which causes us to believe that these assumptions do not provide a reasonable basis for the
projection assuming that the company would get its short term and long term loan liabilities rescheduled
/ restructured with grace period, revised markup rates and other details as disclosed in note 2.3, the
management will be able to generate cash inflows of aggregate amount of 530 million as disclosed in
note 2.1 and 2.5 and Research and Development Support will continue to be provided over the period
of projection by the Government as projected in note 2.14.
Further, in our opinion the Projection is properly prepared on the basis of the assumptions and is
presented in accordance with approved accounting standards as applicable in Pakistan.
Even if the events anticipated under the hypothetical assumptions described above occur, actual
results are still likely to be different from the projections since other anticipated events frequently do
not occur as expected and the variations may be material.
This report is for the use of management as required by it solely to meet the requirement of its lenders.
Chartered Accountants
Karachi :
Dated :
CHAPTER 5:
RESPONDING TO RISK
6. ISA 330 The Auditor’s Responses to Assessed Risks Lecture notes
7. ISA 450 Evaluation of Misstatements Identified during the Audit Lecture notes
REPORTING STANDARDS
8. ISA 705, Modifications to the Opinion in the Independent Auditor’s 116
Report
9. ISA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in 117
the Independent Auditor’s Report
10. ISA 570, Going Concern 119
11. ISA 701 Key Audit Matters 120
12. ISA 700, Forming an Opinion and Reporting on Financial Statements Lecture notes
13. Different Types Of Audit Reports In Standards 125
14. ISA 560, Subsequent Events 126
15. ISA 510, Initial Audit Engagements—Opening Balances 128
16. ISA 710, Comparative Information—Corresponding Figures and 129
Comparative Financial Statements
17. ISA 720, The Auditor’s Responsibilities Relating to Other Information in 131
Documents Containing Audited Financial Statements
18. ISA 800, Special Considerations—Audits of Financial Statements 137
Prepared in Accordance with Special Purpose Frameworks
19. ISA 805, Special Considerations—Audits of Single Financial Statements 137
and Specific Elements, Accounts or Items of a Financial Statement
20. ISA 810, Engagements to Report on Summary Financial Statements 138
REVIEW STANDARDS
21. ISRE 2400 Engagements to Review Financial Statements 139
22. ISRE 2410 Review of Interim Financial Information Performed by the 143
Independent Auditor of the Entity
Definitions:
Audit evidence – Information used by the auditor in arriving at the conclusions on which the
auditor’s opinion is based.
Audit risk – The risk that the auditor expresses an inappropriate audit opinion when the
financial statements are materially misstated. Audit risk is a function of the risks of material
misstatement and detection risk.
Audit risk does not include the risk that the auditor might express an opinion that the
financial statements are materially misstated when they are not. This risk is ordinarily
insignificant.
Detection risk – The risk that the procedures performed by the auditor to reduce audit risk to
an acceptably low level will not detect a misstatement. For a given level of audit risk, the
acceptable level of detection risk bears an inverse relationship to the assessed risks of
material misstatement at the assertion level.
Risk of material misstatement – The risk that the financial statements are materially
misstated prior to audit. It may exist at two levels:
The Overall financial statement level; and
The Assertion level for classes of transactions, account balances, and disclosures.
Two components at the assertion level:
Inherent risk – The susceptibility of an assertion to a possible material
misstatement before consideration of any related controls.
Control risk – The risk that a possible material misstatement in an assertion, will
not be prevented, or detected and corrected, on a timely basis by the entity’s
internal control.
Introduction:
The auditor should plan his work to enable him to conduct an effective audit in an efficient and
timely manner. Plan should be based on knowledge of client’s business.
Objectives of Planning:
To ensure:
1. Prompt identification of potential problems;
2. Appropriate attention is devoted to important areas of the audit;
3. Expeditious completion of work;
4. Proper utilization of team; and
5. Coordination of work done by other auditors and expects.
Introduction:
Misstatement in FS may arise either from Fraud / Error. Distinguishing factor between both
these actions is underlying intention:
Fraud – Intentional
Error – Unintentional
Two types of intentional M/S are relevant to Audit.
i. M/S resulting from fraudulent financial reporting;
ii. M/S resulting from misappropriation of assets.
Primary Responsibility:
The primary responsibility for the detection and prevention of fraud and error is of those
charged with Governance and the management of the entity.
- Management designs and operates A/c and internal control system to discharge this
responsibility;
- Responsibility to those charged with Governance will be to ensure the integrity of an entity’s
A/C and financial reporting system and appropriateness of established controls.
Responsibility of Auditor:
Auditor is responsible to obtain Reasonable Assurance that FS are free from M/M due to fraud /
error.
- Due to inherent limitation even an audit which is properly planned and performed, may fail
to detect a cleverly concealed fraud.
- Risk of not detecting a M/S resulting from management fraud is greater than an employee
fraud.
Characteristics of Fraud:
Fraud frequently involves: Pressure
Fraud a. Pressure to commit; Rationale
Risk b. Perceived opportunity to do so; to commit
Factors c. Intention; fraud.
d. Rationalization.
Intention Opportunity
Audit Approach:
- Auditor shall work with a certain degree of Professional Skepticism (PS) in order to be alert to
any signals of M/S. This does not imply that he should perform his work with suspicion,
unless there is a reasonable ground of doubt. E.G.: when presented with a photocopies
document, the auditor should exercise PS and consider the need to obtain original
documents.
- Discussion among team members regarding the susceptibility of entity’s FS to M/M from
fraud and planned audit procedures.
- Assessing the ROMM resulting from fraud, the Auditor should:
ii. Controls:
Inadequate segregation of duties;
Lack of management foresight;
Inadequate screening of job applicants;
Inadequate system of transaction authorization and approval;
Untimely and inadequate documentation of transactions;
Poor safeguards over cash, investments, fixed assets / inventory.
No mandatory vacation policy for employees.
1. Overall Modifications:
- Professional skepticism: increased sensitivity in selecting audit evidence substantiating
material transactions.
- Assignment of Engagement Team: Staffing the audit team with individuals having
knowledge, skill and ability which commensurate with audit risk.
- Evaluating the selection and application of A/C policies particularly those related to
complex transactions / subjective measurements.
- Incorporating an element of unpredictability in audit procedures.
Yes
SUSPICION IS
CONFIRMED
NEITHER CONFIRMED
No NOR DISPELLED
Issue Appropriate Consider its impact 1. Communicate the findings to
Audit Report on FS and Audit appropriate level of management /
Report TCWG;
2. Consider the implications for other
aspects of Audit particularly
reliability of management
representations.
3. Satisfy himself that FS are adjusted
and issue appropriate Audit Report
or withdraw from engagement.
In situations where there are multiple material uncertainties (MU), that are significant to the FS
as a whole, then auditor may consider it app. to express a DISCLAIMER instead of a GC Para.
(Illustration# 5 – ISA 705) This is the case when auditor is not able to form an opinion. Based on a
number of events / factors, govt. attempting to seize record, new claim being filed by customers,
brand in disrepute, etc.
If managements is unwilling to make an assessment, then the auditor may Qualify Or Disclaim
the opinion based on inability. For period exceeding one year, or 12 months, only inquiry is
required to be made, in case some are identified, we need to perform all the procedures as
required.
Responsibilities for GC assumption assessment:
IAS 1 (AFRF) says management needs to make assessment.
ISA 570 says, no matter what AFRF says (e.g. Indian AS or USGAAP) auditor needs to obtain
assessment of GC assumption.
What is a Material Uncertainty?
Impact and likelihood is so significant to the business that it might affect the fair presentation, if
not disclosed in FS or compliance presentation as per compliance framework.
Determination of KAM:
KAM Judgment Based Decision-Making Framework:
Matters of
most significance
in audit
KAM should be entity-specific, audit-specific and avoid standardised, overly technical words and
jargon.
Each KAM must have a separate sub-heading with the following introductory para:
What Order:
Matter to which a KAM relates may not be disclosed in the financial statements
Description of a KAM only needs to include a reference to a related disclosure, if there is
one.
As a general rule, KAM would not provide original information, which is any information
about the entity that has not otherwise been made publicly available by the entity.
Vopak:
Significant IT migration for the Netherlands business
In 2013, the Netherlands business has migrated to a new IT system for its main financial reporting
processes. We have focused on this migration due to the inherent risk of error and the impact such
an error may have on the control environment of the Group’s largest operating segment. In this
context we involved our IT specialists and assessed, amongst other things, the quality controls
governing the implementation of the new IT system, the configuration within the new system’s
modules, the interaction between the modules, the segregation of duties and the configuration of
expected automated application controls. We also tested the migration of general ledger data from
the legacy IT system to the new IT system.
SBM Offshore:
Revenue recognition on contruction contrcts involves significant judgement
The engineering and construction of Floating Production Storage and Offloading systems
(FPSOs) is complex and exposes the Company to various business and financial reporting risks.
Revenue arising from construction contracts, in its Turnkey segment, represent more than 75%
of the Group’s total revenue. The recognition of revenue and the estimation of the outcome of
construction contracts requires significant management judgement, in particular with respect
to estimation the cost to complete and the amounts of variation orders to be recognised. In
addition, significant management judgement is required to assess the consequences of various
legal proceedings in respect of construction contracts. Reference is made to 4.2.6 Notes to the
Consolidated Financial Statements, Accounting principles, C. Critical accounting policies,
(e) Revenue: Contsruction contracts.
We identified revenue from construction contracts as a significant risk, requiring special audit
consideration. Our audit procedures included an evaluation of the significant judgements made by
management, amongst others based on an examination of the associated project documentation
and discussion on the status of projects under construction with finance and technical staff of the
Company. We also tested the controls that the Company has put in place over its process to record
contract costs and contract revenues and the calculation of the stage of completion. In addition we
visited two projects under construction. Furthermore, we discussed the status of legal proceedings
in respect of construction contracts, examined various documents in this respect and obtained
lawyers’ letters.
Plain speaking! 25
Nutreco:
Sensitivities with respect to the valuation goodwill
The annual impairment test was significant to our audit as the assessment process is complex and
judgemental by nature as it is based on assumptions on future market and/or economic conditions.
The assumptions used included future cash flow projections, discount rates, perpetuity and
sensitivity analyses.
We specifically focused on the valuation of goodwill allocated to the Animal Nutrition Brazll
business’ given the available headroom. Our procedures included, among others, using a valuation
expert assisting us in evaluating the model and assumptions used, in particular the future growth
rates and discount rates which are key to the outcome of the impairment test. We further focused
on the adequacy of the Company’s disclosures on key assumptions in Note 14 of the financial
statements.
Post NL:
Pension accounting
As from 1 January 2013 the accounting standard for pensions has changed (IAS19R). Changes
in key assumptions applied under IAS 19R have a significant impact on the defined benefit
obligations, pension costs incurred and equity. The accounting requires the company to make
assumptions regarding parameters such as the discount rate, the rate of benefit increase and future
mortality rates. Our audit procedures included, amongst others, evaluating the assumptions and
the methodologies used by the company, whereby we also used pension experts to assist us. We
tested the disclosure of the pension paragraph and specifically the change to IAS 19R. The impact
of IAS 19R on the consolidated 2012 balance sheet and (comprehensive) income statement has
been disclosed in the Summary of restatements in the notes. Disclosures on the assumptions
applied including a sensitivity analysis are included in note 11.
