CFAP 06 Ebook Part 2

ISAs – Summaries and Application Guide ISA 580
ISA 580
WRITTEN
REPRESENTATIONS
LO # LEARNING OBJECTIVE
LO 1 INTRODUCTION
LO 2 TYPES OF REPRESENTATIONS REQUESTED BY AUDITOR

LO 3 REPRESENTATIONS NOT PROVIDED BY MANAGEMENT
LO 4 DOUBTS AS TO RELIABILITY OF REPRESENTATIONS
1
LO 1: INTRODUCTION:
Definition:
Written Representation (also called management/client representation) is a written statement by
management to the auditor to confirm its responsibilities and to support other evidence.
From Whom to Obtain:

Written representations are requested from that management who is responsible for preparation
of financial statements, and has knowledge of relevant matters e.g. CEO, CFO or other equivalent
persons (rather than TCWG).
Date of Written Representation:

 As near as practicable to the date of audit report (but not after the report).
 If a representation is obtained during audit, updated representation should be obtained at
end.
Period Covered by Written Representation:

 Written representations shall be for all periods covered by auditor’s report (e.g. when
reporting under Comparative Financial Statements).
 If current management was not present during whole time, requirement to obtain
representation for all periods still applies.
Form of Written Representation:

In the form of representation letter, addressed to auditor. (required to be obtained in all audits)
Communication with TCWG:

Auditor is required to communicate to TCWG, the representations requested from management.
LO 2: TYPES OF REPRESENTATIONS REQUESTED BY AUDITOR:

Representations about Management’s Responsibilities:
Auditor shall request management to provide written representation:
1. About Preparation of financial statements i.e.
“it has fulfilled its responsibility for the preparation of the financial statements in
accordance with AFRF as set out in the terms of the audit engagement.”
2. About Information provided, and Completeness of transactions i.e.
(a) It has provided auditor with access to all relevant information, additional information
requested by auditor, and Unrestricted access to persons.
(b) All transactions have been recorded and are reflected in the financial statements.
Study Tip – Representation Not to be included Representation Letter

It is not necessary to include a representation about Management’s Responsibilities in representation letter
if law requires management to make written public statement about it (e.g. in directors’ report), and:
1. Statement has been made/approved by relevant management.
2. A copy of that statement is provided to auditor before the date of auditor’s report.
2
Other Representations:
Required by Other ISAs:
Area Representation Required
Assumptions & Estimates Significant assumptions and accounting estimates are reasonable. (ISA 540)
1. All related party relationships and transactions have been disclosed to the auditor.
Related Parties 2. All related party relationships and transactions have been accounted for and disclosed in
accordance with AFRF. (ISA 550)
All events subsequent to the date of financial statements, have been adjusted or disclosed.
Subsequent Events
(ISA 560)
The effects of uncorrected misstatements are immaterial, both individually and in the
Immaterial misstatements
aggregate. (ISA 450)
Management has disclosed to auditor:
 results of risk assessment relating to fraud.
Fraud  fraud or suspected fraud that management is aware and that affects the entity
whether involving management, employees or others.
 alleged fraud communicated by others. (ISA 240)
Management has disclosed to auditor non-compliance or suspected non-compliance with
Non-compliance with laws
laws and regulations affecting financial statements. (ISA 250)
1. All litigation and claims have been disclosed to the auditor.
Litigations 2. All litigation and claims have been accounted for and disclosed in accordance with AFRF.
(ISA 501)
Determined necessary by auditor: e.g.

1. Whether selection and application of accounting policies are appropriate.
2. Whether following matters have been appropriately recognized, measured, presented and
disclosed in accordance with AFRF:
 Plans or intentions that may affect the carrying value or classification of assets and
liabilities.
 Liabilities, both actual and contingent
 Compliance (or non-compliance) with contractual agreement affecting financial
statements.
 Title or charge/pledge on assets.
Exam Tip – Evaluating representations about Judgments, Intentions Plans of Management

Even if a matter relates to management’s judgments or intention, auditor has to evaluate them and
obtains evidence e.g. by considering ①Past history in carrying out stated intentions, ②Reason of
choosing particular course of action, ③Ability to pursue a specific course of action, ④Any other
information which is consistent or inconsistent with entity’s judgment and intention.
LO 3: REPRESENTATIONS NOT PROVIDED BY MANAGEMENT:

Representation Letter is required to be obtained in all audits.
Representations about Management’s Responsibilities not Provided:

Auditor is unable to obtain sufficient appropriate evidence, and effect is pervasive. Therefore,
auditor shall express Disclaimer of Opinion.
Other representation not provided:

Auditor is unable to obtain sufficient appropriate evidence. Auditor shall express Qualified Opinion
(if effect is material), or Disclaimer of Opinion (if effect is pervasive).
Auditor shall re-assess integrity of management, and shall determine its effect on reliability of other
representations and evidence in general.
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LO 4: DOUBTS AS TO RELIABILITY OF REPRESENTATIONS:
Situation Course of Action by Auditor

 The auditor shall discuss the matter with management, may
revise risk and, shall perform further procedures to resolve the
If written representation
matter.
is inconsistent with other
 If matter remains unresolved, auditor shall re-assess
evidence
competence, integrity of management and its effect on
reliability of representations and other evidence (in general).
 This may affect reliability of representations, and other
evidence (in general).
If auditor has concerns
 If auditor has serious concerns about competence/integrity of
about competence,
management, and risk of management misrepresentation is
integrity of management
very high, auditor may withdraw from management unless
TCWG take appropriate measures.
If written representations are unreliable, auditor shall modify his opinion.
Exam Tip
Sufficient Appropriate Evidence = Written Representation (if requested) + Other evidence
LO 5: MODIFICATION IN REPRESENTATIONS:
Modification in Representations:
If management modifies representation, this should alert auditor that significant issue may exist
e.g.:
Modification in Representation Implication
Management believes that, except for material non- Management has provided reliable written
compliance with a particular requirement of the applicable representations. However, the auditor is required to
financial reporting framework, the financial statements are consider the effect of the non-compliance on the opinion in
prepared in accordance with that framework. the auditor’s report.
Management believes that, except for information Management has provided reliable written
destroyed in a fire, it has provided the auditor with all representations. However, the auditor is required to
relevant information agreed in the terms of the audit consider the effect of information destroyed in the fire on
engagement. the opinion in the auditor’s report.
Use of Qualifying Language: i.e. “representations are made to the best of our knowledge and belief”
Such wording:
 is NOT acceptable for representations regarding Management’s Overall Responsibilities.
 is acceptable for other representations provided representations are made by that
management who:
o is responsible for preparation of financial statements, and
o has knowledge of relevant matters.
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ISA 600
SPECIAL CONSIDERATIONS—
AUDITS OF GROUP FINANCIAL
STATEMENTS
PART A – AUDIT OF GROUP FINANCIAL STATEMENTS

LO 1 DEFINITIONS AND RESPONSIBILITY
LO 2 UNDERSTANDING THE GROUP
LO 3 WORK TO BE PERFORMED IN A GROUP AUDIT
PART B – USING COMPONENT AUDITOR, OR ITS WORK

LO 4 UNDERSTANDING THE COMPONENT AUDITOR
LO 5 INVOLVEMENT IN THE WORK PERFORMED BY COMPONENT AUDITOR
LO 6 IF A COMPONENT IS ALREADY AUDITED
LO 7 COMMUNICATION, AND DOCUMENTATION
LO 8 RESTRICTION ON ACCESS TO INFORMATION
1
This standard applies on:

 Audit of group financial statements, or
 When auditor involves other auditor (even if it is not audit of group financial statements),
e.g. to observe the inventory count or inspect physical fixed assets at a remote location.
PART A – AUDIT OF GROUP FINANCIAL STATEMENTS
LO 1: DEFINITIONS AND RESPONSIBILITY:

Group financial statements:
Financial statements that include the financial information of more than one component.
Component:
An entity or business activity, for which financial information is prepared and included in the group
financial statements.
Examples include Subsidiaries, or Branches.
Component auditor:
An auditor who, at the request of the group engagement team, performs work on financial
information of a component.
Exam Tip
Like Expert, Component Auditor may be a person outside the firm or within the firm. In both cases,
firm has to evaluate its Competence, Ethics and Regulatory Environment.
Responsibility:
Group engagement partner has sole responsibility to express opinion on Group financial
statements.
For this purpose, Group engagement team obtains evidence:

 On all components (either itself, or through using component auditor or its work)
 On consolidation process
LO 2: UNDERSTANDING THE GROUP:

Auditor shall obtain an understanding:
 whether audit client has components,
 which of them are significant and which are non-significant.
Significant component:
Significant Component is a component:
a) that is of individual financial significance to the group, or
b) that, due to its specific nature or circumstances, is likely to include significant risks of
material misstatement in the group financial statements.
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LO 3: WORK TO BE PERFORMED IN A GROUP AUDIT:

Overall Audit Strategy and Audit Plan:
The group engagement team shall establish an overall group audit strategy and shall develop a
group audit plan, which shall be reviewed by group engagement partner.
Materiality:
Group Engagement team shall determine:
 Materiality and Performance materiality for Group Financial Statements.
 Materiality and Performance materiality for Components (which will be audited or
reviewed).
 Threshold below which misstatements are clearly trivial for group financial statements.
Materiality of components shall be lower than materiality for the group financial statements.
Different components may have different materiality levels.
If performance materiality is determined by component auditor, it shall be reviewed by Group
Auditor.
Procedures to be performed on components:

Nature of Component Procedures to be performed Who will perform
Significant on financial Group engagement team
Audit of component using component materiality.
basis or component auditor
 audit of component using component materiality or
 audit of one or more account balances or classes of Group engagement team
Significant on risk basis
transactions or or component auditor
 specific audit procedures relating to significant risk.
Analytical procedures at group level. If no risks are identified as
Not significant a result of analytical procedures, there is no need to perform Group engagement team
any further procedure.
For selected components:
 audit or review of component using component materiality
or
 audit of one or more account balances or classes of
transactions or
 specific audit procedures.
If all components of a Selection of components will vary over a period of time and will Group engagement team
group are non-significant depend on: or component auditor
 Whether component is comparatively significant.
 Whether the component has been newly formed or acquired.
 Whether significant changes have taken place in component.
 Whether abnormal fluctuations are identified by analytical
procedures.
 Whether the internal audit function has performed work at
the component.
3
Procedures to be performed on Consolidation Process:

Group engagement shall:
1. obtains understanding of consolidation process, and instructions issued by group
management to components.
2. Obtain understanding of group-wide controls, and shall test operating effectiveness of
these controls.
3. Evaluate whether all components have been included in the group financial statements.
4. Evaluate appropriateness, completeness and accuracy of consolidation adjustments and
reclassifications, particularly:
a. if component’s accounting policies are different.
b. if component’s year end is different.
5. Evaluate whether any fraud risk factors or indicators of possible management bias exist.
PART B – USING COMPONENT AUDITOR, OR ITS WORK
LO 4: UNDERSTANDING THE COMPONENT AUDITOR:

Understanding Component Auditor: (usually at acceptance stage)
Group engagement team shall obtain and document its understanding whether:
(i) component auditor is professionally competent
(ii) component auditor shall comply with ethical requirements relevant to Group Audit
(including independence).
(iii) Group engagement team shall be involved in the work of the component auditor.
(iv) component auditor operates in a regulatory environment that actively oversees auditor.
If there are serious concerns about matters (i to iii), component auditor shall not be engaged.
In other cases (e.g. when concerns are less than serious), component auditor can be engaged, and
concern shall be overcome by involvement in the work of component auditor.
Procedures to obtain understanding of component auditor:

In the First Year:
1. Discuss with component auditor
2. Request the component auditor to:
a. Complete the questionnaire about above matters
b. Confirm the above matters in writing
3. Discuss with knowledgeable colleagues and/or third parties
4. Obtain confirmation from professional bodies
5. Evaluate the results of quality control reviews of component auditor
In Subsequent years:
1. Understanding may be based on the group engagement team’s previous experience with the
component auditor
2. Group engagement team may request the component auditor to confirm any changes in
above matters
4
LO 5: INVOLVEMENT IN THE WORK PERFORMED BY COMPONENT AUDITOR:

Nature, timing and extent of involvement in the work of component auditor depends on
Significance of components, Identified significant risk and Understanding of component auditor.
If component is significant:
Group engagement team shall be involved in component’s risk assessment. For this purpose, it shall
 Discussing those business activities of component which are significant to the group.
 Discussing susceptibility of component to misstatement due to fraud or error.
 Reviewing component auditor’s documentation of identified significant risks for group
If significant risk is identified:

Group engagement team shall:
 Evaluate appropriateness of planned further audit procedures to respond to significant risk.
 Determine whether it is necessary to be involved in performance of further audit
procedures (based on understanding of component auditor).
LO 6: IF A COMPONENT IS ALREADY AUDITED:

Group engagement team shall decide whether to use that work by considering:
 Differences in the financial reporting framework.
 Differences in the auditing and other standards.
 Whether audit of component will be completed in time to meet the group reporting
timetable.
If group engagement team decides to use that audit, it shall evaluate the appropriateness of
following:
a) Materiality for the component’s financial statements as a whole and
b) Performance materiality at component level
LO 7: COMMUNICATION, AND DOCUMENTATION:

Communication with the Component Auditor:
From group auditor to component auditor From component auditor to group auditor
–Ethical requirements (specially independence). –Compliance with ethical requirements
–Form, content and extent of work to be –Compliance with instructions of group partner
performed by component auditor. –List of uncorrected misstatements
–Identified risk of material misstatement –Material weakness in internal controls
relevant to component auditor. –Instances of non-compliance with laws and
–List of related parties. regulations
5
Communication with TCWG of the Group:

The group engagement team shall communicate the following matters with those charged with
governance of the group:
 An overview of the type of work to be performed on the financial information of the
components.
 An overview of the nature of the group engagement team’s planned involvement in the
work to be performed by the component auditors on the financial information of
significant components.
 Any limitations on the group audit, for example, where the group engagement team’s
access to information may have been restricted.
 Fraud or suspected fraud involving group management, component management,
employees where the fraud resulted in a material misstatement of the group financial
statements.
Documentation:
1) Analysis of components (significant & non-significant)
2) Type of work performed on components.
3) Nature, timing and extent of group engagement team’s involvement in the work of
component auditor.
4) Written communication between group engagement team and component auditor.
LO 8: RESTRICTION ON ACCESS TO INFORMATION:

Where access to information is restricted:
 In case of significant component, Group Engagement Team will not be able to obtain
sufficient appropriate evidence.
 In case of non-significant component, Group Engagement Team may be able to obtain
sufficient appropriate evidence if:
o Group Engagement Team has a complete set of financial statements.
o Group Engagement Team has component auditor’s report.
o Group Engagement Team has access to information kept by management.
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ISA 610
USING THE WORK OF INTERNAL
AUDITORS
LO 1 INTRODUCTION
PART A – USING WORK OF INTERNAL AUDIT FUNCTION
LO 2 WHEN TO USE WORK OF INTERNAL AUDITOR
PROCEDURES TO DETERMINE ADEQUACY OF WORK OF INTERNAL AUDIT
LO 3
FUNCTION
LO 4 DISCUSSION, COMMUNICATION, AND DOCUMENTATION
PART B – OBTAINING DIRECT ASSISTANCE
LO 5 WHEN TO OBTAIN DIRECT ASSISTANCE
LO 6 PROCEDURES WHEN DIRECT ASSISTANCE IS OBTAINED
LO 7 AGREEMENTS, COMMUNICATION, AND DOCUMENTATION
1
LO 1: INTRODUCTION:
Definition: Internal Audit Function
Internal Audit Function is a function that performs assurance and consulting activities to evaluate
and improve the entity’s ①Governance, ②Risk Management and ③Internal Control.
Activities/Scope/Objectives/Functions/ Benefits of Internal Audit Function:

1. Activities relating to Governance:
Internal Audit Function may assess the governance process e.g. accountability within the
organization, effectiveness communication between TCWG, Management, Internal and External
Auditors.
2. Activities relating to Risk Management:

Internal Audit Function may evaluate significant exposure to risks and may also assist entity in
detection of fraud.
3. Activities relating to Internal Control:

i. Evaluation (or monitoring) of Internal Control:
Management has responsibility to design, implement and operate internal control. Internal
audit function performs tests and other procedures to provide assurance on internal control
and recommendation on improvements.
ii. Examination of financial information:

Internal audit function may be assigned to review financial and operating information. They
may perform inquiry and tests of details.
iii. Review of operating activities:

Internal audit function may be assigned to review economy, efficiency and effectiveness of
operating activities, including non-financial activities of entity. This is also called
Operational Audit, or Value for Money Audit or 3E’s Audit.
iv. Review of compliance with laws and regulations:

Internal audit function may be assigned to review whether entity is complying with applicable laws
and regulations (e.g. environmental laws, money laundering regulations), and other external and internal
requirements.
Comparison of internal auditor with external auditor:
Internal Auditor External Auditor

Relationship/Independence Employee of entity Independent of entity
Appointment By BOD/Audit Committee By Shareholders
Qualification Determined by BOD/Audit Committee Determined by Law
Objective is to evaluate and improve Objective is to express an opinion on
Scope / Objectives /
entity’s Governance, Risk Management and financial statements and on additional
Activities
Internal Control. matters required by law.
Scope/Objectives/ Activities
BOD/Audit Committee Determined by ISAs, Laws and Regulations
determined by
Reports To BOD/Audit Committee and his Reports to Members and his report is
Reporting
reports are restricted to them. publically available.
Format of Report Any (depending on circumstances) Determined by Law
2
Application:
This ISA does not apply if entity does not have an Internal Audit Function.
If an entity has internal audit function, external auditor may:

1. use work performed by internal audit function
2. obtain direct assistance (Direct assistance is the use of internal auditors to perform audit procedures under
the direction, supervision and review of the external auditor)
Auditor should avoid excessive use of internal auditors and should be sufficiently involved in the
audit because he has sole responsibility to express opinion.
PART A – USING WORK OF INTERNAL AUDIT FUNCTION
LO 2: WHEN TO USE WORK OF INTERNAL AUDITOR:

Determine Area and Extent of work to Use:
It depends on evaluation of internal auditor, and area involved.
Work of internal auditor will not be used (or less work will be used) if:
 there are issues regarding competence, objectivity or systematic and disciplined approach,
or
 risks, judgments and accounting estimates are involved in the area.
The higher the issues, the lesser the work that will be used.
Normally, work of internal audit function can be used in following areas:

a. Documentation of Accounting and internal control System.
b. Risk assessment performed by internal audit department.
c. Testing of the operating effectiveness of controls.
d. Substantive procedures involving limited judgment.
e. Observations of inventory counts.
f. Testing of compliance with regulatory requirements.
g. Tracing transactions throughout the information system.
h. Audit or review of components which are not significant.
3
Evaluating the Internal Audit Function:

External auditor shall determine whether work of internal audit function can be used by evaluating:
1. Level of Competence of internal audit function.
2. Whether organizational status support Objectivity of the internal auditor.
3. Whether internal audit function applies a Systematic and disciplined approach, including
quality control.
Factor to evaluate How to evaluate

 Whether internal auditors have adequate technical training and proficiency in auditing,
by considering Level of education, professional qualification and experience.
 Whether internal auditors are members of relevant professional bodies, and meet its
CPD requirements.
Competence of internal  Whether there are established policies for hiring, training and assigning internal
audit function auditors to different engagements.
 Whether internal auditors have knowledge of AFRF and industry specific knowledge
to perform work relating to financial statements.
 Whether internal audit function is adequately resourced relative to size of entity and
nature of its operations.
 Whether organizational status including function’s authority and accountability
supports Objectivity e.g. Function should report to TCWG (i.e. directors or audit
committee) and not to management (i.e. CFO, CEO, director finance or chief
accountant). If function reports to management, it must have direct access to TCWG.
 Employment decisions like hiring, firing or promotion of internal audit functions
should be made by TCWG, and not by management.
 Internal audit function should be free from conflicting responsibilities. They should
Objectivity of internal not perform any managerial or operational work.
audit function  Whether any restrictions are placed on internal audit function (e.g. to communicate its
findings to external auditor)
 Whether internal auditors are members of relevant professional bodies, and meet its
objectivity requirements.
 Whether there is familiarity threat i.e. there are family and personal relationships
with individuals to which work relates.
 Whether there is self-interest threat i.e. significant financial interest of internal
auditors in entity.
 Whether internal audit function has adequately documented work programs, and uses
it.
Systematic and
 Whether work of internal auditor is properly planned, performed, documented and
disciplined approach of
reviewed.
internal audit function
 Whether internal audit function has appropriate quality control policies and
procedures set by relevant professional body for internal auditors.
Work of internal audit function will not be used if there are significant issues regarding Competence,
Objectivity, or Approach.
Study Tip: Outsourcing

These requirements still apply, even if internal audit function is outsourced.
4
LO 3: PROCEDURES TO DETERMINE ADEQUACY OF WORK OF INTERNAL AUDIT

FUNCTION:
Auditor shall perform sufficient audit procedures on the body of work to determine its adequacy for
audit purposes, including evaluating whether:
 The work was properly planned, performed, reviewed and documented.
 Sufficient appropriate evidence was obtained, and
 Conclusions reached are appropriate, and reports prepared are consistent with results of
work performed.
For such evaluation, external auditor:

i. shall perform Reperformance of some of the work in some areas to validate conclusions.
a. Reperformance not required in all areas. Auditor should focus on areas of high risk
and judgment.
b. Auditor shall re-examine items already examined by internal auditor. If this is not
possible, then other similar items may be examined.
ii. may inquire internal auditors.
iii. may observe procedures performed by internal auditors.
iv. may inspect working papers prepared by internal auditors.
Nature, timing and extent of testing of such work will depend on risk and judgment of the area, and
competence and objectivity of internal audit function.
LO 4: DISCUSSION, COMMUNICATION, AND DOCUMENTATION:

Discussion:
If auditor plans to use the work of internal audit function, he shall:
 discuss the planned use of work with Function to coordinate their respective activities.
 read the reports relating to work, understand procedures performed and related findings.
Discussion with internal auditor should include following matters:

 the nature of procedures performed.
 the extent of audit coverage.
 methods of item selection and sample sizes.
 materiality and performance materiality.
 documentation of work performed.
Coordination will be effective if it takes places at appropriate intervals throughout the period.

