By 69
CAF 08: Audit and Assurance
Chapter 1: Introduction to Assurance Services
Secret Sheet for Quick Revision
(For students of Muhammad Asif, FCA)
Outlines:
Introduction to Assurance Engagement, Its Types and Limitations.
LO 1: ORIGIN AND ADVANTAGES OF ASSURANCE
SERVICE
Origin of Assurance Services
Statutory audit
means audit
required by law.
Non-Statutory audit means audit
conducted voluntarily due to its
advantages.
Relationship between shareholders
and directors
Steward: Directors look after the assets of the
shareholders.
Agent:
Directors act in accordance with
instructions and in best interest of shareholders.
Accountable:
Directors
show
their
accountability to shareholders by preparing F/S.
LO 2: DEFINITION AND ELEMENTS OF
ASSURANCE ENGAGEMENT
Advantages of Audit/Assurance Engagement
1. Most of misstatements are identified.
2. Confirms management is performing its duties.
3. Deficiencies internal control are identified.
4. Assists in sale or purchase of business.
5. Assists in obtaining loan.
LO 3: LEVELS OF ASSURANCE AND WHY ABSOLUTE
ASSURANCE CANNOT BE PROVIDED
Limited (Moderate/Negative) Assurance:
It is a moderate level of assurance, expressed in negative
form of conclusion i.e.
Reasonable (High/Positive) Assurance:
It is a high, but not absolute, level of assurance expressed
in positive form of conclusion i.e.
“Based on our review, nothing has come to our attention that
causes us to believe that accompanying financial statements
do not give true and fair view in accordance with IFRSs.”
“In our opinion, financial statements give true and fair
view of financial position of ABC Limited at December 31,
20X1 and its financial performance and cash flow for the
year then ended in accordance with IFRS.”
Example: review of historical financial statements, review of
cash flow forecast.
Example: audit of historical F/S.
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Why Absolute Assurance cannot be provided:
(inherent limitations of audit)
1. Nature of financial statements (estimates,
judgments and uncertainties).
2. Nature of audit procedures
a. No complete information r.
b. No legal powers.
c. Collusion and complex techniques.
3. Time and Cost limitation.
4. Procedures based on judgment.
5. Limitations in internal control.
6. Staff may not be available always.
Elements of Assurance Engagement:
1. Three party relationship (Intended users, Responsible
party, Practitioner)
2. A subject matter (information prepared by responsible
party e.g. F/S)
3. A Suitable Criteria (framework/basis used to prepare F/S)
4. Evidence (information on which his report is based)
5. Written Assurance Report (provided by practitioner to
users, and includes conclusion)
By 69
CAF 08: Audit and Assurance
Chapter 2: Basic Concepts
Secret Sheet for Quick Revision
(For students of Muhammad Asif, FCA)
Outlines:
Introduction to "Sbuject Matter of Audit" and "Parties in an Audit".
Premium Content
(For Autumn 2022)
PART A: FINANCIAL STATEMENTS
LO 1: Financial Statements
LO 2: What is meant by True and Fair
View
Complete set of F/S include:
1. Balance Sheet.
2. Income Statement
3. Statement of changes in equity.
4. Cash Flow Statement.
5. Notes to the accounts.
LO 3: Financial Reporting Frameworks
True means free from errors, and
Fair means free from undue bias in F/S.
Term “True and fair view” indicates that judgment
is applied in F/S.
General Purpose:
(for wide range of users)
Special Purpose
(for specific users)
Fair presentation
Framework
Compliance
Framework
Applicable Financial
Reporting Framework
Requires
compliance
with
framework,
and
acknowledges
additional disclosure or departure
to achieve fair presentation.
An example is IFRS.
Requires compliance with framework,
and
does
not
contain
acknowledgements
(regarding
additional disclosures or departure).
An example is Tax-basis Framework.
AFRF is the framework adopted by
management and TCWG, in preparation of
F/S considering legal requirements,
nature of entity, nature of F/S, and
purpose of F/S.
Auditor shall not accept proposed audit
engagement, if AFRF is NOT acceptable.
PART B: RESPONSIBILITIES OF PARTIES INVOLVED IN AUDIT
LO 4: Responsibilities of
Management/Premise
LO 5: Overall Objectives/
Responsibilities of Auditor
LO 6: Responsibilities Of
Stakeholders / Expectation Gap
1. For financial statements.
2. For internal controls;
3. To provide information to auditor.
1. To obtain reasonable assurance.
2. To issue report which includes
auditor’s opinion.
3. To communicate findings as required
by ISAs.
1. Auditor prepares financial statements.
2. Auditor checks 100% transactions.
3. Auditor provides absolute assurance.
4. Auditor is responsible to prevent and detect fraud.
5. Auditor is responsible to express opinion on
internal controls.
LO 7: Essentials for Proper Conduct
of Audit
Professional Judgment:
Professional Judgment is the application of
Cumulative Audit Knowledge, Experience and
Training to reach an appropriate course of
action.
Areas where Professional Judgment is applied:
1. Planning of audit (risk, materiality)
2. Performance of audit (procedures)
3. Reporting stage (opinion)
Professional Skepticism:
Professional skepticism is an attitude that
includes a questioning mind, being alert to
conditions which indicate misstatement, and
critical assessment of audit evidence.
Advantages/Importance of Professional
Skepticism:
Professional skepticism helps to avoid:
1. Overlooking.
2. Over-generalizing.
3. Using inappropriate assumptions.
PART C: REGULATORY ENVIRONMENT OF AUDITING
LO 8: International Federation of
Accountants (IFAC)
Functions/Role/Activities of IFAC:
1. Development of standards.
2. Facilitating implementation of standards.
3. Promoting accountants worldwide.
4. Speaking out on public interest issues.
Boards of IFAC:
1. International Auditing and Assurance
Standards Board (IAASB)
2. International Ethics Standards Board
for Accountants (IESBA)
3.
International
Public
Sector
Accounting Standards Board (IPSASB)
4. International Accounting Education
Standards Board (IAESB)
LO 8: International Auditing and Assurance
Standards Board (IAASB)
Functions/Role/Activities of IAASB:
1. Develops and promotes standards
for assurance and related services.
2. Facilitates in adoption and
implementation of standards.
3. Issues IAPS to help auditors in
implementing ISAs.
LO 9: International Standards on Auditing
(ISAs)
Process of Developing and Issuing a new ISAs:
1. A subject is selected.
2. Exposure draft is produced, and distributed publicly.
3. Amendments made.
4. New ISA published.
Contents of ISAs:
1. Introductory Material, Objectives, Definition.
2. Requirements.
3. Application and Other Explanatory Material
(including Appendices).
Authority/Status of ISAs:
To obtain reasonable assurance, it is compulsory for
auditors to comply with all requirements of all ISAs.
Exception to follow requirements of ISA:
A required procedure will not be performed if it is:
not relevant or
not practicable (in this case, auditor shall
document reason and alternative procedures).
Independence:
Independence means auditor should
be free to perform audit procedures
without any bias or influence.
