Answering Tips

1. Determine the issue: Misstatement or Limitation

2. Determine materiality of the matter.
3. Suggest the proper treatment.
4. Conclude that if management does not agree to adjustment qualified/adverse
opinion would be given
5. For disclaimer always narrate that first communication would be made to TCG /
audit committee.
6. Suggest KAMs for all significant matters in case of listed companies.
7. Don’t forget EM for major disclosures in the financial statements.
8. Don’t forget OM for prior year FS audited by other auditor
9. Don’t forget impacts on audit report of other information
10. Don’t forget Companies Act additional reporting requirements:
• If there is limitation in scope or records are destroyed etc.
• If you do not agree to change in accounting policy
• If any expenditure was not incurred for Company’s business
• If Zakat was not deducted/deposited appropriately
 Reports to Read
1. Normal Company Audit Report
2. Normal Company Consolidated Report
3. COCG report
4. Banking Company Audit Report
5. Review report
6. Audit report illustrations per ISA 700, 705, 710, 720
7. Audit report illustrations per ISA 800, 805, 810
W17 Q2 (a)
Answers
Although the amount of Rs. 20 million is not quantitatively material, but since the
adjustment would result in breach of loan covenants, it is qualitatively material.

We will consider the independence of the management’s valuer given their long
association with VL and would hire our own expert for assessing the value.

If the value assigned by our expert is different, we would discuss the matter with
management and their valuer to resolve the difference. If difference is unresolved, we
would:
• Reassess the risk of material misstatement due to fraud and the nature, timing and
extent of audit procedures.
• Qualify the opinion in the audit report.
• Consider if the matter creates doubts as to the integrity of the management and we
should consider more severe actions e.g. withdrawing from engagement or disclaiming
the opinion.
W17 Q2 (b)
Answers
• The disclosures are required by IAS 36 and are qualitatively material to the financial
statements.
• We will discuss the non-disclosure with those charged with governance.
• If the disagreement persists, we shall qualify our audit opinion.
• In the Basis for Opinion section, we would describe the nature of omitted disclosures
and include the omitted disclosures, provided it is practicable to do so and we are
able to obtain sufficient appropriate audit evidence about the omitted information.
W17 Q5
Answers
Key audit matter How the matter was addressed in our audit
Tax Contingency (Note X to
the financial statements)
The company has significant • We reviewed the company’s correspondence and
tax contingencies. Due to record of hearings with the tax authorities.
the high level of judgment • We obtained confirmation from the Company’s tax
required to assess the advisor and legal counsel on the status of tax disputes.
outcome of tax litigations, • We employed our own tax specialist to review the
we consider it to be a key justification provided by Company’s tax advisor and
audit matter. legal counsel.
• We reviewed the adequacy of provision recorded and
disclosures made in light of advice of our tax specialist.
W17 Q5
Answers
Key audit matter How the matter was addressed in our audit
Related Party Transactions
(Note Y to the financial
statements)
The company has significant • We reviewed internal controls over identification and
purchases from related capturing and recording of related party transactions.
parties and significant • We reviewed SECP returns / filings for the names of
amount of advertising shareholders and related parties.
expenses are paid to related • We reviewed contracts with related parties for
parties. providing advertising and other services.
• We reviewed minutes of meeting of board of directors
We consider it as an area of to review authorization of related party transaction.
significant risk, and hence • We reviewed accounting record for large, unusual and
this was identified as a key non-recurring transactions.
audit matter • We obtained confirmations from related parties
regarding terms of transactions and balances.
• We evaluated the adequacy of related party disclosures
in the financial statements.
W17 Q5
Answers
Key audit matter How the matter was addressed in our audit
Disposal group held for sale
(Note Z to the financial
statements)
The company is committed • We reviewed correspondence with purchasers and
to a plan to sell part of a prospective purchasers and assessed the status of the
manufacturing facility, that sales process.
is classified as disposal • We reviewed Management and Board approval for sale
group held for sale and and assessed company’s commitment to the sale.
carried at fair value less • We reviewed if there are plans for altering the assets
costs to sell. and if the company is committed to sell the assets in
current condition.
Due to the high level of • We employed our own valuation expert to assist in
judgment involved in evaluating the fair value of the plant.
estimating the fair value • We evaluated the adequacy of disclosures in the
and the significant carrying financial statements.
amounts of the assets and
liabilities associated with it,
we considered it to be a key
audit matter.
S17 Q6(a)
Answers
• The loans should be classified as “current” in accordance with terms of loan.
• Written evidence existing as of year-end should be present to support current
classification.
• Verbal confirmation after year end is a insufficient evidence and a non-adjusting
subsequent event.

