Ch # 14.

Audit Finalisation and Reporting Page 364

ANSWERS
ISA - 560

Answer #1 Q.3 Spring 2010

When management revises the F/S, the auditor should undertake the following audit procedures.
a) Carry out the audit procedures necessary in the circumstances
b) Audit procedures should be designed to obtain sufficient appropriate audit evidence that all events up to date of
auditor’s report that may require adjustment of, or disclosure in, F/S have been identified.

c) Review the steps taken by management to ensure that anyone in receipt of the previously issued F/S together
with the auditors’ report thereon is informed of the situation
d) Issue a new report on the revised F/S. The new auditors’ report should include an emphasis of a matter paragraph
referring to a note to the F/S that more extensively discusses the reason for the revision of the previously issued
F/S and to the earlier report issued by the auditor.
e) The new audit report should be dated not earlier than the date of approval of the revised F/S.
f) If the auditor is unable to obtain sufficient, appropriate audit evidence or if he is not satisfied with the steps taken
by the management, he shall seek a legal opinion.

Answer #2 Q.3 Autumn 2011

The auditor is responsible to consider the impact on the F/S, of all events that take place before the signing of the
audit report.
The loss due to fire is a non-adjusting event as it is indicative of conditions that arose after the reporting period.
Therefore in the above situation auditor will need to carry out following procedures:
a) Assess the financial impact of the damage as may have been determined by the management by reviewing the
accounting documents, board minutes, surveyor’s report etc.
b) If the event needs to be disclosed in the F/S, because of its materiality, advise the management to make
appropriate disclosure.
c) If appropriate disclosure is not made or disclosure is inappropriate, consider modification of the audit report.

Answer #3 Q.6 Autumn 2012

The following procedures will help the auditor in identifying ‘subsequent events’ that require either adjustment or
disclosure in the F/S:
(i) Review existing procedures (if any) laid down by the management to identify these events.
(ii) Study minutes of the meetings of the Members, Board of directors and other important executive committees (if
any) held after the balance sheet date and enquire about the matters which may be relevant in this regard.
(iii) Discuss with key officials on matters such as company’s policy on marketing of new products, price structure,
major sales order booked or cancellation of sales orders and loss of major customers, if any, new borrowings,
capital commitments, fresh guarantees, outcome of pending law suits and any change in accounting policies etc.
(iv) Ascertain the status of litigations, claims etc. against the company from its legal advisors.
(v) Inquire, or extend previous oral or written inquiries, of entity’s legal counsel concerning litigation and claims
(vi) Read the entity’s latest available budgets, cash flow forecasts and other related management reports for periods
after the date of the F/S.
(vii) Obtain written representation from the management that all relevant events have been appropriately accounted
for/dealt with.
(viii) Obtain an assurance from management about the :
▪ Current status of items that were accounted for on basis of estimates or inconclusive data.
▪ Any events occurred or likely to occur which will require change in the existing accounting policies.
▪ Any events which may cast doubts about the validity of entities ‘going concern’ assumption. For this purpose,
the auditor should remain alert for the circumstances which may cast significant doubt on the company’s
ability to continue as a going concern.
Ch # 14. Audit Finalisation and Reporting Page 365

Answer #4 Q.9 Spring 2013

Decision given by court confirms the existence of debtor which is material, therefore audit report issued on the basis
of provision against debtor does not hold good and therefore auditor needs to amend the report.

In view of the above, the auditor needs to take the following steps:
▪ Discuss the matter with management and, where appropriate, TCWG.
▪ Inquire how management intends to address the matter in the F/S.
▪ If management amends the F/S, the auditor shall:
- Carryout audit procedures (as may be necessary under circumstances) on the amendment.
- Review the steps taken by management to ensure that anyone in receipt of the previously issued F/S together
with the auditor’s report thereon is informed of the situation.
- Extend the audit procedures on subsequent events to the date of the newauditor’s report and date the new
auditor’s report no earlier than the date of approval of the amended F/S; and .
- Provide a new auditor’s report on the amended F/S.
▪ Provide a new or amended auditor’s report that includes a statement in an emphasis of matter paragraph or other
matter paragraph that conveys that the auditor’s procedures on subsequent events are restricted solely to the
amendment of the F/S as described in the relevant note to the F/S; and
- The emphasis of matter paragraph or other matter paragraph included in new or amended auditor’s report
shall refer to a note to the F/S that more extensively discusses the reason for the amendment of the previously
issued F/S and to the earlier report provided.
▪ If the management does not take the necessary steps to ensure that anyone in receipt of the previously issued F/S
is informed of the situation, the auditor shall notify management and where appropriate, TCWG, that the auditor
will seek to prevent reliance on the auditor’s report . If despite such notification, management or TCWG do not
take necessary steps, the auditor shall take appropriate action to seek to prevent reliance on the auditor’s report.