External auditor shall communicate with TCWG how the external auditor has planned to use the
work of internal audit function.
Documentation:
If the external auditor uses the work of the internal audit, he shall document:
(a) The evaluation of competence, objectivity and systematic and disciplined approach of
internal audit function.
(b) The audit procedures performed to evaluate the adequacy of the work of internal auditor.
5
PART B – OBTAINING DIRECT ASSISTANCE
LO 5: WHEN TO OBTAIN DIRECT ASSISTANCE:

Nature and extent of work that can be assigned to internal auditor depends on evaluation of
internal auditor, and area involved.
External auditor shall not obtain direct assistance from internal auditor:
1. If direct assistance is prohibited by law or regulation.
2. If there are significant threats to objectivity of internal auditor.
3. Internal auditor lacks sufficient competence to perform the proposed work.
External auditor shall not obtain direct assistance from internal auditor in areas that:
 Involve significant judgments, or more than limited judgments (e.g. evaluation of adequacy
of provision for bad debts).
 Have higher risk of material misstatement. (e.g. discussion of fraud risk factors and
determination of unannounced audit procedures, controls over external confirmation and
evaluating its results)
 Relate to decision regarding internal audit function and use of its work.
 Relate to work with which the internal auditors have been involved, and which has already
been or will be reported to TCWG by the internal audit function (i.e. self-review threat
arises).
LO 6: PROCEDURES WHEN DIRECT ASSISTANCE IS OBTAINED:

External auditor shall direct, supervise and review work performed by internal auditor. In doing so:
 External auditor shall recognize that internal auditors are not independent of entity.
Therefore, direction supervision and review shall be of a different nature and more
extensive depending on risk, judgments involved, objectivity and competence of internal
auditor.
 Review procedures shall include checking back some of the work performed to the
underlying audit evidence.
LO 7: AGREEMENTS, COMMUNICATION, AND DOCUMENTATION:

Agreements:
Prior to using internal auditors to provide direct assistance, external auditor shall obtain written
agreement from:
 authorized representative of the entity that the internal auditors is allowed to follow the
external auditor’s instructions, and that the entity will not intervene in the work; and
 internal auditors that they will keep specific matters confidential, and will inform external
auditor of any threat to their objectivity.
6

External auditor shall communicate with TCWG nature and extent of planned use of internal
auditors to provide direct assistance.
Documentation:
(a) The evaluation of competence, and objectivity of internal audit function.
(b) The written agreements obtained from an authorized representative of the entity and from
internal auditors.
(c) The working papers prepared by the internal auditors who provided direct assistance.
(d) Who reviewed the work performed and the date and extent of that review.
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ISA 620
WORK OF EXPERT
LO 1 INTRODUCTION
PART A – USING INFORMATION PREPARED BY MANAGEMENT’S EXPERT

LO 2 EVALUATE COMPETENCE, CAPABILITIES AND OBJECTIVITY OF THAT EXPERT
LO 3 OBTAIN AN UNDERSTANDING OF WORK OF MANAGEMENT’S EXPERT
LO 4 EVALUATE THE APPROPRIATENESS OF EXPERT’S WORK
PART B – USING THE WORK OF AUDITOR’S EXPERT

EVALUATE COMPETENCE, CAPABILITIES AND OBJECTIVITY OF THE AUDITOR’S
LO 5
EXPERT
LO 6 OBTAIN AN UNDERSTANDING OF FIELD OF THAT EXPERT
LO 7 AGREEMENT WITH THE AUDITOR’S EXPERT
LO 8 EVALUATE THE ADEQUACY OF EXPERT’S WORK
LO 9 REFERENCE IN REPORT
1
LO 1: INTRODUCTION:
What is an Expert:
Expert is an individual or an organization possessing expertise in a field (other than accounting
or auditing).
There are two types of Experts:

1. Management’s Expert: Whose work is used by management to prepare financial statements.
2. Auditor’s Expert: Whose work is used by auditor to obtain evidence.
Expert may be either internal (i.e. employee) or external (i.e. engaged).
Areas where Expert may be used:

 Actuarial calculations (e.g. pension calculation)
 Engineering data (e.g. estimation of life of machinery)
 Valuations (e.g. valuation of fixed assets, or specialized inventory).
 Analysis of complex or unusual tax compliance issues.
 IT Expertise.
 Legal Opinions.
Determining whether to use (or need to hire) auditor’s expert:

This decision depends on:
1. Factors with regard to matter:
a. Significance of the matter.
b. Risk of the matter.
c. Nature of procedures to be performed to address risk.
2. Factors with regard to management’s expert:
a. Whether Management's expert is Competent, Capable, and Objective; and his work
is Appropriate.
b. Scope and objective of expert’s work
c. Entity’s controls over management’s expert
3. Availability of audit evidence (in which form, to what extent)
4. Whether auditor himself possesses necessary expertise (from his education, experience,
discussion with other auditors).
Auditor’s Responsibilities:
If auditor decides to use information prepared by Management’s Expert as audit evidence, auditor
is required to:
1. Evaluate competence, capabilities and objectivity of that expert.
2. Obtain an understanding of field of that expert.
3. Evaluate the appropriateness of expert’s work.
(ISA 500)
If auditor decides to use work of Auditor’ Expert, auditor is required to:
1. Evaluate Competence, Capabilities and Objectivity of the Auditor’s Expert
2. Obtain an understanding of field of that expert.
3. Make Agreement with the Auditor’s Expert
4. Evaluate the adequacy of expert’s work.
(ISA 620)
2
PART A – USING INFORMATION PREPARED BY MANAGEMENT’S EXPERT
LO 2: EVALUATE COMPETENCE, CAPABILITIES AND OBJECTIVITY OF THAT

EXPERT:
Competence relates to required knowledge and skills to perform tasks. Capability relates to the
ability to apply competence considering geographic location, and the availability of time and
resources. Objectivity relates to independence i.e. to make decisions without bias.
Matters relevant to evaluate Competence, Capability and Objectivity:

1. Whether there are professional or regulatory requirements applicable on management’s
expert (e.g. technical performance standards, or ethical standards).
2. Whether expert is specialist in that particular area of the field.
3. Whether expert has knowledge of relevant accounting requirements (e.g. assumptions and
methods to be used).
4. Whether subsequent audit evidence indicates it is necessary to revise evaluation.
5. Whether expert is internal or external. (if expert is internal, it may lack objectivity).
Sources of Information:
Information regarding competence, capabilities and objectivity of a management’s expert may come
from:
 Personal experience with previous work of that expert.
 Discussions with expert and management about any threat to independence of expert.
 Discussions with other auditors or others who are familiar with that expert’s work.
 Information from professional body or industry association.
 Published papers or books written by that expert.
LO 3: OBTAIN AN UNDERSTANDING OF WORK OF MANAGEMENT’S EXPERT:

Obtaining understanding of work of management’s expert includes:
1. Understanding of field of expert.
2. Evaluating the agreement between entity and expert
Understanding of field of expert:

Why:
To understand nature, scope and objective of expert’s work; and whether it will be adequate for
audit purposes.
How to obtain understanding:

Auditor may have understanding from his own education/experience, or he may discuss with that
expert.
3
Aspects of understanding:
Following are aspects of field that may be relevant to understand:
1. Whether expert’s field has area of specialty which is relevant to audit.
2. Internal and external data which expert uses.
3. Assumptions and methods used by expert, and whether they are accepted in the field of
expert and in financial reporting framework.
4. Whether there are professional or regulatory requirements which are applicable.
Evaluation of Agreement:
Evaluating the agreement will assist auditor in understanding following:
1. Nature, scope and objective of work.
2. Respective Roles and responsibilities of parties.
3. Nature, timing and extent of communication between both parties, and form of report to be
issued by expert.
Such an agreement may be written or verbal.
LO 4: EVALUATE THE APPROPRIATENESS OF EXPERT’S WORK:

Auditor shall evaluate the appropriateness of expert’s work by considering:
1. Relevance and reasonableness of expert’s findings and conclusions, and their consistency
with other audit evidence.
2. Relevance and reasonableness of significant assumptions and methods (if expert’s work
involves significant assumptions and methods).
3. Accuracy, Completeness, and Relevance of source data. (if expert’s work involves
significant use of source data).
4
PART B – USING THE WORK OF AUDITOR’S EXPERT
LO 5: EVALUATE COMPETENCE, CAPABILITIES AND OBJECTIVITY OF THE

AUDITOR’S EXPERT:
Matters relevant to evaluating Competence, Capability and Objectivity, and Sources of information
are same as in Part A.
In evaluating objectivity, following are additional points:

1. Management’s expert cannot used as auditor’s expert.
2. It will be appropriate to obtain written representation from external expert about any
interest or relationships which may cause threat to objectivity.
LO 6: OBTAIN AN UNDERSTANDING OF FIELD OF THAT EXPERT:

Same as in Part A.
LO 7: AGREEMENT WITH THE AUDITOR’S EXPERT:

Terms to be agreed:
Whether auditor’s expert is internal or external, auditor shall agree with him following matters:
1. The nature, scope and objectives of expert’s work.
2. The respective roles and responsibilities of the auditor and expert e.g.
a. Who will perform detailed testing of source data,
b. Consent of expert to discuss findings or conclusion with entity, details to be
included in modified opinion (if necessary).
c. Informing expert if auditor concludes expert’s work is not adequate
d. Access and Retention of working papers (if not agreed, expert’s working papers are
his own)
3. The nature, timing and extent of communication between the auditor and expert, including
the form of any report to be provided by that expert; and
4. Confidentiality requirements to be observed by expert. (confidentiality requirements, that
apply to auditor, also apply to expert).
Written or Not:
These terms are not required to be in written form.
However, it is better to have a written detailed agreement, particularly when:
 Client’s data is sensitive and confidential.
 Roles and responsibilities of auditor and expert are different from usually expected.
 Matter is highly complex, or significant.
 Auditor has not previously used work of that expert.
If agreement is not written, evidence of agreement should be included in the working papers.
5
LO 8: EVALUATE THE ADEQUACY OF EXPERT’S WORK:

Evaluating the Adequacy of Auditor’s Expert’s Work:
Auditor shall evaluate the appropriateness of expert’s work by considering:
1. Relevance and reasonableness of expert’s findings and conclusions, and their consistency
with other audit evidence.
2. Relevance and reasonableness of significant assumptions and methods (if expert’s work
involves significant assumptions and methods).
3. Accuracy, Completeness, and Relevance of source data. (if expert’s work involves
significant use of source data).
Exam Tip
Although it is unlikely that examiner ask detailed explanation of above matters, however if so, you will refer
to “ISA 620 – A33 to A39”.
If work is not adequate:

If auditor determines that the work of expert is not adequate, auditor shall perform additional audit
procedures e.g.:
 Agreeing with expert additional work to be performed by both expert and auditor.
 Engaging another expert.
If still sufficient appropriate evidence is not obtained, auditor shall express modified opinion
because he has not obtained sufficient appropriate audit evidence.
LO 9: REFERENCE IN REPORT:
Auditor is solely responsible to express opinion and sign the audit report. He shall NOT include
reference to the work of expert in audit report unless:
1. it is required by Law or Regulation (e.g. in case of Key Audit Matter), or
2. such reference is relevant to explain nature of modified opinion.
If such reference is included in report, the auditor’s report shall indicate that the reference does not
reduce the auditor’s responsibility for audit opinion. Further, auditor may need the permission of
the auditor’s expert before making such a reference.
6
ISA 700
FORMING AN OPINION AND
REPORTING ON FINANCIAL
STATEMENTS
LO 1 INTRODUCTION
LO 2 ELEMENTS OF AUDITOR’S REPORT
LO 3 SUPPLEMENTARY INFORMATION
LO 4 APPLICABLE FINANCIAL REPORTING FRAMEWORK
1
LO 1: INTRODUCTION:
Scope:
ISA 700 deals with audit of Complete Set of General Purpose Financial Statements.
 If financial statements are Special Purpose, ISA 800 applies.
 If financial statements are not Complete Set (e.g Single F/S or Element), ISA 805 applies.
 If it is summary financial statements, ISA 810 applies.
LO 2: ELEMENTS OF AUDITOR’S REPORT:

Auditor’s Report is always in written form (in hard copy or electronic form), with following
elements:
Title:
The auditor’s report shall have a title that clearly indicates that it is “independent auditor’s report”.
Title is necessary to differentiate auditor’s report from other reports e.g. directors’ report.
Addressee
The auditor’s report shall be addressed as required by law or as appropriate in circumstances.
Report is usually addressed to shareholders or TCWG.
Opinion:
This section shall first state introductory information i.e. auditor has audited, and shall sate entity,
financial statements (identifying title of each statement) and period covered by F/S.
Then, this section shall state auditor’s opinion i.e. whether financial statements have been prepared
in accordance with AFRF and give true and fair view.
Basis for Opinion:

This section shall be presented immediately after Opinion section.
Drafting Example of Unmodified Opinion and Basis of Opinion

Opinion
We have audited the financial statements of ABC Company (the Company), which comprise the
statement of financial position as at December 31, 20X1, and the statement of comprehensive income,
statement of changes in equity and statement of cash flows for the year then ended, and notes to the
financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying financial statements give a true and fair view of the financial position
of the Company as at December 31, 20X1, and of its financial performance and its cash flows for the
year then ended in accordance with International Financial Reporting Standards (IFRSs).
Basis for Opinion

(If auditor expresses modified opinion, nature of misstatement/scope limitation will be explained here)
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our
responsibilities under those standards are further described in the Auditor’s Responsibilities for the
Audit of the Financial Statements section of our report. We are independent of the Company in
accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for
Professional Accountants (the Code) and we have fulfilled our other ethical responsibilities in
accordance with the Code. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
2
Material Uncertainty relating to Going Concern: (if relevant)

This section will be discussed in ISA 570.
“Emphasis of Matter” Paragraph: (if relevant)

Key Audit Matters:

This section will be discussed in detail in ISA 701.
Other Information and Auditor’s Report Thereon:

This section will be discussed in detail in ISA 720.
Responsibilities of Management and TCWG for the Financial Statements:

This section shall describe management’s responsibility for ①Financial Statements, ② Internal
Control and ③Going Concern.
If TCWG are different from management, their responsibility for oversight of financial reporting
process shall also be mentioned.
Auditor’s Responsibilities for the Audit of the Financial Statements:

This section shall state overall objective of the auditor is to obtain reasonable assurance whether
financial statements are free from material misstatements, and to issue report.
This section shall “A further description of the auditor’s responsibilities” i.e.

 Discussion on reasonable assurance, materiality, and scope of audit.
 Responsibility to communicate to communicate planned scope and timing of the audit and
significant audit findings to TCWG.
 Responsibility in case of Listed Audit (to communicate Statement of compliance with ethical
requirements and Key Audit Matters to TCWG).
 Responsibility in case of Group Audit.
(For details refer to Sample Auditor’s Report)
Location of the description of the auditor’s responsibilities

Further description of the auditor’s responsibilities may be included:
(a) Within the body of the auditor’s report, or
(b) As an appendix to the auditor’s report, or
(c) on a website of an appropriate authority, (if expressly permitted by law or regulation) ***.
In case of (b) and (c), reference to the location shall be included in audit report.
*** An appropriate authority could be a national auditing standard setter, regulator or an audit oversight
body. Auditor cannot maintain such a website.
Example: If auditor elects to refer to website of appropriate authority*

Auditor’s Responsibilities for the Audit of the Financial Statements:
Our objectives are to obtain reasonable assurance about ……….
A further description of the auditor’s responsibilities for the audit of the financial statements is located
at [Organization’s] website at: [website link].This description forms part of our auditor’s report.
3
Other Reporting Responsibilities:

If auditor is required by law to report on additional matters, then auditor’s report will have two
separate sections:
1. “Report on the Audit of the Financial Statements”, and
2. “Report on Other Legal and Regulatory Requirements”. (such matters can be reported either
explicitly or by exception)
In Pakistan, statutory auditor reports on following Other Legal and Regulatory Requirements:
 Whether proper books of accounts have been kept as required by Companies Act.
 Whether financial statements are drawn up conformity with the Companies Act and are in agreement with the
books of account and returns.
 Whether investments made, expenditure incurred and guarantees extended during the year were for the
purpose of the Company’s business.
 Whether Zakat deductible at source, was deducted by the company and deposited in the Central Zakat Fund
“Other Matter” Paragraph: (if relevant)

Signature:
Audit report shall be signed in the name of audit firm, or in the personal name of auditor or both as
appropriate in local jurisdiction.
Local laws may also allow electronic signature.
Name:
For listed entities, ISAs require to include name of engagement partner, unless there is significant
personal security threat to engagement team members or their close relatives. However, a threat of
legal liability or sanction does not justify omission of name.
Local regulations may specify additional requirements e.g. to include license number.
Date of the Auditor’s Report:

The date of audit report should not be earlier than the date on which auditor obtains sufficient
appropriate evidence on which his report is based (including evidence that financial statement
have been approved by appropriate authority i.e. BOD). However, final approval by shareholders to
issue financial statements publicly is not necessary in this regard.
Date also indicates that auditor has considered the effect of subsequent events on financial
statements upto that date.
Auditor’s Address:
The auditor’s report shall state the location (usually city name) where the auditor practices.
4
Auditor’s Report Prescribed by Law or Regulation

If layout/wording of local audit report is different from ISAs (particularly opinion), auditor shall evaluate
whether users may misunderstand assurance obtained from audit and whether additional explanation
in auditor’s report can mitigate this misunderstanding.
If additional explanation cannot mitigate misunderstanding, auditor shall not accept audit engagement, or
shall not state compliance with ISAs in report (when engagement is required by law)
Audit conducted in accordance with Both “ISAs” and “National Standards on Auditing”
Audit report shall state compliance with both standards only if:
 Jurisdiction of national standards is identified.
 Both standards reach same opinion,
 EOM/OM Paragraph is included in report (if required by ISAs), and
 Audit report includes minimum elements required by ISAs. (ISA 700.50)
If there is a conflict in above requirements, auditor shall refer only to one standard (whichever is complied).
Order of Elements
ISAs do not require ordering of elements of audit report, except for Opinion (first) and Basis for
Opinion (after opinion) Sections. However, ISAs require use of specific headings.
LO 3: SUPPLEMENTARY INFORMATION:
Definition:
Supplementary information is the additional information which not required by AFRF but is
presented with financial statements.
1. If supplementary information is clearly differentiated, it shall not be audited, and shall be
treated as “Other Information”.
2. If supplementary information becomes integral part of financial statements (to its nature or
presentation):
a. it shall be audited, or
b. auditor shall state in audit report that it is not audited.
How to differentiate supplementary information:

 By Removing cross reference with financial statements.
 By placing it outside financial statements, or
 By placing it at end of the required notes and labeling it “unaudited”.
Examples
 If financial statements refer to a note which includes an explanation or reconciliation of a matter
(e.g. compliance with another framework), it will become integral part of financial statements.
 Additional disclosures included as Appendix to the F/S may be considered clearly differentiated.
5
LO 4: APPLICABLE FINANCIAL REPORTING FRAMEWORK (AFRF):

Applicable Financial Reporting Framework:
AFRF means basis on which management has prepared financial statements. It should be
adequately described in financial statements.
Variations in AFRF:
Situation Requirement
 Compliance with an AFRF can only be stated if all requirements of that framework
are met.
Use of a particular AFRF
 Qualifying or limiting language is not allowed e.g. “Financial statements are in
substantial compliance with IFRS”.
Both (i.e. Financial Reporting framework and Additional requirements by law) are
If financial reporting standards are considered AFRF provided they do not conflict e.g.
Supplemented by Law or Regulation. “The financial statements give true and fair view …. in accordance with IFRS and the
requirements of Companies Act of Jurisdiction X.”
Financial statements are prepared in
accordance with One framework, and
Disclosure regarding extent of compliance with another framework is considered
disclose in notes extent of compliance
Supplementary Information.
with another framework
(e.g. IFRS + Tax basis).
Such description is appropriate only if all requirements of each framework are met
separately, without any reconciling statement.
Financial statements are prepared in
In such case, two opinions are expressed in the audit report:
accordance with Two frameworks
 Separately or in a single sentence e.g. “The financial statements give true and
(e.g. IFRS and National Framework)
fair view …. in accordance with IFRS and Accounting Principles generally
accepted in Jurisdiction X.”
 One opinion may be unmodified and other may be modified (e.g. adverse).
6
Independent Auditor’s Report to the members of
Colgate-Palmolive (Pakistan) Limited
Report on the Audit of the Financial Statements
Opinion
We have audited the annexed financial statements of Colgate-Palmolive (Pakistan) Limited (the Company), which
comprise the statement of financial position as at June 30, 2018, and the statement of profit or loss and other
comprehensive income, the statement of changes in equity, the statement of cash flows for the year then ended,
and notes to the financial statements, including a summary of significant accounting policies and other explanatory
information, 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 the audit.
In our opinion and to the best of our information and according to the explanations given to us, the statement of
financial position, the statement of profit or loss and other comprehensive income, the statement of changes in
equity and the statement of cash flows together with the notes forming part thereof conform with the accounting
and reporting standards as applicable in Pakistan and give the information required by the Companies Act, 2017
(XIX of 2017), in the manner so required and respectively give a true and fair view of the state of the Company’s
affairs as at June 30, 2018 and of the profit and other comprehensive loss, the changes in equity and its cash flows
for the year then ended.
Basis for Opinion
We conducted our audit in accordance with International Standards on Auditing (ISAs) as applicable in Pakistan.
Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit
of the Financial Statements section of our report. We are independent of the Company in accordance with the
International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants as adopted by
the Institute of Chartered Accountants of Pakistan (the Code) and we have fulfilled our other ethical responsibilities
in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the
financial statements of the current year. These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these
matters.
36
S. No. Key Audit Matters How the matter was addressed in our
audit
(ii) The Company’s exposure to litigation risk
The Company is exposed to different laws, Our audit procedures included the following:
regulations and interpretations thereof and
hence, there is a litigation risk. In our judgement, • Obtaining understanding of the Company’s
the Company has significant litigation cases in processes and controls over litigations through
respect of claim of exemption from duties and meetings with the management and review
taxes on import of a raw material, valuation of the minutes of the Board of Directors and
of an imported product and levy of Gas Board Audit Committee.
Infrastructure Development Cess, details of
which are disclosed in notes 24.1.3 to 24.1.5 • Reading correspondence of the Company with
to the annexed financial statements. regulatory departments and the Company’s
external counsel, where applicable. Where
Given the nature and amounts involved in such relevant, also assessing external legal advices
cases and the appellate forums at which these obtained by the Company.
are pending, the ultimate outcome and the
resultant accounting in the financial statements • Discussing open matters and developments
is subject to significant judgement, which can with the in-house legal department personnel
change over time as new facts emerge and of the Company.
each legal case progresses, and therefore, we
have identified this as key audit matter. • Circularising external confirmations, where
appropriate, on material cases and assessing
the replies received thereto.
• Whilst noting the inherent uncertainties involved

with the legal and regulatory matters, assessing
the appropriateness of the related disclosures
made in the annexed financial statements.
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 annual 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.
38
Responsibilities of Management and Board of Directors for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with
the accounting and reporting standards as applicable in Pakistan and the requirements of Companies Act, 2017
(XIX of 2017) and for such internal control as management determines is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Company’s ability to continue
as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis
of accounting unless management either intends to liquidate the Company or to cease operations, or has no
realistic alternative but to do so.
Board of directors are responsible for overseeing the Company’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance
with ISAs as applicable in Pakistan will always detect a material misstatement when it exists. Misstatements can
arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with ISAs as applicable in Pakistan, we exercise professional judgment and
maintain professional skepticism throughout the audit. We also:
• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient
and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting
from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit 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
Company’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates
and related disclosures made by management.
• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based
on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may
cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material
uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the
financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based
on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions
may cause the Company to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures,
and whether the financial statements represent the underlying transactions and events in a manner that
achieves fair presentation.
39
We communicate with the board of directors regarding, among other matters, the planned scope and timing of the
audit and significant audit findings, including any significant deficiencies in internal control that we identify during
our audit.
We also provide the board of directors with a statement that we have complied with relevant ethical requirements
regarding independence, and to communicate with them all relationships and other matters that may reasonably
be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with the board of directors, we determine those matters that were of most
significance in the audit of the financial statements of the current period and are therefore the key audit matters. We
describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter
or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report
because the adverse consequences of doing so would reasonably be expected to outweigh the public interest
benefits of such communication.
Report on Other Legal and Regulatory Requirements
Based on our audit, we further report that in our opinion:
(a) proper books of account have been kept by the Company as required by the Companies Act, 2017 (XIX
of 2017);
(b) the statement of financial position, the statement of profit or loss and other comprehensive income, the
statement of changes in equity and the statement of cash flows together with the notes thereon have been
drawn up in conformity with the Companies Act, 2017 (XIX of 2017) and are in agreement with the books
of account and returns;
(c) investments made, expenditure incurred and guarantees extended during the year were for the purpose
of the Company’s business; and
(d) 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.
The engagement partner on the audit resulting in this independent auditor’s report is Khurshid Hasan.
Chartered Accountants
Karachi, July 27, 2018
40
ISA 701
KEY AUDIT MATTERS
IN AUDIT REPORT
LO 1 WHEN TO INCLUDE KEY AUDIT MATTER SECTION IN REPORT