Examples of situations creating
threat to independence:
1. Financial interests
2. Business relationships
3. Family and personal relationships
4. Employment with audit client
5. Inducements
6. Providing non-assurance services
Situations causing increase in risk/professional skepticism:
1. Unusual growth or decrease of sales.
2. Management’s bonuses based on financial performance.
3. Significant transactions at year end.
4. Inconsistency between different sources of evidences
5. Significant related party transactions.
6. Lack of competence or integrity.
7. Defective inventory.
8. Closure of a factory
9. Bankruptcy of debtor.
10. Pending litigations against company
By 69
CAF 08: Audit and Assurance
Chapter 3: Audit Evidence
Secret Sheet for Quick Revision
(For students of Muhammad Asif, FCA)
Outlines:
What is Sufficient Appropriate Evidence, and How to obtain it.
Premium Content
(For Autumn 2022)
PART A. AUDIT EVIDENCE
(information used by auditor in arriving at conclusions)
Sufficient
(Measure of Quantity)
Affected by:
1. Risk
2. Materiality
3. Auditor's Knowledge & Experience
4. Quality of evidence
5. Strength of Internal Control
Appropriate
(Measure of Quality)
Relevance of Evidence
(Means logical connection between Assertion
and Audit Procedures)
1. To test Occurrence/Overstatement ---> Selecting sample from recorded amounts
will be relevant.
To test Completeness/Understatement ---> Selecting sample from supporting
documents (i.e. outside accounting system) will be relevant.
2. A procedure relevant for one assertion may not be relevant for other
3. To test Operating effectiveness of controls---> Tests of controls will be relevant.
4. To detect misstatements in F/S ---> Substantive Procedures will be relevant.
Reliability of Evidence
(depends on its source, nature, circumstances )
1. Control (e.g.pre-numbered documents)
2. Original (vs. photocopy or fax)
3. Directly (e.g. observation)
4. External (e.g. confirmation)
5. Documentary (e.g. written minutes)
PART B. AUDIT PROCEDURES
By Purpose
By Types
1. Risk Assessment Procedures
(Inquiry, Observation, Inspection, Analytical Procedures)
2. Tests of Controls
(e.g. approval, reconciliations, segregation of duties)
3. Substantive Procedures
(Analytical Procedures, Tests of Details)
Use of Management’s Expert
Doubts over Reliability
(e.g. there is inconsistency)
Perform additional procedures.
Effect on other aspects of audit
(e.g. risk, procedures)
1. Evaluate the competence, capabilities and
objectivity of that expert.
2. Obtain an understanding of the work of
that expert.
3. Evaluate the appropriateness of that
expert’s work.
Use of information
produced by entity
Check its Accuracy and
Completeness
PART C. ASSERTIONS TESTING APPROACH
(Assertions are representations by management that are embodied in F/S)
Inquiry
(Seeking information, Alone not sufficient,
Reliability affected by Integrity and
consistency)
Reperformance
(Procedures performed by entity are
performed again by auditor)
External Confirmation
(Obtaining evidence directly from
third parties in written, to confirm closing
balance or other information)
Analytical Procedures
(Evaluation of financial information thorugh
Comparison and Plausible relationship +
Investigation)
Types of
Audit Procedures
Observation
(Looking at ongoing procedures,
Reliability limited to time of observation)
Inspection
(Examining documents, or tangible assets)
Recalculation
(checking the mathematical accuracy of
documents, manually or electronically)
CAF 08: Audit and Assurance
Chapter 14: External Confirmation
Secret Sheet for Quick Revision
(For students of Muhammad Asif, FCA)
By 69
Outlines:
This chapter discusses Use of External Confirmation in Audit, particularly when Negative confirmation is
used, or Disagreement or Non-response.
LO 1: Definition and Use of External Confirmation
Definition:
q
Obtaining evidence directly from a third party in written form.
Situations:
q
Debtors, Creditors,
q
Banks, Lawyers (100%, No alternative)
Confirmation As evidence:
q
Highly reliable evidence (written, external and direct).
q
Provide evidence about Existence, Rights and Obligation,
Accuracy, Valuation and allocation.
q
No evidence about Completeness.
Whether or not to use:
Omit external confirmation:
1. Risk is low, or
2. Balance is immaterial, or
3. Evidence obtained from other procedures, or
4. management requests and request is reasonable.
LO 2: Procedures in Using Confirmation Request
1.
2.
3.
4.
5.
6.
7.
8.
Decide timing (interim or final).
Decide parties (e.g. major parties, or high risk parties).
Decide information (closing balance + other information)
Decide type (positive or negative)
Obtain authorization
Send letters.
Appropriate procedures on replies.
Summary and conclusion.
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LO 3: Types of Confirmation
Positive Confirmation
(requests reply in all cases)
q More reliable.
q Risk of reply without verification -->
Use Blank Confirmation
Procedures at year-end if confirmation used at interim date:
1. Compare individual balances.
2. For intervening transactions, perform:
a. tests of controls (on sample), and
b. tests of details (on major items).
3. Send confirmation letter (if necessary).
Negative Confirmation
(requests reply in disagreement only)
q Less reliable as no explicit evidence.
q Allowed only if following 4 conditions are met:
* Large number of small balances.
* IR & CR are low.
* Low exception rate is expected.
* Confirming party will not disregard request.
Tips for Case Studies
1. Can we use negative confirmation if:
(a) two conditions are met two are not.
(b) two conditions are met two are silent.
2. When to use combination.
LO 4: Audit Procedures after Receipt of Replies
A response indicating agreement:
q
No further work required.
A response indicating exception/disagreement:
General Procedures:
q
Ask client to prepare reconciliation.
q
Check timing difference, or misstatement
q
Increase risk.
Specific Procedures:
q
Depends on nature of disagreement
(given in case).
A non-response of positive confirmation:
(alternative procedures)
1. Check cash after year-end.
2. Check supporting documents.
3. Perform cut-off
4. Check monthly account statements.
5. Check correspondence (if any amount
is disputed)
When a response is oral: (e.g. through
telephone)
q
No confirmation.
q
Ask to confirm in writing.
Otherwise, non-response.
When a response is received indirectly:
(via management)
q
No confirmation.
q
Ask
to
confirm
directly.
Otherwise, non-response.
When
a
response
is
received
electronically: (e.g. email or fax)
q
Check source is authentic.
q
Check
controls
over
communication process i.e. encryption,
digital signature.
By 69
CAF 08: Audit and Assurance
Chapter 14: External Confirmation
Secret Sheet for Quick Revision
(For students of Muhammad Asif, FCA)
Outlines:
This chapter discusses Use of External Confirmation in Audit, particularly when Negative confirmation is
used, or Disagreement or Non-response.
LO 5: Management's refusal to send Confirmation
Reasonable Justification
(e.g. dispute, ongoing negotiations)
LO 7: Information to be confirmed
No Reasonable Justification
Bank Confirmation Letter
Discuss with TCWG. If still unresolved.....
a. Information regarding bank accounts:
1.
Bank accounts and balances at year-end.
2.
Details of accounts closed.
3.
Interest.
4.
Bank charges.
