AUDITING & ETHICS

Details: Test 7 (Ch-7)

Suggested Answer Sheet

Total Marks: - 35

Ans-1 In accordance with SA 560, "Subsequent Events," the auditor has specific responsibilities
when subsequent events and facts come to their attention after the date of the auditor's report
but before the date the financial statements are issued. In the case of Pinnacle Pharmaceuticals
Ltd., here are the necessary actions and considerations:

Responsibilities of the Auditor:

Discuss with Management or Those Charged with Governance (TCWG): The first step is to
engage in discussions with management or TCWG regarding the subsequent events and facts
that have come to the auditor's attention. These discussions aim to gain a clear understanding
of the nature and significance of the matters.

Determine the Need for Financial Statement Amendment: The auditor should evaluate
whether the financial statements require any amendment due to the subsequent events or
facts. This assessment includes considering whether the events could have a material impact on
the financial statements.

Inquire about Management's Plans: The auditor should inquire about how management
intends to address the subsequent events and facts in the financial statements. Management's
response will help the auditor understand the proposed course of action.

Scenarios When Management Amends or Does Not Amend Financial Statements:

GMTESTSERIES.COM®
If Management Amends the Financial Statements:

Extend Audit Procedures: In cases where management decides to amend the financial
statements, the auditor should extend audit procedures to assess the appropriateness and
accuracy of the amendments.

Amend Audit Report: Depending on the extent of the amendments, the auditor should either
amend the audit report to include an additional date restricted to the amendments or provide a
new/amended report, including a statement in either the Emphasis of Matter (EOM) or Other
Matter (OM) paragraph. This statement should explain the nature and impact of the
subsequent events and the corresponding amendments.

If Management Does Not Amend the Financial Statements:

If Audit Report Not Yet Provided: If the audit report has not yet been provided to
management, the auditor should consider modifying the opinion in light of the subsequent
events and facts. The modification should be based on the impact of these events on the
financial statements.

If Audit Report Already Provided: If the audit report has already been provided to
management, the auditor should notify TCWG not to issue the report to third parties. The
auditor should explain the reasons for this action, emphasizing that the report may not
accurately reflect the financial position in light of the subsequent events.

Prevent Reliance on the Auditor's Report: The auditor should take appropriate action to
prevent third parties from relying on the auditor's report in circumstances where the report
does not accurately represent the financial position due to subsequent events and
management's decision not to amend the financial statements.

In summary, SA 560 guides the auditor in addressing subsequent events and facts that come to
their attention after the date of the auditor's report but before the issuance of the financial
statements. The auditor's responsibilities include discussing, assessing, and, if necessary,

GMTESTSERIES.COM®
amending the audit report to ensure that the financial statements provide accurate and
relevant information to users.

(6 marks)

Ans-2 Significant deficiencies: - As per SA 265 "Communicating Deficiencies in Internal Control

to Those Charged with Governance and Management", significant deficiency in internal
control means:

• A deficiency or combination of deficiencies in internal control that, in the auditor's

professional judgement, is of sufficient importance to merit the attention of those charged with
governance.

• Also, the significance of a deficiency or a combination of deficiencies in internal control

depends not only on whether a misstatement has actually occurred but also on the likelihood
that a misstatement could occur and the potential magnitude of the misstatement. Significant
deficiencies may therefore exist even though the auditor has not identified misstatements
during the audit.

(ii) Examples of matters that auditor may consider in determining whether a deficiency or
combination of deficiencies in internal control constitutes a significant deficiency include:

• The likelihood of the deficiencies leading to material misstatements in the financial

statements in the future.

• The susceptibility to loss or fraud of the related asset or liability.

• The subjectivity and complexity of determining estimated amounts, such as fair value
accounting estimates.

• The financial statement amounts exposed to the deficiencies.

GMTESTSERIES.COM®
• The volume of activity that has occurred or could occur in the account balance or class of
transactions exposed to the deficiency or deficiencies.

