Salient Features: Volume-1 1+ Full Coverage of ICAP's Latest Syllabus of CAF-09 (Audit & Assurance) sf "Substantial Coverage of Latest Syllabus of IOMAP & PIPFA. VY le “1 Unique Exam Focused Concept-Based Approach of Author. iS E = : for Immediate Evaluation. 1 Every Concept Supplemented by Past Exam Question(s) for RISE Step by Step Guidance on how to Attempt Case Studies for Each Relevant Chapter PNW cal AL rae hool.edu.pk Scanned with CamScanneres LO 1: ORIGIN, AND ADVANTAGES OF ASSURANCE SERVICE: —== Origin of Assurance Services: Since the Industrial Revolution in 18% century, businessmen started forming Joint Stock Companies to do business, In most situations, people who managed the company (called management o; directors) were separate from those who owned the company (called shareholders). Following concepts explain the nature of relationship between directors/management and shareholders. ee at is an individual employed by principal to provide a particular service, Management and Directors have role of an agent i.e. they are appointed to act in accordance with instructions of shareholders (the principal). "= Steward: Stewardship is the practice of managing other pérson’s property. Management and Directors have role of stewardship Le. they wisely look after the assets of the.company on behalf of shareholders. * Accountable: Management and Directors are responsible to the shareholders for their actions and decisions. To show their accountability, directors and management prepare financial statements and present them to shareholders. To judge the performance of management and directors, shareholders asked them to prepare and Present them financial statements (F/S). Soon after, it was recognized that financial statements prepared by management/directors presented “best-view” of business instead of "true-and.fair. view" due to some Incentives (eg. bonus) or Pressures (eg. fear of removal) faced by management, Thus credibility of financial statements was questioned, To enhance the credibility/ confidence/ assurBWice on these financial statements, an expert person (called assurance Provider or auditor) was hired by shareholders to verify financial statements. This person is independent of hey management and shareholders. Services of auditors were appreciated greatly. Now a days, either because: * they are required by law (called statutory assurance en, assurance engagements are performed are given to shareholders), or * they are not required by law but are vol non-statutory assurance engagement companies conducting an audit). Advantages of ‘Assurance Services to an Organization: For Shareholders: V © . Most of the misstatements are identified, * Assists in sale or purchase of business, * Assists in grant of loan by bank. For Directors/Management: 1. Auditor identifies deficiencies in entity’s internal control system, 2 Audit confirms that management is performin g its statutory and non-statutory duties, . — Scanned with CamScanner luntarily performed because of its advantages (called ts eg. sole-proprietorships, partnerships and smallduction to Assurance Services Auditing-StudyNotes chapter 1 introduction to. CONCEPT REVIEW QUESTIONS on cap, cAF 09 Level - Spring 2004) a 04) Discus the concepts of stewardship and accountability in the content of liited MPA cap g9 Level - Spring 2037) CAF 09-0. tion Banh ond of tis chapter. ‘What are the advantages of an audit to an organization? (icaP's official Ques! ni Hints to concept review questions are included at thee LO 2: DEFINITION AND ELEMENTS OF ASSURANCE ENGAGEMENT: Assurance Engagement: “Assurance engagement” means an engagement in which a practitionet 0! evaluation of a subject matter against suitable criteria, and expresses his cont confidence of the intended users (other than the responsible party). Elements of Assurance Engagement: Every assurance engagement consists of following 5 elements: btains evidence about clusion to enhance the Element Explanation | 1. Intended users (the parties who require subject matter and assurance report eg. shareholders, bankers) | Athree party | 2. A responsible party (the party which is responsible for preparation of relationship subject matter ie. management) and 3. A practitioner (the professional who verifies subject matter and provides assurance on it i.e. auditor) Subject matter is the information which is prepared by responsible party, Asubject matter | and is to be verified by practitioner eg, financial statements (historical or prospective). Criteria means Framework (Le. standard rules and regulations) which Is used | to prepare financial statements. A Suitable Criteria. | Framework may be general purpose (for wide range of users e.g, IFRS) or special purpose (for specific users e.g. Tax Laws). Suitable means it should be selected appropriately. Evidence is the information used by auditor in arriving at the conclusions on which opinion is based. Evidence should be Sufficient and Appropriate. It is a report written in standard format (as per which includes conclusion of practitiones itis panna per local Laws) intended users Y practitioner to WLany of the above element is missin, z ig, engagement will be called non. cd. non-assurance engagement. CONCEPT REVIEW QUESTIONS Evidence Written Assurance | Report Ust down the basic elements of an assurance engagement. a (ICAP, CAF 09 Le {o2) ’ vel - §} State and explain five elements of Assurance Engagements, metagates Hints to concept review questions are Include end of this ae luded at the end of o ae Scanned with CamScannerto Assurance Services puahing-stuynotge enter niacin Auditing - Study Notes SURANCE AND WHY ABSOLUTE “ASSURANCE CANNOT i 2 ELS OF ASS tos ses his conclusion. There are tivo Assurance” means confidence with which a practitioner CxPeCe ass orassurance that can be provided to assurance client le Reasonable Assurance and Limite levels of assurance that cai ‘Assurance. Limited Assurance (also called Moderate Level or Negative Assurance) conclusion Le. “nothing surance which is expressed in neg: e.abtaivetrie ant Te vel of ass as co} fair view” 1 of assurance is usually given in review of financial statements, or examination of This level forecasts/projections. i e It isa high, but not absolute, level of assurance which is expressed in positive form of conclusion ie, “financial statements give true and fair view". This level of assurance is usually given in an audit of financial statements. Auditor is responsible to obtain reasonable assurance, which is not a guarantee that financial statements are free from all misstatements. There may be some undetected misstatements even after audit due to inherent limitations of audit, Absolute assurance means guarantee that auditor has detected all misstatements. Auditor cannot provide absolute assurance because of following inherent limitations of audit: 1. Because of time and cost limitation, auditor checks only a sample of transactions. 2. Fraud involving collusion and complex techniques are harder to detect. 3. “Some accounts in financial statements involve estimates / judgments/ uncertainties which are difficult to calculate and verify, =. Many of the audit procedures are based on auditor's judgment which can be faulty. Management may not provide cgmplete information to auditor. Auditor does not have specific legal powers e.g. power to search. Most of the evidence is ygrsuiasive rather than conclusive. noes CONCEPT REVIEW QUESTIONS (2) Whatis meant by reasonable assurance? ( (©) Wy an auditor cannot provide an absolute assurance as a result of audit? Expla, (03) (ICAP, CAF 09 Level ~ Autumn 2004) in response to an audit engagement letter sent to Roof Limi * In response to nage | imited (RL), Mr. Aziz Aslam, the new chief executive of RL li Regen. /OH" frm to provide absolute assurance in the audit report, Draft an appropriate reply mentioning any four reasons why the above request cannot be complied with. (ICAP, CAF 09 Level - Autumn 201 05) i) 33) {ICAP's Official Question Bank for CAF 09-Q.# Scanned with CamScanner™ Auditing - Study Notes Chapter 1 Introduction to Assurance Services spemenn abst and reasonable surance ety theo iota an wahoo Distinguish between ase ge reasons to sty Your point of view i financial st {ICAP, CAF 09 Level - Spring 2009) {ICAP’s Official Question Bank for CAF 09 ~Q. # 2) ga imitations of external audits. 03) el (ACCA, Fundamentals Level F8 - December 2012) is it yee between an “assurance engagement” and an “audit engagement”? (01) ae ee (ICAP, CAF 09 Level - Spring 2003) 2 iefly explain with examples, the different levels of assurance that can be provided to an assurance client. (03) heey " (ICAP, CAF 09 Level - Autumn 2015) (ICAP’s Official Question Bank for CAF 09 - Q. # 133g) (b)Explain the meaning of “assurance” and give two examples of types of assurance which can be provided, distinguishing between the two in terms of the level of assurance offered by each of them. | {ICAP’s Official Question Bank for CAF 09 - Q. # 169a) | AG Company approached the Mini-Finance Bank to extend their overdraft limit in order to finance a new project. The | bank asked the company to provide cash flow projections and assurance over those projections. Requiréd: Explain the type of assurance engagement that will be undertaken by the auditor in the above scenario and form of such assurance. Also explain why such type of assurance is appropriate for cash flow projections. (03) (CMA Pakistan - Fall 2016) l Hints to concept review questions are included at the end of this chapter. APX: HINTS & COMMENTS TO CONCEPT REVIEW QUESTION: aa State advantages to both external stakeholders and directors (because question did not specify any party) Q2 Straightforward question. (02 marks for each concept. Students are advised to write in exam only what they learn from book. Do not try to produce or explain material on your ‘own, Usually, it results in ‘irrelevant’ points (which are not given any mark by ICAP). fd means only headings are to be given (without explanation). Words “basic” or “essential” or “important” have no diference in audit exam, All elements are equally important ‘ome students confused it with elements of engagement letter, and elements of audit report. eg Note that question clearly asked to “explain” the elements. (2) White explaini it -xplaining reasonable (or limited assurance) many students do not write ‘form of conclusion’ and ‘drafting (©) You can write as many limitations as possible in given time. ston’ and ‘drafting. Scanned with CamScannerChapter 1 Introduction to Assurance Se Auditing ~ Study Notes rvices vided because of inherent limitation. absolute assurance cannot be pro Ot mark for giving reason that (4 marks for four reasons. eA. ged of mentioning the IheretHmtations of ua, the Inherent iain of intern rol ent risks were mentioned. control and inhere | hors Cammtn asks for Jour reosns, however, it is better to write some extra points If any of our fst four | aoe rang een Ss pone may earn you one mark Foe here are no marks in ICAP exams for good hand-writing or presentation. You can write answer to this question | without giving format ofa letter Absolute assurance means perfect or 100% guarantee that financial statements are free from ALL misstatements, nan audit, reasonable assurance Is expected. Reasons for reasonable assurance (instead of absolute assurance) in an audit are Inherent Limitations. Students should give list of innerent limitations. Author's Comments: This question hos three sub-parts which are not pre-numbered by ICAP. There is a risk that you may skip a part while ‘tempting this question, So be careful and better to number eack part yourself Audit is also called ‘external’ audit because it is.conducted by a person outside the entity who is being audited. Opposite conceptis ‘internal’ audit, which means audit by empléyees of company. a Audit engagement is a type of assurance engagement. ag (@& b) Levels of assurance that can be provided are Reasonable assurance and Limited assurance. Limited assurance engagement (or review engageriient) will be undertaken. Such assurance is expressed in negative form of conclusion. For cash flow projection limited assurance is appropriate because it relates to future and there is more “uncertainty and auditor can obtain only moderate level of assurance about future. Note: Marks-allocation