2015 AUDIT AND ASSURANCE QUESTION BANK ICAP Question Bank P Audit and Assurance Second edition published by Emile Woolf Limited Bracknell Enterprise & Innovation Hub Ocean House, 12th Floor, The Ring Bracknell, Berkshire, RG12 1AX United Kingdom Email: info@ewiglobal.com www.emilewoolf.com © Emile Woolf International, February 2015 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, without the prior permission in writing of Emile Woolf Publishing Limited, or as expressly permitted by law, or under the terms agreed with the appropriate reprographics rights organisation You must not circulate this book in any other binding or cover and you must impose the same condition on any acquirer Notice Emile Woolf International has made every effort to ensure that at the time of writing the contents of this study text are accurate, but neither Emile Woolf International nor its directors or employees shall be under any liability whatsoever for any inaccurate or misleading information this work could contain © Emile Woolf International ii The Institute of Chartered Accountants of Pakistan Certificate in Accounting and Finance Audit and Assurance C Contents Page Question and Answers Index v Questions Section A Multiple choice questions Section B Objective test and long-form questions 17 Section C Multiple choice answers 71 Section D Objective test and long-form answers 77 Answers © Emile Woolf International iii The Institute of Chartered Accountants of Pakistan Audit and Assurance © Emile Woolf International iv The Institute of Chartered Accountants of Pakistan Certificate in Accounting and Finance Audit and Assurance I Index to Objective test and long-form questions and answers Question page Answer page Audit framework, regulation and ethics ICAP Code of Ethics 17 77 Levels of assurance 18 79 Shamsuddin 18 79 Core concepts 18 80 Threats 19 81 Burewala and Kamal 19 82 Zaman and Bilal 19 83 Audit process 19 84 Regulatory and professional requirements 20 85 10 Fundamental principles 20 87 11 Oops 20 87 12 Independence of external auditors 20 88 13 Tahira and Parvez 21 88 Planning and risk assessment 14 Saad Co 21 89 15 Alpha 21 90 16 Engagement letter and documentation 22 90 17 Shahid Corporation 22 91 18 Assertions 22 91 © Emile Woolf International v The Institute of Chartered Accountants of Pakistan Audit and Assurance Question page Answer page 19 Companies Ordinance 1984 23 93 20 ASPL 23 93 21 AMF 24 94 22 Acceptance and planning 24 95 23 SPL 25 95 24 Fruit and nuts 25 96 25 Discussions and judgment 26 97 26 Dynamic 26 98 27 Changing Terms 26 99 28 EL 27 99 29 Calm Co 27 100 30 Azam 27 100 31 Hurricane 27 102 32 Zakir Co 29 104 33 Hajira 30 106 34 Tahir Co 30 108 Internal control 35 Controls 31 110 36 Shahzad 31 111 37 Waheed Engineering 32 112 38 Danish 33 113 39 Roses Anytime 34 115 40 Trade Receivables 35 117 41 Granger 35 119 Audit evidence 42 Nobel 36 122 43 Masoom Limited 37 122 44 Sky Blue 37 123 45 Direct confirmations 37 123 46 Chill 37 124 47 Sales sampling 38 124 48 PQR 38 125 49 Hard Stone Limited 39 126 50 Related parties 39 127 © Emile Woolf International vi The Institute of Chartered Accountants of Pakistan Index to questions and answers Question page Answer page 51 Direct confirmations 39 127 52 Working papers 39 128 53 Al-Shams 39 128 54 Auditor’s expert 40 129 55 ADL 40 130 56 Guava & Co 40 131 57 RP Planning 41 132 58 Manufacturing inventories 41 132 59 Wedge & Co 41 135 60 MWL 41 136 61 BPR 42 137 62 Taskeen Co 42 138 63 Wings 43 140 64 Glasses2Go 43 142 65 ISA 620 44 144 66 Cuddly World 45 144 67 Analytical procedures and materiality 45 146 68 Tahira Transporters 46 148 69 Willow 47 150 70 Sparkle Forever 48 152 71 Bubbles 48 154 72 ISA 500 49 156 73 Javeria Co 49 157 74 Porridge 50 158 75 Trembridge Engineering 51 160 76 ISA 620: Using the Work of an Auditor’s Expert 51 162 77 Heidi Co 52 163 Scenarios 78 Zeedin Co 52 165 79 Sahito Co 54 168 80 Bashir Co 55 170 57 173 Completion 81 © Emile Woolf International Analytical Procedures vii The Institute of Chartered Accountants of Pakistan Audit and Assurance Question page Answer page 82 Auditor Responsibility 57 175 83 Al-Badr 57 175 84 Shahrukh and Company 58 176 85 The engagement partner 59 177 86 Different audit clients 60 177 87 Situations have arisen on different clients 60 178 88 Hafiz Limited 61 179 89 An ‘emphasis of matter’ paragraph and an ‘other matter’ paragraph 61 180 90 MM Electronics (Private) Limited 61 180 91 Ranjha Limited 62 181 92 Pervasive effects 63 182 93 Audit report at the end of the audit 63 183 94 Iqra Industries Limited 64 184 95 Blue Sky Limited 64 184 96 Form 35A in the Companies 64 185 97 Written Representations 65 185 98 Shahrukh and Co 65 186 99 Kazmi-Wassan 66 186 100 RK Resourcing 67 188 101 Rake Enterprises 67 191 Review engagements 102 ISRE 2400 68 192 103 Karim 68 193 104 IFI 69 194 © Emile Woolf International viii The Institute of Chartered Accountants