Lecture 1

Basic elements of audit report:

1 title

2. addressee

3. introductory para

4. management responsibility

5. auditor responsibility

6. opinion para

7 other reporting responisbilities

8. date

9 address

10 signature

11 name of partner

Additional elements

1. Key audit matter (kam) para

2. Material uncertainity w.r.t g.c para
3. Other information para
4. Basis for opinion para

What is an audit report ?

An auditor is required to communicate all his findings at the end of audit in the form of a written
document. This written doc is called audit report.
State 5 elements of audit? (5 marks )

Learn 7-8 from handout

-title
-addressee
-mat uncertainity w.r.t g.c
-date
-address
-signature
-name of partner
Above are recommended by sir to learn and after writing definition expalain in own words.
 Lecture 2

what opinion to give ?

4 types of opinions

1) Unmodified or unqualified opinion

2) Qualified opinion
3) Adverse opinion
4) Disclaimer of opinion

If there is no misstatement or no inability to obtain SAAE

Therefore:

Unmodified opinion (clean chit)

“financial statemments give a true and fair view”

Misstatement:

-wrong value

-wrong treatment

-wrong disclosure

-wrong a/c policy

Inability to obtain SAAE?

Auditor was unable to obtain evidence

-management

-material factors
 If there is misstatement or inability to obtain SAAE, opinion must be modified

Misstatement Inability to obtain SAAE

Immaterial Material but Material and Immaterial material but material and
not pervasive pervasive not pervasive pervasive

unmodified Qualified Adverse Unmodified Qualified Disclaimer of

opinion opinion opinon opinion opinion

“financial “except for “f/s do not “f/s gives a “except for “we do not
statements give this f/s gives a give a t&F T&F view” this f/s gives a express an
a t&F view” t&f view” view” t&f view” opinion”

Less than 5% = immaterial

5-20%= material but not pervasive

Above 20% = material and pervasive

1. Unmodified (no misstatement and no inability to obtain evidence or immaterial misstatement or

immaterial inability to obtain SAAE)
2. Qualified ( misstatement or inability to obtain SAAE but level is material but not pervasive)
3. Adverse ( misstatement at material and pervasive level)
4. Disclaimer(inability to obtain SAAE, level material and pervasive)
 Lecture 3

E.O.M paragraph (emphasis of matter paragraph)

There are certain items in f/s that require disclosure,hence management will disclose it in f/s. however if
auditor believes:

The matter is fundamental to users Matter is already disclosed in f/s

understanding of audit report
*He adds another paragraph in audit report called e.o.m para, which makes a reference to that note in
disclosures , thus highlighting that matter in detail.

Contents of e.o.m para:

1. Highlights a matter effecting f/s

2. Highlights a matter already disclosed in f/s
3. The para must make note to the point where matter is explained in detail
4. The para must specifically mention that opinion is not qualified in this respect

Other matter paragraph :

There are certain items in f/s that do not require disclosure hence management will not
disclose it in f/s however if auditor believes the matter needs to be brought to shareholders
Attention he adds another paragraph in audit report called other matter paragraph that explains
that matter in detail.

In e.o.m para items are disclosed but in other matter para items are not disclosed.

Other information:

All information other than f/s is called other information

There are 2 issues to consider in other information :

Inconsistency b/w f/s and other information Material misstatement of facts in other
 information

 Auditor needs to check what is right and Auditor should take following steps
what is wrong :
1.If f/s are correct and other information is wrong 1.discuss with management
this will led to unmodified opinion plus other 2. discuss with those charged with governance
information para. 3. take an independent legal advice
2.if financial statements are wrong & other info is
correct take following steps :
. discuss with management and ask them to
revise f/s
. if they revise f/s give unmodified opinion
. if they refuse to revise f/s, give modified
opinion.

Q1: what should auditor do if there is inconsistency b/w f/s and other information

Q2:what should auditor do if there is misstatement of facts in other info.

Overall review of f/s.

Audit start, audit ends , report signed:

Here auditor does overall review of f/s

*after completing the audit but before signing report, auditor does an overall review of f/s this is just a
guide check and balance of all work done to ensure overall audit opinion is consistent with findings of
audit.
 Lecture 4

Subsequent events or events after the balance sheet date

IAS 10:

What are the events/ events after the balance sheet date ?