LO 2 DETERMINATION OF KEY AUDIT MATTERS (KAMs)
LO 3 COMMUNICATING KEY AUDIT MATTERS (KAM) IN REPORT
LO 4 COMMUNICATING WITH TCWG AND DOCUMENTATION
LO 5 EXAMPLES OF COMMON KEY AUDIT MATTERS AND DRAFTING
LO 6 LIST OF SECTOR-WISE KEY AUDIT MATTERS
1
LO 1: WHEN TO INCLUDE KEY AUDIT MATTER SECTION IN REPORT:

Key Audit Matter Section is required to be included for audits of complete sets of general
purpose financial statements of listed entities.
Exceptions of the above rule:

1. If auditor expresses disclaimer of opinion, Key Audit Matter Section will not be included in
auditor’s report, unless required by law.
2. Audit report of an Unlisted Company may also include KAM section if it is required by law
or is considered necessary by auditor (e.g. in case of public interest entities like banks,
insurance companies, pension funds and charities).
LO 2: DETERMINATION OF KEY AUDIT MATTERS (KAMs):

What are “Key audit matters”:
Those matters that, in the auditor’s professional judgment, were of most significance in the audit
of the financial statements of the current period***. Key audit matters are selected from matters
communicated with TCWG.
***even if comparative financial statements are presented.
Determining the key audit matters:

Determining Key Audit Matter involves Three steps:
1. From matters communicated with TCWG,
2. Auditor determines which matters required significant auditor attention in performing
audit. (matters to consider are listed below)
3. Auditor determines which of the above matters (determined in ‘2’ above) are most
significant, and therefore, are key audit matters.
Study Tip: Matters which require significant auditor attention

 Areas of higher risks or significant risks as per ISA 315*** e.g.
o Accounting estimates having high estimation uncertainty (valuation of complex financial
instruments), or
o Accounting policies or changes which significantly affect F/S particularly when not
consistent with industry).
 Areas of significant auditor judgments
 Areas of complexity and significant management judgment.
 Areas involving experts.
 Significant events or transactions that occurred during the period.
 Significant transactions with related parties or outside the normal course of business.
*** However, some significant risks may not be KAM e.g. risk of fraud in revenue recognition, and risk of
management override of controls are presumed significant risk, but may not be KAM.
2
Study Tip – How many KAMs

1. Significance depends on relative importance, therefore it is likely that atleast one matter will be
considered KAM. How many KAMs depends on auditor’s judgment based on size and complexity of entity,
nature of business, and circumstances of audit engagement. A lengthy list is not recommended.
2. In limited circumstances, a listed company may not have any key audit matter (e.g. a listed entity with
very limited operations may not have any matter that required significant auditor attention).
3. If a matter determined to be a KAM is also fundamental for users’ understanding of F/S, it will be reported
as KAM but prominently (e.g. at first place).
LO 3: COMMUNICATING KEY AUDIT MATTERS (KAM) IN REPORT:

Key Audit Matters are described in audit report under the heading “Key Audit Matters” (using
appropriate subheading for each KAM).
Key Audit Matters (main heading):

Introductory language in this section shall state that:
“Key audit matters are those matters that, in our professional judgment, were of most significance in
the audit of the financial statements of current period. These matters were addressed in the context of
audit of the financial statements as a whole, and in forming the auditor’s opinion thereon, and we do
not provide a separate opinion on these matters.
Further statement in this section depends on circumstances:
Modified Opinion/
Key Audit Matters Going Concern Statement to be added
Uncertainty
We have determined the matters described below to be Key Audit Matters
 X to be communicate in our report.
In addition to the matters described in the Basis for Qualified/Adverse
Opinion section or Material Uncertainty Related to Going Concern
  section***, We have determined the matters described below to be the key
audit matters to communicate in our report.
Except for the matter described in the Basis for Qualified/Adverse Opinion
section or Material Uncertainty Related to Going Concern section***, We
x  have determined that there are no other key audit matters to communicate
in our report.
We have determined that there are no key audit matters to communicate in
x x our report.
*** This is so because Modified Opinion/Going Concern Uncertainty are, by definition, KAMs but are described in
their respective sections (NOT in KAM section).
Description of Individual Key Audit Matters (for each KAM):

Auditor shall give a sub-heading for each individual KAM and shall describe:
1. What is the KAM i.e. auditor shall briefly describe matter alongwith reference to related
disclosure in F/S (if any***).
2. Why the matter was considered most significant in audit.
3. How the matter was addressed in audit e.g. a brief overview of procedures performed (or
an indication of the outcome of the auditor’s procedures, or key observations with respect
to the matter, or aspects of auditor’s response/approach relevant to matter).
*** Some matters may not be required to be disclosed in F/S but may be KAM e.g. Implementation of a new IT System (or
significant changes to existing IT system) affecting F/S.
3
Tips for drafting KAM

1. Description of KAM should not imply that auditor expresses separate opinion on KAMs (particularly when
Adverse Opinion is expressed.
2. Use of highly technical auditing terms should be avoided.
3. If it is necessary to include additional information, auditor should encourage management to disclose
additional information in F/S, rather than auditor providing original information in report.
Placement of KAM Section:

To make it prominent, KAM section should be placed closely to the auditor’s opinion.
Order of individual matters within KAM section:

Order of presentation depends on professional judgment of auditor e.g. these may be presented
 In order of relative importance.
 In order in which matters are disclosed in financial statements.
Study Tips
1. Key Audit Matter is not a substitute for ①Disclosures in F/S, ②Modified Opinion, ③Material Uncertainty
relating to Going Concern, and ④Separate opinion on single element.
2. A matter reported as KAM in last year, may also be reported this year if it meets criteria.
3. A matter determined to be KAM is not communicated in report if ①Law or regulation precludes public
disclosure about a specific matter (e.g. when a public communication may prejudice investigation of illegal
act), or ②in rare cases, auditor determines that adverse consequences of communication (e.g. harm to
entity’s commercial negotiations or competitive position) will outweigh the public interest benefits.
LO 4: COMMUNICATING WITH TCWG AND DOCUMENTATION:

Audit Documentation:
Auditor shall document:
 Matters that required significant auditor attention, and reasoning whether or not each of
them is KAM or not.
 Reasoning if auditor determines that a matter is KAM but will not be communicated in
report.

Auditor shall communicate with TCWG:
 Matters determined to be KAM, or
 Auditor’s determination that there are no KAM.
Auditor may communicate to TCWG preliminary view of matters likely to be KAM, however this
view may change and final determination depends on evidence obtained throughout the audit.
4
LO 5: EXAMPLES OF COMMON KEY AUDIT MATTERS AND DRAFTING:

Examples:
1. Goodwill, Intangible Assets, Deferred Tax.
2. Assets carried at revalued amounts e.g. Property, Investments, Specialized Inventory,
3. Valuation of liabilities e.g. financial instruments, retirement obligations (Pension or Gratuity).
4. Significant accounting policies
5. Areas where work of Expert or Component auditor is used.
6. Acquisition and disposals of business units,
7. Restructuring of business (Non-current assets held for sale, Restructuring provision)
8. Significant number of litigations and tax contingencies.
9. Significant related party transactions.
10. Share-based payments.
Other areas (e.g. Revenue, additions to PPE, Inventory, Debtors, Long-term loan) may also be KAM
if they meet criteria.
Drafting:
Key Audit Matter How the matter was addressed in our audit
1. Revenue:  Considered whether revenue recognition policy of
Refer note xxx to the financial statements. company is appropriate in accordance with applicable
accounting standards.
The company recognized revenue from sale of Rs. xxx.  Performed tests of controls over recording of revenue.
 For sales recorded during the year, we verified a sample
We identified revenue as a Key Audit Matter because this of revenue transactions with sales orders, sales invoices,
is a key performance indicator of company and there is an GDN and other underlying documents.
inherent risk that revenue may be misstated to meet  Checked sales recorded at year end and credit notes
expectations or targets. issued after the year end, to assess whether these have
been recorded in appropriate periods.
 Assessed the adequacy of disclosures related to Revenue
in notes to the accounts.
2. Goodwill:
Refer note xxx to the financial statements.
 Used an expert to evaluate assumptions and
Company has recorded Goodwill amounting Rs. xxx. methodologies used by company.
 Evaluated appropriateness of assumptions (e.g. sales
We identified Goodwill as a Key Audit Matter because its volume, prices, operating cost, growth rates) by
amount is material to the financial statements. In addition, comparing with our own assessment based on our
annual testing of impairment of goodwill is a highly knowledge of client and industry.
complex and judgmental process which involves  Assessed the adequacy of disclosures related to Goodwill
assumptions and methods affected by future economic in notes to the accounts.
and market conditions.
3. Revaluation of PPE: (similar for revaluation of

investment property and impairment)
Refer note xxx to the financial statements.  Assessed competence, capability and objectivity of
expert.
Company has recorded its land, building and machinery at  Obtained revaluation report from valuer and discussed
revalued amounts. with management and expert appropriateness of
assumptions and methodologies used.
We identified Revaluation of PPE as a Key Audit Matter  Checked relevance, completeness and accuracy of source
because its amount is material to the financial statements. data.
In addition, process of valuation is a highly complex and  Ensured that revaluation is properly accounted for and
judgmental process which involves assumptions and disclosed in financial statements.
methods affected by future economic and market
conditions.
5
4. Additions to PPE:
 Obtained understanding of controls of management over
authorization and recording of capital expenditure, and
performed tests of controls.
Company has made significant capital expenditure on
 On a sample basis, tested cost incurred with supporting
PPE.
documents and contracts. Also analyzed nature of
expenditure to evaluate whether expenditure meets
We identified addition/capitalization to PPE as a Key
criteria for capitalization as per applicable accounting
Audit Matter because there may be misclassification
standards.
between capital and revenue expenditure. Further, there
 Inspected supporting documents to ensure it has been
may also be implications on depreciation expense because
capitalized from date when asset was ready for intended
of this misclassification.
use.
 Assessed reasonableness of useful life of fixed asset.
 Tested calculation of depreciation expense.
5. Non-current assets held for sale:
 Discussed with management regarding their plan to
dispose-off the asset. Checked status of sales process and
reviewed correspondence with prospective buyers.
Company has classified some of its non-current assets as
 Reviewed board-minutes to confirm approval of disposal
held for sale.
of assets.
 Assessed competence, capability and objectivity of
We identified non-current assets held for sale as a Key
expert.
Audit Matter because this is a non-routine transaction,
 Obtained revaluation report from valuer and discussed
involving significant management judgments. Further,
with management and expert appropriateness of
there are also requirements regarding determination of
assumptions and methodologies used.
fair value, presentation and disclosures relating to assets
 Assessed the adequacy of disclosures related to non-
held for sale.
current assets held for sale in notes to the accounts.
6. Tax contingencies:  We circularized confirmation to company’s external tax
Refer note xxx to the financial statements. consultants for their views on tax assessment, and
discussed the rationale and justification of their views.
Company has a number of tax contingencies.  We used our own tax specialist to consider the level of
provision required considering nature of case, legal
We identified tax contingencies as a Key Audit Matter precedents, and company’s correspondence with the tax
because of significance of amounts involved, and authorities.
judgments involved to assess the outcome (i.e. level of  We analyzed significant changes from prior period.
provisions and disclosures) of tax litigations.  Assessed the adequacy of disclosures related to tax
contingencies in notes to the accounts.
7. Completeness and valuation of Litigations & Claims:  We assessed management’s process to identify new
Refer note xxx to the financial statements. obligations, and changes in existing obligations.
 We used our own legal expert to consider the level of
Company has a number of pending litigations. provision required considering nature of case, legal
precedents, and company’s correspondence with
We identified pending litigations as a Key Audit Matter opponents.
because of significance of amounts involved, and  We circularized confirmation to company’s external legal
judgments involved to assess the outcome (i.e. level of consultants for their views on pending litigations, and
provisions and disclosures) of pending litigations. discussed the rationale and justification of their views.
 We analyzed significant changes from prior period.
 Assessed the adequacy of disclosures related to pending
litigations in notes to the accounts.
8. Retirement benefits:
 Assessed competence, capability and objectivity of
actuarial expert.
Company operates defined benefit plans for its
 Obtained actuarial report from expert and discussed with
employees.
management and expert appropriateness of assumptions
We identified retirement benefits as a Key Audit Matter
and methodologies used.
because assessment of present value of defined benefit
 Checked relevance, completeness and accuracy of source
obligation involves use of assumptions which are
data.
inherently complex and require specialist actuarial input
 Ensured that actuarial valuation report is properly
(e.g. expected annual increment in salaries, mortality
accounted for and disclosed in financial statements.
rates, discount rates). Changes in these assumptions can
have material impact on calculation of liability.
6
9. Deferred Tax:
 Performed substantive procedures on calculation of
deferred tax balances, based on tax regulations.
Company has recognized deferred tax amounting Rs. xxx.
 Performed analysis of recoverability of deferred tax
assets, and evaluated company’s assumptions and
We identified Deferred Tax as a Key Audit Matter because
estimates in generating sufficient future taxable profits.
its amount is material and assessment process is a highly
 Used an internal tax specialist to support us in these
complex and judgmental which involves assumptions and
procedures.
methods affected by future economic and market
 Assessed the adequacy of disclosures related to deferred
conditions.
tax in notes to the accounts.
10. Related party transactions and disclosures:  Obtained understanding of controls over identification,
Refer note xxx to the financial statements. recording and disclosure of related party transactions.
Also, tested such controls.
Company has many related party transactions mainly  Inspected minutes of BOD meetings and shareholders’
with subsidiaries and associated companies. meetings to understand nature and approval of
transactions.
We identified related party transactions as a Key Audit  On a sample basis, compared transactions with related
Matter because of nature of such transactions and its parties with underlying supporting documents and
significance to the financial statements as a whole. agreements.
 Obtained confirmation (on sample basis) from related
parties for transactions and balances.
 Assessed the adequacy of disclosures related to related
parties in notes to the accounts.
11. Long term loan:  We reviewed loan agreement and inquired management
Refer note xxx to the financial statements. about compliance with covenants. Also performed tests
of controls related to such compliance.
Company has long term loan amounting Rs. xxx.  We circularized confirmations to lenders to confirm
outstanding balance and other terms and conditions.
We identified long term loan as a Key Audit Matter  We also reviewed maturity dates of loans to ensure
because amount involved is significance and there are proper classification between current and non-current
debt-covenants which company is required to comply. liabilities.
 Assessed the adequacy of disclosures related to long
term loan in notes to the accounts.
12. Inventories:  We performed physical verification of inventory counts.
Refer note xxx to the financial statements.  We compared, on sample basis, cost of purchased
inventory with supporting documents.
Company has inventory amounting Rs. xxx.  Tested appropriateness of valuation method and their
calculation.
We identified inventories as a Key Audit Matter because  We also evaluated usability of inventory items based on
its amount is significant as compared to total assets, and management’s report for slow moving, expired and
determination of NRV and identification of obsolete obsolete items. Also performed tests of controls over
inventory involves significant management judgment and accuracy of aging report.
estimation.  Assessed the adequacy of disclosures related to
inventory in notes to the accounts.
13. Trade debts:  Send confirmation letters to selected debtors.
Refer note xxx to the financial statements.  Checked subsequent receipts of cash.
 Obtained understanding of internal controls over credit
Company has debtors amounting Rs. xxx. control process (e.g. approval and review of credit limit),
debt collection process, and making provision for bad
We identified inventories as a Key Audit Matter because debts.
its amount is significant as compared to total assets, and  Tested accuracy of receivables’ aging report.
determination of recoverable amount involves significant  Assessed appropriateness of assumptions and estimates
management judgment and estimation. made by management for provision for bad debts by
comparing with actual write-offs and cash collection
subsequent to year.
 Assessed historical accuracy of provision for bad debts.
7
14. Change in Accounting Policy (or Framework):  considered the management’s process to identify the
Refer note xxx to the financial statements. necessary amendments required in the Company’s
financial statements;
IFRS/Law has brought changes regarding measurement,  ensured the presentation and disclosure requirements of
presentation and disclosure of ____________. accounting and reporting framework relating to change
in accounting policy
In view of the significant change in accounting and
disclosures, we consider it as a key audit matter.
8
ISA 705
MODIFICATIONS TO THE OPINION
LO 1 WHEN TO MODIFY OPINION
LO 2 HOW TO DRAFT MODIFICATION
LO 3 COMMUNICATING MODIFICATIONS TO TCWG

LO 4 TYPE OF OPINION IN CASE OF MULTIPLE MISSTATEMENTS/SCOPE LIMITAITONS
LO 5 OTHER CONSIDERATIONS
1
This ISA discusses two main concepts:

1. When to modify opinion on financial statements.
2. How to draft modification.
LO 1: WHEN TO MODIFY OPINION:

Modified Opinion means Qualified, Adverse or Disclaimer of Opinion. Auditor shall express
modified opinion if:
1) there is a misstatement or scope limitation.
2) effect of misstatements or scope limitation is material or pervasive.
Immaterial effect Material effect Pervasive effect
Misstatement Adverse Opinion

Unmodified Opinion Qualified Opinion
Scope Limitation Disclaimer of Opinion*
* Disclaimer of opinion can also be expressed in case of Multiple Uncertainties.
What is Misstatement:
Definition:
Misstatement means difference between:
 amount, classification, presentation and disclosure reported in financial statements, and
 amount, classification, presentation and disclosure required by AFRF.
Examples:
1. Damaged or Obsolete inventory is not recorded at Lower of Cost and NRV.
2. Impairment loss (or depreciation) is not recorded on plant which is not in use, or is not useful.
3. Not recording provision for bad debts or provision for warranty.
4. Selective revaluation of fixed assets, or no revaluation conducted at year-end when revaluation model is used.
5. Debt-covenant breached but management still classified it as long-term loan.
6. Litigations pending against company not appropriately recorded or disclosed.
7. Subsequent Adjusting events are not recorded in financial statements (e.g. Bankruptcy of debtor/recovery of
doubtful debt, Decision of legal cases, Sale of inventory below cost), OR Subsequent Non-Adjusting events are
not disclosed in financial statements (e.g. destruction of major assets by fire or natural disaster, issuing
significant bank guarantee). However, if it is appropriately recorded or disclosed, auditor shall include Emphasis
of Matter Paragraph.
8. Contingent assets are disclosed in financial statements (i.e. possible but not probable).
9. Research cost or Repair expense is capitalized.
10. Not including required disclosures (e.g. circumstances of impairment loss, related party relationships or
transactions, EPS of a listed company)
What is Scope Limitation:

Definition:
Scope Limitation arises when auditor is unable to obtain sufficient appropriate audit evidence on
which to base his opinion.
Examples:
a) Limitation by Circumstances beyond control of entity or relating to nature/timing of auditor’s work:
a. Accounting records of entity have been destroyed (e.g. by fire, computer virus or other natural
disaster).
b. Accounting records of entity have been seized by govt. authorities.
c. If auditor is appointed after year end and is unable to observe the physical count of inventory.
d. Inventory is at a location where there is threat of life.
e. Inventory has been mixed with someone else’s inventory.
f. No explanation for negative balances of assets.
2
b) Limitations imposed by management/ entity:

a. Management prevents the auditor from observing the counting of the physical inventory.
b. Management prevents the auditor from sending external confirmation.
c. Management does not provide written representations to auditor.
d. Management does not provide minutes of meetings of TCWG to auditor.
Study Tips
1. There will be no scope limitation if auditor is able to obtain evidence from alternative audit
procedures in above cases.
2. If accounting records are destroyed by fire, or are not available for any reason, auditor shall also
qualify his opinion regarding proper books of accounts as required by Companies Act 2017.
3. Limitation imposed by management has double effect i.e. on audit report + on other aspects of audit.
What is Material:
This term is used to describe effects of misstatements or scope limitation. Items are considered
material if they, individually or in aggregate, could reasonably be expected to influence the
economic decisions of users taken on the basis of financial statements.
Materiality depends on size as well as nature of misstatement.
What is Pervasive:
This term is used to describe effects of misstatements or scope limitation. Pervasive effects on the
financial statements are those that, in the auditor’s judgments:
i. Are not confined to specific accounts/elements of the financial statements;
ii. If so confined, represent substantial proportion of the financial statements; or
iii. In relation to disclosures, are fundamental to users’ understanding of F/S.
Consequences of Scope Limitation imposed by Management after acceptance of engagement:

If scope limitation is imposed by management and is inappropriate (i.e. without reasonable
justification), auditor shall request management to remove the limitation. If management refuses,
auditor shall communicate the matter to TCWG and determine whether it is possible to perform
alternative procedures to obtain evidence.
If matter still remains unresolved:

 If effect is material:
Auditor shall revise assessment of risk of fraud (including integrity of management) and
shall express Qualified Opinion.
 If effect is pervasive:
Auditor shall withdraw from engagement if possible and practicable. In such situation,
auditor shall consider to communicate reasons of withdrawal to Shareholders and
Regulators.
If withdrawal is not possible or practicable, auditor shall express Disclaimer of opinion.
Study Tip – Withdrawal by Auditor

Withdrawal is not possible if auditor is prohibited in a jurisdiction to withdraw from engagement before
completion of audit. Withdrawal is not practicable if auditor has substantially completed the audit at the
time when limitation is imposed.
3
LO 2: HOW TO DRAFT MODIFICATION:

Drafting “Qualified/Adverse/Disclaimer of Opinion”:
1. State that “we have audited …………….” and
2. Express “Qualified/Adverse/Disclaimer of Opinion” in standardized wording.
Drafting “Basis for Qualified/ Adverse/ Disclaimer of Opinion”:

1. Explain nature of misstatement or scope limitation in this section (as stated below***), and
2. State that “audit was conducted in accordance with ………………………”
***In case of misstatement ***In case of scope limitation

If misstatement relates to amount:
Auditor shall explain nature of misstatement, and quantification* of
misstatement (if practicable). If quantification is not practicable,
auditor shall state so in this section.
Auditor shall explain:
 Which procedures was not performed,
* An example of quantification is effect on expenses, profit, assets and
and why.
equity.
 Statement that “auditor was unable to
If misstatement relates to disclosure:
obtain evidence from alternative
Auditor shall explain nature of wrong or omitted disclosure., and
procedures too; and therefore, auditor
include omitted disclosure (if practicable)**.
is unable to verify whether this amount
is fairly stated in F/S”.
** Including the omitted disclosure would be impracticable if
disclosure is not prepared by management, or disclosure is not
readily available to auditor, or disclosure is unduly lengthy in relation
to audit report.
Drafting Examples:
Drafting of Qualified Opinion
Facts: Inventory is not stated at lower of cost & NRV, and effect is Material
Qualified Opinion:
We have audited the ……………….
In our opinion, except for the (possible) effects of the matter described in the Basis for Qualified Opinion
section of our report, financial statements give true and fair view of financial position of ABC Limited at
December 31, 2020 and its financial performance and cash flow for the year then ended in accordance with
IFRS.
Basis for Qualified Opinion:

Management has not stated the inventories at the lower of cost and net realizable value but has stated them
solely at cost, which is a departure from IFRS. Had management stated the inventories at the lower of cost
and net realizable value, inventories would have been written down by xxx, cost of sales would have been
increased by xxx, and income tax, net income and shareholders’ equity would have been reduced by xxx, xxx
and xxx, respectively.
We conducted our audit in accordance with …………
4
Drafting of Qualified Opinion

Facts: Auditor is unable to physically count the inventory, and effect is Material
Qualified Opinion:
In our opinion, except for the (possible) effects of the matter described in the Basis for Qualified Opinion
section of our report, financial statements give true and fair view of financial position of ABC Limited at
IFRS.