of Pakistan Audit and Assurance (ii) Significant matter Amount claimed by the customer is material to the financial statements in terms of total assets as well as profit before tax of the company Impact on audit report If management agrees to explain the issue in the note on contingent liabilities, the report will not be qualified but in view of the material uncertainty an emphasis of matter paragraph would have to be added to the auditor’s report to draw the user’s attention to the note in the financial statements In case of disagreement on making appropriate disclosure, the auditor should give a qualified opinion (iii) Significant matter It is a fundamental error within the meaning of IAS-8 and its effect should be taken into account retrospectively All comparatives figures should be restated accordingly The management’s decision to adjust the short amortization in the future years is in contravention to the requirements of IAS-8 Impact on audit report Since the error is material in terms of profit after tax, it should be discussed with the management They should be advised to make appropriate adjustment and disclosure in accordance with the requirements of IAS-8 In case of disagreement, the auditor should give a qualified opinion 92 Pervasive effects (a) Pervasive is a term used to describe the effects of misstatement on the financial statements or the possible effects thereon if any misstatement remains undetected due to the auditor’s inability to obtain sufficient appropriate audit evidence Pervasive effects on the financial statements are those that, in the auditor’s judgments: (b) (i) are not confined to specific elements, account or items of the financial statements, (ii) if so confined, represent or could represent a substantial proportion of the financial statements or (iii) in relation to disclosures, are fundamental to user’s understanding of the financial statements (i) Issuance of bank guarantee after the year end does not require any adjustment or disclosure Therefore, there will be no effect on the audit report on this issue © Emile Woolf International 182 The Institute of Chartered Accountants of Pakistan Answer bank: Objective test and long-form answers (ii) The audit report shall state that “Zakat deductible at source under the Zakat & Ushr Ordinance, 1980, was deducted and deposited in the Central Zakat Fund established under section of that Ordinance” (iii) The auditor should consider the materiality of the amount If the amount is material, the auditor should express a qualified or adverse opinion (iv) 93 The audit report shall mention the exception to the consistent application of accounting policies and whether the auditor concurs with it or not The financial statements shall be adjusted accordingly and the effect of change in estimate shall be disclosed in the notes to the financial statements unless the differences are material and auditor has reasons to differ with the reviewed estimate There would be no impact on the audit report on this issue Audit report at the end of the audit (a) (b) The statement of responsibility should state the following: (i) It is the responsibility of the auditor to express an opinion on the financial statements (ii) The audit was conducted in accordance with International Standards on Auditing (iii) Those standards require that : the auditor complies with ethical requirements the auditor plans and performs the audit to obtain reasonable assurance whether the financial statements are free from material misstatement (iv) That an audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements (v) That while selecting the procedures to be performed the auditor exercises judgment, including the assessment of risks of material misstatements and whether due to fraud or error (vi) In making the risk assessment the auditor considers internal controls relevant to fair presentation of 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 entity’s internal control (vii) That an audit includes evaluation of the appropriateness of the accounting policies used, the reasonableness of estimates and the overall presentation of information in the financial statements (viii) The auditor believes that the audit evidence the auditor has obtained is sufficient and appropriate to provide a basis for the auditor’s opinion The situations in which a report is modified without affecting the auditor’s opinion are as follows: (i) If the use of going concern assumption is appropriate but a material uncertainty exists which was adequately disclosed in the financial statements © Emile Woolf International 183 The Institute of Chartered Accountants of Pakistan Audit and Assurance (ii) If there is a significant uncertainty (other than going concern or multiple uncertainties), the resolution of which is dependent upon future events and which may affect the financial statements (iii) In case, other information attached with the