Basis for qualified opinion

As more fully explained in note X to the financial statements, the debt covenants of
the loans as at 30 June 2018 have been breached by the company. Accordingly, the
long term loans reflected in the statement of financial position of the company
amounting to Rs. 500 million should have been classified as “current liabilities” as
the terms of the loan require immediate repayment of loan in case of breach of debt
covenants.
W16 Q1
Answers
(a) Key audit matters, other than the issue giving rise to adverse opinion, may be
included in the audit report. However, the descriptions of such key audit matters should
not imply that the financial statements as a whole are more credible, in view of the
adverse opinion.

(b) A matter giving rise to a qualification should not be included in the Key Audit Matters
section and should instead be explained in the Basis for opinion section.

(c) Key Audit Matters should be reported only for current year even when comparative
financial statements approach is used (i.e. opinion refers to both years). Accordingly,
audit report is appropriate.

(d) The auditor can only accept the management request if:
• Law or regulation precludes public disclosure about the matter; or
• Adverse consequences of including would reasonably be expected to
outweigh the public interest benefits of such communication. This shall not
apply if the entity has publicly disclosed information about the matter.
S16 Q7a
Answers
(i) The Group auditor should assess if the matter giving rise to modification in the
subsidiary’s audit opinion is material from the view point of the group as a whole.
If the qualification is material to the group’s financial statements, the audit opinion on
the Group financial statements should also be modified.
If the qualification is not material to the group’s financial statements, the group auditor
would express an unmodified audit opinion.

(ii) In order to resolve the difference of opinion, the matter should be discussed between
the joint auditors. In case the difference is not resolved, both the joint auditors
should express their own opinion.
 Answers
W14 Q2
• EM for irrecoverability is not appropriate.
• Since amount is outstanding since last year the provision adjustment needs to be
rectified retrospectively in the last year.
• Auditor should request management to restate the prior period figures and make
appropriate disclosures for restatement of financial statements.
• If management agrees to restate, the auditor may include an EM to highlight the
same.
• If management refuses to restate, the auditor should express a qualified opinion or
adverse opinion.

In addition, UL is a major customer and the company has also incurred a loss. The
indicates that the auditor should request management to make an assessment of the
entity’s ability to continue as a going concern and the auditor should evaluate the
assessment together with management plans. Three circumstances may arise in this
case.

1. Material uncertainty exists but the going concern assumption is valid:

• If a note is given in FS, include a separate Going Concern section in the audit report.
• If note is not given, express a qualified or adverse opinion.
W14 Q2
Answers
2. Going concern assumption is inappropriate:
• If FS are prepared on a going concern basis, express an adverse opinion.
• If FS are prepared on a non-going concern basis, add an EM to highlight basis of prep.

3. If management is unwilling to make its assessment, and there are no alternate sources
of evidence (business plans etc.), express a qualified or disclaimer of opinion

(b) Opinion (includes only main opinion portion and excludes other required content):
In our opinion, except for the effect on the financial statements of the matter referred to
in the basis for opinion section, the financial statements give a true and fair view of the
financial position of Mars Limited as at 30 September 2013 and the results of their
operation for the year then ended.

Basis for opinion (includes only main portion and excludes other required content):
The company has recognized a provision of Rs. 70 million against amount due from
Utopia Limited in the current year. We consider that this provision should have been
recognized in the year 2013 in accordance with IAS 8. Had a provision been recognized in
2013, the profit after taxation of year 2013 would have been reduced by Rs. 70 million
and loss after taxation of year 2014 would have been reduced by Rs. 70 million.
 Answers
S13 Q7

(a) Evaluation:
• Entire class shall be revalued in accordance with IAS 16.
• It is not appropriate to incorporate the revised value of only 3 properties out of 8.