26 PwC
14
KAM: THE MATTERS THAT MATTER - EMBRACING THE SPIRIT OF THE NEW REQUIREMENTS
Other
Share-based payments
Development costs
Supplier incentives, rebates and discounts
Accruals
Assets held for sale
Controls
Mining/oil/gas accounting
Receivables
Going concern
Capitalisation
Disposals
Exceptionals
Accounting for long-term contracts
Insurance
Property valuations
Legal provisions
Financial instruments
Valuation of inventories
Investments
Acquisitions
Pensions
Provisions
Revenue (not fraud)
Fraud in revenue recognition
Management override of controls
Goodwill impairment
Tax
Impairment of assets
0 10 20 30 40 50 60 70 80 90 100
NUMBER
The accounting treatment of exploration and evaluation As exploration and evaluation expenditures are often
expenditures (capitalising or expensing) can have a made in the hope (rather than the expectation) that
significant impact on the financial statements and there will be future economic benefits, it is difficult
reported financial results. This is particularly so for entities for an entity to demonstrate that the recovery of
at the exploration stage with no production activities. exploration and evaluation expenditures is probable.
In determining whether an exploration and evaluation A feasibility study may be needed before the entity
asset should be recognised or not there are some can demonstrate that future economic benefits
considerations to be made. By way of example; whether are probable.
the rights to tenure of the area of interest are current; The following is a fictitious example to illustrate
and whether the exploration and evaluation expenditures an exploration and evaluation expenditures KAM:
are expected to be recouped, either through successful
development and exploitation or through sale.
EXAMPLE:
ASIA RESOURCE MINERALS PLC Y/E 31 DECEMBER 2014
Assessment of carrying value of mining properties
This balance is material and its value is highly discount rate applied, to establish whether it was
sensitive to changes in the global thermal coal appropriately derived from market data including
market. In 2014 thermal coal prices continued to risk free rate and inflation assumptions and
decline which increased the risk of impairment of the consistent with the approach adopted by a typical
Group’s mining properties. As part of their annual market participant. We agreed management’s
impairment review management prepared an production assumptions to the latest Board
analysis of the recoverable amount of the PT Berau approved Life of Mine production plans and budgets
cash generating unit which was based on a ‘fair and found no material differences. We assessed the
value less costs to sell’ model. competence and the independence of experts used
by management to review the Life of Mine Plan and
The basis of the valuation model was management’s
were satisfied with their objectivity and expertise.
Life of Mine Plan which was independently reviewed
We obtained sufficient evidence to support other
by third party mining experts. The valuation model
key inputs into the model, such as contractor costs
also includes a number of judgmental estimates and
and capital expenditure assumptions, and, where
assumptions.
appropriate, corroborated these assumptions by
We tested the integrity of management’s reviewing signed contracts or approved budgets.
impairment model and identified the most We re-performed the sensitivity analysis prepared
judgemental assumptions. We tested management’s by management to ascertain the extent to which
commodity price assumptions (thermal coal and a change in key assumptions (production volumes,
fuel), against third party bank and broker forecasts coal and fuel prices and discount rate) would result
and found that they fell within a reasonable in impairment. We concur with management’s
range and in line with market views. We evaluated analysis as disclosed in the financial statements.
management’s assumption about the future sales
Refer to Note 2 for the directors’ disclosures of
recovery rates against the Newcastle thermal coal
the related accounting policies, Note 3 for critical
benchmark and found it to be supportable based
accounting judgements and estimates and Note 13
on the historical rates of recovery. We tested the
for detailed disclosures.
CHARTERED ACCOUNTANTS AUSTRALIA AND NEW ZEALAND
17
GOING CONCERN
Consider an entity in the mining industry in the ADAPTED EXAMPLE *
exploration stage. It has the following attributes:
NEW WORLD RESOURCES PLC Y/E
• Has planned levels of exploration spending that
31 DECEMBER 2014
exceed its cash balance;
• Expects that future capital raising will provide the
Material Uncertainty Related to
necessary funding;
Going Concern
• Does not have material current or non-current
In forming our opinion on the financial statements,
liabilities; and
which is not modified, we have considered the
• Has minimal contractual commitments other than adequacy of the disclosures made in Note 2 to
payments required to maintain its exploration the consolidated financial statements concerning
property and permit rights. the Group’s and the Company’s ability to continue
If it becomes difficult to raise financing in the capital as a going concern. The Group is currently cash
markets, the entity can take the following actions until flow negative and the current low coal price
financing is possible: environment has placed significant pressure
on the Group’s liquidity position, and also on
• Slow its rate of exploration activity and associated
its solvency, resulting in the Group having net
spending to a level that can be sustained for a
liabilities of EUR 160 million at 31 December 2014.
significant period of time based on its existing
The Directors completed a capital restructuring
financial resources; or
during the year, which is expected to provide
• Defer exploration spending to the level necessary sufficient cash for a period of 12 months from its
to keep its exploration property and permit rights, completion. However, in the event of unexpected
and reduce its operational spending to a level that production or other operating issues, or further
enables it to “keep the lights on” for a significant deterioration in coal prices, the Group could
period of time. be in breach of the minimum available cash
The entity does not intend to curtail its operations requirement for the Super Senior Credit Facility,
permanently nor does it intend to pursue liquidation. which is set at EUR 40 million and is first tested
Rather, it is pursuing additional financing to continue as at 31 October 2015. In those circumstances the
its activities. Group could run out of cash in the fourth quarter
of 2015 and all of the remaining debt of the Group
It’s easy to see how an entity that does not have could become immediately repayable.
sufficient funds and faces significant uncertainty about
its ability to raise funds may have a material uncertainty These conditions, along with other matters
related to going concern. explained in Note 2 to the consolidated financial
statements, indicate the existence of a material
uncertainty which may cast significant doubt as to
the Group’s and the Company’s ability to continue
as a going concern. The financial statements do
not include the adjustments that would result if
the Group and Company were unable to continue
as a going concern.
However, the nature of the business and the entity’s SPECIFIC ISSUES FOR
stage in the business life cycle may require a different
SMALLER ENTITIES
approach to assessing going concern. The only time
when going concern can be a KAM is when the use of For smaller entities it may not be so immediately
the going concern basis of accounting is appropriate apparent what the KAM are, especially if the entity is
but there is a close call. not complex, and it is not a high-risk audit engagement.
Therefore determining KAM for smaller entities comes
with its own unique challenges.
If an entity has limited operations, it is possible for there
EXAMPLE: to be no KAM. However, because the concept of KAM
is relative as opposed to absolute, it is likely there will
AVOCET MINING PLC Y/E always be at least one KAM.
31 DECEMBER 2014
Smaller entities may not have any significant risks
except the mandatory risk of management override of
Going concern assessment controls and the reputable presumption of risk of fraud
The accounts are prepared on a going concern in revenue recognition. But this does not automatically
basis in accordance with IAS 1 Presentation mean these are the only KAM, or there are no KAM. It
of Financial Statements and as the directors’ is important to remember that KAM are broader than
assessment of the group’s ability to continue “significant risks”; KAM may just be areas where you
as a going concern can be highly judgemental, spent most of your time during the audit.
we identified going concern as a significant risk Again we can look to the UK for examples of KAM for
requiring special audit consideration. smaller entities, and see that they are not necessary
Our audit work included, but was not restricted related to areas of significant risk, judgement or
to, the following: complexity.
EXAMPLE 2:
HIDONG ESTATE PLC Y/E 31 MARCH 2015
Income = RM 443k, Overall materiality = RM 117k
Carrying amount of cash and listed investments
The Company’s portfolio of cash and listed Our procedures over the existence, completeness
investments makes up 99.6% of total assets (by and valuation of the Company’s portfolio of cash and
value) and is considered to be the key driver of listed investments included, but were not limited to:
operations and performance results. We do not • documenting and assessing the processes and
consider cash or listed investments to be at high controls in place to record investment transactions
risk of significant misstatement, or to be subject and to value the portfolio;
to a significant level of judgement because they
• agreeing the valuation of 100% of listed
comprise liquid and, in the case of the listed
investments to externally quoted prices; and
investments, quoted, investments. However, due
to their materiality in the context of the financial • agreeing 100% of cash and listed investment
statements as a whole, they are considered to holdings to independently received third party
be the area which had the greatest effect on our confirmations.
overall audit strategy and allocation of resources Refer to page 10 (Audit Committee section of Report
in planning and completing our audit. of Directors), page 24 (accounting policy) and pages
20 to 32 (financial disclosures).
EXAMPLE 3:
ASSOCIATED BRITISH ENGINEERING PLC Y/E 31 MARCH 2015
Revenue = £2.6m, Performance materiality = £16k
Inventory valuation and existence
British Polar Engines Limited holds a significant Our audit work included, but was not restricted to,
amount of inventory which is used for the the attendance of the inventory count at the year
manufacture and supply of diesel engines end and the assessment of the adequacy of controls
and spare parts, as well as associated repair over the existence of inventory. We also tested a
works. Inventory may be held for long periods sample of stock items to ensure they were held at the
of time before utilisation making it vulnerable lower of cost and net realisable value, and evaluated
to obsolescence or theft. This could result in an management judgement with regards to the
overstatement of the value of inventory if the application of provisions to inventory lines.
historical cost is higher than the net realisable value. The group’s accounting policies in respect of inventory
Furthermore, the assessment and application are in included in the group accounting policies and
of inventory provisions are subject to significant disclosures are included in note 12 to the group
management judgement. We have therefore financial statements.
identified inventory existence and valuation as an
area requiring particular audit attention.
10
KAM: THE MATTERS THAT MATTER - EMBRACING THE SPIRIT OF THE NEW REQUIREMENTS
When the use of the going concern basis • A qualified or adverse opinion as appropriate
of accounting is appropriate but a material • A description of this circumstance in the Basis for Qualified/Adverse Opinion section
uncertainty exists related
• Reference the Basis for Qualified/Adverse Opinion in the KAM section
to events or conditions that may cast
significant doubt on an entity’s ability to
continue as a going concern and disclosures
in the financial statements are inadequate or
omitted
EMPHASIS OF MATTER Used to draw users’ attention to a matter disclosed in the financial statements that is fundamental
to users’ understanding of the financial statements.
OTHER MATTER Used to draw users’ attention to a matter other than those disclosed in the financial statements
that is relevant to users’ understanding of the audit, the auditor’s responsibilities or the audit report.
A matter that is determined to be KAM is usually The KAM section in the audit report does not have to
fundamental to users’ understanding of the financial reference the Emphasis of Matter or Other Matter
statements, the audit, the auditor’s responsibilities or the paragraph. An Emphasis of Matter paragraph may
auditor’s report. Therefore it may also meet the definition be presented either directly before or after the KAM
of an Emphasis of Matter or an Other Matter. If this is section, depending on the relative significance of the
the case, then the matter is a KAM as opposed to an information in each. When a KAM section is presented in
Emphasis of Matter or Other Matter. the auditor’s report and an Other Matter paragraph is
also considered necessary, you may add further context
In summary, Emphasis of Matter and Other Matter
to the heading “Other Matter”, such as “Other Matter
paragraphs still exist, but should not be used for a
– Scope of the Audit”, to differentiate the Other Matter
matter that is a KAM.
paragraph from the KAM section.