By considering these examples of matters outlined in SA 265, CA. Sakshi can effectively assess
whether deficiencies in internal control rise to the level of a significant deficiency and
communicate them appropriately to those charged with governance and management.

(6 marks)

Ans-3 According to SA 570 Going Concern, the key factors that management should consider
when assessing the entity's ability to continue as a going concern, and The following factors are
relevant to that judgment: -

• The degree of uncertainty associated with the outcome of an event or condition increases
significantly the further into the future an event or condition or the outcome occurs.

• The size and complexity of the entity, the nature and condition of its business and the degree
to which it is affected by external factors affect the judgment regarding the outcome of events
or conditions.

• Any judgment about the future is based on information available at the time at which the
judgment is made. Subsequent events may result in outcomes that are inconsistent with
judgments that were reasonable at the time they were made.

In summary, the timing of future events or conditions, the entity's size, complexity, and
business nature, the impact of external factors, and the potential for subsequent events to
contradict initial judgments all contribute to the degree of uncertainty involved in
management's assessment of the entity's ability to continue as a going concern.

(4 marks)

GMTESTSERIES.COM®
Ans-4 SA 260 "Communication with Those Charged with Governance”

Objectives of auditor in accordance with SA 260 : -

(a) To communicate clearly with those charged with governance the responsibilities of the
auditor in relation to the financial statement audit, and an overview of the planned scope and
timing of the audit;

(b) To obtain from those charged with governance information relevant to the audit;

(c) To provide those charged with governance with timely observations arising from the audit
that are significant and relevant to their responsibility to oversee the financial reporting process
and

(d) To promote effective two-way communication between the auditor and those charged with
governance.

(4 marks)

Ans-5 Written Representations: As per SA 580, “Written Representation” is a written

statement by management provided to the auditor to confirm certain matters or to support
other audit evidence.

These representations are an important source of audit evidence. If management modifies or

does not provide the requested written representations, it may alert the auditor to the
possibility that one or more significant issues may exist.

Further, a request for written, rather than oral, representations in many cases may prompt
management to consider such matters more rigorously, thereby enhancing the quality of the
representations.

Requested Written Representations not provided by Management:

GMTESTSERIES.COM®
If management does not provide one or more of the requested written representations, the
auditor shall-

 Discuss the matter with management;

 Re-evaluate the integrity of management and evaluate the effect that this may have on the
reliability of representations (oral or written) and audit evidence in general; and
 Take appropriate actions, including determining the possible effect on the opinion in the
auditor’s report.

If, after considering the relevant circumstances, Rakesh Gupta concludes that the refusal to
provide the written representations is pervasive and material, he should disclaim an opinion on
the financial statements of Zenith Enterprises Ltd. This action is necessary because the auditor
is unable to obtain sufficient appropriate audit evidence to form an opinion on the financial
statements due to the management's refusal to provide the required written representations.

(5 marks)

Ans-6 MCQS

1. b) The auditor must evaluate the effect of identified misstatements on the audit and any
uncorrected misstatements on the financial statements.

Explanation:

Under SA 450, auditors are tasked with the responsibility of evaluating the impact of identified
misstatements on both the audit process and the financial statements. This evaluation process
is essential for maintaining the integrity and accuracy of the financial reporting process. Let's
delve deeper into why option (b) is the correct choice.

When auditors identify misstatements during the audit, it's crucial to assess their implications
on the financial statements. Misstatements can arise due to errors or fraud and may affect the
fairness and reliability of the financial statements. By evaluating the effect of these

GMTESTSERIES.COM®
misstatements, auditors can determine whether adjustments are necessary to accurately
reflect the financial position and performance of the entity.

Moreover, auditors must also consider the impact of any uncorrected misstatements on the
financial statements. Uncorrected misstatements refer to errors or discrepancies that remain
unresolved by management even after being brought to their attention by the auditor. These
misstatements can have material implications for stakeholders and may require disclosure in
the financial statements.