of some questions has been revised considering current pattern of exam. 6] Scanned with CamScanner“puaiting Study Notes Caper Cc HAPTER TWO BASIC CONCEPTS O' F AUDITING| — ICAP’s Study Text | _ICAP’s Question | Lo# LEARNING OBJECTIVE Reference ** Bank Reference PART A- FINANCIAL STATEMENTS [101 | FINANCIAL STATEMENTS N/A PART B - FINANCIAL REPORTING FRAMEWORK . APPLICABLE FINANCIAL REPORTING N/A 102 | FRAMEWORK Abd LO3 | WHAT IS MEANT BY TRUE AND FAIR VIEW 1.1.3 125 PART C - RESPONSIBILITIES OF PARTIES INVOLVED IN AUDIT RESPONSIBILITIES OF MANAGEMENT & TCWG 43 104 | FoR FINANCIAL STATEMENTS 1.18 a RESPONSIBILITIES (OR OVERALL OBJECTIVES) tos | Resvonsiet 14.6 8a, 163a RESPONSIBILITIES OF _ STAKEHOLDERS 7 106 | EXPECTATION GAP aed, 1338 107 | ESSENTIALS FOR PROPER CONDUCT OF AUDIT 1.4.6,3.1.2 4b, 109e PART D - REGULATORY ENVIRONMENT OF AUDITING INTERNATIONAL FEDERATION OF Lo § | AccounTANTS (IFAC) 142,144 N/A INTERNATIONAI tos | TER iL STANDARDS ON AUDITING | 7454 4 6 N/A PART E~ APPENDICES APX1 | APPLICATION OF PROFESSIONAL SKEPTICISM N/A N/A apx2 | HINTS & COMMENTS TO CONCEPT L** Lauestions ew N/A N/A “* September 2018 Edition ot a Scanned with CamScannernn Auditing - Study Note: WaiN 5 Pry uieeninn are correct. A complete set of 3 L STATEMENTS: . ee FINAN to express opinion whether financial statements Auditor is re n Taare "statements include following: tion. statement of financial posi vei oier y aeareiment of comprehensive income (= Statement of profit or loss + Oth > Statement of changes in equity. Statement of cash flows. (0 the accounts Aor > Notes "Seater naw question (02 marks) laa * rt ‘eporp ai re an audit report? aa ofa company’gannual repor)are covered by an audit rep ° cazw Professional Stage - September 2006) | Comprehensive income) i ter. Hints to concept review questions are included atthe end ofthis chapter. gi FINANCIAL REPORTING FRAMEWORK LO 2: APPLICABLE FINANCIAL REPORTING FRAMEWORK: Applicable Financial Reporting Framework (AFRF) is the financial reporting framework adopted by management and TCWG, in preparation of financial statements considering legal requirements, nature of entity, nature of financial statements, and purpose of financial statements. Study Tip Auditor shall not accept proposed audit engagement, if AFRF is NOT acceptable. SSS eee LO 3: WHAT IS MEANT BY TRUE AND FAIR VIEW: % ‘The term “True and Fair View” has not been defined in the. Com, in at anies Act in ISAs IFRSs. Therefore, itis the most important judgment auditor makes ra reachingthe cna A or in ion. Generally true means free from error, and fair means free flatements or the way in which they have been presented. True AFI have been prepared in accordance with AFRI Fequirements). SE (a, IFRS, Co from undue bias in the financial and fair méans financial st: a fatements panies Act, and other regulatory it - Study Tip ~ ees ee Tams “Bnancial statements give true and fair view” ond “finan ateralresects' are equivalent However. firsttermis morecne ee fs cial statements Presen mon in practice, itl, in all CAF (02) mi ne¥e!~ Spring 2017) Scanned with CamScanneray Chapt Concepts of Auditing Auditing - Study Notes —— Pati INVOLVED IN AUDIT ese fy) _ RESP" CWG FOR FINANCIAL STATEMENTS: RESPONSIBILITIES ‘OF MANAGEMENT & T" Lo# ccordance with AFRF. esp ration and presentation of financial date ens % For pr internal controls which are necessary for preparation of orion requested information, af n To provide auditor with al reevan foe d addition (0 po Prscor and unrestricted Bceess to persons f0 ‘prain evidence restricted ee : Guptpement is responsible: es eg, assessing entity's ability to aamisess Spe gement is also responsible for other specific responsibil continue as going concern. study Tip premise of an audit” means management (and where applicable TCWG) understands and acknowledges that ithas responsibilities as described above, ‘CONCEPT REVIEW QUESTION ents? (04) (ICAP, CAF 09 Level - Autumn 2009) (ICAP's Official Question Bank for CAF 09 - Q. # 4a) Briefly highlight the management's responsibilities relating to the financial statem Discuss as to whois responsible to prepare financial statements. (02) ; ; (ICAP, CAF 09 Level - Spring 2002) Hints to concept review questions are included at the end of this chapter. OS: RESPONSIBILITIES (OR OVERALL OBJECTIVE) OF AUDITOR: esponsible to obtain reasonable assurance whether the financial statements are free from material misstatements, a1 is ia certain matters to TCWG, ind to issue report. Auditor is also required to communicate Auditor 10" tesponsibleto communicate following matters to TCWG: unter esponsibility for the audit of financial statement gjanmed scope and timing of audit. " ignificant findings from audit. Auditor's igdey lence. , B < CONCEPT REVIEW QUESTION Primary/overall objective of an audit? (ICAP, CAF 09 Level - Autumn 2601) SS oe ‘ Scanned with CamScannerAuditing ~ Study Notes Chapter 2 Basie Concepts of Auditing ‘The purpose of an external audit and its role are not well understood. You have been asked to write some material oy inclusion in your firm's training materials dealing with these issues in the audit of large companies: Required: = Draft an explanation dealing with the purpose of an external audit and its role in the audit of large companies, for ihe inclusion in your firm’s training materials. a7 (ICAP’s Official Question Bank for CAF 09-Q.4 83) You are the audit manager of Rake Enterprises, limited lability company. The company's annual revenue is over Rs 0) Required: | Compare the responsibilities of the directors and auditors regarding the published financial statements of Rake mterprises. (icch,Fondamentas Level 8-200 | cars ota Ghar CAF 098 | - Hints to concept review questions are included at the end of this chapter. | See LO 6: RESPONSIBILITIES OF STAKEHOLDERS / EXPECTATION GAP: Itis the responsibitity of stakeholders to understandland eliminate expectation gap so that scope of audit is not misunderstood Who” nas intent 7 jo entity: Expectation gap means public perception of the role and responsibilities of the external auditor is different (and usually higher) from his statutory role and responsibilities. — is nding (2.5 ‘ " 1, Auditor prepares financial statements. 2. Auditor checks 100% transactions of entity during the accounting period. 3. Auditor provides absolute assurance (ie. he certifies or guarantees that financial statements are correct). 4, Auditor is responsible to detect all misstatements and fraud. Consequences of Expectation Gap: It increases tendency to file legal actions against auditors without any valid basis. How to Reduce Expectation Gap: Expectation gap can be reduced by: *> Mentioning management's responsibilities, and auditor's responsibilities in Engagemett Letter and Auditor's Report. > Expanding and improving the format of auditor's report. > Steps taken by SECP and ICAP eg. through implementation of Code of Corporate Governance, Public awareness on scope of audit and responsibilities of auditor. ‘CONCEPT REVIEW QUESTION inthe term ‘Expectation Gap’ in the context ofan audit and give three examples of expectation gap. (of) (ICAP, CAF 09 Level - autumn 2015) (ICAP's official Question Bank for CAF 03-0. # 132) | Scanned with CamScannerae Chapter 2 Basie Concepts of Auditing auditivg - Study Notes __— ¢ Polycrafts Limited for two years. uring the aut for te yeoe ended 30th June, 2017, the ger of Polycratts Limi ai aut manager of Por statement identified in previous year accountng Cue that was not corrected | eed enn = | iin sega by MME a ” se tu iditing profession? (04) ene expectaton gop” and how could itbe removed orréducedby theausleTe OTE ay winter 1993) What | ‘ints to concept review questions are included at the end ofthis chapter. LO 7: ESSENTIALS FOR PROPER CONDUCT OF AUDIT: Prolet eal Judgment is the application of Cumulative Audit Knowledge, Experience and Training (within the-context of accounting, auditing, and ethical standards), during an audit to reach an appropriate course of action or conclusion. i Professional skepticism is an attitude that includes: + aquestioning mind, + being alert to conditions which indicate possible misstatement (due to error or fraud), and + critical assessment of audit evidence. It means auditor should not believe everything which management tells him. Rather, he should obtain corroborative evidence and should investigate if there is a conflict. Independence means auditor should be free to perform audit procedures without any bias or jnnente: Auditor should: be Independent of financial, personal and employment relations with client. : (This concept will be discussed in detail in later chapter.) i wa CONCEPT REVIEW QUESTION Briefly discuss the concept of Professional skepticism’. (03) (ICAP, CAF 09 Level - Spring 2016) ((cAP's ofmcial Question Bank for CAF 09"-Q.# 103¢) During the audit te: b with the gtd team planning meeting, a member of the audit team management ee, N28 confident that the management of the client Per hanes and Ga eer ae eae ee maintain an ny. The audit manager Require of profesional skepticism throughoutthe audi seer “esPonded thatthe auditor should always Briefy describe’ ‘Audit Skepticism’ and elaborate on the response ofthe audit manager. (04) (ICAP, CAF 09 Level - Autumn 2009) ines to concepe rev es Mia Question Bank for CAF 09 ~Q. 2) cha lew questions are included at the end of this Scanned with CamScannerAuditing - study Notes Chapter 2 EU ea nN RO LO 8: INTERNATIONAL FEDERATION OF ACCOUNTANTS (IFAC 5 ati : IFAC is the worldwide leader of audit profession. It is the global organization of professional accountants dedicated to serving the public interest. Basic Concepts of Auditing Functions/Role/Activities of IFAC: IFAC supports the development of profession in the area of auditing, ethics, professional education and public sector by follow + development of high-quality standards and guidance. + facilitating the adoption and implementation of standards and guidance. . promoting te value of professional accountants worldwide. speaking out on public interest issues where professional voice is important. Boards of IFAC: IFAC includes following four boards: + International Auditing and Assurance Standards Board (IAASB) + Interriational Ethics Standards Board for Accountants (IESBA) + International Public Sector Accounting Standards Board (IPSASB) + International Accounting Education Standards Board (IAESB) International Auditing and Assurance Standards Board (IAASB): IAASB is one of the boards within IFAC. It is a standard-setting body which enhances quality and consistency of asgugance practice throughout the world by following activities: 0% 1. It develops and promotes standards to be applied in providing the audit, review and related a services, 2. It also provides facilitatign in adoption and implementation of international standards. In doing so, [AASB enhances quality and consistency of assurance practice throughout the world. 3. In addition to ISAs, IAASB also issues International Auditing Practice Statements (IAPS) to help auditors in implementing ISAs and to promote good auditing practice in general. ‘CONCEPT REVIEW QUESTION a3 International Federation of Accountants (IFAC) provides leadership to the worldwide accountancy profession in serving the public interest. What activities are undertaken by IFAC to achieve this aim? (04) (ICAP, CAF 09 Level - Autumn 2006) gaa Explain briefly the role of International Auditing and Assurance Standards Board (IASB), (04) ; (ICAP, CAF 09 Level - Spring 2008) Hints to concept review questions are included atthe end of this chapte. a a / Scanned with CamScannerChapt study Notes a 10 9: INTER abject is selected for detailed study rs conducting comprehensive study and research, an €X 2 n idely for, ts. Mpproved by [AASB and then distributed wi 4, comments and proposed amendments are ee tered by the IASB, 4. The new ISA is then published, ; redraft is produced which i lanatory material Major parts ofan ISA are Objectives, Requirements, and Application and other explanatory r 1 In Pakistan, audit is conducted in accordance ISAs. for auditors to comply with all required procedures of all ISAs. ro obtain reasonable assurance, it is compulsory ——<—<——_ ‘A required procedure will not be performed if it is not relevant or is not practicable. However, if a procedure is not practicable, auditor shall document: «reason of departure from required procedure, and + alternative procedures performed to obtain evidence/assurance. a f. ‘CONCEPT REVIEW QUESTION International Standards on Auditing (ISAs) are issued by the International Auditing and assurance Standard Board (1AAS8). In this context, explain the following: (0) The position ofthese standards relating to external audit process (02) | (i) The extent to which an auditor must follow ISAs. (02) (ICMA Pakistan - Fall 2017) l Hints to concept review questions are included at the end of this chapter. zi E - APPENDICES Aen & APPLICATION OF PROFESSIONAL SKEPTICISM: “iow ls alist of circumstances which indicate ossibility of misstatemer i An. auditor increases his professional skey i 4 Raltuations hanna : ticism ifhe faces any of such situations in an audi 3 ated sale ofshares/business, or acquiring loan, ‘St: I mane Sait 's bonuses based on financial performance. p other evi s r j idence from one source is inconsistent with other source. 