Audit Report

Question 1
In order to form the audit opinion as required by SA 700, the auditor shall conclude as to whether the auditor has obtained reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. Explain the conclusions that the auditor shall take into account. Also explain the objective of auditor as per SA 700.
[MTP-Aug. 18]
Or
“An auditor is required to make specific evaluations while forming an opinion in an audit report.” State them. [Nov. 18 (5 Marks)]
Answer:
Forming an Opinion on the Financial Statements:
SA 700 “Forming an Opinion & Reporting on Financial Statements” requires that auditor shall form an opinion on whether the Financial statements (F.S.) are prepared in all material respects in accordance with the applicable financial reporting framework (FRF).
To form this opinion, auditor needs to conclude as to whether he has obtained reasonable assurance that FS as a whole are free of material misstatements, whether due to fraud or error. The conclusion shall take into account:
(a) The auditor’s conclusion, in accordance with SA 330, whether sufficient appropriate audit evidence has been obtained;

(b) The auditor’s conclusion, in accordance with SA 450, whether uncorrected misstatements are material, individually or in aggregate; and

(c) The evaluations mentioned below:
1. Whether the financial statements are prepared, in all material respects, in accordance with the requirements of the applicable FRF. This evaluation shall include consideration of the qualitative aspects of the entity’s accounting practices, including indicators of possible bias in management’s judgments. 

2. Whether, in view of the requirements of the applicable FRF:

• The F.S. adequately disclose the significant accounting policies selected and applied;
• The accounting policies selected and applied are consistent with the applicable FRF and are appropriate;
• The accounting estimates made by management are reasonable;
• The information presentedin the F.S. isrelevant,reliable, comparableand understandable;
• The F.S. provide adequate disclosures to enable the intended users to understand the effect of material transactions and events on the information conveyed in the F.S., and
• The terminology used in the F.S., including the title of each F.S., is appropriate.

3. When the F.S. are prepared in accordance with a fair presentation framework, auditor is required to evaluate whether the F.S. achieve fair presentation by considering the following:

• The overall presentation, structure and content of the F.S. and
• Whether the F.S., including the related notes, represent the underlying transactions and events in a manner that achieves fair presentation.
• Whether the F.S. adequately refer to or describe the applicable FRF.

Question 2.
The auditor’s report shall include a section with a heading “Responsibilities of Management for the j Financial Statements.” SA 200 explains the premise, relating to the responsibilities of management ! and, where appropriate, those charged with governance, on which an audit in accordance with SAs is conducted. Explain. [RTP-Nov. 18, MTP-April 19, May 20]
Answer:
Responsibilities of Management for the Financial Statements:
As per SA 700 “Forming an Opinion & Reporting on Financial Statements” the auditor’s report shall include a section with a heading “Responsibilities of Management for the Financial Statements.”

This section of the auditor’s report shall describe management’s responsibility for:
(a) Preparing the F.S. in accordance with the applicable FRF, and for such internal control as management determines is necessary to enable the preparation of F.S. that are free from material misstatement, whether due to fraud or error; and

(b) Assessing the entity’s ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate as well as disclosing, if applicable, matters relating to going concern. The explanation of management’s responsibility for this assessment shall include a description of when the use of the going concern basis of accounting is appropriate.

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Question 3.

When does an auditor issue unqualified opinion and what does it indicate. [May 08 (4 Marks)]
Or
The Auditor is fully satisfied with the audit of an entity in respect of its systems and procedures and wants to issue a report without any hesitation. What type of opinion can be given and give reasoning. [MTP-April 19]
Answer:
Unqualified opinion:
SA 700 “Forming an opinion and Reporting on Financial Statements” requires the auditor to express an unqualified opinion when he concludes that the financial statements give a true and fair view in accordance with the financial reporting framework used for preparation and presentation of the financial statements.

An unqualified opinion indicates the following:

• The financial statements have been prepared using the generally accepted accounting principles and being constantly followed.
• The financial statements comply with relevant statutory requirements and regulations.
• All material matters relevant to proper presentation of the financial information, subject to statutory requirement, if applicable, have been adequately disclosed.

Question 4.
State any six elements of the Auditor’s Report. [Nov. 12 (6 Marks)]
Answer:
Basic Elements of the Auditor’s Report:
As per SA 700 “Forming an Opinion and Reporting on Financial Statements”, the auditor’s report includes the following basic elements:
1. Title: Audit Report should have a title clearly stating that it is a report of an independent auditor.

2. Addressee: Audit Report is normally addressed to those for whom Audit Report is prepared, i.e. shareholders or TCWG.

3. Opinion Section: This section states the auditor’s opinion on true and fair view of financial statements. Opinion Section of the Auditor’s Report shall also cover the following:

• Identify the entity whose FS have been audited.
• State that Financial Statements have been audited.
• Identify title of each statement that comprises F.S.
• Refer to the notes, including the summary of significant accounting policies; and
• Specify date of period covered by each Financial Statement.

4. Basis for Opinion Section: The auditor’s report shall include a section, directly following the Opinion section, with the heading “Basis for Opinion”, that:
(a) States that the audit was conducted in accordance with SA;
(b) Refers to the section of the auditor’s report that describes the auditor’s responsibilities under the SAs;
(c) Includes a statement that the auditor is independent of the entity in accordance with the relevant ethical requirements relating to the audit, and has fulfilled the auditor’s other ethical responsibilities in accordance with these requirements. The statement shall refer to the Code of Ethics issued by ICAI;
(d) States whether the auditor believes that the audit evidence the auditor has obtained is sufficient and appropriate to provide a basis for the auditor’s opinion.