5.
Restrictions.
Perform Alternative Procedures
q
If evidence obtained,
Unmodified opinion
q
If evidence not obtained, scope
limitation.
q
Qualified opinion (if material) or
Disclaimer of opinion (if pervasive).
Effect on Report:
q
Scope limitation by management.
q
Qualified opinion (if material) or
Disclaimer of opinion (if pervasive).
LO 6: Summary and Conclusion
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Other effects/implications:
1. Increase risk (of fraud) and
procedures
2. Re-evaluate integrity.
3. Withdrawal (if serious concerns)
b. Information regarding overdrafts/loans:
1.
Details of loan.
2.
Security.
3.
Repayment Schedule.
4.
Terms of Interest/Markup.
5.
Debt-covenants.
c. Information regarding contingent liabilities:
d. Additional Information.
Legal Confirmation Letter
1.
2.
3.
List of cases.
Outcome.
Financial implications.
By 69
ISA 520: ANALYTICAL PROCEDURES
Introduction
Definition
Evaluation of financial information through
Comparison and Plausible Relationships
+ Investigation.
Examples
Comparison
¨Prior Period
¨Industry
¨Budget
¨Comparable parts of same entity
Use/Purposes of Analytical Procedures
As Risk assessment Procedures
Examples:
± Decrease in Sales
± Unusual Decrease/Increase in selling, admin, interest
expenses
± Unusual Increase in Inventory, Debtors, Creditors
± Unusual Decrease in Creditors, Current Ratio
Plausible Relationships
¨ with financial information
(e.g.
selling exp. to sales)
¨ with non-financial information (e.g.
Payroll to number of employees)
As Substantive Procedures
1. Determine suitability of assertion
How efficient and effective in detecting
misstatement.
Suitable for large volume data with predictable
relations.
2. Evaluate reliability of data
q Source of information
q Controls over preparation
q Nature and Relevance of information
q Comparability of financial information
3. Develop precise expectation
q Availability of information.
q Disaggregated information.
q How accurately results can be predicted.
Practical Insight:
Major areas where substantive
analytical procedures are performed
include Sales (if sale price is fixed),
Payroll expenses. Rent Expenses,
Depreciation Expense, Selling
commission, Interest Expense, Accruals.
4. Determine acceptable difference
q Materiality.
5. Investigate significant difference
q Inquire of management
q Corroborate
q Perform other procedures.
In forming overall conclusion
ü To corroborate conclusions on individual
components.
ü In forming overall conclusions.
ü To identify previously unrecognized risk.
By 69
CAF 08: Audit and Assurance
Chapter 16: Related Parties
Secret Sheet for Quick Revision
(For students of Muhammad Asif, FCA)
Outlines:
q How to ensure completeness of related parties.
q How to address risks related to related parties.
LO1 & LO 2: Introduction and Responsibilites of Management and Auditor
Examples of Related Parties:
q Holding company, subsidiary, associated company.
q Majority shareholders, Directors, Key management
or their close relatives.
q Other entities controlled by above individuals.
Examples of Related Party Transactions:
q Sale (or purchase) of assets.
q Receiving (or providing) services.
q Giving (or obtaining) loan.
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LO 5: Implications on Report
Responsibilities of Management:
To identify, account for and disclose related party
relationships and transactions in F/S.
Controls over related party Ineffective:
q Scope limitation.
q
Qualified Opinion or Disclaimer of
Opinion.
Responsibilities/Objectives of Auditor:
1. To ensure management has identified, accounted
for and disclosed related parties in F/S.
2. To perform risk assessment procedures to assess
risks relating to related parties.
3. To respond to risks.
Disclosure not adequate:
q Misstatement.
q Material by nature (even if amount is small).
q Qualified Opinion or Adverse Opinion.
LO 3: Risk Assessment Procedures and Related Activities
(to ensure completeness of related parties)
Inquiry:
1. of management regarding:
q Related parties
q Relationships.
q Transactions.
2. of management and others to obtain
understanding of controls:
q
To identify, account for and disclose related
party relationships and transactions in F/S.
q To approve transactions with related parties.
Discussion among Engagement Team:
q Nature and extent.
q Professional scepticism.
q Circumstances.
q Documents and records.
Inspection:
1. Bank and legal confirmations;
2. Minutes of meetings of shareholders and TCWG
3. Other records or documents (e.g. confirmations,
Register
of
shareholders/directors/officers/
investment, tax return, regulatory filings.)
Other Procedures:
1. working papers of previous years.
2. inquire other audit firms involved in audit.
3. inquire predecessor auditor.
4. inquire interest of TCWG and other officers in other entities.
LO 4: Substantive Procedures to Respond to Risks
If management states “Related Party Transactions
were conducted on arm’s length basis”
Management's Support may include:
q Comparing terms to open market.
q Comparing terms with unrelated parties.
q Engaging expert.
Auditor shall:
q Consider appropriateness support.
q Test accuracy, completeness and relevance of source data.
q Evaluate reasonableness of assumptions.
If auditor identifies related party relationships or
transactions not identified by management
1.
2.
3.
4.
5.
6.
Promptly communicate to other members.
Inquire why controls failed to identify this party.
Request management to identify all transactions with this party.
Perform substantive procedures on transactions.
Reconsider risk of completeness of related party information.
Reconsider risk of fraud, if non-disclosure is intentional.
If there is a significant transaction
outside the normal course of business
Examples of Transactions outside the entity’s normal course of business:
1. Equity transactions.
2. Transactions with offshore entities.
3. Providing property or services without consideration.
4. Sales with unusually large discounts or returns or with commitment to
repurchase.
5. Transactions whose terms are changed before expiry.
Auditor’s Course of Action:
1. Inquire and evaluate business rationale.
2. If related party is involved,
a. Inspect approval.
b. Inspect underlying contract to evaluate:
q Indication of fraud.
q Terms consistent with management’s explanation.
q Transaction appropriately accounted for and disclosed.
Related Party with Dominant Influence
This is a fraud risk factor.
Indicators of dominant influence:
1. Founder and Manager of entity.
2. Significant transactions referred for final approval.
3. Vetoed significant business decisions.
4. Little or no debate on proposals by related party.
5. Transactions with such party are not reviewed and approved.
By 69
Overview:
This chapter discusses how concept of Sampling is used in audit in performing:
Tests of Controls, and
Tests of Details.
CAF 08: Audit and Assurance
Chapter 17: Audit Sampling
Secret Sheet for Quick Revision
(For students of Muhammad Asif, FCA)
Premium Content
(For Autumn 2022)
Selecting Items for Testing
100% Selection:
1. Small number of large items, or
2. Significant risk , or
3. Cost effective, or
4. Population not homogenous.
Specific item selection:
1. Items over certain amount
2.
Items
showing
characteristics/risk
3. Items to obtain information.
Audit Sampling:
Procedures on less than 100% Items
Conclusion on entire population
Used in TOC/TOD
certain
Sampling Risk:
Definition:
Auditor’s conclusion based on sample might be
different from conclusion if entire population tested.
How to reduce Sampling Risks:
Increase in Sample Size, and
Stratification.