We did not observe the counting of the physical stock as of December 31, 20X1 because we were appointed
after the year end. We were unable to obtain sufficient appropriate audit evidence by performing alternative
audit procedures. Consequently, we were unable to verify whether inventory is stated fairly in financial
statements.
Drafting of Adverse Opinion

Facts: A subsidiary is not consolidated, and effect is Pervasive
Adverse Opinion
In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion section of
our report, financial statements do not give true and fair view of financial position of ABC Limited at
IFRS.
Basis for Adverse Opinion

The company has not consolidated the financial statements of subsidiary XYZ Company which it acquired
during 20X1, because it has not yet been able to ascertain the fair values of certain of the subsidiary’s assets
and liabilities at the acquisition date. Under IFRS, the subsidiary should have been consolidated because it is
controlled by the company.
Drafting for Disclaimer of Opinion

Facts: Auditor is unable to physically count the inventory, and to confirm accounts receivables, and
effect is Pervasive
Disclaimer of Opinion
We were engaged to audit the ……………….
Because of the significance of the matter described in the Basis for Disclaimer of Opinion section of our report,
we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion
on these financial statements. Consequently, we do not express an opinion on the accompanying financial
statements of the company.
Basis for Disclaimer of Opinion

We were unable to obtain sufficient appropriate audit evidence about the carrying amount of ABC’s inventory
as at December 31, 20X1 because we did not observe the counting of the physical stock as of December 31,
20X1 since that date was prior to our appointment as auditor of the company. We were also unable to obtain
sufficient appropriate audit evidence about the carrying amount of company’s accounts receivables
amounting Rs. XXX million because we were prohibited to obtain confirmation of certain accounts receivables
due to introduction of a new computerized accounts receivable system during the year which resulted in
numerous errors in accounts receivable. We were unable to obtain sufficient appropriate audit evidence by
using other alternative procedures. Consequently, we were unable to verify whether these amounts are
stated fairly in financial statements.
5
Exam Tips
Wording of opinion is given by ISAs and is standardized. However, wording of basis for opinion is not
standardized and may vary from situation to situation.
LO 3: COMMUNICATING MODIFICATIONS TO TCWG:

If the auditor expects to include “Modified Opinion” or “Emphasis of Matter” or an “Other Matter” or
“Key Audit Matter” or “Going Concern” paragraph in his report, the auditor shall communicate with
TCWG the circumstances that led to such modification and the proposed wording to be included in
report.
This communication enables:

 TCWG to be aware of modification that auditor intends to include in audit report.
 TCWG to have an opportunity to obtain further clarification from auditor or to provide
further information and explanation to auditor regarding the matter causing modification.
 Auditor to obtain concurrence of TCWG regarding facts of the matter.
LO 4: TYPE OF OPINION IN CASE OF MULTIPLE MISSTATEMENTS/SCOPE

LIMITAITONS:
Misstatement Scope Limitation Effect on Report
 Qualified Opinion
Material Material
 Both to be explained in Basis for Qualified Opinion.
 Disclaimer of Opinion
Material Pervasive
 Both to be explained in Basis for Disclaimer of Opinion.
 Adverse Opinion
Pervasive Material
 Both to be explained in Basis for Adverse Opinion.
Pervasive Pervasive Not Possible
 Multiple immaterials (misstatements or scope limitations) may become material.

 Multiple materials (misstatements or scope limitations) may become pervasive.
 Multiple pervasives is not possible.
6
LO 5: OTHER CONSIDERATIONS:
Other Considerations when Disclaimer of Opinion is expressed:
If auditor expresses disclaimer of opinion, auditor report shall not include:
 Key Audit Matter (ISA 701)
 Other Information Section (ISA 720)
 Unmodified opinion on single F/S or element (ISA 805)
 Specified information in Basis for opinion section, and auditor’s responsibility section.
However, if scope limitation was imposed by management, auditor shall include Other Matter
paragraph to state why he did not withdraw.
Can an auditor express two opinions in one audit report:

In following situations, auditor can express multiple opinions in one report when:
 Financial statements are prepared on the basis of two AFRFs (ISA 700).
 Auditor is also engaged to express opinion on single F/S or element in the same report (ISA
805).
In following situations, auditor can split opinion when:

 Modified opinion on operations, and Unmodified When on financial position (ISA 510).
7
ISA 706
EMPHASIS OF MATTER AND
OTHER MATTER PARAGRAPHS
LO 1 EMPHASIS OF MATTER PARAGRAPHS
LO 2 OTHER MATTER PARAGRAPHS
1
LO 1: EMPHASIS OF MATTER PARAGRAPHS:

When to add paragraph in auditor’s report (i.e. Definition)
Emphasis of Matter Paragraph is included in audit report if auditor considers it necessary to draw
users’ attention to a matter which is disclosed in financial statement and is fundamental to users’
understanding of the financial statements, provided:
 The auditor is NOT required to modify his opinion because of the matter, and
 Matter is not a key audit matter.
Points to remember:
 An emphasis of matter paragraph does not modify audit opinion, but it modifies audit
report
 An emphasis of matter paragraph is included to draws users’ attention to entity’s
disclosures.
 EOM is not included:
o If disclosure is not appropriate.
o If there is material uncertainties relating to going concern
Examples of Situations/ Circumstance when EOM is included in Audit Report:

1. If there is material uncertainty relating to the exceptional litigation or regulatory action.
2. A significant subsequent event occurs before issuance of audit report and financial
statements (e.g. a fire after the year destroying production facilities).
3. If a misstatement is identified after issuance of financial statements.
4. When a major disaster significantly affects entity’s financial position.
5. Early application (when permitted) of a new accounting standard that has a material effect
on financial statements.
6. Where a financial reporting framework is unacceptable but is prescribed by law or
regulation.
7. When financial statements are prepared on the basis of special purpose framework.
8. When a material misstatement is found in last year’s (prior period’s) financial statements
and corresponding figures are restated.
Exam Tips
1. Excessive use of EOM paragraph should be avoided. (Every material uncertainty is NOT fundamental.)
2. Emphasis of Matter paragraph is not a substitute for Material Uncertainty relating to Going Concern paragraph.
Presentation of EOM Paragraph in Auditor’s Report:

This paragraph is presented as a separate section. Auditor may add further context to the heading
e.g. Emphasis of Matter - Subsequent Event.
This paragraph shall state:

 a clear reference to the matter being emphasized.
 reference to the notes in financial statements which fully describes the matter.
 that auditor’s opinion is not modified in respect of this matter.
2
Example: Exceptional litigation adequately disclosed

We draw your attention to Note X of the financial statements, which describe the uncertainty related to the
outcome of the lawsuit filed against the company by XYZ Company. Our opinion is not modified in respect of
this matter.
Other Drafting Examples:

Standard Example
Subsequent event (i.e. Fire) destroyed assets after the balance sheet date, disclosed as
subsequent event:
ISA 706
Emphasis of Matter:
(Appendix 3)
We draw attention to Note X of the financial statements, which describes the effects of a fire in the
Company’s production facilities. Our opinion is not modified in respect of this matter.
Financial statements are prepared on special purpose framework:
Emphasis of Matter – Basis of Accounting
ISA 800 We draw attention to Note X to the financial statements, which describes the basis of accounting. The
(Illustration 3) financial statements are prepared to assist the Company to meet the requirements of Regulator DEF.
As a result, the financial statements may not be suitable for another purpose. Our opinion is not
modified in respect of this matter.
Placement:
 Emphasis of matter paragraph is presented after basis of opinion section.
 It may be presented either before or after Key Audit Matter, depending on its significance.
If a matter is a Key Audit Matter as well as fundamental for users understanding of F/S:
Auditor shall communicate such matter as a Key Audit Matter. However, auditor may highlight or
draw further attention to relative importance of the matter by:
 by presenting the matter more prominently than other KAMs (e.g. as the first matter), or
 by including additional information in description of KAM
3
LO 2: OTHER MATTER PARAGRAPHS:

When to add paragraph in auditor’s report (Definition):
Other Matter Paragraph is included in audit report if auditor considers it necessary to communicate
a matter which is not required to be disclosed in financial statements but is relevant to users’
understanding of the audit, auditor’s report or auditor’s responsibilities, provided:
 Communication is not prohibited by law, and
 Matter is not a key audit matter.
Examples of Situations/ Circumstance when OM is included in Audit Report:

1. When financial statements of prior period were not audited or were audited by another
auditor.
2. When auditor reports on more than one sets of financial statements (e.g. entity prepared one set
of F/S under IFRS and other set under national framework and auditor is engaged to report on both set of F/S).
3. When auditor restricts distribution of auditor’s report (e.g. when F/S are prepared for specific
purpose and audit report is prepared solely for specific users).
4. When a matter is relevant to users’ understanding of audit e.g.
a. if law requires auditor to communicate planning and scoping matters in auditor’s
report), or
b. If there is scope limitation imposed by management whose effect is pervasive and it
is not possible/practicable to withdraw from engagement.
5. If current opinion on comparative financial statements is different from that expressed in
last year.
6. If predecessor auditor did not re-issue audit report when misstatement is identified in
comparative financial statements.
Presentation of Other Matter Paragraph in Auditor’s Report:

This paragraph is presented as a separate section. Auditor may add further context to the heading
e.g. Other Matter – Scope of Audit.
Example of Draft:
“The financial statements of ABC Company for the year ended December 31, 20X0 were audited by
another auditor who expressed an unmodified opinion on those statements on March 31, 20X1.”
Examples of Other Matter Paragraph in Other ISAs:

Standard Example
Company issued separate set of financial statements:

Other Matter
ISA 800
The Company has prepared a separate set of financial statements for the year ended December 31,
(Illustration 3)
20X1 in accordance with International Financial Reporting Standards on which we issued a separate
auditor’s report to the shareholders of the Company dated March 31, 20X2.
Placement:
Other Matter Paragraph is placed after the “Report on Audit of Financial Statements” and “Report
on Other Legal and Regulatory Requirements”.
4
Exam Tips
1. Every important element of audit report (i.e. Modified Opinion, Emphasis of Matter Paragraph, Going Concern
Paragraph, Key Audit Matter) has its own situations. No situation is to be misclassified, or duplicated (except in
case when books of accounts are not available, or there is pervasive scope limitation by management).
2. Other matter paragraph is different from Other Information and Other Reporting Responsibilities.
3. Financial statements prepared under Special Purpose Framework may not be restricted to specific users.
Similarly, financial statements prepared under General Purpose Framework may be restricted to specific users.
LO 2: PRACTICAL IMPLICATIONS:
Impact of Covid-19 on Audit Report:
In some cases (where in auditor’s judgment impact if fundamental), auditor may include Emphasis
of Matter in audit report considering it as:
 a major catastrophe that has had a significant effect on the entity’s financial position, or
 a significant subsequent event.
5
ISA 710
COMPARATIVE INFORMATION
LO 1 NATURE OF COMPARATIVE INFORMATION
LO 2 REPORTING UNDER CORRESPONDING FIGURES
LO 3 REPORTING UNDER COMPARATIVE FINANCIAL STATEMENTS
1
ISA 710 guides how to deal with misstatement/scope limitation in prior year.
LO 1: NATURE OF COMPARATIVE INFORMATION:

Comparative Information:
Comparative information (i.e. financial information of previous year) can be presented in Current
Period Financial Statements in two ways:
 As Corresponding Figures
 As Comparative Financial Statements
Choice will depend on requirements of AFRF and approach taken by entity to present comparative
information.
Prior period financial statements:

Financial statements of prior period means financial statements which were issued last year.
Corresponding Figures Comparative Financial Statements

 Presented as integral part of current
Presentation  Presented as separate financial statements.
financial statements
 Auditor shall express separate opinion on
 To ensure that Corresponding figures agree
financial statements of each period presented.
Auditor’s with prior period financial statements.
 Opinion on financial statements of one period
Responsibilities  Auditor’s opinion refers to financial
may be different from financial statements of
statements of current period only.
other period.
Written
To be obtained for current period only. To be obtained for all periods reported
Representation
If this is an Initial Audit: (Prior period financial statements are unaudited, or audited by another auditor)
Auditor shall include Other Matter paragraph in his report to state that:
 financial statements of prior period were unaudited, or
 financial statements of prior period were audited by another auditor (alongwith date of
opinion, type of opinion and reason of modification if any).
LO 2: REPORTING UNDER CORRESPONDING FIGURES:

A misstatement is identified in corresponding figures: (recall ISA 560)
Situation Impact on Report

If Prior period’s financial statements and auditor’s report are
Current auditor shall express unmodified opinion.
amended/re-issued
If Prior period’s financial statements and auditor’s report are Auditor shall express unmodified opinion with
NOT amended/re-issued, but management restate Emphasis of matter paragraph referring to disclosure
corresponding figures with appropriate dislcosures. with fully describe the matter.
If Prior period’s financial statements and auditor’s report are
Auditor shall express qualified or adverse opinion
NOT amended/re-issued, and also management does not restate
(because of Lack of Comparability).
corresponding figures.
2
If Modified Opinion was expressed last year:
Situation Example Impact on Report

There was a misstatement/scope Auditor shall express unmodified
If matter has been resolved now. limitation in last year (e.g. depreciation opinion.
not recorded) which has been corrected. (ISA 710.A3)
If matter has not been resolved, but is not Auditor shall express modified opinion
There was a scope limitation on opening
relevant (i.e. has no effect) in current because of lack of comparability.
stock of last year.
period. (ISA 710.11b, A4, Illustration 2)
Auditor shall express modified opinion
If matter has not been resolved, and is Depreciation neither recorded in last
and shall refer to both period’s figures.
relevant for (i.e. affects) current period. year nor in current year
(ISA 710.11a, Illustration 1)
LO 3: REPORTING UNDER COMPARATIVE FINANCIAL STATEMENTS:

In all cases of reporting under comparative financial statements, current financial statements shall
include opinion on both periods.
If current auditor’s opinion on prior period financial statements is different from predecessor
auditor:
 If predecessor auditor agrees and reissues his report with current financial statements 
auditor shall report only on current period (no OM Para in this case).
 If predecessor auditor does not reissue his report  auditor shall report on both periods
(auditor shall include Other Matter Paragraph).
3
ISAs – Summaries and Implementation Guide ISA 720
ISA 720
THE AUDITOR’S RESPONSIBILITIES
RELATING TO OTHER
INFORMATION
LO 1 WHAT IS “OTHER INFORMATION”
LO 2 WHAT IS AUDITOR’S RESPONSIBILITY REGARDING “OTHER INFORMATION”

IMPACT ON AUDIT IF OTHER INFORMATION IS INCONSISTENT WITH FINANCIAL
LO 3
STATEMENTS OR AUDITOR’S KNOWLEDGE
LO 4 DRAFTING OF OTHER INFORMATION PARAGRAPH
1
LO 1: WHAT IS “OTHER INFORMATION”:

Other Information:
Other information means information included in the Annual report, other than financial
statements and auditor's report.
Examples include Directors’ Report, Chairman’s Review/Statement/Message.
Matters discussed in Other Information:

 Extracts/Highlights of the financial statements e.g. EPS, Revenue, Expenses, Profits, Capital
Expenditure, Ratios.
 Operating highlights e.g. a disclosure of the new products launched, units produced, or
summary of locations.
 A disclosure providing greater detail about a balance or account shown in the financial
statements, such as “Revenue for 20X1 comprised XXX million from product X and YYY
million from product Y.”
Some of these amounts/disclosures may appear in financial statements, and some may not.
Misstatement in Other information:

Misstatement in other information exists when there is:
 Error, or
 Omission (e.g. when KPIs are discussed but an important KPI is missing), or
 Misleading information.
LO 2: WHAT IS AUDITOR’S RESPONSIBILITY REGARDING “OTHER INFORMATION”:

Auditor is not responsible to express opinion on Other Information. Auditor is responsible to read
Other Information and compare selected amounts with financial statements to determine whether
it is inconsistent with F/S or auditor’s knowledge. If so, auditor shall evaluate its impact on audit.
To fulfill its responsibilities, Other Information may be available to auditor either:

 before auditor’s report, or
 after auditor’s report (In this case, auditor shall obtain written representation from management to provide
auditor final version of “Other Information” before issuance of Annual Report).
Website version of other information is irrelevant for audit purposes.
2
LO 3: IMPACT ON AUDIT IF OTHER INFORMATION IS INCONSISTENT WITH

FINANCIAL STATEMENTS OR AUDITOR’S KNOWLEDGE:
Auditor shall confirm whether:
 Financial statements are misstated.
 Auditor’s knowledge is deficient.
 Other Information is misstated.
If financial statements are materially misstated:

Auditor shall discuss the matter with the management to adjust the financial statements. If the
management refuses to amend the financial statements, the auditor shall modify the opinion in the
auditor’s report.
If auditor’s knowledge is deficient:

In reading other information, auditor may become aware of new information about entity. In such
case, auditor shall:
 Update understanding of entity, and may revise risk assessment.
 Evaluate the effect of identified and uncorrected misstatements on financial statements and
audit.
If other information is materially misstated:

If Other information obtained prior to the date of the auditor’s report:
Auditor shall request management to correct the other information. If management corrects,
auditor shall determine that correction has been made.
If management refuses, auditor shall communicate to TCWG and shall request to correct. If TCWG
do not correct misstatement, auditor shall describe uncorrected material misstatement of other
information in “Other Information” section.
In rare circumstances when such refusal creates doubt on integrity of management, and reliability of
evidence, auditor may withdraw from engagement (if possible and practicable), or may express
disclaimer of opinion on financial statements.
If Other Information obtained after the date of the auditor’s report: (approach similar to ISA 560)
Auditor shall request management to correct the other information. If management corrects,
auditor shall determine that correction has been made.
If management refuses, auditor shall communicate to TCWG and shall request to correct. If TCWG
do not correct misstatement, auditor shall take appropriate action to bring this misstatement into
knowledge of users for whom auditor’s report is prepared, considering auditor’s legal rights and
obligations e.g.
 Providing new report with modified section on “Other Information”
 Communicate to shareholders at AGM.
 Communicate to regulatory body about misstatement (e.g. SECP)
 Consider implication for engagement continuance.
3
LO 4: DRAFTING OF OTHER INFORMATION PARAGRAPH:

Auditor’s report shall include a section “Information Other than the Financial Statements and
Auditors’ Report” except:
 When Disclaimer of opinion is expressed, and
 In case of unlisted company, other information is not available before audit report.
Case A: All other information obtained before date of audit report. No misstatement found
Management is responsible for the other information. The other information comprises the information included in the
Annual Report, but does not include the financial statements and our auditors’ 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.
Case B: All other information obtained before date of audit report. Misstatement found.
Management is responsible ………..
Our opinion on ………….
In connection …………...
information, we are required to report that fact. As described below, we have concluded that such a material
misstatement of the other information exists.
[Description of material misstatement of the other information]
Case C: All of other information will be obtained after audit report.

Management is responsible for the other information. The other information comprises the information included in the
Annual Report, but does not include the financial statements and our auditors’ report thereon. Other Information is
expected to be made available to us after the date of this auditor's report.
Our opinion ……….
In connection with our audit ………..
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].
4
Case D: Some other information obtained before audit report, some to be obtained after audit report. No
misstatement identified.
Management is responsible for the other information. The other information comprises the X report (which we
obtained prior to the date of auditor’s report), and the Y report (which is expected to be made available to us
after the date of auditor’s report), but does not include the financial statements and our auditor’s report thereon.
Our opinion ……….
In connection with our audit ………..
information, we are required to report that fact. We have nothing to report in this regard.
When we read the Y report, if we conclude that there is a material misstatement therein, This para is not required
we are required to communicate the matter to those charged with governance and for unlisted entity.
[describe actions applicable in the jurisdiction].
Case E: Matter causing modified opinion (due to misstatement) is also presented in other information.

information, we are required to report that fact. As described in the Basis for Qualified/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.
Case F: Matter causing qualified opinion (due to scope limitation) is also presented in other information.