Answer #5 Q.4 Autumn 2013

(a) The auditor shall perform the audit procedures designed to obtain sufficient appropriate audit evidence that all
events occurring between the date of the F/S and the date of the auditor’s report that require adjustment or disclosure
in the F/S have been identified*.

However, the auditor is not expected to perform additional audit procedures on matters to which previously applied
audit procedures have provided satisfactory conclusions.

(b) The following procedures will help the auditor in identifying ‘subsequent events’ that require either adjustment
or disclosure in the F/S:

(i) Review existing procedures (if any) laid down by the management to identify these events.
(ii) Study minutes of the meetings of Members, Board of the directors and other important executive committees (if
any) held after the balance sheet date and enquire about the matters which may be relevant in this regard.
(iii) Discuss with key officials on matters such as company’s policy on marketing of new products, price structure,
major sales orders booked or cancellation of sales orders and loss of major customers, if any, new borrowings,
capital commitments, fresh guarantees, outcome of pending law suits and any change in accounting policies etc.
(iv) Ascertain the status of litigations, claims etc. against the company from its legal advisors.
(v) Read the entity’s latest available budgets, cash flow forecasts and other related management reports for periods
after the date of the F/S

Answer #6 Q.10h Autumn 2014

Auditor’s responsibility with respect to events between end of reporting period and date of the auditor’s
report:
The auditor is required to obtain sufficient appropriate evidence that all subsequent events that require adjustment
or disclosure in the F/S:
▪ have been identified, and
▪ are suitably reported in the F/S.
Ch # 14. Audit Finalisation and Reporting Page 366

Examiner Comments:
Many students seemed confused and discussed auditors responsibility for events subsequent to
publishing of financial statement or after signing of the report instead of the responsibility for the
subsequent events after the period end but before the date of auditors report.

Many students mentioned that auditor is responsible to ensure that all subsequent events have been duly
incorporated in the financial statements whereas such responsibility lies with the management. The
auditor’s responsibility is only to obtain audit evidence to support the above view.

Answer #7 Q.4 Autumn 2015

The imposition of restriction by foreign country is an adjusting event as the inventory prepared for the order can not
be supplied to any other customer, without considerable expense of Rs. 105 million. The revised net realizable value
of the inventory would therefore be approximately Rs. 395 million (500-105), as against the cost of Rs. 416.67 million
(500÷1.2), resulting in an adjustment of Rs. 21.67 million which is approximately 6.19% of the profit before tax.
As an auditor we have no obligation to perform any audit procedures after the date of the audit report. However, in
view of the fact that the above situation has come to our knowledge, we are required to discuss the matter with
management and inquire how it intends to address the matter in the F/S.
If the F/S are amended, the auditor is required to:
▪ carry out the necessary audit procedures on the amendment.
▪ extend his review of subsequent events up to the date of the new audit report.
If management do not amend the F/S for the event identified, then the auditor should take appropriate action to
prevent reliance on the audit report after taking legal advice.

Examiner Comments:
This question was based on a situation which had arisen after the issuance of the audit report but before
the issuance of financial statements. The key aspects of the students performance are discussed below:
▪ Many students failed to clearly identify that it was an adjusting event.
▪ Many students reached the conclusion that the auditor should take steps to avoid reliance on the
audit report without discussing the intermediary steps such as discussing with client and trying to
reach an agreement regarding amendment in financial statements.
▪ Many students who identified it as an adjusting event described the need for disclosure only and did
not recommend any other amendment.
▪ It was clearly written in the question that audit report has been issued. Still, many candidates
mentioned the steps that were required in case the audit report had not been issued.
▪ Very few students specified the procedures in case the client agrees to revise the financial statements
appropriately.
▪ Many students answered the question in different parts and termed some of the information as
adjusting and some of it as non-adjusting. In fact, all the information pertained to a single event and
should have been dealt with accordingly.

Marking Scheme:
▪ Identification of subsequent event 1.0
▪ Consideration of materiality 1.0
▪ Auditors’ responsibility with respect to subsequent events 2.0
▪ Procedures to be performed by the auditor 3.0

Answer #8 Q.2(b) Spring 2017

Express Limited
The auditor has no obligation to perform any audit procedures regarding the F/S after the date of the auditor’s report.
However, the matter has come to the knowledge of the auditor and bankruptcy of customer is indicative of condition
that existed at balance sheet date as no recovery has been made from the debtor after the balance sheet date. Had the
bankruptcy been known to the auditor at the date of the auditor's report, it may have caused the auditor to amend the
audit report, therefore, he shall:
Ch # 14. Audit Finalisation and Reporting Page 367

▪ discuss the matter with management and, where appropriate, those charged with governance.
▪ determine whether the F/S need amendment and, if so inquire how management intends to address the matter in
the financial statements.
▪ carry out the necessary audit procedures on the amendment.
▪ review the steps taken by management to inform about the situation to anyone who received the original F/S and
audit report.
▪ extend the review of subsequent events up to the date of the new audit report
▪ if management does not agree to change the F/S, the auditor should consider the available alternative to him.

