Auditing – The Case Book Chapter 4: Auditor’s Report & Types of Opinions

CHAPTER 4
Assignment – Lecture 26
QUESTIONS

Q.1 You are the audit partner in a firm of chartered accountants. Some of the audits are in the finalization stage and presently
the following matters are under your consideration:
(a) The management of Sohni Limited has changed its revenue recognition policy. As the audit engagement
partner you are satisfied with the accounting and disclosures related to change in accounting policy. Further,
the impact of the change is significant. (04)
(b) There is a legal dispute between Marvi Limited and one of its customers. In this regard, the legal advisor has
confirmed the stance of the management in a meeting with you. However, he has refused to provide a written
confirmation thereon. (02)
(c) The management of Laila Limited is not willing to make certain disclosures. The management is of the view
that these disclosures will not add any value to the financial statements. Further, the information required to
make these disclosures cannot be compiled before the deadline for completion of the audit. (04)
Required:
Discuss the possible impact on the audit report and specify the procedures (if any) which you would undertake in the
above situations.
(ICAP, CAF 09 Level – Spring 2017)
(ICAP’s Official Question Bank for CAF 09 – Q. # 167)

Q.2 In relation to the audit report on financial statements and the contents thereof (under revised/new ISAs), discuss the
appropriateness or otherwise of the following statements:

(a) The management is only responsible for preparation of financial statements in accordance with the financial reporting
framework and for such internal controls as management determines are necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or error. (03)

(b) Reasonable assurance is a high level of assurance and is a guarantee that if audit is conducted in accordance with ISAs,
it will always detect a material misstatement whenever it exists. (03)

(c) The auditor obtains an understanding of controls relevant to the audit in order to design audit procedures that are
appropriate in the circumstances and also for the purpose of expressing an opinion on the effectiveness of the entity’s
internal control. (03)

(d) The description of the auditor’s responsibilities for the audit of the financial statements should be included within the
body of the auditor’s report. (03)

(e) The audit report can only be signed in the personal name of the auditor. (02)

(f) Key audit matters are determined from the matters communicated with the management of the entity that required
significant auditor’s attention in performing the audit. In making that determination, the auditor shall take into account
the effects on the audit of significant events or transactions that occurred during the current year and prior period
presented. (03)
(ICAP, CAF 09 Level – Autumn 2016)

Page | 1
 Auditing – The Case Book Chapter 4: Auditor’s Report & Types of Opinions

Q.3 As the engagement partner, you have reviewed the working papers of Nadeem Limited (NL) in which the audit team has
highlighted the following matters:
(a) NL provides six months warranty to its customers and has hired an expert to compute the warranty provision. The
management is not willing to provide written representation for the warranty provision because the provision is in
accordance with the expert’s advice. (03)
(b) Certain contingent assets have been disclosed in the draft financial statements in which inflow of economic benefits
is possible but not probable. The management is of the view that International Financial Reporting Standards does
not prohibit making additional disclosures which enhance the users understanding of the financial statements. (03)

Required:
Discuss the possible impact on the audit report.
(ICAP, CAF 09 Level – Autumn 2015)
(ICAP’s Official Question Bank for CAF 09 – Q. # 140 a &b)

Q.4 As the engagement partner, you have reviewed the audit working papers of Apricot Engineering Limited (AEL). The audit
team has highlighted the following matters in the working papers.
(i) The company has issued a bank guarantee to one of its related parties after the balance sheet date. No disclosure
in this regard has been made in the draft financial statements.
(ii) AEL has paid a dividend after many years. Zakat has been appropriately deducted and deposited in the Central
Zakat Fund.
(iii) Subsequent to the year end, a major debtor has declared bankruptcy. The company expects to recover only 20%
of the outstanding amount. The management has refused to make a provision but is ready to disclose the fact by
way of a note.
(iv) With effect from January 1, 2010, AEL has:
 Changed the method of charging depreciation on its fixed assets from the ‘straight line’ to the
‘diminishing balance’; and
 Revised its estimate of useful lives of vehicles from 6 years to 4 years.
Required:
Discuss the impact of each of the above matters on your audit report. (10)
(ICAP, CAF 09 Level – Spring 2011)
(ICAP’s Official Question Bank for CAF 09 – Q. # 157b)

Q.5 An extract from the draft audit report produced by an audit junior is given below:

Auditor’s responsibility
'We conducted our audit in accordance with Auditing Standards. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of all the
estimates and judgements made by the directors in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances, consistently applied and adequately disclosed.