3 4 Goi 5 gn'8 Concern Issues eg. inc 6 rease i 7 Satan raed pry ees d_ competition, product failures, operating losses Mficant * 7 Identined dogo’ ExPeNSes, Assets, and Liabilities are based on estimates, 8 No internaton cries in internal control, not being corrected : 9 Lackofcomutlé function, oF ineffective internal aeait faneeton 10, Portable, moetence oF integrity in management 1 Longest Precious inventory or f ning fixed assets, 2 ees anding inventory, ew products by competitors, Scanned with CamScanner‘Auaiting ~ study Notes Chapter 2 Basle Concepts of Auditing 13, Company has launched new products but there is no increase In revenue. 14, There is dispute with major debtor. 15. There are pending litigations against company. Te Reconciliations (bank, debtors, or inventory) are not being prepared- 17, Management holds majority shares CONCEPT REVIEW QUESTION 18 op i required to maintain an attitude of ‘Professional Skepticism’ while conducting 2° audit of Financial Statements Describe by giving TWO appropriate examples, the term Professional Skepticism. (04) | erating TWO App fe FA- Summer 2015) e included atthe end of this chapter. L Hints to concept review questions are: ‘APX 2: HINTS & COMMENTS TO CONCEPT REVIEW QUESTIONS: ember that annual report contains components of financial statements as well as other information (€6, directors report) However, audit report cavers 5 components of financial statements only. While describing true and fair, don't forget to mention that this term has not been defined in law, IFRS, oF ISAS. aa Easy question to be reproduced from notes. a4 Management and TCWG. as Easy question to be reproduced from notes. [Note that question has two parts: 1. purpose of an external audit (Le. objective of audit), and 2, fole in the audit of large companies (ie. advantages of audi ‘You must present both parts separately giving sutable headings in your answer. a Easy question to be reprodyced from notes. ga Easy question tobe reproduced from notes {@) Easy question tobe reproduced from notes. Although examples are mua gee ore amps ln concep les arena specifically required in question, however 3! o. Auditor Is not responsible to detect immaterial error or prams onl ressoabc assrace case aheenimtatons faa ee aoB Maer eco or fraud, asl {c) Easy question Recall that this part relates to chapter #1 une gid Easy question to be reproduced from notes. 4 TR a cee “Ye, Scanned with CamScannerAuditing - Study Notes Chapter 2 Basie Concepts of Auditing points of professional skepticism. Explanatory line should also be written alongwith 03, os . Question oe ion of audit skepticism (Le. professional skepticism) a ertboraton. (Students should give some examples of situ ations in which itis particularly important to apply sravessionai skepticism. These examples are given inthe appendix). . a3 uestion to be reproduced from notes. However, students did not perform well in this question. ae “rvestion to be reproduced from notes. However, students did not perform well in this question (reproduce “authority/status of ISAS". {i reproduce “exception to follow requirements of ISA” Many candidates could not understand in exam what was required. Easy question to be reproduced from notes. Note: Marks-allecation of some questions has been revised considering current pattern of exam. Scanned with CamScannerAuditing - Study Notes : CHAPTER THREE AUDIT EVIDENC Chapter3 Audit Evidence veStudy Text | ICAP’s Question Low LEARNING OBJECTIVE sa eence? | Bank Reference PARTA-AUDITEVIDENCE _ = 1o1 |WHAT 15 MEANT BY SUFFICIENT AND] 44> 4.1.3,4.1.5 109b, 1481 APPROPRIATE AUDIT EVIDENCE - PART B - AUDIT PROCEDURES _ PROCEDURES/METHODS/TECHNIQUES TO 5 108a 102 | oprain AUDIT EVIDENCE 414,74 = PART C - PHASES OF OBTAINING AUDIT EVIDENCE “ LO3 | RISK ASSESSMENT 7 g20,416,72:, | 45130024 L04 | TESTS OF CONTROLS 324,332 24aii, LOS | SUBSTANTIVE PROCEDURES ASSERTIONS TESTING APPROACH TO 106 | OBTAIN EVIDENCE DEG 829 24c PART D - AUDIT DOCUMENTATION 7 Lo7 [AUDIT DOCUMENTATION, ITS PURPOSES] 4.2.1,4.22, 4.2.4, AND RETENTION N/A Log | AUDIT FILE AND ITS TYPES 106 aah 109 | FORM, CONTENT AND EXTENT OF AUDIT DOCUMENTATION 94, 106c* 1010 | CHANGES IN DOCUMENTATION AFTER | AUDITOR'S REPORT | 4.2.3 98, 134, 22bii APPENDIX ‘apx | HINTS & COMMENTS TO CONCEPT REVIEW — Baily QUESTIONS N/A N/A | * Case Study Question ** September 2018 Edition RT Scanned with CamScannerAuditing - Study Notes __Chapter 3 Aua To obtain reasonable assurance, auditor shall obtain “Audit Evidence” by performing “Auait Procedures”, and shall retain “Audit Documentation”. Se LO 1: WHAT IS MEANT BY SUFFICIENT AND APPROPRIATE AUDIT EVIDENCE: | Audit evidence is the information used by auditor in arriving at the conclusions 0 auditor's opinion is based. Audit evidence should be Sufficient and Appropriate. wi Sufficiency is the measure of the quantity of audit evidence, Su(ficiency. of the audit evidence Is affected by: SL * “Assessed risk of material misstatement. ey Materiality and complexity of item, Auditor’s knowledge and experience of business. Quality of audit evidence. Strength of internal control Whati i . Appropriateness is the measure of the quality of audit evidence. Quality of evidence is affected by relevance and reliability of information on which it is based. Relevance: Relevance deals with logical connection between assertion and audit procedures e4 auton saEPOTEEE osrsttement of acrounts payable, testing recorded payables will be relevant procedure. However, if auditor wants to test understatement of accounts payable, testing information, eg. subsequent payments, unpaid invoices, pending GRN, supplier's statements will be relevant. 2, A procedure relevant for one assertion may not be relevant for other e.g. inspection of tangible assets may provide evidence for Existence, but not for Rights & Obligation. Reliability: Reliability of evidence depends on its source, nature; and circumstances under which it is obtained eg. Evidence from independent external source is more reliable than internal evidence. Evidence in documentary form is more reliable than evidence in oral form. Evidence in the form of original document is more reliable than photocopy ot fax. Evidence obtained directly by the auditor is more reliable than evidence obtained indirectly or by inference. Evidence generated internally is more reliable when related gontrols over its preparation and maintenance are effective. * vy < A shorteut to remember the reliability criteria of evidence is that evidence should be “CODED Controlled, Original, Documentary, External and Direct. be "CODED" Le. Scanned with CamScannery ees i all: If audit evidence is not sufficient to reach opinion, a stat it 1. Discuss the matter with management and TCWG to c i 2. Obtain more evidence by performing More tests of controls and 3. ifmatter still remains unresolved, auditor shall express mo substantive procedures: d opinion. confirmation or verbal sxaminer may ask you to comment on reliblliy of @speeiied evidence (&6 external ¢ Fepresentation From management). CONCEPT REVIEW QUESTION | (04) icar, CAF 09 Level - Spring 2016) | 1 question Bank for CAF 09-Q. # 109b) | Briely describe how an auditor evaluates the sufficiency of audit evidence. (icaP’s offi | State any two factors which the auditor should consider to ensure reliability of audit evidence. (02) | (ICAP, CAF 09 Level - Autumn 2014) (ICAP’s Official Question Bank for CAF 09 -Q. # 148) Discuss the factors that influence the auaitor’s judgment as to what constitutes sufficient appropriate audit evidence?(06) (ICAP, CAF 09 Level - Spring 2008) Hints to concept review questions are included at the end of this chapter. Py RES LO 2: PROCEDURES/METHODS/TECHNIQUES TO. OBTAIN Audit procedures are methods and techniques used by the auditor to oer sudieendied nce. I Inquiry means seeking information from knowled igeable persons , entity. Inquiry alone is not sufficient appropriate audit idence Ane ah era . jould always obtain 3 corrobors . ative evidence. Reliability of man: ' py corrobaraty lagement’s response i i B gement and consistency of response with other evidence S$ affected. by integrity of Examples: 1. Inquiry from mana; ement ab oihcones 8 about legal cases against company and 2 0 asse: i Inquire management about an unusual payment in cash by eel ‘ash book, Z.Observation: ; Observation consists of | pro s ook Evidence from observation is Hitet to ee secure (eg. c being perform: ot know that they are bei rv qd (© the time of vai mand aie *y are being observed, observation, and is als, fats eh affec _ ‘ted when people 1. Observing inventory cou: i inting by p 2. Observing cash receiving process,” SNUYS personnel 3. Observing distribution of wages. Sar a Scanned with CamScannerChapter 3 Audit Evia Auditing - Study Notes. ves examining records or documents (whether internal or external), ora physical Inspection involv examination of an asset. arin f purchase invoices. 1. Inspection of ; 2. Physical examination of individual inventory items (or fixed assets). Eaernal confirmation is a process of obtaining evideice by auditor directly from a third party in written form (e.g. on paper, electronic or other medium). Examples: 1, Circularization of sample of debtors/creditors. 2. Sending confirmation letter to banks /lawyers. ‘Study Tip ~ Confirmation Vs. Supplier's Statement (or Account Statement) External Confirmation is eifferent from supplier's statement. A supplier's statement is a statement received at regular intervals from a supplier (usually each month), showing details of transactions between the supplier and its customer (eg, purchases, returns and payments) and closing balance. Tiss indirect, therefore less reliable. S.Recalculation: Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation may be performed manually or electronically. mples: 1. Recalculation of sales invoices or purchase invoices. * 2, Recalculate the profit or loss on disposal of fixed assets. E 3, Adding up list of debtors. Ee _ 4. Checking of figure of bonus paid to directors to confirm its accuracy, |= &:Reperformance: & Reperformance means auditor independently perfagningpreeedures or controls that were originally performed by entity as part ofits internal control. ay ee Examples: * 1. Reperforming ageing of accounts receivable balances, aie |= __2 Reperforming the extraction ofa trial balance from company's general ledger. | Analytical : i ___ Atalytical Procedures means evaluation of financial information through: Ane comparisons, and Plausible relationships with other financial and non-financial information, Scanned with CamScannerAuditing - Study Notes ing sal ear with last year. : sad aid Cen, rae Rat fore ‘GP Ratio, Current Ratio, Debtors Turnover : 2 Calculating Ratios , Curre erent pu isk Assessment Procedures, as | res can be performed for different purposes e8 a — * _ REET nn any sx et ing audit evidence. (i yaaa lita ee (ICAP, CAF 09 Level - Autumn 7 3 ase cadence ists down various procedures for obtaining aut evidence, Provide TWO example on scion would perform EACH of the following: (2) Recaleslation (3) Inspection of record (6 inapecion of assets (4) hasta review { (PIPFA - winter 2 as "You are planning the audit of Cuddly World and are considering using some of the procedures for gathering ‘erence recorsmented by 15A 500 as follows: (2) analytieal procedures: above procedures: in its use in gathering audit evidence; i (ACCA, Fundamentals Level B8 - June2i ; (ICAPs Official Question Bank for CAF 09 - Q. 1 Hints to concept review questions are included at the end of this hi LO 3: RISK ASSESSMENT: Risk Asse Ver rO easment Procedures are auditor's procedures tool rstandil 20 ess. thi Heap ct e risk of material misstatement at financial statement level # Examples of Hisk Assessment Procedures: © Ine ‘ \duirles of management and others within the entity (e, * Observation and Ii internal audi on nspectior audit function) records) ection (e.g, observation of entity's operations, inspection of acco" Analytical Procedures (eg. increas facing difficulty in paying and provision debtors’ turnover days indicates that debto" 'sion for bad debt is required). Scanned with CamScannerAuditing - study Notes Chapter 3 Audit Vvidenee x t Assertion Leve There are two levels of risk Le. risks at Financia Statement Level and risks a Risk at Financial Statement Level: Risks at the financial statement level refer to risks that a potentially affect many assertions. frect financial statements pervasively arc Examples: 1. Risk of 2. Risk of management override of control 3. Lack of Competence and Integrity of management. 