Examiner Comments:
This was a straight forward question from ISA 560 “Facts Which Become Known to the Auditor after the
Financial Statements Have Been Issued”. Majority of the candidates performed well in this part also.
However, it appeared that several students had not studied the above ISA altogether. Many such students
specified the steps that may be carried out to verify the information given in the scenario, which was
totally incorrect.

Marking Scheme:
▪ Evaluation of the situation 2.0
▪ 01 mark for mentioning each audit procedure 6.0

Answer #9 Q.6(f) Spring 2018

▪ Obtain an understanding of management’s procedures for identifying subsequent events.

▪ Inquire of management as to whether any subsequent events have occurred which might affect the financial
statements.
▪ Read the entity’s latest subsequent financial statements.
▪ Read minutes of shareholders’ meetings, meeting of the board of directors held after the date of the financial
statements and inquire about matters discussed at any such meetings where minutes are not available.
▪ Obtain written representations in respect of subsequent events.

Examiner Comments:
This question consisted of six short questions. The performance was good as 61% of the candidates
secured passing marks. Brief comments on performance in each part are given below:
The performance remained average. Some students gave pertinent answers but many other seemed
confuse and tried to mention procedures related to subsequent receipts, subsequent warranty claims,
subsequent sale prices to assess NRV, etc. which were totally irrelevant.

Marking Scheme:
01 mark for each procedure for identification of subsequent events 4.0

Answer #10 Q.8 Spring 2019

Evaluation of the situation:

The auditor has no obligation to perform any audit procedures regarding the financial statements after the date of the
auditor’s report. However, the matter has come to the knowledge of the auditor before publication of financial
statements and imposition of penalty is indicative of condition that existed at balance-sheet date.

Course of action:
Had the actual amount of penalty imposed by the court been known to the auditor at the date of the auditor's report,
it may have caused the auditor to ask the management for adjustment in the financial statements. Therefore, the
auditor need to perform the following procedures:
▪ Discuss the matter with management and, where appropriate those charged with governance
Ch # 14. Audit Finalisation and Reporting Page 368

▪ Inquire how management intend to address the matter in the financial statements.
▪ Instruct management not to issue the financial statements before the necessary amendments have been made
▪ If the financial statements are amended, the auditor is required to:
– Carry out the necessary audit procedures on the amendment.
– Extend his review of subsequent events up to the date of the new audit report.
▪ If the financial statements are not amended, the auditor is required to
– Take appropriate action to prevent reliance on the audit report, after taking legal advice.
– In the longer term, the auditor should also consider resigning from the audit, but this would not be
appropriate as an immediate response to the problem.

Examiner Comments:
Students failed to mention that if the financial statements are not amended auditor needs to take
appropriate action to prevent reliance on the audit report and in the longer term, the auditor should
consider resigning from the engagement.

Marking Scheme:
▪ Evaluation of the situation 2.0
▪ Up to 01 mark for each procedure 7.0

Answer #11 Q.4 Autumn 2020

(i) Evaluation: The incident occurred after the year-end for which no condition existed before the year-end.
Therefore, it is a non-adjusting event for which the financial statements does not need an amendment.

Furthermore, after the financial statements have been issued, the auditor has no obligation to perform any audit
procedures regarding such financial statements.

Therefore, no action from the auditor with regards to financial statements for the year ended 30 June 2020 is required.
However, auditor shall inquire how the management intends to address the matter in the financial statements. If the
management amends the financial statements to disclose the non-adjusting event then the auditor shall extend the
audit procedures to the date of new audit report.

(ii) Evaluation: The difficulty in selling the inventory after the year-end at current prices and consideration of
revising the price give the evidence about their net realizable value (NRV) at the year-end, which is an adjusting event.
Therefore, NRV of the inventory should be calculated on the basis of revised selling price after the yearend and the
financial statements should be adjusted accordingly.
Suggested audit procedure:
▪ Review prices at which goods have been sold after the reporting period, for evidence that NRV is higher than cost.
▪ Review and test the procedures in place for comparing NRV with cost for each item of inventory.
▪ Select major items of inventory from the list of stock and compare NRV with cost.
▪ Review inventory records and order books to identify of slow-moving items and compare their expected NRV with
cost.
▪ Review the information gathered during the physical inventory count (e.g. deterioration of inventory) which may
suggest that NRV may be lower than cost.
▪ Review the records related.

