Outlines:

CFAP 06: Advanced Audit & Related Services

This standard discusses:
ISA 200: Oveall Objectives of Auditor
1. Overall objective of auditor.
Secret Sheet for Quick Revision
2. Key requirements for performing an audit i.e. Professional Judgment, Professional Skepticism, Premium Content
(For students of Muhammad Asif, FCA)
Compliance with Code of Ethics, Compliance with ISAs. (For Summer 2023)
3.Various terms frequently used in ISA e.g. Applicable Financial Reporting Framework, Reasonable
Assurance, Material Misstatement, Audit Risk, Sufficient appropriate evidence.

Framework

General Purpose Framework Special Purpose Framework Fair Presentation Framework Compliance Framework

To meet needs of wide range of users To meet needs of specific users e.g. Allows additional disclosure or Does not allow additional
e.g. 1. Regulatory Basis departure from AFRF to achieve disclosure or departure.
1. IFRS 2. Tax Basis fair presentation.
2. IFRS for SMEs 3. Cash Basis
3. National Framework e.g. US GAAP 4. Contractual Basis Opinion:
4. XYZ Law of Jurisdiction X Opinion: “financial statements are prepared, in all
“financial statements give true and fair view material respects, in accordance with the
Implications on Report: in accordance with the framework”, or framework”.
Implication on Report: EOM (to explain basis of accounting) “financial statements are presented fairly, If framework is misleading/unacceptable,
If AFRF is other than IFRS, jurisdiction shall also OM (if distribution of report is restricted) in all material respects, in accordance with the engagement is not accepted.
be mentioned in opinion. framework”. (Both phrases are equivalent)

Audit Risk (AR)

There are 03 Parties involved in an audit (risk of misstatement after audit)

Auditor Management (e.g. CFO, CEO) Stakeholders (Existing Shareholders, Risk of Material Misstatement (RMM) Detection Risk (DR)
& TCWG (e.g. Directors) Prospective investors, A holding company, (risk of misstatement prior to audit) (risk that auditor does not
Lenders, Donors, Tax Authorities.) detect misstatement)
Overall Objectives of Auditor:
To obtain reasonable assurance, and report on F/S. Responsibilities of Management: At F/S Level At Assertion Level
To communicate certain matters to internal/ Preparation of F/S. Expectation Gap: (which affects many (which affects
external parties when required by ISA/local laws. Internal controls. 1. Auditor prepares financial statements. assertions/areas) specific assertion)
(Opinions on internal control, future viability, To provide information to auditor. 2. Auditor checks 100% transactions.
efficiency/effectiveness of management are NOT 3. Auditor provides absolute assurance.
auditor’s objectives.) 4. Auditor is responsible to detect fraud. Inherent Risk (IR) Control Risk (CR)
5. EOM, OM, Going Concern Uncertainty are (risk due to nature of transactions) (risk due to weaknesses in internal control)
modified opinions.

Important Concepts for Case Studies:

Partial compliance with AFRF is not allowed e.g. “Financial statements are in substantial
compliance with I FRS”.
 Outlines:
CFAP 06: Advanced Audit & Related Services
This standard discusses:
ISA 200: Oveall Objectives of Auditor
1. Overall objective of auditor.
Secret Sheet for Quick Revision Premium Content
2. Key requirements for performing an audit i.e. Professional Judgment, Professional Skepticism, Compliance with
(For students of Muhammad Asif, FCA) (For Summer 2023)
Code of Ethics, Compliance with ISAs.
3.Various terms frequently used in ISA e.g. Applicable Financial Reporting Framework, Reasonable Assurance,
Material Misstatement, Audit Risk, Sufficient appropriate evidence.

KEY REQUIREMENTS FOR PERFORMING

AN AUDIT Evidence

Professional Judgment
Application of knowledge and
experience to reach an appropriate
course of action. (e.g. procedures
when guidance is not available in ISas)
Professional Skepticism
Being alert to conditions which
indicate possible misstatements.
(See list of conditions below)
Compliance with ISAs Compliance with Code of Ethics Characteristics: Sources:
Sufficient (measure of Quantity) 1. Previous audits.
Appropriate (measure of Quality) 2. A & C Procedures
Structure of ISAs: A CA shall comply with requirements of 3. During the audit (inside or outside the entity)
Introductory Material, Objectives, Definition. Code of Ethics in every engagement. 4. Using Others (e.g. Predecessor Auditor,
However, Independence is required only Component Auditor, Internal Auditor, Service
Requirements.
for assurance engagements. Auditor, Expert, Quality Control Reviewer)
Application and Other Explanatory Material (including
Appendices).