financial statements are inconsistent with the information in the financial statements How modification is presented: 94 (i) By adding an emphasis of matter paragraph to highlight an important matter affecting the financial statements (ii) The above paragraph is required to refer to the note to the financial statements that more extensively discusses the matter (iii) The paragraph should preferably be included after the paragraph containing the auditor’s opinion but before the section on any other reporting responsibilities (iv) The emphasis of matter paragraph should ordinarily refer to the fact that the auditor’s opinion is not qualified in this respect Iqra Industries Limited Significant uncertainty regarding litigation The ultimate outcome of the matter cannot presently be determined and therefore there is a significant uncertainty the resolution of which is dependent upon future events Since it is not possible to reliably estimate the amount of loss accounting treatment of not recognizing the provision and giving of disclosure is correct The auditor should consider modifying the auditor’s report by adding an emphasis of matter paragraph referring to the detailed note in the financial statements 95 Blue Sky Limited On September 30, 2007, the inventory of a subsidiary was overvalued by Rs 5.7 million The overvaluation was adjusted to the extent of Rs 1.9 million during each of the years ended September 30, 2008 and 2009 Consequently the inventory as appearing in the consolidated financial statements for the year ended September 30, 2009 has been overstated by Rs 1.9 million In our opinion, the above adjustment is not in accordance with the International Accounting Standards which requires that the overstatement should be rectified retrospectively Accordingly, the inventory should be reduced by Rs 1.9 million in the year 2009 and by Rs 3.8 million in the year 2008, profit for the year should be increased by Rs 1.9 million in the year 2009 and by Rs 0.475 million in 2008, accumulated retained earnings should be increased by Rs 2.1375 million in the year 2009 and by Rs 0.4275 million in the year 2008, goodwill should be increased by Rs 3.8475 million in both the years i.e 2009 and 2008 and minority interest should be reduced by Rs 0.19 million in the year 2009 and by Rs 0.38 million in the year 2008 In our opinion, except for the effect on the consolidated financial statements of the matter referred to in the preceding paragraph, the consolidated financial statements present fairly the financial position of Blue Sky Limited and its subsidiary as at September 30, 2009 and the result of their operation for the year then ended © Emile Woolf International 184 The Institute of Chartered Accountants of Pakistan Answer bank: Objective test and long-form answers 96 Form 35A in the Companies The report specified in form 35A in the in the Companies (General Provisions and Forms) Rules, 1985 covers the following additional reporting responsibilities (i) that proper books of accounts are being maintained by the company as required by the Companies Ordinance, 1984 (ii) (iii) that the balance sheet and the profit and loss account together with notes thereonare in conformity with the Companies Ordinance, 1984 and in agreement with the books of accounts and are further in accordance with the accounting policies consistently applied Opinion as regards the following: whether expenditure incurred during the year was for the purposes of the company’s business and whether the business conducted, investments made and expenditure incurred during the year were in accordance with the objects of the company (iv) Opinion as regards the following: whether Zakat deductible at source under the Zakat and Usher Ordinance, 1980; was deducted and whether the zakat deducted (if any) was deposited in the Central Zakat Fund 97 Written representations Under the following situations, the auditor would have doubt as to the reliability of written representation: (a) When the auditor has concerns about the competence, integrity, ethical values or diligence of management, or about its commitment to or enforcement of these (b) When written representations are inconsistent with other audit evidence obtained Course of action in situation (a) (i) The auditor shall determine the effect that such concerns may have on the reliability of representations and audit evidence in general (ii) If the auditor concludes that the risks related to management representations on the financial statements is such that an audit cannot be conducted, the auditor may consider withdrawing from the engagement Course of action in situation (b) (i) The auditor may consider whether the risk assessment remains appropriate and, if not, revise the risk assessment and determine the nature, timing and extent of further audit procedures to respond to the assessed risks (ii) If the matter remains unresolved, the auditor shall