Examiner Comments:
▪ Examinees failed to comprehend that it was a non-adjusting event as the bankruptcy of the debtor
occurred after the year-end and there was no condition existed before the year-end.
▪ In the case of NRV issue, examinees failed to mention some of the important audit procedures such
as 1) Review prices at which goods have been sold after the reporting period, for evidence that NRV
is higher than cost; 2) Review and test the procedures in place for comparing NRV with cost for each
item of inventory; and 3) Review inventory records and order books to identify slow-moving items
and compare their expected NRV with cost.
Ch # 14. Audit Finalisation and Reporting Page 369

Marking Scheme:
▪ 02 marks for evaluation of each situation 4.0
▪ 01 mark for each audit procedure 5.0

Answer #12 Q.6 Autumn 2021

Evaluation:
Even though MML came to know about the defect after the year end, the existence of defect in MML products provide
evidence of conditions that already existed at the end of the reporting period. Therefore, it is as an adjusting event.
The warranty provision should be reassessed on the basis of the identified defect and the financial statements should
be adjusted accordingly.

Course of action:
(i) Inquire with the management about the quantity of effected products which have been sold until the year end.
(ii) Inquire from the management whether they have assessed the revised warranty provision on the basis of this
new information.
(iii) Consider involving auditor’s expert to re-assess the warranty provision.
(iv) Evaluate the management assumptions for the revised warranty provision.
(v) Assess whether there is any material effect to the warranty provision because of the identified defect.
(vi) Ask the management to revise the financial statements and get it approved by the board of directors.
(vii) Obtain management representation that the warranty provision reflects the management best estimate.
(viii) Ask the management to prepare a working for the net realizable value of the inventory and assess its adequacy.

Evaluation:
The incident occurred after the year-end for which no condition existed before the year- end. Therefore, it is a non-
adjusting event for which the financial statements do not need amendment. The incident has a significant impact and
it seems material for the users of the financial statements. Therefore, DHL shall disclose nature of the event and an
estimate of its financial effect.

Course of action:
(i) Inquire from the management about the time it would take to repair the hotel and make it operational.
(ii) Inquire from the management to assess the amount of revenue lost due to non- functionality of hotel.
(iii) Inquire from the management about the estimated cost of repair.
(iv) Inquire from the management about any amount to be received from the insurance company.
(v) Ask the management to disclose the matter in accordance with the requirements of IFRSs.

Examiner Comments:
▪ Generally, the response of the examinees was only restricted to the fact that whether the event is
adjusting or non-adjusting. No further discussion on course of action was made by the examinees.
▪ Examinees answered the entire scenario in the context that the said event took place after issuance
of the financial statements, and consequently produced an incorrect answer.

Marking Scheme:
▪ Evaluation of the need to amend in the financial statements 3.0
▪ 01 mark for each auditor’s course of action 7.0

Answer # 13 Q.7 Autumn 2022

(i) Evaluation:
Even though HL came to know about the issue after the year-end, the existence of defect in HL products provide
evidence of conditions that already existed at the end of the reporting period. Therefore, it is as an adjusting event.
The provision for sales return and NRV provision should be reassessed on the basis of the identified defect and
the financial statements should be adjusted accordingly.
Ch # 14. Audit Finalisation and Reporting Page 370

Auditor’s course of action:

Sales return:
▪ Obtain reports to verify the quantity of those batches sold during the year.
▪ Obtain production reports to calculate the total production of those batches.
▪ Consider whether quantity of such inventory could be verified through inventory count performed at year
end.
▪ Obtain any subsequent claims made by the distributor for return of inventory.
▪ Obtain the managements working for the net realizable value of the inventory and assess its adequacy.
▪ Evaluate the management assumptions for the revised provisions.
▪ Obtain management representation that the sales return provision and NRV provision reflects the
management best estimate.
▪ Ask the management to revise the financial statements and get it approved by the board of directors.
(ii) The acquisition of OL occurred after the year-end and therefore, it is a non-adjusting event for which the financial
statements do not need amendment. It is a material acquisition and therefore, CL shall disclose the details of the
acquisition in the financial statements.
Auditor’s course of action:
▪ Obtain from the management the agreement made for the acquisition.
▪ Assess the adequacy of the disclosure made in the financial statements.

Examiner Comments:
▪ For the audit client HL, the examinees did not mention any procedure to verify the quantity and value
of the affected inventories.
▪ For the audit client OL, the examinees perceived it as an adjusting event and produced an irrelevant
answer.

