ARMGT402

ADVANCED AUDIT AND

ASSUARANCE
AUDITS OF HISTORICAL FINANCIAL STATEMENTS OF PROFIT ORIENTATED ENTITIES
Topic 2g – Conclusion and Reporting

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1. Concepts And Principles Of Assurance Engagements
a) Concept of assurance
b) Expectation gap
c) Regulatory environment of assurance engagements
d) Ethical principles
e) Assurance engagement risk considerations
2. Audits of Historical Financial Statements of Non Specialised Profit Orientated Entities
a) Preliminary Engagement Activities
b) Assertions
c) Audit Procedures
d) Planning Activities
i. Audit planning concepts
ii. Audit risk
iii. Fraud and Error
iv. Audit Strategy + plan
v. Analytical procedures
vi. Materiality
e) Gathering audit evidence
i. Important concepts
ii. Audit of business cycles
f) Completion of the audit
i. Related parties
ii. Provisions and contingent liabilities
iii. Subsequent events
iv. Going concern and factual insolvency
g) Audit Conclusion and Reporting
i. Evaluating Misstatements
ii. Reporting on audit engagements (ISA 700R, 705R, 706R)
iii. Key Audit matters (ISA 701)
iv. Audit Reports
h) International Standard on Sustainability Assurance (ISA5000)
3. Audits of Public Sector Entities

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Conclusion and reporting

1. Evaluating and concluding on the audit evidence gathered.

2. Formulating the audit opinion and drafting the audit report which
conveys that opinion.

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Evaluating Misstatements
(ISA 450)

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• Defining misstatements
• Types of misstatements
• Causes of misstatements
• Identified misstatements
• Evaluation of accumulated misstatements
• Communicating misstatements
• Uncorrected misstatements
• Effect of uncorrected misstatements on AFS
• Documentation

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Introduction

- ISA 450 – Evaluation of misstatements identified during the audit,

provides guidance on how the auditor should proceed with regard to
misstatements identified on the audit.
- The statement says that the auditor must
• evaluate the effect of identified misstatements on the audit, and
• evaluate the effect of uncorrected misstatements if any, on the financial
statements.

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1. Defining materiality
2. Determining which figures to use in calculating materiality
3. Calculating materiality
4. Practice questions

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 Defining misstatements
• ISA 450 defines a misstatement as
• “a difference between;
• the reported amount, classification, presentation or disclosure of a financial statement
item
• and the amount, classification, presentation or disclosure that is required for the item to
be in accordance with the applicable accounting framework”
• If the auditor does not agree with what is reported in the client’s
financial statements, based on what is required by the framework, a
possible misstatement arises.

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Items in the entity’s
IFRS Requirements
financial statements
Amounts -
- Amounts
Classifications -
- Classifications
Presentations -
- Presentations
Disclosure -
- Disclosure

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 Causes of misstatements

Inacuracy in Incorrect
gathering and accounting
processing estimates
data

Omission of an “unreasonable
amount or judgements of
disclosure management

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Steps to be followed when evaluating
misstatements

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 8.Document
the findings
7.Communic
ate
6.Evaluate individual
the effect of and total of
5.Commu uncorrected uncorrected
4.Evaluate nicate misstateme misstateme
the effect of misstatem nts on the nts to those
these ents to AFS charged
3.Determine
an amount accumulated managem with
below which misstateme ent governance
misstateme nts on the
2.Accumula nts would be audit
te these clearly trivial
1.Identify identified and remove
possible misstateme these
misstateme nts misstateme
nts during nts from the
the accumulated
performanc misstateme
e of audit nts
procedures L.H., F&A, BMSE, 2023. 12
 Step 1:
Identify possible misstatements during the performance
of audit procedures

- ISA 450 requires that the auditor record all misstatements identified
on the audit unless they are clearly trivial.
- Examples
- purchase invoices not accounted for at year end.
- Reclassification of receivables with credit balances.

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 Step 2:
Accumulate these identified misstatements

An e.g. of a schedule of accumulated misstatements

Item Type of Description Assets Liabilities Equity Retained

# (see misstatement Dr/(Cr) Dr/(Cr) Dr/(Cr) Earnings
next $’000 $’000 $’000 Dr/(Cr)
slide) $’000
1 Factual VAT input (SFP) 1,570
Inventory (SFP) (1,570)
2 Judgmental Provision for bonuses (SCI) (1,720)
Provision for bonuses (SFP) 1,720
3 Projected Allowance for obsolete inventory (SCI) (1,500)
Allowance for obsolete inventory (SFP) 1,500
TOTAL (1,500) (1,720) 3,220
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• Item 1: ABC Ltd’s inventory is purchased for cash and recorded inclusive of VAT,
totaling $1,570,000, in the inventory account in the general ledger.

• Item 2: There is a difference of opinion of $1,720,000 between the auditor and

management of ABC Ltd regarding the provision for performance bonuses payable to
staff (the auditor believes that the provision is understated by this amount).

• Item 3:
- The inventory balance of ABC Ltd is $9,326,597 at 31 December 2022.
- The audit team conducted an inventory count at only one of the warehouses where the inventory is
stored.
- The carrying amount of inventory at this warehouse was $7,461,277 according to ABC Ltd’s records.
- The inventory count at this warehouse revealed that inventory to the value of $1,200,000 should be
recorded as obsolete.
- Based on a rough estimate, the projected misstatement is therefore in the region of $1,500,000 i.e.
{ $1,200,000
$7,461,277
x $9,326,597 }
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 Step 3:
Determine an amount below which misstatements would be clearly trivial and
remove these misstatements from the accumulated misstatements

• “Clearly trivial” should be taken to mean that the misstatement is very small,
insignificant and inconsequential.

• “Clearly trivial” is not another phrase for not material; because a

misstatement falls below the materiality level it does not mean it is
automatically regarded as trivial and therefore not part of the accumulation
of misstatement.

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 Step 4:
Evaluate the effect of these accumulated misstatements on the audit

This is done by:

a) Distinguishing between
i. Factual misstatements
ii. Judgemental misstatements
iii. Projected misstatements
b) Determining whether overall audit strategy and audit plan should
be revised by taking into account the NATURE and AMOUNT of
identified misstatements that have been accumulated.
c) Request management to examine causes of misstatements, record
the amount of actual misstatements and make adjustments to the
AFS where deemed appropriate. Perform additional audit
procedures to see if misstatements remain.
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 Step 5:
Communicate misstatements to management

Consider reasons for and the effects on the AFS if management

refuse to correct all or some of these.

In communication, distinguish between factual, judgemental and

projected misstatements.

Consider the effect on the fair presentation of AFS

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 Step 6:
Evaluate the effect of uncorrected misstatements on the AFS

• This is done by
a) Re-assessing materiality
b) Considering the:
 size (quantitative aspects) and
 Nature (qualitative aspects)
of uncorrected misstatements
c) Do this for individual misstatements and for the aggregate

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 Step 7:
Communicate individual and total of uncorrected
misstatements to those charged with governance

• Consider the effect on the audit report.

• Request the relevant people to correct the misstatements.
• Consider the possible effect of not correcting the misstatements on
future audit involvement.
• Communicate the possible effect of prior period uncorrected
misstatements.
• Request a management representation letter (that uncorrected
misstatements are immaterial).
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 Step 8:
Document the findings

• Document
Clearly trivial amounts.
Accumulated misstatements and whether they are corrected.
Conclusion on uncorrected misstatements.

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 Conclusion
- This section dealt with misstatements that the auditor identifies
during the audit and how they should be evaluated.
- The auditor should consider the sufficiency of the evidence gathered
in support of management’s assertions underlying financial
statements.
- He/she must also evaluate the differences between the amounts
included in the financial statements and amounts supported by audit
evidence gathered by the application of substantive procedures.
- These differences are referred to as misstatements and arise from:
• Misstatement of fact,
• The misapplication of accounting practices or
• Unreasonable accounting estimates.
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 Practice question (10 marks)
You completed the detailed fieldwork for the audit of Afric Art Pvt Ltd on 19 September
2022 and the only work remaining is the resolution of certain outstanding audit issues as
well as the final review of the annual financial statements. You have settled on $25000 to
be used as performance materiality.

Afric Art Pvt Ltd calculated the allowance for obsolete inventory in the 2022 financial year
on a different basis, which is not in accordance with IFRS, in an attempt to overstate
inventory and profit before tax.

The allowance for obsolete inventory on 30 June 2022 calculated in terms of the new
approach, amounted to $5806. The allowance would have been $53,675 had the company
applied its previous policy which was in accordance with IFRS.

Required
Discuss, giving reasons, what actions you would take should the directors of Afric Art Pvt
Ltd be prepared to make all adjustments requested by you, except for an adjustment to the
allowance for obsolete inventory which, based on the audit evidence you have gathered,
should be $53, 675 (Graded Questions on Auditing)
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 Solution
1. The difference between management’s estimate and the amount best
supported by the available evidence is a misstatement, and its effect on
the financial statements should be considered to evaluate if it has a
material effect on fair presentation.
2. Is the misstatement material
Profit before tax
Difference $53675 - $5806 $47869
Performance materiality $25000

As the effect of the misstatement exceeds performance materiality, it is quantitatively

material.
3. The matter should be communicated on the audit report as a key audit
matter under “key audit matters” section per the requirements of ISA
701.
cont…
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4. Management should be informed that you would have to qualify your
audit opinion should they fail to make the adjustment required to the
allowance for obsolete inventory and that you would have to
communicate the matter as a key audit matter on the audit report.
5. Should management continue to refuse to make the adjustment, you
must then consider whether the material misstatement has a pervasive
effect on the financial statements (affecting the fair presentation of the
financial statements)
a. If the misstatement is material and pervasive, an adverse audit
opinion should be reported.
b. If the misstatement is material but not pervasive (more likely in this
instance), a qualified “except for” audit opinion should be expressed.
6. The auditor must consider whether he can rely on any other information
obtained from management.
7. The auditor would consider if he can still continue with the appointment.
8. The auditor should consider resigning after having complied with his
responsibility in terms of the PAA Act.
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 Practice Question
You are the senior in charge of the audit of Inside-Out (Pvt) Ltd, a company which sells an extensive range of home products,
e.g. furniture, appliances. You have commenced with the concluding stage of the audit and are currently evaluating the
uncorrected misstatements with a view to determining whether adjustments are required to the client’s draft annual
financial statements for the 2022 financial year. The final materiality figure for this audit has been set as $200000.
Uncorrected misstatement 1
• During the course of the 2022 financial year, three of the five directors of the company had taken loans in their personal
capacities from third party financiers in the amount of $200,000 each to enable them to participate in a private
investment venture. Having obtained the appropriate statutory authority in terms of section 208(2) of the Companies and
Other Business Entities Act, Inside Out (Pvt) Ltd provided security for these loans. The financial director has made no
disclosure of the security provided in the company’s 2022 annual financial statements – on the basis that this is not
relevant to shareholders.
Uncorrected misstatement 2
• A calculation error of $85,000 was detected on the costed inventory sheets resulting in an overstatement of the year-end
inventory balance. Management has acknowledged the error, and the following adjusting journal entry has been recorded
Dr Cr
Inventory $85,000
Cost of Sales $85,000
To account for a misstatement detected by external auditors