'We planned and performed our audit so as to obtain as much information and explanation as possible given the time
available for the audit. We confirm that the financial statements are free from material misstatement, whether caused by
fraud or other irregularity or error. The directors however are wholly responsible for the accuracy of the financial
statements and no liability for errors can be accepted by the auditor. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the company's annual report.'

Required:
Identify and explain the errors in the above extract. (10)
Note: You are not required to redraft the report.
(ACCA, Fundamentals Level F8 – June 2005)
(ICAP’s Official Question Bank for CAF 09 – Q. # 163b)

Page | 2
 Auditing – The Case Book Chapter 4: Auditor’s Report & Types of Opinions

SUGGESTED SOLUTIONS

A.1 (a)
This matter will be reported in Key audit Matter section. Auditor shall discuss following in KAM section:
o Why the matter was considered most significant in audit.
o How the matter was addressed in audit.
o Reference to related disclosure in F/S (if any)

Auditor shall also communicate the KAM with TCWG. (Student should note why this step is discussed in solution)

(b)
 Verbal confirmation from lawyer is less reliable evidence, and is not a sufficient appropriate audit evidence.
 Auditor should request lawyer to confirm response in writing.
 If written confirmation is not obtained, it will be a scope limitation.
 Auditor shall express Qualified Opinion (if effect is material), or Disclaimer of opinion (if effect is pervasive).
 Auditor shall also discuss the issue with TCWG, before expressing modified opinion. (Student should note why
this step is discussed in solution)

(c)
 If a disclosure is required by IFRS, it must be included in F/S.
 Auditor should request management to include disclosure in F/S, and extend deadline for completion of audit, if
necessary.
 If management does not agree, this will be a misstatement in F/S. Auditor shall:
o express Qualified Opinion (if effect is material), or Adverse Opinion (if effect is pervasive).
o describe the nature of omitted disclosure in “basis for qualified/adverse section”.
 Auditor shall also discuss the issue with TCWG, before expressing modified opinion. (Student should note why
this step is discussed in solution)

Examiners’ Comments:
This question contained three situations (parts) and the candidates were required to discuss the possible impact on the audit
report and specify the procedures which the auditor may be required to take, in each case. The overall performance was very
poor as only 7% of the candidates secured passing marks. A common issue in part (b) and (c) was that many candidates only
mentioned that a modified opinion would be issued but did not specify the exact nature of modification. Further comments on
each part are given below:
(a)The performance was very poor. Only few candidates could identify that change of accounting policy has to be reported as
a key audit matter and therefore missed all the related issues. However, the students generally scored marks by mentioning
that auditor needs to concur with the change.
(b)It was rightly noted by majority of the candidates that refusal to grant written confirmation by lawyer is a scope
limitation in gathering audit evidence and would have a consequential impact on the audit report either being qualified or
disclaimer being issued. However, some students presumed it to be an issue of management representation and went into a
totally different direction.
(c)This was a simple situation where the management was unwilling to make certain disclosures. Generally the candidates
were able to identify that a qualified opinion would be given but most of them failed to explain clearly about giving details of
the nature of information in the basis of opinion paragraph. Further, before making any final decision, the auditor was
supposed to bring the issue to the knowledge of those charged with governance. This aspect was rarely covered.

A.2 (a)This statement incorrect because under ISAs management is also responsible to assess the entity’s ability to continue
as a going concern, and for appropriate accounting or disclosing matters relating to going concern (if any). Further,
management is also responsible to provide auditor with relevant information for the purpose of audit.

(b)This statement is incorrect because reasonable assurance is a high, but not absolute, level of assurance. It is not a
guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement whenever it exists;
and misstatements can arise from fraud or error which could be material.

(c)This statement is partly correct in that auditor obtains understanding of control to assess risk of material misstatement
and to design audit procedures. However, auditor does not express opinion on effectiveness of entity's internal control.