Impact on audit report

(i) This represents an inability to obtain sufficient appropriate audit evidence for 5
properties.
The auditor would express a qualified opinion or a disclaimer depending upon the
materiality of the issue.
The auditor would also add an exception to the opinion regarding properness of the
books of accounts under the Companies Act.

(ii) There is misstatement to the extent of 3 properties; the auditor will express a
qualified or adverse opinion depending on materiality.
There is limitation on scope with regard to 5 properties; the auditor would express a
qualified or a disclaimer depending upon materiality.
The auditor would also add an exception to the opinion regarding properness of the
books of accounts under the Companies Act.
 Answers
S13 Q7

(b) Consideration:
• Whether the change in accounting policy provides more relevant and reliable
information to users and is therefore permissible under IAS 8.
• Whether the change is appropriately disclosed in accordance with IAS 8

Impact on audit report

If the auditor agrees with the change in policy and appropriate disclosures are made, the
auditor shall mention the exception to the consistent application of accounting policy
and state that the auditor agrees with the change.

If the auditor disagrees with the change in policy, the auditor would state that he does
not agree with the change and express a qualified or adverse opinion

If the auditor agrees with the change in policy but appropriate disclosures are not made,
the auditor would express a qualified or adverse opinion and state that the auditor
agrees with the change.
 Answers
W13 Q7(b)

Matters to consider
• Can SAAE be obtained for opening inventory and factory building by performing
certain procedures during the year such as:
 Factory Building: Review of factory title documents and impairment calculations
as of the end of last year etc.
 Inventory: Closing to Opening inventory reconciliation or Stock to sales
reconciliation for the current year etc.

Impact on the audit report

Include an OM stating that prior period were audited by the predecessor auditor who
has issued a qualified opinion due to non-observance of inventory count and date of that
report.

If auditors are unable to obtain SAAE for opening balance express a qualified opinion or
disclaimer of opinion with respect to corresponding figures.
 Answers
S14 Q1

Course of action:
• Inquire the reasons of 65% subsequent recovery as agreement is for 30 days payment
• Consider the need for impairment of the remaining balance
• Review the process for recording sales and receivables as consignment accounting is a
complex area
• Review reconciliation of sales, receivable and stock at JDS
• Review the mistakes made in the stock posting by JDS and the reconciliations
prepared therefor
• Perform cut-off testing, since profit improvement show that revenue / receivables
may be overstated
• Obtain confirmation from JDS as to the closing inventory and sales made during the
year

Implications on the Audit Report:

• If misstatements are identified in sales / receivables and management does not
correct, express a qualified or adverse opinion.
• If the auditor is unable to obtain sufficient appropriate audit evidence, express a
qualified or disclaimer of opinion.
 Answers
Winter 2012 Q4

The auditor may issue a report containing an unmodified opinion on the element
subject to the following conditions:
• The auditor is not prohibited by law to do so
• The report on the element is not to be published with the auditor’s report
containing the adverse opinion
• The trade debts balance does not constitute major portion of the entity’s
complete set of FS

In the said report, the auditor should refer to the adverse opinion on the complete FS
in an OM and should also add a restriction on distribution or use.

Alternatively, the auditor may propose that an agreed upon procedures engagement
should be carried out in this respect.
 Answers
Winter 2011 Q5

(i) The auditor should:

- state that the audit report on the audited financial statements contains a qualified
opinion
- describe the basis for the qualified opinion
- describe the effect of the qualification on the summary financial statements.

(ii) The auditor should:

- Request management to change the criteria and assist them in selecting an appropriate
criteria.
- If management does not agree and the auditor is obliged under law to undertake the
engagement, the auditor should make appropriate reference of this fact in EL and indicate
in the audit report that the engagement was not conducted in accordance with ISAs
- Reconsider whether the firm may continue to accept the engagement to audit the
statutory FS

(iii) The auditor should:

- Ask the management to differentiate the notes from summary financial statements.
- If management does not agree, the report on the summary FS shall disclose that the note
is not covered by the report