There may be a matter that is not determined to be a
KAM (ie because it did not require significant auditor
attention), but is fundamental to users’ understanding
of the financial statements, the audit, the auditor’s
responsibilities or the auditor’s report (for example
a subsequent event). If it is considered necessary to
draw users’ attention to such a matter, the matter is
included in an Emphasis of Matter or Other Matter
paragraph as appropriate.
Auditor reporting
Opinion The audit opinion and identification of what’s been audited will now be the first section of the report.
Basis for Opinion The Basis for Opinion will directly follow the Opinion section and, in addition to referring to compliance with the ISAs
and referring to the auditor’s responsibilities section, will now include the new assertion of the auditor’s independence.
If the audit opinion has been modified, the explanation would be here too.
Material uncertainty regarding If there is a material uncertainty with respect to going concern, it will now be described in a separate section that
going concern (if any) identifies it as such.
Emphasis paragraphs* (if any) *An emphasis of matter paragraph may be next if, for example, it is relevant to understanding the financial reporting
framework, or it might follow the key audit matters if it relates to a matter also addressed in that section.
Key audit matters The new section providing insight into the key matters addressed in the audit will be required for audits of listed
companies, but can also be included voluntarily by others.
Other matter paragraphs* *The placement of an Other Matter paragraph could be here if it relates to the financial statement audit only, or later in
(if any) the report if it relates to other legal or regulatory requirements, or both.
Other information A new section in the auditor’s report will describe the auditor’s responsibilities for “other information” (e.g., the rest of
the annual report, including the management report) and the outcome of fulfilling those responsibilities.
Responsibilities for the financial The description of management’s responsibilities will be expanded to explain its responsibilities with respect to going
statements concern. It will also now identify those charged with governance (if different from management).
Auditor’s responsibilities The description of the auditor’s responsibilities under the ISAs is now much more comprehensive and includes a
description of the auditor’s responsibilities with respect to going concern.
Date, address and signature In addition to the signature, address and date, auditor’s reports for listed companies will now also have to identify the
engagement partner’s name.
Page 10
Closer look – Reporting of Key Audit Matters
Page 19
Advanced Auditing & Assurance
Study Manual
DIFFERENT TYPES OF AUDIT REPORTS IN STANDARDS
S. NO DESCRIPTION Opinion Type Standard
Ref.
Illustration 1 Qualification as to opening inventory count - Limitation Qualification 510
After Auditor’s report date, there is no obligation to perform procedures, however, if any event /
fact comes across which may require amendment of auditor’s report, then the auditor should:
- Discuss with the management/ TCWG;
- Determine whether it needs amendment;
- Inquire how the management intends to address the matter
OR
Opening Balances: i. A/C balances which existed at the beginning of the period;
ii. closing balances of the preceding period brought forward to current
period;
iii. effect of transactions, e vents and A/C policies applied in preceding
period (including contingencies and commitments).
REPORTING
No need to refer
to modification
By Other auditor By Us
Report only on CY FS
With no ref. to PY adjustment in
Audit report
Adjusted our FS CY / Comparative
of CY & comparative(A11) not adjusted
“Other information” is financial or non-financial information (other than financial statements and
the auditor’s report thereon) included in an entity’s annual report.
Annual report – usually includes information about entity’s developments, future outlook, risks,
uncertainties, Boards statements, governance and matters, etc.
Reporting
The auditor’s report will always include a separate Other Information section when the
auditor has obtained some or all of the other information as of the date of the auditor’s
report.
For audits of financial statements of listed entities, an Other Information section will also be
included if the auditor expects to obtain other information after the date of the auditor’s
report.
Other Information [or another title if appropriate, such as “Information Other than the Financial
Statements and Auditor’s Report Thereon”]
Management is responsible for the other information. The other information comprises the
[information included in the X report, but does not include the financial statements and our
auditor’s report thereon.]
Our opinion on the financial statements does not cover the other information and we do not
express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other
information and, in doing so, consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the audit or otherwise appears to be
materially misstated. If, based on the work we have performed, we conclude that there is a
material misstatement of this other information, we are required to report that fact. We have
nothing to report in this regard.
ILLUSTRATION/ SCENARIO: 5
Any entity,
Unmodified opinion,
Obtained ALL of the other information prior
Identified a material misstatement
In connection with our audit of the financial statements, our responsibility is to read the other
information and, in doing so, consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the audit or otherwise appears to be
materially misstated. If, based on the work we have performed, we conclude that there is a
material misstatement of this other information, we are required to report that fact. As described
below, we have concluded that such a material misstatement of the other information exists.
Management12 is responsible for the other information. The other information comprises the X
report13 (but does not include the financial statements and our auditor’s report thereon), which
we obtained prior to the date of this auditor’s report, and the Y report, which is expected to be
made available to us after that date.
….We have nothing to report in this regard.
[When we read the Y report, if we conclude that there is a material misstatement therein, we are
required to communicate the matter to those charged with governance and [describe actions
applicable in the jurisdiction]]
ILLUSTRATION / SCENERIO: 3
Non-listed entity,
Unmodified opinion,
Obtained part of the other information prior
Not identified a material misstatement
Expects to obtain part after the audit report date
Management17 is responsible for the other information. The other information obtained at the
date of this auditor’s report is [information included in the X report,18 but does not include the
financial statements and our auditor’s report thereon]
Our opinion on the financial statements does not cover the other information and we do not
express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other
information and, in doing so, consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the audit, or otherwise appears to be
materially misstated.
Management21 is responsible for the other information. The other information comprises the
[information included in the X report,22 but does not include the financial statements and our
auditor’s report thereon]. The X report is expected to be made available to us after the date of this
auditor's report.
Our opinion on the financial statements does not cover the other information and we will not
express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other
information identified above when it becomes available and, in doing so, consider whether the
other information is materially inconsistent with the financial statements or our knowledge
obtained in the audit, or otherwise appears to be materially misstated.
[When we read the X report, if we conclude that there is a material misstatement therein, we are
required to communicate the matter to those charged with governance and [describe actions
applicable in the jurisdiction].]23
ILLUSTRATION / SCENERIO: 6
Any entity,
Qualified opinion, wrt to a limitation of scope of a material item in FS which also affects
Other information
Obtained ALL of the other information prior
If, based on the work we have performed, we conclude that there is a material misstatement of
this other information, we are required to report that fact. As described in the Basis for Qualified
Opinion section above, we were unable to obtain sufficient appropriate evidence about the
carrying amount of ABC’s investment in XYZ as at December 31, 20X1 and ABC’s share of XYZ’s net
income for the year. Accordingly, we are unable to conclude whether or not the other information
is materially misstated with respect to this matter.
If, based on the work we have performed, we conclude that there is a material misstatement of
this other information, we are required to report that fact. As described in the Basis for Adverse
Opinion section above, the Group should have consolidated XYZ Company and accounted for the
acquisition based on provisional amounts. We have concluded that the other information is
materially misstated for the same reason with respect to the amounts or other items in the X
report affected by the failure to consolidate XYZ Company.
SCENERIO: 8
In case of Disclaimer of Opinion – No Other Information para as per revised ISA 720
ICAP Question Summer 2012: (4 Marks)
Q2 (b) The directors’ report of XCP Limited states without any further explanation that the 20%
increase in profit as compared to the previous year is due to increase in sales and austerity
measures introduced by the management. The income statement for the year shows an increase
in profits and sales amounting to Rs. 20 million and Rs. 8 million respectively whereas the costs
have reduced by Rs. 12 million. A review of your working papers however indicates that costs
have reduced mainly on account of reduction in import duty on certain raw materials.
ICAP Answer
If there are material inconsistencies in the other information presented with the financial
statements the auditor should discuss the reasons thereof with the management and ask
them to revise the other information.
In case of disagreement, the auditor shall communicate the matter to those charged with
governance.
Include in the auditor’s report an ‘other matter paragraph’ describing the material
inconsistencies
Revised Answer
This represents an inconsistency between the auditors knowledge and Other information
(as Annual Report includes information presented in Director’s report(DR) )
Information presented in DR is misleading and therefore, the auditor should request
management to amend DR to reflect true facts
If management refuses, communicate the entire matter to TCWG
In case of no action, the auditor should report the matter in Other Information para
clearly describing the misleading nature of disclosure
The auditor may consider withdrawal or disclaimer (if prohibited) in case of the intention
to mislead creates integrity issues.
Add: An EOMP that the FS are not intended to be used for any other purpose and they are
prepared for this purpose + restriction on distribution.
When SPF is based on Fair PF, but not in full compliance, cannot show so.
REVIEW STANDARDS:
Evaluation of financial information them analysis of plausible relationship among both financial
and non-financial data.
Engagement risk
Inquiry
Limited Assurance
Engagement risk is reduced to an acceptable level, atleast sufficient for the practitioner to obtain
a meaningful level of assurance.
Unless required by law / regulation shall not accept a review engagement if:
Its operations;
Ownership and governance stenature;
Entity’s objectives and strategies;
1. Inquiries
How management makes significant A/C estimates;
Identification f RP and RP transactions;
Significant, unusual / complex transactions, events / matters that have affected / may
affect entity’s FS;
Significant transaction near the end of reporting period;
Status of any uncorrected M/S;
Existence of any actual, suspected / alleged fraud;
Non-compliances with laws and regulations;
Basis for management’s assessment of entity’s ability to continue as going concern;
Events / conditions that may cast doubt on entity’s ability to continue as going concern;
Whether management has identified / addressed events occurring between date of FS
and date of practitioner’s report;
Material commitments, contractual obligations / contingencies.
By attributes of the transaction, e.g. sales through retail outlets and factory outlets.
3. Related Parties
Practitioner shall remain alert during review for information that may indicate existence of
RP relationships; if practitioner identifies any significant transactions outside the entity’s
normal course of business, inquire management about:
Nature of transactions;
Whether RP could be involved; and
The business rationale of those transactions.
5. Going Concern
If during the review, practitioner become aware of events / conditions that may cast
significant doubts about entity’s ability to continue as GC the practitioner shall:
Inquire of management about plans for future actions;
Evaluate the results of those inquiries.
Subsequent events:
Practitioner has no obligation after the date of practitioner’s report. If after the date of PR, but
before the date FS are issued, facts because known to practitioner that, had it been known to
the practitioner at the date of the practitioner’s report, may have caused the practitioner to
amend the report, practitioner shall:
FS need amendment
Reporting:
Reading the documentation, of preceding year’s audit and review of prior interim period;
Considering any significant period;
Reading most recent annual / comparable prior period FI;
Considering materiality;
Considering result of corrected MM and identified uncorrected immaterial M/S in prior
year’s FS;
Considering result of internal audit;
Inquiring management of any significant charges in IC;
Reading minutes of meeting of shareholders.
For Convenience and efficiency, the auditor may decide to performance certain audit procedures
concurrently with the review. E.g: performing audit procedures on significant revenue
transactions, business combinations, destructing’s.
The auditor should read the other information to consider whether any such information is
materially with FI.
Material inconsistency
Any matter comes to auditor’s attention that causer auditor to believe that it is necessary to
make a material adjustment – communicate the matter as soon as practicable to management.
Inform TCWG
Consider:
Modifying Report;
Possibility of
withdrawal; and
Possibility of resigning
from the appointment
to audit Annual FS.