Non-Sampling Risk:
Definition:
Auditor’s conclusion may be wrong for other reasons than sampling
risk e.g. use of inappropriate procedures by auditor, or misinterpretation
of evidence, or failing to recognize a misstatement.
How to reduce Non-Sampling Risk:
Proper planning, supervision and review.
Audit Sampling
Sample Design
Performing Procedures
¨ Perform Procedures on each item.
¨ If procedures not applicable (e.g.
cancelled cheque), select replacement
item.
¨ If auditor unable to perform procedures
(e.g. lost documents), treat deviation/
misstatement.
Steps in Sample
Design
Deviation/ Misstatement and Projection
Investigate Cause and Nature
If Anomaly:
¨Be certain.
¨Don't project.
¨Include in identified misstatements.
Determine Purpose and Population
Purpose
¨ TOC or TOD
¨Overstatement or Understatement
If share common feature
¨Select all such items and extend
procedures.
¨Risk of fraud (if intentional)
Define Deviation/Misstatement
Project
Tests of Controls
Tests of Details
¨ No projection for TOC
¨Project misstatements for TOD
1. If projected < Tolerable ® Rely on controls.
2. If projected > Tolerable ® Increase Risk.
1. If projected < Tolerable ® Evidence obtained.
2. If projected > Tolerable ® Do not conclude, request
management and increase procedures to make adjustment.
Assess Expected Rate of Deviation, or
Expected Misstatement
ý Posting into wrong customers’
account
ý Timing difference
þ Lost documentation
Statistical
(i) random selection of items, and
(ii) probability theory to evaluate results
Disadvantages of Statistical Sampling:
1. Lacks human judgment.
2. Investment, and training needed.
3. False conclusions may be drawn.
4. Sample size may be larger.
Assess Tolerable Rate of Deviation
or Tolerable Misstatement
Set by auditor to obtain assurance that
actual
deviations/misstatements
in
population do not exceed this level (i.e.
application of performance materiality)
Determine Sampling Approach
Advantages of Statistical Sampling:
1. Scientific techniques.
2. Sample size calculated accurately and objectively.
3. Free from bias.
4. Special softwares available.
5. efficient in large population.
Evaluating Results
Stratification
Non-Statistical
That
does
not
characteristics (i) or (ii)
have
Stratification
Sub-dividing population into different
groups (having similar characteristics).
Separate projection for each group, and
then combined.
Determine sample size
Test of Controls
1. Tolerable rate of deviation
2. Expected Rate of deviation
3. Desired Level of Assurance
4. Reliance on controls
5. Population Size
Test of Details
1. Tolerable misstatement
2. Expected Misstatement
3. Desired Level of Assurance
4. Stratification of Population
5. Other Substantive Procedures
6. Population Size
Methods of Selection
1. Systematic Selection:
Selecting every nth item.
2. Random Selection
Using random numbers to select items.
3. Haphazard Selection:
Selecting without any structured technique. (Not allowed in Statistical Approach)
4. Block Selection:
Selecting complete block of contiguous items. (Never allowed)
By 69
CAF 08: Audit and Assurance
Chapter 18: Reliance on Work of Others
Secret Sheet for Quick Revision
(For students of Muhammad Asif, FCA)
Outlines:
q How to use the work of Internal Auditor.
q How to use the work of Expert.
Premium Content
(For Autumn 2022)
LO 1: Introduction to Internal Audit Function
Comparison of Internal Auditors/Audit with External
Auditors/Audit:
q Independence
q Appointment
q Qualification
q Scope
q Report to
q Report Format
Scope of Activities:
1. Monitoring of internal control (performs TOC)
2. Examination of financial and operating
information (performs TOD)
3. Review of compliance with laws and regulations
4. Review of operating activities (economically,
efficiently and effectively).
5. Special investigations (e.g. suspected fraud)
LO 2: Using the Work of Internal Audit Function
Evaluate Internal Audit Function
Determine which work of Internal Audit
Function can be used
Competence:
q Qualification and experience.
q Knowledge and skills of financial reporting.
q Training and hiring process
resources.
Objectivity:
q Reportable to.
q Determination of scope..
q Conflicting responsibilities.
q Familiarity threat.
q HR decisions (hiring, firing, promotion).
q Restrictions.
Approach:
q Planning, Direction, Supervision, Review
q Documentation.
q Quality Control Standards
Do NOT use work if
q Competence or Objectivity lacks.
Use but less reliance if:
q Area involves Risk and Judgment
q Less than serious concerns about competence
or objectivity.
Work can be used in following areas:
q Documentation of System.
q Risk assessment.
q Tests of Controls.
q Substantive procedures (with low judgment).
q Inventory counts.
q Compliance with laws.
q Trace transactions.
Evaluate Adequacy of Work
Evaluate:
q
Work properly performed.
q
Evidence obtained.
q
Conclusions appropriate,
consistent with work performed.
q
Exceptions resolved.
Discussion and Agree Matters with
Internal Auditor
and
Procedures to Evauate:
q
Reperformance,
q
inquiry,
q
observation.
q
inspection.
Extent depends on area and internal
auditor.
q
nature of work.
q
timing.
q
coverage.
q
materiality.
q
sample sizes and methods of
selection.
q
documentation.
q
review.
Communication and Documentation
Communication with TCWG:
q Planned use of work.
Documentation:
q
The evaluation of Competence,
Objectivity, Approach.
q Nature and extent of work used.
q Procedures to evaluate adequacy.
LO 3: Using the Internal Auditor to Provide Direct Assistance
Auditor’s Responsibilities if he Uses Internal
Auditor to Provide Direct Assistance
Whether to obtain direct assistance
Which areas to obtain Direct Assistance
NOT if:
1. Prohibited by law.
2. Significant threats to competence or
objectivity.
Consider:
q
Risk and Judgment in area,
q
Competence and Objectivity of internal auditor.
q
Leve of Involvement of external auditor in audit.
Obtain Agreements:
q
Authorized representative of the entity (NOC) and
q
Internal auditors (to ensure confidentiality and objectivity).
NOT in following Areas:
q
Higher risk and significant judgments.
q
Risk of fraud.
q
Unannounced audit procedures.
q
Confirmation requests.
Direction, Supervision and Review:
q
To ensure sufficient appropriate evidence obtained.
q
Different as compared to audit team member (considering risk
and judgment of area, competence and objectivity of internal auditor).
q
checking back some of the work performed.
Communication and Documentation
Communication with TCWG:
Nature and extent of planned use of internal
auditors to provide direct assistance.
Documentation:
q
The evaluation of Competence, Objectivity.
q
nature and extent of work.
q
Who Reviewed, when.
q
Written agreements.
q
Working papers.
By 69
CAF 08: Audit and Assurance
Chapter 18: Reliance on Work of Others
Secret Sheet for Quick Revision
(For students of Muhammad Asif, FCA)
Outlines:
q How to use the work of Internal Auditor.
q How to use the work of Expert.