5. Going Concern: Where applicable, the auditor shall report in accordance with SA 570.

6. Key Audit matters: For audits of complete sets of general purpose F.S. of listed entities, the auditor shall communicate key audit matters in the auditor’s report in accordance with SA 701,

7. Other Information: Where applicable auditor shall report in accordance with SA 720.

8. Management’s Responsibility for the Financial Statements: Describe responsibility of Management for preparation of Financial Statements in the manner in which responsibility is described in Terms of Engagement.

9. Auditor’s Responsibility Section: It shall state the auditor’s objectives to obtain reasonable assurance about whether the F.S. as a whole are free from material misstatement, whether due to fraud or error; and to Issue an auditor’s report that includes the auditor’s opinion. This section also enumerates the auditor’s responsibilities as prescribed under different Standards on Auditing.

10. Other Reporting Responsibilities: This Section covers reporting over those additional matters on which auditor is required to report under statutory requirements.

11. Signature of the Auditor: Audit report to be signed in auditor’s personal name. Where firm appointed as auditor, report signed in personal name & in name of audit firm.

12. Date of Auditor’s Report: It should not be earlier than date on which auditor has obtained Sufficient Appropriate Audit Evidence on which to base auditor’s opinion.

13. Place of signature: It is ordinarily the city where audit report is signed.

Question 5.
The auditor’s report shall include a section, directly following the Opinion section, with the heading “Basis for Opinion”. Explain what is included in this “Basts for Opinion” section, [RTP-Nov. 19, May 20, Nov. 20]
Answer:
Basic Elements of the Auditor’s Report:
As per SA 700 “Forming an Opinion and Reporting on Financial Statements”, the auditor’s report includes the following basic elements:
1. Title: Audit Report should have a title clearly stating that it is a report of an independent auditor.

2. Addressee: Audit Report is normally addressed to those for whom Audit Report is prepared, i.e. shareholders or TCWG.

3. Opinion Section: This section states the auditor’s opinion on true and fair view of financial statements. Opinion Section of the Auditor’s Report shall also cover the following:

• Identify the entity whose FS have been audited.
• State that Financial Statements have been audited.
• Identify title of each statement that comprises F.S.
• Refer to the notes, including the summary of significant accounting policies; and
• Specify date of period covered by each Financial Statement.

4. Basis for Opinion Section: The auditor’s report shall include a section, directly following the Opinion section, with the heading “Basis for Opinion”, that:
(a) States that the audit was conducted in accordance with SA;
(b) Refers to the section of the auditor’s report that describes the auditor’s responsibilities under the SAs;
(c) Includes a statement that the auditor is independent of the entity in accordance with the relevant ethical requirements relating to the audit, and has fulfilled the auditor’s other ethical responsibilities in accordance with these requirements. The statement shall refer to the Code of Ethics issued by ICAI;
(d) States whether the auditor believes that the audit evidence the auditor has obtained is sufficient and appropriate to provide a basis for the auditor’s opinion.

5. Going Concern: Where applicable, the auditor shall report in accordance with SA 570.

6. Key Audit matters: For audits of complete sets of general purpose F.S. of listed entities, the auditor shall communicate key audit matters in the auditor’s report in accordance with SA 701,

7. Other Information: Where applicable auditor shall report in accordance with SA 720.

8. Management’s Responsibility for the Financial Statements: Describe responsibility of Management for preparation of Financial Statements in the manner in which responsibility is described in Terms of Engagement.

9. Auditor’s Responsibility Section: It shall state the auditor’s objectives to obtain reasonable assurance about whether the F.S. as a whole are free from material misstatement, whether due to fraud or error; and to Issue an auditor’s report that includes the auditor’s opinion. This section also enumerates the auditor’s responsibilities as prescribed under different Standards on Auditing.

10. Other Reporting Responsibilities: This Section covers reporting over those additional matters on which auditor is required to report under statutory requirements.

11. Signature of the Auditor: Audit report to be signed in auditor’s personal name. Where firm appointed as auditor, report signed in personal name & in name of audit firm.

12. Date of Auditor’s Report: It should not be earlier than date on which auditor has obtained Sufficient Appropriate Audit Evidence on which to base auditor’s opinion.

13. Place of signature: It is ordinarily the city where audit report is signed.

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Question 6.
The first section of the auditor’s report shall include the auditor’s opinion, and shall have the heading “Opinion.’’ The Opinion section of the auditor’s report shall also Identify the entity whose financial statements have been audited. Apart from the above, explain the other relevant points to be included in opinion section. [RTP-May 20]
Answer:
Basic Elements of the Auditor’s Report:
As per SA 700 “Forming an Opinion and Reporting on Financial Statements”, the auditor’s report includes the following basic elements:
1. Title: Audit Report should have a title clearly stating that it is a report of an independent auditor.

2. Addressee: Audit Report is normally addressed to those for whom Audit Report is prepared, i.e. shareholders or TCWG.

3. Opinion Section: This section states the auditor’s opinion on true and fair view of financial statements. Opinion Section of the Auditor’s Report shall also cover the following:

• Identify the entity whose FS have been audited.
• State that Financial Statements have been audited.
• Identify title of each statement that comprises F.S.
• Refer to the notes, including the summary of significant accounting policies; and
• Specify date of period covered by each Financial Statement.