Reporting:
RELATED SERVICES
Agreed upon Procedures: is an engagement where the auditor and the specified users (i.e. client
/ other third party users) agree to carry out procedures of an audit nature and factual finding
reported thereon.
Reporting:
Compilation Engagement: engagement in which a practitioner applies A/C and financial reporting
expertise to assist management in the preparation and presentation of FI.
Compile FI using the records, documents, explanation and other information provided by
management;
Discuss significant judgements with management and TCWG;
Prior to completion of Engagement, practitioner shall read compiled FI in the light of
practitioner’s understanding of entity and AFRF.
Practitioner becomes aware FI does not adequately refer to AFRF / FI maternally misstated /
information is misleading;
Withdrawal possible
Yes No
Practitioner shall obtain acknowledgment from management that they have taken
responsibility for the final version
Documentation include
Reporting
Party other than the practitioner measures / evaluates the underlying subject matter against the
criteria. Practitioner’s conclusion addresses whether SMI is from MM.
Direct Engagement:
Practitioner measures / evaluates the underlying subject matter against the applicable criteria
and the practitioner presents assurance report on resulting SMI.
Criteria - benchmarks used for evaluation.
Obtaining Evidence:
Practitioner chooses a combination of procedures, depending on the context
Inspection;
Recalculation;
Inquiry;
Observation;
Re-performance;
Confirmation; and
Analytical procedures.
Reporting:
Form of conclusions:
Limited Assurance: “in our opinion, the entity has complies, in all material respects, with x 42
Law”.
Reasonable Assurance: “Based on the procedures performed and evidence obtained, nothing
has come to our attention that causes us to believe …………..”.
Compliance Engagement: “in compliance with”.
Forecast Projections
prepared on realistic assumptions about Prepared on hypothetical assumptions
future events. about future events.
Management actions expected to take Management not necessarily expected
place. to take place.
Best estimate assumptions. A mixture of – estimate and
hypothetical assumptions.
Responsibility of Auditor
Auditor may be asked to examine and report on the PFI to enhance it credibility whether it is
intended for use by 3rd parties / for internal purpose.
Since its generally future oriented and speculative in nature, auditor is not in a position to
express an opinion as to the achievement of its results.
Acceptance of engagement:
Auditor should not Accept or Withdraw from engagement when the assumptions are unrealistic
/ when auditor believes PFI would be inappropriate for its intended use.
Procedures:
* determining nature, timing and extent of examination procedures, auditor should consider:
Likelihood of MM;
Knowledge obtained during previous engagement;
Management’s competence for preparation of PFI;
Adequacy and reliability of underlying data.
* Evidence supporting hypothetical assumptions need not be obtained. Auditor only need to
satisfy that there are no reasons to believe they ae unrealistic.
* Focus on areas sensitive to variation that will have material effects on results of PFI;
* when any period has elapsed that is included in PFI, auditor would consider extent to which
procedures need to be applied.
Reporting
2. Significant assumptions do not provide reasonable basis for best – estimate hypothetical
assumption: Adverse opinion / with draw;
3. One / more necessary procedure precluded due to circumstances – Disclaim the opinion and
describe scope limitation / withdraw.
Description of service org system includes Description of service org system includes
the nature of services provided by sub- the nature of services provided by sub-
service org. service org.
Sub-service organization’s control Sub-service organization’s control
objectives and controls are excluded from objectives and controls are included in the
scope of the service Auditor’s scope of the service Auditor’s
Engagement. Engagement.
Determine whether:
* service auditor has competence and capabilities to perform the engagement;
* criteria applied by service organization to prepare the description of its system are
suitable;
* scope of the engagement will not be limited;
So (Service Organization)
Service organization
Suitability of the criteria: Service auditor shall determine, at a minimum: (Description of system)
Whether description presents how the service organization’s system was designed and
implemented;
Procedures, within both information technology and manual system, by which services are
provided;
Service organization has identified the risks that threaten achievement of the control
objectives stated in description of its system;
Control identified, if operated as desired provide reasonable assurance that those risks do
not prevent stated control objectives.
Whether the controls were consistently applied as designed throughout the specified period.
Obtaining Evidence
1. Description of System:
Evaluate:
3. Operating Effectiveness of Controls (Type 2 Report) designing and performing TOCs, the SA
shall:
Sampling:
Reporting:
- SO’s descript does not fairly present, in all material respects, the system as designed and
implemented;
- Control related to control objectives stated in the description tested did not operate
effectively.
Pro-forma FI:
FI that shows pro forma adjustments presented in columnar format consisting of:
Unadjusted FI;
Pro-forma adjustments; and
Resulting pro-forma column.
- Its operations;
- Its assets and liabilities;
- Its structure and how its financed.
Audit / Review carried out Audit / Review not carried Audit / Review lever carried
out out
Be satisfied that the source Whether practitioner Unlikely that law and regulation
from which information has previously Audited / will permit entity to issue
has been extracted is reviewed the FI; prospectus.
appropriate, is not How recently entity’s FI
diminished was audited;
Whether entity is
subject to periodic
review.
Reporting:
1. Unmodified opinion: Proforma FI has been complied, in all material respect, by responsible
party.
2. Modified opinion: Relevant law and regulation precludes publication of prospectus that
contain a modified opinion. The practitioner shall discuss the matter with responsible party.
If responsible party does not agree, practitioner shall:
Complete Complete Single FS, Summ- Review Interim FI Assurance PFI Controls at AUP Compil- Cons- Tax Other
set of FS set of FS element, ary FS of perform- engagement SO, ation ulting services
item Histori- ed by other than Greenhou-
cal FS Indepe- audit or se Gas
ndent review Statement,
auditor Compilati-
GPFS SPFS GPFS / on of
SPFS proforma FI
Introduction:
This ISA deals with the agreement of terms of engagement before accepting / continuing an Audit,
through:
- establishing that pre-conditions for Audit are present;
- confirming that there is a common understanding between auditor and management on terms
of engagement.
Preconditions of audit:
- Whether AFRF is acceptable.
- Agreement of management and TCWG on premise for Audit (acknowledging responsibilities)
EL shall include:
Yes No
Send Revise EL
Don’t Send
Reasonable Justification?
No
Yes No
Introduction:
The firm has an obligation to establish and maintain a system of quality control to provide it with
reasonable assurance.
Objective:
To implement QC procedures to provide auditor with reasonable assurance that:
i. audit complies with professional standards and applicable legal and regulatory
requirements; and
ii. auditors’ report issued is appropriate in the circumstances.
Leadership:
Engagement partner takes the responsibility for overall quality an each audit engagement.
- Throughout the engagement, engagement partner shall remain alert for evidences of non-
compliance by engagement team.
Non-Compliance:
Refers to the acts of omission / commission by the entity, either intentional / unintentional and
are contrary to prevailing Laws / Regulation.
- It does not include personal misconduct of entity’s management / employees.
ISA distinguishes auditor’s responsibilities in relation to compliance with two different categories
of L&R:
1. Laws and Regulation having direct effect on material amounts and disclosures in FS;
2. L&R having no direct effect on FS, but compliance with which is fundamental to the
operating aspects.
ii. To Users:
Non-compliance has a material effect on FS, but FS don’t reflect it adequately – Qualified /
Adverse.
Unable to obtain SAAE to assess materiality of non-compliance – Qualified / Disclaimer of
Opinion.
Instances where non-compliance have occurred because of limitations imposed by
circumstances rather than by Management / TCWG – evaluate effect on Audit Report (ISA –
705).
Auditor has a professional duty to maintain confidentiality, which may be overridden by Law
/ Statute.
Obtain legal advice and determine Duty to Report.
Non-compliance discovered No
Yes
Management:
Person(s) with executive responsibility for the conduct of entity’s operations.
Identification of TCWG:
Factors to be considered for such identification:
a. Governance structure of the entity;
b. Circumstances of the engagement;
c. Legal requirements;
d. Importance and relevance of the significant matter of governance interest.
Matters to be communicated:
Planned scope and timing of Audit;
Adoption / changes in significant A/C policies;
Significant finding from Audit;
Significant qualitative aspects of Accounting practices;
Significant difficulties encountered during Audit;
Significant matters discussed with management;
Form and content of Audit Report
Auditor’s independence.
Communication Process:
Form of communication: Shall be in writing, oral communication would not be adequate.
Timings: Timely communication throughout the audit contributes to the achievement of
robust two-way dialogue between TCWG and Auditor.
Adequacy: Auditor should evaluate whether two-way communication between the Auditor
and TCWG is adequate. If not, then Auditor shall take appropriate action.
Process for taking action and reporting back on matters communicated by the auditor and
vice versa.
Certain identified significant deficiencies in intend control may call into question the integrity /
competence of management. Accordingly, it may not be appropriate to communicate such
deficiency directly to management.
Introduction:
Type 1 Report:
Type 2 Report:
Understanding how a service organization affects the client’s A/C and IC.
Assessing the relevance of service organization’s activities to the audit and significance of
activities.
The material FS assertions that are affected by the use of service organization and inherent
risk associated with those assertions.
Extent to which client’s A/C and IC system interact with the system at the service
organization and client’s IC that are applied to the transactions processed by the service
organization.
Effect of failure of service organization on client.
Information contained in 3rd party reports about the A/C and IC system of the service
organization.
Auditor shall modify opinion of he is unable to obtain SAAE regarding service provided by
service organization relevant to audit.
Unmodified report issued – auditor shall not include reference of service auditor.
Modified report – reference only to the extent of understanding modification and such
reference shall not diminish the uses auditor’s responsibility for that opinion.
Reasonable basis for forming opinion i.e. in case of TOC assures completeness,
accuracy, validity, restricted access and incase of substantive procedures
assures existence, rights and obligations, occurrence, completeness, valuation,
accuracy, presentation and disclosure.
No Yes
Least Reliable
Necessity:
i. Determine whether the use of external confirmations is necessary to obtain sufficient
appropriate audit evidence.
ii. Auditor should employ external confirmation procedures in consultation with Management.
Design:
Positive confirmation request: request that confirming party respond directly to the auditor
indicating whether the confirming party agrees / disagree with the info in the request /
providing the info.
Negative confirmation: request that confirming party respond directly to the auditor only if
he disagrees with the info.
Reliability of Responses:
Factors that may indicate doubts about the reliability of a responses include:
it was received by auditor indirectly;
appeared not to come from the originally intended confirming party;
responses received electronically
respondent may not be authorized to respond;
integrity of the transmission may have been compromised.
Non-Response:
For each non-response, perform alternate audit procedures, example:
For A/C R/A Balances: examining subsequent cash receipts, shipping documents and sales
near the period end.
For A/C P/A Balances: examining subsequent cash disbursements, correspondences from
third parties and goods received notes.
Planning
Substantive procedures
Overall review
Analytical procedures consist of comparing items, for example current year financial information with prior
year financial information, and analysing predictable relationships, for example the relationship between
receivables and credit sales.
Reviews
Assurance engagements
Prospective financial information
There are a number of factors which the auditors should consider when deciding whether to use analytical
procedures as substantive procedures.
Factors which should also be considered when determining the reliance that the auditors should place on
the results of substantive analytical procedures are:
The peculiarity of analytical procedures is that they aim to find out whether or not there is a relationship
between variables (eg between sales and expenses) that is plausible and reasonable. This is the opposite of
other substantive procedures, where the aim is to discover misstatements, rather than reasonability.
