ALLAMA IQBAL OPEN UNIVERSITY,

ISLAMABAD
(Department of Commerce)

Course: Auditing (5417) Semester: Autumn, 2023

Level: BS (Accounting & Finance)
Name: Amna Maryam Student ID:
0000124880
Tutor Name: Saira bibi

ASSIGNMENT No. 2

Q. 1 Describe different types of audit reports. Also

explain the purposes for which the reports are
required
• AUDIT :

Unveiling the Truth: Different Types of Audit Reports and Their Purposes
Audit reports aren't just dry financial documents; they're the culmination of an
auditor's investigation, offering insights into a company's financial health and
adherence to regulations. These reports come in various flavours, each serving a
distinct purpose. Let's delve into the four main types:

⦁ Unqualified Opinion (Clean Report):

This is the gold standard, a clean bi l of health from the auditor. It signifies that:

⦁ Financial statements
are fairly presented i
accordance with GAAP (Generally Accepted

Accounting Principles).
⦁ No material misstatements were found .
⦁ Internal controls are adequate to ensure reliable financial reporting.
Purpose: Boosts governance.
inv
stor confidence, facilitates
loan approvals, and demonstrates strong financial

⦁ Qualified Opinion:
While generally positive, this report raises specific concerns:
⦁ Auditor agrees with the overall financial statements but identifies specific
exceptions.
⦁ Exceptions might relate to uncertainties, inconsistencies, or limitations in scope.

Purpose: Alerts stakeholders to potential issues needing attention, while

maintaining overall financial reliability.
⦁ Disclaimer of Opinion:
The auditor cannot form an opinion due to:

⦁ Significant limitations in the scope of t

⦁ Insufficient or unreliable evidence.

• E AUDIT :

⦁ Major irregularities in the financial records.

Purpose: Raises serious red flags for stakeholders, highlighting potential financial
instability or fraud.

⦁ Adverse Opinion:
This is the strongest negative verdict, indicating:
⦁ Financial statements are materially misstated.
⦁ Internal controls are significantly deficient.
⦁ Financial information cannot be relied upon.

Purpose: Triggers immediate action and investigation, potentially impacting

investor regulatory scrutiny.
Beyond the Types: Purposes Beyond Compliance
Audit reports serve additional purposes, extending beyond regulatory
compliance:
confidence and
⦁ Management Tool: Identifying internal control weaknesses and areas for
improvement.
⦁ Risk Assessment: Evaluating financial risks and forming strategic decisions.
⦁ Transparency and Accountability: Enhancing trust and responsibility towards
stakeholders.

Ultimately, audit reports offer a window into a company's financial

integrity,guiding star enholders towards informed decisions and contributing to a
healthy financial ecosystem.

Q.2 What do you understand about events? Explain

the events occurring after the balance sheet date.

In accounting, the term "events" has a specific meaning within the context of
financial statements. Let's explore both the general and specific interpretations:

⦁ General Understanding of Events:

In a broader sense, an event simply refers to any occurrence that may impact a
business financially. This could include everything from routine transactions like
sales and purchases to significant occurrences
like la suits, natural disasters, or changes in regulations.

⦁ Specific Meaning of Events in Accounting:

Within the framework of financial statements, "events" are specifically
categorised into two main types:
⦁ Adjusting Events: These are events that provide further evidence about
conditions that existed at the balance sheet date. They necessitate adjustments
to the financial statements to reflect the true state of affairs as of that date.
Examples include:

⦁ Settlement of a lawsuit filed before the balance sheet date: The final
settlement amount may differ from the estimated provision recorded at the
balance sheet date, prompting an adjustment.

⦁ Discovery of inventory shrinkage after the balance sheet date:

This Indicates That the inventory balance at the balance sheet date was
overstated, requiring a downward adjustment.

⦁ Non-Adjusting Events: These are events that occur after the balance
sheet date and have no bearing on the conditions that existed in financial
statements.

Examples include:At that date. They do not require adjustments to the

⦁ Declaration of dividends after the balance sheet date: The dividend liability is
incurred after the balance sheet date and will be reflected in the subsequent financial
statements
⦁ Sale of a major asset after the balance sheet date: The gain or loss from the sale
will be
recorded in the income statement of the following period.

Understanding Events After the Balance Sheet Date:

Events occurring after the balance sheet date are crucial for auditors to consider
as they may affect the:
⦁ Accuracy and completeness of the financial statements: Adjusting events
necessitate corrections to ensure accurate representation.
⦁ Going concern assumption: Some events may raise concerns about the entity's
ability to continue operating as a going concern.
⦁ Disclosure requirements: Certain events may need to be disclosed in the notes to
the financial

statements even if they don't require adjustments.