4. Basis for Opinion Section: The auditor’s report shall include a section, directly following the Opinion section, with the heading “Basis for Opinion”, that:
(a) States that the audit was conducted in accordance with SA;
(b) Refers to the section of the auditor’s report that describes the auditor’s responsibilities under the SAs;
(c) Includes a statement that the auditor is independent of the entity in accordance with the relevant ethical requirements relating to the audit, and has fulfilled the auditor’s other ethical responsibilities in accordance with these requirements. The statement shall refer to the Code of Ethics issued by ICAI;
(d) States whether the auditor believes that the audit evidence the auditor has obtained is sufficient and appropriate to provide a basis for the auditor’s opinion.

5. Going Concern: Where applicable, the auditor shall report in accordance with SA 570.

6. Key Audit matters: For audits of complete sets of general purpose F.S. of listed entities, the auditor shall communicate key audit matters in the auditor’s report in accordance with SA 701,

7. Other Information: Where applicable auditor shall report in accordance with SA 720.

8. Management’s Responsibility for the Financial Statements: Describe responsibility of Management for preparation of Financial Statements in the manner in which responsibility is described in Terms of Engagement.

9. Auditor’s Responsibility Section: It shall state the auditor’s objectives to obtain reasonable assurance about whether the F.S. as a whole are free from material misstatement, whether due to fraud or error; and to Issue an auditor’s report that includes the auditor’s opinion. This section also enumerates the auditor’s responsibilities as prescribed under different Standards on Auditing.

10. Other Reporting Responsibilities: This Section covers reporting over those additional matters on which auditor is required to report under statutory requirements.

11. Signature of the Auditor: Audit report to be signed in auditor’s personal name. Where firm appointed as auditor, report signed in personal name & in name of audit firm.

12. Date of Auditor’s Report: It should not be earlier than date on which auditor has obtained Sufficient Appropriate Audit Evidence on which to base auditor’s opinion.

13. Place of signature: It is ordinarily the city where audit report is signed.

Question 7.
Communicating Key Audit Matter is not a substitute for disclosure in the Financial Statements rather Communicating key audit matters in the auditor’s report is in the context of the Auditor having formed an opinion on the financial statements as a whole. Analyse. [RTP-May 18]
Answer:
Scope of SA 701:
This SA deals with the auditor’s responsibility to communicate key audit matters in the auditor’s report.

Communicating key audit matters in the auditor’s report is not:
(a) A substitute for disclosures in the F.S. that the applicable FRF requires management to make, or that are otherwise necessary to achieve fair presentation;
(b) A substitute for the auditor expressinga modified opinion when required by the circumstances of a specific audit engagement in accordance with SA 705;
(c) A substitute for reporting in accordance with SA 570 when a material uncertainty exists relating to events or conditions that may cast significant doubt on an entity’s ability to continue as a going concern; or
(d) A separate opinion on individual matters.

• SA 701 applies to audits of complete sets of general purpose F.S. of listed entities and circumstances when the auditor otherwise decides to communicate key audit matters in the auditor’s report.
• SA 701 also applies when the auditor is required by law or regulation to communicate key audit matters in the auditor’s report.
• SA 705 prohibits the auditor from communicating key audit matters when the auditor disclaims an opinion on the financial statements, unless such reporting is required by law or regulation.

Question 8.
Explain clearly the purpose of communicating key audit matters. [RTP-Nov. 18]
Answer:
Purpose of communicating key audit matters:
As per SA 701 “Communicating Key Audit matters in the Independent Auditor’s Report” Key Audit Matters are those matters that, in the auditor’s professional judgment, were of most significance in the audit of the F.S. of the current period. Key audit matters are selected from matters communicated with TCWG.
Various purposes of communicating Key Audit matters as per SA 701 are:

• To enhance the communicative value of the auditor’s report by providing greater transparency about the audit that was performed.
• To provide additional information to intended users of the financial statements to assist them in understanding those matters that, in the auditor’s professional judgment, were of most significance in the audit of the F.S. of the current period.
• To assist intended users in understanding the entity and areas of significant management judgment in the audited F.S.
• To provide a basis to further engage with management and TCWG about certain matters relating to the entity, the audited F.S. or the audit that was performed

Question 9.
Mr. A was appointed as statutory auditor of X Ltd. While doing audit, Mr. A is required to determine the key audit matters which are required to be mentioned in the audit report. You are required to
advise Mr. A about the considerations which Mr. A shall take into account while determining key audit matters.
Or
How would an auditor determine Key Audit Matters as per SA – 701, “Communicating Key Audit Matters in the Independent Auditor’s Report”? [Nov. 20 (3 Marks)]
Answer:
Considerations to determine Key Audit Matters:
As per SA 701 “Communicating Key Audit matters in the Independent Auditor’s Report” Key Audit Matters are those matters that, in the auditor’s professional judgment, were of most significance in the audit of the F.S. of the current period. Key audit matters are selected from matters communicated with TCWG.

The auditor shall determine, from the matters communicated with TCWG, those matters that required significant auditor attention in performing the audit. In making this determination, the auditor shall consider the following:

(a) Areas of higher assessed RMM, or significant risks identified in accordance with SA 315;
(b) Significant auditor judgments relating to areas in the F.S. that involved significant management judgment, including accounting estimates that have been identified as having high estimation uncertainty.
(c) The effect on the audit of significant events or transactions that occurred during the period.
The auditor shall determine which of the matters so determined above were of most significance in the audit of the F.S. of the current period and therefore are the key audit matters.