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.
5
ISA 800
SPECIAL CONSIDERATIONS —
AUDITS OF COMPLETE SET OF F/S
PREPARED ON THE BASIS OF
SPECIAL PURPOSE FRAMEWORKS
APPLICATION
LO # LEARNING OBJECTIVE REQUIREMENTS PARAGRAPHS
LO 1 WHAT IS MEANT BY SPECIAL AUDITS N/A N/A
LO 2 ACCEPTANCE OF ENGAGEMENT 8 A5–A8
PLANNING AND PERFORMANCE OF THE

LO 3 9–10 A9–A12
ENGAGEMENT
LO 4 CONTENTS OF AN AUDIT REPORT UNDER ISA 800 11–14 A13–A21

ILLUSTRATIONS OF INDEPENDENT AUDITOR’S
APX REPORTS ON SPECIAL PURPOSE FINANCIAL Appendix Appendix
STATEMENTS
1
LO 1: WHAT IS MEANT BY SPECIAL AUDITS:
General Audits Special Audits

(ISA 200 – 700 Series) (ISA 800 Series)
General Purpose Special Purpose (ISA 800)
(e.g. IFRS, GAAP) (e.g. Cash, Tax, Contractual, Regulatory)
Complete Set Single (ISA 805)
Comprehensive Summary (ISA 810)
Historic Prospective (ISAE 3400)
ISA 800 – SPECIAL CONSIDERATIONS FOR AUDIT OF F/S PREPARED

UNDER SPECIAL PURPOSE FRAMEWORKS
Requirements of ISA 800 can be broadly classified into three categories i.e. ①Acceptance, ②Planning
& Performing and ③Reporting.
LO 2: ACCEPTANCE OF THE ENGAGEMENT:

Whenever an auditor is asked to report on financial statements which are prepared on special
purpose framework, first of all auditor shall consider whether AFRF is acceptable, particularly if
there are many choices for management.
For this purpose

1. Purpose of financial statements.
2. Users of financial statements, and their financial information needs
3. Steps taken by management to determine that AFRS is acceptable (particularly when there
are many choices).
Determining Acceptability of AFRF:

If special purpose framework is prescribed/established by Law/regulations or an authorized body,
it is presumed to be acceptable.
In other cases (e.g. prepared on the basis of provisions of a contract), auditor shall consider
purpose of the financial statements, users of the financial statements and their information needs.
Auditor shall also evaluate whether framework shows following characteristics (as described in
Appendix 2 of ISA 210) i.e.
1. Relevance: i.e. information provided is relevant to nature of financial statements and
purpose of financial statements.
2. Completeness i.e. all information that could affect users’ decision is included.
3. Reliability (i.e. information provided reflects substance-over-form, and is based on
consistency)
4. Neutrality (i.e. financial statements should be free from bias)
5. Understandability (i.e. information in financial statements is clear and comprehensive)
2
LO 3: PLANNING AND PERFORMANCE OF THE ENGAGEMENT:

During planning, ISA 800 requires auditor to make following special considerations:
 As per ISA 315, auditor shall obtain understanding of special purpose framework (e.g.
provisions of a contact made by management).
 As per ISA 320:
o Auditor shall determine materiality but considering needs of specific users.
o Auditor is required to calculate materiality on his own, even if management has
agreed with intended users not to correct misstatements below a certain threshold.
 Some or all of TCWG may not be responsible for preparation of special purpose financial
statements.
For other considerations, requirements of relevant ISAs (from 200 to 700 series) shall apply.
LO 4: CONTENTS OF AN AUDIT REPORT UNDER ISA 800:

Contents of audit report under ISA 800 shall be same as per ISA 700, with following special
considerations:
Opinion Paragraph:
Opinion paragraph shall mention the special purpose framework.
Management’s Responsibility:
Auditor shall state in management’s responsibility section that it is management’s responsibility to
prepare financial statements in accordance with Special Purpose Framework.
If management has a choice of financial reporting frameworks, this section shall also state that it is
management’s responsibility to determine that Special Purpose Framework is acceptable.
Emphasis of Matter paragraph:

Auditor’s report under special purpose framework shall always include Emphasis of Matter
Paragraph.
 EOM paragraph shall state Basis of Accounting, including statement that financial
statements may not be suitable for other purposes.
 If necessary, auditor may also state that audit report should not be distributed to other
users. (e.g. in regulatory or contractual basis framework)
Other Matter Paragraph:

Report on special purpose financial statements may include Other Matter paragraph if company has
also prepared separate set of general purpose financial statements.
Key Audit Matters:

Not required in special purpose financial statements, but may be included if:
 Required by local laws and regulations, or
 Auditor thinks necessary.
3
Going Concern Uncertainty:

This paragraph will be included only if it is relevant according to framework e.g. in is not relevant in
tax basis framework.
Other Information (ISA 720):

Requirements apply.
Name of engagement partner:

Requirements apply.
APX: ILLUSTRATIONS OF AUDIT REPORTS ON FINANCIAL STATEMENTS USING

SPECIAL PURPOSE FRAMEWORKS:
Prepared under (i.e.
ISA Reference Prepared for (i.e. Users) Further Facts
Framework)
ISA 800 Financial reporting provisions of
 Contractual Companies  Distribution of report restricted.
(Illustration 1) a contract.
ISA 800  Partnership (and its
Tax basis of accounting  Distribution of report restricted.
(Illustration 2) Partners)
 Company also prepared financial
ISA 800 Financial reporting provisions statements on the basis of IFRS.
 Regulator.
(Illustration 3) established by a regulator.  Going Concern Uncertainty and
KAM paragraphs included.
4
ISA 805
SPECIAL CONSIDERATIONS —
AUDITS OF SINGLE FINANCIAL
STATEMENTS AND SPECIFIC
ELEMENTS
LO 1 WHAT IS MEANT BY SINGLE FINANCIAL STATEMENT, OR SPECIFIC ELEMENT
LO 2 ACCEPTANCE OF ENGAGEMENT
LO 3 PLANNING AND PERFORMANCE OF THE ENGAGEMENT

LO 4 AUDIT REPORT AND OPINION
EXAMPLES OF AUDIT REPORTS ON SINGLE FINANCIAL STATEMENT, OR SPECIFIC
APX 1
ELEMENT
1
APX 1: WHAT IS MEANT BY SINGLE FINANCIAL STATEMENT, OR SPECIFIC

ELEMENT:
Examples of Single Financial Statement:
 Statement of cash receipts and disbursements.
 Balance sheet
Examples of Specific Elements:

 Accounts receivable
 Trade Creditors
 Allowance for doubtful accounts receivable.
 Inventory.
 A schedule of net tangible assets.
 Intangible assets.
 Pension liability.
 Royalty.
Note that a “single financial statement” or “element” include related disclosures.
LO 2: ACCEPTANCE OF ENGAGEMENT:
Single financial statement, or specific element may be prepared on the basis of:
 General purpose framework, or
 Special purpose framework.
At time of acceptance, auditor should consider:

 whether Applicable financial reporting framework is acceptable. (refer ISA 210)
 whether he will be able to perform procedures on interrelated items, if he is not engaged to
audit the complete financial statements. (e.g. auditor may have to perform procedures on
sales while expressing opinion on receivables).
LO 3: PLANNING AND PERFORMANCE OF THE AUDIT:

However, ISA 805 requires auditor to make some specific considerations e.g.
 TCWG responsible for single financial statements/element may be different from TCWG
who are responsible for complete set of financial statements.
 Auditor shall obtain representation required by ISA 580, about only about single financial
statements/element.
 Materiality determined for single financial statement/element is usually lower than the
materiality determined on audit of financial statements as whole. Therefore, procedures
performed are usually extensive in audit of single financial statements/element.
 In obtaining evidence, auditor may use the audit evidence obtained from audit of complete
set of financial statements.
 If relevant, auditor shall also obtain evidence on inter-related items of single financial
statements/element.
In other cases, auditor complies with requirements of relevant ISAs (from 200 to 700 series).
2
LO 4: AUDIT REPORT AND OPINION:

Contents of an audit report under ISA 800:
An audit report under ISA 800 shall include following elements:
1. Title
2. Addressee
3. Opinion
4. Basis for Opinion
5. Material Uncertainty related to Going Concern (if relevant)
6. Emphasis of Matter Paragraph (if relevant)
7. Other Information and Auditor’s Report Thereon (if relevant)
8. Responsibilities of Management and TCWG for Financial Statements
9. Auditor’s Responsibility for the audit of the Financial Statements
10. Name of Engagement Partner
11. Signature
12. Address
13. Date
Key Audit Matter Paragraph is included in audit report on complete set of financial statements only,
and NOT in audit report of single financial statements/element.
If same auditor is engaged to audit Complete set of F/S as well as Single F/S or Element:
 Auditor shall express a separate opinion for each engagement (in the single audit report or
in two different audit reports).
 If both opinions are published together, auditor should ensure that complete financial
statements are differentiated from single financial statements/element.
If audit report on Complete set of F/S is modified:

If Adverse or Disclaimer of Opinion is expressed on Complete set of Financial Statements:
Auditor cannot express unmodified opinion on single financial statements.
However, auditor can express unmodified opinion on single element if:

 Audit report on element is not published together with audit report on complete set.
 Element is not a major portion of complete set of financial statements.
 Auditor is not prohibited by law from doing so.
If Qualified opinion is expressed on Complete set of Financial Statements:

This may or may not have implications for audit of single F/S or element e.g.
 A qualification on accounts’ receivables may have implication if audit of single financial
statements or element includes accounts’ receivables.
 A qualification relating to classification of long-term loan may not have implication for audit
of accounts receivable or income statement.
Study Tip – Modification in audit report on complete set of financial statements

If there is a modification in audit report of complete F/S (e.g. adverse/disclaimer/qualified opinion, or going
concern uncertainty), auditor shall consider to include “Other Matter” Paragraph in this report to mention such
modification.
3
APX 1: EXAMPLES OF AUDIT REPORTS ON SINGLE FINANCIAL STATEMENT, OR

SPECIFIC ELEMENT:
ISA Reference Subject Matter Framework Users
General/National (Financial Reporting

ISA 805 Single Financial Statements
Framework in Jurisdiction relevant to Wide range of users
(Illustration 1) i.e. B/S
prepare a balance sheet)
Single Financial Statements Specific Users (Creditor

ISA 805 Special (cash receipts and disbursements
i.e. Statement of cash requesting cash flow
(Illustration 2) basis of accounting)
receipts and disbursements information)
ISA 805 Specific Element i.e. Special (Financial reporting provisions

Specific Users (Regulator)
(Illustration 3) Accounts Receivable established by a regulator)
4
ISA 810
ENGAGEMENTS TO REPORT ON
SUMMARY FINANCIAL
STATEMENTS
LO 1 DEFINITIONS
LO 2 ACCEPTANCE OF ENGAGEMENT
LO 3 NATURE OF PROCEDURES
LO 4 ELEMENTS OF AUDITOR’S REPORT ON SUMMARY FINANCIAL STATEMENTS
LO 5 OTHER ISSUES
APX ILLUSTRATIONS OF AUDIT REPORTS ON SUMMARY FINANCIAL STATEMENTS
1
LO 1: DEFINITIONS AND RISKS:

It is very import for you to know difference between two terms frequently used in this standard i.e.
“Audited financial statements” and “Summary financial statements”.
Audited Financial Statements:

Financial statements from which Summary financial statements are prepared.
Summary Financial Statements:

Financial statements which are derived from audited financial statements but contain less detail
(i.e. aggregated information, and limited disclosures).
Summary financial statements can be included in annual report or other reports (to save users’
time).
Risks in Audit of Summary Financial Statements:

Summary financial statements may NOT:
 include Comparatives.
 be audited.
 accompany auditor’s report.
 be prepared on an appropriate criteria.
 include all necessary information.
 include appropriate treatment of subsequent events.
Full audited financial statements or Audit report may not be accompanied with summary financial
statements.
LO 2: ACCEPTANCE OF ENGAGEMENT:
Auditor shall accept engagement to report on summary financial statements only if:
1. he has audited full financial statements.
2. preconditions are present:
 Applied criteria is acceptable
 Management agrees that it acknowledges and understands its responsibility:
o For preparation of summary financial statements,
o For availability of audited financial statements to users,
o To include audit report in the document containing summary F/S.
If preconditions are not present, auditor shall not accept proposed audit engagement.
If criteria is not acceptable but engagement is required by law, auditor shall:

 indicate in audit report that audit was not conducted in accordance with ISAs.
 include appropriate reference to this fact in terms of engagement.
Acceptability of Criteria:
Criteria may be established by authorized body (normally presumed to be acceptable), or may be
developed by management (if established criteria does not exist).
2
LO 3: NATURE OF PROCEDURES:
The auditor shall perform the following procedures:
1. Ensure that summary financial statements describe:
a. their summarized nature, and
b. audited financial statements from which summary financial statements are derived
(e.g. by mentioning year ended).
c. applied criteria.
2. Ensure (by comparing) that summary financial statements agree with audited financial
statements, or can be calculated from them.
3. Ensure that audited financial statements are either accompanied, or should be publically
made available to users.
Note that auditor is not performing procedures to verify figures in summary F/S, because they have
already been verified in audited F/S.
LO 4: CONTENTS OF AN AUDIT REPORT UNDER ISA 810:

An audit report on summary financial statements shall include following elements:
1. Title
2. Addressee
3. Opinion
4. Basis for Opinion (in case of adverse opinion only)
5. Summary Financial Statements
6. Audited Financial Statements and Our Report Thereon
7. Responsibilities of Management for Summary Financial Statements
8. Auditor’s Responsibility
9. Other Information Paragraph (if relevant)
10. Other Matter Paragraph (if relevant)
11. Name of Engagement Partner
12. Signature
13. Address
14. Date
Note that there is no Emphasis of Matter Paragraph, Material Uncertainty related to Going Concern,
Key Audit Matters, and Other Information paragraph in audit report on summary F/S.
If report on audited F/S includes any of them, these will be stated in “Audited Financial
Statements and Our Report Thereon” paragraph.
3
Opinion:
Situation Impact on Opinion on Summary Financial Statements

Auditor shall express unmodified opinion as follows:
“The summary financial statements are consistent, in all material
respects, with (or ‘a fair summary of’) the audited financial statements,
If summary financial statements are
in accordance with the applied criteria.
consistent with audited financial statements.
Note that auditor’s opinion on summary financial statements does not
include words “True and Fair View”.
If summary financial statements are not
Auditor shall express adverse opinion.
consistent with audited financial statements.
Auditor shall state that summary financial statements are consistent.
If summary financial statements are
consistent but qualified opinion was However, auditor shall state that opinion on audited financial
expressed on audited financial statements statements was qualified and summary financial statements have
equivalent effect of such misstatements/scope limitation.
Auditor shall express “Denial of Opinion” in his report on summary F/S
If adverse or disclaimer of opinion was
and shall state that it is inappropriate to express an opinion on
expressed on audited financial statements.
summary financial statements.
Summary Financial Statements:

Auditor shall describe in this paragraph that summary financial statements do not include all
disclosures included in audited financial statements and reading summary financial statements is
not a substitute of reading audited financial statements.
Auditor shall also describe that summary financial statements include effects of subsequent events
only upto the date of audit report on audited F/S.
Exam Tip – Subsequent Misstatement identified in audited F/S

If a factual misstatement is identified after the date of auditor’s report, this will be dealt in accordance
with ISA 560 (i.e. audited financial statements and auditor’s report thereon will be revised). Auditor
shall not issue report on summary financial statements unless audited financial statements are revised.
Audited Financial Statements and Our Report Thereon:

Auditor shall describe type of opinion and date of opinion on audited financial statemetns.
Auditor shall also describe:

 Basis of modified opinion (if opinion on audited financial statements is modified)
 Other modifications/matters (i.e. EOM/OM Paragraph, Going Concern Uncertainty Paragraph, KAM, and
Uncorrected misstatement in other information if included in audited financial statements) . However, these
other modifications/matters will not be described if Adverse Opinion is expressed on
summary financial statements.
Study Tip – Restriction on Use or Distribution of Report

If auditor’s report on audited financial statements restricts use or distribution of audit report, similar
restriction shall be included in audit report on summary financial statements.
Date of Auditor’s Report on Summary Financial Statements:

Date of auditor’s report on summary financial statements shall be on or after (but not earlier than)
the date of auditor’s report on audited financial statements.
4
LO 5: OTHER ISSUES:
Comparatives:
If summary financial statements do not include Comparatives:
Auditor shall evaluate whether such omission is reasonable or not, and shall evaluate its effect on
audit report.
If comparatives are audited by another Auditor:

Auditor shall also refer to another auditor in his report on summary financial statements.
Unaudited Supplementary Information (i.e. which was not part of audited financial statements)
presented with Summary Financial Statements:
Same as in ISA 700.
Auditor’s Association with Summary Financial Statements:

If summary financial statements are unaudited:
Auditor (of audited F/S) shall ensure that Summary F/S do not give impression that the auditor has
audited them.
If summary financial statements are audited:

 Auditor shall request management to include the auditor’s report in the document
containing summary financial statements.
 If management does not include report, the auditor shall determine and carry out other
appropriate actions designed to prevent management from inappropriately associating
the auditor with the summary financial statements.
5
APX: ILLUSTRATIONS OF AUDIT REPORTS ON SUMMARY FINANCIAL

STATEMENTS:
Report on Audited Facts about
ISA Reference Report on Summary Financial Statements
Financial Statements Summary F/S
Opinion:
 Unmodified opinion Consistent
Summary F/S are
ISA 810  Material Uncertainty Audited Financial Statements and
consistent with
(Illustration 1) relating to going concern. Auditor’s Report Thereon:
audited F/S.
 Key Audit Matters Material Uncertainty relating to going
concern, and Key Audit Matters are described.
Opinion:
 Unmodified opinion Consistent
Summary F/S are
ISA 810  Other Information is Audited Financial Statements and
consistent with
(Illustration 2) materially misstated. Auditor’s Report Thereon:
audited F/S.
Uncorrected misstatement in other
information is described.
Opinion:
Consistent, however misstated.
Qualified Opinion Summary F/S are
ISA 810 Audited Financial Statements and
(due to material consistent with
(Illustration 3) Auditor’s Report Thereon:
misstatement) audited F/S.
Uncorrected misstatement in audited financial
statements is described.
Opinion:
Denial of Opinion.
Adverse Opinion Summary F/S are
ISA 810 Audited Financial Statements and
(due to pervasive consistent with
(Illustration 4) Auditor’s Report Thereon:
misstatement) audited F/S.
Uncorrected misstatement in audited financial
statements is described.
Opinion:
Summary F/S are Adverse.
ISA 810
Unmodified opinion NOT consistent with Basis for Adverse Opinion:
(Illustration 5)
audited F/S. Describe the matter which caused summary
financial statements not to be consistent.
6
ISAs – Summaries and Application Guide ISRE 2400: Review of Historical F/S
ISRE 2400
ENGAGEMENTS TO REVIEW
HISTORICAL FINANCIAL
STATEMENTS
LO # LEARNING OBJECTIVE PARAGRAPHS
CONDUCT OF A REVIEW ENGAGEMENT IN

LO 1 18–20, A14
ACCORDANCE WITH THIS ISRE
LO 2 ETHICAL REQUIREMENTS 21, A15–A16
PROFESSIONAL SKEPTICISM AND PROFESSIONAL
LO 3 22–23, A17–A25
JUDGMENT
LO 4 ENGAGEMENT LEVEL QUALITY CONTROL 24–28, A26–A33
ACCEPTANCE AND CONTINUANCE OF CLIENT
LO 5 29–41, A34–A62
RELATIONSHIPS AND REVIEW ENGAGEMENTS
COMMUNICATION WITH MANAGEMENT AND THOSE
LO 6 42, A63–A69
CHARGED WITH GOVERNANCE
LO 7 PERFORMING THE ENGAGEMENT 43–57, A70–A99
LO 8 SUBSEQUENT EVENTS 58–60
LO 9 WRITTEN REPRESENTATIONS 61–65, A100–A102
EVALUATING EVIDENCE OBTAINED FROM THE
LO 10 66–68, A103–A105
PROCEDURES PERFORMED
FORMING THE PRACTITIONER’S CONCLUSION ON
LO 11 69–85, A106–A117
THE FINANCIAL STATEMENTS
LO 12 THE PRACTITIONER’S REPORT 86–92, A118–A144
LO 13 DOCUMENTATION 93–96, A145
1
LO 1: CONDUCT OF A REVIEW ENGAGEMENT IN ACCORDANCE WITH THIS ISRE:

Practitioner shall comply with each requirement of this ISRE unless a requirement is not relevant.
LO 2: ETHICAL REQUIREMENTS:
Practitioner shall comply with relevant ethical requirement including independence requirements
according to IESBA Code of Ethics.
LO 3: PROFESSIONAL SKEPTICISM AND PROFESSIONAL JUDGMENT:

Practitioner shall apply professional judgment and professional skepticism in conducting review.
LO 4: ENGAGEMENT LEVEL QUALITY CONTROL:

Engagement partner shall possess competence in:
 Assurance, and
 Financial reporting.
Engagement partner shall take responsibility for:

 Appropriateness of procedures regarding acceptance and continuance
 Engagement team collectively has appropriate competence and capability to perform the
review.
 Overall quality of review engagement to which partner is assigned.
 Appropriateness of review report
If any information comes to knowledge of engagement partner, which may have caused to decline
the engagement if available earlier, he shall communicate information to firm so that firm and
engagement partner can take necessary action.
LO 5: ACCEPTANCE AND CONTINUANCE OF CLIENT RELATIONSHIPS AND

REVIEW ENGAGEMENTS:
Practitioner shall not accept engagement unless he is satisfied that:
 There is a rational purpose of the engagement,
 Review is appropriate in the circumstances,
Engagement shall not be accepted if:

 Information is likely to be unavailable or unreliable.
 There are doubts about management’s integrity.
Auditor shall accept review engagement only if preconditions are present. If preconditions are not
present, practitioner shall not accept engagement unless required by law. In such case, practitioner
shall not state compliance with this ISRE.
2
Practitioner shall agree terms of engagement, including intended use and distribution of financial
statements, and any restrictions on use or distribution.
On recurring engagement, practitioner shall evaluate whether there is a need to revise the terms
of engagement or to remind the management about existing terms.
Practitioner shall not agree to a change in terms of the engagement if there is no reasonable
justification.
LO 6: COMMUNICATION WITH MANAGEMENT AND THOSE CHARGED WITH

GOVERNANCE:
Practitioner shall communicate the matters of importance to management and TCWG on timely
basis.
LO 7: PERFORMING THE ENGAGEMENT:

Practitioner shall determine materiality for the financial statements as a whole, and may also revise
materiality subsequently.
Practitioner shall obtain understanding of entity only. Understanding of internal control is not
required in review engagement.
Practitioner shall perform inquiry and analytical procedures to address all material items and
disclosures in the financial statements.
Auditor shall also perform procedures to address following specific circumstances:

 Related parties.
 Fraud
 Non-compliance with laws and regulations.
 Going Concern
 Use of work performed by others
Practitioner shall obtain evidence that financial statements reconcile with underlying accounting
records.
If practitioner becomes aware that financial statements may be materially misstated, practitioner
shall design and perform additional procedures sufficient to conclude whether misstatement exists
or not.
LO 8: SUBSEQUENT EVENTS:
If subsequent events are identified, practitioner shall request management to correct financial
statements.
3
LO 9: WRITTEN REPRESENTATIONS:
Practitioner shall request written representation from management that:
 Management has fulfilled its responsibility for preparation of financial statements.
 All transactions have been recorded in financial statements.
 Management has disclosed to the practitioner
o related parties,
o fraud,
o going concern,
o subsequent events etc.
Auditor shall express disclaimer of conclusion if representation letter is not provided, or there are
doubts on integrity of management.
LO 10: EVALUATING EVIDENCE OBTAINED FROM THE PROCEDURES

PERFORMED:
Practitioner shall evaluate whether sufficient appropriate evidence has been obtained.
LO 11: FORMING THE PRACTITIONER’S CONCLUSION ON THE FINANCIAL

STATEMENTS:
Practitioner shall express unmodified conclusion, or modified conclusion if there are misstatements
or scope limitation.
LO 12: THE PRACTITIONER’S REPORT:

The practitioner’s report for the review engagement shall be in writing, and shall contain the
following elements:
1. A title, which shall clearly indicate that it is the report of an independent practitioner for a
review engagement
2. The addressee(s), as required by the circumstances of the engagement
3. An introductory paragraph that:
a. States that the financial statements have been reviewed
b. identifies the title of each financial statement reviewed, and
c. the date and period covered by each financial statement
4. A description of the responsibility of management for
5. If the financial statements are special purpose financial statements:
a. A description of the purpose
b. and, if necessary, the intended users
c. If management has a choice of financial reporting framework, a reference to
management’s responsibility that AFRF is acceptable in the circumstances.
6. A description of the practitioner’s responsibility
7. A description of a review of financial statements and its limitations
8. Conclusion
9. A reference to the practitioner’s obligation under this ISRE to comply with relevant ethical
requirements
10. Date
4
11. Signature
12. location
Report may also include Emphasis of matter paragraph (e.g. when a special purpose framework is
used), Other matter paragraph and Other Reporting Responsibilities.
LO 13: DOCUMENTATION:
Practitioner shall prepare documentation for review that provides evidence that review was
performed in accordance with this ISRE.
LO 13: REVIEW REPORTS ON GENERAL PURPOSE FINANCIAL STATEMENTS:

INDEPENDENT PRACTITIONER’S REVIEW REPORT
[Appropriate Addressee]
Report on the Financial Statements
We have reviewed the accompanying financial statements of ABC Company, which comprise the statement of financial
position as at December 31, 20X1, and the statement of comprehensive income, statement of changes in equity and
statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory
information.
Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with the
International Financial Reporting Standard for Small and Medium-sized Entities,3 and for such internal control as
management determines is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
Practitioner’s Responsibility
Our responsibility is to express a conclusion on the accompanying financial statements. We conducted our review in
accordance with International Standard on Review Engagements (ISRE) 2400 (Revised), Engagements to Review
Historical Financial Statements. ISRE 2400 (Revised) requires us to conclude whether anything has come to our attention
that causes us to believe that the financial statements, taken as a whole, are not prepared in all material respects in
accordance with the applicable financial reporting framework. This Standard also requires us to comply with relevant
ethical requirements.
A review of financial statements in accordance with ISRE 2400 (Revised) is a limited assurance engagement. The
practitioner performs procedures, primarily consisting of making inquiries of management and others within the entity,
as appropriate, and applying analytical procedures, and evaluates the evidence obtained.
The procedures performed in a review are substantially less than those performed in an audit conducted in accordance
with International Standards on Auditing. Accordingly, we do not express an audit opinion on these financial statements.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that these financial statements do not
present fairly, in all material respects, (or do not give a true and fair view of) the financial position of ABC Company as at
December 31, 20X1, and (of) its financial performance and cash flows for the year then ended, in accordance with the
International Financial Reporting Standard for Small and Medium-sized Entities.
Report on Other Legal and Regulatory Requirements