*Subsequent events are all events after the balance sheet date.

Adjusting event Non-adjusting event

Which provides evidence of conditons that Which does not provide evidence of
existed at balance sheet date conditons that existed at balance sheet
- Recievable gone bad date
- Inventory obsolete - fire
- Going concern - floods
- etc - terrorism

What are audtiors responisibility in subs event?

Upto date of signing a audit report? Or After signing of audit report?

Before signing of a audit report?
Auditor has active responsibility. He must ensure Auditor has passive responsibility, he Is not
all events upto date of signing of report have responsible at all. However if auditor becomes
been identified and have been adjusted or aware of facts that had been known to him at
disclosed by company accordingly date of audit report would have caused him to
amend report , he should discuss it with
management and ask them revise f/s.if
management revise f/s, auditor should perform
new procedures and issue a new audit report but
if management refuse to revise f/s, auditor
should take necessary steps to prevent reliance
on old report.
Practical question

Case study event details

3 requirments

1. whether f/s need amendment

2. audit procedures
3. impact on audit report if issue remains unrealized.

Answer plan

1. give a short intro about case

2. write “under Ias 10 it is an adjuting/ non adjusting event and needs to be adjusted/ disclosed in
fs”
3. write 3 audit procedures
-discuss with management
-inspect supporting document
-take expert legal advice

4. find materiality (less than 5%, 5%-20%, above 20%)

5. state impact on audit report as per rules learned.
 Lecture 5

Humphries co:

a : auditor responisbilites before and after

1. receivable:
a customer of Humphries who owes $0.3m is facing going concern problems but company
expects they will receive some amount.
Under Ias 10 this is an adjusting event as it provides evidence of conditions that existed at
balance sheet date hence it will be adjusted in financial statements.
Following audit procedures will be performed :
- discuss with management why they think customer will pay same amount
- inspect supporting documentation like sales invoice, correspondence with recievable etc.
- take legal advice on how to initiate legal proceedings against recivables.
The balance is immaterial as it represents 4% of profits hence there will be no impact on audit
report, an unmodified opinion will be given.

2. Lawsuit: a supplier is suing the company for breach of contract. Initially they claimed $1m but
are now willing to settle the case for $0.6m.
Under Ias 10 this is an adjusting event as it provides evidence of conditions that existed at
balance sheet date hence this will be adjusted in f/s.
Following audit procedures will be performed:
- Discuss with management why was their a breach of contract
- Inspect supporting documentation like supplier contract, correspondence from supplier etc.
- Take legal advice as to what were chances of winning the case
The matter is material but not pervasive as it represents 8% of profit hence a qualified opinion
will be issued.

3. Warehouse: co. has 3 warehouses and due to excessive rains, flood water entered the
warehouse located in basis and damaged all inventory.
Under Ias 10, this is a non adjusting event as it does not provide evidence of conditions that
existed at balance sheet date hence will be disclosed in f/s following audit procedures will be
performed:
- Discuss with management what are their views on insurance claims
- -inspect supporting documents like inventory records , insurance policy etc.
- Take expert advice as to what is the level of damage in monetary terms

No information is provided to find materiality. If it is material but not pervasive then qualified
opinion will be given & if its mat& pervasive an adverse opinion will be given.
 Lecture 6

Subsequent events

Event 1: a batch of chemicals produced in april was defective whose worth was $0.85m but now has a
scrap value of 0.1m$. under Ias 10, this is an adjusting event as it provides evidence of conditions that
existed at balance sheet date hence will be adjusted in f/s.

Following audit procedures will be performed:

- Discuss with management why defect occurred even after quality checks
- Inspect supporting document like inventory records , quality control reports etc
- Take expert advice as to whether there is any alternative use

The issue is mat but not pervasive as it represents 13% of profits hence a qualified opinion will be
issued

Event 2

An explosion occurred at smallest of four locations resulting in damage to property, plant

equipment worth $0.9m.

Under Ias 10 this is a non adjusting event as it does not provide evidence of conditions that existed
at balance sheet date hence will be disclosed in f/s.

Following audit procedures will be performed .