Premium Content
(For Autumn 2022)
LO 6: Reference to Expert’s Work in Audit Report
LO 4: Introduction to Expert
Areas where Expert may be used:
q
Fair value of Assets and Liabilities (property, pension)
q
Legal Cases, and Legal Requirements.
q
Engineering data (machinery life)
q
Tax issues.
q
IT Expertise.
Reference of expert only if:
q
Required by Law, or
q
Relevant to explain modified opinion.
q
Key Audit Matter.
If reference included:
1. Obtain permission of expert.
2. Indicate reference does not reduce auditor’s responsibilities.
LO 5: Auditor’s Responsibilities If he Uses Expert in an Audit
Evaluate Competence, Capabilities and Objectivity of
Expert.
Factors to consider:
q
Professional qualification
q
Experience and reputation.
q
Independence from client company.
Sources to obtain knowledge:
q
Personal experience.
q
Discussions with expert.
q
Discussions with others familiar with expert.
q
Information from relevant authorities.
q
Published papers or books by expert.
Obtain Understanding of Field of
Expert’s Work:
q
To determine scope of work.
q
To evaluate adequacy of work.
Agree Terms of Engagement with Expert:
1.
Nature, scope and objectives of work.
2.
Responsibilities of auditor and expert.
3.
Form of expert’s report.
4.
Confidentiality requirements.
Evaluate Appropriateness/Adequacy of Work:
1.
source data.
2.
assumptions and methods.
3.
findings and conclusions,
4.
consistency with other audit evidence.
If Expert’s Work is Not Adequate for Auditor’s Purpose:
q
Agree additional work, or
q
Perform additional procedures (e.g. hiring another expert), or
q
Scope limitation (if still not adequate).
By 69
CAF 08: Audit and Assurance
Chapter 4: Audit Report
Secret Sheet for Quick Revision
(For students of Muhammad Asif, FCA)
Outlines:
Elements of Audit Report, and Modified Opinions
Other Modifications in Report (EOM, OM, GCU, KAM)
ELEMENTS OF AUDITOR’S REPORT
Premium Content
(For Autumn 2022)
DECIDING OPINION
1. Title (independent auditor’s report)
2. Addressee (Members or Others e.g. BOD)
3. Opinion (identifying information + Opinion)
4. Basis for Opinion (ISAs, Ethics, Evidence)
5. Key Audit Matter Section
6. Other Information
7. Responsibilities of Management (F/S, Internal Control, Going Concern)
8. Responsibilities of Auditor (Location = Within report, Appendix, Website)
Overall Objective
Discussion on reasonable assurance, materiality, scope of audit,
Responsibility to communicate to TCWG (Scope, Significant findings, KAMs, Statement of Compliance)
9. Other Legal and Regulatory Requirements (Books of Account, F/S drawn up, Investment, Zakat)
10. Signature (in firm name, personal name or both)
11. Date (on/after evidence completed and subsequent events considered).
12. Address (city name).
Cases of Misstatement
Cases of Scope Limitation
Steps to Solve Case Study of Audit Report
Important Examples:
1. Pending litigation is not correctly accounted for or
disclosed.
2. Related party transactions or Going Concern Issues are not
disclosed.
3. Obsolete inventory or bad debts are not provided for.
4. Depreciation or Impairment is not properly recorded.
5. 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)
Important Examples:
1. Records destroyed or seized by govt.
2. No inventory count, confirmation, written
representation.
Step # 1: Evaluate the situation
(i.e. whether misstatement, scope limitation or
other modifications).
Also state course of action if required in question.
Step # 2: Determine Materiality
(if it is misstatement or scope limitation)
Step # 3: Determine Effect on Report
Effect on Report:
Qualified Opinion (if effect is material), or
Adverse Opinion (if effect is pervasive).
Effect on Report:
Qualified Opinion (if effect is material), or
Disclaimer of Opinion (if effect is pervasive).
If misstatement or scope limitation is intentional,
it will affect Opinion + Other aspects (e.g. Integrity,
Risk, Procedures, Withdrawal)
KEY AUDIT MATTER
When to include KAM Section
Included, if listed company.
Not included, if disclaimer of
opinion is given.
How to determine KAM
How to draft KAM Section
Definition
Examples
When KAM not Reported
– Communicated with TCWG
– Most significant
– Current Period
1. Goodwill, Intangible Assets, Deferred Tax.
2. Assets carried at revalued amounts.
3. Impairment loss.
4. Valuation of liabilities e.g. financial instruments, retirement obligations (Pension or
Gratuity).
5. Significant accounting policies
6. Areas where work of Expert or Component auditor is used.
7. Acquisition and disposals of business units,
8. Restructuring of business (Non-current assets held for sale, Restructuring provision)
9. Significant number of litigations and tax contingencies.
10. Significant related party transactions.
A KAM is not included in KAM section if:
Law prohibits disclosure, or
Adverse consequences are more than
benefits.
Additional Concepts
– How many KAMs (no lengthy list, 2-3)
– No KAM (Section included without any
KAM)
– Matters causing modifications in Opinion/
Report (they are KAMs but reported in their
relevant sections)
EMPHASIS OF MATTER PARAGRAPH
Definition
Examples
Placement
Presentation
Drafting Example
Included if necessary to draw users’
attention to a disclosure in F/S, which
is fundamental to understanding of
the F/S, provided:
- not requires modified opinion, and
- not a KAM.
1. Exceptional litigation or Regulatory action.
2. Subsequent event.
3. F/S are re-issued, or corresponding figures are restated
4. Major disaster during the year
5. Early application of a new accounting standard
6. Financial reporting framework is unacceptable but is
required by law
7. Special Purpose Framework is used.
After basis of
opinion , before Key
Audit Matter
1.Reference to notes.
2. Matter being emphasized.
3. Opinion not modified in this matter.
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.
By 69
CAF 08: Audit and Assurance
Chapter 4: Audit Report
Secret Sheet for Quick Revision
(For students of Muhammad Asif, FCA)
Outlines:
Elements of Audit Report, and Modified Opinions
Other Modifications in Report (EOM, OM, GCU, KAM)
Premium Content
(For Autumn 2022)
GOING CONCERN
Responsibilities
Audit Procedures
Management
Auditor
Risk Assessment Procedures
– To assess (atleast for 12 months) ability of entity to
continue as Going Concern (whether or not AFRF
requires).
– If there are events or conditions casting doubt,
dislcose them.
–If there is material uncertanity, disclose it.
– If Going concern not appropriate, prepare F/S on
non-going concern basis.
– To perform Risk Assessment Procedures to
identify events/conditions.
– If events/conditions are identified, perform
procedures to confirm whether going concern
assumption is appropriate, or mateiral
uncertanity exists.
– To report in accordance with his findings.
Inquire if management made assessment:
(i) If assessment is made, evaluate whether assessment covers 12
months, and includes all information.
(ii) If assessment is not made, discuss basis of going concern accounting.
If any event/condition identified, discuss plans to address it.
During risk assessment procedures, consider whether events or
conditions exist.
Remain alert throughout the audit.
Examples of events/conditions casting doubt
on going concern
Additional Procedures if events/conditions
are identified
Financial conditions:
Substantial losses or negative equity.