reconsider the assessment of the competence, integrity, ethical values or diligence of management, or of its commitment to or enforcement of these, and shall determine the effect that this may have on the reliability of other representations and audit evidence in general (iii) If the auditor concludes that the written representations are not reliable, the auditor shall take appropriate actions, including determining the possible effect on the opinion in the auditor’s report © Emile Woolf International 185 The Institute of Chartered Accountants of Pakistan Audit and Assurance 98 Shahrukh and Co (i) In the introductory paragraph the word “Income and expenditure account” should be replaced with “profit and loss account" (ii) In the introductory paragraph the phrase “to the best of our knowledge and belief” is to be inserted before the phrase “were necessary for the purpose of an audit” (iii) In the responsibility paragraph the word “auditing standard” is to be replaced with “accounting standard” (iv) In the responsibility paragraph the phrase “of the fourth schedule” is to be omitted (v) At the end of responsibility paragraph the phrase; “Our responsibility is to audit these statements” is to be replaced with the phrase “Our responsibility is to express an opinion on these statements based on our audit” (vi) In the scope paragraph the phrase “and limited” is incorrect and be omitted (vii) In the scope paragraph the word “material” be added before the word misstatement (viii) In the scope paragraph the phrase “on a test basis” should be added before the phrase “evidence supporting the amounts and disclosures in the above said statements” (ix) In point (a) the phrase “as required by the Companies Ordinance 1984” be added (x) In para (b) point (ii) the phrase “was in accordance with the objects of the Company” be replaced with “was for the purpose of the Company’s business” (xi) In para (b) point (iii) the phrase “was for the purpose of the Company’s business” be replaced with “were in accordance with the objects of the Company” (xii) In para (c) the phrase “of the profit or loss, its cash flows and changes in equity for the year then ended”; be added at the end (xiii) The place of signing of accounts is to be mentioned after the signature of the firm (xiv) Name of the engagement partner has not been mentioned 99 Kazmi-Wassan (a) Purpose of a written representation letter Written representations are a form of audit evidence They are usually contained in a letter, written by the company’s directors and sent to the auditor, just prior to the completion of audit work and before the audit report is signed Representations are required for two reasons: firstly, so the directors can acknowledge their collective responsibility for the preparation of the financial statements and to confirm that they have approved those statements; secondly, to confirm any matters, which are material to the financial statements where representations are crucial to obtaining sufficient and appropriate audit evidence © Emile Woolf International 186 The Institute of Chartered Accountants of Pakistan Answer bank: Objective test and long-form answers In the latter situation, other forms of audit evidence are normally unavailable because knowledge of the facts is confined to management and the matter is one of judgement or opinion Obtaining representations does not mean that other evidence does not have to be obtained Audit evidence will still be collected and the representation will support that evidence Any contradiction between sources of evidence should, as always, be investigated (b) Matters (i) Tiger’s Purr The amount of the claim is material being 50% of profit before taxation There is also a lack of definite supporting evidence for the claim The two main pieces of evidence available are the claim from Tiger’s Purr itself and the legal advice from Kazmi-Wassan’s solicitors However, any claim amount cannot be accurately determined because the dispute has not been settled The directors have stated that they believe the claim not to be justified, which is one possible outcome of the dispute However, in order to obtain sufficient evidence to show how the treatment of the potential claim was decided for the financial statements, the auditor must obtain this opinion in writing Reference must therefore be made to the claim in the representation letter Paragraph for inclusion in representation letter ‘A legal claim against Kazmi-Wassan by Tiger’s Purr has been estimated at Rs million by Tiger’s Purr However, the directors are of the opinion that the claim is not justified on the grounds of breach of product specification No provision has been made in the financial statements, although disclosure of the situation is adequate No similar claims have been received or are expected to be received.’ (ii) Depreciation This matter is unlikely to be included in the letter of representation because the auditor appears to have obtained sufficient evidence to confirm the accounting treatment The lack of profit or loss on sale confirms that the depreciation charge is appropriate – large profits would indicate overdepreciation and large losses, under-depreciation The amount also meets industry standards confirming the Kazmi-Wassan’s accounting policy is acceptable Including the point in the representation letter is inappropriate because the matter is not crucial and does not appear to be based on judgment or opinion The only opinion here appears to be that of the auditor – unless the ‘feelings’ can be turned into some appropriate audit evidence, the matter should be closed (c) Lack of representation letter The auditor may take the following actions: (i) Discuss the situation with the directors to try and resolve the issue that the directors have raised The auditor will need to explain the need for the representation letter again (and note that the signing of the letter was mentioned in the engagement letter) © Emile Woolf International 187 The Institute of Chartered Accountants of Pakistan Audit and Assurance (ii) Ascertain exact reasons why the directors will not sign the letter Consider whether amendments can be made to the letter to incorporate the directors’ concerns that will still provide the auditor with appropriate and sufficient audit evidence (iii) The discussion must clearly explain the fact that if the auditor does not receive sufficient and appropriate audit evidence, then the audit report will have to be qualified The reason for the audit qualification will be uncertainty regarding the amounts and disclosures in the financial statements (iv) Even if the letter is subsequently signed, the auditor must still evaluate the reliability of the evidence If, in the auditor’s opinion, the letter no longer provides sufficient or reliable evidence, then a qualification may still be required 100 RK Resourcing (a) Audit procedures to be used prior to the audit report being signed Reviewing procedures established by management to try and ensure that subsequent events are identified Reading minutes of the meetings of directors, the audit committee and shareholders and enquiring into unusual items Obtaining and reading the company’s latest interim accounts as well as any budgets and cash flow forecasts Obtaining additional evidence if possible from the company’s lawyers concerning litigation and claims Asking management as to whether any subsequent events have occurred such as x New borrowing commitments x Significant sales of assets x New shares or debentures issued x Assets being destroyed by flood, fire etc or impounded by the government x Unusual accounting adjustments made or being contemplated (b) Checking whether any events have occurred that could call into question the validity of the going concern assumption The three dates 15 August 20X3 (i) Adjusting or non-adjusting? The bankruptcy of a major customer provides additional evidence of conditions existing at the end of the reporting period The customer will not be able to pay debts due, therefore receivables are overstated and the bad debt expense in the profit and loss account is understated An adjustment for the amount of the receivable should be made in the financial statements © Emile Woolf International 188 The Institute of Chartered Accountants of Pakistan Answer bank: Objective test and long-form answers (ii) Auditor’s responsibility and audit procedures to be carried out The bankruptcy of the major customer takes place after the end of the year but before the financial statements and the auditor’s report are signed As the auditor’s report has not been signed, the auditor is responsible for identifying material events that affect the financial statements This means that audit procedures should be carried out which are designed to identify this event Specific procedures undertaken include the following: Confirming that the customer will not pay to a letter from the receiver or similar authorised person Confirming the amount due from the customer to invoices raised prior to the year end, and if possible to a positive confirmation request Auditing the adjustment to the financial statements decreasing the receivable balance and increasing the bad debt write off in the profit and loss account Including the amount in the written representation letter to confirm no other amounts are due from the customer November 20X3 (i) Adjusting or non-adjusting? The accidental release of toxic chemicals occurred after the reporting period Assuming that the inventory was not on the statement of financial position at the year end, then the spill is indicative of conditions that arose subsequent to the year end No adjustment appears to be necessary However, the event may be significant in terms of the operations of the company (a large legal claim could arise) and so disclosure of the event would be