Question 10.
State the circumstances in which a matter determined to be a key audit matter is not required to be communicated in the Auditor’s Report.
Answer:
Circumstances in which key audit matters not required to be communicated:
As per SA 701 “Communicating Key Audit matters in the Independent Auditor’s Report” Key Audit Matters are those matters that, in the auditor’s professional judgment, were of most significance in the audit of the F.S. of the current period. Key audit matters are selected from matters communicated with TCWG.

The auditor shall describe each key audit matter in the auditor’s report unless:
(a) Law or regulation precludes public disclosure about the matter; or
(b) In extremely rare circumstances, the auditor determines that the matter should not be communicated in the auditor’s report because the adverse consequences of doing so 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.

Question 11.
What is a qualified auditor report? Under what circumstances a qualified report is issued. [May 07 (8 Marks)]
Answer:
Qualified Opinion:
The auditor shall express a qualified opinion when:
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or

(b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.

SA 705 “Modification to the Opinion in the Independent Auditor’s Report” requires the auditor to add one more para named as “Basis for Qualified Opinion Para” in the audit report immediately before the opinion para stating therein the reasons for the qualified opinion.
The opinion para in case of qualified opinion will be worded as follow:
“Except for the effects of the matter(s) described in the Basis for Qualified Opinion paragraph, the Financial statements gives a true and fair view in all material respects in accordance with the applicable FRF”.

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Question 12.
What is clean audit report. Explain how it is different from qualified report affecting Auditor’s opinion. [Nov. 07 (8 Marks)]
Answer:
Clean Audit Report:
Unqualified opinion:
SA 700 “Forming an opinion and Reporting on Financial Statements” requires the auditor to express an unqualified opinion when he concludes that the financial statements give a true and fair view in accordance with the financial reporting framework used for preparation and presentation of the financial statements.

An unqualified opinion indicates the following:

• The financial statements have been prepared using the generally accepted accounting principles and being constantly followed.
• The financial statements comply with relevant statutory requirements and regulations.
• All material matters relevant to proper presentation of the financial information, subject to statutory requirement, if applicable, have been adequately disclosed.

Qualified Opinion:
The auditor shall express a qualified opinion when:
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or

(b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.

SA 705 “Modification to the Opinion in the Independent Auditor’s Report” requires the auditor to add one more para named as “Basis for Qualified Opinion Para” in the audit report immediately before the opinion para stating therein the reasons for the qualified opinion.
The opinion para in case of qualified opinion will be worded as follow:
“Except for the effects of the matter(s) described in the Basis for Qualified Opinion paragraph, the Financial statements gives a true and fair view in all material respects in accordance with the applicable FRF”.

Question 13.
Write short note on: Disclaimer of opinion. [Nov. 08 (5 Marks)]
Or
State briefly the circumstances when an auditor issues a disclaimer of opinion. [Nov. 10 (4 Marks)]
Answer:
Disclaimer of Opinion:
SA 705 “Modification to the Opinion in the Independent Auditor’s Report” requires the auditor to disclaim an opinion

• when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and
• the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.

If auditor disclaims the opinion auditor is required to add a para in the audit report “Basis for Disclaimer of Opinion Para” describing therein the auditor’s inability to collect the sufficient appropriate audit evidence.

Auditor is also required to amend the description of auditor’s responsibility para as “Our responsibility is to express an opinion on the financial statements based on conducting the audit in accordance with Standards on Auditing issued by the ICAI. Because of the matter(s) described in the Basis for Disclaimer of Opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion”.

Question 14.
Differentiate between ‘Qualified Report’ and ‘Adverse Report’. [May 10 (5 Marks)]
Answer:
Distinction between Qualified Report and Adverse Report:

Question 15.
State the circumstances which could lead to any of the following in an Auditors Report:
(i) A modification of opinion
(ii) Disclaimer of opinion
(iii) Adverse opinion
(iv) Qualified opinion [May 13 (8 Marks)]
Answer:
Circumstances in which a modified opinion may be issued:
As per SA 705 “Modifications to the Opinion in the Independent Auditor’s Report” a modified opinion may be expressed in the following circumstances:
(a) The auditor concludes that, based on the audit evidence obtained, the F.S. as a whole are not free from material misstatement, may be due to following reasons:

• Inappropriate method of selection of Accounting Policies;
• Accounting policies are not consistent with applicable FRF;
• Disclosures as required by FRF are not given.

(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement, may be due to following reasons:

• Limitations imposed by management
• Circumstances beyond entity control (For Ex.: Accounting records destroyed by fire)
• Circumstances related to Nature and Timing of auditor’s work.

Types of Modified Opinion:
(a) Qualified opinion: It is issued under following circumstances:

• Financial statements are materially misstated which in the auditor’s judgments are not pervasive.
• Auditor is unable to obtain Sufficient and appropriate audit evidence which in the auditor judgment are not pervasive

(b) Adverse Opinion: It is issued when financial statements are materially misstated which in the auditor’s judgments is having pervasive effect.

(c) Disclaimer of Opinion: It is issued when auditor is unable to obtain Sufficient and appropriate audit evidence which in the auditor judgment are having pervasive effect.

Question 16.
Discuss the following: The Auditor’s Report is considered to be modified under certain circumstances. [May 15 (5 Marks)]
Answer:
Circumstances in which a modified opinion may be issued:
As per SA 705 “Modifications to the Opinion in the Independent Auditor’s Report” a modified opinion may be expressed in the following circumstances:
(a) The auditor concludes that, based on the audit evidence obtained, the F.S. as a whole are not free from material misstatement, may be due to following reasons:
4 Inappropriate method of selection of Accounting Policies;

• Accounting policies are not consistent with applicable FRF;
• Disclosures as required by FRF are not given.