Marking Scheme:
▪ Evaluation of the situation 4.0
▪ 01 mark for each course of action 8.0

Question # 14 Q.5(a) Autumn 2023

The effect of Rs. 350 million will be 23% of the revised profit before tax of Rs. 1,550 million. Since the effect is confined
to a single element of the financial statement, the effect is material but not pervasive.

If the auditor concludes that the provision should have been recorded for Rs. 500 million then, the misstatement being
material in nature, the auditor will have to express a qualified opinion. The auditor shall include in the basis for
opinion section, a description and quantification of the financial effects of the misstatement.

However, if the auditor agrees with the legal team of the audit client then an unmodified opinion will be expressed.

In either case, since the audit report is being re-issued following changes need to be made irrespective of the audit
opinion being expressed:
▪ Amend the auditor’s report to include an additional date restricted to that amendment that thereby indicates that
the audit procedures on subsequent events are restricted solely to the amendment of the financial statements
described in the relevant note to the financial statements; or
▪ Provide a new or amended auditor’s report that includes a statement in an Emphasis of Matter paragraph or Other
Matter paragraph that conveys that the auditor’s procedures on subsequent events are restricted solely to the
amendment of the financial statements as described in the relevant note to the financial statements.

Examiner Comments:
▪ Examinees wasted their time in evaluating the scenario and mentioning audit procedures that were
not required. The only requirement of the question was to discuss the reporting implications.
▪ Examinees did not realize that the audit report needs to be reissued and therefore an emphasis of
matter paragraph needs to be included in the audit report.
Ch # 14. Audit Finalisation and Reporting Page 371

▪ Examinees also did not mention that the emphasis of matter paragraph should convey that the
auditor's procedures on subsequent events are restricted solely to the amendment of the financial
statements.

Marking Scheme:
▪ Discussion on materiality 1.0
▪ Discussion on the audit opinion to be expressed 3.0
▪ Discussion on including an additional date and emphasis of matter paragraph 3.0

ISA - 580

Answer #1 Q.2 Spring 2011

Under the following situations, the auditor would have doubt as to the reliability of written representation:
(a) When the auditor has concerns about the competence, integrity, ethical values or diligence of management, or
about its commitment to or enforcement of these.
(b) When written representations are inconsistent with other audit evidence obtained.

Course of action in situation (a)

(i) The auditor shall determine the effect that such concerns may have on the reliability of representations and audit
evidence in general.
(ii) If the auditor concludes that the risks related to management representations on the F/S is such that an audit
cannot be conducted, the auditor may consider withdrawing from the engagement

Course of action in situation (b)

(i) The auditor may consider whether the risk assessment remains appropriate and, if not, revise the risk assessment
and determine the nature, timing and extent of further audit procedures to respond to the assessed risks.
(ii) If the matter remains unresolved, the auditor shall reconsider the assessment of the competence, integrity, ethical
values or diligence of management, or of its commitment to or enforcement of these, and shall determine the effect
that this may have on the reliability of other representations and audit evidence in general.
(iii) If the auditor concludes that the written representations are not reliable, the auditor shall take appropriate
actions, including determining the possible effect on the opinion in the auditor’s report.

Answer #2 Q.7 Spring 2012

(a) Matters that will be considered as an Auditor while assessing the reliability of representation made by the
management:
When the representations relate to matters material to the F/S:
(i) Whether the representations appear reasonable and consistent with other audit evidence obtained.
(ii) Whether the individuals making them can be expected to be well informed on such matters.
(iii) Integrity of those making the representations.
(iv) Accuracy of representations made in the past.
(v) Corroborate audit evidence from sources inside or outside the entity.

(b) Auditor’s course of action if management refuse to provide a management representation on a particular issue:
If management does not provide one or more of the requested written representations, the auditor shall:
(i) Evaluate whether sufficient, appropriate audit evidence can be obtained from other sources;
(ii) If sufficient appropriate audit evidence cannot be obtained from other sources than this will constitute a scope
limitation and the auditor should express a qualified opinion or disclaimer of opinion.
(iii) Re-evaluate the integrity of management and evaluate the effect that this may have on the reliability of
representations (oral or written) and audit evidence in general; and
(iv) Consider possible implications that the refusal may have on the auditor’s report.
(v) Re-assess the continuation of engagement with the audit client
Ch # 14. Audit Finalisation and Reporting Page 372

Answer #3 Q.4(b) Autumn 2012

How the auditor would deal with a situation where he is in doubt as regards the reliability of the written
representation provided by the management of the company:
The doubt as regards management’s representation can be on account of several different reasons. Auditor’s response
in each situation is described below:
▪ If there is inconsistency between one or more written representations and audit evidence is obtained from
another source, the auditor may consider whether the risk assessment remains appropriate and, if not, revise the
risk assessment and the nature, timing and extent of further audit procedures to respond to the assessed risk.
▪ If the matters relates to the competence, integrity, ethical values, diligence and commitment of management, the
auditor may conclude that the audit cannot be conducted. In such a situation, the auditor may consider
withdrawing from the engagement and if withdrawal is not possible, he may disclaim an opinion.