Practical Techniques
When carrying out analytical procedures, auditors should remember that every industry is different and each
company within an industry differs in certain aspects.
Important accounting ratios Gross profit margins, in total and by product, area and months/quarter (if
possible)
Receivables ratio (average collection period)
Inventory turnover ratio (inventory divided into cost of sales)
Current ratio (current assets to current liabilities)
Quick or acid test ratio (liquid assets to current liabilities)
Gearing ratio (debt capital to equity capital)
Return on capital employed (profit before tax to total assets less current
liabilities)
Ratios mean very little when used in isolation. They should be calculated for previous periods and for
comparable companies. The permanent file should contain a section with summarised accounts and the
chosen ratios for prior years.
In addition to looking at the more usual ratios, the auditors should consider examining other ratios that may
be relevant to the particular client's business, such as revenue per passenger mile for an airline operator
client, or fees per partner for a professional office.
Other analytical techniques include:
(a) Examining related accounts in conjunction with each other. Often revenue and expense accounts are
related to statement of financial position accounts and comparisons should be made to ensure
relationships are reasonable.
(b) Trend analysis. Sophisticated statistical techniques can be used to compare this period with previous
periods.
(c) Reasonableness tests. These involve calculating expected value of an item and comparing it with its
actual value, for example, for straight-line depreciation.
(Cost + Additions – Disposals) x Depreciation % = Charge in statement of profit or loss and other
comprehensive income
Investigating Results
If analytical procedures produce results that are inconsistent with other relevant information or expected
values, the auditors should investigate this by making enquiries of management and performing other audit
procedures as necessary.
Introduction:
Determination of design and selection of an audit sample and evaluation of sample results.
Audit Sample is a process of applying audit procedures to less than 100% of a population to
estimate some characteristics about population.
Sampling unit are individual auditable elements, as defined by auditor, that constitute that
population.
Sampling Risk is the risk that auditor’s conclusion based on a sample may be different from the
conclusion he would reach if the same audit procedures were applied to the entire population.
Tolerable Error is maximum error (substantive procedures) to accept in the population and still
conclude that the audit objective has been achieved.
Expected Error is the deviation rate expected by the auditor on the basis of his prior experience.
Introduction:
Obtain SAAE about:
i. Accounting estimates are reasonable;
ii. Related disclosures are adequate.
Accounting Estimate:
An approximation of a monetary amount in the absence of a precise means of measurement.
Estimation uncertainty:
Susceptibility of an A/C estimate to an inherent lack of precision in measurement.
Management Bias:
Lack of neutrality by management.
Management’s point estimate: The amount selected by management for recognition / disclosure
in FS as an A/C estimate.
Responsibility of Management:
Management is responsible for establishing the process for A/C estimates.
Responsibility of Auditor:
Auditor should obtain SAAE to be able to conclude:
a. Whether necessary procedures and methods have been established by management to
develop estimates.
b. Whether estimates are:
reasonable in the circumstances; and
are appropriately disclosed.
Auditor’s Responsibility:
Auditor should obtain SAAE regarding:
identification and adequacy of disclosures of RP; and
identification and adequacy of disclosures of material transactions with RP.
If matter remains unresolved and raise concerns about competence, integrity, ethical value
of management
that due to its specific nature / circumstances is likely to include significant ROMM of the
group FS.
GET won’t be able to obtain SAAE due to restriction imposed by Group Management; and
Possible inability would result in Disclaimer:
Significant Component
Yes No
Subsequent Events:
Component auditor shall perform procedures designed to identify events that occur between
the dates of financial information of component and date of AR on GFS and notify it to GET if
they become aware of subsequent event.
Yes No
Determine involvement in
component auditor
Yes engagement.
Yes
Evaluate the need to use the work of an expert after considering factors such as:
Materiality and complexity of info;
Availability of alternative source of AE.
Consider whether expert appointed by client / auditor has desired skill, competence and
objectivity.
No
Agree on nature, timing and Yes
extent of further work.
Perform additional AP. Audit report
modified
CAO –(2) A member of the Institute shall be deemed "to be in practice" when individually or in
partnership with chartered accountants in practice, he, in consideration received or to be
received-
(i) engages himself in the practice of accountancy; or
(ii) offers to perform services involving the auditing, or verification of financial transactions,
books, accounts, or records or the preparation, verification or certification of financial
accounting and related statements or holds himself out to the public as an accountant; or
(iii) renders professional services or assistance in or about matters of principle or detail relating
to accounting procedure or the recording, presentation or certification of financial facts or data.
Explanation - salaried employee of CA in practice shall be deemed to be in practice for the
limited purpose of the training of [students]
a. The CA provides a professional service related to a particular matter for two or more
clients whose interests (with respect to that matter) are in conflict; or
b. The interests of the CA w.r.t. a particular matter and the interests of the client for whom
the CA provides a professional service related to that matter are in conflict.
Safeguards:
1. This may create self-interest, intimidation and familiarity threat, which cannot be
reduced to an acceptable level, unless the value is clearly trivial and inconsequential.
Consequently, such gifts should not be accepted.
2. CA shall not make inducements to influence judgment or obtain confidential information
under pressure or otherwise.
Purchase of Firm
CA in practice may purchase all or part of another firm on the basis that payments will be made
to individuals formerly owning the firm or to their heirs or estates. Such payments are not
regarded as commissions.
1. Assurance engagements.
Independence is required for all assurance engagements.
Definitions:
Independence
a) Independence of mind.
b) Independence in appearance.
(Refer para 290.8 of the code of ethics).
1. Assurance Engagement
a) Assertion based assurance engagements.
b) Direct reporting assurance engagements.
2. Non-assurance engagements
For non-assurance engagements, independence is not mandatory. However in case
independence is not followed, a statement to that effect would be made in the report of factual
findings (AUP) or compilation report.
Direct Reporting Assurance Engagements
REQUIREMENTS OF ISQC-1
The firm should establish policies and procedures designed to provide it with reasonable
assurance that the firm and its personnel comply with relevant ethical requirements.
The firm’s policies and procedures reinforce the ethical requirements by:
(a) Leadership of the firm,
(b) Education and training,
(c) Monitoring, and
(d) Process for dealing with non-compliance
At least annually, the firm should obtain written confirmation of compliance with its policies and
procedures on independence from all firm personnel required to be independent by the Code and
national ethical requirements.
Firm should establish policies and procedures:
(a) To reduce the familiarity threat to an acceptable level when using the same senior
personnel on an assurance engagement over a long period of time; and
(b) For audits of listed entities, requiring the rotation of the engagement partner after a
specified period in compliance with the Code and national ethical requirements that are
more restrictive.
NOTE:
Section 247 (3) (d) do not allow a firm to be auditors of the Company if it is indebted to the
company. However, it also states that firm shall not be deemed to be indebted to the
company if: (a) sum of money exceeding PKR 1,000,000 to a credit card issuer; or (b) a sum to
a utility company in form of unpaid dues for a period not exceeding 90 days.
Section 254 (3) (C) do not allow person to be auditors of the Company where the person has
given a guarantee or security in connection with indebtedness of third person to the
companyother thanin ordinary course of business
1) Material financial interest in a joint venture with: (a) Assurance client or (b) Controlling
owner, director, officer or senior managerial employees.
2) Arrangements to combine services or products of the firm with that of the assurance client
and to market the package with reference to both parties.
3) Distribution or marketing arrangements under which the firm acts as a distributor or
marketer of the assurance client’s products or services, or vice versa.
- Firm or network and audit client or its - Firm and audit client or its mgmt
mgmt
- AST or its IMF and audit client or its mgmt. - AST or its IMF and audit client or its mgmt
Unless the financial interest is immaterial and the relationship is clearly insignificant to the
firm, the network firm and the audit client, no safeguards could reduce the threat to an
acceptable level. In case of a member of AST, remove the individual from team. In case of
Immediate FM, evaluate.
Section 247 (4) (f) do not allow a person to be auditors of the Company where, a person or a
firm, has business relationship other than in the ordinary course.
- In case of KAP, subsequent to the partner ceasing as such, the entity had issued audited
financial statements covering a period of not less than twelve months and the partner
was not a member of the audit team with respect to the audit of those financial
statements.
- In case of SP or MP, unless twelve months have passed since the individual was the
Senior or Managing Partner(CEO or equivalent) of the firm.
S290.139 Independence is not compromised, when the above position is taken in contemplation
of / as a result of business combination. Provided that
Section 247 (3) (b) do not allow a person to be auditors of the Company where, a person who is,
in employment of, a Director, Other officer or Employee of the company.
1- Position of the person in the assurance client and assigned responsibilities on the assurance
client
2- Position of the member of AST and assigned responsibilities on the assurance engagement
3- Closeness of the relationship between above two.
Inadvertent violation
In case of inadvertent violation, follow the general rules in accordance with the firm’s
established policies.
CCG: No listed company shall appoint a person as an external auditor or a person involved in the
audit of a listed company who is a close relative, i.e., spouse, parents, dependents and non-
dependent children, of the CEO, the CFO, an internal auditor or a director of the listed company.
Section 247 (3) (C) do not allow person to be auditors of the Company where the person is the
spouse of a Director of the company;
No Safeguards.
Remove the person. Safeguards available
Significance depends on:
Section 254 (4) (b) do not allow a person to be auditors of the Company where, a person who is,
in employment of, a Director, Other officer or Employee of the company.
Familiarity threat is created when same senior CCG -All banks DFIs are required to ensure
person is used for long period of time. that the external auditors are rotated on
Significance depends on: expiration of five years. In case of banks / DFIs
Length of time the individual has been a having two audit firms jointly auditing their
member of AST accounts and both of them complete their
Role of the individual on the assurance five years period at the same time, one of
team them will be rotated on completion of five
The structure of the firm years and the other one in the next year.
The nature of the assurance engagement
All listed companies in the financial sector
Apply relevant safeguards, if significant. shall change their auditors every five years.
Financial sector for this purpose means Non-
Requirements of ISQC-1 Banking Finance Companies (NBFCs),
Modarabas and Insurance Companies.
Firm should establish policies and procedures:
(a) To reduce the familiarity threat to an All listed companies other than those
acceptable level when using the same mentioned at (a) and (b) shall at a minimum
senior personnel on an assurance rotate the engagement partner after every
engagement over a long period of time; five years.
and
(b) For audits of listed entities, requiring the
rotation of the engagement partner after
a specified period in compliance with the
Code and national ethical requirements
that are more restrictive.
In accordance with the Code of Corporate Governance, every listed company is required to
change their auditor (or at least the audit partner) who have been auditing for last five
years. In this regard we request clarification regarding the following years. our firm was a
sole proprietorship upto January 2003 and was converted into partnership. Previously Mr.
A was signing the accounts, but since the partnership I am the partner of all listed
companies.
Q. 1 Will our firm fall within the requirement of rotation of auditor by December 2003.
Q. 2 What is the status of two firms, which are merged?
Q. 3 Is it the name of the audit firm that mattes or the structure of firm i.e. sole
proprietorship / partnership. At the time of entering into partnership we were
considering the change of name of the firm, but the same was deferred and we are
now considering the change in the near future.