4 Going concern Issugg, Risk at Assertion Level: Risk at assertion level refers to risks that do not affect financial statements only specific identifiable assertions. pervasively and affect Examples: 1. Risk that precious and portable assets may be misappropriated. 2. Risk that complex transactions (e.g. deferred tax, lease), and non-routine transactions (e.g purchase or disposal of fixed assets) may not be accurately recorded. 3. Risk that large transactions at year end may not have occurred (e.g. heavy at year end), or may be recorded in wrong period. y k od Noo —Sanp 4 as Response to Risk at Financial Statement Level: To address risk at financial statement level, audito verall ee Increased level of professional skepticism specially during audit of judgmental areas. Adequate planning, and reduced materiality level. Assigning rrore omperienced and speralized sath eg. use of experts if necessary. Increased_supervision and review of the audit work performed (e.g. quality control review of the engagement). Incorporating unpredictability in nature, timing and extent of audit procedures. Makingghanges to audit procedures, More audit procedures at period end rather than at interim date. Obtaining more reliable audit evidence (eg, from external sources). ————— vv vrvy Response to Risk at Assertion Level: To address risk at assertion level, auditor shall perform following audit procedures: * Tests of Controls (to be discussed in chapter # 11) and + Substantive Procedures (to be discussed in chapter # 12). ‘CONCEPT REVIEW QUESTION “The auditor shall perform risk assessment procedures to provide a bats for thei i material misstatement at the financial statement and assertion levels *'® “entification and assessment of risks of List down the risk assessment procedures as referred above. (ICAP, CAF 09 Level - Sprit (02) (ICAP’s Official Question Bank for CAF 09 "et zen) 21 — Scanned with CamScanner— videnc Auditing - Study Notes _ auditor should perform ig ts Internal control ment states th ronment, elude [BE sont leg yn essinent procedures, idence the auditor ca use as part of risk assess (ACCA, F (ICAP’s ortictal log . | {Starner acts tc one tes of control and one substantive Procedure Stee recto your asendanse : [ sessieelt eto (ACCA, Fundamentals Level F8 - December 2007) {ICAP’s Official Question Bank for CAF 09 Q.# 130) a petri sessment praedres to prvi afr th entiation and asesamen ork cena eRe feanal eaten ON gauge lve . se artand oy ne ik of material ssacrent at nan tates ew — ” el {ICAP, CAF 09 Level ~ Spring 2003) (ICAP’s Offictal Question Bank for CAF 09 ~Q. # 24a) Fanerate the possible overall responses to address the assessed risks of material misstatement at the financis statement level (08) (ICMA Pakistan, Professional Level P2 ~ Fall 2014) OS ———— LO 4: TESTS OF CONTROLS: (also called Compliance Tests) Definition/ Objective: Objective of Tests of Controls is to confirm the operating effectiveness of internal control in preventing, detecting and correcting misstatements at assertion level. ss LO 5: SUBSTANTIVE PROCEDURES: _ Objective of Substantive Procedures is to detect material misstatements i assertion level, These inlude Analytical Procedures and Tests of Detals. ieendtel statements Risk Assessment Procedi id colic ent Procedures and Substantive Procedures are required for Tests of Controls are required only if: are TenOAES (68 @eery area of fsancal sextant * controls are operating effectively and auditor plans y is | : tor plans ta ely on internal | stand nnesan drt provkasuicenceromiaamuateddanae eT) atten ‘CONCEPT REVIEW QUESTION Substantive procedures are tests to obtain audit List the two general types of substantive procedut evidence to detect material mi a rial misstatements in the’ financial statemen'® (ICMA Pakistan ~ Summer 2018) Can an auditor i tive a zed t0 ‘ignore substantive procedures fora material account balance if related internal controls are assessed t0& ‘Autumn 2002) | (ICAP, CAF 09 Lev Scanned with CamScanner maine:Chapter 3 Audit Evidence Auditing - Study Notes ng at leastewo examples af each: 0-18 «the following methods used to obtain audit evidence by providing at least (6s) {i Tests af controls (Gs) {i) Substantive procedures po L professional Level P2 - 2014 August } (CMA Pavirons are included at che end of this chapter. ‘Hints to concept review questions are LO 6: ASSERTIONS TESTING APPROACH TO OBTAIN EVIDENCE: | conte Modern auditing takes the view that each element of financial statenie™ To ‘aavertions’ Le. specific objective in preparation and auditing of financial sta f many ssertions/Management Assertions/Financial Statement Assertions: tatements, ‘assertions are representations by management that are embodied tn the marcia! st easter ‘These are used By auditor to assess different types of misstatement that may occu evidence. ‘There are two broad types/categories of assertions ie. Assertions about account balances at the period end: 1. Existence i.e. recorded assets, liabilities, and equity actuallwexist. 2. Rights and obligations i.e. entity holds or controls the rights to’ assets, and liabilities are obligations of entity. 3. Accuracy, Valuation and allocation i. assets, liabilities, and equity are included in the + financial statements at appropriate amounts; and adjustments relating to valuation/allocation have been recorded. 4. Completeness ice. all assets, liabilities and equity that should have been recorde ‘been recordes Classification ie. assets, liabilities and equity have been recorded in the proper accounts. 6. Presentation i.e. assets, liabilities and equity are appropriately aggregated or disaggregated, and disclosures are according to AFRF. —_— Assertions about classes of transactions and events for ths iod: 1. Occurrence Te. all transactions and events, that hrave been recorded, have actually occurred. and pertain to the entity (i.e. there is no overstatement). 2. Accuracy i.e. amounts and other data relating to transactions and events have been recorded appropriately. Cutoff ie. transactions and events have been recorded in correct accounting period, Completeness i.e. all transactions and events, that should have been recorded, have been recorded (ie. there is no understatement). Classification i.e. transactions and events have been recorded in the proper accounts. . Presentation i.e, transactions and events ar ‘i Le. appropriately aggregated and disclosures are according to AFRF. nen oF Speciale have Directional Testing; (an old approach to obtain evidence) - ans directly testing debit items (assets and expenses) for overstatement and credit, items ables and in inden rei understatement thereby opposite accounts are automaticaly tested Indirectly expensestor caseree re Stee testng of lables for understatements also tests Directional testing mes 3 Scanned with CamScannerv7 rapier 3 Audit Evidence ‘Auditing - Study Notes ‘eases | o eT x that cold oceu 1 #0 AF rypes of miss is eam you ee srasoments wre | CONCEPT REVIEW QUESTION f the following: Be descrive the assertions used by the auditors in respect 0! = 2 | (i account balances (icap, CAF 09 Level - Spring 2005) | (i classes of transactions: ‘Bank for CAF 09 - Q. # 24c) i (ICAPs Offical Question {| (06) i 1 year-end date. - Decem | a3, and explain FOUR assertions relevant to accounts payable aca Fundamentals Level FB ber 2009) marily for understatement and | | Use of the audit method called directional testing means that certain items are tested pri tested for understatement or i) } | others for overstatement When this method is adopted, state whether the following are — overstatement. | + assets» lailties; income; and » expenditure scat ems Bocas | in England and Wales, Professional Level Dece | | | ee rns to concep review questions ‘are included at the end of this chapter, LO 7: AUDIT DOCUMENTATIO! r Audit Documentation is the written record of audit procedures performed, evidence obtained and conclusions reached by auditor. Purposes/Objectives/| ‘Benefits of Preparation of Audit | Documentation: Primary Purposes: Audit documentation provides evidence that: {audits planned and performed in accordance with ISAs and re " auditor as appropriat isis for opini i ree Al ite ba: pi in audit report Additional Purposes: ‘Audit documentation also helps to: a) assist engagement team in lant | b) acest ehasintreeron nena Performance of audit. | 3 enable quality control reviews ‘nd review of audit team, enable accountabili . | €) retains reek ofmaens 'gement team for its work. of continuing s, | Documents prepared timely (when wort Ispereniicance to future audits, ITS PURPOSES AND RETENTION: ‘Bulatory requirements, and and achievement of overall " med) are more accurate than prepared later. ‘Advantages of using automated/eo coytorkineg papers my * Standardized and formas: “"NE Papers easy to use formats. Preparation of working papers becomes Speedy, neater and k less a. Costly. Scanned with CamScanner : include:—_“ Chapter 3 Audit Evidence ~ Study Notes. rocedures are easy to perform. a yced processIng apduces risk of errors eg, in casting numeric schedule, ? locations. | online review" is possible from distant : ‘Morking papers can be integrated with other areas. hip. Confidential aT “rot part of accounting record. It is the property/ownership of a Be ower, suditor Is also required to keep them in safe custody to ensure ‘ tiality of these documents, fan time a fy establish its own policies and procédures for retention of documentation However, minimum period for retention is atleast 5 years from date of auditor's report or froup auditor's report, whichever is later CONCEPT REVIEW QUESTION Documentation (Revised) establishes standards and provides guldance regarding documentation in the poses of audit working papers. . (03) (ACCA, Fundamentals Level F8-June 2007) (ICAP's Official Question Bank for CAF 09 ~ Q.