Answer #4 Q.5(b) Spring 2013

Representation provided by management that useful lives of fixed assets are realistically estimated seems
inconsistent with audit evidence related to the losses on disposal of fixed assets.
However, since the matter pertains to future estimates, the error does not seem to render other management
representations unreliable.

The auditor shall discuss the matter with the management to attempt to resolve the matter. If after discussion with
the management, the matter remains unresolved, the auditor may:

Consider whether the risk assessment remains appropriate and, if not, revise the risk assessment and determine the
nature, timing and extent of further audit procedures.
Ask the management to reassess the estimated useful lives of fixed assets.

Answer #5 Q.2(a) Autumn 2013

The Auditor is generally not in a position to obtain evidence from an external source in relation to warranty provisions.
Hence the written representation, whilst being an entity generated source of evidence, would still be useful as there
are few other alternatives.

Steps to take if written representation on warranty provision is not provided

▪ If management does not provide the requested written representation on the warranty provision the auditor
should discuss the matter with management to understand why they are refusing.
▪ In addition, the auditor should re-evaluate the integrity of management and consider the effect that this may have
on the reliability of other representations (oral or written) and audit evidence in general.
▪ Auditor should then take appropriate actions, including determining the possible effect on the audit opinion.

Impact on audit report

Unless auditor is able to obtain sufficient appropriate evidence* to conclude that warranty provision is free from
material misstatement, a modified audit opinion will be required, as discussed below:
▪ If the warranty provision is material but not pervasive then a qualified opinion would be appropriate, a disclaimer
of opinion would be appropriate if the effect of misstatement is both material and pervasive.

Answer #6 Q.7 Autumn 2014

The management representation regarding disclosure of non-compliance with law does not remain appropriate, as it
contradicts with the audit evidence obtained.
To address the contradiction, we should:
▪ consider whether his risk assessment of that area is still appropriate.
▪ consider whether additional audit procedures are needed.
▪ consider the integrity of management, document those concerns and consider the possible course of action.
Ch # 14. Audit Finalisation and Reporting Page 373

Examiner Comments:
According to the situation given in the question, it was determined during the audit that information
provided by the client as part of management representation was inaccurate as an incidence of non-
compliance with law had not been reported.

The performance was average as many candidates jumped to the conclusion that audit opinion needs to
be modified, without analyzing the situation. Further, the following important steps were mostly missing.
▪ Consider whether risk assessment in the concerned area is still appropriate.
▪ Consider the integrity of management, document those concerns and consider the possible course of
action.

Answer #7 Q.1(f) Spring 2015

If a representation by management is contradicted by other audit evidence, the auditor should:

▪ consider whether his risk assessment of that area is still appropriate.
▪ consider whether additional audit procedures are needed.

If the auditor has concerns about the integrity of management, document those concerns and consider withdrawing
from the audit.

Examiner Comments:
The performance in this part was good and generally the candidates correctly identified the auditor’s
reaction to a situation where written representation of the management is inconsistent with other audit
evidence.

Answer #8 Q.8 Spring 2016

(a) In this case, the representation provided by the management contradicts with the audit evidence obtained later
and therefore we should:
▪ consider whether his risk assessment of that area is still appropriate
▪ consider whether additional audit procedures are needed
▪ assess the impact on auditors assessment of management’s integrity, document those concerns and consider
withdrawing from the audit.

(b)The written representation from the management must cover:

▪ the completeness of the information that has been provided about the identity of related parties and related party
relationships and transactions, and
▪ the adequacy of accounting for and disclosure of such related party relationships and transactions in the F/S.

The audit report should not be signed unless the written representation has been received.
If management does not provide the written representation, it will result in limitation of scope and we would take
appropriate actions, including determining the possible effect on the opinion in the auditor’s report

Examiner Comments:
Both parts of this question on written representation were very poorly answered as discussed below:
(a) The key issue to ponder in this case was the fact that representation provided by the client had
proved false by subsequent events. Consequently, the candidates were expected to consider the
impact of the situation on the risk assessment carried out by the auditor previously. Most of the
students failed to comprehend the situation and focused on identifying subsequent events, discussing
adjusting and non- adjusting events and how to deal with the situation in the financial statements.
Only few students were able to give a correct answer.
(b) The performance in this part was also poor. Most of the candidates failed to understand the
importance of written representation in the given situation and talked about carrying out alternate
procedures which was not relevant.
Ch # 14. Audit Finalisation and Reporting Page 374

Answer #9 Q.8(b) Spring 2017

(i) This must be included in a representation letter. The written representation must cover the completeness of the
information that has been provided about the related parties and related party transactions.
(ii) This may not be included in a representation letter. The auditor should obtain sufficient appropriate audit
evidence on this matter such as checking the shareholding in the share register, etc.
(iii) This should not be included in a representation letter. This is a matter of incorrect accounting treatment which
the auditor should discuss and resolve with the management.