Q. 4 If we plan to change the name of our firm, what will be the status of our firm in
respect of the following:-
a) Will be QCR (satisfactory status) already issued to our firm remain valid.
b) Will this change of name cause casual vacancy in the office of the auditor of listed
and unlisted companies or will we be required to carry the old name upto the AGM of
the Companies and in the AGM the new name will be proposed.
c) Will the requirement of rotation of auditor (as per the listing rules) apply
retrospectively to the new named firm.
Opinion:
The appropriate Committee of the Institute would like state that the purpose of
introduction of rotation clause in the Code of Corporate Governance was to bring more
transparency and independence in audit and this objective would not be achieved if firms
change their names or merge with any other firm or do few cosmetic changes just to avoid
rotation.
Therefore the Committee is of the opinion that mere change of firm’s name or conversion
of sole proprietorship into partnership or merger may not be treated as a new firm with
regards to the applicability of rotation of auditors.
Following are the responses to the queries you have raised:-
FINANCIAL INTEREST
ALL ASSURANCE ONLY AUDIT ENGAGEMENTS LAWS AND REGULATIONS
ENGAGEMENTS
Firm, members of AST & Firm’s retirement benefit plan PROVISIONS OF COMPANIES
Immediate Family owns DFI or owns DFI or MIDFI. ACT 2017
MIDFI as purchased.
No safeguards available. Safeguards are there. Threat to Section 247 (3) (j) do not allow
evaluate. person to be auditors of the
Company where, persons or
Close family of AST owns DFI Others within the firm i.e. (a) his spouse or minor children,
or MIDFI Partners & Managers provides or
Non audit services and in case of a firm, all partners of
immediate family and (b) Other such firm holds any share of an
partners & immediate family, audit client or any of its
where lead engagement partner associated companies.
practices, has DFI or MIDFI
If shares held prior to
appointment, disclose on
appointment and disinvest
within 90 days of such
appointment.
Safeguards are there. No safeguards available. Holding
of interest by Immediate family
member as a result of
employment rights, should be
disposed-off ASAP.
PROFESSIONAL MISCONDUCT
In relation to chartered accountants in practice
A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if
he-
(1) allows any person to practice in his name as a chartered accountant, unless such person is
also a chartered accountant in practice and is in partnership with, or employed by, him;
(2) pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or
brokerage or the fees or profits of his professional business to any person other than a member
of the Institute or a partner or a retired partner or the legal representative of a deceased
partner.
Explanation:- In this clause, "partner" includes a person residing outside Pakistan with whom a
Chartered Accountant in practice has entered into partnership which is not in contravention of
clause (4) of this part;
(3) accepts or agrees to accept any part of the profits of the professional work of a lawyer,
auctioneer, broker, or other agent who is not a member of the Institute.
(4) Places his professional service at the disposal of, or enters into partnership with, an
unqualified person in a position to obtain business of the nature in which chartered accountants
engage by means which are not open to a member of the Institute:
Provided that this paragraph shall not be construed as prohibiting a member from practicing in a
country outside Pakistan in association with a person who is entitled under the laws in force in
that country to perform functions similar to those of a member of the. Institute is entitled to
perform in Pakistan:
(5) Solicits clients for professional work either directly or indirectly by circular, advertisement,
personal communication or interview or by any other means;
(6) Advertises his professional attainments or services, or uses any designation or expression
other than chartered accountant on professional documents. Visiting cards, letter head or sign
boards, unless it be a degree of a University established by law in Pakistan or recognized by the
Federal Government or the Council;
(7) Accepts a position as auditor previously held by another member of the Institute without first
communicating with him in writing;
(8) accepts appointments as auditor of a company without first ascertaining from it whether the
requirements of sub-section (6) of section 144 of the Companies Act, 1913 (VII of 1913), in
respect of such appointment have been duly complied with;
(9) charges or offers to charge, accepts or offers to accept in respect of any professional
employment fees which are based on a percentage of profits or which are contingent upon the
findings or results of such employment except in cases which are permitted under any law for
the time being in force or by an order of the Government;
(10) Engages in any business or occupation other than the profession of Chartered Accountants
unless permitted by the Council so to engage;
Provided that nothing contained herein shall disentitle a Chartered Accountant from being a
director of a company unless he or any of his partners is interested in such company as an
auditor;
(11) accepts a position as auditor previously held by some other Chartered Accountant in such
conditions as to constitute undercutting;
(12) allows a person not being a member of the Institute or a member not being his partner to
sign on his behalf or on behalf of his firm; any balance sheet, profit and loss account, report or
financial statement; or
(13) gives estimates of future profits for publication in a prospectus or otherwise or certifies for
publication the statements of average profits over a period of two years or more without, at the
same time, stating the profits or losses for each year separately.
In relation to members engaged in management consultancy
A member of Institute engaged in management consultancy shall be deemed to be guilty of
professional misconduct, if he-
(1) advertises or solicits for work or issues any circular, calendar or publicity material;
(4) refers to associate firms of Chartered Accountants on his letter head or professional cards or
announcements;
(5) adopts a name or associates himself as a partner or director of a firm or a company whose
name is indicative of its activities;
(6) uses the term chartered accountants for his management consultancy firm or company;
(7) shares profits of remuneration in a manner contrary to clauses (2) and (3) of Part 1 of this
Schedule, except when he associates with non- members as
stated in clause (10) of this part;
(8) or his partner in any firm accepts auditing, taxation, or other conventional accounting work
from any client introduced to him for management consultancy services by the client's own
professional accountant;
(9) uses the term "Management Consultant(s)" except in respect of a company engaged in
management consultancy field;
(10) associates with non-members for the rendering of various management services except as
long as such non-member observes the bye-laws and code of professional ethics of the Institute;
(11) does not communicate with the existing professional accountant or consultant, if a member
of the Institute, informing him of the special work he has been asked to undertake in the event
of an introduction for management consultancy work other than through the existing
professional accountant; or
(12) Under the guise or through the medium of a company or firm does anything which he is not
allowed to do as an individual.
Non tax • Using payroll time records provided and • Accept responsibility to authorize
approved by the client, generate unsigned payment of client funds,
Disbursement
checks, or process client's payroll. electronically or otherwise, except
as specifically provided for with
• Transmit client-approved payroll or other
respect to electronic payroll tax
disbursement information to a financial
payments.
institution provided the client has authorized
the member to make the transmission and • Accept responsibility to sign or
has made arrangements for the financial cosign client checks, even if only in
institution to limit the corresponding emergency situations.
• Maintain a client's bank account
Corporate • Assist in developing corporate strategies. • Commit the client to the terms of
finance— a transaction or consummate a
• Assist in identifying or introducing the
transaction on behalf of the client.
consulting or client to possible sources of capital that
meet the client's specifications or criteria. • Act as a promoter, underwriter,
advisory
broker-dealer, or guarantor of
• Assist in analyzing the effects of proposed
client securities, or distributor of
transactions including providing advice to a
private placement memoranda or
client during negotiations with potential
offering documents.
buyers, sellers, or capital sources.
• Maintain custody of client
• Assist in drafting an offering document or
securities.
memorandum.
• Participate in transaction negotiations in
an advisory capacity.
• Be named as a financial adviser in a client's
private placement memoranda or offering
documents
Business risk • Provide assistance in assessing the client's • Make or approve business risk
business risks and control processes. decisions.
consulting
• Recommend a plan for making • Present business risk
improvements to a client's control processes considerations to the board or
and assist in implementing these others on behalf of management.
improvements.
Internal audit Client designates an appropriate and Setting internal audit policies or
assistance competent resource to be responsible strategic direction;
Client's management or those charged with Directing and taking
governance reviews, responsibility;
assesses and approves the scope, risk and Deciding on recommendations;
frequency of the internal audit services; Reporting the results to TCWG on
Client's management evaluates adequacy of behalf of management;
audit services and the findings; Performing procedures that form
Client's management evaluates and part of the internal control, such
determines which recommendations as reviewing and approving
changes to employee data access;
Internal audit resulting from internal audit services to Taking responsibility for
assistance – implement; and designing, implementing and
cont’d Client's management reports to TCWG. maintaining controls;
Performing outsourced services,
comprising substantial portion of
internal audit
Benefit plan • Communicate summary plan data to plan • Make policy decisions on behalf
trustee. of client management.
Administrati-
on • Advise client management regarding the • When dealing with plan
application or impact of provisions of the participants, interpret the plan
plan document. document on behalf of
management without first
• Process transactions (e.g., investment/
obtaining management's
benefit elections or increase/decrease
concurrence.
contributions to the plan; data entry;
participant confirmations; and processing of • Make disbursements on behalf of
distributions and loans) initiated by plan the plan.
participants through the member's
• Have custody of assets of a plan.
electronic medium, such as an interactive
voice response system or Internet
connection or other media.
• Prepare account valuations for plan
participants using data collected through the
member's electronic or other media.
• Prepare and transmit participant
statements to plan participants based on
data collected through the member's
electronic or other medium.
Explanation:
For the purposes of this regulation, the expression “associated with” shall mean any person
associated with the auditor, if the person:-
Explanation:
For the purposes of this regulation the services that are prohibited shall mean the following:-
Sec247
1. For public company or a company subsidiary of public company having paid-up capital of
PKR 3 million or more, only ICAP CA.
2. For others, CMA or other firm of CAs.
The objective of the auditor is to implement quality control procedures at the engagement level that
provide the auditor with reasonable assurance that:
(a) The audit complies with professional standards and applicable legal and regulatory requirements; and
The burden of this falls on the audit engagement partner, who is responsible for the audit and the ultimate
conclusion.
1. Leadership Responsibilities
The engagement partner shall take responsibility for the overall quality on each audit engagement to which
that partner is assigned.
2. Ethical Requirements
Throughout the audit engagement, the engagement partner shall remain alert, through observation and
making inquiries as necessary, for evidence of non-compliance with relevant ethical requirements by
members of the engagement team.
The engagement partner shall form a conclusion on compliance with independence requirements that
apply to the audit engagement. In doing so, the engagement partner shall:
(b) requirements that apply to the audit engagement. In doing so, the engagement partner shall:
Take appropriate action to eliminate such threats or reduce them to an acceptable level by
applying safeguards, or, if considered appropriate, to withdraw from the audit engagement,
where withdrawal is possible under applicable regulatory environment.
5. Engagement Performance
Several factors are involved in engagement performance.
5.1. Direction
The partner directs the audit. They are required by other auditing standards to hold a meeting with the
audit team to discuss the audit, in particular the risks associated with the audit. This ISA suggests that
direction includes ‘informing members of the engagement team of:
Responsibilities of respective partners where more than one partner is involved in the conduct of the
audit engagement.
5.2. Supervision
Considering the capabilities and competence of individual members of the team, and whether they
have sufficient time and understanding to carry out their work;
Addressing significant issues arising during the audit engagement and modifying the planned approach
appropriately; and
5.3. Review
Review includes consideration of whether:
The work has been performed in accordance with professional standards and regulatory and legal
requirements.
Appropriate consultations have taken place and the resulting conclusions have been documented and
implemented.
There is a need to revise the nature, timing and extent of work performed.
The work performed supports the conclusions reached and is appropriately documented.
The evidence obtained is sufficient and appropriate to support the auditor's report.
Before the audit report is issued, the engagement partner must be sure that sufficient and appropriate
audit evidence has been obtained to support the audit opinion. The audit engagement partner need not
review all audit documentation but may do so.