[Form and content of this section of the practitioner’s report will vary depending on the nature of the practitioner’s other
reporting responsibilities.]
[Practitioner’s signature]
[Date of the practitioner’s report]
[Practitioner’s address]
5
ISAs – Summaries and Application Guide ISRE 2410: Review of Interim Information
ISRE 2410
REVIEW OF INTERIM FINANCIAL
INFORMATION BY AUDITOR
INTRODUCTION (SCOPE, OBJECTIVE, AND

LO 1 1–3
DEFINITION)
GENERAL PRINCIPLES OF A REVIEW OF INTERIM
LO 2 4–6
FINANCIAL INFORMATION
OBJECTIVE OF AN ENGAGEMENT TO REVIEW
LO 3 7–9
INTERIM FINANCIAL INFORMATION
LO 4 AGREEING THE TERMS OF THE ENGAGEMENT 10–11
UNDERSTANDING THE ENTITY AND ITS INTERNAL
LO 5 12–18
CONTROL
INQUIRIES, ANALYTICAL AND OTHER REVIEW
LO 6 19–29
PROCEDURES
LO 7 EVALUATION OF MISSTATEMENTS 30–33
LO 8 MANAGEMENT REPRESENTATIONS 34–35
AUDITOR’S RESPONSIBILITY FOR ACCOMPANYING
LO 9 36–37
INFORMATION
LO 10 COMMUNICATION 38–42
PRACTITIONER’S REPORT ON A REVIEW
LO 11 43–44
ENGAGEMENT
LO 12 MODIFICATIONS IN REVIEW REPORT 45–63
LO 13 DOCUMENTATION 64
APX DIFFERENT EXAMPLES OF REVIEW REPORT Appendices 1 – 7
1
Difference between ISRE 2400 & ISRE 2410
ISRE 2400 ISRE 2410

Word “Practitioner” is used. Word “Auditor” is used.
Review report contains separate sections for Management and Auditor’s responsibilities are
responsibilities of Management and included in introductory paragraph.
Practitioner.
Period covered may be 3 months, 6 months, 9 Period covered is usually 6 months, and can
months, or even 12months. never be 12 months.
Review report may be restricted. Review report is usually not restricted.
LO 1: INTRODUCTION (SCOPE, OBJECTIVE, AND DEFINITION):

The auditor who is engaged to perform a review of interim financial information should perform
the review in accordance with this ISRE.
LO 2: GENERAL PRINCIPLES OF A REVIEW OF INTERIM FINANCIAL

INFORMATION:
The auditor should comply with the ethical requirements relevant to the audit of the annual
financial statements of the entity.
The auditor should implement quality control procedures.
The auditor should plan and perform the review with an attitude of professional skepticism.
LO 3: OBJECTIVE OF AN ENGAGEMENT TO REVIEW INTERIM FINANCIAL

INFORMATION:
A comparison of Reasonable Assurance Engagement and Limited Assurance Engagement:
Type of Level of Evidence-gathering The assurance

Objective/Definition Example
engagement Assurance procedures report
Procedures includes
An engagement to provide high Assurance
-Preliminary
but not absolute assurance. report states
Reasonable Engagement Activities Audit of
Objective is to reduce the audit positive form of
assurance Reasonable -Planning Engagement Financial
risk to provide basis for positive expression of
engagement -Performing Statements
form of expression of practitioner’s
Engagement
practitioner’s conclusion. conclusion.
-Issuing Report.
An engagement to provide Assurance
Procedures are
moderate level of assurance. report states
Limited deliberately limited as Review of
Objective is to reduce the audit negative form
assurance Limited compared to a Financial
risk to provide basis for of expression of
engagement reasonable assurance Statements
negative form of expression of practitioner’s
engagement
practitioner’s conclusion. conclusion.
2
LO 4: AGREEING THE TERMS OF THE ENGAGEMENT:

Auditor and client should agree the terms of review engagement i.e.
 Objective and scope of a review.
 Management’s responsibilities
 Management’s agreement:
o to provide written representations to auditor.
o to include review report in the document containing interim financial information.
 Expected form and content of the report to be issued
These terms may be combined with terms of audit engagement.
LO 5: UNDERSTANDING THE ENTITY AND ITS INTERNAL CONTROL:

Auditor shall obtain understanding of entity and internal control to assess risk and determine
procedures to be performed.
If auditor is newly appointed: (who has not yet performed annual audit)
A newly appointed auditor shall obtain understanding by:
i. Making inquiries of predecessor auditor.
ii. Reviewing (where possible) predecessor auditor’s documentation for the previous annual
audit.
iii. Reviewing (where possible) predecessor auditor’s documentation for any prior interim
period in the current year.
In doing so, auditor considers following matters which may have been identified in prior periods:
i. Significant matters (e.g. deficiencies in internal control, significant risks).
ii. nature of corrected and uncorrected misstatements.
If auditor has already audited the entity’s financial statements:

If auditor has performed one or more annual audits for the entity, he would have already obtained
understanding as required by ISA – 315. He shall update his understanding in a review engagement
by:
i. Reading the documents of audit and review of prior periods to identify matters that may
affect current interim financial information.
ii. Reading the recent annual and comparable interim financial information.
iii. Inquiries of management about the results of management’s risk of material
misstatement due to fraud.
iv. Inquiring of management about any significant changes in entity’s business activities.
v. Inquiring of management about any significant changes in internal control.
vi. Inquiring of management about reliability of underlying accounting records and process
by which financial information has been prepared.
vii. Considering materiality in accordance with AFRF as it relates to interim financial
information.
viii. Considering the results of any audit procedures performed (with respect to current
year’s financial statements).
ix. Considering the results of any internal audit performed. (with respect to current year’s
financial statements).
3
x. Considering any significant risks, including risk of management override of controls,

that were identified in the audit of prior year.
xi. Considering nature of corrected material misstatements and uncorrected immaterial
misstatements in prior year’s financial statements.
xii. Consider any significant accounting and reporting matters e.g. deficiencies in internal
control.
LO 6: INQUIRIES, ANALYTICAL AND OTHER REVIEW PROCEDURES:

Review Procedures:
The auditor should make inquiries, primarily of persons responsible for financial and accounting
matters, and perform analytical and other review procedures to enable the auditor to conclude on
A review ordinarily does not require tests of the accounting records through inspection,
observation or confirmation.
List of Inquiries, analytical and other review procedures performed is available in Paragraph 21.
Important points to note:

 Usually inquiry letter to lawyers is not sent unless a matter comes to auditor’s attention
which increases risk.
 Auditor inquires management about subsequent events, however no other procedures are
performed to identify subsequent events.
 Auditor inquires about management’s assessment of going concern. If an event or condition
casting doubt is identified, auditor:
o inquires management about its plants for future actions (e.g. to liquidate assets,
borrow money, increase capital, restructure debt, reduce or delay expenditures).
o inquires about feasibility of plan.
o considers adequacy of disclosures.
However, auditor does not corroborate feasibility of management’s plans.
 If there is a risk that an item may be misstated, auditor shall perform additional procedures
sufficient to resolve the issue.
During review, auditor may decide to perform audit procedures.
LO 7: EVALUATION OF MISSTATEMENTS:
The auditor should evaluate, individually and in the aggregate, whether uncorrected misstatements
that have come to the auditor’s attention are material to the interim financial information.
Auditor shall also consider qualitative aspects of misstatements.
Auditor may also determine level of clearly trivial misstatements.
4
LO 8: MANAGEMENT REPRESENTATIONS:
The auditor should obtain written representation from management:
1. Regarding its responsibilities.
2. That uncorrected misstatements are immaterial.
3. Assessment of risk of fraud.
4. frauds or suspected frauds.
5. Noncompliance with laws and regulations; and
6. Significant subsequent events.
Auditor can also obtain additional representations.
LO 9: AUDITOR’S RESPONSIBILITY FOR ACCOMPANYING INFORMATION:

The auditor should read the other information that accompanies the interim financial information
to consider whether any such information is:
 inconsistent with the interim financial information, or
 contains misstatement of fact (i.e. misstatement in information not related to information in
financial statements).
Unresolved inconsistencies are described in additional paragraph (i.e. in Other matter paragraph).
Regarding uncorrected misstatements of facts, auditor communicates TCWG and obtains legal
advice.
LO 10: COMMUNICATION:
If auditor identifies a misstatement, he communicates the misstatement to appropriate level of
management.
If management does not take appropriate actions, auditor shall communicate to TCWG, orally or in
writing.
If TCWG does not appropriate actions, auditor shall:

 modify report, or
 withdraw from engagement and consider resigning from annual audit.
The auditor should communicate relevant matters of governance interest arising from the review to
TCWG.
5
LO 11: PRACTITIONER’S REPORT ON A REVIEW ENGAGEMENT:

A review report shall be in writing and shall consist of following elements:
1. A title of report
2. The addressee
3. An introductory paragraph that:
a. Identifies the title of each of financial statements, and period covered;
b. States that the financial statements have been reviewed;
4. A description of the management’s responsibility for the preparation of the financial
statements.
5. A description of the practitioner's responsibility to express a conclusion on the financial
statements.
6. A description/scope of a review of financial statements, with following statements:
a. A review is performed under ISRE, and is a limited assurance engagement.
b. The practitioner performs procedures, primarily consisting of inquiries, analytical
procedures, and other procedures.
c. The procedures performed in a review are substantially less than those performed
in an audit conducted in accordance with ISAs and, accordingly, the practitioner
does not express an audit opinion on the financial statements.
7. A paragraph under the heading "Conclusion". If conclusion is modified, reason of
modification shall also be explained.
8. The date of the practitioner's report.
9. The practitioner's signature.
10. The Place.
Study Tip
Practitioner can also include in his report “Emphasis of matter” and/or “Other matter” paragraphs.
LO 12: MODIFICATIONS IN REVIEW REPORT:
Result Effect on Report

If financial statements are not materially misstated Unqualified Conclusion
If financial statements are misstated and effect is Qualified conclusion
material.
If financial statements are misstated and effect is Adverse conclusion
pervasive.
If there is a scope limitation by management, Auditor should not accept engagement.
before acceptance.
If there is a scope limitation by management, after Auditor shall:
acceptance. - communicate it to TCWG
- express Disclaimer of conclusion. ***
*** However, in rare circumstances Qualified conclusion may be expressed if effect is confined to
specific element and is not pervasive.
6
Going Concern Issues and Effect on Review Report:

If there is an uncertainty relating to going concern or other significant uncertainty, auditor shall:
 include Emphasis of Matter Paragraph in his review report (if adequately disclosed).
 Express Qualified or Adverse conclusion (if not adequately disclosed).
Other Considerations:
If document containing interim financial Auditor shall seek legal advice to determine
information indicates that these have been appropriate course of action.
reviewed, but review report is not included in
the document
If auditor issued modified review report, but Auditor shall seek legal advice to determine
management issued interim financial statements appropriate course of action. Further, auditor
without review report shall also consider withdrawal from audit of
annual financial statements.
The auditor should prepare review documentation that is sufficient and appropriate to provide a
basis for the auditor’s conclusion and to provide evidence that the review was performed in
accordance with this ISRE and applicable legal and regulatory requirements.
7
APX: DIFFERENT EXAMPLES OF REVIEW REPORT:
Examples of Review Reports on Interim Financial Information (Unqualified Conclusion)

AUDITORS’ REPORT TO THE MEMBERS ON REVIEW OF CONDENSED INTERIM FINANCIAL INFORMATION
Introduction
We have reviewed the accompanying condensed interim balance sheet of ABC Entity as of March 31, 20X1 and the
related condensed interim profit and loss account, condensed interim statement of comprehensive income,
condensed interim cash flow statement and condensed interim statement of changes in equity for the half year
then ended (here-in-after referred to as the “condensed interim financial information”). Management is
responsible for the preparation and presentation of this condensed interim financial information in accordance
with approved accounting standards as applicable in Pakistan for interim financial reporting. Our responsibility is
to express a conclusion on this condensed interim financial information based on our review.
Scope of Review
We conducted our review in accordance with International Standard on Review Engagements 2410, “Review of
Interim Financial Information Performed by the Independent Auditor of the entity.” A review of interim financial
information consists of making inquiries, primarily of persons responsible for financial and accounting matters,
and applying analytical and other review procedures. A review is substantially less in scope than an audit
conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain
assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly,
we do not express an audit opinion.
Conclusion***
Based on our review nothing has come to our attention that causes us to believe that the accompanying interim
financial information as of and for the half year ended March 31, 2012 does not give a true and fair view of (or
“does not present fairly, in all material respects,”) in accordance with approved accounting standards as applicable
in Pakistan for interim financial reporting.
Auditor
Auditor
Date
Address
8
Qualified Conclusion due to misstatement (Opinion Paragraph Only):

Basis for Qualified Conclusion
Based on information provided to us by management, ABC Entity has excluded from property and
long-term debt certain lease obligations that we believe should be capitalized to conform with
AFRF. This information indicates that if these lease obligations were capitalized at March 31, 20X1,
property would be increased by Rs. ______, long-term debt by Rs. ______, and net income and earnings
per share would be increased (decreased) by Rs. ________, Rs. _________, Rs. ________, and Rs. ________,
respectively for the three-month period then ended.
Qualified Conclusion
Based on our review, with the exception of the matter described in the preceding paragraph,
nothing has come to our attention that causes us to believe that the accompanying interim financial
information does not give a true and fair view of (or “does not present fairly, in all material
respects,”) the financial position of the entity as at March 31, 20X1, and of its financial performance
and its cash flows for the three month period then ended in accordance with AFRF.
Qualified Conclusion due to scope limitation (Opinion Paragraph Only):

Basis for Qualified Conclusion
As a result of a fire in a branch office on (date) that destroyed its accounts receivable records, we
were unable to complete our review of accounts receivable totaling Rs. ________ included in the
interim financial information. The entity is in the process of reconstructing these records and is
uncertain as to whether these records will support the amount shown above and the related
allowance for uncollectible accounts. Had we been able to complete our review of accounts
receivable, matters might have come to our attention indicating that adjustments might be
necessary to the interim financial information.
Qualified Conclusion
Except for the adjustments to the interim financial information that we might have become aware
of had it not been for the situation described above, based on our review, nothing has come to our
attention that causes us to believe that the accompanying interim financial information does not
give a true and fair view of (or “does not present fairly, in all material respects,”) the financial
position of the entity as at March 31, 20X1, and of its financial performance and its cash flows for
the three-month period then ended in accordance with AFRF.
Adverse Conclusion due to misstatement (Opinion Paragraph Only):

Basis for Adverse Conclusion
Commencing this period, management of the entity ceased to consolidate the financial statements
of its subsidiary companies since management considers consolidation to be inappropriate because
of the existence of new substantial non-controlling interests. This is not in accordance with AFRF.
Had consolidated financial statements been prepared, virtually every account in the interim
financial information would have been materially different.
Adverse Conclusion
Our review indicates that, because the entity’s investment in subsidiary companies is not accounted
for on a consolidated basis, as described in the preceding paragraph, this interim financial
information does not give a true and fair view of (or “does not present fairly, in all material
respects,”) the financial position of the entity as at March 31, 20X1, and of its financial performance
and its cash flows for the three-month period then ended in accordance with AFRF.
9
ISAs – Summaries and Application Guide Due Diligence
DUE DILIGENCE ENGAGEMENT

Nature of Due Diligence Engagement:
Due diligence engagement is a form of review service, which is conducted prior to mergers and
takeovers. Reviewer makes inquiries of different aspects of target company e.g. financial issues,
operational issues, identification of assets and liabilities, benefits and costs due to takeover.
Main objective of due diligence is to provide information to client to:

 To decide whether a takeover or merger is actually desirable.
 If so, whether the proposed cost of the acquisition is reasonable.
Items to investigate in a due diligence exercise:
Area Items to investigate

Practitioners should consider:
Financial  Analysis of historical financial performance through ratio analysis
performance and and investigate significant fluctuations.
financial position  Profit/cash flow forecasts.
 Level of sustainable growth.
Practitioners should also consider:
 Contracts with customers, and their financial implications
 Agreements with lenders and their implications on acquisition.
 Guarantees to customers
Operational issues
 Warranty provisions.
 Contracts with key employees to evaluate whether acquiring
entity will be able to retain them for smooth operations.
 Whether IT systems can be integrated.
Management Practitioner should evaluate whether representations by management of
Representations target company are appropriate e.g. regarding tax issues and litigations.
Identification of Practitioner should include in his analysis unrecognized assets and
assets and liabilities liabilities by target company e.g. internally generated intangible assets
Practitioner should estimate future benefits and costs associated with
Benefits and costs
takeover e.g. cost savings due to economies of scale, or redundancy and
due to takeover
restructuring cost.
1
ISAE 3000: Assurance Engagements (except Audit/Review)
ISAE 3000
ASSURANCE ENGAGEMENTS
(EXCEPT AUDIT AND REVIEW)
LO 1 INTRODUCTION
LO 2 ASSURANCE ENGAGEMENT AND ITS TYPES
LO 3 CONDUCT OF AN ASSURANCE ENGAGEMENT IN ACCORDANCE WITH ISAE
LO 4 PREPARING THE ASSURANCE REPORT

LO 5 UNMODIFIED AND MODIFIED CONCLUSIONS
LO 6 OTHER COMMUNICATION RESPONSIBILITIES
LO 7 DOCUMENTATION
APX 1 REPORT UNDER ISAE 3000 (EXAMPLES)
1
LO 1: INTRODUCTION:
This standard applies on following assurance engagements:
 Assurance on non-financial information (e.g. KPIs, Compliance Reporting).
 Assurance engagements other than audit/reviews (e.g. Prospective financial information,
Pro-forma financial information, controls at service organizations)
Assurance on Non-financial information:

Many users now a day also require non-financial information alongwith financial information to
make decisions. Therefore, there has been an increasing trend of requiring assurance services
(reasonable or limited) from practitioners, in which subject matter is other than financial
information.
Examples include:
 Management may give a Statement/Assertion in annual report, director’s report, or on its
website and may require auditor to provide users assurance about their assertion e.g.
o Key Performance Indicators
o Compliance with regulatory or other requirements
o Corporate Social Responsibility Report (Sustainability/Environmental Reporting
 Management may prepare. Auditor may be required to express conclusion based on his
work performed on the qualitative and quantitative disclosures.
 In Pakistan, management of listed company is required to prepare a statement of free
float of shares, and auditor is required to provide assurance on statement.
These Assurance Engagements (i.e. other than Audit and review of financial statements) are
conducted in accordance with ISAE 3000.
LO 2: ASSURANCE ENGAGEMENT AND ITS TYPES:

Assurance Engagement:
“Assurance engagement” means an engagement in which a practitioner obtains evidence about
evaluation of a subject matter against suitable criteria, and expresses his conclusion to enhance the
confidence of the intended users (other than the responsible party).
Elements of Assurance Engagement:

1. A three party relationship
2. A subject matter (general purpose or special purpose)
3. A Suitable Criteria
4. Evidence
5. Written Assurance Report
Types of Assurance Engagement:

Assurance engagements can be:
 Reasonable assurance engagement or Limited assurance engagement, and
 Attestation engagement or Direct engagement
2
What is the difference between Attestation engagement or Direct engagement:

Attestation Engagement:
An assurance engagement in which a party, other than the practitioner, prepares subject matter
against the criteria, and presents the resulting subject matter information in a report or statement.
Practitioner expresses his conclusion in a separate report.
Direct engagements:
An assurance engagement in which the practitioner measures or evaluates the underlying subject
matter against the applicable criteria and the practitioner presents the resulting subject matter
information as part of the assurance report.
Attestation Engagement Direct Engagement

(old name “Assertion-based engagement) (old name “Direct reporting engagement)
Subject matter is a report or statement made by Responsible party does not present the subject
responsible party to users. matter information.
Subject matter
Both (subject matter and assurance report) are Practitioner reports directly on the subject
presented to users separately. matter and provides assurance report
containing the subject matter information.
Responsible party decides about applicable criteria. Practitioner normally decides on the applicable
The practitioner determines whether the applicable criteria to be used for the engagement.
Applied Criteria
criteria are suitable for the engagement
circumstances.
Measurer / Subject matter is measured/evaluated by responsible Subject matter is measured/evaluated by
evaluator party. practitioner.
Important Things to Note:

1. Note that an audit or review of Historical financial statements could also have been examples of attestation
engagements, however, they are not included here because they are out of scope of ISAE 3000.
2. Audit report under ISA 700 did not require auditor to give summary of procedures performed, however ISA
3000 requires to include “Summary of Work Performed” in assurance report.
3. Practitioners more commonly perform assertion-based engagements. Therefore, ISAE 3000 contained limited
guidance for direct engagements.
LO 3: CONDUCT OF AN ASSURANCE ENGAGEMENT IN ACCORDANCE WITH ISAE:

Practitioner shall comply with all requirements of this ISAE and any other subject matter-specific
ISAE, unless a requirement is not relevant, or not practicable.
Ethical Requirements:
Practitioner shall comply with Code of ethics.
Acceptance and Continuance:

Practitioner shall perform acceptance and continuance procedures and shall ensure that
preconditions for engagement are present.
Quality Control:
Practitioner shall comply with ISQC 1.
Professional Skepticism, Professional Judgment, and Assurance Skills and Techniques:

Practitioner shall plan and perform the engagement with professional skepticism and professional
judgment.
3
Planning and Performing the Engagement:

Practitioner shall:
 Plan the engagement in effective manner.
 Consider materiality.
 Make inquiries of appropriate parties to obtain understanding of subject matter and other
engagement circumstances.
Obtaining Evidence:
 If work of other practitioner or expert is used, practitioner shall evaluate whether that work
is adequate for practitioner’s purpose.
 Practitioner shall request written representation from responsible party.
Subsequent Events:
Practitioner shall consider effects of subsequent events upto the date of practitioner’s report.
Other Information:
Practitioner shall read the other information to identify inconsistency or misstatement in other
information.
Description of Applicable Criteria:

Applicable criteria shall be adequately described in subject matter information. Imprecise,
qualifying or limiting language in description of criteria is not allowed e.g. “the subject matter is in
substantial compliance with requirements of XYZ”.
Forming the Assurance Conclusion:

Practitioner shall obtain sufficient appropriate evidence that subject matter is free from material
misstatement.
Evidence is primarily obtained from:

 procedures performed during the engagement, as well as from
 other sources (e.g. previous engagements or from acceptance and continuance procedures).
Evidence can be obtained from:

 inside the entity, or
 outside parties, or
 expert (if work of expert is used, wording of report shall not suggest that practitioner’s
responsibility for conclusion is reduced).
Evidence must be:

 Sufficient (measure of quality), and
 Appropriate (measure of quantity)
Sufficiency and appropriateness depends on professional judgment.
If evidence from one source is inconsistent from other source, practitioner shall perform additional
procedures to resolve the inconsistency.
Auditor’s conclusion will be modified if there is a misstatement or scope limitation.
4
LO 4: PREPARING THE ASSURANCE REPORT:

Elements of Assurance Report:
1. Title (indicating this is independent assurance report)
2. Addressee
3. Identification and description of subject matter information and level of assurance obtained
by practitioner.
4. Identification of applicable criteria (so that users can understand basis of conclusion).
5. A description of significant inherent limitations (e.g. in an assurance report on Controls, it
may be appropriate to state that historical evaluation may not be relevant for future).
6. Restriction on use and distribution of report, when engagement if for a specific purpose.
7. Describe who is responsible party, Responsibilities of responsible party and practitioner.
8. A statement that engagement was performed in accordance with this ISAE, and other
subject matter ISAE (if any). Imprecise, qualifying or limiting language is not allowed.
9. A statement that firm applies ISQC 1.
10. A statement that firm complies Code of Ethics.
11. Summary of work performed.
12. Practitioner’s conclusion (and basis for modified conclusion, if relevant) with an
appropriate heading (e.g. “Qualified Conclusion,” “Adverse Conclusion,” or “Disclaimer of Conclusion” and
“Basis for Qualified Conclusion,” “Basis for Adverse Conclusion,” as appropriate).***
13. Practitioner’s signature
14. Date
15. Place
Note: If law prescribes other format, practitioner shall refer to ISAE only if all of the above elements
are included in report.
LO 5: UNMODIFIED AND MODIFIED CONCLUSIONS:

Practitioner shall express unmodified opinion when he has obtained sufficient appropriate
evidence that there is no material misstatement.
Practitioner shall express modified opinion (e.g. qualified, adverse or disclaimer of opinion) if there
is a scope limitation or misstatement whose effect is material or pervasive.
LO 6: OTHER COMMUNICATION RESPONSIBILITIES:

Practitioner shall evaluate whether any identified matter (e.g. fraud) is to be communicated to
relevant parties.
1. Practitioner shall prepare documentation on experienced auditor principle.
2. If there is inconsistency, practitioner shall document how the inconsistency was resolved.
3. Assembly of Final engagement file shall be completed on timely manner.
4. If after the assembly of engagement file, it is necessary to change documents, practitioner
shall document:
 reason of making change and
 when and by whom changes were made and reviewed.
5. Practitioners shall not delete or discard documents before the end of retention period.
5
APX 1: REPORT UNDER ISAE 3000 (EXAMPLES):

INDEPENDENT ASSURANCE REPORT
To the Directors/Management of ______
We were engaged by the Company to provide reasonable assurance on its compliance report for the period ended
December 31, 2018. Scope of engagement consists of the Compliance Report prepared by the management of Company in
accordance with requirements of ______________.
Company’s Responsibility:
Management of the company is responsible for preparation and presentation of compliance report in accordance with
applicable criteria. This responsibility includes establishing appropriate risk management and internal controls from
which the reported information is derived.
Applicable criteria:
We assessed the information in Compliance Report in accordance with _____________.
Practitioner’s Responsibility:
Our responsibility is to perform a reasonable assurance engagement and to express an opinion based on our work
performed. We conducted our engagement in accordance with International Standard on Assurance Engagements ISAE
3000.
This standards requires that we comply with ethical requirements and plan and perform our procedures to obtain
reasonable assurance whether the Compliance Report was prepared, in all material aspects, in accordance with the
____________.
Summary of Work Performed:

We performed among others the following procedures
1. Enquiries of management to gain an understanding
2. Enquiries of relevant staff responsible for the preparation of the Compliance Report
3. Site visits
4. Assessing the suitability of the policies, procedures and internal controls that are in place to comply with _______
5. Test a selection of the underlying processes and controls that support the information
6. Review of a selection of the supporting documentation
We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our conclusion.
Opinion:
In our opinion, Company’s Compliance Report for the year ended December 31, 2018 is, in all material respects, in
accordance with requirements of ______
Inherent limitations
Non-financial information, such as that included in the Refiner’s Compliance Report, is subject to more inherent
limitations than financial information, given the more qualitative characteristics of the subject matter and the methods
used for determining such information.
Independence and Quality Control Statement:

We have complied with the independence and other ethical requirements of the Code of Ethics for Professional
Accountants issued by the International Ethics Standards Board for Accountants.
The firm applies International Standard on Quality Control 1, and accordingly maintains a comprehensive system of
quality control.
Other Matter – Restriction on Use and Distribution

Our report is intended solely for the use of Company and Regulator, and should not be distributed to parties other than
these. We do not accept or assume liability to any party other than the entity, for our report.
Sign,
Name of Engagement Partner
Date,
Place.
6
Example of Modified Opinion on Compliance Report under Reasonable Assurance Engagement

Qualified Opinion:
In our opinion, except for the effects of matter described in the basis for qualified opinion paragraph, Company’s
Compliance Report for the year ended December 31, 2018 is, in all material respects, in accordance with requirements of
______

As per requirements of Applicable criteria, company is required to hold atleast xxx quantity of the stock at any point of
time during the year. However, actual stock of the company during November remained below this level.
Example of Unmodified Opinion on KPIs under Reasonable Assurance Engagement

Opinion:
“In our opinion, the management’s statement that the key performance indicators are presented, in all material respects,
in accordance with XYZ criteria, is fairly stated”.
Example of Unmodified Conclusion on KPIs under Limited Assurance Engagement

Conclusion:
“Based on the procedures we have performed and the evidence obtained, nothing has come to our attention that causes us
to believe that the key performance indicators are not presented, in all material respects, in accordance with XYZ
Criteria.”
7
ISAs – Summaries and Application Guide ISAE 3400: Prospective Financial Information
ISAE 3400
EXAMINATION OF PROSPECTIVE
PROSPECTIVE FINANCIAL INFORMATION AND ITS

LO 1 1–7
TYPES
LO 2 RESPONSIBILITY OF MANAGEMENT AND AUDITOR 8–9
LO 3 ACCEPTANCE OF ENGAGEMENT 10–12
LO 4 EXAMINATION PROCEDURES 13–26
LO 5 SPECIFIC EXAMINATION PROCEDURES N/A
LO 6 REPORT 27–33
1
LO 1: PROSPECTIVE FINANCIAL INFORMATION AND ITS TYPES:

Prospective Financial Information:
Prospective information means financial information of future periods.
These may be prepared:

 for internal purpose (e.g. to evaluate a capital investment), or
 for third parties (e.g. in a prospectus to provide future expectation to investors or lenders)
These may include complete set of financial statements, or single financial statements or one or
more elements.
Types of Prospective Financial Information:

There are two types of prospective financial information i.e. Forecast and Projection.
Forecast (expected results) Projection (targeted results)

Based on “Hypothetical Assumptions” i.e. assumptions
Based on “Best-estimate Assumptions” i.e. assumptions
which are not supported by past data (prepared on the
which can be supported by evidence (e.g. by past data).
basis of ‘what-if’ analysis)
Prepared usually for a short period. Prepared usually for a long period.
Higher (e.g. 80%) change of occurrence Lower (e.g. 50% or less) chance of occurrence
Example: Expected cash flows of entity in start-up phase
Example: Expected cash flows for valuation of an existing (to issue shares or borrow money), using assumptions like
business, using constant growth rate Grant of license by Govt., demand of a new product in
market.
Actual results might be different in both cases; however, projection is more uncertain and risky.
Study Tip
Verification Procedures and Reports under both types are similar to large extent.
LO 2: RESPONSIBILITY OF MANAGEMENT AND AUDITOR:

Responsibility of Management:
Management is responsible for forecast/projections including assumptions.
Responsibility of Auditor:
Auditor’s responsibility is:
 to ensure that assumptions are reasonable, and provide limited assurance on assumptions,
 to provide opinion on forecast/projection.
2
LO 3: ACCEPTANCE OF THE ENGAGEMENT:

Auditor shall consider following matters before acceptance:
 Intended users of Prospective information (whether internal or external)
 Whether distribution of report is restricted.
 Whether auditor would be able to obtain sufficient knowledge of the business.
 Nature of assumption (not to accept if assumptions are clearly unrealistic)
 Period covered by information (not to accept if period is unreasonably extended)
Auditor shall agree terms of the engagement (including above matters) with management.
Study Tip
What is a reasonable period depends on ①Need of users, ②Degree of reliability of assumptions, and
③Operating cycle.
LO 4: EXAMINATION PROCEDURES ON FORECAST/PROJECTIONS:

To ensure that assumptions are reasonable, and forecast/projection is prepared in accordance with
assumptions, auditor performs following procedures:
1. Obtain Knowledge of the Business:

Auditor shall obtain sufficient knowledge of business of client to be able to evaluate whether all
significant assumptions required for preparation of prospective information, have been
identified.
2. Evaluate Assumptions:
For best-estimate assumptions:
Auditor shall obtain sufficient appropriate audit evidence from internal and external sources, in
the light of historical financial information and entity’s capacity.
For Hypothetical assumptions:

Evidence supporting hypothetical assumptions need not be obtained. However, auditor shall
ensure that these are consistent with entity’s purpose of financial information, and are not
clearly unrealistic.
3. Evaluate Prospective Financial Information:

1. Inquire about the process of making the prospective information and the internal controls
over the system used to prepare prospective financial information.
2. Ensure that consistent accounting policies are used in preparing the prospective financial
information i.e. are consistent with historical financial information and with AFRF.
3. Auditor shall evaluate whether prospective financial information is prepared on the basis of
assumptions.
For this purpose auditor shall:
a. Perform recalculation,
b. Review whether assumptions are internally consistent between different areas (e.g.
of interest rates).
c. Ensure that all implications of assumptions have been taken into account (e.g.
growth in sales will also impact fixed assets and/or expenses).
3
4. Auditor shall also evaluate that financial information is properly presented and includes
adequate disclosures e.g.
a. Date of preparation of financial information.
b. Assumptions (making clear whether assumptions are best-estimate or
hypothetical).
c. Basis of establishing points in range.
5. Obtain written representations from the management regarding the assumptions used
intended use of prospective financial information and management’s acceptance of its
responsibility for the prospective financial information.
Extent of these examination procedures will depend on:

 Auditor’s knowledge of business,
 Management’s competence,
 Judgments involved in forecast/projection.
Exam Tip
Exam questions usually give some assumptions of management in making forecast. You will be required to
describe some examination procedures to validate these assumptions. Mention specific procedures for each
assumption. (Although general procedures described above may be mentioned, if marks are higher).
Key to success in this standard is to practice past papers’ questions, many times.
LO 5: SPECIFIC EXAMINATION PROCEDURES:
Area Specific Procedures

 Obtain quotation to confirm cost.
Set-up of new Plant  Check depreciation is appropriately reflected in F/S.
 Check time when it will be received, and ready for production.
 Inspect correspondence with bank to ensure that loan is likely to be
received.
Loan  Obtain repayment plan, and ensure
- repayment is appropriately reflected in F/S.
- finance cost is appropriately reflected in F/S.
 Check past trends of sales level. Any variation from past trend should
be supported by market research.
 Review prices of competitor to ensure reasonableness of prices.
Sales  Check whether sales levels are reasonable in line with historical data.
 Compare sales level with production capacity.
 If new plant is bought, check whether increase in sales is shown after
installation of plant.
Debtors/Receipts
Check whether these figures are based on company’s credit terms.
from Debtors
Salaries Check reasonableness of salary with increment rates.
Repair and
Review basis of projection, considering age of fixed assets.
Maintenance
Marketing expenses Ensure they are in line with sales.
If decrease in any expense is expected, review the assumptions by management.
If foreign currency transactions are involved, review exchange rates used.
4
LO 6: REPORT:
Elements of Report on Examination of Prospective Financial Information (PFI):
1. Title
2. Addressee
3. Identification of Prospective Financial Information
4. Management’s responsibility
5. Purpose of the financial information, and restriction on distribution (if any)
6. Limited assurance on assumptions.
7. Opinion whether prospective financial information is prepared on the basis of assumption.
8. Caveats that actual results may be different.
9. Date
10. Address
11. Signature
Types of Opinions:
Situation Auditor’s Course of Action

If assumptions are not Auditor shall express adverse opinion, or withdraw from
reasonable. engagement.
(Note: if assumptions are not reasonable, PFI will be automatically misstated)
Forecast/Projection is not
prepared in accordance with Express qualified or adverse opinion, or withdraw from
assumptions (or disclosures engagement (depending on severity of the situation).
are not appropriate)
Auditor is unable to apply a
Express disclaimer of opinion, or withdraw from engagement.
procedure
Extract of report on Forecast:

We have examined the forecast in accordance with the International Standard on Assurance Engagements applicable to
the examination of prospective financial information. Management is responsible for the forecast including the
assumptions set out in Note X on which it is based.
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 forecast.
Further, in our opinion the forecast is properly prepared on the basis of the assumptions and is presented in accordance
with ....
Actual results are likely to be different from the forecast since anticipated events frequently do not occur as expected and
the variation may be material.
5
Extract of report on Projection:

We have examined the projection in accordance with the International Standard on Assurance Engagements applicable
to the examination of prospective financial information. Management is responsible for the projection including the
assumptions set out in Note X on which it is based.
This projection has been prepared for (describe purpose). As the entity is in a start-up phase 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 purposes 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 (state or refer to the
hypothetical assumptions).
Further, in our opinion the projection is properly prepared on the basis of the assumptions and is presented in
accordance with ....
Even if the events anticipated under the hypothetical assumptions described above occur, actual results are still likely to
be different from the projection since other anticipated events frequently do not occur as expected and the variation may
be material.
6
ISAs – Summaries and Application Guide ISAE 3402
ISAE 3402
ASSURANCE REPORTS ON
CONTROLS AT A SERVICE
ORGANIZATION
LO 1 ELEMENTS OF REPORT UNDER ISAE 3402
LO 2 OBTAINING EVIDENCE REGARDING OPERATING EFFECTIVENESS OF CONTROLS
LO 3 ILLUSTRATIONS OF SERVICE AUDITOR’S ASSURANCE REPORT (TYPE 2)
LO 4 SUB-SERVICE ORGANIZATION
1
LO 1: ELEMENTS OF REPORT UNDER ISAE 3402:
Element Type 1 Report Type 2 Report


Scope (including description of service 
( Tests of controls not included in
organization's system) (including testing of controls)
scope)
Service Organization's responsibilities
 for providing the description of system,
 stating control objectives, and  
 for design, implementation and
operating effectiveness of controls
Independence and Quality Control  
Opinion on Description and design
of its controls Opinion on Description, design and operating
Service Auditor's responsibilities
(opinion on operating effectiveness effectiveness of controls.
of controls is NOT included)
Limitations i.e. Report prepared for broad 
range of users/auditors (not for specific  (including statement that controls may not
individuals) operate effectively in future periods)
 Whether description fairly presents the
 Whether description fairly system as designed and implemented
presents the system as designed throughout the period from ….... to ……, and
and implemented as at …..., and  Whether related controls stated in the
Opinion (providing reasonable assurance)  Whether related controls stated description were suitably designed
in the description were suitably throughout the period from ….... to ……, and
designed and implemented as at  Whether the controls tested, operated
…... effectively throughout the period from …....
to …….
Description of Tests of controls X 
Intended users and Purposes  
To be useful, minimum period for Type 2 report is 6 months.
2
LO 2: ILLUSTRATIONS OF SERVICE AUDITOR’S ASSURANCE REPORT (TYPE 2):

For ease of learning, following example of report covers both types i.e. Type 1 and Type 2 Report.
Text common in both reports is not underlined. Text relevant to Type 1 report only is single underlined. Text relevant to
Type 2 report is double underlined.
Independent Service Auditor’s Assurance Report on

The Description of Controls, their Design and Operating Effectiveness
To: XYZ Service Organization
Scope
We have been engaged to report on XYZ Service Organization’s description at pages [bb–cc] of its [type or name of] system
for processing customers’ transactions throughout the period [date] to [date] (the description), and on the design and
operation of controls related to the control objectives stated in the description.
We did not perform any procedures regarding the operating effectiveness of controls included in the description and,
accordingly, do not express an opinion thereon.
XYZ Service Organization’s Responsibilities

XYZ Service Organization is responsible for preparing the description and accompanying statement at page [aa], including
the completeness, accuracy and method of presentation of the description and statement; providing the services covered
by the description; stating the control objectives; and designing, implementing and effectively operating controls to
achieve the stated control objectives.
Our Independence and Quality Control

We have complied with the independence and other ethical requirements of the Code of Ethics for Professional
Accountants issued by the International Ethics Standards Board for Accountants, which is founded on fundamental
principles of integrity, objectivity, professional competence and due care, confidentiality and professional behavior.
The firm applies International Standard on Quality Control 1 and accordingly maintains a comprehensive system of
quality control including documented policies and procedures regarding compliance with ethical requirements,
professional standards and applicable legal and regulatory requirements.
Service Auditor’s Responsibilities

Our responsibility is to express an opinion on XYZ Service Organization’s description and on the design and operation of
controls related to the control objectives stated in that description, based on our procedures. We conducted our
engagement in accordance with International Standard on Assurance Engagements 3402, Assurance Reports on Controls at
a Service Organization, issued by the International Auditing and Assurance Standards Board. That standard requires that
we plan and perform our procedures to obtain reasonable assurance about whether, in all material respects, the
description is fairly presented and the controls are suitably designed and operating effectively.
An assurance engagement to report on the description, design and operating effectiveness of controls at a service
organization involves performing procedures to obtain evidence about the disclosures in the service organization’s
description of its system, and the design and operating effectiveness of controls. The procedures selected depend on the
service auditor’s judgment, including the assessment of the risks that the description is not fairly presented, and that
controls are not suitably designed or operating effectively. Our procedures included testing the operating effectiveness of
those controls that we consider necessary to provide reasonable assurance that the control objectives stated in the
description were achieved. An assurance engagement of this type also includes evaluating the overall presentation of the
description, the suitability of the objectives stated therein, and the suitability of the criteria specified by the service
organization and described at page [aa].
As noted above, we did not perform any procedures regarding the operating effectiveness of controls included in the
description and, accordingly, do not express an opinion thereon.
We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
3
Limitations of Controls at a Service Organization

XYZ Service Organization’s description is prepared to meet the common needs of a broad range of customers and their
auditors and may not, therefore, include every aspect of the system that each individual customer may consider important
in its own particular environment. Also, because of their nature, controls at a service organization may not prevent or
detect all errors or omissions in processing or reporting transactions. Also, the projection of any evaluation of
effectiveness to future periods is subject to the risk that controls at a service organization may become inadequate or fail.
Opinion
Our opinion has been formed on the basis of the matters outlined in this report. The criteria we used in forming our
opinion are those described at page [aa]. In our opinion, in all material respects:
(a) The description fairly presents the [the type or name of] system as designed and implemented throughout the
period from [date] to [date];
(b) The controls related to the control objectives stated in the description were suitably designed throughout the
period from [date] to [date]; and
(c) The controls tested, which were those necessary to provide reasonable assurance that the control objectives
stated in the description were achieved, operated effectively throughout the period from [date] to [date].
Description of Tests of Controls

The specific controls tested and the nature, timing and results of those tests are listed on pages [yy–zz].
Intended Users and Purpose

This report and the description of tests of controls on pages [yy–zz] are intended only for customers who have used XYZ
Service Organization’s [type or name of] system, and their auditors, who have a sufficient understanding to consider it,
along with other information including information about controls operated by customers themselves, when assessing
the risks of material misstatements of customers’ financial statements.
[Service auditor’s signature]

[Date of the service auditor’s assurance report]
[Service auditor’s address]
LO 3: MODIFICATIONS IN REPORT:
Service Auditor may express modified opinion in following situations:
(a) If service organization’s system is not fairly describe/presented, and/or
(b) Controls are not suitably designed to achieve objectives of the system, and/or
(c) Controls did not operate effectively.
LO 4: SUB-SERVICE ORGANIZATION:
If there is a sub-service organization, then service organization’s description of system will include
nature of services provided by subservice organization.
Further:
 If description also includes sub-service organization’s control objectives and related
controls, this is called Inclusive Method of reporting.
 If description does not include sub-service organization’s control objectives and related
controls, this is called Carve-out Method of reporting. In this case, user auditor is required
to apply requirements of this standard to sub-service organization too.
4
ISAs – Summaries and Application Guide ISAE 3420: Report on Pro forma
ISAE 3420
REPORT ON PRO FORMA
INCLUDED IN A PROSPECTUS
PROFORMA FINANCIAL INFORMATION AND ITS

LO 1 1–12, A1 – A16
EXAMPLES
13, A10 – A12, A31,
LO 2 ENGAGEMENT ACCEPTANCE
A54 – A56
14 – 28, A13 – A31,
LO 3 OBTAINING EVIDENCE
A41 – A44
IF SOURCE IS NOT APPROPRIATE, OR THERE IS
LO 4 23 – 24, A39 – A40
MODIFIED REPORT ON SOURCE
LO 5 FORMING THE OPINION 29 – 33, A46 – A50
ASSURANCE REPORT ON PRO FORMA FINANCIAL
LO 6 35, A51 – A57
INFORMATION
1
LO 1: PROFORMA FINANCIAL INFORMATION AND ITS EXAMPLES:

What is a proforma financial information:
This is the financial information (with adjustments and assumptions) to show retrospectively the
effect of a significant even/transaction on unadjusted financial information, assuming that
even/transaction occurred at an earlier selected date.
Understanding the Nature of Pro-formal financial information

Proforma financial information is different from Prospective financial information. For example consider
following two statements:
1. If I will work hard, I will pass. (Prospective information)
2. If I had worked hard, I would have passed. (Pro-forma information)
Although both sentences have assumptions, however, first sentence relates to future and is an example of
Prospective financial information. Second sentence relates to past which has three parts:
(a) I am fail. (unadjusted information; implied from statement)
(b) If I had worked hard (assumption)
(c) I would have passed (Proforma financial information)
Steps to prepare Pro Forma Financial Information:

Pro-forma financial information is prepared in follwoing steps:
 Identifying the source from which to extract unadjusted financial information (annual or
interim financial statements).
 Selecting the unadjusted financial information (e.g. income statement, cash-flow
statement, statement of net assets)
 Identifying proforma adjustments (it includes Acquiree or Divestee’s financial information
in case of Acquisition or disposal).
 Presenting the pro forma financial information in columnar format (as below).
Resulting Pro-forma
Unadjusted Financial Information Pro-forma Adjustments (+/–)
financial information
Examples:
1. If we had launched our product six months’ ago, what would have been impact on our
historical Income Statement.
2. If we had acquired/disposed a subsidiary, what would have been our historical Income
Statement and Balance Sheet.
Practitioner’s Responsibility:
Practitioner’s responsibility is NOT to prepare pro-forma financial information (which will be a
compilation engagement).
Practitioner’s responsibility is to provide reasonable assurance whether pro-form financial

information has been compiled, in all material respects, on the basis of applicable criteria,
Note that two standards are applied on pro-forma financial information i.e. ISAE 3420 (when it is included in
Prospectus) and ISAE 3000 (when it is included in Financial Statements.
2
LO 2: ENGAGEMENT ACCEPTANCE:
General Factors to consider:
1. Whether the firm possesses technical competence to perform such services.
2. Whether required resources would be available to carry out the engagement.
3. Could there be any threats to compliance with the fundamental principles?
4. Premise are present (i.e. Management understands and acknowledges its responsibilities,
and Criteria is suitable).
Specific Factors to consider:

 Determine whether source has been audited/reviewed, and whether assurance report is
unmodified or modified.
 If source has not been audited/reviewed, consider whether practitioner can obtain
sufficient understanding of entity (and acquiree, if any).
 Obtain understanding of how management compiled pro-forma information.
LO 3: OBTAINING EVIDENCE:
Evidence regarding following is obtained in a pro-forma financial information:
 Appropriateness of Source
 Appropriateness of Adjustments
 Appropriateness of Disclosures
Appropriateness of Source:
Practitioner shall determine whether responsible party has appropriately extracted the unadjusted
financial information from an appropriate source.
Factors that affect appropriateness of source include whether source:

 represents reasonable starting point in relation to event/transaction,
 is audited or reviewed, and
 is generally use
If Source has not been audited or reviewed (e.g. source is Income Statement for Quarter ended 31st March):
In such situation, there will be a most recent annual or half-yearly F/S which are audited or
reviewed. Practitioner may perform following procedures:
1. Comparing source with immediately preceding annual or half-yearly financial information,
and discussing significant changes with management.
2. Consider findings of audit or review reports, and their possible implications on Source.
3. Inquiring management about process by which Source is prepared, consistency of
accounting policies, assessment of risk of fraud.
4. Corroborate information provided by management if it appears inconsistent with
practitioner’s understanding.
3
Appropriateness of Adjustments:
Practitioner shall determine whether adjustments are ①Directly Attributable, ②Factually
Supportable and ③Consistent.
Directly Attributable:
Only those adjustments should be included which arise solely as a result of the event, and are
integral part of the transaction.
For example, closing of redundant production unit after an acquisition, should not be included in
adjustments.
Factually Supportable:
These supporting evidences may include:
 Purchase/sale agreements.
 Independent valuation reports.
 Employment agreements.
 Financing Agreement (debt agreements)
 Relevant regulatory requirements e.g. taxation laws.
 Minutes of meetings of TCWG.
Factual support if Acquiree’s financial information is included in Adjustment:

If source from which acquiree’s financial information has been extracted, has been audited or
reviewed by practitioner, such information is factually supportable. If this has been audited or
revised by other, practitioner still has to be satisfied that financial information is factually
supportable.
If source from which acquiree’s financial information has been extracted, has not been audited or
reviewed, practitioner shall perform procedures to ensure source is appropriate. These procedures
will depend on:
 Whether in past practitioner has performed audit or review of acquiree, and knowledge of
acquiree from that engagement.
 Whether acquiree’s financial information is subject to periodic audit or review.
 How recently acquiree’s financial information has been audited or reviewed.
Factual support if Divestee’s financial information is included in Adjustment:

This information will be derived from unadjusted financial information, which is usually audited or
reviewed). Therefore allocation of income and expenses attributable to divestee will be an
important matter to consider.
Consistent:
Adjustments should be consistent with Source.
If adjustments include different or new accounting policies (e.g. when accounting policies of
Acquiree are not consistent with entity in a business combination), they should be changed to make
them consistent with entity’s AFRF, and accounting policies.
4
Appropriateness of Disclosures:
Appropriate disclosures include following:
 Source of “unadjusted financial information”, and whether an audit or review report on
such information is publically available.
 Nature of “event or transaction” (e.g. business combination, or disposal of business units),
and the date at which it is assumed to have occurred.
 Description and explanation of “The Pro-forma adjustments”
 Description of “Applicable Criteria”
 A statement that pro-form financial information has been compiled for illustrative purposes
only and it does not represent actual financial information.
 The approaches used (e.g. for allocating income, overheads, assets and liabilities between
relevant businesses in a divestment)
Checking arithmetical accuracy, presentation and disclosures:

Practitioner shall evaluate the presentation and arithmetic accuracy of pro-forma financial
information.
Practitioner shall read the other information included in Prospectus to identify material
inconsistency. If such inconsistency is identified and responsible party does not make correction,
practitioner shall take further appropriate action.
Written Representation:
The practitioner shall request written representations from the responsible party that
1. Responsible party has identified all appropriate pro forma adjustments
2. The pro forma financial information has been compiled, in all material respects, on the basis
of the applicable criteria
LO 4: IF SOURCE IS NOT APPROPRIATE, OR THERE IS MODIFIED REPORT ON

SOURCE:
Source is inappropriate:
If responsible party used an inappropriate source, or Omitted a pro forma adjustment the
practitioner shall evaluate what further appropriate action to take e.g.
 modifying the practitioner’s opinion.
 Where possible under relevant law or regulation, withholding the report or withdrawing
from the engagement.
 Seeking legal advice.
Modified Report on Source:

If source from which the unadjusted financial information has been extracted (or adjustments have
been extracted), contains Modified opinion or EOM Paragraph and relevant laws allow use of such
source, the practitioner shall evaluate consequences of modification on report.
Further appropriate action to take may include:

1. Discussing the matter with the responsible party.
2. Making a reference of modified opinion/EOM Paragraph in the practitioner’s report if
possible under law and appropriate in auditor’s judgments.
3. withholding the report or withdrawing from the engagement (if possible under local laws).
4. Seeking legal advice.
5
LO 5: FORMING THE OPINION:

If there is a misstatement in pro-forma financial information:
 practitioner shall express modified opinion, if permitted by law.
 If law does not permit to issue prospectus with modified opinion, practitioner shall
withhold the report, withdraw from engagement or shall obtain legal advice.
Practitioner may include emphasis of matter paragraph in his report if necessary.
LO 6: ASSURANCE REPORT ON PRO FORMA FINANCIAL INFORMATION:

Practitioner’s report shall include following elements:
1. Title
2. addressee
3. Introductory paragraphs
4. Responsibility of Responsible Party
5. Responsibility of Practitioner
6. A statement of compliance with ISAE 3420
7. A statement of compliance with ISQC 1.
8. A statement of compliance with Code of Ethics
9. Statements to describe nature of engagement, and procedures
10. Practitioner’s Opinion.
11. Practitioner’s Signature.
12. Date of report
13. Location
INDEPENDENT PRACTITIONER’S ASSURANCE REPORT ON THE COMPILATION OF PRO FORMA FINANCIAL

INFORMATION INCLUDED IN A PROSPECTUS
To the Management Board of

ABC Company
We have examined the accompanying pro-forma income statement for the year ended 31December 2015 of ABC
Company (the company) and related notes. The applicable criteria on the basis of which the Company has compiled the
Pro Forma Financial Information are described in Note xxx.
The pro forma financial information has been compiled by the Company to illustrate retrospectively the effect of merger
of ABC with XYZ on Income Statement as if the merger had taken place on 01 January, 2015.
As part of this process, information about the Company's income statement has been extracted by the financial statements
of ABC and XYZ for the year ended 31 December 2015.
The ABC Company’s Financial Statements were audited by us and our audit report thereon was issued on 13 June 2016.
No audit or review was conducted on financial statements of XYZ Company.
Responsibility for the Pro Forma Financial Information

The Company is responsible for the Pro Forma Financial Information and it is responsible for compiling the Pro Forma
Financial Information on the basis of applied criteria.
6
Our Independence and Quality Control

We have complied with the independence and other ethical requirement of the Code of Ethics for Professional Accountants
issued by the International Ethics Standards Board for Accountants, which is founded on fundamental principles of
integrity, objectivity, professional competence and due care, confidentiality and professional behavior.
The firm applies International Standard on Quality Control 1 and accordingly maintains a comprehensive system of
quality control including documented policies and procedures regarding compliance with ethical requirements,
professional standards and applicable legal and regulatory requirements.
Practitioner’s Responsibilities
Our responsibility is to express an opinion as required by Securities and Exchange Commission’s Regulation XX about
whether the pro forma financial information has been compiled, in all material respects, by company on the basis of the
applicable criteria.
We conducted our engagement in accordance with International Standard on Assurance Engagements (ISAE) 3420,
Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus, issued
by the International Auditing and Assurance Standards Board. This standard requires that the practitioner plan and
perform procedures to obtain reasonable assurance about whether company has compiled, in all material respects, the
pro forma financial information on the basis of the applicable criteria.
For purposes of this engagement, we are not responsible for updating or reissuing any reports or opinions on any
historical financial information used in compiling the pro forma financial information, nor have we, in the course of this
engagement, performed an audit or review of the financial information used in compiling the pro forma financial
information.
The purpose of pro forma financial information included in a prospectus is solely to illustrate the impact of a significant
event or transaction on unadjusted financial information of the entity as if the event had occurred or the transaction had
been undertaken at an earlier date selected for purposes of the illustration. Accordingly, we do not provide any assurance
that the actual outcome of the event or transaction at 31 December 2015 would have been as presented.
We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
In our opinion, the Pro Forma Financial Information has been properly compiled, in all material respects, on the basis of
applied criteria, and are consistent with the accounting policies of the company.
Signature
Date
Address
7
ISAs – Summaries and Application Guide ISRS 4400: Agreed-upon Procedures
ISRS 4400
ENGAGEMENTS TO PERFORM
AGREED-UPON PROCEDURES
DEFINITION AND EXAMPLES OF AGREED UPLON

LO 1 1–6
PROCEDURES
LO 2 COMPLIANCE WITH ETHICAL REQUIREMENTS 7–8
LO 3 AGREEING TERMS OF THE ENGAGEMENT 9–12
LO 4 REPORTING 17–18
APX FACTUAL FINDINGS IN THE REPORT
1
LO 1: DEFINITION AND EXAMPLES OF AGREED UPLON PROCEDURES:

Definition:
Agreed-upon procedures means CA firm (or practitioner or auditor) agrees with Client to perform
certain procedures usually on financial information***, and gives report of factual findings.
However, no assurance is provided in report, and report is restricted to intended users only.
In an agreed-upon procedure assignment, sometimes a third party may also be involved as

intended user.
***Financial information could be single element, single financial statement or complete set of
Examples of Agreed-upon Procedures:

1. Regulatory reporting (e.g. reporting on book value per share)
2. Client requests that firm trace all travel expenses for the year over Rs. 100,000
to supporting documentation for purposes of an internal fraud investigation.
3. Client requests to perform certain internal audit services e.g. compliance with internal
procedures
4. Client may request to Test IT systems and report findings.
LO 2: COMPLIANCE WITH ETHICAL REQUIREMENTS:

Auditor (or you may call practitioner) shall comply with ethical principles, except Independence.
Independence is not a requirement for agreed-upon procedures engagements. However, if auditor

is not independent, this will be stated in report of factual findings.
LO 3: AGREEING TERMS OF THE ENGAGEMENT:

Auditor shall agree following terms in engagement letter:
1. Financial information on which procedures will be performed.
2. A list of procedures to be performed.
3. Expected form of the report of factual findings
4. Purpose of the engagement (i.e. intended users), and restriction on distribution.
5. A statement that no assurance will be expressed.
If there is a third party (intended user) involved but auditor is unable to discuss and agree the
procedures with that party (e.g. when regulators are foreigners are involved), auditor may:
 Discuss the procedures to be performed with representatives of parties, or
 Review relevant correspondence from such parties, or
 Send them a draft of type of report.
2
LO 4: REPORTING:
Elements of Report:
1. Title
2. Addressee
3. Identification of information on which procedures are to be performed.
4. A list of procedures performed.
5. Factual findings of auditor, including details of errors and exceptions identified.
6. A statement that the auditor is not independent of the entity (if relevant).
7. Statement that no assurance is expressed;
8. A statement that report is restricted to those parties that have agreed to the procedures to
be performed, and is not to be distributed to any other party. (Required)
Restriction on distribution of report:

Report on agreed upon procedures is not made available publically or to any other party.
If a client wants to provide a copy of report to other parties, auditor should send a notice to client
and third party that:
 such report should not be distributed to parties other than named in engagement letter, and
 if such report is still distributed, auditor will have no responsibility to such third party.
However, if feasible, engagement letter may be revised and third party may also be included as a
user alongwith existing user of the report.
3
APX: FACTUAL FINDINGS IN THE REPORT:

Purpose: Assisting in evaluation of accuracy of Accounts Payable
Exceptions
Procedures performed Factual Findings
identified
1. We obtained additions in subsidiary ledger of
We found the addition to be correct and the
accounts payable as at March 31, and we compared None
total amount to be in agreement.
the total to the control account.
2. We obtained list of suppliers alongwith balances, We found the amounts in agreement with
None
and compared closing balance with control account. control account.
3. For 20 suppliers randomly selected, we obtained We found there were suppliers’ statements
[Detail
suppliers’ statements (or requested suppliers to (or confirmations received), except for the
exceptions]
confirm balances) as at March 31. exceptions noted.
4. We compared such statements (or confirmations) to We found the amounts agreed with suppliers’
[Detail
the amounts referred to in 2. For amounts which did statements or confirmation received, except
exceptions]
not agree, we obtained reconciliations from client. for the exceptions noted.
5. For reconciliations obtained, we checked whether
We found that reconciling items agreed to
reconciling items exceeding Rs. XXX (i.e. invoices, [Detail
invoices, credit notes and payments in
credit notes and payments) have been cleared in exceptions]
subsequent period unless exceptions noted.
subsequent period.
Purpose: Assisting directors in evaluation of the aging of the accounts receivable
Exceptions
identified
1. We found that all outstanding invoices
1. From aging of receivables as at March 31, we selected
agreed with the amounts shown on the
amounts appearing in 'within thirty days' column. We
schedule, and the dates shown on such None
compared the amount and date of related invoices to
invoices was correctly classified in the
determine whether invoice is within thirty days or not.
column of aging.
2. We traced receipts from customers by tracing into bank 2. We found that all cash was received
[Detail
records and determined whether cash has been received from major customers, except for the
exceptions]
from debtors. exceptions noted.
Purpose: Assisting in accuracy of book value per share:
Exceptions
identified
1. The book value per share after taking
1. We obtained the statement of book value per share as into consideration, surplus on
prepared by management and compared the information revaluation of fixed assets, works out to
with the audited financial statements as at 30 June 2012. Rs. xxx per share.
None
2. We checked that the calculation of the book value per 2. The book value per share without
share is in accordance with the directives of the Institute of taking into consideration, surplus on
Chartered Accountants of Pakistan (TR 22). revaluation of fixed assets, works out to
Rs. xxx per share.
4
ISAs – Summaries and Application Guide ISRS 4410: Compilation Engagements
ISRS 4410
COMPILATION
ENGAGEMENTS
DEFINITION AND EXAMPLES OF COMPILATION

LO 1 1–10, A12 – A18
ENGAEMENTS
LO 2 COMPLIANCE WITH ETHICAL REQUIREMENTS 21, A19 – A21
LO 3 AGREEING TERMS OF THE ENGAGEMENT 24 – 26, A28 – A40
LO 4 PERFORMING THE ENGAGEMENT 27– 37, A41 – A52
LO 5 THE PRACTITIONER’S REPORT 39 – 41, A56 – A63
LO 6 DOCUMENTATION 38, A53 – A55
APX PRACTITIONERS’ COMPILATION REPORTS Appendix 2
1
LO 1: DEFINITION AND EXAMPLES OF COMPILATION ENGAEMENTS:

What is a compilation engagement:
Compilation engagement is an engagement in which management asks firm to prepare (or to assist
in preparation of) financial information (single element or single F/S) or complete set of financial
statements.
Compilation engagement is different from:

 Assurance Engagements (i.e. Audit and Review) because no assurance is provided in
compilation engagement.
 Agreed upon Engagement because management does not specify any procedures to be
performed by practitioner.
LO 2: COMPLIANCE WITH ETHICAL REQUIREMENTS:

Auditor (or you may call practitioner) shall comply with ethical principles, except Independence.
Independence is not a requirement for compilation engagements. However, ethics require that if a
practitioner becomes aware that he is associated with financial information which is false or
misleading, he should take necessary steps to disassociate with it.
LO 3: AGREEING TERMS OF THE ENGAGEMENT:

Firm shall perform acceptance and continuance procedures (e.g. evaluating integrity of owners,
TCWG and key management) and shall agree following terms on acceptance:
1. Intended use and distribution of financial information and any restrictions thereon.
2. Applicable financial reporting framework.
3. Objective and scope of engagement
4. Responsibilities of practitioner.
5. Responsibilities of management (for financial information, for accuracy and completeness
of records, documents, explanations and for judgments needed to prepare financial
statements)
6. Expected form and content of report.
2
LO 4: PERFORMING THE ENGAGEMENT:

Procedures to be performed in compilation:
Practitioner does not perform verification procedures (i.e. risk assessment, tests of controls, tests of
details) in compilation engagement. No checking of any supporting documents is done.
Accountant should obtain an understanding of:

 Applicable financial reporting framework, and
 Entity’s business and operations, including accounting system and accounting records.
Practitioner shall read the financial information in the light of his understanding, and consider
whether they appear to be correct in form and free of obvious material errors.
If there are misstatements in financial information:

 Practitioner should propose appropriate adjustments to management.
 If management does not make adjustments in financial statements, practitioner should
withdraw from engagement, and give reasons to management and TCWG.
 If withdrawal from the engagement is not possible, practitioner shall determine the
professional and legal responsibilities in the situation.
Study Tip
Note that in the report of compilation engagement, there is no concept of modified report (i.e. qualified,
or adverse or disclaimer). Due to ethical requirements, practitioner has to disassociate himself if there
is a misstatement or scope limitation.
If records/documents provided by management are incomplete, incorrect or unsatisfactory:

(similar to scope limitation)
 Practitioner shall bring that to the attention of management and request the additional or
corrected information.
 If management fails to provide additional or corrected information, practitioner shall
withdraw from the engagement and inform management and TCWG of the reasons for
withdrawing.
Requirements if Special Purpose Framework is used:

Auditor shall draw the attention users to the fact that the financial information is prepared in
accordance with a special purpose framework, and may not be suitable for other purposes.
This will be mentioned in the report as follows:

“As described in Note X, these financial statements/information are prepared in accordance with
______, and for the purpose described in Note Y. Accordingly these financial statements/information
may not be suitable for other purposes.”
If practitioner decides to restrict use/distribution of report:

The practitioner may consider it appropriate to indicate that the practitioner’s report is intended
solely for the specified intended users of the financial information. This may be achieved by
restricting either the distribution or use, or both, of the practitioner’s report to the intended users
only.
3
If use of report is restricted, this will be mentioned at end of the report as follows:
“Our compilation report is solely for the use of party ____, and should not be distributed to other
parties”.
LO 5: THE PRACTITIONER’S REPORT:

The practitioner is also required to issue a report whenever he completes a compilation.
Elements of Report:
1. title
2. addressee
3. responsibilities of management
4. applicable financial reporting framework
5. Identification of the financial information (including title and date)
6. practitioner’s responsibilities
7. description that compilation is not an assurance engagement and no opinion/conclusion is
expressed.
8. restriction on use of report (if any)
9. date
10. signature
11. address
Formats of Reports:
Restriction on
Purpose Compilation of …. Applicable Framework Appendix 2
use/distribution
General Purpose Framework
General Financial Statements Not restricted Illustration 1
(e.g. IFRS or IFRS for SMEs)
Special Financial Statements Modified General purpose Not restricted Illustration 2
Financial
Special Contractual basis of accounting Restricted Illustration 3
Statements/Information
Management’s own basis of
Financial
Special accounting Restricted Illustration 4
(for its internal purposes)
Financial
Special Regulatory basis of accounting Restricted Illustration 5
Practitioner shall include following in engagement documentation:
1. Reconciliation of compiled financial information with underlying records, and explanation
provided by management.
2. Significant matters arising during the compilation engagement
3. A copy of the final version of the compiled financial information
4. Practitioner’s report
4
APX: PRACTITIONERS’ COMPILATION REPORTS:

PRACTITIONER’S COMPILATION REPORT
To the Management of ABC Company
We have compiled the accompanying financial statements of ABC Company based on information you have provided.
These financial statements comprise the statement of financial position of ABC Company as at December 31, 20X1, the
statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended,
and a summary of significant accounting policies and other explanatory information.
We performed this compilation engagement in accordance with International Standard on Related Services 4410
(Revised), Compilation Engagements.
We have applied our expertise in accounting and financial reporting to assist you in the preparation and presentation of
these financial statements in accordance with International Financial Reporting Standards for Small- and Medium-sized
Entities (IFRS for SMEs). We have complied with relevant ethical requirements, including principles of integrity,
objectivity, professional competence and due care.
These financial statements and the accuracy and completeness of the information used to compile them are your
responsibility.
Since a compilation engagement is not an assurance engagement, we are not required to verify the accuracy or
completeness of the information you provided to us to compile these financial statements.. Accordingly, we do not express
an audit opinion or a review conclusion on whether these financial statements are prepared in accordance with IFRS for
SMEs.
[Practitioner’s signature]
[Date of the practitioner’s report]
[Practitioner’s address]

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ISAs – Summaries and Application Guide ISA 580

LO 2 TYPES OF REPRESENTATIONS REQUESTED BY AUDITOR

From Whom to Obtain:

Date of Written Representation:

Period Covered by Written Representation:

Form of Written Representation:

Communication with TCWG:

LO 2: TYPES OF REPRESENTATIONS REQUESTED BY AUDITOR:

Study Tip – Representation Not to be included Representation Letter

Determined necessary by auditor: e.g.

Exam Tip – Evaluating representations about Judgments, Intentions Plans of Management

LO 3: REPRESENTATIONS NOT PROVIDED BY MANAGEMENT:

Representations about Management’s Responsibilities not Provided:

Other representation not provided:

LO 4: DOUBTS AS TO RELIABILITY OF REPRESENTATIONS:

Situation Course of Action by Auditor

If written representations are unreliable, auditor shall modify his opinion.

PART A – AUDIT OF GROUP FINANCIAL STATEMENTS

PART B – USING COMPONENT AUDITOR, OR ITS WORK

This standard applies on:

PART A – AUDIT OF GROUP FINANCIAL STATEMENTS

LO 1: DEFINITIONS AND RESPONSIBILITY:

For this purpose, Group engagement team obtains evidence:

LO 2: UNDERSTANDING THE GROUP:

LO 3: WORK TO BE PERFORMED IN A GROUP AUDIT:

Procedures to be performed on components:

Procedures to be performed on Consolidation Process:

PART B – USING COMPONENT AUDITOR, OR ITS WORK

LO 4: UNDERSTANDING THE COMPONENT AUDITOR:

Procedures to obtain understanding of component auditor:

LO 5: INVOLVEMENT IN THE WORK PERFORMED BY COMPONENT AUDITOR:

If significant risk is identified:

LO 6: IF A COMPONENT IS ALREADY AUDITED:

LO 7: COMMUNICATION, AND DOCUMENTATION:

Communication with TCWG of the Group:

LO 8: RESTRICTION ON ACCESS TO INFORMATION:

Activities/Scope/Objectives/Functions/ Benefits of Internal Audit Function:

2. Activities relating to Risk Management:

3. Activities relating to Internal Control:

ii. Examination of financial information:

iii. Review of operating activities:

iv. Review of compliance with laws and regulations:

Comparison of internal auditor with external auditor:

Internal Auditor External Auditor

If an entity has internal audit function, external auditor may:

PART A – USING WORK OF INTERNAL AUDIT FUNCTION

LO 2: WHEN TO USE WORK OF INTERNAL AUDITOR:

Normally, work of internal audit function can be used in following areas:

Evaluating the Internal Audit Function:

Factor to evaluate How to evaluate

Study Tip: Outsourcing

LO 3: PROCEDURES TO DETERMINE ADEQUACY OF WORK OF INTERNAL AUDIT

For such evaluation, external auditor:

LO 4: DISCUSSION, COMMUNICATION, AND DOCUMENTATION:

Discussion with internal auditor should include following matters:

Communication with TCWG:

PART B – OBTAINING DIRECT ASSISTANCE

LO 5: WHEN TO OBTAIN DIRECT ASSISTANCE: