Sec E

Chapter 18; Audit reports

What is an audit report?

An auditor is required to communicate all his findings at the end of audit in the form of written
document. This written document is called audit report.

Basic elements of audit report (colored 7 are most learn for exam)
1) Title
2) Addressee
3) Introductory para
4) Management responsibility
5) Auditor responsibility
6) Opinion para
7) Other repertory responsibilities
8) Date
9) Address
10) Signature
11) Name of partner

Additional elements
1) Key audit matter (KAM) para
2) Material uncertainty w.r.t.g.c para(with respect to going concern)
3) Other information para
4) Basic for opinion para

Most important is opinion para.

What opinion to give?
4 types of opinions;
1) Unmodified opinion or unqualified opinion
2) Qualified opinion
3) Adverse opinion these 3 are modified opinion
4) Disclaimer of opinion

1) If there is no misstatement or no inability to obtain SAAE.

Then give no inability to obtain SAAE.
 Unmodified opinion (clean chit)
“f/s give a true and fair view”
2) Misstatement
- Wrong value
- Wrong treatment
- Wrong a/c policy
This means inability to obtain SAAE.
Auditor was unable to obtain evidence,
- Due to management
- Due to natural factor
If there is misstatement or inability to obtain SAAE, opinion must be modified.
Misstatement
Immaterial mat but not persuasive mat & persuasive
Unmodified mat but not persuasive adverse opinion
“f/s gives a T&F qualified opinion f/s does not give a
View. Except for this f/s give a T&F view.
T&F views.
Less than 5% -immaterial
5%-20%-mat but not persuasive
Above 20% - mat and persuasive
Inability to obtain SAAE
Immaterial mat but not persuasive mat and persuasive
Unmodified opinion qualified opinion disclaimer of opinion
f/s gives a T&F views except for this f/s we don’t express an
give T&F views opinion.
 1) Unmodified ( no misstatement and no inability to obtain evidence or
immaterial misstatement or immaterial inability to obtain SAAE.)
2) Qualified (misstatement or inability to obtain SAAE but level is material but
not persuasive)
3) Adverse (misstatement at mat and persuasive level)
4) Disclaimer (inability to obtain SAAE, level mat and persuasive)

E.O.M paragraph (emphasis of matter paragraph)

There are certain items in f/s that require disclosure, hence management will
disclose it in f/s. however if auditor believes;
1) The matter is fundamental of user’s understanding of audit report
2) Matter is already disclosed in f/s.
He adds another paragraph in audit report called EOM para, which makes a
reference to that note in disclosure. Thus highlighting that matter in detail.

Contents of EOM para

1) Highlights a matter effecting f/s
2) Highlights a matter already disclosed in f/s
3) The para must make note to the point where matters is explained in detail
4) The para must specifically mention that opinion is not qualified in this
respect
Other matter paragraph;
There are certain items in f/s that do not require disclosure hence management
will not disclose it in f/s however if auditor believe the matters needs to be
brought to s/h attention, he adds another para graph in audit report called other
matter paragraph that explain that matter in details.
EOM para for already disclosed item used
Other matter para for not already disclosed item used
This both para is used in audit report to highlight or bring to s/h attention some
matters.
Other information;
All information other than f/s is called other information.
There are 2 issues to consider in other information
Inconsistency b/w f/s & other Materials misstatement of facts in
information other information
1- Auditor needs to check what is Auditor should take following steps
right and what is wrong 1) Discuss with management
2- If f/s are correct and other 2) Discuss with those charged with
information is wrong –then use governance
Unmodified opinion plus other 3) Take an independent legal advice.
information matter para.
3- If f/s are wrong and other info is
correct take following steps;
1) Discuss with management
and ask them to resolve
f/s.
2) If they resolve f/s give
unmodified opinion.
3) If they refuse to revise f/s,
give modified opinion.

Question comes likes, what should auditor do it there is inconsistency b/w f/s
and other information. & Next question is what should auditor do if there is
misstatement of facts in other information.
Overall review of f/s; auditor start -audit ends-report signed (here auditor does
overall review of f/s.
 After completing the audit but before signing report, auditor does an
overall balance of all work done to ensure overall audit opinion is
consistent with findings of audit.

Subsequent events/events after the balance sheet date.(IAS 10)

What are subsequent events/events after the balance sheet date?
1st January yrs start - 31 dec yr end audit start 28th feb audit
end (audit report)
- SE events are all events after balance sheet date ie 31 dec.
Adjusting events (adjust in f/s) Non adjusting event (give
disclosure)
Which provides widens of Which does not provide evidence
condition that existed at balance of conditions that existed at
sheet date balance sheet date.
Example like; receivable gone bad Fire
Inventory obsolete Flood
Going concern etc. Terrorism etc.

What is auditors’ responsibility in subsequent events;

Upto date of signing a audit
report? Or before giving of audit
report?
Auditor has active responsibility.
He must ensure all events up to
date of signing of report have
been identified and have been
adjusted or disclosed by company
accordingly.
After signing of audit reports
Auditor has passive, responsibility
He is not responsibility at all.
However if auditor becomes
aware of facts that had been
known to him at date of audit
report would have caused him to
amend report, he should discuss
with management and ask them
to revise f/s. if management
revise f/s, auditor should perform
new procedure and issue a new
audit report but if management
refuse to revise f/s, auditor
 should take necessary step to
prevent reliance on old report.

Answer plan; if question said

1) whether f/s need amendment
2) audit procurers
3) impact on audit report if issue remains un resolves.