# 106a) sement of technology in the last two decades has resulted in significant changes in the way auditors prepare n their working papers. Explain the advantages of computer based audit working papers. (04) (PIPFA- 2015 Winter) owner of working papers? Can working papers be a substitute to the accounting records ofa company? (02) (ICAP, CAF 09 Level - Spring 2001) Hints to concept review questions are included at the end of this chapter. ontains documents releva it only. Pri zs 7 int to current audit only. i i me : ‘imarily, it contains the evidence on of docu mentation in Current Fil I (eg, relating to risk and materiality) lett i ‘ers_with different parties e.g. Professional Clearance Letter, tion Letter, R¢ i “presentation letter, Audit Report, Letter of Weakness/Management Scanned with CamScanneree Chapter 3 Audit Evidence ‘Auditing - Study Notes financial statements: — oo) # For each area of financi resto be per a 2 tet sched (ies eure soe tne audit area as appearing in F/ 5 Lead Schedule (It lin aie . Workin papers showing rems selected, and procedures Pet © Working, 1” ents which auditor has identified during the same) oe Auditor this schedule as audit progresses ‘by management. Auditor builds up’ camulaive Error schedule 15 8 ‘rel while expressing his opinion on financial statements. Ceres have ns corrected SE ec ath fl materi Petite contains documents of continuing relevance ie. relevant to current as well as future audits le co ng . relevant to current as S i Examples of documentation in Permanent File: + Long termloan agreements. «Accounting and internal control systems. * Copies of Previous years"Mfancial statements with key ratios and trends. «Legal constitutional documents (e.g. memorandum and articles) | CONCEPT REVIEW QUESTION | ni various types of audit files and state at least five contents of each type of audit file maintained by an audit firm. (08) (CMA Pakistan, Professional Level P2 ~ Summer 2005) | azz You ave recentiy ben promoted to audit manager inthe audit firm of Trums & Co. As part of your new responsibilities, | Youhave ben placed in charge ofthe audit ofSpecs4¥ou Co, a ong established audit cent of Trums & Co, ecetYon co {tls speacies the company owns 42 stores where customers can have ther eyes tasted and choose Norns rege | | Required: | List the documentation that should be of assistance to your ini ith Specs ce a tn a Sct oD (ACCA, Fundamentals Level F8 - june2007) a CICAP’s Official Question Bank for CAF 09 -Q. # 106b) ee a) Permanent file ’ j b) Current audit working Paper files (03) (ICAP, CaF o00) BB ssomans 09 Level - Autumn 2000) aa (02) i (ICAP, CFAP 06 Level - ns concep ree gusdonsrs nuded she ne) ON i Scanned with CamScanner& Chapter 3 Audit Evidence Auditing - Study Netes nap: e LO 9: FORM, CONTENT AND EXTENT OF AUDIT DOCUMENTATION: Il be sufficient to ‘Audit documentation should be self-explanatory ie. audit documentation shall be 3 mats enable an Experienced Auditor (having no previous connection wi inderstand any Nature, timing and extent of audit procedures performed > Evidence obtained, and conclusions reached. > Significant matters arising during audit. corsaffect ten! nt of Audit Do y i, Riskfmatezial misstatement. ii, ‘Size and complexity of entity. iii, Audit methodology and tools used. iv. Nature and sig Audit procedures performed. v. Nature and significance of evidence obtained. vi. Nature and significance of exceptions identified. 2 Nameofaudiel b. Peroduner aude & age number or page reference) 4 Wepre i er paper and when ¢ Whesevwed the working paper and when £ “ea oryehich working paper prepared, & “Rkey to“audit ticks” and other symbols used in the working papers. 1, Items selected and basis oF selection \_BsGteiiaes ‘perforMes,TBsatement or deviation identited (if any), and ‘conch of auditor. tt a we ‘CONCEPT REVIEW QUESTION The preparation of working pa 7 i persis an integral part ofthe auditor's responsibilities. Identify the factor e auditor Soldenader anes ben a tga. itor's responsibilities. Identify the factors that the audit. tent and extent of audit working papers, (03) (ICAP, CAF 09 Level - Spring 2010) aa (ICAP’s Official Question Bank for CAF 09 - Q. # 94) How an auditor sho an in experienced auditor, having no previous en done in accordance with ISA-230-Audit (03) e - (PIPFA - 2016 Summer) mation that Sanca satements\ “*®%Mt be Included on every working paper prepared in connection with the audit of the (04) {Certified Accounting Technician UK - December 2008) Hints to concept review questions are included at the end of this chapter. Scanned with CamScannereee ant ae ‘OR’S REPORT DIT" LO 10: CHANGES IN DOCUMENTATION AFTER AU on of assembly ditor’s report. : mpleti Time period for assembly of final audit fle: res for timely Oo! ISAs require firms to establish their own policies and procedures f ane date of au thin | of audit files. However, an appropriate time limit is wil g new audit procedures or erlod: Type of changes during file assembly period: cormmin ie } Changes of administrative nature (which do . Examples drawing new conclusion) can be made during file assembly period 1. Deleting ot alscarding superseded documentation. ry sing and cas referent ing working papers. ess. 3 Sie i or’s report. the file asset 3. Signing off on completion checklists relating to date of audit 4, DerunnTInp audit evidence that auditor has obtained before the * perl ing are documented: ‘Auditor may also change documents after file assembly period provided following * The specific reasons for making change. "= Who made the changes, and when, + Who reviewed the changes, and when. If exceptional circumstances occur after auditor’s report (eg. subsequent event occurs, or misstatement is ‘dentifed), auditor may perform new audit procedures and may add new documents. 3 —____——- = 4 In this case, auditor shall document following: | «The specific reasons for making change. |" The new or additional audit procedures, performed relating to event, audit evidence | obtalhed and conclusions reached, and their effect on the auditor’s report. + Who wadethe changes, and when. * Who reviewed thechauges, and when, CONCEPT REVIEW QUESTION (0) The changes that can be inc (©) Te crcumstances under which become ee a ESS Broce cing th (03) the issuance of the auditor's report ate rattan aad, 2 perform new Procedures at an as (04) —— maters that should be documented in such SitaaeteW audit documents after Offer appropriate explanations for each ofthe above issues. 7 om CAPs oficiay ACAP-CAP 09 Level - Spri Explain the requirements of SA 230 « Ss! Qvestion Bank for cap oo “a498) ‘auditor's report in respect of: r () Time timit to complete the assembly ofthe final il) Nature of the procedures allowed during assembly aug iia nal (H) Examles of such procedures that can be performed ae ing assemb 02) Sembly ofthe final ‘ual fe, oe ICMA Pakiss (03) = Summer 2018) Scanned with CamScanner (ilmeniteChapter 3 Audit Evidence ‘auditing ~ Study Notes complete the assembly of his fina audit le. ert ate of aor report the autor required compete he ase of ie al ue fe, i (ICAP’s Official Question Bank for CAF 09 ~ Q. # 22bII) m the auditor was oa li Limited was signed on 30 April 2016, After issuance of the audit report, St oe ng — above situation. (03) ag rs hatte utr woud be requredt document inthe above HSNO op ersl=iemum ing 7 = Q.# 1340) (ICAP’s OfMiclal Question Bank for CAF 09 - Q. nso concept riview questions are inde atthe endo cope ‘APX: HINTS & COMMENTS TO CONCEPT REVIEW QUESTIONS: By qusion One marker exch factor As a precaution you can write an extra factor than required in question (If you haverime} {sty questo. One mark for each factor. As a precaution, you can write an extra factor than required In question (if you Avene. 3 &, ‘Remember that sufficiency and appropriateness are to be ‘explained separately. Further, appropriateness is to be 2 3 evidence itorvard question 4 snghtforward question. Don't forget to include examples with each method @ ru B med te Fequires to “ist” procedun fevens of uncle pcre 99 explanation isnot required. Examiner ‘commented that students also “= etion of och procedure andi) requires example of each Procedure, eee Horse et dfetion fs assessment procedures. Purpose isi ean procedures hea pede. Purpose i included in delntion, ss hich will be performed to obtain evidere bstantive procedure mst enseeescedtre. Alms included in definition, fo ensure they are complying wi eee omeyng ii ihe clients inventory count instructions Y t0 Identify obsolete items Scanned with CamScannerAuditing - Study Notes Chapter 3 Audlt Evidence cz Analytical procedures and Tests of details. aig No, because every system of internal control has some limitations. BS. comumsinta some fui mie efron and examples of tests of controls and substantive procedure Straightforward question. However, do not mix assertions of one category with other. gag Write assertions relating to account balance (because account payable is a balance sheet item), and explain each assertion with specific reference to Accounts Payable (do not give general explanation), Examiner commented that significant proportion provided procedures to test the assertion rather than an explanation of the assertion, en Assets ~ overstatement Liabilities - understatement Income - understatement Expenditure - overstatement él Primary purposes should be given priority when producing purposes. @ Straightforvsard question. However, note that examiner required advantages of “computer based" working papers, NOT general advantages of working papers. Both are different concepts. él Auditor fs the owner of working papers. Working papers cannot be treated as accounting records ofa company. B Straightforward question. | fig, SY 08 examples from curent file and permanent fle wit bref explanation of what information is included in that QF straightforward question. However, do not mix contents of one file with other. a Straightforward question, él (0.5 mark for each factor. él Reproduce experienced auditor principle, 2: stmatters mentioned In “Tnformaton Wt should be included on every working pape 30 OOD Scanned with CamScanner‘Auditing - Study Notes Chapter 3 Audit Evidence ect cage ea b) changes of administrative nature (examples given in not gs 22 commented that students could not perform well in part “i” and "ii" 5 con fis quality ontrl policies and procedures, Appropriate ime is 60 days from audltor report 13 Gris an adjusting event which requires adjustment in financial statements (assuming it occurred before Issuance of financial statements to shareholders), Matters of exceptional circumstances’ will be documented. Be careful about requirement ofthe question, Question requires to specify “matters to document” and not “procedures to perform after audit report. Both concepts are different. Examiner commented that many students discussed procedures and possible implication on the report, though the «question merely required the matters that were to be documented in the given scenario, Scanned with CamScannerIe $0105, CHAPTER FOUR OR’S REPORT & TYPES q_ AUDIT OPINIO) 5 ICAP's Study Text | ics) [ L0H LEARNING OBJECTIVE Reference** | pan! PART A - AUDITOR'S REPORT 101 | ELEMENTS OF AUDITOR'S REPORT | 14.5.3 |] T 150 j LO2 | FORMAT OF AUDITOR'S REPORT 14.7.1 163 COMPARISON BETWEEN DIFFERENT FORMATS OF 1408 403 | AUDITOR'S REPORT PART B - AUDITOR'S OPINIONS ON FINANCIAL STATEMENTS Pr |WHAT IS MEANT BY MISSTATEMENTS AND LO4 | AUDITOR'S COURSE OF ACTION IF HE IDENTIFIES A 14.8.2 MISSTATEMENT DURING AUDIT WHAT IS MEANT BY SCOPE LIMITATION AND LOS | AUDITOR'S COURSE OF ACTION IF HE FACES A 14.8.3, 14.8.5 ¥ SCOPE LIMITATION DURING AUDIT ¥ WHAT IS MEANT BY IMMATERIAL, MATERIAL. AND. 106 | PERVASIVE 14.8.4, 3.2.5 Lo7 [DECIDING TYPE OF OPINION ON FINANCIAL] 145.1,148:, | it [ STATEMENTS qa - PART C - EMPHASIS OF MATTER AND OTHER MATTER. PARAGRAPHS ; Log | DECIDING ABOUT “EMPHASIS OF MATTER” AND 14.9.1, 14.9.2, “OTHER MATTER” PARAGRAPHS IN AUDIT REPORT. 14.9.3 COMMUNICATING . SIGNIFICANT MATTERS 109 | ccwe a3 14.9.4, 14.8.7 APPENDIX HINTS & COMMENTS TO CONCEPT REVI APX | QUESTIONS EW N/A ** September 2018 Edition * Case Study Question 32 Scanned with CamScannerchapter 4 Auditor's Report & Types of Opinions LO 1: ELEMENTS OF AUDITOR'S REPORT: Auditor's Report is always in written form with following elements/contents Title: : z « tor’s report Title is necessary to differentiate auditor's report from other reports €-6: dire Addressee ; cumstances. The auditor’s report shall be addressed as required by law or as appropriate tn CNet Tt Report is usually addressed to Members (in case of statutory audit), or Pires statutory audit). 