(a)Analyse financial information of Water Villa PLC by performing Analytical Procedures for the year ended

2021/2022. (10 Marks)

Vertical, horizontal & ratio analysis
(b)Assess the audit risk in the planning level of external audit for Water Villa PLC for the year ended
2021/2022. In addition to general audit risk, it is required to assess the risk arising from prevailing macro-
economic conditions also as the external auditor. (16 Marks)
(c) Propose how to respond to each assessed risk to reduce the audit risk to an acceptably low level. (08
Marks) increase sample, collect collaborative audit evidences, TOC, for each balances, audit procedures
u need to do
(d)Compute the materiality level for Water Villa PLC and explain the applicability of the materiality level to
your junior auditors in your team <loss making company so revenue * 1 or 2 %>

Discuss the role/objectives of the different committees formed in compliance with the corporate governance
code
1. Audit Committee
 Oversight of Financial Reporting: Ensure the integrity of the financial statements and related disclosures.
 Internal Control and Risk Management: Oversee the effectiveness of the company’s internal controls and
risk management systems.
 External Audit: Liaise with external auditors, review their work, and ensure their independence and
objectivity.
 Internal Audit: Monitor the performance and findings of the internal audit function.
 Compliance: Ensure compliance with applicable laws, regulations, and internal policies.
2. Nomination Committee
 Board Composition: Assess the balance of skills, knowledge, and experience on the board and recommend
new appointments.
 Succession Planning: Develop and review succession plans for the board and senior management.
 Board Performance: Evaluate the performance of the board, its committees, and individual directors.
 Diversity: Promote diversity in board appointment
3. Remuneration Committee
 Executive Compensation: Determine the remuneration packages for the executive directors and senior
management.
 Incentive Plans: Oversee the design and implementation of performance-based incentive schemes.
 Alignment with Strategy: Ensure that remuneration policies align with the company's long-term strategy
and performance.
Transparency: Ensure that executive compensation is transparent and disclosed in accordance with
regulations.
4. Risk Committee
 Risk Identification: Identify and assess the principal risks facing the company.
 Risk Mitigation: Develop strategies to manage and mitigate these risks.
 Risk Appetite: Establish the company’s risk appetite and ensure that it is adhered to.
 Reporting: Ensure that risk management processes are robust and regularly reported to the board.

fundamental ethical principles, a professional accountant is required to comply

✓ Integrity
✓ Objectivity
✓ Professional Competence and Due Care
✓ Confidentiality
✓ Professional Behavior

(a) Integrity
A professional accountant should be straightforward and honest in all professional and business
relationships.
The principle of integrity imposes an obligation on all professional accountants to be straightforward and
honest in professional and business relationships. Integrity also implies fair dealing and truthfulness. A
professional accountant should not be associated with reports, returns, communications or other
information where they believe that the information:
✓ Contains a materially false or misleading statement;
✓ Contains statements or information furnished recklessly; or
✓ Omits or obscures information required to be included where such omission or obscurity would be
misleading.
A professional accountant will not be considered to be in breach of this principle if the professional
accountant provides a modified report in respect of a matter contained above.

(b) Objectivity
A professional accountant should not allow bias, conflict of interest or undue influence of others to override
professional or business judgments.
The principle of objectivity imposes an obligation on all professional accountants not to compromise their
professional or business judgment because of bias, conflict of interest or the undue influence of others. A
professional accountant may be exposed to situations that may impair objectivity. It is impracticable to
define and prescribe all such situations. Relationships that bias or unduly influence the professional
judgment of the professional accountant should be avoided.

(c) Professional Competence and Due Care

A professional accountant has a continuing duty to maintain professional knowledge and skill at the level
required to ensure that a client or employer receives competent professional service based on current
developments in practice, legislation and techniques. A professional accountant should act diligently and in
accordance with applicable technical and professional standards when providing professional services.

The principle of professional competence and due care imposes the following obligations on professional
accountants:
✓ To maintain professional knowledge and skill at the level required to ensure that clients or employers
receive competent professional service; and
✓ To act diligently in accordance with applicable technical and professional standards when providing
professional services.

Competent professional service requires the exercise of sound judgment in applying professional knowledge
and skill in the performance of such service. Professional competence may be divided into two separate
phases: ✓ Attainment of professional competence; and ✓ Maintenance of professional competence.

(d) Confidentiality
A professional accountant should respect the confidentiality of information acquired as a result of
professional and business relationships and should not disclose any such information to third parties without
proper and specific authority unless there is a legal or professional right or duty to disclose. Confidential
information acquired as a result of professional and business relationships should not be used for the
personal advantage of the professional accountant or third parties.