Examiner Comments:
This part required analysis of scenario and whether it was necessary to obtain representation or not.
Most of the candidates rightly stated that representation would be required in case of related parties but
erred in the other two cases. They must understand that representation is not a substitute for available
audit evidence and that it cannot justify an incorrect accounting treatment.

Marking Scheme:
02 marks for discussing each situation 6.0

Answer #10 Q.8(a) Spring 2017

▪ Discuss the matter with the management.

▪ Re-evaluate the integrity of the management.
▪ Take appropriate action including determining the possible effects on the auditor’s report.

Examiner Comments:
A short and straight forward question on management representation which was generally well
answered.

Marking Scheme:
Up to 01 mark for each course of action to be adopted 2.0

Answer #11 Q.10 Autumn 2017

(a) Offer of CEO cannot be accepted as the letter of representation is to be dated as near as practicable (but not after)
the date of audit report, because:
▪ written representation is also obtained in respect of subsequent events
▪ further matters might also arise during the course of audit for which we may require management
representation.

However, the written representations are requested from those responsible for the preparation of financial
statements. Therefore, in the absence of the Chief Executive Officer, management representation may be obtained
from the Chief Financial Officer and those charged with governance.

(b) If the management modifies our requested wording, we may still be able to conclude that it is a reliable
representation.
However, before arriving at any conclusion, we must consider the effects of the information destroyed in the fire on
the financial statements and on our ability to obtain the necessary audit evidence and the possible impact on our audit
report.
Ch # 14. Audit Finalisation and Reporting Page 375

(c) If adjustments are immaterial, representation letter may include the effect of any uncorrected immaterial
misstatements. However, the decision regarding materiality of the uncorrected misstatements is to be made by the
auditor and not by the client.
Further, materiality depends on the fact that omission or misstatement would influence the economic decision of the
user, and the financial statements are relevant not only for the owners but also for other users which may include
bankers, government institutions, etc., therefore, the comment of the managing director regarding the effect on
decision making is not correct.
If financial statements remain uncorrected and the required correction is material also, its impact on audit report
would need to be assessed.

Examiner Comments:
This question was divided into three parts. Each part contained a situation and the candidates were
required to comment how the audit partner would deal with it. The overall performance was extremely
poor as only 3% of the candidates secured passing marks. Part wise comments are given below:

Part (a)
In this situation, the CEO was travelling abroad and was not available on the date of the report and
therefore he had offered to sign all representations before leaving. The overall performance was very
poor as most of the candidates were unable to grasp that representations should be as near as
practicable, before the audit report. Further, very few could specify that it is not necessary that CEO
should sign the representation.

Part (b)
This was a tricky situation in which the management had stated in its written representation that
“except for the information destroyed in fire, we have provided all the necessary information for the
purposes of audit”. The performance in this part remained extremely poor.
Most of the students only discussed one aspect i.e. whether the management’s stance was reasonable or
not. The failed to understand that even if the stance was correct and reasonable, the auditor cannot give
an unmodified opinion merely on that basis. However, whether any modification is needed or not would
depend on the significance of the information destroyed and the auditor’s ability to obtain audit evidence
through other means.

Part (c)
According to this scenario the MD of the client had written a letter to the firm that financial statements
provided by them are final except for certain immaterial adjustments which would not affect the decision
making of the owner and therefore the audit report should be signed and required adjustments should
be included in the representation letter. The performance was relatively better, however, only few
students commented on the fact that it is not just the owner whose decisions are based on the financial
statements; there are other stakeholders also for whom financial statements are important.

