Auditing Answers

Module - 4
Q1.) Difference between qualified report, adverse report & disclaimer of
opinion?

Ans:-
Q2.) Write a detail note on Emphasis of matter paragraph.

Ans - An emphasis of matter paragraph is a section included in an

auditor's report that draws attention to a specific matter in the financial
statements that is significant but does not affect the opinion of the
auditor on the overall financial statements. The paragraph is typically
placed after the opinion paragraph in the audit report.
The purpose of an emphasis of matter paragraph is to provide additional
information to the readers of the financial statements about a particular
matter that is important but does not affect the overall opinion of the
auditor. The matter may relate to a significant uncertainty, a material
misstatement, or a violation of laws or regulations.
Examples of matters that may result in an emphasis of matter paragraph
include:

1) Going concern uncertainties: If there is significant doubt about

the ability of the entity to continue as a going concern, the
auditor may include an emphasis of matter paragraph to draw
attention to this issue.
2) Significant related party transactions: If the entity has
significant related party transactions that may affect the
financial statements, the auditor may include an emphasis of
matter paragraph to highlight this fact.
3) Litigation or claims: If the entity is involved in significant
litigation or claims, the auditor may include an emphasis of
matter paragraph to disclose this fact.
4) Material uncertainties: If there is a material uncertainty related
to an event or transaction that could have a significant effect on
the financial statements, the auditor may include an emphasis of
matter paragraph to disclose this fact.
5) It is important to note that an emphasis of matter paragraph does
not modify the auditor's opinion on the financial statements.
 Instead, it is used to provide additional information to the
readers of the financial statements about a particular matter that
is significant but does not affect the overall opinion of the
auditor.
In conclusion, the emphasis of matter paragraph is an important
tool for auditors to highlight specific matters in the financial
statements that require attention from the readers of the
financial statements. It helps to ensure that users of the financial
statements have a complete understanding of the financial
position of the entity and any significant risks or uncertainties
that may affect it.

Q3.) How are the key audit matters presented in audit report in
accordance to SA 701 .

Ans - SA 701 (Communicating Key Audit Matters in the Independent

Auditor's Report) requires auditors to communicate key audit matters
(KAMs) in their audit report. KAMs are matters that, in the auditor's
professional judgment, were of most significance in the audit of the
financial statements of the current period.

The presentation of KAMs in the audit report should include the

following:
1. Title: Each KAM should be clearly identified and described
in the audit report.
2. Basis for Determination: The auditor should provide an
explanation of why the matter is considered a KAM, including
the criteria used to assess its significance.
 3. Description: The auditor should provide a clear and concise
description of the KAM, including the financial statement line
item(s) or disclosure(s) affected.
4. Audit Response: The auditor should describe the audit
procedures performed in response to the KAM, including any
significant judgments made in the audit.
5. Conclusion: The auditor should provide a clear and concise
conclusion or outcome of the audit response to the KAM.
The presentation of KAMs should be included in a separate
section of the audit report, such as an "Other Matters" or "Key
Audit Matters" section, and should be clearly identified as such.
The KAMs should be presented in a consistent manner
throughout the audit report to ensure clarity and comparability.

Q4.) Explain basic elements of the auditors report as per SA 700.

Ans- As per the International Standards on Auditing (ISA) 700, the basic
elements of the auditor’s report are as follows:
1. Title: The title of the report should be “Independent
Auditor’s Report.”

2. Addressee: The report should be addressed to the

appropriate parties, such as the shareholders, board of
directors, or trustees.

3. Opening Paragraph: This paragraph should identify the

financial statements that have been audited and provide a
statement that the audit was conducted in accordance with
International Standards on Auditing.
 4. Management’s Responsibility for the Financial
Statements: This paragraph should state that management
is responsible for preparing the financial statements and
ensuring they are free from material misstatements.

5. Auditor’s Responsibility: This paragraph should state that

the auditor is responsible for expressing an opinion on the
financial statements and conducting the audit in
accordance with International Standards on Auditing.

6. Basis for Opinion: This paragraph should describe the

scope of the audit and the procedures performed. It should
also state that the audit provides a reasonable basis for the
opinion.
7. Opinion: The opinion paragraph should state the auditor’s
opinion on whether the financial statements are presented
fairly, in all material respects, in accordance with the
applicable financial reporting framework.

8. Other Reporting Responsibilities: This paragraph should

describe any additional matters that the auditor is required
to report on under relevant laws or regulations.

9. Signature: The report should be signed by the auditor or

audit firm, including the date of the report.

10. Auditor’s Address: The report should include the

address of the auditor or audit firm.
Overall, the auditor’s report is designed to provide assurance to
users of the financial statements that the financial information
contained in them is accurate and reliable
Q5.) What are the key audit matters and how are they identified?

Ans- Key audit matters (KAMs) are those matters that, in the auditor’s
professional judgment, were of most significance in the audit of the
financial statements of an entity. KAMs are determined by the auditor
after considering various factors, including the nature, complexity, and
materiality of the items being audited.

KAMs are required to be communicated in the auditor’s report as per

International Standards on Auditing (ISA) 701. The auditor is required
to identify and communicate KAMs to provide transparency to users of
the financial statements about the areas of the audit that required the
most significant attention.

