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

unmodified Qualified Adverse Unmodifie Qualified Disclaimer

opinion opinion d opinon opinion of opinion

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

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 Material misstatement of facts in other

information information

 Auditor needs to check what is Auditor should take following steps

right and what is wrong :
 [Link] f/s are correct and other [Link] with management
information is wrong this will led to 2. discuss with those charged with
unmodified opinion plus other governance
information para. 3. take an independent legal advice
[Link] 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 Which does not provide evidence

conditons that existed at of conditons that existed at
balance sheet date balance sheet date
- Recievable gone bad - fire
- Inventory obsolete - floods
- Going concern - terrorism
- etc

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 Auditor has passive responsibility, he Is
must ensure all events upto date of not responsible at all. However if
signing of report have been identified auditor becomes aware of facts that
and have been adjusted or disclosed had been known to him at date of audit
by company accordingly report would have caused him to
amend report , he should discuss it
with management and ask them revise
f/[Link] 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

b
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 If management has not adequately

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

breakup basis on breakup 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 [Link] 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 [Link]?
4. How to obtain written representation ?
5. Reporting issues of written representation ?
Q#1 what is [Link]?
[Link] 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 [Link] 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 [Link]?

Sure! Here's a simple summary:

 Quality: Management writing is often based on opinions or experience, not deep

research. It can be useful but not very strong.
 Appropriateness: Good for sharing ideas or examples, but not great for serious decisions
or academic work.
 Reliability: If it comes from a trusted source, it's better—but still considered weak
evidence because it's not backed by strong data or research.

So, it's okay to use management writing for general understanding, but not as solid proof.

[Link]= management writing

reliability = external source
weak low level evidence

q#4 how to obtain written representation :

the [Link] are usually obtained in the form of a letter addressed to the auditor
throughout the audit, auditor will determine those items on which [Link] are
required and inform management of those areas on which they will be seeking
[Link].
at the finalization and review stage auditors will provide management with a draft
[Link] 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 [Link]:

If auditor has doubts on reliability If management refuse to give

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

Hil industries:
Importance of [Link] (quality, app, reliability)
Steps to refuses to give [Link]
4 steps

Greenfiels:
B (i)
C)
f/s date till date of audit report