- give a short intro about case

- write under IAS 10 it is an adjusting/non adjusting event and
needs to be adjusted/ disclosed in f/s
- write 3 audit procedures;
1) discuss with management ………….
2) Inspect supporting document…………..
3) Take expert/legal advice……………
- Find materiality (less than 5%,5%-20%, above 20%)
- State impact on audit report as per learned.
Q. Humphries co.
Part a) all written in above
Part b)
1) Receivable;
A customer of Humphries who owes $0.3m is facing going
concern problems but company expects they will receive some
amount.
Under IAS 10 this is an adjusting event as it provides evidence of
conditions that existed at balance sheet date hence it will be
adjusted in f/s.
Following audit procedure will be performed.
 - Discuss with management why they think customers will pay
some amount.
- Inspect supporting documentation like sales invoice,
correspondence with receivable etc.
- Take legal advice on how to initiate legal proceedings against
receivable.
The balance is immaterial as it represent 4% (0.3/7.5) of profits hence
there will be no impact on audit report an unmodified opinion will be
given.
2) Law suit;
A supplier is suing the company for breach of contract. Initially they
claimed $1m but are now willing to settle the case for $0.6m.
Under IAS10 this is an adjusting event as it provides evidence of
conditions that exited at balance sheet date hence this will be
adjusted in f/s,
Following audit procedure will be performed;
- Discuss with management why was their a breach of contract
- Inspect supporting documentation like supplier contract,
correspondence from supplier etc.
- Take legal advice as to what was chances of winning the case.
The matter is material but not serviceable as it represents 8% of
profit hence a qualified opinion will be issued.
Warehouse;
Co has three warehouses and due to excessive rains, flood water
entered warehouse located in bass and damaged all inventory.
 Under IAS 10 , this is a non adjusting event as balance sheet date
hence will be disclosed in f/s.
Following audit procedures will be performed;
- Discuss with management what are their views on insurance
claims
- Inspect supporting documents like inventory records, insurance
policies etc.
- Take expert advice as to what is the level of damage in
monetary terms.
No information is provided to find materiality, if it is material but not
persuasives then a qualified opinion will be given and if it is material
persuasive an adverse opinion will be given.
Panda co.
Part b,c)
Event 1:
A batch of chemicals produced in April was defective whose worth
was 0.85m but now has a scrap value of 0.1m.
Under IAS10, this is an adjusting event as it provides evidence of
conditions that existed at balance sheet date hence will be
adjusted in f/s.
Following audit procedure will be performed;
- Discuss with management why defect occurred even after
quality checks.
- Inspect supporting document like inventory records, quality
control reports etc
- Take expert advice as to whether there is any alternative use
The issue is material but not pervasive as it represents 13% of profit
hence a qualified opinion will be issued.
Event 2:
An explosion occurred at smallest of four locations resulting in damage
to property, plant equipment worth 0.9m.
Under IAS 10 this is a non adjusting event as it does not provide
evidence of conditions that existed at balance sheet date hence will be
disclosed in f/s.
Following audit procedures will be performed.
- Discuss with management why they think they wont be able to
claim insurance.
- Inspect supporting document like insurance policy, valuation
report etc.
- Take expert advice as too how to claim insurance
The matter is material but not persuasive as it represents 10% of profit
hence a qualified opinion will be issued.

Zeediem co
Event 1;
The springs in a new mattress have been found to be
defective and inventory worth 750000 is affected.
Under IAS 10 this is an adjusting event as it provides
evidence of conditions that existed at balance sheet date hence
will be adjusted in f/s.
Following audit procedure will be performed
- Discuss with management why they were under insures
- Inspect supporting document like inventory record, insurance
policy
- Take legal advice as to possibility of case against suppliers.
The issue is material but not persuasive hence a qualified opinion will
be given.
Event :2
Production at sham factory was halted for one day when truck carrying
dye reversed and dye fell into premises and local river.
Under IAS 10 this is non adjusting event as it does not provide evidence
of conditions that existed at balance sheet date hence it will not be
adjusted in f/s.
The following audit procedures will be performed
- Discuss with management what is their view on whether co has
breached environment legislation
- Inspect supporting document like environmental reports,
insurance policy etc.
- Take legal advice as to options with co if case is filed.
This issue is material but not persuasive hence a qualified opinion
will be given.
Grains 4U co.
Ans event 1;
A fire occurred at largest of distribution depots and related damage of
650000 to vehicles and 25000 inventory.
Under IAS 10 this is a non adjusting event as it does not provide
evidence of conditions that existed at balance sheet date hence will be
disclosed in f/s.
Following audit procedure will be performed.
- Discuss with management what is their view on whether co has
breached environmental legislation.
 - Inspect supporting document like environmental reports like
insurance policy
- Take legal advice as to options in insurance co. does not give
claim. c
This issue is material but not persuasive as it represents 8% of
profit hence a qualified opinion will be given.
Event 2;
A large batch of inventory was defective and no sales have been made
cost of defect is 0.95m,
Under IAS 10 this is an adjusting event as it provides evidence of
conditions that existed at balance sheet date hence will be adjusted in
f/s.
Following audit procedure will be performed.
- Discuss with management whether there are any quality
controls
- Inspects supporting document like inspection report, inventory
records etc.
- Take expert advice how to maximize benefit from alternate use
The issue is material but not persuasive as it represents 11% of profit
hence qualified opinion will be given.
Palm industries co(palm)