5.4. Consultation
The partner is also responsible for ensuring that if difficult or contentious matters arise, the teams
appropriate consultation on the matter and that such matters and conclusions are properly recorded. If
differences of opinion arise between the engagement partner and the team, or between the engagement
(a) The procedures required by the firm's policies on engagement quality control review have been
performed.
(b) The engagement quality control review has been completed on or before the date of the auditor’s
report; and
(c) The reviewer is not aware of any unresolved matters that would cause the reviewer to believe that
the significant judgments the engagement team made and the conclusions it reached were not
appropriate.
A quality control review for a listed entity will include a review of:
(b) conceals or disguises the true nature, origin, location, disposition, movement or ownership
of property, knowing or having reason to believe that such property is proceeds of crime;
or
(c) holds or possesses on behalf of any other person any property knowing or having reason to
believe that such property is proceeds of crime; or
(d) participates in, associates, conspires to commit, attempts to commit, aids, abets, facilities,
or counsels the commission of the acts specified in clauses (a), (3) and (c).
Para 27
a) Dedicated resources
b) Written policies and procedures
c) Comprehensive coverage
d) Timey escalation and resolution of matters
e) Explicit management support
f) Sufficient training and education
g) Regular review/audit of the programme.
a) Dedicated resources
A person should be identified and charged with the responsibility for overseeing the entire anti-
money laundering programme. The MLRO must be:
c) Comprehensive coverage
All aspects of a company’s business, particularly those that have contact with customers should
be covered. KYC guidelines are crucial and, at a minimum, should include an examination of:
the account holder’s identity when compared to government lists of known or suspected
terrorists or terrorist organisations
all affiliated and other relationships that may result in franchise risk.
recognise possible signs of money laundering that could arise during the course of their
duties
know what to do once the risk is identified.
CHAPTER 6:
SUMMARIES OF IMPORTANT
FINANCIAL REPORTING STANDARDS
(IAS & IFRS)
Key definitions
Event after the reporting period: An event, which could be favourable or unfavourable, that occurs between the
end of the reporting period and the date that the financial statements are authorised for issue. (Refer examples
discussed in class)
Adjusting event: An event after the reporting period that provides further evidence of conditions that existed at
the end of the reporting period, including an event that indicates that the going concern assumption in relation
to the whole or part of the enterprise is not appropriate. (Refer examples discussed in class)
Non-adjusting event: An event after the reporting period that is indicative of a condition that arose after the end
of the reporting period.
Accounting
Adjust financial statements for adjusting events - events after the balance sheet date that provide further
evidence of conditions that existed at the end of the reporting period, including events that indicate that
the going concern assumption in relation to the whole or part of the enterprise is not appropriate.
Do not adjust for non-adjusting events - events or conditions that arose after the end of the reporting period.
If an entity declares dividends after the reporting period, the entity shall not recognise those dividends as a
liability at the end of the reporting period. That is a non-adjusting event.
Disclosure
Non-adjusting events should be disclosed if they are of such importance that non-disclosure would affect
the ability of users to make proper evaluations and decisions.
The required disclosure is (a) the nature of the event and (b) an estimate of its financial effect or a statement
that a reasonable estimate of the effect cannot be made.
A company should update disclosures that relate to conditions that existed at the end of the reporting
period to reflect any new information that it receives after the reporting period about those conditions.
Companies must disclose the date when the financial statements were authorised for issue and who gave
that authorisation. If the enterprise's owners or others have the power to amend the financial statements
after issuance, the enterprise must disclose that fact.
* * * * * * * * *
Initial costs
Some items of property, plant and equipment might be necessa to acquire for safety or environmental reasons.
Although they do not directly increase the future economic benefits, they might be inevitable to obtain future
economic benefits from other assets and therefore, should be recognized as an asset.
For example, water cleaning station might be necessary in order to proceed with some chemical processes
within chemical manufacturer.
Subsequent costs
Day-to-day servicing of the item shall be recognized in profit or loss as incurred because they just maintain (not
enhance) item’s capacity to bring future economic benefits.
However, some parts of the item of property, plant and equipment may require replacement at regular intervals,
for example, aircraft interiors.
In such a case, an entity derecognizes carrying amount of older part and recognizes the cost of new part into
the carrying amount of the item. The same applies to major inspections for faults, overhauling and similar items.
Measurement
Initial Measurement:
An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost.
The cost of an item of property, plant and equipment comprises:
1. its purchase price including import duties, non-refundable purchase taxes, after deducting trade discounts
and rebates
2. any costs directly attributable to bringing the asset to the location and condition necessary for it to be
capable of operating in the manner intended by management. Examples of these costs are: costs of site
preparation, professional fees, initial delivery and handling, installation and assembly, etc.,
3. the initial estimate of the costs of dismantling and removing the item and restoring the site on which it
is located.
The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date.
Subsequent Measurement
An entity may choose 2 accounting models for its property plant and equipment:
1. Cost model: An entity shall carry an asset at its cost less any accumulated depreciation and any accumulated
impairment losses.
2. Revaluation model: An entity shall carry an asset at a revalued amount. Revalued amount is its fair value at
the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated
impairment losses.
An entity shall revalue its assets with sufficient regularity so that the carrying amount does not differ materially
from its fair value at the end of the reporting period. If an item of property, plant and equipment is revalued,
the entire class of property, plant and equipment to which that asset belongs shall be revalued.
The change of asset’s carrying amount as a result of revaluation shall be treated in the following way:
Change in
Where
Carrying Amount
Other comprehensive income Profit or loss if reverses previous revaluation decrease of
Increase
(heading “Revolution surplus”) the same value.
Other comprehensive income if reduces previously
Decrease Profit or loss recognized revaluation surplus (heading “Revaluation
surplus”).
Impairment
Here, IAS 16 refers to another standard, IAS 36 Impairment of Assets that prescribes rules for reviewing the
carrying amount of assets, determining their recoverable amount and impairment loss, recognizing and
reversing impairment loss and more.
IAS 16 states that compensation from third parties for items of property, plant and equipment that were
impaired, lost or given up shall be included in profit or loss when the compensation becomes receivable.
For example, claim for compensation of damage on insured property from insurance company is recognized to
profit or loss when insurance company accepts claim, closes the case and agrees to compensate (or after
whatever procedure is agreed in the insurance contract).
Derecognition
IAS 16 prescribes that the carrying amount of an item of property, plant and equipment shall be derecognized on
disposal; or when no future economic benefits are expected from its use or disposal.
The gain (not classified as revenue) or loss arising from the derecognition of an item of property, plant and
equipment shall be included in profit or loss when the item is derecognized. The gain or loss from the
derecognition is calculated as the net disposal proceeds (usually income from sale of item) less the carrying
amount of the item.
* * * * * * * * *
* * * * * * * * *
Specific borrowings
If you borrowed some funds specifically for the acquisition of a qualifying asset, then the capitalization is easy:
You simply capitalize the actual costs incurred less any income earned on the temporary investment of such
borrowings. (Refer example discussed in class)
General borrowings
General borrowings are those funds that are obtained for various purposes and they are used (apart from these
other purposes) also for the acquisition of a qualifying asset.
In this case, you need to apply so-called capitalization rate to the borrowing funds on that asset, calculated as
the weighted average of the borrowing costs applicable to general pool. (Refer example discussed in class)
* * * * * * * * *
IAS 24 – Related Party
Objective
to ensure that an entity's financial statements contain the disclosures necessary to draw attention to the
possibility that its financial position and profit or loss may have been affected by the existence of related parties
and by transactions and outstanding balances with such parties.
(a) A person or a close member of that person's family is related to a reporting entity if that person:
(b) An entity is related to a reporting entity if any of the following conditions applies:
(i) The entity and the reporting entity are members of the same group (which means that each parent,
subsidiary and fellow subsidiary is related to the others).
(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a
member of a group of which the other entity is a member).
(iii) Both entities are joint ventures of the same third party.
(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
(v) The entity is a post-employment defined benefit plan for the benefit of employees of either the
reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan,
the sponsoring employers are also related to the reporting entity.
(vi) The entity is controlled or jointly controlled by a person identified in (a).
(vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key
management personnel of the entity (or of a parent of the entity).
(viii) The entity, or any member of a group of which it is a part, provides key management personnel
services to the reporting entity or to the parent of the reporting entity.
Two entities simply because they have a director or key manager in common
Two venturers who share joint control over a joint venture
Providers of finance, trade unions, public utilities, and departments and agencies of a government.
A single customer, supplier, franchiser, distributor, or general agent with whom an entity transacts a
significant volume of business merely by virtue of the resulting economic dependence.
Disclosure
Relationships between parents and subsidiaries.
Management compensation. Disclose key management personnel compensation in total and for each of the
specified categories.
Related party transactions.
* * * * * * * * *
Scope of IAS 33
IAS 33 applies only to publicly-traded entities or those which are about to be publicly traded. A publicly-traded
entity is an entity whose shares are traded by the investing public, for example on a stock exchange.
Most publicly-traded entities prepare consolidated financial statements as well as individual financial
statements. When this is the case, IAS 33 requires disclosure only of EPS based on the figures in the consolidated
financial statements.
Basic EPS
Basic earnings per share is calculated by dividing the profit or loss on continuing operations by the weighted
average number of ordinary shares in issue during the period.
The calculation of the basic EPS is as follows:
Formula: Basic EPS = Net profit (or loss) attributable to ordinary shareholders during a period
Weighted average number of shares in issue during the period
Total earnings
The total earnings figure is the profit or loss from continuing operations after deducting tax and preference
dividends (and in the case of consolidated financial statements, after excluding the earnings attributable to non-
controlling interests). Total earnings include any income from associates (i.e. any share of profits or losses of
associates).
Earnings from discontinued operations are dealt with separately. An EPS from any discontinued operations must
also be disclosed, but this does not have to be disclosed on the face of the statement of profit or loss. Instead,
it may be shown in a note to the financial statements.
The total earnings figure must be adjusted for the interests of preference shareholders before in can be used in
EPS calculations.
Preference shares
Preference shares must be classified as equity or liability in accordance with the rules in IAS 32: Financial
Instruments: Presentation. If a class of preference shares is classified as equity, any dividend relating to that
The current period’s shares are adjusted as if the bonus shares were issued on the first day of the year;
and
The comparative EPS for the previous year is restated on the same basis.
Number of shares
The weighted average number of shares is increased, by adding the maximum number of new shares that
would be created if all the potential ordinary shares were converted into actual ordinary shares.
The additional number of shares is calculated on the assumption that they were in issue from the beginning
of the year or from the date of issue whichever is later.
Options are only included in the diluted EPS calculation if the average share price in the year is greater than
the exercise price of the option. If this were not the case the option would not be exercised. (Nobody would
pay an exercise price of Rs. 100 for something worth only Rs. 80). (Refer example discussed in class)
An
asset
You don’t necessarily need to determine both of these amounts, because if just one of them is higher than
asset’s carrying amount, then there’s no impairment.
2. Value in use
Value in use is the present value of the future cash flows expected to be derived from an asset or cash-
generating unit.
In order to determine value in use, you need take the following elements into account:
An estimate of the future cash flows the entity expects to derive from the asset.
Expectations about possible variations in the amount or timing of those future cash flows.
The time value of money, represented by the current market risk-free rate of interest.
The price for bearing the uncertainty inherent in the asset.
Other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows
the entity expects to derive from the asset.
Cash-
generating units
A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely
independent of the cash inflows from other assets or groups of assets.
If you are not able to determine recoverable amount for an individual asset, then you might need to establish
cash-generating unit to which this asset belongs.
In determining your cash-generating unit you need to be consistent from period to period to include the same
asset or type of assets.
You need to be consistent in determining the carrying amount of cash-generating unit with determining
recoverable amount of that unit. It means that you need to include the same assets in calculation of carrying
amount and recoverable amount, too.
Goodwill
If there is a goodwill acquired in a business combination, then it must be allocated to each of the acquirer’s cash-
generating units (or group of them) that are expected to benefit from the synergies of the combination.
Goodwill should be tested for impairment on an annual basis.
A cash-generating unit (CGU) with allocated goodwill shall be tested for impairment at least annually. In this case
testing means to compare:
The carrying amount of CGU including the goodwill, and
The recoverable amount of that CGU.
In allocating an impairment loss you must make sure that you don’t reduce the carrying amount of an asset
below the highest of:
Its fair value less cost of disposal;
Its value in use;
Zero.
* * * * * * * * *
IAS 37 - Provisions, Contingent Liabilities and Contingent Assets
What is a provision?
Provision is a liability of uncertain timing or amount.
If timing and amount are certain or almost certain, then you don’t deal with the provision but with a payable or
an accrual.
To understand provisions better, let’s break down the definition of a liability in IAS 37:
A liability is a present obligation arising from past event that is expected to be settled by an outflow of economic
benefits from an entity.
In other words, if there is no past event, then there is no liability and no provision should be recognized.
Past event can create 2 types of obligation:
Legal obligation that arises from legislation, a contract or other legal act; or
Constructive obligation that arises from some business practice or customs and created an expectation
in other parties to fulfill the obligation (in other words, people simply expect some company to fulfill
the obligation even if it’s not in the law or any contract).
Onerous contracts
Onerous contract is a contract in which unavoidable costs of fulfilling exceed the benefits from the contract.
In other words, it is a loss contract that cannot be avoided.
You should make a provision in the amount lower of:
Unavoidable costs of fulfilling the contract and
Penalty for not meeting your obligations from the contract
Restructuring
Restructuring is a plan of management to change the scope of business or a manner of conducting a business.
Contingent liabilities
A contingent liability is either:
A possible obligation (not present) from past event that will be confirmed by some future event; or
A present obligation from past event, but either:
The ouflow of economic benefits to satisfy this obligation is not probable (less than 50%), or
The amount of obligation cannot be reliably measured (this is very rare, in fact).
For example, you might face a lawsuit, but your lawyers estimate the probability of losing the case at 30% –
in this case, it’s not probable that you will have to incur any expenditures to settle the claim and you should
not book a provision. It’s typical contingent liability.
If you identify you have a contingent liability, you DO NOT recognize it – no journal entry. You should
only make appropriate disclosures in the notes to the financial statements.
Contingent assets
A contingent asset is a possible asset arising from past events that will be confirmed by some future events
not fully under the entity’s control.
Similarly as with contingent liabilities, you should not book anything in relation to contingent assets, but
you make appropriate disclosures.
* * * * * * * * *
IAS 38 - Intangibles
Overview
IAS 38 Intangible Assets outlines the accounting requirements for intangible assets, which are non-monetary
assets which are without physical substance and identifiable (either being separable or arising from contractual
or other legal rights).
Intangible assets meeting the relevant recognition criteria are initially measured at cost.
Subsequently measured at cost or using the revaluation model, and amortized on a systematic basis over
their useful lives (unless the asset has an indefinite useful life, in which case it is not amortized).
Scope
IAS 38 applies to all intangible assets other than:
financial assets
exploration and evaluation assets (IFRS 6)
expenditure on the development and extraction of minerals, oil, natural gas, and similar resources
intangible assets arising from insurance contracts issued by insurance companies
intangible assets covered by another IFRS, such as intangibles held for sale (IFRS 5), deferred tax assets
(IAS 12), lease assets (IAS 17), assets arising from employee benefits (IAS 19), and goodwill (IFRS 3).
Recognition criteria
IAS 38 requires an entity to recognise an intangible asset, whether purchased or self-created (at cost) if, and
only if:
it is probable that the future economic benefits that are attributable to the asset will flow to the entity;
and
IAS 38 includes additional recognition criteria for internally generated intangible assets (see below).
If recognition criteria not met. If an intangible item does not meet both the definition of and the criteria for
recognition as an intangible asset, IAS 38 requires the expenditure on this item to be recognized as an expense
when it is incurred.
Reinstatement. The Standard also prohibits an entity from subsequently reinstating as an intangible asset, at a
later date, an expenditure that was originally charged to expense.
If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the
development phase, the entity treats the expenditure for that project as if it were incurred in the research phase
only.
Initial measurement
Intangible assets are initially measured at cost.
Revaluation model. Intangible assets may be carried at a revalued amount (based on fair value) less any
subsequent amortization and impairment losses only if fair value can be determined by reference to an active
market. [Such active markets are expected to be uncommon for intangible assets. Examples where they might
exist:
production quotas
fishing licences
taxi licences
The asset should also be assessed for impairment in accordance with IAS 36.
Subsequent expenditure
Due to the nature of intangible assets, subsequent expenditure will only rarely meet the criteria for being
recognised in the carrying amount of an asset. Subsequent expenditure on brands, mastheads, publishing titles,
customer lists and similar items must always be recognised in profit or loss as incurred.
* * * * * * * * *
IAS 40 Investment Property
Objective of IAS 40
IAS 40 Investment Property prescribes the accounting treatment and disclosure with respect to investment
property.
When payment for investment property is deferred, then discount it to its present value to set the cash price
equivalent.
Subsequent measurement of investment property
After initial recognition, you have 2 choices for measuring your investment property:
Once choice has been made, stick to it and measure all of your investment property using the same model (there
are actually exceptions from that rule).
Disclosures
IAS 40 Investment property prescribes a lot of disclosures to be presented in the financial statements, including
the description of selected model, how the fair value was derived, what the classification criteria for investment
property are, movements in investment property during the reporting period (please refer to IAS 40.74 and
following for more information).
* * * * * * * * *
Share-based payment arrangement is an agreement between the entity and another party (including an
employee) whereby the other party receives:
Cash or other assets of the entity for amounts that are based on the price (or value) of equity instruments
(including shares or share options) of the entity or another group entity.
This type of arrangement is cash-settled share-based payment transaction.
Equity instruments (including shares or share options) of the entity or another group entity.
This type is called equity-settled share-based payment.
If there are some specified vesting conditions, these must be met before receiving any share-based payment.
Vesting conditions
Some share-based payment transactions include vesting conditions that must be met before any payment is
made.
IFRS 2 recognizes 2 types of vesting conditions:
1. Service conditions: they require the counterparty to complete a specified period or service;
2. Performance conditions: they require the counterparty to complete a specified period of services AND
specified performance targets to be met.
A performance condition might include a market condition that is linked to the market price of shares in some
way, for example, vesting might depend on achieving a minimum increase in the share price of the entity.
How to recognize share-based payments
The basic recognition principle is to recognize goods or services received in a share-based payment
transaction when the goods are obtained or as the services are received.
Goods or services acquired should be recognized as expenses in profit or loss unless they qualify for recognition
as assets. That’s the debit side of an accounting entry.
The credit side depends on the type of share-based payment arrangement:
If the goods or services were acquired in an equity-settled share-based payment transaction, then the
corresponding increase is recognized in equity.
If the goods or services were acquired in a cash-settled share-based payment transaction, then the
corresponding increase is recognized as a liability.
YES: If the share-based payment DOES NOT vest until the counterparty meets some vesting conditions,
then IFRS 2 regards this transaction as granted in return for the supplier’s (employee’s) service rendered
during the vesting period. In this case, an entity should recognize an amount for the goods or services
received during the vesting period based on the best available estimate of the number of equity
instruments expected to vest.
If the fair value of the new instruments is lower than the fair value of the old instruments, the original
fair value of the equity instruments granted should be expensed as if the modification never occurred.
If an entity cancels or settles the equity instruments, then it is recognized as an acceleration of the vesting
period and any remaining unrecognized amount is recognized immediately.
Recognition of cash-settled share-based payment transactions
* * * * * * * * *
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
Objective of IFRS 5
IFRS 5 focuses on 2 main areas:
1. It specifies the accounting treatment for assets (or disposal groups) held for sale, and
2. It sets the presentation and disclosure requirements for discontinued operations.
3. In the statement of financial position: you shall present a non-current asset or assets of a disposal group
classified as held for sale separately from other assets. The same applies for liabilities of a disposal group
classified as held for sale.
* * * * * * * * *
Initial Fair value of Fair value of Fair value of Fair value of Fair value of
measurement consideration consideration consideration consideration consideration
given. (Present given. given. received. received.
value of future (Present value
cashflows of future
discounted at cashflows
effective discounted at
interest rate or effective
market rate, interest rate or
whichever is market rate,
applicable) whichever is
applicable)
Subsequent Ammortised Marked to Marked to Ammortised Marked to
measurement cost market market cost market
Transaction Capitalised as a Expensed out Capitalised as a Capitalised as a Expensed out
cost part of carrying immediately part of carrying part of carrying immediately
amount on from statement amount on initial amount on from statement
initial of profit or loss. recognition. initial of profit or loss.
recognition. recognition.
Fair value Not applicable Statement of Other Not applicable Statement of
changes on Profit or Loss comprehensive Profit or Loss
reporting date income
Fair value is a market-based measurement, not an entity-specific measurement. It means that an entity:
shall look at how the market participants would look at the asset or liability under measurement
shall not take own approach (e.g. use) into account.
Asset or liability
The asset or liability measured at fair value might be either:
a stand-alone (individual) asset or liability (for example, a share or a pizza oven)
a group of assets, a group of liabilities, or a group of assets and liabilities (for example, controlling interest
represented by more than 50% of shares in some company, or cash-generating unit being pizzeria).
Whether the asset or liability is stand-alone or a group depends on its unit of account. Unit of account is
determined in accordance with the other IFRS standard that requires or permits fair value measurement (for
example, IAS 36 Impairment of Assets).
When measuring fair value, an entity takes into account the characteristics of the asset or liability that a market
participant would take into account when pricing the asset or liability at measurement date.
These characteristics include for example:
the condition and location of the asset
the restrictions on the sale or use of the asset.
Transaction
A fair value measurement assumes that the asset or liability is exchanged in an orderly
transaction between market participants at the measurement date under current market conditions.
Orderly transaction
The transaction is orderly when 2 key components are present:
there is adequate market exposure in order to provide market participants the ability to obtain
knowledge and awareness of the asset or liability necessary for a market-based exchange
market participants are motivated to transact for the asset or liability (not forced).
Market participants
Market participants are buyers and sellers in the principal or the most advantageous market for the asset
or liability, with the following characteristics:
independent
knowledgeable
able to enter into transaction
willing to enter into transaction.
Principal market is the market with the greatest volume and level of activity for the asset or liability. Different
entities can have different principal markets, as the access of an entity to some market can be restricted.
The most advantageous market is the market that maximizes the amount that would be received to sell the asset
or minimizes the amount that would be paid to transfer the liability, after taking into account transaction costs
and transport costs.