(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude thatthe financial statements as a whole are free from material misstatement, may be due to following reasons:

• Limitations imposed by management
• Circumstances beyond entity control (For Ex.: Accounting records destroyed by fire)
• Circumstances related to Nature and Timing of auditor’s work.

Types of Modified Opinion:
(a) Qualified opinion: It is issued under following circumstances:

• Financial statements are materially misstated which in the auditor’s judgments are not pervasive.
• Auditor is unable to obtain Sufficient and appropriate audit evidence which in the auditor judgment are not pervasive

(b) Adverse Opinion: It is issued when financial statements are materially misstated which in the auditor’s judgments is having pervasive effect.

(c) Disclaimer of Opinion: Itis issued when auditor is unable to obtain Sufficient and appropriate audit evidence which in the auditor judgment are having pervasive effect.

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Question 17.
Write short note on: Qualified Opinion. [Nov. 15 (4 Marks)]
Answer:
Qualified Opinion:
The auditor shall express a qualified opinion when:
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or

(b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.

SA 705 “Modification to the Opinion in the Independent Auditor’s Report” requires the auditor to add one more para named as “Basis for Qualified Opinion Para” in the audit report immediately before the opinion para stating therein the reasons for the qualified opinion.
The opinion para in case of qualified opinion will be worded as follow:
“Except for the effects of the matter(s) described in the Basis for Qualified Opinion paragraph, the Financial statements gives a true and fair view in all material respects in accordance with the applicable FRF”.

Question 18.
What is Emphasis of matter Paragraph? State the circumstances when EOM para can be included in Auditor’s report
Answer:
Emphasis of Matter Paragraph:
SA 706 “Emphasis of matter Paragraph and Other Paragraphs in the Independent Auditor’s Report” defines Emphasis of Matter paragraph as Para included in Auditor’s Report that refers to a matter appropriately presented/ disclosed in financial statement that in the auditor’s judgment is of such importance that it is fundamental to users’ understanding of financial statements.

EOM paragraph is not a substitute for need for expression of qualified opinion, adverse opinion or Disclaimer of opinion or the disclosures to be made by management in Financial statements as required by applicable FRF.

Circumstances when EOM Para can be included in Auditor’s Report:
An uncertainty relating to the future outcome of an exceptional litigation or regulatory action.
Early application (where permitted) of a new accounting standard that has a pervasive effect on the financial statements in advance of its effective date.
A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position.

Question 19.
What is Modified Reports? Discuss disclosure pattern when the auditor includes an Emphasis of Matter Paragraph in the Auditor’s Report. (May 14 (5 Marks)]
Answer:
Modified Reports:
The auditor shall express a qualified opinion when:
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or

(b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.

SA 705 “Modification to the Opinion in the Independent Auditor’s Report” requires the auditor to add one more para named as “Basis for Qualified Opinion Para” in the audit report immediately before the opinion para stating therein the reasons for the qualified opinion.
The opinion para in case of qualified opinion will be worded as follow:
“Except for the effects of the matter(s) described in the Basis for Qualified Opinion paragraph, the Financial statements gives a true and fair view in all material respects in accordance with the applicable FRF”.

Disclosure pattern of EOM paragraph:
As per SA 706 “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report”, when the auditor includes an EOM paragraph in the auditor’s report, the auditor shall:
(a) Include the paragraph within a separate section of the auditor’s report with an appropriate heading that includes the term “Emphasis of Matter”;

(b) Include in the paragraph a clear reference to the matter being emphasized and to where relevant disclosures that fully describe the matter can be found in the financial statements. The paragraph shall refer only to information presented or disclosed in the financial statements; and

(c) Indicate that the auditor’s opinion is not modified in respect of the matter emphasized.

Question 20.
What is an Emphasis of Matter paragraph, when it is used and manner of its use in an audit report? [May 17 (4 Marks)]
Or
Define emphasis of matter paragraph and how it should be disclosed in the independent auditor’s report? [May 18 (5 Marks)]
Or
Define Emphasis of Matter paragraph. When the auditor shall include an Emphasis of Matter paragraph in the auditor’s report? Also explain how the auditor would include an Emphasis of Matter in the auditor’s report? [RTP-May 19]
Answer:
Emphasis of Matter Paragraph:
SA 706 “Emphasis of matter Paragraph and Other Paragraphs in the Independent Auditor’s Report” defines Emphasis of Matter paragraph as Para included in Auditor’s Report that refers to a matter appropriately presented/ disclosed in financial statement that in the auditor’s judgment is of such importance that it is fundamental to users’ understanding of financial statements.

EOM paragraph is not a substitute for need for expression of qualified opinion, adverse opinion or Disclaimer of opinion or the disclosures to be made by management in Financial statements as required by applicable FRF.

Circumstances when EOM Para can be included in Auditor’s Report:
An uncertainty relating to the future outcome of an exceptional litigation or regulatory action.
Early application (where permitted) of a new accounting standard that has a pervasive effect on the financial statements in advance of its effective date.
A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position.

Disclosure ofEmphasis ofMatter Paragraph in the Auditor’s report:
Modified Reports:
The auditor shall express a qualified opinion when:
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or

(b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.