4 This section shall state that auditor has audited, and shall sate entity, financial statements and period for which audit was conducted. Then, this section shall state auditor's opinion Le. whether financial statements give true and fair view. Basis for Opinion: Auditor shall state that he has conducted audit in accordance with ISAs, has fulfilled, ethical requirements relating to independence, and has reasonable basis for his opinion. If auditor’s opinion is modified, auditor shall also describe nature of misstatement _or scope itation in this paragraph. " i i i (ifrelevant) This section will be discussed in Chapter # 21. “Emphasis of Matter” Paragraph; (ifrelevant) This section will be discussed in detail later in this chapter. Key Audit Matters: This section will be discussed in detail in Chapter # 21, 7 rt : Auditor shall state in this section: + what comprises ‘Other Information’, + management is responsible to prepare other information, = auditor is not responsible to express opinion on Other 1, : ther to read other information. if there s inconsistency with ee ne it Smisstatement. auditor shall e Acend, auditor shall state whether other information is materially misstated, to report. or auditor has nothing —. SY 33 Scanned with CamScannerChapter 4 Auditor's Report & Types of Opinion, Auditing - Study Notes of jready discussed in Chapter # 2. ts This section has bt Responsibilities of i ready discussed in Chapter # 2. However, in audit report, these has This sectit es are discussed in detail (to remove expectation gap). responsibi Location of the description of the auditor’s responsibilities “the description ofthe auditors responsiblites shal be included . | uudltor's report; oF - 8 pee auditors report, In which case the auditor's report shall include a reference to | onofthe append oF aa crear appropiate authori, n which case the autor’ report shall inchide a reference | tothe location of such a description. 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". “Other Matter” Paragraph: (if relevant) ‘This section will be discussed in detail later in this chapter. ‘Signature and Name: Auditor report shall be signed in the name of audit firm, or in the personal name of auditor or both as appropriate in local jurisdiction. * Ifthe auditor is an individual, report shall be signed by him and shall state name of auditor. * “Ifthe auditor is a firm, report shall be signed only by a partner, and shall state name of firm and name of engagement partner. 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), Date also indicates that auditor has considered the effect of subseque al statements upto that date. ee ets on Anan ‘The auditor's report shall state the location (usually city name) where the auditor practices. = ‘CONCEPT REVIEW QUESTION [ist out the major elements ofan unmodified auditor's report. 7 04) a (CMA Pakistan ~ summer 2017) The date is an important element of audit report: What —— port What date should the auditor put on the audit report and what does (03) CICAP, CAF 09 Level - spring 2007 TM] a a Scanned with CamScannergrees Aviiing =i mies Chapter 4 Auditor’s Report & Types a: PSREPOF ETP Ong, LO 2: FORMAT OF AUDITOR'S REPORT: INDEPENDENT AUDITOR'S REPORT splipiecclersel Nis ‘Reporton the Audit of the Financial Statements plain ace snes franc statements of which comprise the statement of financial poston 3s a and the statement: ‘of comprehensive income, the statement of changes in equity, the statement of cash lows forthe year then ended, and notes to the financial statements, including a summary of significant accounting polices and Lote yn ade ste tat ne have obtained af ie information and explanauons wich 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, statement of 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, in the manner so required and respectively give a true and fair view of the state of the Company's affairs as at 1» and of the profit or loss (or the surplus or deficit), 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. Material Uncertainty relating to Going Concern: (ifapplicable) Emphasis of Matter: (applicable) Key Audit Matters: (in case of listed company) 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 and {or 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. ln pre i going conse ane financial statements, management is responsible for assessing the Company's ability to continue as a —— Tae Oung matters related to going concern and using the going concern basis of accounting unless nds to liquidate the Company or to cease operations, or has no realistic alternative but to do so, Board of dir 'eetors are responsible for overseeing the Company's financial reporting process. Auditor's Re Our object ensibilites for the Audit ofthe Financial Statements: S are to obtain material misstatement, whet ale assurance about whether the financial statements as a whole are free from Reasonable assurance sa gh ys oa oF er, and to issue an auilitor’s report that includes our opinion. 2 applicable in Pakistan ult ease 4868 tis not a guarantee that an audit conducted in accordance with ISAs Stor and ae considered mater eae dn ssatement when exit. Misstatements can arse from faud oF nome decison individually or in the aggregate, th reasonal 0 influenc “ors of users taken on thebasisfthesenancestatements nan Be exPeded to invence the a Scanned with CamScannerrt & Types of Opini,, Auditing - Study Notes Chapter 4 Auditor’s Rel ig Study : jonal judgment and ance with 1SAs as applicable in Pakistan, we exercise Proves al jude ot te eat jnancial statements, whether due tof : ofthe anc st ence ts rd terial misstatement», illusion, forgery. inte» {As part of an audit in accord profesional skepsm trough + Identify and assess the rs ist (or desig ad evo au procedures responsive to habe OS er gproplate to provide a basis fr our opinion. The risk of not davec oa ey ftom fraud is higher than one resulting from error, omissions, misrepresentations «Obtain an understanding of internal appropriate in the circumstances, but not ‘ompany's internal control + Eeldate tne approprtateness of accounting policies used and the reason! related disclosures made by management. ae Contiude on te appropriateness of management's use ofthe going concern basis of accountings fn the audit evidence obtained, whether a material uncertainty exists related to events" fiat st ‘ast significant doubt on the Company's ability to continue as a going concern. tila Uncertainty exist, we are required to draw attention in our auditor's report to the related Cistlosure: financial statements or, if such disclosures are inadequate, to modify our opinion. Our conelusions St bas the audit evidence obtained up to the date of our auditor's report. However, future ev : cause the Company to cease to continue as a going concern - + Evaluate the overall presentation, structure and content of the financial statements, including the discos. and whether the financial statements represent the underlying transactions and events in a manne: achleves fair presentation inorder to design audit procedures, rer pinion on the effectiveness control relevant to the audi for the purpose of expressing an ‘bleness of accounting estimar: ‘We communicate with the board of directors regarding the planned scope and timing of the audit and significar uit findings, including any significant deficiencies in internal control that we identify during our audit. = Li We also provide the board of directors with a statement that we have complied with relevant ethical requiremens regarding independence, and to communicate with them all relationships and other matters that may reasonably thought to bear on our independence, and where applicable, related safeguards. eC From the matters communicated withthe board of directors, we determine those matters that were of most signifi in the audit ofthe financial statements of the current period and are therefore the key audit matters. We describe thes: rr ‘matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when A extremely rare circumstances, we determine that a matter should not be communicated in our report because the adver! consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication ‘Based on our audit, we further report that in our opinion: 8) proper books of account have been kept by the Company as required by the Companies Act, 2017, 8). the statement of financial position, che statement of compeshensve noo oe a chensive income, the seat ‘changes in st and the statement of cash flows together with the nots thereon have besa desae ee eee Re Companies Act 2017 and aren agreement withthe books of account an sexcran oP COROT 1 Invesments made expenditure incurred and guarantees extended during the year were for dhe purpose of" & mpany’s business and abe ce per "a ) no Zakat was deductible at source under the Zakat and Ushr Ordinance* ” ica ne wt Fe 2 nd hr de, 8 section It mice”. Other Matter (applicable) ‘The engagementtpartner on the auditis [signature] [Address] [pate] ‘Study Tip - Understana _ 1 | Yona stile re ane ant PeBt on ram | | are presented i jeram, you may be required to ide, 'y words/phrases’ (particularly in bold) | || paragraph oF omted) in elven section of repent? °TF°F5 2nd omissions (ether whole Scanned with CamScannerAuditing - Study Notes Chapter 4 Auditor's Report & Types of Opinions 7 ‘CONCEPT REVIEW QUESTION 5 citrix required to Eue an audit report at the end of the aval, which Ses out fis oP statements. An important element of the audit report is the statement of auditor's TesPO! ales incluc in an audit report | rete matters that should be contained inthe stitement of autor’ responsibilty as included os | enn (ICAP, CAF 09 Level - Spring 2010) ((CAP’s Official Question Bank for CAF 09 Q.# 150, 158a) ‘ san opinion whether PFer the Companies At 2017, while reporting onthe financial statements the auditor has to express an opinion Wt the financial ‘statements give @true and fair view in all material respect opinion as per the rey sate the matiers other than the above, on which the auditor is required to express his opinion #5 Pel jy eigenen Comipenien 8 2007 (ICAP, CAF 09 Level - Autumn 2007) a per SA 260, what are the matters need to be communicated to thase charged with governance by auditor in rlatcr As audit of financial statements? (IMA Pakistan - Summer 2018) Hints to concept review questions are included at the end of this chapter. eee SS LO 3: COMPARISON BETWEEN DIFFERENT FORMATS OF AUDITOR'S REPORT: 7 Vs. ISA's Audit R Companies Act, 2017 requires auditor to report on four additional matters (i. in addition to report on financial statements). Audit report off is required to include following: . Kjauii matensection andthe related last paragraph in the auditor's responsibilities. «Rime of engagement partner. §—§ ‘CONCEPT REVIEW QUESTION State the key differences between an unmodified audit report issued in accordance with ISA 700 mnmodifi issued in accordance wi Forming an Opinion and ‘Reporting on Financial Statements’ and the audit report issued under the Companies Act, 2017. anc) (ICAP, CAF 09 Level - Autumn 2013) \dentiy the differences between the auditor's i oly the differences between the auditor's report on financial statements of a listed company. as com, Salsted company, based on International Standards on Auditing ea (ICAP, CFAP 06 Level - Winter Hs concptrevew questions ore inuded st thecad ofthe oe BT Scanned with CamScanneri Chapter 4 Auditor's Report & Types of Opinions Auditing - Study Notes iN Poe eens FINANCIAL ST/ Seed INU ekeeoke Before reaching an oj r shall evaluate: wuditor shall evaluat fore reaching an opinion, a ‘scope limitation, or pervasive mhether there is 4 limitation ts immaterial, material 1» wi pe 2) Whether effect of misstatements oF $0 BY MISSTATEMENTS AND AUDITOR'S COURSE OF : WHAT IS MEANT : Monon IE HE IDENTIFIES A MISSTATEMENT DURING AUDIT: Definition and Examples of Misstatements; Mistatements race hetweom isstatement means difference between: aassrount, presenlatiovand disclosure reported in financial statements, and io * amount, presentation and disclosure required to be reported in accor with AFRF, ‘Amisstatement in financial statements may arise in relation to following: (a) The appropriateness and application of accounting policies: e.g. «The selected accounting policies are nd¥ consTtent With the APRF. * Selected accounting policies are not applied correctly (i.e. errors in application of accounting policies) Selected accounting policies are not applied consistently (i.e, not consistent with prior year or with other similar items) and auditor does not concur with change. (6) The appropriateness or ade‘ ‘quacy of disclosures in the financial statements: & If disclosure required by AFRF is not included (e.g, related parties and their transactions) If disclosure prohibited by AFRF is included (eg. disclosing contingent assets). "disclosure is not adequate (eg. going concern issues not specifically disclosed). 