Auditor has to comply with all ISAs and their all

requirements, except when requirement is not relevant
or not practicable.

When Requirement is not relevant: When Requirement is not

1. ISA 610 not relevant if no internal audit function. practicable/not effective:
2. ISA 705 not relevant if auditor expresses unmodified opinion. Auditor shall perform
3. ISA 265 not relevant, if no significance deficiency in internal control. alternative procedures
4. Requirements relating to segment information ISA 501 not relevant performed to obtain
if no segments. evidence/assurance.

Levels of Assurance

Application of Professional Skepticism in Case Studies:

Read the following events/conditions carefully, and think misstatement which may occur in each case in financial statements. This list is very important to solve case studies in exam. Limited Assurance. Reasonable Assurance: Absolute Assurance:
Moderate level of assurance expressed in High, but not absolute, level of Not provided, due to Inherent Limitations.
negative form. assurance expressed in positive form. 1. Nature of financial statements (estimates,
Sales: Unusual increase in sales, Unusual decrease in sales, Income is received (or expense is paid) in advance “Nothing has come to our attention that “Financial statements give true and judgments and uncertainties are involved)
Inventory: Decrease in sales/demand (due to change in fashion/technology or launch of new products), Long-standing inventory/increase in inventory turnover ratio, Defective goods causes us to believe that financial fair view in accordance with the 2. Nature of audit procedures (Not complete
in inventory, Cost of production increases, or Sale price decreases, If product is malfunctioning, New products are launched by company or competitor, Contract of specialized inventory statements do not give true and fair view”. framework”. information, No legal powers, Fraud)
is cancelled or customer goes bankrupt, Defective goods returned by customers. Inventory is held at various locations, or Inventory is held with third party. 3. Time and Cost limitation
4. Other difficult matters/assertions (Related
Fixed Assets: Major fixed assets purchased during the year, Significant capital expenditures incurred during the year, Revaluation Policy, Change in life, Decrease in sales/demand of Parties, NOCLAR, Going Concern)
inventory, Faults in production process (e.g. increase in scrap/wastage of inventory during production), Destroyed or Unused or Under-utilized Fixed Assets, Closure of a factory
Debtors: Increase in Debtors (or turnover ratio), Dispute with debtors, FCY receivables/payables.
Creditors: Decrease in creditors (or turnover ratio)
Provisions: Provision for Warranty (Company provides warranty to its customers, Increase in warranty period/complains, Malfunctioning of products, Not in alignment with sales),
Provision for Restructuring (closure of a factory), Provision for Onerous contracts (Loss making non-cancellable contracts), Provision for Legal Cases (unfair dismissal of staff, serious
accident damaging environment or injuring people, malfunctioning of product)
Intangible Assets: Goodwill (Business purchased during the year), Development Cost (Product developed/launched during the year).
Going Concern Uncertainty: Loss during the year, Bankruptcy of major customer. Adverse key financial ratios (e.g. Current ratio, Quick-asset ratio, Debt-equity ratio), Ceased
substantial manufacturing activities, Serious accident damaging environment or injuring people.
Risk at F/S level: Issue of Shares is planned, Sale of business is planned, Contingent remuneration of CFO/CEO, Other fraud risk factors
Tax: Pending tax litigations, Deferred tax,
Other Risks: You are appointed this year, Non-compliance with Laws and Regulations (fines/bribery paid), Implementation of New IT system, Related Party Transactions, Reduction in
staff, Company deals in large number of products, Recording contingent asset as receivable, Weak internal controls: e.g. Reconciliations not being prepared (in bank, debtors, creditors,
inventory), Predecessor auditor did not wish to be reappointed, or expressed modified opinion, Restricted time schedule for audit, Predecessor auditor expressed modified opinion.