SA 705 “Modification to the Opinion in the Independent Auditor’s Report” requires the auditor to add one more para named as “Basis for Qualified Opinion Para” in the audit report immediately before the opinion para stating therein the reasons for the qualified opinion.
The opinion para in case of qualified opinion will be worded as follow:
“Except for the effects of the matter(s) described in the Basis for Qualified Opinion paragraph, the Financial statements gives a true and fair view in all material respects in accordance with the applicable FRF”.

Disclosure pattern of EOM paragraph:
As per SA 706 “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report”, when the auditor includes an EOM paragraph in the auditor’s report, the auditor shall:
(a) Include the paragraph within a separate section of the auditor’s report with an appropriate heading that includes the term “Emphasis of Matter”;

(b) Include in the paragraph a clear reference to the matter being emphasized and to where relevant disclosures that fully describe the matter can be found in the financial statements. The paragraph shall refer only to information presented or disclosed in the financial statements; and

(c) Indicate that the auditor’s opinion is not modified in respect of the matter emphasized.

Circumstances when EOM Para can be included in Auditor’s Report:
Emphasis of Matter Paragraph:
SA 706 “Emphasis of matter Paragraph and Other Paragraphs in the Independent Auditor’s Report” defines Emphasis of Matter paragraph as Para included in Auditor’s Report that refers to a matter appropriately presented/ disclosed in financial statement that in the auditor’s judgment is of such importance that it is fundamental to users’ understanding of financial statements.

EOM paragraph is not a substitute for need for expression of qualified opinion, adverse opinion or Disclaimer of opinion or the disclosures to be made by management in Financial statements as required by applicable FRF.

Circumstances when EOM Para can be included in Auditor’s Report:
An uncertainty relating to the future outcome of an exceptional litigation or regulatory action.
Early application (where permitted) of a new accounting standard that has a pervasive effect on the financial statements in advance of its effective date.
A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position.

Question 21.
State clearly the objective of the Auditor as per SA 706. Also define emphasis of matter paragraph and other matter paragraph. [MTP-Oct. 20]
Answer:
Objectives of the Auditor as per SA 706:
The objective of the auditor, having formed an opinion on the financial statements, is to draw users’ attention, when in the auditor’s judgment it is necessary to do so, by way of clear additional communication in the auditor’s report, to:
(a) A matter, although appropriately presented or disclosed in the financial statements, that is of such importance that it is fundamental to users’ understanding of the financial statements; or

(b) As appropriate, any other matter that is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.

Definition of EOM and OM Para:
SA 706 defines the emphasis of matter paragraph as a Para included in Auditor’s Report that refers to a matter appropriately presented/disclosed in financial statement that in the auditor’s judgment is of such importance that it is fundamental to users’ understanding of financial statements.

SA 706 defines the Other Matter paragraph as a paragraph included in the auditor’s report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.

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Question 22.
The nature of the comparative information that is presented in an entity’s financial statements depends on the requirements of the applicable financial reporting framework. There are two different broad approaches to the auditor’s reporting responsibilities in respect of such comparative information: corresponding figures and comparative financial statements. Explain clearly stating the essential audit reporting differences between the approaches. Also define comparative information and audit procedures regarding comparative information. [RTP-May 19]
Answer:
Meaning of Comparative Information:
SA 710 “Comparative Information – Corresponding Figures and Comparative Financial Statements” defines the term comparative information as the amounts and disclosures included in the financial statements in respect of one or more prior periods in accordance with the applicable FRF.

Comparative information where amounts and other disclosures for the prior period, are included as an integral part of current period financial statements and are intended to be read only in relation to the amounts and other disclosures relating to the current period is known as Corresponding Figures.

Comparative information where amounts and other disclosures for the prior period, are included for comparison with the financial statements of the current period but, if audited, are referred to in the auditor’s opinion is known as Comparative financial statements.

Essential reporting difference:
The essential audit reporting differences between the approaches are:
(a) For corresponding figures, the auditor’s opinion on the financial statements refers to the current period only; whereas
(b) For comparative financial statements, the auditor’s opinion refers to each period for which financial statements are presented.
Audit procedures regarding comparative information:

Auditor’s responsibilities w.r.t. Comparative Information:
SA 710 “Comparative Information – Corresponding Figure and Comparative Financial Information” deals with the auditor’s responsibilities regarding comparative information in an audit of financial statements.

The term Corresponding Figures refers to Comparative information where amounts and other disclosures for the prior period, are included as an integral part of current period F.S., and are intended to be read only in relation to the amounts and other disclosures relating to the current period.

When corresponding figures are presented, the auditor’s opinion shall not refer to the corresponding figures because the auditor’s opinion is on the current period financial statements as a whole including the corresponding figures.

When the auditor’s report on the prior period, as previously issued, included a modified opinion and the matter which gave rise to the modified opinion is resolved and properly accounted for or disclosed in the financial statements in accordance with the applicable FRF, the auditor’s opinion on the current period need not refer to the previous modification.

If the auditor’s report on the prior period, as previously issued, included a modified opinion and the matter which gave rise to the modification is unresolved, the auditor shall modify the auditor’s opinion on the current period’s financial statements.
TAXMAMM’

In the Basis for Modification paragraph in the auditor’s report, the auditor shall either:
(i) Refer to both the current period’s figures and the corresponding figures in the description of the matter giving rise to the modification when the effects or possible effects of the matter on the current period’s figures are material; or

(ii) In other cases, explain that the audit opinion has been modified because of the effects or possible effects of the unresolved matter on the comparability of the current period’s figures and the corresponding figures.