7 scree nininae h fs Study Tips {management discloses a misstatement in notes, 2. There will be no misstatement in financial sta auditor's report. itis nota substitute of correct accounting treatment. ements if management corrects it before signing of Auditor accumu; ili i on timely bane ates ll misstatements identined Sis and requests to correctthem, 4"8 audit, communicates them to managenient id Uncorrected mis: 7 n written representation from Material sud ateMeNts are immaterial P i Scanned with CamScanner__Chapter 4 Auditor's Report & Types of Opinions CONCEPT REVIEW QUESTION nd describe the auditor's responsibilty in relation to misstatements (04) Explain the term ‘misstatement’ and descr me (ACCA, Fundamentals Level F8 - June 2011) 3 nagement would, ater or pervasive, cause the autor to express qualified sen maners dsagreement wth management woul, material op te ‘or adverse opinion. (idit Che iaeeisAdes Hints to concept review questions are Included at the end of this chapter. LO 5: WHAT IS MEANT BY SCOPE LIMITATION AND AUDITOR'S COURSE. OF ACTION IF HE FACES A SCOPE LIMITATION DURING AUDIT: ie E ts Re Scope Limitation: Scope Limitation arises when auditor is unable to obtain sufficient appropriate audit evidence on which to base his opinion. A scope limitation in an audit may arise in relation to following: (a) Circumstances keyond the control of entity: * Accounting records of entity have been destroyed (eg. by fire, computer virus or other natural disaster). Accounting records of entity have been seized by govt. authorities. (b) Circumstances relating to nature or timing of auditor's work: * The timing of the auditor’s appointment is such that the auditor is unable to observe the counting of the physical inventory. * Substantive procedures alone do not provide sufficient evidence and entity's internal controls are also weak. (c Limitations imposed by management/ entity: * Management prevents the auditor from observing the counting of the physical inventory. * Management prevents the auditor from sending external confirmation, * Management does not provide written representations to auditor. + 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 pee above cases. 2. Ifaccounting record is not available, auditor shall also qualify his opinion regardi accounts). is garding proper books of 3 Mtscope limitation is caused by Circumstances: Mfauditor is unable to perform a required procedure, auditor shall Procedures to obtain evidence. If auditor is unable to obtain evider ‘oo, it will be'a scope limitation. Auditor shall express Qualified Disclaimer of Opinion (if effect is pervasive). try to perform alternative hut nce from alternative procefures Opinion (if effect is materi, ), or — Scanned with CamScanner 39Chapter 4 Auditor's Re ort & Types of Opin ap Auditing - Study Notes 2 nt to remo imposed by Management: request manageme! Ove imposed by auditor shall req esr. shall communicate th 7 Ifscope limitation is ee sudity h y imitation on scoP ch limitation, audi t If management imposes Mong to remove SU the limitation. If management rel * plications as Follows: uditor shall re. matter to TCWG and se eal ‘express qualified opinion. Further, 3 re ver effect materia, auditor shall Pre eee nent. - f manager ert withdraw from engagement if possible and practicable. evaluate integrity © +. Ifeffect is pervasive withdrawal is not pos auditor shal Disclaimer of opinion. sible or practicable, auditor shall express — withdrawal by Auditor wands mot possibi T75 of publ sector entities, or auditor is prohibited in @ jurisdiction to auc i ope vgagement before completion of audit). Withdrawal is not practicable if auditor has arengilly completed the audit atthe time when limitation isimposed. a ‘CONCEPT REVIEW QUESTION ~ = = yy, ‘he auditor should obtain sufcient appropriate audit evidence inorder to be able to form an audit opinion. a Required Identify the situations which restrict the auditor's ability to obtain sufficient appropriate audit evidence. Give two ‘examples for each situation. (09) (ICAP, CAF 09 Level - Spring 2011) aa In peculiar circumstances the client restricts the auditors from performing certain audit procedures. Discuss how the auditor should deal with such restrictions ifthe same are imposed by management: (atthe time of appointment (i) during the audit (03) ; (ICAP, CAF 09 Level - Autumn 2007) ‘Hints to concept review questions are included at the end of this chapter. LO Waar IS MEANT BY IMMATERIAL, MATERIAL AND PERVASIVE: rms are used in audit to describe effects of misstatement, and scope limitation, Unmaterial: ‘Anitem which is not material, is called immaterial, ii fic account its ihre oroen winaalpeens oe financial statements; ion of th ; iil. In relatior Nn to disclosures, are the financial statements: of fundamental to users’ understanding of Fs, Scanned with CamScannering ~ Study Netes Chapter 4 Auditer’s Repert & Types «1 ‘CONCEPT REVIEW QUESTIONS = ha What are the factors which make an item material? en (ICAP, CFAP @6 Level - Summer 1997) Briefly explain the term ‘pervasive effects on the financial statements’ (04) | Hesecielvomeene (ICAP, CAF 09 Level - Spring 2011) (IcAP’s Oficial Question Bank for CAF 09 Q. # 157a) Hints to concept review questions are Included at the end of this chapter. LO 7: DECIDING TYPE OF OPINION ON FINANCIAL STATEMENTS: ‘There are four types of audit opinions, expressed by an auditor. Immaterial effect Material effect Pervasive effect Misstatement Aiwadied take arta ‘Adverse Opi Scope Limitation cane rn Qualified Opinion Disclaimer of Opinion When to express Unmodified Opinion: Auditor shall express unmodified opinion when: 1. auditor has obtained sufficient appropriate audit evidence, and 2. there is no material misstatement in financial statements. ‘When to express Modified Opinion; ‘Auditor shall express modified opinion when: 1. there are misstatements in financial statements whose effect is material or pervasive, or 2. auditor is unable to obtain evidence and effect is material or pervasive. Study Tips If qualified, adverse or disclaimer of opinion is expressed in sudit report. auditor is required to deseribe nature of misstatement or scope limitation in basis for opinion paragraph, | CONCEPT REVIEW QUISTION 2 ba | CBRE eee {G) Explain the circumstances when a modification.to the auditor's oy inion is, (4) Deseribe the circumstances when an auditor will form a qy al of opinion, opinion, an adverse opinion and a: (Professional ons are inc fy coma Pe ‘Hints to concept rev iew Scanned with CamScannerEEE Chapter 4 Auditor's Report & Types of Opinions Ain stay Notes ue eV sng ABOUT “EMPHASIS OF MATTER” AND “OTHER MATTER" : DI H vo oe GRAPHS IN AUDIT REPORT: ParaG! (relates t0F/5) cideny i \ditor's report (i.e. Definition) id paragraph is Included in audit report If auditor considers it necessary i draw Emphasis o! users’ attention to 2 which ig disclosed in financial statements and is fundamental to matter which in 3 0 Snderstandi rancial statements, provided: understanding of (yr required to modify his opinion because ofthe matter, and The | to modify his opinion b + Matter is not a key audit matter. When to add paray examples of Situations/ Circumstance when Emphasis of Matter is included in Audit Report: 1” i there is exceptional litigation or regulatory action pending against company. 2 toni aplication (when permitted) ofa new accounting standard that has a material effect 3. When a maj disaster significantly affects eatity= Rnancial position, 4. A significant subsequent event occurs between the date of financial statements and the date of auditor’s report (eg.a fire after the year destroying production facilities). 5. Financial statements and Audit report are revised after issuance. —rassvanee Usually, emphasis of matter paragraph is not giver Placement and Presentation of EOM Paragraph: This paragraph is presented as a separate section immediately after basis of opinion section but before “key audit matter” section. J rvs Paragraph, auditor shall state > the matter being emphasized. 7 the reference to the notes in financial statements which fully describes the matter, > that auditor's opinion is not modified in respect of this matter. sal llaaerichoan Examples of Draft: Example 1 We draw your attention to Note X of the financial Statements, which describe the uncertainty related to the outcome of the filed against th Le modified in respect of this — ‘eainst the company by XYZ Company. Our opinion is not Example 2: Scanned with CamScannerhd Awaiting - Study Notes (relates to Audit) ph in auditor's report (Definition): add jean aa epaph is included in audit report if auditor considers it necessary to commupicate in financial statements but is r6TeVant to uee ter which is not requit f ' 2 at esnding ofthe audit, auditor's report or auditor's responsibilities, pravided: £ Communication is not prohibited by law, and + Mater isnot ey audit matter ‘ons/ Circumstances when Other Matter is included in Audit Report: | statements of prior period were not audited or were audited by another : ere roadie oer _Chapter 4 Auditor's Report & Type: Examples of Situati 1. When financial auditor. ‘on more than one sets of financial statements (eg, entity prepared one set 2. When auditor reports wr¥/S under IFRS and othe? sevunder national framework and auditor is engaged to report on both set of F/S). 3. When auditor restricts distribution of auditor's report (eg when F/5 are prepared for specific purpose and audit report iS prepared solely for intended users). Placement of Other Matter Paragraph: This paragraph is presented as a separate section at end of ie. after the “Report on the ‘Audit of the Financial Statements” and the “Report on Other Legal and Regulatory Requirements”. 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.” - Every important element of audit report (i. Key Audit Matter, Modified important it report (Le, Fe Ait Mater, Modified opinion, Emphasis of Mate, Other Mater, Going Concer) has its own situations. No situation is to be misclassified or duplicated. ‘CONCEPT REVIEW QUESTION paragraph in the audit report (04) (ICAP, CAF 09 Level - 2018) (ICAP’s Official Question Bank for CAF 09 - Q, # 148)) modify his report without affecting his opinion. Also explain how such a (07) (ICAP, CAF 09 Level - (CAP ’s Official Question Bank for CAF: wat 1508) 10 include an emphasis of matter paragraph in the auditor's report (05) (CMA Pakistan - Summer 2017 Extra Attempt) ‘audit has been conducted by ‘auditor, (04) ° another CAP, CFAP 06 Level - Winter 2012) Scanned with CamScannercapter 4 Auditor's Report {TYPES OF Opin, ERS TO TCWG: : Emphasis of Matter” or an “Other Matt, rr shall communicate with Tew, ,” ding to be included in repor, Auditing - Study Notes___——— NICATING SIGNIFICANT MATT include “Modified Opinion” OF ETT | raph in his report, the al he er) modification and the propose LO 9: COMMU! ifthe auditor expect "Key Audit Matter” para ney stances that ed to SUC 5 t ' ” | This communication enaBIES gn that auditor intends to include in audit report. TCWG to beaware Of modi Cptain further clarification from auditor oF to prov + TCWG to Tave an_gpporet tion to auditor regarding the matter causing modificatn, * ation and XP ; further informatio rence of TCWG regarding facts ofthe matter «tort obtain concurrence of7 CONCEPT REVIEW QUESTION .ed with Governance, explain why it is important for auditor, light — Communication with those Charge ; 1 ac mh et tters arising from the audit of an entity's financial stater.. communicate with those charged with governance on ma oughout the audit troupes (ICMA Pakistan ~ Summer 2017 Extra Attenp Hints to concept review questions are included at the end of this chap, APX: HINTS & COMMENTS TO CONCEPT REVIEW QUESTIONS: Note that only elements are required. Explanation should not be given. a2 ‘Answer given in explanation of element "Date of the Auditor's Report:" Answer should be produced ld be in two parts inline with requirements ofthe question. Examiner commented that this question was answered poorly ° Responsiiities as mentioned in format of audit report will be produced. Students shou ‘explanation. Itis not necessary to memorize and reproduce 100% of audit report, Ra Matters included in the section “Report Examiner commented that some stud of which the audit report is qualified. Id cover main headings with bi ton Other Legal and Regulatory Requirements” of audit report wil ed lents misunderstood the question and started to list and describe mates on te list and describe matters on the