expected (ii) Auditor’s responsibility and audit procedures to be carried out The accidental release of toxic chemicals takes place after the auditor’s report has been signed but before the financial statements are sent to the members At this stage of the audit, the auditor does not have any responsibility to perform procedures or make enquiries regarding the financial statements The management of RK Resourcing are responsible for telling the auditor about any significant events, such as this one However, as the auditor is now aware of the event and this materially affects the financial statements in terms of disclosure being required, the auditor does have to discuss the event with management Specific procedures to be undertaken include the following: Obtain information concerning the chemical release from management, reading local press and if possible the company’s lawyers – the latter may be able to indicate whether there is any legal liability Discuss the appropriate accounting treatment with the directors, confirming that disclosure is required in the circumstances Read the disclosure note to confirm that the matter is adequately explained in the financial statements © Emile Woolf International 189 The Institute of Chartered Accountants of Pakistan Audit and Assurance Obtain an updated letter of representation from the directors confirming that there are no other events requiring disclosure Amend the auditor’s report to include an emphasis of matter paragraph to draw attention to the full disclosure noted in the financial statements Date the new auditor’s report no earlier than the date of the amended financial statements and update “active” subsequent events review to that date 30 November 20X3 (i) Adjusting or non-adjusting? The fire at an oil well means that RK Resourcing’s oil production and presumably profits will fall in the next financial year The fire though does not provide additional evidence of conditions existing at the end of the reporting period as at this time there was no indication that this would occur The event is therefore non-adjusting in the financial statements However, disclosure of the event should be made so that the financial statements not give a misleading position (ii) Auditor’s responsibility and audit procedures to be carried out The fire at an oil well takes place after the financial statements have been issued At this time, the auditor has no obligation to make any inquiry at all regarding the financial statements However, if the auditor becomes aware of the event, then the potential effect on the auditor’s report must be considered Specific procedures undertaken include the following: Checking the board minutes, insurance claims and similar documents to ensure that the fire will be covered by insurance and there is no contingent liability for replacing non-current assets or clearing up any environmental damage Enquiring of the directors how the members will be informed of the situation If the directors plan to re-issue the financial statements, ensure that appropriate disclosure is made of the event, date the new auditor’s report no earlier than the date of the amended financial statements and update “active” subsequent events review to that date If the directors not intend to amend the financial statements, and the auditor considers the matter to be material to understanding the accounts, consider attempting to contact the members directly, depending on the methods available in your country If necessary, take legal advice to discuss what action can be taken regarding the lack of disclosure © Emile Woolf International 190 The Institute of Chartered Accountants of Pakistan Answer bank: Objective test and long-form answers 101 Rake Enterprises (a) Comparison of directors’ and auditors’ responsibilities (i) Preparation of financial statements The directors are normally required to prepare the financial statements of the company using the appropriate law of their country and in accordance with the International Accounting/Financial Reporting Standards (IASs/IFRSs) The auditors are normally required to check or audit those financial statements, again in accordance with the legislation of their country and the International Statements on Auditing (ii) Fraud and error The directors are responsible for preventing and detecting fraud and error in the financial statements, no matter how immaterial this may be Auditors are responsible for ensuring that the financial statements show a true and fair view; in other words that the financial statements are materially correct Auditors are not required to detect immaterial fraud or error (iii) Disclosure The directors must ensure that there is adequate disclosure of all matters required by statute or IASs/IFRSs in the financial statements The auditor will check that disclosure provisions have been complied with, and where certain disclosures have not been made (e.g ISA 550 