Question 23.
What are the auditor’s responsibilities in respect of corresponding figures.
Answer:
Auditor’s Procedures in respect of examination of corresponding figures:
1. SA 710 “Comparative Information – Corresponding Figure and Comparative Financial Information” deals with the auditor’s responsibilities regarding comparative information in an audit of financial statements.

2. The term Corresponding Figures refers to Comparative information where amounts and other disclosures for the prior period, are included as an integral part of current period F.S., and are intended to be read only in relation to the amounts and other disclosures relating to the current period.

3. To examine the corresponding figures, auditor is required to perform the following procedures:
(a) Determine whether F.S. include Comparative information required by FRF, & Whether such information is classified appropriately.

(b) Evaluate the following:

• Whether the comparative information agrees with the amounts and other disclosures presented in the prior period; and
• Whether the accounting policies reflected in the comparative information are consistent with those applied in the current period.
• Whether, changes in accounting policies, if any, have been properly accounted for and adequately presented and disclosed.

(c) In case, auditor has doubt over existence of Possible Material Misstatement, then auditor is required to perform additional audit procedures to obtain sufficient appropriate audit evidence to determine existence of material misstatement.

(d) Obtain Written Representation from management to re-affirm that the Written Representation it previously made with respect to the prior period remain appropriate.

Question 24.
The extent of audit procedures performed on corresponding figures is less compared to audit of current period figure’s reporting. Justify the statement with regard to auditor’s duties for reporting of comparatives under SA 710. [May 10 (5 Marks)]
Answer:
Auditor’s responsibilities w.r.t. Comparative Information:
SA 710 “Comparative Information – Corresponding Figure and Comparative Financial Information” deals with the auditor’s responsibilities regarding comparative information in an audit of financial statements.

The term Corresponding Figures refers to Comparative information where amounts and other disclosures for the prior period, are included as an integral part of current period F.S., and are intended to be read only in relation to the amounts and other disclosures relating to the current period.

When corresponding figures are presented, the auditor’s opinion shall not refer to the corresponding figures because the auditor’s opinion is on the current period financial statements as a whole including the corresponding figures.

When the auditor’s report on the prior period, as previously issued, included a modified opinion and the matter which gave rise to the modified opinion is resolved and properly accounted for or disclosed in the financial statements in accordance with the applicable FRF, the auditor’s opinion on the current period need not refer to the previous modification.

If the auditor’s report on the prior period, as previously issued, included a modified opinion and the matter which gave rise to the modification is unresolved, the auditor shall modify the auditor’s opinion on the current period’s financial statements.
TAXMAMM’

In the Basis for Modification paragraph in the auditor’s report, the auditor shall either:
(i) Refer to both the current period’s figures and the corresponding figures in the description of the matter giving rise to the modification when the effects or possible effects of the matter on the current period’s figures are material; or

(ii) In other cases, explain that the audit opinion has been modified because of the effects or possible effects of the unresolved matter on the comparability of the current period’s figures and the corresponding figures.

Question 25.
When corresponding figures are presented, the auditor’s opinion shall not refer to the corresponding figures except in some circumstances. Explain those circumstances. [MTP-Aug. 18]
Or
When corresponding figures are presented, the auditors’ opinion shall not refer to the corresponding figures. Discuss the exceptions of the above statement when the prior period financial statements are audited. [Nov. 19 (4 Marks)]
Answer:
Audit reporting on Corresponding Figures:
When corresponding figures are presented, the auditor’s opinion shall not refer to the corresponding
figures except in the following circumstances.
1. If the auditor’s report on the prior period, as previously issued, included a qualified opinion, a disclaimer of opinion, or an adverse opinion and the matter which gave rise to the modification is unresolved, the auditor shall modify the auditor’s opinion on the current period’s financial statements. In the Basis for Modification paragraph in the auditor’s report, the auditor shall either:

(a) Refer to both the current period’s figures and the corresponding figures in the description of the matter giving rise to the modification when the effects or possible effects of the matter on the current period’s figures are material; or

(b) In other cases, explain that the audit opinion has been modified because of the effects or possible effects of the unresolved matter on the comparability of the current period’s figures and the corresponding figures.

2. If the auditor obtains audit evidence that a material misstatement exists in the prior period financial statements on which an unmodified opinion has been previously issued, the auditor shall verily whether the misstatement has been dealt with as required under the applicable financial reporting framework and, if that is not the case, the auditor shall express a qualified opinion or an adverse opinion in the auditor’s report on the current period financial statements, modified.

3. Prior Period Financial Statements Not Audited: If the prior period financial statements were not audited, the auditor shall state in an Other Matter paragraph in the auditor’s report that the corresponding figures are unaudited. Such a statement does not, however, relieve the auditor of the requirement to obtain sufficient appropriate audit evidence that the opening balances.

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Objective Type Questions (Correct/Incorrect)

Question 1.
SA 700 deals with modification to the opinion in the independent Auditor’s Report.
Answer:
Statement is incorrect.

• SA 700 “Forming an opinion and Reporting on Financial Statements” does not deals with modifications to the opinion, it deals with forming an opinion and reporting on financial statements.
• Modifications to the opinion have been dealt by SA 705.

Question 2.
An adverse report is one where an auditor gives an opinion subject to certain reservation. [May 07 (2 Marks)]
Answer:
Statement is incorrect.

• SA 705 “Modifications to the opinion in the Independent Auditor’s Report” requires the auditor to express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.
• If opinion is subject to certain reservations, auditor is required to issue qualified report.