-discuss with management why they think they wont be able to claim insurance

- inspect supporting document like insurance policy, valuation report etc

- take expert advice as to how to claim insurance

The matter is material but not pervasive as it represents 16% of profit hence a qualified opinion will
be issued.
 Zee diem question:

the spring in a new mattres have been found to be defective and investment worth $750000 is affected.

Under Ias 10 this is an adjusting event and adjusted in financial statements.

Following audit procedures will be performed:

- Discuss with management why they were under insured

- Inspect supporting document like inventory records, insurance policy
- Take legal advice as to possibility of case against supplier .
The issue is material but not pervasive hence a qualified opinion will be given

Event 2
Production at sham eve factory got halted for one day when truck carrying dye reversed & dye
fell into premises & local river under Ias 10 this is an adjusting event as………..disclosed in f/s.
Following audit procedures will be performed
- Discuss with management what is their view on whether co has breached env legislation
- Inspect supporting document like environments reports, insurance policy
- Take legal advice as to options with co. if case is filed.

Issue is mat but not pervasive hence a qualified opinion will be given.
 Event1
A fire occurred at largest of distribution depots & resulted in damage of $650000 to vehicles
And $25000 inventory.
Under Ias 10 this is a non adjusting event as it does not provide evidence of conditions that
existed at balance sheet date hence will be disclosed in f/s.
Following audit procedures will be performed:
- Discuss with management what is their state on insurance claims
- Inpect supporting document like insurance policy, inventory records asset register etc
- Take legal advice as to options in case insurance company does not give claim
- The issue is mat but not pervasive as it represents 8% of profit hence a qualified opinion will be
given.

Event 2
A large batch of inventory was defective and no sales have been made. Cost od defect is 0.95m
Under Ias 10 this is an adj event as It produces evidence of conditions that existed at balance
sheet date hence will be adjusted in financial statements.
Following audit procedures will be performed.
- Discuss with management whether there are anu quality controls
- Inspect supporting document like inspection reports, inventory records etc.
- Take expert advice how to maximize benefit from alternative use

The issue is mat but not pervasive as it represents 11% of profit hence and qualified opinion will
be given.
 Lecture 7

PALM INDUSTRIES:
a customer who owed $35000 has not paid anything and disputes quality of goods
however finance directors feels confident that issue will be resolved. There is a doubt that
recivable balance is overstated and a provision may be required. This issue is 7.3% of profit
indicating it is material but not pervasive.
- Discuss with management why they haven’t made any allowance from recivables.

Since issue is material but not pervasive a qualified opinion will be provided.

Ash trading :

Inventory count was attended by co.s internal audit department and neither chestnut nor previous
auditors attended the count hence there are doubts on inventory balance as auditors did not observe
count.

This issue is mat and pervasive as it represent 21.4% of profit

-take expert advice as to valuation of inventory since issue is mat & pervasive, a disclaimer of opinion
will be given as auditor will be unable to obtain saae.
 Going concern

possible questions:

1. What is going concern?

2. Auditor & management responsibilities in going concern?
3. Events that cast doubt on going concern status or potential indicators of g.c problems
4. Audit procedures in going concern
5. Reporting issues in going concern

What is g.c?

g.c is an assumption which states entity will be able to continue operations for the forseeable
future. f/s should be prepared on G.C basis if entity believes it will be able to continue operations for
forseeable future.

IF entity believes it wont be able to continue operations for the forseeable future then G.c assumption is
not valid & f/s should be prepared on a breakup basis.

Management responsibilities in g.c

1. Management needs to carefully asses that whether entity will be able to continue operations as
f/s will be prepared accordingly
2. If management become aware of any events that cast doubt on g.c status, they need to disclose
it
3. If g.c assumption is not valid, management must prepare f/s on breakup basis

Auditor responsibilities in G.C

1. Auditor needs to remain alert throughout the audit for any events that cast doubt on g.c
status
2. He must cover assessment period of atleast 12 months
3. He must carefully assess assumptions made by management
Audit procedures in going concern

1. Analyse & discuss cash flow and other forecasts with management
2. Analyse & discuss entity’s latest available interim f/s.
3. Review terms of debentures & loan agreements to see whether they have been breached
4. Enquire from entitys lawyers regarding litigation & claims
5. Obtain & review reports of any regulatory actions
6. Read minutes of board meetings, shareholders meetings and directors for details of any
financing difficulties
 Lecture 8