By thoroughly evaluating misstatements and their effects, auditors fulfill their duty to provide
stakeholders with reliable and transparent financial information. This process enhances the
credibility of the financial statements and promotes confidence in the entity's financial
reporting practices.

Therefore, option (b) accurately captures the auditor's responsibility as outlined in SA 450,
emphasizing the importance of evaluating misstatements on both the audit process and the
financial statements to ensure accuracy and transparency in financial reporting.

2. c) It denotes the date when the audited financial statements and auditor's report are made
accessible to external stakeholders, ensuring transparency and facilitating informed decision-
making.

Explanation:

Option (a) incorrectly portrays the "Date the financial statements are issued" as the date when
the auditor's report is signed, overlooking its broader significance in making audited financial
information available to external stakeholders.

Option (b) misinterprets the date as the initiation of the audit process, which actually begins
when auditors examine the financial statements prepared by the entity's management.

GMTESTSERIES.COM®
Option (d) inaccurately depicts the date as a regulatory deadline for financial statement
submission, disregarding its primary function in disseminating audited financial statements to
external parties.

Option (c) accurately reflects the primary significance of the "Date the financial statements are
issued" by emphasizing its role in making audited financial statements and the accompanying
auditor's report accessible to external stakeholders. This availability promotes transparency,
enhances accountability, and empowers stakeholders to make informed decisions based on
reliable financial information.

3. (a) Appropriateness of management’s assessment in relation to going concern assumption

may be made by auditor without performing detailed evaluation procedures.

Explanation:

(a) Would be the most appropriate choice because it suggests that the auditor can make an
assessment of the appropriateness of management's assessment of the going concern
assumption without necessarily performing detailed evaluation procedures. This is because the
indicators present in the scenario (consistent profits, low debt, expansion plans with bank
approval) are strong signals supporting the going concern assumption.

Performing detailed evaluation procedures, as suggested in option (b), might still be necessary
in certain cases to confirm the initial assessment. However, based on the information provided
in the scenario, it seems that a detailed evaluation may not be immediately necessary given the
positive indicators present.

Option (c) is not appropriate because the auditor should not skip management's assessment of
the going concern assumption. It's important for the auditor to understand management's
perspective and assessment before making their own evaluation.

Option (d) suggests that examining the cash flow forecast is necessarily required, but in this
scenario, while examining the cash flow forecast could be part of the detailed evaluation

GMTESTSERIES.COM®
procedures, it may not be immediately necessary given the positive indicators of profitability
and the bank's support for the expansion plans.

Therefore, based on the scenario provided, option (a) appears to be the most appropriate
choice.

4. c) Individuals or organizations responsible for overseeing the strategic direction and

accountability, including financial reporting, which may include a board of directors,
supervisory board, or owner-manager

Explanation:

"Those charged with governance" refers to individuals or organizations responsible for

overseeing the strategic direction of the entity and obligations related to its accountability,
including the financial reporting process. This can include a board of directors, supervisory
board, partners, proprietors, a committee of management, trustees, or an owner-manager,
depending on the entity's governance structure. Options (a), (b), and (d) do not encompass the
full range of responsibilities and roles described.

5. c) The auditor is responsible for ensuring that the entity will continue its operations for the
foreseeable future, regardless of the audit evidence obtained.

Explanation:

This statement is incorrect because the auditor's role is to evaluate the appropriateness of
management's use of the going concern assumption based on the audit evidence obtained. The
auditor is not responsible for ensuring that the entity will continue its operations for the
foreseeable future. That responsibility lies with the entity's management. The auditor's
objectives are to conclude whether a material uncertainty exists and to obtain sufficient
appropriate audit evidence about the appropriateness of management's use of the going

GMTESTSERIES.COM®
concern assumption, as stated in options a) and b). Option d) is also correct, as the auditor
should determine the implications for the auditor's report based on the conclusions drawn.

(2×5= 10 MARKS)

GMTESTSERIES.COM®