The principle of confidentiality imposes an obligation on professional accountants to refrain from:

✓ Disclosing outside the firm or employing organization confidential information acquired as a result of
professional and business relationships without proper and specific authority or unless there is a legal or
professional right or duty to disclose; and
✓ Using confidential information acquired as a result of professional and business relationships to their
personal advantage or the advantage of third parties.

A professional accountant should maintain confidentiality even in a social environment. The professional
accountant should be alert to the possibility of inadvertent disclosure, particularly in circumstances involving
long association with a business associate or a close or immediate family member.

The need to comply with the principle of confidentiality continues even after the end of relationships
between a professional accountant and a client or employer. When a professional accountant changes
employment or acquires a new client, the professional accountant is entitled to use prior experience. The
professional accountant should not, however, use or disclose any confidential information either acquired
or received as a result of a professional or business relationship.

The following are circumstances where professional accountants are or may be required to disclose
confidential information or when such disclosure may be appropriate:
✓ Disclosure is permitted by law and is authorized by the client or the employer;
✓ Disclosure required by law, for example:
(i) Production of documents or other provision of evidence in the course of legal proceedings
(ii) Disclosure to the appropriate public authorities of violation of the law that come to light; and
✓ There is a professional duty or right to disclose, when not prohibited by law:
(i) To comply with the quality review of a member body or professional body
(ii) To respond to an inquiry or investigation by a member body or regulatory body
(iii) To comply with technical standard and ethics requirements.

(e) Professional Behavior

A professional accountant should comply with relevant laws and regulations and should avoid any action
that discredits the profession.
The principle of professional behavior imposes an obligation on professional accountants to comply with
relevant laws and regulations and avoid any action that may bring discredit to the profession.
In marketing and promoting themselves and their work, professional accountants should bring the
profession into disrepute. Professional accountants should be honest and truthful and should not
(a) Make exaggerated claims for the services they are able to offer, the qualifications they possess, or
experience they have gained; or
(b) Make disparaging or unsubstantiated comparisons to the work of others.

circumstances in which compliance with the fundamental principles may potentially be threatened according
to the Code of Ethics
(a) Self-interest threats; which may occur as a result of the financial or other interests of a professional
accountant or of an immediate or close family member.
➢A financial interest in a client or jointly holding a financial interest with a client.
➢Undue dependence on total fees from a client.
➢Having a close business relationship with a client.
➢Concern about the possibility of losing a client
➢Potential employment with a client.
➢Contingent fees relating to an assurance engagement.
➢A loan to or from an assurance client or any of its directors or officers

(b) Self-review threats; the threat that a professional accountant will not appropriately re-evaluate the
results of a previous judgment made or service performed by the professional accountant, or by another
individual within the professional accountant’s firm or employing organization, on which the accountant will
rely when forming a judgment as part of performing a current activity or providing a current service;
➢The discovery of a significant error during a re-evaluation of the work of the professional accountant in
public practice.
➢Reporting on the operation of financial systems after being involved in their design or implementation.
➢Having prepared the original data used to generate records that are the subject matter of the engagement.
➢A member of the assurance team being, or having recently been, a director or officer of that client.
➢A member of the assurance team being, or having recently been, employed by the client in a position to
exert direct and significant influence over the subject matter of the engagement.
➢Performing a service for a client that directly affects the subject matter of the assurance engagement.

(c) Advocacy threats; the threat that a professional accountant will promote a client’s or employer’s position
to the point that the professional accountant’s objectivity is compromised;
➢Promoting shares in a listed entity• when that entity is a financial statement audit client.
➢Acting as an advocate on behalf of an assurance client in litigation or disputes with third parties

(d) Familiarity threats; which may occur when, because of close relationship a professional accountant
becomes too sympathetic to the interests of others; and
➢A member of the engagement team having a close or immediate family relationship with a director or
officer of the client.
➢A member of the engagement team having a close or immediate family relationship with an employee of
the client who is in a position to exert direct and significant influence over the subject matter of the
engagement.
➢A former partner of the firm being a director or officer of the client or an employee in a position to exert
direct and significant influence over the subject matter of the engagement.
➢Accepting gifts or preferential treatment from a client, unless the value is clearly insignificant.
➢Long association of senior personnel with the assurance client

(e) Intimidation threats; – the threat that a professional accountant will be deterred from acting objectively
because of actual or perceived pressures, including attempts to exercise undue influence over the
professional accountant.
➢Being threatened with dismissal or replacement in relation to a client engagement.
➢Being pressured to reduce inappropriately the extent of work performed In order to reduce fees

Safeguards that may eliminate or reduce such threats to an acceptable level fall into two broad categories:
(a) Safeguards created by the profession, legislation or regulation; and
Safeguards created by the profession, legislation or regulation include, but are not restricted to:
✓ Educational, training and experience requirements for entry into the profession.
✓ Continuing professional development requirements.
➢Corporate governance regulations
✓ Professional or regulatory monitoring and disciplinary procedures.
✓ External review by a legally empowered third party of the reports, returns, communications or
information produced by a professional accountant

(b) Safeguards in the work environment.