Net liability position.
Liquidity issues (insufficient cash to pay liabilities, inability to
obtain finance)
Adverse key financial ratios.
1. Evaluating management’s plans.
2. Evaluate Cash Flow Forecast.
3. Obtain representation.
4. Consider subsequent event
5. Read minutes, loan agreements, financial
information.
6. Inquire legal counsel.
7. Consider availability of financial support.
Operating conditions:
Loss of key management.
Loss of a major market, or major customer with highest sales.
Non-availability of production resources (e.g. material, labor,
license)
Legal and Other conditions:
Non-compliance with laws and regulations.
Uninsured or underinsured catastrophes.
Effect on Report
Event/Condition exists (but no material
uncertanity exists)
Disclosed in F/S
Not disclosed in F/S
– Unmodified Opinion
– Key Audit Matter
Qualified opinion (if material), or
Adverse opinion (if pervasive)
OTHER MATTER PARAGRAPH
Material Uncertanity Exists
Going Concern NOT appropriate
Adequately
disclosed in F/S
Not adequately
disclosed in F/S
F/S prepared on nongoing concern basis
F/S prepared on going
concern basis
– Unmodified Opinion
– Material Uncertanity relating
to Going Concern Paragraph
Qualified opinion (if
material), or Adverse
opinion (if pervasive)
– Unmodified Opinion
–
Emphasis
of
Matter
Paragraph (Special Basis of
Accounting)
Adverse Opinion
Definition
Examples
Placement
Drafting Example
Included to communicate a matter relevant
to users’ understanding of the audit,
auditor’s
report
or
auditor’s
responsibilities, provided:
- not prohibited by law, and
- not a key audit matter.
1. Prior period not audited or audited by
another auditor.
2. Auditor expresses opinion on two sets of
financial statements.
3. Restriction on distribution of report.
4. Pervasive scope limitation by management,
and withdrawal is not possible.
Within the section to which it
relates, or at end of report.
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.
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.
By 69
CAF 08: Audit and Assurance
Chapter 4: Audit Report
Secret Sheet for Quick Revision
(For students of Muhammad Asif, FCA)
Premium Content
(For Autumn 2022)
PART C: DRAFTING OPINION
Unmodified Opinion
Opinion
We have audited the ………...
In our opinion, financial statements give true and fair view of financial position of ABC Limited at
December 31, 20X1 and its financial performance and cash flow for the year then ended in accordance
with IFRS.
Basis for Opinion
We conducted our audit in accordance with …...
Qualified Opinion
(Inventory is not stated at lower of cost & NRV)
Qualified Opinion:
We have audited the ……………….
Qualified Opinion
(Auditor is unable to physically count the inventory)
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:
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.
We conducted our audit in accordance with …………
In our opinion, except for the 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 …………
Adverse Opinion
(A subsidiary is not consolidated)
Adverse Opinion
We have audited the ……………….
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 December 31, 2020 and its financial performance and cash flow for the year then ended in
accordance with 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.
We conducted our audit in accordance with …………
Disclaimer of Opinion
(Auditor unable to confirm inventory, and receivables)
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.
By 69
CAF 08: Audit and Assurance
Chapter 5: Acceptance & Continuance Procedures
Secret Sheet for Quick Revision
(For students of Muhammad Asif, FCA)
Outlines:
This chapter discusses Proposed Auditor's Responsibilities before accepting an
engagement.
Premium Content
(For Autumn 2022)
Preliminary Engagement Activities
(Activities performed at the start of engagement)
1. Acceptance and
continuance procedures
Information to be considered before acceptance:
1. Integrity of client.
2. Competence and capability of engagement team.
3. Compliance with ethical requirements.
4. Significant matters during other/previous engagement.
5. Relevant information from predecessor auditor.
If Threats are identified at time of Acceptance
Firm lacks Competence, Capabilities:
q
Understand business (operations), subject matter
and engagement (purpose).
q Realistic time frame.
q Sufficient and suitable staff (including experts)
q Don’t accept if threat cannot be reduced.
Integrity of Client is Doubtful:
q Discuss with client
q Obtain commitment to address issue.
q Don’t accept if threat cannot be reduced.
2. Compliance with Ethical
(including Independence)
requirements
Auditor’s Procedures after accepting Client/Engagement:
1. Send consent.
2. Ensure appointment in AGM (e.g. through minutes).
3. Send Engagement letter.
Second Opinion/Complementary Work
Preliminary Engagement Activities
(Activities performed at the start of engagement)
Reasons:
To identify any matters relevant to acceptance decision (e.g.
integrity of management, overdue fee, disagreement,
inappropriate scope limitation).
Procedures by incoming auditor:
1. Permission from client (due to confidentiality principle).
Refuse if permission not given.
2. If reply from predecessor auditor:
q Received, consider and address issues identified.
q Not received, obtain information from other sources.
3. Agree on terms of
engagement.
Procedures by outgoing auditor:
1. Permission from client (due to confidentiality principle).
2. If permission from client:
q Given, honestly state relevant facts.
q Not given, inform auditor about non-permission.
Threats:
Threat to professional competence and
due care due to lack of information.
Safeguards:
1. After permission of client, obtain relevant facts
from existing accountant.
2. Provide a copy of opinion to existing accountant.
By 69
CAF 08: Audit and Assurance
Chapter 6: Compliance with Legal Requirements
Secret Sheet for Quick Revision
(For students of Muhammad Asif, FCA)
Outlines:
q This chapter discusses requirements of Companies Act applicable on Auditor
(e.g. Appointment, Qualification/Disqualification, Rights/Duties).
LO 2: Procedures for Appointment and Removal of Statutory Auditor
LO 1: Authority for Appointment and Removal of Statutory Auditor
1. First auditor:
q By Directors within 90 days of incorporation.
q If not appointed, Commission.
Tenure of Auditor:
q from date of appointment till conclusion of
next AGM.
2. Subsequent auditor:
q By members at AGM.
q If not appointed, Commission.
Removal of Auditor:
1. At AGM (=Retirement):
q Tenure completes. New appointment made.
3. Casual vacancy: (death, disqualification)
q By directors within 30 days of occurrence.
q If not appointed, Commission.
4. Mid-term removal of auditor:
q By directors with prior approval of Commission.
5. If disqualified person is appointed:
q Appointment is void.
q Commission will appoint now.
6. If appointed auditor is unwilling to act:
q Commission will appoint now.
Premium Content
(For Autumn 2022)
2. Before AGM (= Mid-term Removal):
q By members through Special Resolution.
Remuneration of Auditor:
Determined
q by members; or
q
by the board (if appointed by Board) or
Commission (if appointed by Commission).
Signature on Auditor Report:
q By Partner of firm.
q In the name of firm.
Legal Procedure
Ethical Responsibilities
1. Recommendation by Directors: (new or existing auditor)
q Obtain consent of proposed auditor.
q Send recommendation with notice of AGM.
2. Recommendation by Members:
q Obtain consent of proposed auditor.
q 10% shareholder.
q Send notice 07 days before AGM.