By carefully evaluating the nature and impact of events occurring after the
balance sheet date, auditors can ensure that the financial statements provide a
fair and accurate view of the entity's financial position and results of operations.
Q.3 How will an auditor evaluate the reliability and
correctness of the profit and loss account?

An auditor's evaluation of the reliability and correctness of the profit and loss
account is a multi-faceted process involving various techniques and procedures.
Here's a breakdown of their key approaches:

• Understanding the Business and its Environment:

⦁ Gather information about the company's industry, market dynamics, and

accounting policies.
⦁ Assess the entity's internal controls and identify potential risk areas.

• Testing Specific Controls and Transactions:

⦁ Select key revenue and expense categories for detailed testing.
⦁ Trace transactions from source documents (invoices, purchase orders, payroll
records) to the general ledger.
⦁ Perform vouching procedures to verify the authenticity and accuracy of supporting
documents
⦁ Test calculations and accounting estimates for reasonableness.
⦁ Analytical Procedures:
⦁ Analyse trends and ratios in financial data to identify anomalies or inconsistencies.
⦁ Compare results with industry benchmarks and budget projections.
⦁ Investigate any significant fluctuations or unusual p
⦁ Substantive Procedures:
tterns.

⦁ Perform additional procedures t

directly corrobo ate specific account b
lances.

⦁ For example, confirming accounts receivable with observations.

⦁ Evaluation of Disclosures:
customers or performing inventory

⦁ Review the adequacy and accuracy of disclosures related to revenue recognition,

expenses,accounting estimates, and contingencies.
Throughout the process the auditor will be guided by the following principles:
⦁ Professional is it.scepticism:
Questioning the information provided and seeking evidence to support

⦁ Materiality: Focusing on issues that could significantly affect the financial

statements.

⦁ Auditing standards: Adherence to generally accepted auditing standards

(GAAS) or International Standards on Auditing (ISA).

By employing these techniques and principles, the auditor confirm a reasoned

conclusion on the reliability and correctness of the profit and loss account
nt. Their opinion will be expressed in the audit report, providing valuable insights
for stakeholders or lying on the financial statements.
Additionally, here are some specific procedures auditors might perform
depending on the risk identified:
⦁ Testing of sales cut-off procedures to ensure revenue is recorded in the correct
period.
⦁ Reviewing valuation methods used for inventory and property, plant, and
equipment to ensure they are appropriate and applied consistently.
⦁ Assessing the adequacy of provisions for doubtful accounts and bad debts.
⦁ Evaluating the appropriateness of accounting estimates used for depreciation,
amortisation, and impairment.

The auditor's goal is to gather sufficient evidence to form an opinion on whether

the profit and loss the account fairly presents the financial performance of the
entity in accordance with the accounting framework.with the applicable
Q.4 Describe the status, powers, rights and duties
of a Public Ltd. Company’s auditor ?

A public limited company (PLC) auditor occupies a critical position in

safeguarding the financial integrity and transparency of the organisation. Let's
dive into their:

Status:
⦁ Independent Agent: The auditor acts as an independent agent of the
shareholders, responsible for objectively examining the company's financial
statements.
⦁ Appointed and Removed by Shareholders: Auditors are appointed an

removed by a majority vote of the shareholders at the annual general m

⦁ Statutory Obligation: Appointing an audi or is company law regulations.

⦁ Powers: eating a statutory obligation for PLCs, governed by

⦁ Right of Access: The auditor has the right to access all books, accounts,
vou relevant documents of the company at any time.hers, and other

⦁ Request Information: They can request any information and explanations

from the company's directors and officers necessary for the audit.

⦁ Attend Meetings: Auditors have the right to attend and be heard at any
general meeting of the company.

⦁ Report Directly to Shareholders: They Can report directly to the

shareholders at the annual general meeting on any matters concerning the audit.

Rights:
⦁ Remuneration: The auditor is entitled to reasonable remuneration for their
services, determined by the shareholders.

⦁ Resignation: They have the right to resign from the audi engagement if they face
any undue pressure or obstruction in performing their duties.

⦁ Immunity from Liability: Auditors enjoy immunity from liability for any loss or
damage suffered by the company due to their actions, except in cases of negligence or
fraud.