Reporting issues of going concern

Case 1 : if auditor concludes that G.C assumption is valid but material uncertainity exists

As per standards management is required to disclose this uncertainity is f/s

if management has adequately disclosed it in f/s If management has not adequately disclosed it in
f/s or management has not disclosed
Give unmodified opinion but mention this give modified opinion
uncertainity in material uncertainity w.r.t going -material not pervasive (qualified)
concern para in audit report - material and pervasive (adverse opinion)

CASE 2: if auditor concludes that G.c assumption is not valid as per standards f/s must be prepared on a
breakup basis

If management have prepared f/s on a breakup If management have not prepared f/s on breakup
basis basis

Unmodified opinion plus e.o.m para Adverse opinion

Case 3: if managemet is unwilling to give or extend its assessment

This creates an inability to obtain SAAE

Mat but not pervasive Mat & pervasive

Qualified opinion Disclaimer of opinion
Medimade co

a) Describe g.c assumption ?

b) Indicators that co Is not g.c

1) The level of competiton has increased. This will reduce demand leading to lost revenues, lost
profits, lost cash flow ultimately creating G.c problem
2) Company is unable to recruit scientific sraff.
This will make it difficult to produce product hence co will not be able to sale it. This will lead to
reduced revenues, reduced profits and redcuced cash ultimately creating g.c problem
3) Co. had to rely on o/d which carried high interest. High interest will reduce profits reduce cash
ultimately creating g.c problems.
4) Suppliers have withdrawn credits terms menaing co. must pay cash on delivery. This will create
cash flow problems leading to G.c problem.
5) Directors have produced a cash flow forecast which shows worsening position. This means
outflows are higher than inflows which will create cash flow problems ultimately leading to g.c
issues.

c) Audit procedures to verify whether co.is g.c

. analyse & discuss cash flow & other forecasts with management
.analyse and discuss entity latest available interim f/s
. review terms of loan agreement to see whether they have been breached
. ensure of entity lawyers regarding litigation & claims
. review reports of any regulatory actions
. review board minutes, shareholders meeting minutes for discussion on g.c.

d) If auditor believes co is going concern but material uncertainity exists, as per standards
management is required to disclose this uncertainity in f/s.

Since directors have agreed to make g.c disclosures, if they are accurate then unmodified opinion
will be given and this uncertainty will be mentioned in mat uncertainity w.r.t g.c para however if
disclosures are inadequate auditor will give modified opinion. If mat but not pervasive then qualified
& if mat & pervasive adverse.
 Lecture 9

Clarinet question:

B)

1) A new competitor has entered the market. This can result in loss of customers which will lead to
lost revenue. Redued profits, reduced cash ultimately creating g.c problems
2) Key employees have left the company. This will result in productivity issues hence co will not be
able to generate sales leading to lost revenues, reduced profit, reduced cash ultimately creating
g.c problems.
3) One of key suppliers has ceased to trade. This will result in shortage of supplies effecting
production. This will effect sales. Leads to lost revenue, reduced profits, reduced cash ultimately
creating g.c problems.
4) Shareholders have decided to invest further for new product development. If now new product
is developed, co wont be able to make sales. This will lead to lost revenues, reduced profits,
reduced cash ultimately creating g.c problem.
5) Directors have produced a cash flow forecast which shows worsening position in coming 12
months. This indicates outflows are higher than inflows leading to cash flow problems ultimately
creatim g.c issues.
6) One of customer is taking legal action . this can result in penalties leading to outflow of cash.
This will create cash flow problems ultimately leading to g.c problems.

c) - analyse & discuss cash flows and other forecasts with management

- analyse & discuss entity latest available interim f/s

- review terms of debentures & loan agreement to see whether they have been breached

- enquire from entity lawyers regarding litigation & claims

- review reports of any regulatory actions

- review board mins, s/h meeting mins for evidence of going concern discussion

D) since auditor belives co is g.c but this is subject to a material uncertainity, as per standards
management is required to disclose this in f/s.