Company to send notice to retiring auditor and upload on website.
Ethical Responsibilities of Outgoing Auditor:
1. To reply to Professional Clearance Letter with permission of client.
2. To file ICAP Representation in writing (if made).
3. To file ICAP “Statement of Facts/Circumstances” (in mid-term removal).
Ethical Responsibilities of Incoming Auditor:
1. To send Professional Clearance Letter with permission of client.
2. To read Representation in writing (if made).
3. To inform and obtain clearance from ICAP (in mid-term removal)
3. Right of Retiring Auditor:
q To make representation in writing, atleast 02 days before AGM.
q Representation to be rea out at AGM.
Retiring auditor shall attend AGM.
4. Appointment at AGM:
q By members through resolution.
5. Notification after Appointment:
q To Registrar within 14 days of appointment.
LO 3: Rights and Duties of Statutory Auditor
Statutory Rights of Auditor
Auditors’ right to information:
1. To access company‘s books, accounts and vouchers.
2. To access books, accounts and vouchers of branches.
3. To require information from any employee of:
q company, or
q subsidiary of company, or
q person who holds company’s books etc.
Statutory Duties of Auditor
Rights with regard to the general meeting:
1. To receive notices general meetings.
2. To attend general meetings.
3. To speak at general meetings.
4. To make representation in writing.
To report:
1. whether F/S give true and fair view.
2. whether all information and explanations obtained.
3. whether proper books of account kept.
4. whether F/S drawn up as per Act, and in agreement with books
of account.
5. whether investments, expenditure for the purpose of business.
6. whether zakat deducted and deposited.
LO 5: Audit of Cost Accounts
LO 4: Qualification and Disqualification of Statutory Auditor
Qualification Criteria
1.
Public Company, or Private company (subsidiary
of a public company, PUC of more than 03 million) -->
by Chartered Accountant
2.
Other Companies --> Chartered Accountant, or
Cost and Management Accountant.
Disqualification Criteria
1. Shareholding by a partner (or spouse or minor child) in audit client (or
associated company). If so, disclose and dispose within 90 days of appointment.
2. Indebtedness of a partner to company, except:
q In ordinary course of business, or
q Upto 1 million to a credit card issuer, or
q Upto 90 days to a utility company.
3.
4.
5.
6.
7.
8.
9.
Business relationship with company (except ordinary).
Employee/Director (current or in last 3 years)
Employee/Partner of an employee of company.
Spouse of Partner is a Director in company.
Body corporate.
Guarantee to company.
Convicted of fraud in last 10 years.
Requirements to maintain Cost
Accounting Records
Which Company:
q
Engaged in production, processing, manufacturing or
mining activities
Which Record:
q Utilisation of Material, Labour, Other inputs or items of
cost.
Audit of Cost Accounting Records
When to conduct cost audit:
q If ordered by Commission, in the manner specified.
Who can conduct:
q Chartered Accountant or Cost and Management Accountant.
Powers of Cost Auditor:
q
Same powers, duties and liabilities as an auditor + others as
prescribed.
Important Notes:
1. If a partner is disqualified, then whole firm is disqualified.
2. If a person is disqualified for a company, he is also disqualified for its holding, subsidiaries,
and holding’s other subsidiaries.
By 69
CAF 08: Audit and Assurance
Chapter 19: Fraud Considerations in Audit
Secret Sheet for Quick Revision
(For students of Muhammad Asif, FCA)
Premium Content
(For Autumn 2022)
Outlines:
q How to identify and address risk of fraud in an audit
LO 1: Types of Fraud and Responsibilities
Misstatements
Error
(Unintentional misstatement)
Responsibilities
Fraud
(Intentional act to deceive someone to
obtain illegal advantage)
Misappropriation of Assets:
q Embezzling receipts.
q Stealing physical assets or intellectual property.
q Making payment without any goods/services.
q Using an entity’s assets for personal use.
Responsibility of Management (& TCWG):
q Primary responsibility.
q Management establishes systems and controls. TCWG monitor.
Fraudulent Financial Reporting:
(through management override of control)
q Recording fictitious entries.
q Changing assumptions and judgments.
q Advancing or delaying recognition.
q Altering records.
q Complex structured transactions.
q Concealing facts.
LO 2: Risk Assessment Procedures and Fraud Risk Factors
Risk Assessment Procedures to identify risk of fraud:
1. Inquiries of Management (process, risks,
assessment, communication).
2. Inquiries of Management & Others (frauds).
3. Inquiries of internal audit/TCWG (frauds).
4. Unusual trends in analytical procedures.
5. Fraud risk factors.
Responsibility of Auditor regarding Fraud:
q Primary responsibility is reasonable assurance, not fraud detection.
q Auditor responsible to identify risk of fraud, address risk of fraud,
maintain professional skepticism.
Fraud Risk Factors: (important ones)
1. Known deficiencies in internal control.
2. Intended sale of shares/business
3. Pressure/Incentive on management to achieve targets.
4. Going Concern Issues/Poor financial conditions.
5. Related party transactions outside normal course.
6. Domination of management without oversight by directors.
7. No or Ineffective Internal Audit department.
8. Lack of Management Integrity.
9. Precious and movable items.
10. Adverse Relationships between entity and employee.
11. Personal financial obligations
12. Missing evidence/records.
13. Unexplained items on reconciliation.
14. Inconsistent evidences.
15. Large transactions at year end.
LO 3 & LO 4 & LO 5: Auditor's Courses of Actions
If there is a risk of fraud
If fraud is identified or suspected
Refer Chapter 3, sub-heading “Response
to Risk at Financial Statement Level”.
1. Communicate:
q To Management (Appropriate level).
q
To TCWG (if significant, or management
involved).
q To Regulatory authority (if required by law).
2. Impact on Report (if misstatement in F/S)
3. Withdraw (if management integrity doubtfully)
Management Override of Control
Techniques:
Same as in Fraudulent financial reporting.
Audit Procedures to address risk of Management override of control:
1. Test the appropriateness of journal entries.
q
Inquiries about unusual activity;
q
Select entries/adjustments at year-end; and
q
Consider to select entries/adjustments throughout the year.
2. Review accounting estimates for possible biases.
q
Indication of possible bias as a whole; and
q
Retrospective review of estimates.
3. Business rationale for transactions outside the normal course.
By 69
Outlines:
This chapter discusses
Subsequent Events [How to respond to Subsequent Events, particulalry when they are identified after Audit
Report or after Issue of F/S.]
Written Representations [Guidance on which areas to obtain written representation from management/
TCWG, and course of action if there are doubts or representation is not provided.]
CAF 08: Audit and Assurance
Chapter 20: Final Matters
Secret Sheet for Quick Revision
(For students of Muhammad Asif, FCA)
Premium
Content
(For Autumn 2022)
ISA 560: Subsequent Events
Occured till Audit Report
(Responsibility = Active Review)
Procedures to identify
Subsequent Events
Identified after Audit Report
(Responsibility = Passive Review)
Procedures to verify
Subsequent Events
Auditor performs procedures to identify subsequent
events:
1.Obtain Understanding of management procedures
2. Inquiry of management & TCWG
3. Reading Minutes
4. Reading Subsequent Interim F/S
5. Obtain Representation
6. Other Procedures (inspection of books and records,
budgets, inquire legal counsel)
These procedures will be performed if
specific subsequent event is discussed in
question e.g. Debtor, Inventory, Fire.