Duties:
⦁ Conduct Audit and Issue Report: The auditor's primary duty is to conduct an
independent audit of the company's financial statements and issue an audit report
expressing their opinion on their fairness and accuracy.
⦁ Report on Internal Controls: They have a responsibility to assess the company's
internal controls and report on their adequacy and effectiveness in safeguarding assets
and preventing fraud.

⦁ Compliance with Standards: The auditor must comply with relevant auditing
standards and regulations while conducting the audit.

⦁ Report Irregularities: They are obligated to report any irregularities or suspected

fraud discovered during the audit to the directors and the appropriate authorities.

In summary, a PLC auditor acts as a watchdog, wielding significant powers and

rights to ensure the

the company's financial statements are reliable and transparent. Their duties are
crucial in upholding the integrity of the financial system and protecting the
interests of shareholders and other stakeholders.

Q.5 Suppose your firm has assigned a task to

conduct an Audit of M/SEZ & Co. A public limited
company for the year 2019-2020. Draft a qualified
report based on assumptions.Imagine the following
scenario for M/S Z & Co.
Assumptions:
⦁ M/S Z & Co. is a manufacturing company listed on the stock exchange.

⦁ The audit for the year 2019-2020 reveals two key issues:

⦁ Inventory Valuation: The company used estimated costs instead of physical counts
for a significant portion of its inventory due to a warehouse fire shortly before the year-
end.

⦁ Related Party Transactions: The company entered into significant loan agreements
with the CEO's family company on terms not readily explained b

Draft Qualified Audit Report: Independent Auditors' Report to the Shareholders of

M/S Z & Co.
Report on the Audit of the Financial Statements market rates.

We have audited the accompanying financial statements of M/S Z & Co., which
comprise the balance sheet as of March 31, 2020, the income statement, the
statement of shareholders' equity, and the statement of cash flows for the year
then ended, and our report thereon.

In our opinion, except for the matter described in the Basis for Qualified Opinion
paragraph below, the financial statements present fairly, in all material respects,
the financial position of M/S Z & Co. as of March 31, 2020 and its results of
operations and its cash flows for the year then ended in accordance with Indian
Accounting Standards (Ind AS).

Basis for Qualified Opinion:

⦁ Inventory Valuation: We were unable to physically verify a significant portion of
the company's

inventory amounting to [amount] due to a fire at the company's warehouse

shortly before the year-end. The company has estimated the value of this
inventory based on production costs and historical sales data. While we have
performed analytical procedures and reviewed the company's estimation
methods, we were unable to obtain sufficient appropriate audit evidence to
support the valuation of this inventory. As a result, the accuracy of the company's
inventory balance and cost of goods sold is uncertain, and this could have a
material impact on the company's gross profit, net income, and total assets.

⦁ Related Party Transactions: The company entered into significant loan agreements
with [Name of CEO's family company] during the year, amounting to [amount]. The
terms of these loans, including the interest rate and collateral,were not readily explained
by market rates.

We were unable to obtain sufficient audit evidence to confirm the

appropriateness of these transactions and determine whether they were
conducted on arm's length terms. The potential implications of these transactions
on the company's financial position and results of operations are uncertain.

We recommend that the company:

⦁ Implement robust physical inventory valuers for future inventory valuations.

count procedures and consider engaging independent

⦁ Provide proper documentation and justification for the terms of the related party
transactions and consider seeking independent advice on such transactions in the future.

Emphasis of Matter:
Our opinion is not modified in respect of any other matters. However, we draw
attention to the fact that [Name of CEO's family company] is also a significant
customer of M/S Z & Co., and the nature and volume of these transactions could
have implications for the company's independence and related party disclosures.

Our responsibility:

Our responsibility is to express an opinion on the financial statements based on

our audit. We conducted our audit in accordance with the Standards on Auditing
issued by the Institute of Chartered Accountants of India (ICAI) and International
Standards on Auditing ("ISA"). These standards require that we plan and perform
an audit to obtain reasonable assurance about whether the financial statements
are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the

amounts and disclosures in the financial statements. The procedures selected
depend on our judgement, including the assessment of the risks of material
misstatement of the financial statements, whether due to fraud or error.

In making our assessments, we consider internal control relevant to the

preparation and fair presentation of the financial statements in order to design
audit procedures that are appropriate in the circumstances,but not for the
purpose of expressing an opinion on the effectiveness of the company's internal
control.

An audit does not guarantee the detection of all material misstatements.

 Key Audit Matters:The key audit matters addressed during the audit were the
inventory valuation and the related party transactions.

We performed a Qualified Opinion paragraph.additional procedures on these

matters,as described in the Basis for