Since management have agreed to disclose, if disclosures are adequate then unmodified opinion will be
given & this uncertainity will be mentioned in material uncertainity w.r.t g.c para in audit report
however inadequate then opinion will be modified. If it is material but not pervasive then a qualified
opinion will be given and If it is material and pervasive then an adverse opinion will be given.
New question:

a) – a major customer has ceased trading. This will result in loss of future sales leading to reduced
revenue, reduced profits and reduced cash ultimately creating g.c problem.
- Sales director has left and is yet to be replaced. There will be no one to sell product leading to
lost reveneues, reduced profits and reduced cash ultimately creating g.c problems
- Cash flow is forecast as negative. This means outflows are higher than inflows which will create
cash flow problems ultimately leading to gc issues
- Some suppliers are threatning legal action. This may result in penalties which will create cash
flow probems ultimately leading to g.c issues
- The bank has asked to repay the loan. This will result in huge cash outflows leading to cash flow
problems ultimately creating g.c issues
- No dividen will be paid lack of dividends will encourage sh to pull back their investments leading
to cash flow problems ultimately creating g.c Issues.

B)
- analyse and discuss cash flow and other forecasts with management
- analyse and discuss entity latest available interim f/s
- Review terms of debentures and loan agreement to see whether they have been breached
- enquire from entity lawyers regarding litigation and claims
-review reports of any regulatory actions
- review board mins, s/h meeting mins for evidence of going concern discussion

C) audit firm ( auditor resp)

Since there are serious concerns on g.c status which means going concern assumption is not
valid, as per standards f/s should be preapared on breakup basis.
Since directors are refusing to amend f/s , an adverse opinion will be given
 Lecture 10

New topic ( written representation )

Possible questions:
1. What is /are written representation ?
2. On what matter auditor should take written representation ?
3. What is the quality/ reliability and appropriateness of w.rep?
4. How to obtain written representation ?
5. Reporting issues of written representation ?

What is the quality / reliability /appropriateness of w.rep?

For evidence to be reliable it must be in written form. Written representations although in written form
are not a reliable source of audit evidence as they have been generated from internal source i.e
management. They are considered a week source of evidence and should be used when no other
evidence is available

Reporting issues of written representation

If auditor has doubts on reliability of written If management refuse to give written

representation representation
If auditor has doubts on reliability of written If management refuse to give written
representation, he should try and gain evidence representation auditor should take following
from other sources & try to resolve the matter if steps :
he concludes that written representation are 1) discuss with management as to why they
reliable then no impact on audit report however are refusing
if auditor concludes that w.rep are not reliable he 2) reevaluate integrity and ethical values of
may take some action, including impact on audit management with respect to other
report. representation
3) try to obtain saae from other sources
4) take action including impact on audit
report. Since it creates an inability to
obtain saae, a qualified opinion is given if
material but not pervasive and disclaimer
of opinion if it is material and pervasive.s
Q#1 what is w.rep?

w.rep are written statements by management to confirm certain matters or to support other audit
evidence. However they do not include f/s, book, records.

Q#2 on what matters auditor will take written representation?

The auditor shall ask management to provide w.rep on following matters (compulsory elements):

1) the management has fulfilled its responsibility for preparation of f/s and f/s are preapared in
accordance with applicable framework
2) that management has provided auditor with all relevant information and all transactions have
been recorded in f/s

other written representations ( not compulsory, auditors wish)

 all instances of non compliance have been reported to auditor
 Whether assets are leased or bought
 Have subsequent events been adjusted or disclosed etc

Q#3 what is quality / appropriatenss / reliability of w.rep?

w.rep= management writing

reliability = external source

weak low level evidence

q#4 how to obtain written representation :

the w.rep are usually obtained in the form of a letter addressed to the auditor

throughout the audit, auditor will determine those items on which w.rep are required and inform
management of those areas on which they will be seeking w.rep.

at the finalization and review stage auditors will provide management with a draft w.rep the auditors
will then ask management to print the letter on their headed paper, review the representation and sign
it.

Q#5 reporting issues of w.rep:

 If auditor has doubts on reliability of w.rep If w.rep not provided
4 steps
w.rep doubt 4 banks try to gain evidence Inability to obtain saae.

Hil industries:

Importance of w.rep (quality, app, reliability)

Steps to refuses to give w.rep

4 steps

Greenfiels:

B (i)

C)

f/s date till date of audit report