to Scope and timing of the audit i Srmadenly uring audit including any significant deficiencies in int fement that auditor has complied wi felationships and othe aqcomblied with relevant ethical req 3. Key audit matters. independence, and significant audit findings, luirements regarding independence, inciudiné™ State four additional opinions required by Companies Act, 2017 [Sag require following additional items tobe in ded In audit report of listed compan les: 7 ire la ‘be included in audi listed comp: 5 Laseewe paragiaphis n audit Auditors Responsibly sects in . pendence and KAM . d ; iii (relating to ind, i lenc ) Scanned with CamScanner: ales Chapter 4 Auditor’s Report & Types of Opinions ‘i te s Auditing - Study Notes _— BB mat comment Examiner ome on .or’s course of acto! responsibility = ” ioned i WS stamens ss mentioned i as mentioned scape tation” as men Fn o/fancal statements oe weak aul {jattime of appointment: vf that most students could not ex} ino inLows, sn when misstatement is identified ‘plain the auditor's responsibility. Some focused only on i reli 2s ov that some students wrote incorrect examples eg, Source information not reliable, Controls over If ettect is pervasive, do not accept. effec is material, accept but inform management about expected qualified opinion through engagement letter. (4) ding the audit, effects pervasive, withdraw. Ifeffect is material, qualified opinion. Student should remember that if effect of a misstatement or scope limitation is not mentioned in the question (Le. ‘whether material or pervasive), we have to cover both situations. ag Definition of Materiality. Deiinition of Pervasive, {i) when there isa misstatement or scope tation whose effect is material or pervasive. {1 Student should describe circumstances for each type of opinion separately ie. qualified opinion is expressed when there is misstatement or scope limitation whose effect is material acne commented that some students gave examples in casual way eg when sales transactions are recorded Fanart. or when disclosure isnot given in financial statements, or when management is not ready te coro financial statements, ae Simple and strai imthis question, aig ‘Term “Modified report” may “Other Matter Paragraph" ‘These paragraphs are Presentation Presentation Presentation Definition and examples of circumstances Auditors hall ‘ype arpa et4 “Other Mater Paragraph Pinion and date of opinion by prove 45 'heforward question. Examiner commented that there were many students who couldn't obtain any mark. y include “modified opinion’ as well as other eleme: ‘OF “Material Uncertainty relating to going concern” Presented as separate section in audit report of OM paragraph is included in notes, of OM paragraph depends on each case. of Material Uncertainty relating to Going Concern” in the audit re cessor auditor. 'nts_ eg. "Emphasis of Matter Paragraph", ll be discussed in Chapter # 21. Port. in which auditor shall state name of predecessor auditor, Scanned with CamScannerAuditing - Study Notes Chapter 4 Auditor's Report & Types Sf Opinion, .rn, auditor discusses it in paragraph “material uncertai tainty relates to going concer. ses In paragr ty relating to going c Mareen inten en rut acton sur dcsss inp ee fone uncertain ees ctineormmateril matters (x contingencies), this not discussed neers Soe and straightforward question requiring to produce 03 points included in LO ¥ 8, Nar 2 CR ee 46) Scanned with CamScannerAuditing -Study Notes: Chapter 5 Acceptance and Continuane CHAPTER FIVE ACCEPTANCE AND CONTINUANCE PROCEDURES) T los nossa Reference" | Bank eevee ™ T | LO1 | ACCEPTANCE AND CONTINUANCE PROCEDURES 2.1.3, 3.1.3 23a | LO2 | COMMUNICATION WITH PREDECESSOR AUDITOR | ° 2.1.3 N/A | LO3 | PRECONDITIONS FOR AUDIT 2.2.1 a ome APPENDIX | HINTS & COMMENTS TO CONCEPT REVIEW |_APX | QUESTIONS N/A N/A ** September 2018 Edition * 3 Scanned with CamScanner: Chapter 5 Acceptance and ‘Auditing - Study Notes Ss TT SPARIMUANE Procdan, cent activities are those activities which are performed by ‘ment. These include: Preliminary engagem™ Y aN auditor atv, ze tart of each audit engas' fn i sO performing acceptance proce : engagement. 2) Agreeing the terms of To 1: ACCEPTANCE AND CONTINUANCE PROCEDURES == client (or continuance of engagement), audit firm should determine cepting a Dana vu create any threat to f damental principles e.g. eptance W' to fund mental principle Te Et 20, [tie behavior may be created if client involves in activities Or questionable financial reporting practices, = . Frents Professional competence and due care may be created if firm is not competers perform th engagement Evaluate integrity of client by obtaining information about proposed audit clien owners ead dltece Gg by coesinuntcates with predecessor auditor. (This is called clin screening). 2. Ensure that engagement team is competent to perform the audit engagement and has the necessary capabilities, including time and resources and special knowledge. 3. Ensure that engagement team can comply with relevant ethical requirements, particulary relating to independence. 4. Consider significant matters arisen in-previous engagements, and their implications on continuing the relationship. 5. Ensure preconditigns for audit are present. prgconditign If there are any threats, auditor, should apply necessary safeguards (eg. obtaining clients commitment to improve its governance, obtaining understanding of client's business, assigning sufficient staff with necessary skills and agreeing realistic timeframe). If threats cannot be reduced, auditor should decline the engagement. 1. Firm should communicate its consent to company before AGM 2. Ensure that removal of predecessor auditor and appointment of firm is in accordance with legal requirements (e.g. through minutes of AGM). 3. Prepare and submit engagement letter to the client. x — CONCEPT REVIEW QUESTION | kal Fee tive becnnpany have been the auditors of Shahid Corporation Limited, a listed company, for the past many yes" You have been appointed as the avait Youve eet apo st acess a si Felationship” "® MAMES which you would consider while assesting the acceptance and continuance of 9 | (QCAP, CAF 09 Level - Autumn 2008) (ICAP’s Official Question Bank for CAF 09 -@. # 238 Scanned with CamScannerET — Auditing - Study Notes Chapter § Acceptance and Continuance Procea, . nee Procedures aaa SS LO 2: COMMUNICATION WITH PREDECESSOR AUDITOR: {As part of acceptance procedures, every incoming auditor writes Professional Clearance Letter (or NOC letter) to identify any matters relevant to acceptance decision (e.g. integrity of management, overdue fee) 1. Obtain written permission from client (due to confidentiality principle). If permission is not given, duditor should refuse the engagement. . 2. If response is received from predecessor auditor indicating some issues, incoming auditor may still accept the engagement after applying necessary safeguards. 3. If response is not received from predecessor auditor, proposed auditor should try to obtain relevant information from other sources (eg. inquiries from third parties or background investigation of senior management and TCWG). 1. Obtain written permission from client to reply to incoming auditor (due to confidentiality principle). 2. If permission is not given, inform proposed auditor about non-permission. 3. If permission is given, write as soon as possible to proposed auditor honestly stating the relevant facts. —__ a ‘CONCEPT REVIEW QUESTION ‘What is the purpose of the professional etiquette letter sent by an incoming auditor to the outgoing auditor. (02) (ICAP, CFAP 06 Level - Summer'1997) ‘Your firm has received a request for information from Blonde LLP, a firm of auditors, in respect of its prospective external ‘audit cient Auburn Led (Auburn). Auburn is currently audited by your firm but, after discovering that Auburn's ‘manufacturing process includes unethical labour practices in its overseas supply chain, your firm decided not to seek Feappointment. ‘Sate the actions that your firm shold take with respect to the request for information from Blonde LLP. (03) Gnstitute of Chartered Accountants in England and Wales, Professional Level - 2012 September) ‘ABC and: Chart Sindh Limmted (60) eaces Accountants, have been requested to give their consent for appointment as the auditor of in place of XYZ and Comy Chat ir Company ts pany, Chartered Accountants. The matter of appointment of ABC and Require 12 be Placed inthe annual general meeting of SL. © Explain the 6) Whae would be ogy ABC and Company and the s teps that it needs to take before acceptance of the audit. (05) ay. in case the retiring auditor's responsibilities with res ilties with respect to the above and th sibility of ABC and auditor does not fulfil its responsibility? eee rey A os) (ICAP, CFAP 06 Level - Winter 2013) BT Scanned with CamScanner p=5 Acceptance and continuance Proce, LO3: PRECONDITIONS FOR AuDr Preconditions for an audit MEANS: sn gr financial statements is acceptapie REF remise on Which an ay, 'AFRE,used by management | ! Fi eement (and TCWG where applicable) agrees the p' conducted. rT porting framework adopted by manager 1. Auditor shall determine whether financial re preparation of financial statements is acceptable (considering, nature of financial statements thnancial statements, nature of entity, legal requirements). (via engagement letter) that it under 2. Auditor shall obtain agreement from management tit undersrs, 2. for preparation and presentation of financial statements. b. for ee intera control which management and TCWG determine necessary preparation offinancial statements that are free from material misstatement; and c. to provide the auditor all relevant information; additional information; and unrestric: a€Gess to personnel. \ Joann should discuss the matter with management and should explain them what preconditic: M management does not agree to premise on which audit is conducted: ‘Auditor shall not accept the proposed audit engagement. IfAFRF is not acceptable: Auditor shall refuse the engagement unless AFRF is required by law. If AFRF is not acceptable but i IC AFRE ts not ac is required by law, auditor shall accept engagement if follow"! 1. Management agrees to provide additional di i being ile pI tional disclosure in financial statements (to avoid F > 2. Its included in Engagement Letter that: auditor's report will include E: mph itiot towards additional disclosure)*@ = of Matter Paragraph (to draw users’ atte auditor's report will not include phrases “give a true and fair view” or “pre , fh sha fairly, in all material respects’ al Scanned with CamScannereee eT TTT ‘Auditing - Study Notes Chapter 5 Acceptance and Continu, “ance Procedur, ‘CONCEPT REVIEW QUESTION yberry Pakistan Limited (SPL) was incorporated on March 1, 2011. The directors of SPL are in the pr seavintng the first statutory auditor ofthe company. They have requested your firm to submit a proposal rice seer eudit assignment. A partner of your firm has asked you to draft the proposal after assessing whether the preconditions for the audit exist. Required: (a) Briefly discuss the term ‘preconditions for an audit. (02) {b) What are the steps that you would perform in order to ensure that preconditions for the audit exist? (05) {2} Discuss whether your firm may or may not accept the assignment if one of the preconditions for the audit is nok present. (08) (ICAP, CAF 09 Level - Spring 2011) (ICAP’s Official Question Bank for CAF 09 - Q. #39) ‘tate the matters which an’auditor should consider to estat whether the pre-condition for an audit are present. (05) (ICAP, CAF 09 Level - Spring 2018) (ICAP’s Official Question Bank for CAF 09 - Q. # 56b) hanewal Limited (KL) has requested your firm to submit engagement letter for KL's statutory audit. The engagement partner has asked you to establish whether preconditions for the audit of KL are present. Required: ‘What matters woiild you consider in order to ensure that preconditions for the audit exist? (05) (ICAP, CAF 09 Level - Autumn 2014) a (ICAP’s Official Question Bank for CAF 09 - Q. # 143) Discuss the course of action which may be adopted by the auditor if pre-conditions of audit are not present. (04) Z {ICAP, CAF 09 Level - Spring 2017) {ICAP’s Official Question Bank for CAF 09 - Q. # 148!) Scanned with CamScanner