regarding related party transactions) provide this information in the audit report (iv) Going concern The directors are responsible for ensuring that the company will continue in operational existence for the foreseeable future, and report to the members in the published financial statements if this is unlikely to be the case The auditor will check the accuracy of the directors' workings and assumptions and if these are considered incorrect or inappropriate, then the audit report or opinion may be modified to bring the situation to the attention of the members of the company (b) Errors The auditor’s responsibility paragraph does not meet the requirements of ISA 700 for the following reasons: (i) It does not follow the standard wording set out in ISA 700 For example, it does not state at the outset that the auditor’s responsibitly is to express an opinion on the financial statements based on his audit (ii) The use of the term Auditing Standards is not clear, because the report does not state which auditing standards have been used (e.g ISAs) This provides uncertainty regarding the actual standard of work performed (iii) The assessment of estimates and judgements made by the directors normally relates to material amounts only, rather than all of those estimates and judgements The correct wording from ISA 700 would state that the procedures selected took into account ‘ the risks of material misstatement’ i.e showing that the audit testing was probably focused on material amounts only © Emile Woolf International 191 The Institute of Chartered Accountants of Pakistan Audit and Assurance (iv) Stating that time was a factor in obtaining information and explanations for the audit is not correct as this implies some factor which could have been avoided and that the audit may therefore be incomplete The auditor has to plan the audit carefully and ensure that all the information and explanations considered necessary are obtained to form an opinion, not simply stop work when time runs out (v) The auditor does not confirm that the financial statements are free from material misstatement as this implies a degree of accuracy that the auditor simply cannot provide Making the statement could also leave the auditor liable to claims from members or third parties should errors be found in the financial statements later Rather than make such a categorical statement, the correct wording from ISA 700 states that the auditor provides reasonable assurance that the financial statements are free from material misstatement, which clearly implies that audit techniques are limited (vi) The disclaimer regarding errors appears to be useful in that it limits the auditor's liability However, it does not belong in the auditor’s responsibility paragraph as it appears to severely limit the auditor's responsibilities stating that the directors are responsible for all errors Management’s responsibility is also clearly outlined in another section of the report, and this statement also appears to extend those responsibilities making the audit report overall less clear This could also imply that the auditor has done little or no work 102 ISRE 2400 (a) Meaning and types of assurance Meaning ‘Assurance’ means confidence In an assurance engagement, an ‘assurance firm’ is engaged by one party to give an opinion on a piece of information that has been prepared by another party The opinion is an expression of assurance about the information that has been reviewed It gives assurance to the party that hired the assurance firm that the information can be relied on Types There are two main types of assurance: audit: this may be external audit, internal audit or a combination of the two; and review An audit provides a high, but not absolute, level of assurance that the audited information is free from any material misstatement This is often referred to as reasonable assurance The opinion is usually expressed as positive assurance that, in the opinion of the auditors, the financial statements present fairly the financial position and performance of the company A review is a ‘voluntary’ investigation In contrast to the “reasonable” level of assurance provided by an audit, a review into an aspect of the financial statements would provide only a moderate level of assurance that the information under review is free of material misstatement The resulting opinion is usually (although not always) expressed in the form of negative assurance Negative assurance is an opinion that nothing is obviously wrong: in other words, ‘nothing has come to our attention to suggest that the information is misstated’ © Emile Woolf International 192 The Institute of Chartered Accountants of Pakistan Answer bank: Objective test and long-form answers (b) Review procedures The accountant should obtain an understanding of the entity’s business and the industry in which it operates The accountant should make enquiries into: x the entity’s