The following are some examples of KAMs that an auditor may identify
during the audit:

1. Valuation of financial instruments: Financial instruments

such as derivatives, investments in securities, and other
financial assets require careful evaluation by auditors to
ensure their valuation is accurate and consistent with
applicable accounting standards.

2. Revenue recognition: Revenue recognition is a critical

area that requires scrutiny by auditors as it impacts the
financial statements’ overall accuracy and reliability.

3. Impairment of goodwill: Impairment of goodwill is a

complex area that requires careful analysis of various
factors, such as changes in business conditions and future
cash flows, to determine whether the carrying value of
goodwill is impaired.
 4. Going concern: Going concern refers to the entity’s ability
to continue operating in the foreseeable future. If an entity
is at risk of going concern, it can impact the financial
statements’ accuracy, and auditors must carefully evaluate
the entity’s ability to continue operating.

In conclusion, KAMs are identified by the auditor based on their

professional judgment after considering various factors such as the
nature, complexity, and materiality of the items being audited. The
auditor is required to communicate KAMs in the audit report to provide
transparency to users of the financial statements about the areas of the
audit that required the most significant attention

Q6.) What do you understand by the term comparative financial

statement explain in detail.

Ans- comparative financial statement is a financial statement that

presents financial information for two or more periods, usually
consecutive periods, side by side for comparison purposes. The
comparative financial statement is prepared to help users of financial
statements to understand the changes that have occurred in the financial
position and performance of an entity over time.
Comparative financial statements typically include a balance sheet, an
income statement, and a statement of cash flows for two or more
periods. The financial information for each period is presented in
separate columns or sections, allowing users to compare the financial
data for each period and to identify trends and changes in the financial
performance of the entity.
The comparative financial statements can be prepared using different
approaches, including horizontal analysis and vertical analysis.

1. Horizontal Analysis: Horizontal analysis involves the comparison

of the financial statement items for two or more periods. This analysis
can be performed by calculating the percentage change or difference
between the financial statement items of each period. This approach
helps users to identify the changes in the financial position and
performance of an entity over time.

2. Vertical Analysis: Vertical analysis involves the comparison of the

financial statement items as a percentage of a common base, typically
total assets or total revenue. This approach helps users to understand the
relative size of each item within the financial statements and to identify
any changes in the relative proportions of these items over time.

The use of comparative financial statements allows users to make

better-informed decisions based on the financial performance of an
entity over time. It provides a historical perspective of an entity's
financial performance and helps to identify trends and changes in its
financial position. It also helps to identify any areas of financial strength
or weakness, allowing users to make informed decisions on investment,
lending, or other financial transactions.

Q7.) When should an auditor make a disclaimer of opinion in his audit

report.
Ans- An auditor may need to issue a disclaimer of opinion in their audit
report when they are unable to obtain sufficient appropriate audit
evidence to support their audit opinion. This could be due to a limitation
in scope or a restriction on access to the necessary information.
Here are some scenarios where an auditor may consider issuing a
disclaimer of opinion:
1. Limitations in the scope of the audit: If the auditor is unable to
obtain access to certain information or documentation that is necessary
to perform the audit, they may not be able to form an opinion on the
financial statements as a whole. This could be due to a variety of
reasons, such as legal or regulatory restrictions, management’s refusal to
provide certain information, or limitations in the design of the audit
procedures.
2. Lack of independence: If the auditor lacks independence in relation
to the entity being audited, they may need to disclaim their opinion. This
could be due to a financial or personal relationship with the entity, or a
conflict of interest that could impair their objectivity and independence.
3. Material uncertainty: If there is a significant uncertainty related to
the entity’s ability to continue as a going concern, the auditor may need
to issue a disclaimer of opinion. This could be due to factors such as a
loss of a major customer, a significant decline in cash flows, or a breach
of loan covenants.
In all of these scenarios, the auditor must disclose the reasons for the
disclaimer of opinion in their audit report and provide additional
information as necessary to help users of the financial statements
understand the limitations of the audit work performed. A disclaimer of
opinion is considered a negative audit opinion and may have significant
implications for the entity being audited, such as a decrease in investor
confidence and difficulties obtaining financing.

Q8.) Write a note on other matter paragraph.

Ans- An "Other Matter" paragraph is a section found in audit reports and
financial statements that contains information that is relevant but not
directly related to the financial statements or the audit opinion. This
paragraph is usually included after the opinion paragraph and may cover
various topics such as the scope of the audit, the basis of the audit
opinion, and other relevant information.
The purpose of the Other Matter paragraph is to provide readers with
additional information that could impact their understanding of the
financial statements or the audit opinion. This paragraph is typically
used to provide transparency and clarity regarding matters that are not
covered elsewhere in the report.
Examples of matters that may be included in an Other Matter paragraph
include the adoption of new accounting standards or changes to
accounting policies, the disclosure of significant events or transactions
that occurred after the balance sheet date, and other information that
may be relevant to users of the financial statements.
It is important to note that the information included in the Other Matter
paragraph is not intended to modify the auditor's opinion or the financial
statements. Rather, it is meant to provide context and additional
information to the reader.
In conclusion, the Other Matter paragraph is an important part of audit
reports and financial statements as it provides relevant information to
users of the financial statements that is not covered elsewhere in the
report.