Page | 3
 Auditing – The Case Book Chapter 4: Auditor’s Report & Types of Opinions

(d) This statement is correct but incomplete. Description of auditor's responsibilities may also be included:
 Within an appendix to the auditor’s report, in which case the auditor’s report shall include a reference to the
location of the appendix; or
 on a website of an appropriate authority, where law, regulation or national auditing standards expressly permit
the auditor to do so, in which case the auditor’s report shall include a specific reference to the location of such a
description.

(e) This statement is wrong. The auditor’s signature is either in the name of the audit firm, or the personal name of the
auditor or both, as appropriate.

(f)
These statements are wrong.
 Key audit matters are determined from matters communicated to those charged with governance, and not to
management.
 In determination of key audit matters, auditor takes into account significant events or transactions of current
year only. Prior year events and transactions are not considered.

A.3 (a)
1. Management is still responsible for F/S even if provision is based on expert’s advice.
2. It will be a scope limitation if management does not provide written representation.
3. Auditor shall express qualified opinion on F/S (if effect is material) or disclaimer of opinion (if effect is pervasive).

(b)
1. Management’s point of view is incorrect, because contingent assets are disclosed only if they are probable.
2. This is a misstatement in F/S.
3. Auditor shall express qualified opinion on financial statements (if effect is material) or adverse opinion (if effect is
pervasive). Auditor shall also describe nature of misstatement in Basis for Qualified/Adverse Opinion paragraph.

Examiners’ Comments:
(a)Majority of the students accepted the management’s argument that the provision is as per expert’s advice and stated that
if alternate procedures can be performed then audit report does not need to be modified even if the management refuses to
provide appropriate representation. This was not correct because when any amount in the financial statements is computed
on the basis of assumptions the management must assume responsibility for these assumptions even if the calculation has
been carried out by an expert. Further, many candidates also discussed attributes of the expert which were not required at
all, in this case.
(b)Average performance was witnessed in this part as most of the candidates correctly concluded that contingent assets
cannot be disclosed unless it is probable that these would be realized. However, as regards the impact on audit report, most of
the candidates seemed confused and recommended insertion of emphasis of matter paragraph probably because they were
not sure whether the report may be qualified merely on the grounds of disclosures.

A.4 (i)
1. This is a misstatement in F/S, because bank guarantee is a non-adjusting event which should be disclosed in F/S.
2. Auditor shall express Qualified Opinion (if effect is material) or Adverse Opinion (if effect is pervasive) on financial
statements.

(ii)
Auditor shall state in his report that “Zakat deductible at source under the Zakat and Ushr Ordinance was deducted by the
company and deposited in the Central Zakat Fund”.

(iii)
1. This is a misstatement in F/S because bankruptcy of debtors after year end is an adjusting event. Disclosure is not a
substitute of correct accounting treatment.
2. Auditor shall express Qualified Opinion (if effect is material) or Adverse Opinion (if effect is pervasive) on financial
statements.

Page | 4
 Auditing – The Case Book Chapter 4: Auditor’s Report & Types of Opinions

(iv)
1. Both of these cases are change in accounting estimates.
2. If changes in estimates are reasonable, and correctly recorded and disclosed, there will be no misstatement.
3. Auditor shall express unmodified opinion on financial statements.

Examiners’ Comments:
The performance in this part was very poor as most students failed to analyse the given situations. Without going into the
merit of the case and related guidance available in ISAs, the students kept on mentioning that auditor should qualify or add
an emphasis of a matter paragraph. Several candidates could not specify the reference to be made in the audit report for
deduction and deposit of Zakat.

A.5
1. Auditor is responsible to assess “significant” estimates, and not “all” estimates
2. Audit is planned and performed to obtain all information and explanation which is necessary for the purpose of audit.
Responsibility to obtain evidence is not limited/reduced by time availability.
3. Auditor provides reasonable assurance on financial statements and does not “confirm”, “certify” or “guarantee” about
financial statements.
4. Directors’ liabilities are stated in a separate paragraph; and are not included in auditor’s responsibility paragraph.
5. Auditor cannot limit its liability by stating that it cannot accept responsibility for any error.
6. Auditor evaluates presentation of financial statements; and not presentation of whole annual report.
7. First sentence of the auditor’s responsibility is wrongly given under this heading; it should have been classified under
the basis of opinion section of the report.
8. Heading should be “Auditor’s Responsibilities for the Audit of the Financial Statements” instead of “Auditor’s
Responsibility”.

Page | 5