If management amends F/S
Law prohibits restrictedamendment
Law does NOT prohibit
restricted-amendment
1. Perform procedures on amendment.
2. Provide new report. (include EOM)
3. Update Report
4. Extend Active review of subsequent
events.
1.Perform procedures on amendment.
2.Amend report (describe that responsibility is
restricted by adding Dual Date or EOM/OM )
If management does not amend F/S
If report not provided, modify it.
If report provided:
(a) Notify management not to issue.
(b) Obtain legal advice, if still issued.
Identified after Issue of F/S
Examples of Subsequent Events
If management amends F/S
Adjusting Events
Non-Adjusting Events
1. Settlement of legal case after the year end.
2. Subsequent bankruptcy of debtors.
3. Subsequent sale of inventory below cost.
4. Return of defective inventory after year end.
5. Subsequent discovery of misstatement in F/S.
6. Change in going concern assumption after the
year end.
1. Destruction of assets by fire/flood.
2. Customer cancelled order due to change in law.
3. Major restructuring, discontinuance of operations,
4. Issue of shares or debentures.
5. Appropriation of assets by government.
6. Issuance of guarantees or commitments.
Law prohibits restrictedamendment
Law does NOT prohibit
restricted-amendment
1. Perform procedures on amendment.
2. Provide new report (include EOM)
3. Update Report
4. Extend Active review of subsequent
events.
1. Perform procedures on amendment.
2.
Amend
report
(describe
that
responsibility is restricted by adding Dual
Date or EOM/OM )
If management does not amend F/S
(a) Notify management to take steps
to prevent reliance on report.
(b) Obtain legal advice, if still no
steps taken.
By 69
Outlines:
This chapter discusses
Subsequent Events [How to respond to Subsequent Events, particulalry when they are identified after Audit
Report or after Issue of F/S.]
Written Representations [Guidance on which areas to obtain written representation from management/
TCWG, and course of action if there are doubts or representation is not provided.]
CAF 08: Audit and Assurance
Chapter 20: Final Matters
Secret Sheet for Quick Revision
(For students of Muhammad Asif, FCA)
Premium Content
(For Autumn 2022)
ISA 580 Written Representations
Introduction
Definition:
Written statement by management to the auditor:
to confirm management’s responsibilities and
to support other evidence
From Whom to Obtain:
From management who is responsible and
knowledgeable for F/S
(e.g. CEO, CFO rather than TCWG)
Types of Representations
About Management’s Responsibilities
1. About Preparation of financial
statements.
2. About Information provided, and
Completeness of transactions
Date of Written Representation:
As near as possible to the date of report (but not
after).
Other Representations
Required by Other ISAs
Determined necessary by auditor
1. Assumptions & Estimates
2. Related Parties
3. Subsequent Events
4. Immaterial misstatements
5. Fraud
6. Non-compliance with laws
7. Litigations
8. Going Concern
Representations regarding intentions/plans about
future course of action, and judgments
1. Intention to hold or sell investment/machinery.
2. NRV of inventory.
Period Covered:
For all periods covered by auditor’s report.
Form:
Letter form, addressed to auditor
Course of Action in Problematic Situations
Representation not provided
About Management’s
Responsibilities
Scope Limitation + Pervasive
Disclaimer of Opinion
Other Representations
Scope Limitation
Qualified
(if mateerial), or
Disclaimer of Opinion (if pervasive)
Re-assess integrity of management
Doubt as to Reliability of Representation
Representation inconsistent with
other evidence
Concerns about competence,
integrity of management
Discuss with management
Perform further procedures
If unresolved, re-assess competence/
integrity of management, and evaluate its
affect
on
reliability
of
other
representations and evidence.
Evaluate its affect on reliability of
representations and other evidence.
Withdraw if concerns are serious and
TCWG do not take appropriate action.
Diclaimer of opinion if representations are
not reliable .
Modifications in Representations
(e.g. 'except for')
-Representation is reliable
-Evaluate effect on audit report (exceptfor wording may indicate scope
limitation or misstatement)
Case Study Tip – Appropriateness of Written Representation
1. Written representation is Appropriate if it is required by ISAs or considered necessary by auditor.
2. Written representation is Not Appropriate in case of material misstatement or scope limitation.
Case Study Tip – Sufficient Appropriate Evidence
Sufficient Appropriate Evidence = Written Representation (if appropriate/requested) + Other evidence
(expected to exist)
(If either is missing, it will be scope limitation)
By 69
CAF 08: Audit and Assurance
Chapter 23:Quality Control
Secret Sheet for Quick Revision
(For students of Muhammad Asif, FCA)
Outlines:
This chapter discusses Elements of a Quality Control System
which should be implemted by Engagement Partner.
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Elements of Quality Control System
LO 2: Leadership Responsibility
Overall responsibility for engagement:
On Engagement Partner.
LO 4: A&C Procedures
Firm shall perform A &C Procedures.
Partner shall:
ensure that procedures are performed,
and conclusion is appropriate.
communicate to firm if any further
information is identified.
LO 1: Introduction
Objective: To implement a system to ensure engagement is
performed as per legal and professional standards, and
report is appropriate.
LO 3: Ethical Requirements
LO 5: Assignment of Team
LO 6: Performance
LO 7: Monitoring
Engagement Partner:
remains alert throughout engagement
for non-compliances of ethics. If occurred,
determines appropriate action.
forms conclusion on independence. For
this purpose, he obtains information, applies
safeguards (including withdrawal), evaluates
firm’s system.
Engagement partner shall ensure that team
has sufficient competence, and capability
(including Expert).
Direction, supervision and Review:
Engagement Partner shall ensure:
Direction, Supervision and Review of
engagement.
Sufficient Appropriate
evidence
obtained before report.
Partner shall review reports on monitoring
of Quality Control System of firm.
LO 8: Documentation
Engagement Partner shall document:
1. Conclusion on A & C Procedures.
2. Conclusions on Independence.
3. Issues identified and how resolved.
4. Nature and scope of consultations.
Quality Control Reviewer shall document:
1. Necessary procedures for QCR are performed.
2. Review completed before report.
3. No unresolved matter, or inappropriate conclusion.
Consultation:
Engagement partner shall ensure:
Consultation on difficult matters within
team, with within firm or outside firm.
Documentation of consultation, conclusion
and implementation.
Difference of opinion:
Follow firm’s policy.
Quality Control Review
Engagement partner shall ensure:
QC Reviewer is appointed (if required).
Discuss significant matters.
Date report after QCR.
Firm shall establish procedures to require
QC Reviewer to:
Discuss significant matters.
Evaluate conclusions.
Review documentations.
Review F/S and Report.
For listed clients, reviewer shall also ensure:
Independence of team.
Consultation, and conclusions.
Review documentation.