In the work environment, the relevant safeguards will vary depending on the circumstances. Work
environment safeguards comprise firm-wide safeguards and engagement specific safeguards. A professional
accountant in public practice should exercise judgment to determine how to best deal with an identified
threat.

IDENTIFY THE ETHICAL ISSUES THAT MAY ARISE IN YOUR FIRM FROM THESE SCENARIOS AND STATE, WITH REASONS, HOW YOUR
FIRM SHOULD DEAL WITH THEM ACCORDING TO THE CODE OF ETHICS REQUIREMENTS .

Mr. Silva, the engagement partner for Aqua Limited (acquired by Alpha Limited), has a wife, Ms.
Chandradi, who is a director of Alpha Limited, the new owner.
Ethical Issues:
 Threat to Independence: Mr. Silva's wife's position as a director in Alpha Limited creates a close
relationship that could threaten his independence in auditing Aqua Limited's financial statements.
This is a violation of the Objectivity principle of the Code of Ethics.
 Threat to Confidentiality: Mr. Silva may be privy to confidential information about Aqua Limited
during the audit. There's a risk of this information being inadvertently disclosed to his wife, impacting
the Confidentiality principle.
Recommendations for PQR & Co.:
1. Immediate Disclosure: Mr. Silva should disclose this close family relationship to the PQR & Co.
engagement quality control partner and the engagement team.
2. Impairment of Independence Assessment: The engagement quality control partner should conduct
an impairment of independence assessment according to the Code of Ethics. This assessment will
consider the specific facts and determine the level of threat posed.
3. Possible Safeguards: Depending on the assessment, various safeguards can be implemented:
o Reassignment: The most prudent course of action might be to reassign the Aqua Limited audit
engagement to another partner in the firm entirely eliminating the threat.
o Restrictions on Mr. Silva's involvement: If reassignment isn't feasible, restrictions can be
placed on Mr. Silva's involvement in the audit. He might be excluded from discussions
involving sensitive information or decision-making processes.
o Cooling-off Period: If Ms. Chandradi recently joined the board of Alpha Limited, a cooling-off
period might be considered. This would involve waiting a specific period (determined by the
Code of Ethics or firm policy) before Mr. Silva can lead the Aqua Limited audit again.
4. Documentation: All decisions and actions taken regarding this matter should be thoroughly
documented to maintain transparency and demonstrate adherence to the Code of Ethics.

ABC Limited offers PQR & Co. a 10% introduction fee for recommending their Fixed Assets Register
software to clients.
Independence: Accepting a commission for recommending a specific software product could be perceived
as compromising PQR & Co.'s independence. The potential financial gain could influence the firm to prioritize
ABC's product over others, even if a different option might be a better fit for the client.
Objectivity: The financial incentive could also threaten PQR & Co.'s objectivity. Recommendations for client
software should be based solely on the client's needs, not on the potential for financial gain.

Ethical Issues
Self-Interest Threat: Financial Incentive: Accepting an introduction fee creates a financial incentive for the
audit firm, which may compromise the auditor's objectivity and independence. The audit firm might be
perceived as prioritizing its financial interests over its duty to provide unbiased audit services.
Conflict of Interest: Dual Role Conflict: The audit firm would be acting both as an auditor and as a promoter
of a product. This dual role can lead to a conflict of interest, where the firm's judgment may be impaired due
to its financial interest in promoting the software.

Recommendations for PQR & Co.:

1. Decline the Offer: The safest course of action is to politely decline the offer from ABC Limited. This
demonstrates PQR & Co.'s commitment to upholding its ethical obligations and maintaining its
independence.
2. Provide Alternative Recommendations: PQR & Co. can still fulfill its role by providing clients with a
list of reputable Fixed Assets Register software options. This allows clients to make informed
decisions based on their specific needs and budget.
3. Maintain Transparency: If PQR & Co. has used ABC's software in the past and found it valuable, this
can be communicated to clients along with other software options. However, it's crucial to clarify
that there is no financial relationship with ABC Limited.
4. Education: PQR & Co. can hold internal training sessions to educate staff on potential threats to
independence and the importance of objective client recommendations.

Ethical Concerns Regarding Long Association with a Client

The scenario involving Mr. Perera and KLM Limited presents a potential threat to the audit's Independence
and Objectivity, which are fundamental principles of the Code of Ethics for Chartered Accountants.
Here's why:
 Long Association: Mr. Perera's 9th year as the engagement partner raises concerns about familiarity.
Over such a long period, a close relationship with the client's management can develop, potentially
leading Mr. Perera to be less critical of their actions.
Possible Consequences:
 Reduced Scrutiny: Familiarity might lead Mr. Perera to overlook potential red flags or be hesitant to
challenge management decisions.
 Pressure to Conform: The strong relationship might make it difficult for Mr. Perera to disagree with
management or insist on additional audit procedures.

Ethical Issues
Familiarity Threat: Over-Familiarity: The long-term relationship between Mr. Perera and KLM Limited can
lead to a familiarity threat, where Mr. Perera may become too sympathetic to the interests of KLM Limited,
impairing his objectivity and professional skepticism.

Self-Interest Threat: Personal Relationships: Mr. Perera's good relationship with the client could result in a
self-interest threat, where he might be inclined to avoid conflicts and maintain the relationship at the
expense of audit quality and objectivity.

Recommendations:
1. Partner Rotation: The Code of Ethics often recommends partner rotation for long-standing audit
engagements. PQR & Co. should consider assigning a new partner to the KLM Limited audit.
 2. Safeguards: If rotation isn't feasible, PQR & Co. could implement safeguards to mitigate the threats:
o Independent Review: Assign a different partner to perform a quality control review of Mr.
Perera's work on the KLM Limited audit.
o Cooling-Off Period: Consider a cooling-off period before Mr. Perera is assigned to future
audits of KLM Limited. This allows the relationship to cool down and reduces the familiarity
threat.
o Increased Skepticism: PQR & Co. should emphasize the importance of maintaining
professional skepticism throughout the audit process.
o Communication with Client: Inform KLM Limited about the potential threats arising from a
long association and the safeguards being implemented.

The scenario with Beta PLC and the private company valuation presents a potential violation of the
Code of Ethics for Chartered Accountants due to threats to independence. Here's why:
 Non-Audit Service: Providing a valuation service, especially for a material investment on Beta PLC's
financial statements, is considered a non-audit service.
 Self-Review Threat: If PQR & Co. performs both the audit and the valuation, it creates a self-review
threat. Essentially, the firm would be auditing its own work (the valuation) which could compromise
its objectivity in the audit opinion.
Recommendations for PQR & Co.:
1. Decline the Valuation Service: The most ethical course of action is to decline providing the valuation
service for Beta PLC. This demonstrates PQR & Co.'s commitment to maintaining its independence.
2. Recommend an Independent Valuer: PQR & Co. can recommend Beta PLC engage an independent
valuation specialist with expertise in valuing private companies. This ensures an objective and
unbiased valuation for the financial statements.
3. Safeguards (if absolutely necessary): If, under exceptional circumstances, declining the valuation is
not an option, PQR & Co. can only consider providing the service with significant safeguards:
o Separate Engagement Team: A separate and independent team within PQR & Co., with no
involvement in the audit, should perform the valuation.
o Quality Control Review: A rigorous quality control review of the valuation by a partner not
involved in either the audit or the valuation should be conducted.

Considerations for Assisting Alpha Ltd. with Year-End Closing and Financial Statements
Potential Issues:
 Loss of Independence: Providing bookkeeping and accounting services (including year-end closing) can
create a self-interest threat to your independence. An independent audit requires the auditor to
objectively evaluate the financial statements prepared by management.
 Scope Creep: Initially assisting with closing entries might lead to inadvertently assuming responsibility
for the accuracy of the financial statements. This can be problematic if errors are discovered later.
 Self-Review Threat: Preparing Financial Statements: If the audit firm assists in preparing financial
statements, the auditors might end up auditing their own work, creating a self-review threat. This can
impair the auditors' objectivity and independence, as they may be less likely to critically evaluate the
financial statements they helped prepare.
 Management Responsibility: Assuming Management's Role: Assisting with closing journal entries and
financial statement preparation can blur the lines between the auditor's role and management's
responsibilities. This can lead to a situation where the auditor is effectively making management decisions,
which is inappropriate and can compromise independence.

Recommendations:
  Offer Separate Audit Engagement: The best approach is to offer Alpha Ltd. a separate audit
engagement focusing on the review of their financial statements prepared by their internal staff.
 Disclaimers and Limitations: If your firm agrees to assist with closing entries, ensure clear disclaimers
and limitations are outlined in your engagement letter:
o Disclaim responsibility for the accuracy and completeness of underlying accounting records.
o Specify that your assistance does not constitute an audit and will not provide assurance on
the financial statements.
 Maintain Independence: Even with closing assistance, maintain a professional distance from Alpha
Ltd.'s management. Avoid any actions that could compromise your objectivity during a potential
future audit.

Additional Considerations:

 Internal Controls: Assess Alpha Ltd.'s internal controls over financial reporting. Weak controls might
necessitate a more extensive audit due to increased risk of errors or misstatements.
 Communication: Open communication with Alpha Ltd. is crucial. Explain the importance of
independent audits and the potential conflict of interest if your firm prepares the financial
statements.
 Self-Review Threat: Preparing Financial Statements: If the audit firm assists in preparing financial
statements, the auditors might end up auditing their own work, creating a self-review threat. This
can impair the auditors' objectivity and independence, as they may be less likely to critically evaluate
the financial statements they helped prepare.
 Management Responsibility: Assuming Management's Role: Assisting with closing journal entries and
financial statement preparation can blur the lines between the auditor's role and management's
responsibilities. This can lead to a situation where the auditor is effectively making management
decisions, which is inappropriate and can compromise independence.

Unpaid Audit Fee from Sand Ltd.

Ethical Issues
1. Self-Interest Threat: Financial Dependency: The overdue fee creates a financial dependency on the
client, which may impair the auditor’s objectivity and independence. The auditor might be
influenced, consciously or unconsciously, to issue a favorable audit report to ensure that the overdue
fees are paid.
2. Independence and Objectivity: Perception of Bias: There could be a perceived lack of independence
and objectivity by third parties (such as investors, regulators, and other stakeholders) if it becomes
known that the audit firm is owed a significant amount of overdue fees.

Code of Ethics Requirements and Recommendations

Self-Interest Threat: Addressing Overdue Fees: Overdue fees from an audit client can create a self-interest
threat. The Code suggests that if fees due from an audit client remain unpaid for a long time, especially if
they relate to a previous audit engagement, the auditor should consider whether to continue with the
current audit engagement.
Independence: Discontinuing the Engagement: If significant fees (usually more than one year old) remain
unpaid, the audit firm should consider the implications for its independence. The firm may need to discuss
the situation with the client and potentially discontinue the audit engagement if the fees are not settled
promptly.

Evaluate the issue and describe the impact on the auditor’s opinion, if any, should this issue remain unresolved.

The discrepancy between the recognized redundancy provision (Rs. 110,000) and the necessary
provision (Rs. 305,000) amounts to Rs. 195,000. This amount is material in relation to both profit
before tax and total assets.
Materiality Assessment:
Profit Before Tax: Rs. 2.6Mn> Materiality Threshold (typically 5% of PBT): Rs. 130,000
Total Assets: Rs. 18Mn> Materiality Threshold (typically 1% of Total Assets): Rs. 180,000

Given that Rs. 195,000 exceeds both materiality thresholds (Rs. 130,000 for PBT and Rs. 180,000 for total
assets), the error is considered material.

Impact on Auditor's Opinion

If the finance director remains unwilling to adjust the financial statements, the auditor needs to consider the
impact on the audit opinion.
Material Misstatement: The understatement of the redundancy provision by Rs. 195,000 means the
financial statements are materially misstated.

Types of Opinions:
Qualified Opinion (Except for): Issued when the auditor concludes that misstatements are material but not
pervasive.
Adverse Opinion: Issued when the misstatement is both material and pervasive, leading to the conclusion
that the financial statements do not present a true and fair view.

Conclusion: Given the specifics of this case, the misstatement of Rs. 195,000 is material but likely not pervasive
because it affects a specific account (the redundancy provision) rather than the financial statements as a
whole. Therefore, a qualified opinion is appropriate.

Impact on the Auditor's Report

Qualified Opinion: Basis for Qualified Opinion: A paragraph preceding the opinion paragraph describing the
misstatement, including the amount involved (Rs. 195,000) and its impact on the financial statements.
Explanation that the financial statements are materially misstated because the redundancy provision is
understated.

Audit Report Wording: Basis for Qualified Opinion: "The company has included a redundancy provision of
Rs. 110,000 in the financial statements. However, based on our audit procedures, we have determined that
the provision should be Rs. 305,000, resulting in an understatement of the provision by Rs. 195,000.
Consequently, profit before tax is overstated by Rs. 195,000, and total liabilities are understated by the same
amount."

Steps Before Issuing a Qualified Opinion

1. Communicate with Management and Those Charged with Governance:

o Discuss the material misstatement and its impact with the finance director and the board or
audit committee.
o Attempt to persuade management to adjust the financial statements to avoid a qualified
opinion.
2. Document the Issue:
o Clearly document the discussions, management’s refusal, and the auditor's assessment of the
impact of the misstatement.
3. Consider Additional Disclosures:
o Recommend that management disclose the nature and impact of the misstatement in the
notes to the financial statements, even if they do not adjust the amounts.
 The issue revolves around the capitalization of Rs. 440,000 related to one of the nine new health and
beauty products under development, which currently does not meet the recognition criteria under
LKAS 38 Intangible Assets.

LKAS 38 Intangible Assets - According to LKAS 38, development expenditure can only be
capitalized if the project meets the following criteria:

1. Technical Feasibility: The project must be technically feasible to complete.

2. Intention to Complete: The company must intend to complete and use or sell the asset.
3. Ability to Use or Sell: The company must have the ability to use or sell the asset.
4. Future Economic Benefits: The asset must be expected to generate future economic benefits.
5. Availability of Resources: The company must have adequate resources to complete the project.
6. Measurement of Costs: The costs attributable to the asset can be measured reliably.

In this case, the Rs. 440,000 does not meet these criteria yet and thus should not be capitalized in the current
financial year.

Materiality Assessment:

Profit Before Tax: Rs. 6.4m> Materiality Threshold (typically 5% of PBT): Rs. 320,000
Total Assets: Rs. 37.2m> Materiality Threshold (typically 1% of Total Assets): Rs. 372,000

The Rs. 440,000 misstatement is material as it exceeds both the PBT materiality threshold (Rs. 320,000) and
the total assets materiality threshold (Rs. 372,000).

Impact on Auditor's Report

Unresolved Issue: If the finance director remains unwilling to adjust the financial statements, the auditor needs
to consider the impact on the audit opinion.

1. Material Misstatement:
o The inclusion of Rs. 440,000 as an intangible asset results in the financial statements being
materially misstated.
2. Types of Opinions:
o Qualified Opinion (Except for): Issued when the auditor concludes that misstatements are
material but not pervasive.
o Adverse Opinion: Issued when the misstatement is both material and pervasive, leading to
the conclusion that the financial statements do not present a true and fair view.

Given the specifics of this case, the misstatement of Rs. 440,000 is material but likely not pervasive because
it affects a specific account (intangible assets) rather than the financial statements as a whole. Therefore, a
qualified opinion is appropriate.

Impact on the Auditor's Report

Qualified Opinion: Basis for Qualified Opinion:

o A paragraph preceding the opinion paragraph describing the misstatement, including the
amount involved (Rs. 440,000) and its impact on the financial statements.
o Explanation that the financial statements are materially misstated because the development
costs related to one project do not meet the capitalization criteria.
Audit Report Wording:

 Qualified Opinion Wording:

o Qualified Opinion: "In our opinion, except for the effects of the matter described in the
Basis for Qualified Opinion paragraph, the financial statements give a true and fair view of
the financial position of Gooseberry Co as at 31 January 2022, and of its financial
performance and cash flows for the year then ended in accordance with [applicable financial
reporting framework]."
o Basis for Qualified Opinion: "The company has capitalized Rs. 440,000 of development
expenditure as an intangible asset which does not meet the recognition criteria under LKAS
38 Intangible Assets. Consequently, intangible assets are overstated by Rs. 440,000, and
profit before tax is overstated by Rs. 440,000."

Steps Before Issuing a Qualified Opinion- same as above

Benefits of IT in Auditing:
 Enhanced Efficiency and Productivity
Automated Processes: IT enables the automation of routine audit tasks such as data extraction, sampling, and
analysis, allowing auditors to focus on more complex and judgmental areas.
Data Analytics: Advanced data analytics tools can analyze large datasets quickly, identifying anomalies,
trends, and patterns that may require further investigation.
Real-Time Access: Auditors can access client financial data and documents in real-time, facilitating timely
audit procedures and reducing delays.

 Improved Accuracy and Reliability

Reduced Human Error: Automation and standardized procedures reduce the risk of human error in data
handling and analysis.
Comprehensive Analysis: Technology allows for the analysis of entire populations of data rather than just
samples, increasing the thoroughness and reliability of audit conclusions.
 Enhanced Communication and Collaboration
Remote Access: Auditors can access client systems and data remotely, facilitating continuous auditing and
enabling work from various locations.
Collaboration Tools: Digital collaboration platforms (e.g., video conferencing, shared document platforms)
improve communication between audit teams and clients, ensuring better coordination and information
sharing.

 Cost-Effectiveness
Reduced Travel Costs: Remote auditing reduces the need for physical travel, resulting in significant cost
savings.
Resource Optimization: Technology optimizes the use of audit resources, allowing firms to manage multiple
engagements more efficiently.

 Security and Documentation

Digital Documentation: IT provides secure digital storage of audit documentation, ensuring better
organization, accessibility, and compliance with record-keeping requirements.
Data Security: Advanced security measures, such as encryption and secure access controls, protect sensitive
financial data during the audit process.

Risks Involved in Conducting Remote Audits

1. Data Security and Privacy

o Cybersecurity Threats: Remote audits increase the risk of cybersecurity threats, such as data
breaches, hacking, and unauthorized access to sensitive financial information.
 o Privacy Concerns: Handling client data remotely may raise privacy concerns, especially in
jurisdictions with strict data protection regulations.
2. Technical Challenges
o Connectivity Issues: Reliable internet connectivity is crucial for remote auditing. Connectivity
issues can disrupt communication and access to client systems.
o Technical Competence: Both auditors and clients need to have a certain level of technical
competence to effectively use remote auditing tools and platforms.
3. Quality of Evidence
o Limited Physical Inspection: Remote auditing limits the ability to perform physical inspections
of assets and inventory, potentially affecting the quality of audit evidence.
o Verification Challenges: Verifying the authenticity of electronic documents and ensuring the
integrity of digital evidence can be more challenging in a remote audit.
4. Communication Barriers
o Reduced Face-to-Face Interaction: The lack of face-to-face interaction may hinder effective
communication and relationship-building between auditors and clients.
o Miscommunication Risks: Digital communication can sometimes lead to misunderstandings
or misinterpretations, affecting the clarity of audit instructions and findings.
5. Regulatory and Compliance Issues
o Jurisdictional Restrictions: Different jurisdictions may have varying regulations regarding
remote auditing, potentially complicating cross-border engagements.
o Compliance with Standards: Ensuring compliance with auditing standards and regulatory
requirements in a remote environment can be challenging, particularly when dealing with
complex or unfamiliar regulations.

strategies to mitigate Remote audit risks:

1. Enhance Data Security and Privacy

 Implement Strong Cybersecurity Measures:

o Encryption: Use encryption for data at rest and in transit to protect sensitive financial
information.
o Multi-Factor Authentication (MFA): Implement MFA to add an extra layer of security to
remote access systems.
o Regular Security Audits: Conduct regular security audits and vulnerability assessments to
identify and address potential security weaknesses.
 Secure Communication Channels:
o Use secure communication platforms for sharing sensitive information, such as encrypted
email services and secure file-sharing systems.
o Avoid using unsecured public Wi-Fi networks for accessing or transmitting sensitive data.
 Data Privacy Policies:
o Develop and enforce data privacy policies that comply with relevant data protection
regulations, such as GDPR or CCPA.
o Train staff on data privacy practices and the importance of safeguarding client information.

2. Address Technical Challenges

 Ensure Reliable Connectivity:

o Invest in high-quality internet connections and backup solutions to ensure reliable access to
client systems and data.
o Use virtual private networks (VPNs) to secure remote connections and protect data integrity.
 Provide Technical Support:
o Offer technical support to both audit teams and clients to assist with any technical issues that
may arise during remote audits.
 o Conduct pre-engagement checks to ensure that both the auditor's and client's technology
infrastructure can support remote auditing activities.

3. Maintain Quality of Audit Evidence

 Remote Verification Techniques:

o Use video conferencing tools to perform virtual inspections and observations when physical
inspections are not possible.
o Implement electronic signatures and digital authentication methods to verify the authenticity
of electronic documents.
 Detailed Documentation:
o Maintain comprehensive documentation of all audit procedures, evidence collected, and
communications with the client.
o Use electronic workpapers and audit management software to organize and store audit
documentation securely.

4. Enhance Communication and Collaboration

 Regular Communication:
o Schedule regular video calls and virtual meetings to maintain open lines of communication
with the client and audit team.
o Use collaborative platforms (e.g., Microsoft Teams, Slack) to facilitate real-time
communication and information sharing.
 Clear Communication Protocols:
o Establish clear protocols for communication, including response times, preferred
communication channels, and escalation procedures.
o Provide guidelines on effective virtual communication to ensure clarity and avoid
misunderstandings.

5. Ensure Compliance with Standards and Regulations

 Stay Updated on Regulations:

o Keep abreast of changes in auditing standards and regulations that may affect remote
auditing practices.
o Participate in training and professional development programs to stay informed about
regulatory requirements and best practices.
 Internal Quality Controls:
o Implement internal quality control measures to ensure compliance with auditing standards
and firm policies.
o Conduct peer reviews and quality assurance reviews to assess the effectiveness of remote
auditing procedures and identify areas for improvement.