• Uncorrected misstatement 3
• Based on the audit evidence gathered, the audit team concluded that there is an understatement of the allowance for
credit losses of between $100,000 and $150,000.
Required
• Evaluate the materiality of the uncorrected misstatements both individually and in aggregate (12 marks)
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 Solution
Solution
• Uncorrected misstatement 1
1. As the directors are members of the key management personnel of the reporting
entity, the security provided will give rise to a related party transaction in terms
of IAS 24 – and as such disclosure of this is necessary. (1)
2. This factual uncorrected misstatement is quantitatively material as the amounts
involved are in excess of the final material figure. (1)
3. The failure to disclose the details of the security provided is also qualitatively
material as: (1)
a. Given the inherent conflict of interest in directors using company resources for their personal
benefit, the users of the company’s financial statements need to be made aware / reminded of
this when they evaluate the directors’ performance for the financial year. (1)
b. The third party financiers are also likely to check the notes to the company’s annual financial
statements for disclosure of this security. (1)
Cont…
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• Uncorrected misstatement 2
1. There is a factual uncorrected misstatement in the overstatement of
$170,000 ($85,000 x 2) in respect of inventory and gross profit /
profit for the year - due to the adjusting journal entry being recorded
incorrectly. (1½)
2. The uncorrected misstatement is not quantitatively material in
isolation due to it being below the final materiality limit. (1)
3. Neither is the uncorrected misstatement qualitatively material
individually as the mere knowledge of the misstatement is unlikely to
influence the economic decisions of users. (1)
cont,…

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Uncorrected misstatement 3
1. The auditor should determine whether the difference between the
client’s estimate and the estimate supported by the auditor’s evidence
requires adjustment or whether it can be accepted as reasonable. (1)
2. It would appear that the difference is unreasonable and management’s
failure to revise their estimate will result in the difference being a
judgmental uncorrected misstatement. (1)
3. This uncorrected misstatement in isolation is neither quantitatively
nor qualitatively material. (1)
Cont…

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 Individually immaterial uncorrected misstatements considered in aggregate

Schedule of Uncorrected Misstatements

(after removing individually material matters & ignoring the tax effects)
Assets Liabilities Statement of
$’000 $’000 Profit or Loss
Dr / (Cr) Dr / (Cr) $’000
Dr / (Cr)
Uncorrected misstatement #2 FM (170) (170)
Uncorrected misstatement #3 JM (150) (150)
Total unadjusted misstatements (320) - (320)

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Cont…
1. When uncorrected misstatements 2 and 3 are aggregated, it is evident
that pre-tax profit for the year will be overstated by an amount which
is in excess of the final materiality figure, and these misstatements in
aggregate must be regarded as quantitatively material. (1)
2. Therefore, one of the uncorrected misstatements (probably
uncorrected misstatement #2) must be regarded as being material, and
will have to be corrected by the client’s directors, else a modification
of the auditor’s opinion will be necessary. (1)

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 Evaluating and concluding on the audit evidence gathered

Application of IFRS - In particular the auditor will evaluate whether:

• The financial statements adequately disclose the significant accounting policies selected and
applied.
• The accounting policies selected and applied are consistent with the financial reporting standards/
accounting framework and appropriate for the company’s business.
• The accounting estimates made by management are reasonable.
• The information presented in the financial statements is relevant, reliable, comparable and
understandable.
• The financial statements provide adequate disclosures to enable users to understand the effect of
material transactions and events on the entity’s financial position, financial performance and cash
flows (information conveyed in the financial statements).
• The terminology used in the financial statements is appropriate.
• The company has complied with the applicable statutory requirements and regulations, for
example ZSE regulations for listed companies and king IV corporate governance requirements.

• The financial statements achieve fair presentation.

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 REPORTING
The auditor gathers sufficient and appropriate audit evidence to obtain reasonable
assurance in order to report on the fair presentation of financial statements. This
section introduces you to the reporting aspect of auditing. This is the last and one
of the most important steps in the audit process as it highlights the overall
objective of the auditor.

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Outline
• Forming an opinion
• Uncorrected misstatement
• Report elements
• Fundamental concepts

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Forming an opinion

• Objective of the auditor

• To form an opinion based on the audit evidence obtained
• To express the opinion clearly in a written report
• Consideration
• Sufficient appropriate evidence obtained
• Uncorrected misstatements not material
• Prepared in accordance with financial reporting framework
• Adequate disclosure of significant accounting policies
• Accounting policies are consistent and accounting estimates are reasonable
• Information is relevant, reliable, comparable and understandable
• Adequate disclosure of all material matters

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 Types of audit opinions
ISA 700 ISA 705 (Modifications)
UNMODIFIED QUALIFIED ADVERSE DISCLAIMER
- Financial statements - “except for…… - “financial statements - “we do not express an
are fairly presented in Financial statements are not fairly opinion on the
all material respects are fairly presented” presented”. financial statements”.
- Only “Opinion” (certain - Two paragraphs: - Two paragraphs
paragraph accounts/classes of - Basis for adverse - Basis for
transactions are opinion; and disclaimer opinion
materially misstated) - Adverse opinion and
- Two paragraphs: - Disclaimer of
- Basis for qualified opinion.
opinion and
- Qualified opinion

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 Audit report
The audit report It is important for regulators, Therefore, the audit
provides an independent standard setters, report serves as a crucial
and objective researchers, and users of communication tool
financial statements to
assessment of the understand the role of between the auditors
company's financial auditors in the private sector and the shareholders of
statements, ensuring as well, as findings based on a company, providing
their accuracy and public companies may not be transparency and
reliability. directly applicable to private accountability in the
companies. financial reporting
process.

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 • Title
• Addressee
• Auditor’s opinion
• Basis for opinion
Audit • Key Audit matters
Report • Other information
• Responsibilities for the financial statements
• Auditor's responsibilities
• Sign off

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 Unmodified opinion

When the financial statements give

a true and fair view
(or equivalent)
in accordance with an identified
financial reporting framework, an
unmodified opinion should be
expressed.

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 • The report must be in “writing”, i.e.
1.Title: hard copy or electronic, The auditor
can not just give a verbal audit report
The report is at the AGM

headed • Including the word “independent” in

Independent the title adds to the credibility of the
audit report by emphasising that the
Auditor’s auditor is reporting as an individual
Report who is independent of the company
being reported on
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 • The audit report for a public
company is addressed to the
shareholders.
2. • An audit of a private company
which is required to be audited
Addressee because of its Memorandum of
Incorporation requires it, will also
be addressed to the shareholders.

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 • The opinion paragraph must:
• have a heading “opinion”
• state that the financial statements have been audited
• identify the company whose financial statements have been audited
• identify the title of each statement comprising the financial statements
• refer to the notes, including the summary of significant accounting
3. policies
• specify the date of, or period covered by, each financial statement
Auditor’s making up the financial statement as a whole, for example the statement
of financial position at 31 December 2023, statement of cash flows for
opinion the year then ended.
• identify the reporting framework and any other regulatory requirements
in accordance with which the financial statements have been presented.
• In Zimbabwe, this means IFRS and the Companies and Other Business
Entities Act 2019 which also contains certain reporting requirements.
• When the auditor gives a qualified or adverse opinion or disclaims an
opinion, it will require changes to the wording of the opinion paragraph.

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4. Basis for opinion
• The basis of opinion paragraph in the unmodified report presents the user
with a broad outline of the “background” to the audit and its ethical basis.
• Four matters are covered:
i. a statement that the audit was conducted in accordance with the ISAs
(background)
ii. a reference to the section of the auditor’s report which describes the auditor’s
responsibilities in terms of the ISAs (background)
iii. a statement that the auditor is independent of the client (as described by The
Code of Ethics), and has fulfilled his ethical duties in accordance with the Code
iv. a statement that the auditor believes sufficient appropriate evidence to provide a
basis for the opinion, has been obtained (background).
• When the auditor gives a qualified or adverse opinion or disclaims an
opinion, an explanation thereof will be provided at the start of the Basis for
Opinion paragraph.

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5. Key audit matters
Scope
• KAM are those matters that, in the auditor’s professional judgement, were
of most significance in the audit of the financial statements of the current
period.

Determining and communicating

• Communicating provides greater transparency about the audit and assists
users’ understanding of those matters
KAM
Is not a separate opinion
Is not a substitute for
• Necessary disclosure
• Expressing a modified opinion, or
• Reporting on going concern

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Determining what are KAM

Matters communicated with those

charged with governance
Matters that required
significant auditor
attention

KAM

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Examples of KAM

Impairment of financial instruments

Valuation of PPE
Inventory
Valuation of investment properties
Investment in subsidiaries
Deferred tax
Revenue recognition
Biological assets
Impairment of goodwill

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Communicating KAM to users of AFS

- In separate section of audit report

- Where there are no key audit matters to communicate, the auditor
shall include a statement to this effect under the ‘key audit matters’
section of the audit report

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6. Other information
• The directors’ report forms part of the annual financial statements of
both private and listed companies prescribed by the COBE Act, and
must be reported upon by the auditor.
• Nonetheless, the information in the directors’ report is not in the
form of assertions and the subject matter is not identifiable and
capable of consistent evaluation or measurement against identified
criteria.
• The opinion expressed on the financial statements does not extend to
the information contained in the directors’ report as the auditor has
no basis for concluding that the information is properly stated.
• Therefore, the auditor cannot give reasonable assurance that the
directors’ report “fairly presents” because there is no standard on
which to judge the fair presentation of directors’ reports.

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7. Responsibilities for the financial statements
• The inclusion of this paragraph is to emphasise for users that
the directors are responsible for:
i. preparing the financial statements (not the auditor)
ii. implementing internal controls which underlie the
financial statements
iii. assessing the company’s going concern ability, and
iv. using the going concern basis of accounting to prepare
the financial statements (unless they intend to liquidate,
cease trading or have no option other than to do so).

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8. Auditor’s responsibilities
• A number of general matters are covered in this paragraph:
i. the objectives of the auditor, i.e. obtain reasonable assurance and report
ii. the meaning of reasonable assurance, i.e. a high level of assurance but not a guarantee
iii. the meaning of material in the context of misstatements
iv. professional judgement and professional scepticism
v. the risk relating to fraud, as opposed to error.
• These are followed by a broad description of what the auditor does:
vi. Identify, assess and respond to the risks of material misstatements
vii. Obtain sufficient appropriate evidence to provide a basis for our opinion
viii. Obtain an understanding of internal control but not for the purpose of expressing an opinion on its
effectiveness
ix. Evaluate the appropriateness of accounting policies and estimates
x. Conclude on the appropriateness of the use of the going concern basis of accounting
xi. Evaluate overall presentation, structure and content of the financial statements and whether they
fairly present the underlying transactions
xii. Communicate with the directors.
xiii. For a listed company only, the auditor states in the auditor’s responsibility section (at the end) that
from the matters communicated with the directors, those that were of most significance to the
audit were designated key audit matters and thus were described in the audit report.

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9. Signing off
• If the report is not presented on a firm’s letterhead, the name and address of
the registered auditor’s firm must be added.
• The designation “director” is used when the auditor’s firm is incorporated.
• If the auditor is a sole practitioner, neither “partner” nor “director” is
required.
• The auditor’s report must be dated no earlier than the date on which the
auditor has obtained sufficient appropriate audit evidence on which to base
the auditor’s opinion. This means that the auditor has considered the effect of
events and transactions on the financial statements up to the date of signing.
• Before signing, the auditor must ensure that:
i. a complete set of financial statements has been prepared, and
ii. the directors have signed the financial statements (indicating that the board has
taken responsibility for them).
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Modified opinions and additional paragraphs
•Modified opinions,
Emphasis of the matter and
other paragraphs

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 Decision 2
(3) Material but
(4) Material and pervasive
not pervasive
Decision 1

Adverse
(1) Material Qualified
Misstatement ‘except for’
…financial statements are
seriously misleading

Qualified Disclaimer
(2) Lack of
‘except for’ …unable to express an
Evidence
opinion
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Basic principles
Grounds for a modified opinion on a material matter

1. Financial statements are not free form material misstatement

2. Auditor has been unable to obtain sufficient appropriate audit

evidence.

3. Pervasiveness or the extent to which the financial statements are

affected by the matter which may give rise to modification of the
auditor’s opinion.

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1. Financial statements are not free form material
misstatement
i. The appropriateness of the selected accounting policies
a. the accounting policies are not consistent with the applicable financial reporting framework,
b. the accounting policy for a significant account heading/item in the financial statements is not
correctly described or
c. the financial statements do not represent or disclose the underlying transactions and events in a
manner which achieves fair presentation.
ii. The appropriateness or adequacy of disclosures in the financial statements
a. The directors have not applied the policy consistently with the requirements of the financial
reporting framework including, consistency between reporting periods and consistency between
similar transactions and events.
b. The method of application of the accounting policy is incorrect:
iii. The appropriateness or adequacy of disclosures in the financial statements
a. when the disclosure required by the reporting framework is incomplete or not presented in terms
of the financial reporting framework

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2. Auditor has been unable to obtain sufficient appropriate audit evidence.
i. Circumstances beyond the control of the audit client
a. E.g., the client’s accounting records were destroyed by fire and were not adequately
backed up.
b. E.g., ongoing physical danger; political unrest has prevented the auditor from visiting
certain of the audit client’s warehousing or manufacturing facilities to conduct audit
procedures such as inventory counts.
ii. Circumstances relating to the nature or timing of the auditor’s work
a. E.g., the audit client is required to account for an associated company using the equity
method, but the auditor is not able to obtain sufficient appropriate evidence about the
associated company’s financial information to evaluate whether the equity method has
been appropriately applied. (Remember that the auditor does not have the right to
demand evidence from the associated company.)
b. E.g., the timing of the auditor’s appointment is such that the auditor is unable to observe
the counting of physical inventories.
iii. Limitations imposed on the auditor by the client’s management
a. E.g., management refuses to give the auditor access to the accounting records relating to
directors’ emoluments.
b. E.g., the board will not allow the auditor to review the minutes of directors’ meetings.
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3. Pervasiveness of the matters
• Matters are pervasive if they:
i) Are not confined to specific elements, accounts or
items of the financial statements
ii) If so confined, represent or could represent a
substantial proportion of the financial statement
iii) In relation to disclosure, they are fundamental to
users’ understanding of the financial statements

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Emphasis of matter and other matter paragraphs
- Emphasis of matter – a matter that is fundamental to understanding
the financial statements
- An ‘other matter’ is relevant to understanding the audit, auditor’s
responsibilities or report
- Cannot include going concern issues

These can only draw attention to matters which do not modify the
audit opinion

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 Emphasis of matter and other matters

Emphasis of matter Other matter

• Headed by emphasis of matter
• Immediately after basis of
opinion or KAM
• Clear reference to matter and
where relevant disclosure can
be found
• Indicate that the audit opinion
is not modified in respect to
this matter
• Headed by Other matter
• Usually after KAM
• State clearly that matter is not
required to be disclosed
• Do not include matters
prohibited by law or required
to be given by management

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 Practice question 1: Complete the chart given below. Consider each circumstance separately.
Circumstance Nature Material and/pervasive Opinion
i. disagreement with
management
ii. limitation of scope

1. No cash sales records a Material and Pervasive b

2. Deferred tax policy inappropriately applied c d Qualified

3. Inventory stated at replacement cost e Material and Pervasive f

4. Going concern dependent on award of contract; g Material h

adequate disclosure made
5. Misclassification of liabilities i j Qualified

6. Finance leases accounted for as operating leases k l Adverse

7. Insufficient evidence relating to capitalization of m n Qualified

intangible asset development costs
8. Non-disclosure of subsequent event o Material p

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 Solution
No. Circumstance Nature Material and/or Opinion
pervasive
1. No cash sales records a) Insufficient appropriate evidence, Scope limitation Material and b)Disclaimer
pervasive
2 Deferred tax policy inappropriately applied c) Disagreement (misstatement) d) Material Qualified
- Inappropriate application of standard
3. Inventory stated at replacement cost e) - Disagreement (misstatement) Material and f) Adverse
- Inappropriate selection of standard Pervasive
4. Going concern dependent on award of g) Added paragraph: Material Uncertainty Material h)Qualified
contract; adequate disclosure made Related to Going Concern
5. Misclassification of liabilities i)Disagreement (misstatement) j)Material Qualified
Inappropriate disclosure
6. Finance leases accounted for as operating k)Disagreement (misstatement) l)Material and Adverse
leases Inappropriate selection of standard pervasive
7. Insufficient evidence relating to capitalization m)Insufficient appropriate evidence n)Material Qualified
of intangible asset development costs Scope limitation
8. Non-disclosure of subsequent event o)Disagreement (misstatement) Material p)Qualified
Inadequate disclosure/inappropriate
application

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Practice question 2
You are the partner in charge of the audit of Cordon (Pvt) Limited, a large manufacturing company, and are
evaluating the audit working papers for the audit year end 31 March 2022 with a view to concluding on your
audit opinion. All matters other than those mentioned below, have been satisfactorily resolved.
Matter 1 - Inventory
The company has valued its inventory at replacement cost. In discussion with the directors, who are adamant
that the value remains unchanged, they have explained that they intend moving to “fair value” accounting and
that by valuing at anticipated replacement prices, the statement of financial position will reflect the real value
of inventory. The effect of this decision has been to increase the value of inventory and the profit for the year
ended 31 March 2021 by $1 750 000. There is no effect on the taxation figure which is correctly calculated and
disclosed.
Matter 2 - Related party transactions
It has been established through scrutiny of the minutes and other documents, that the following related party
transactions have not been disclosed in the annual financial statements:
i. Purchase of manufacturing equipment costing $2 million from Billben CC, a close corporation in which
Bill Benson, the chief executive officer of Cordon (Pvt) Ltd has a 50% member’s interest.
ii. A supply and maintenance contract with George Grove for Cordon (Pvt) Ltd’s computer equipment.
George Grove is married to Marie Grove, the company’s IT director.
Required
Draft the audit report of Cordon (Pvt) Limited for the financial year-end 31 March 2021 assuming that both
matters 1 and 2 remain unresolved. You are not required to write out the sections dealing with the directors’
and auditor’s responsibilities or other information.
(Adapted from Graded Questions)
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 Practice question 3
The following audit report was drafted by a trainee on the audit of Lite (Pvt) Ltd, a company which manufactures lighting systems. The trainee was asked to draft the
report at the conclusion of the audit for the financial year end 30 June 2021 as part of “on-the-job” training and as part of your training, you have been asked to evaluate
his report. The shareholders of Lite (Pvt) Ltd included a clause in the company’s Memorandum of Incorporation which requires that the company’s annual financial
statements are externally audited.
Independent Report
To the board of directors.
We have evaluated the accompanying financial statements of Lite (Pvt) Ltd for fairness based on our annual audit carried out in terms of the Memorandum of
Incorporation of the company. Management is responsible for the preparation of the financial statements and for the prevention of fraud. The auditor’s responsibility is
to perform the audit and in doing so, to detect any fraud which may have a material effect on the financial statements not having been prevented by the directors.

We report on the following aspects of the audit:

An expert was engaged by our firm to assist in the valuation of work-in-progress. Due to the complexity of some of the company’s lighting systems, the risk of
misstatement in work-in-progress warranted this. The company is currently being sued by a former employee who suffered personal injury at work whilst testing electric
current flow during quality control procedures. With regard to the detection of fraud, we detected a small wage fraud relating to unauthorized overtime. We reported
this to management who subsequently dismissed the perpetrators. In our opinion, except for the matters raised in 1 to 3 above, there are no outstanding issues arising
from the audit which was conducted in terms of the International Standards on Auditing and the International Financial Reporting Standards.

Emphasis of matter
There are no matters which require emphasis.
Mayer and Mose
30 June 2021
Park Place
Harare

REQUIRED
Detail the errors/deficiencies in the audit report presented to you for evaluation (give explanations where necessary). You are not required to redraft the report. (30)

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End of lecture

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