accounting policies, practices and procedures, including the preparation of financial statements; x material assertions in the financial statements that are subject to the review; x decisions taken at board meetings and other meetings of the entity that may affect the financial statements; x the completeness of the accounting records that were used to prepare the financial statements The accountant should use analytical procedures to identify unusual relationships between items in the financial statements, and individual items that appear unusual Other procedures such as: x discussions with the company’s auditors; x obtaining representations from management; x considering the appropriateness of the accounting policies employed by the entity; x making enquiries into subsequent events; x reviewing the statements as a whole 103 Karim In the above situation the auditor should carry out the following procedures: (i) He should inquire whether the management has changed its assessment of the entity’s ability to continue as a going concern (ii) If on account of the above inquiry or on account of his own assessment of the situation the auditor concludes that the conditions cast significant doubts about the entity’s ability to continue as a going concern, he should: Inquire the management about its future plans, the feasibility of these plans and whether management believes that the outcome of such plans will improve the situation Consider the adequacy of the disclosure of such matters in the financial information (iii) The auditor should consider whether the note given by the management adequately discloses the uncertainty as regards the entity’s ability to continue as a going concern (iv) If he assesses that the note is adequate, the auditor should give an emphasis of the matter paragraph (v) If adequate disclosure is not made in the interim financial information, the auditor should express a qualified or adverse opinion, as appropriate The report should include specific reference to the fact that there is such a material uncertainty © Emile Woolf International 193 The Institute of Chartered Accountants of Pakistan Audit and Assurance 104 IFI Procedures which an auditor may perform to update the understanding of the entity and its environment for an engagement to review interim financial information includes the following: (a) Reading the documentation, to the extent necessary, of the preceding year’s audit and reviews of prior interim period(s) of the current year and corresponding interim period(s) of the prior year, to enable the auditor to identify matters that may affect the current-period interim financial information (b) Considering any significant risks, including the risk of management override of controls that were identified in the audit of the prior year’s financial statements (c) Reading the most recent annual and comparable prior period interim financial information (d) Considering materiality with reference to the applicable financial reporting framework as it relates to interim financial information to assist in determining the nature and extent of the procedures to be performed and evaluating the effect of misstatements (e) Considering the nature of any corrected material misstatements and any identified uncorrected immaterial misstatements in the prior year’s financial statements (f) Considering significant financial accounting and reporting matters that may be of continuing significance such as material weaknesses in internal control (g) Considering the results of any audit procedures performed with respect to the current year’s financial statements (h) Considering the results of any internal audit performed and the subsequent actions taken by management (i) Inquiring of management about the results of management’s assessment of the risk that the interim financial information may be materially misstated as a result of fraud (j) Inquiring of management about the effect of changes in the entity’s business activities (k) Inquiring of management about any significant changes in internal control and the potential effect of any such changes on the preparation of interim financial information (l) Inquiring of management of the process by which the interim financial information has been prepared and the reliability of the underlying accounting records to which the interim financial information is agreed or reconciled © Emile Woolf International 194 The Institute of Chartered Accountants of Pakistan ,ĞĂĚ KĸĐĞͲĂŚŽƌĞ WŚŽŶĞ͗ ;ϵϮͲϰϮͿ ϯϳϱϭϱϵϭϬͲϭϮ͕ h E͗ ϭϭϭͲϬϬϬͲϰϮϮ͕ ĞͲŵĂŝů͗ lahore@icap.org.pk /ƐůĂŵĂďĂĚ KĸĐĞ͗ ^ĞĐƚŽƌ 'ͲϭϬͬϰ͕ DĂƵǀĞ ƌĞĂ͕ /ƐůĂŵĂďĂĚ h E͗ ϭϭϭͲϬϬϬͲϰϮϮ͕ &Ădž͗ ;ϵϮͲϱϭͿ ϵϭϬϲϬϵϱ͕ ĞͲŵĂŝů͗ ŝƐůĂŵĂďĂĚΛŝĐĂƉ͘ŽƌŐ͘ƉŬ &ĂŝƐĂůĂďĂĚ KĸĐĞ͗ ϯϲͲ͕ ŽŵŵĞƌŝĐĂů ĞŶƚĞƌ͕ EĞĂƌ DƵũĂŚŝĚ͕ ,ŽƐƉŝƚĂů DĂĚŝŶĂ dŽǁŶ͕ &ĂŝƐĂůĂďĂĚ WŚŽŶĞ͗ ;ϵϮͲϰϭͿ ϴϱϯϭϬϮϴ͕ &Ădž͗ ;ϵϮͲϰϭͿ ϴϱϬϯϮϮϳ͕ ĞͲŵĂŝů͗ ĨĂŝƐĂůĂďĂĚΛŝĐĂƉ͘ŽƌŐ͘ƉŬ DƵůƚĂŶ KĸĐĞ͗ ϯƌĚ &ůŽŽƌ͕ WĂƌŬůĂŶĞ dŽǁĞƌ͕ KĸĐĞƌƐ͛ ŽůŽŶLJ͕ EĞĂƌ ŝĚ 'ĂĂŚ ŚŽǁŬ͕