Role of Internal Controls in Achieving Organizational Objectives

1. Safeguarding Assets:
o Physical Controls: Locks, safes, and security systems protect physical assets.
o Authorization Controls: Policies requiring authorization for asset use prevent unauthorized
access and misuse.
2. Ensuring Accurate and Reliable Financial Reporting:
o Segregation of Duties: Dividing responsibilities among different employees reduces the risk
of errors and fraud.
o Reconciliation: Regular reconciliations between different sets of records ensure accuracy and
completeness.
 3. Promoting Operational Efficiency:
o Standard Operating Procedures (SOPs): Well-defined SOPs streamline processes and reduce
inefficiencies.
o Performance Reviews: Regular performance reviews identify areas for improvement and
ensure operations align with objectives.
4. Ensuring Compliance:
o Compliance Controls: Policies and procedures ensure adherence to laws, regulations, and
internal policies.
o Internal Audits: Regular internal audits assess compliance and effectiveness of controls.
5. Improve Decision-Making:
o Provide accurate and timely financial information for better decision-making.
o Use data analytics to support strategic planning and forecasting.
6. Mitigate Risks:
o Identify and assess risks to the organization’s objectives.
o Implement controls to mitigate identified risks.
7. Enhance Reliability of Financial Reporting:
o Ensure completeness and accuracy of financial records.
o Conduct independent reviews and audits to verify the reliability of reports.
8. Strengthen Governance:
o Establish clear lines of responsibility and accountability.
o Enhance transparency and accountability in financial and operational activities.
9. Prevent and Detect Errors and Fraud:
o Implement controls to detect and prevent errors and fraudulent activities.
o Conduct regular audits and reviews to identify and address irregularities.

Challenges in Implementing an Effective System of Internal Controls

Implementing an effective system of internal controls presents several challenges:

1. Complexity and Scale:

o Large Organizations: Complex structures and multiple layers of operations make it difficult to
design and implement uniform controls.
o Changing Environments: Rapid changes in technology and business environments require
continuous adaptation of controls.
2. Cost Considerations:
o Resource Allocation: Designing and maintaining a robust system of controls can be costly and
resource-intensive.
o Cost-Benefit Analysis: Organizations must balance the cost of controls against the potential
benefits and risk mitigation.
3. Human Factors:
o Resistance to Change: Employees may resist new controls, especially if they are perceived as
burdensome or if they disrupt established workflows.
o Training and Awareness: Ensuring that all employees understand and comply with controls
requires ongoing training and communication.
4. Integration with Existing Systems:
o Compatibility Issues: Integrating new controls with existing systems and processes can be
challenging, especially if legacy systems are involved.
o System Overhauls: Significant changes may be needed to existing IT systems and processes
to implement new controls effectively.
5. Maintaining Flexibility:
o Balancing Control and Flexibility: Organizations need to balance the need for controls with
the need to remain flexible and agile in response to changing market conditions.
o Over-Control: Excessive controls can stifle innovation and slow down operations.
Overcoming Challenges in Implementing Effective Internal Controls

To overcome these challenges, organizations can adopt several strategies:

1. Risk-Based Approach:
o Prioritize Controls: Focus on areas with the highest risk to ensure that resources are allocated
efficiently.
o Continuous Risk Assessment: Regularly assess risks to identify new threats and adjust
controls accordingly.
2. Effective Change Management:
o Employee Involvement: Involve employees in the design and implementation of controls to
gain their buy-in and reduce resistance.
o Clear Communication: Communicate the purpose and benefits of controls clearly to all
employees.
3. Cost-Benefit Analysis:
o Evaluate Impact: Conduct thorough cost-benefit analyses to ensure that the benefits of
controls outweigh their costs.
o Scalable Solutions: Implement scalable controls that can be adjusted as the organization
grows and evolves.
4. Technology and Automation:
o Leverage Technology: Use technology to automate controls where possible, reducing the
burden on employees and increasing efficiency.
o Integrated Systems: Ensure that control systems are integrated with existing IT infrastructure
for seamless operation.
5. Regular Review and Improvement:
o Internal Audits: Conduct regular internal audits to assess the effectiveness of controls and
identify areas for improvement.
o Feedback Mechanisms: Establish feedback mechanisms for employees to report issues and
suggest improvements.
6. Training and Development:
o Continuous Training: Provide ongoing training to ensure employees understand the
importance of controls and how to comply with them.
o Skill Development: Invest in developing the skills of employees to effectively implement and
monitor controls.