Question 3.
Where the accounts of the company do not present a “true and fair” view, the auditor should express disclaimeil^f opinion. A [Nov. 07 (2 Marks)]
Answer:
Statement is incorrect.
SA 70 5 “Modifications to the opinion in the Independent Auditor’s Report” requires the auditor to express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.

Disclaim of opinion is issued when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.

Question 4.
AAS 25 (SA 710) on ‘comparatives’ is applicable to corresponding previous year figures and not to comparative financial statement. [June 09 (2 Marks)]
Answer:
Statement is Incorrect as SA 710 “Comparative Information – Corresponding Figures and Comparative Financial statements” the comparative information may be in the either of two forms:

1. Corresponding Figures or
2. Comparative Financial Statements.

Question 5.
Disclaimer of opinion is issued when an auditor confronts a different stand by management in respect of a material issue which auditor does not approve of. [June 09 (2 Marks)]
Answer:
Statement is incorrect.

• If the auditor confronts a different stand with the management in respect of a material issue, he should issue a qualified report or express an adverse opinion.
• Disclaimer of opinion is issued when the auditor is not able to frame an opinion due to non availability of sufficient appropriate audit evidences.

Question 6.
The Auditor disagreed with the management with regard to the acceptability of the Accounting Policies and the inadequacy of disclosures in the financial statements and issued a disclaimer. [Nov. 09 (2 Marks)]
Answer:
Statement is incorrect.

• The auditor is wrong in issuing a disclaimer.
• If the auditor disagrees with the management in the matters relating to the acceptability of Accounting Policies selected and inadequacy of the disclosures in the financial statements, he should issue a qualified report or express an adverse opinion.

Question 7.
Emphasis of Matter paragraph in the Auditor’s Report is a substitute of Disclaimer of Opinion. [Nov. 14 (2 Marks)]
Answer:
Statement is incorrect.

• As per SA 706 “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report”, the inclusion of an Emphasis of Matter paragraph in the auditor’s report does not affect the auditor’s opinion.
• Disclaimer of opinion is issued when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements could be both material and pervasive.

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Question 8.
The auditor shall not modify the opinion in the auditor’s report. [May 15 (2 Marks)]
Answer:
Statement is incorrect.
As per SA 705 “Modifications to the Opinion in the Independent Auditor’s Report” a modified opinion is required when the auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement or the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.

Question 9.
An auditor issues unqualified opinion when he concludes that the financial statements give true and fair view.
Answer:
Statement is correct.
An unqualified opinion should be expressed when the auditor concludes that the financial statements give a true and fair view in accordance with the financial reporting framework used for the preparation and presentation of the financial statements.

It indicates, implicitly, that any changes in the accounting principles or in the method of their application, and the effects thereof, have been properly determined and disclosed in the financial statements.

Question 10.
If Financial statements are misstated, and in the auditor’s judgment such misstatement is material and pervasive, he should issue a stated, qualified opinion. [May 17 (2 Marks), MTP-Oct. 19]
Answer:
Statement is incorrect.

• As per SA 705 “Modification to the Opinion in the Independent Auditor’s Report” if financial statements are misstated, and in the auditor’s judgment such misstatement is material and pervasive, he should issue an adverse opinion.
• Qualified opinion is issued if financial statements are misstated, and in the auditor’s judgment such misstatement is material, but not pervasive.

Question 11.
The auditor shall express an adverse opinion when:
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive. [MTP-March 18, Aug. 18]
Answer:
Statement is incorrect.
The auditor shall express a qualified opinion when:
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or

(b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive

Question 12.
Other matter paragraph is paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users understanding of the financial statements. [MTP-March 18, Aug. 18, Oct. 18, March 19]
Answer:
Statement is incorrect: Emphasis of Matter paragraph is a paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements.

Question 13.
The statutory auditor of ABC Ltd. is of the opinion that communicating key audit matters in the auditor’s report constitutes a substitute for disclosure in the financial statements. [May 18 (2 Marks), MTP-April 19]
Answer:
Statement is incorrect.
As per SA 701 “Communicating Key Audit Matters in the Independent Auditor’s Report” communicating key audit matters in the auditor’s report is not a substitute for disclosures in the F.S. that the applicable FRF requires management to make, or that are otherwise necessary to achieve fair presentation.

Question 14.
The auditor shall express a qualified opinion when:
(i) The auditor concludes that misstatements are material but not pervasive to the financial statements; or
(ii) The auditor is unable to obtain sufficient appropriate audit evidence but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive. [MTP-Oct. 18, March 19]
Answer:
Statement is correct.
The auditor shall express a qualified opinion when:
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive

Question 15.
An auditor should issue disclaimer of opinion when there is difference of opinion between him and the management on a particular point. [Nov. 18 (2 Marks)]
Answer:
Statement is incorrect.

• If the auditor confronts a different stand with the management in respect of a material issue, he should issue a qualified report or express an adverse opinion.
• Disclaimer of opinion is issued when the auditor is not able to frame an opinion due to non-availability of sufficient appropriate audit evidences.    

Question 16.
An Audit report is an opinion drawn on the entity’s financial statements to make sure that the records are true and correct representation of the transactions they claim to represent. [RTP-May 20]
Answer:
Statement is incorrect.

• The purpose of an audit is to enhance the degree of confidence of intended users of the financial statements. The aforesaid purpose is achieved by the expression of an independent reporting by the auditor as to whether the financial statements exhibit a true and fair view of the affairs of the entity.
• Thus, an Audit report is an opinion drawn on the entity’s financial statements to make sure that the records are true and fair representation of the transactions they claim to represent.