Marking Scheme:
(a)
▪ 01 mark for each reason for not accepting written representation on 20 September 2017 3.0
▪ Discussion on who can provide the written representation 1.0
(b)
▪ Discussion on acceptability of written representation 1.0
▪ Evaluation of situation and the impact on report 2.0
(c)
▪ Discussion on acceptability of managing director’s suggestion 1.0
▪ Discussion on the concept of materiality 1.0
▪ Evaluation of the situation and the impact on audit report 2.0

Answer #12 Q.6(C) Spring 2018

▪ Perform other audit procedures to attempt to resolve the matter or finalize your view point.
▪ Consider the effect of the above on reliability of other representations and the audit evidence.
Ch # 14. Audit Finalisation and Reporting Page 376

▪ Consider whether the risk assessment remains appropriate and if not, revise the risk assessment and determine
the nature, timing and extent of further audit procedure. The auditor may also reconsider assessment of the
competence, integrity, ethical values or diligence of the management.
▪ If the auditor has concerns about the integrity of management, he should document those concerns and consider
withdrawing from the audit and the impact on the report.

Examiner Comments:
This question consisted of six short questions. The performance was good as 61% of the candidates
secured passing marks. Brief comments on performance in each part are given below:
The performance in this part was extremely poor. Many candidates did not attempt it altogether. The
issue of integrity of management and how the auditor should handle it were rarely mentioned.

Marking Scheme:
01 mark for each step that may be taken in case the reliability of management representation is
inconsistent with other audit evidence 4.0

Answer #13 Q.3(b) Autumn 2018

The directors would need to provide representation as regards the following:

(i) That based on their assessment it is appropriate to prepare accounts on the going concern basis.
(ii) That the assumptions used to assess going concern (future cash flows, earnings etc.) are reasonable.
(iii) Completeness of the information that has been provided about the identity of related parties and related party
relationships and transactions.
(iv) Adequacy of accounting and disclosure of such related party relationships and transactions in the financial
statements.
(v) All the transaction with the related parties have been carried out at arms length.
(vi) All events subsequent to the date of financial statements and for which IFRS require adjustment or disclosure
have been adjusted or disclosed.
(vii) The effects of uncorrected misstatement are immaterial, both individually and in aggregate to the financial
statement as a whole along with the list of uncorrected misstatement.

Examiner Comments:
The overall performance in this question was poor as only 23% candidates secured passing marks. The
question was based on a scenario according to which three issues had been identified by the audit team,
during the audit. There were two requirements set out in part (a) and (b) of the question. Performance
in each part is discussed below:

In this part, the requirement was to identify the matters which the auditor would like to include in
respect of the three issues discussed in the question. It appears that the students did not read the
requirement carefully. The most common mistake was that most candidates produced a long list of items
which had no relationship with the issues discussed in the question. Furthermore, a number of students
identified matters to be included in the management letter instead of management representation letter.

Marking Scheme:
Up to 01 mark for each matter to be included in the management representation letter 5.0

Answer #14 Q.1(b) Spring 2019

Written representations are necessary information that the auditor requires in connection with the entity’s financial
statements. Although written representations provide audit evidence, they do not provide sufficient appropriate audit
evidence on their own about any of the matters with which they deal.
Ch # 14. Audit Finalisation and Reporting Page 377

The fact that the management has provided reliable written representations do not affect the nature or extent of other
audit evidence that the auditor should obtain. Hence, considering the scenario, the auditor should take the following
steps to obtain the required evidence:
▪ Inquire management about reasons for refusal to send confirmation.
▪ Seek audit evidence as to their validity and reasonableness.
▪ In case a valid reason is not provided by the management, evaluate the implications of management’s refusal on
the auditor’s assessment of the relevant risks of material misstatement, including the risk of fraud and on the
nature, timing and extent of other audit procedures;
▪ Perform alternative audit procedures to obtain relevant and reliable audit evidence, such as:
– Obtain the correspondence with the supplier.
– Check subsequent receipt from the supplier.
▪ Communicate with those charged with governance, if:
– The auditor concludes that management’s refusal to allow the auditor to send a confirmation request is
unreasonable.
– The auditor is unable to obtain relevant and reliable audit evidence from alternative audit procedures.
▪ The auditor shall determine the implications for the audit and the auditor’s opinion in accordance with ISA 705
given such a limitation on scope.

Examiner Comments:
▪ In case of refusal, the impact on the risk of material misstatement and the nature, timing and extent
of other audit procedures was not mentioned.
▪ Communication with those charged with governance was ignored.

Marking Scheme:
▪ Evaluation of appropriateness of written representation 2.0
▪ Evaluation of reasonableness of management refusal and its impact on audit approach 3.0
▪ Discussion on communication with those charged with governance 1.0
▪ Discussion on audit report implications 1.0

Answer #15 Q.1 Autumn 2019

(iv) This must be included in the representation letter. The written representation must cover that there were no
events subsequent to the date of the financial statements and for which IFRSs require adjustment or disclosure.
(v) This may not be included in the representation letter. The auditor should obtain sufficient appropriate evidence
on this matter such as checking the customer correspondence or directly confirming from the customer. However,
after obtaining sufficient appropriate audit evidence, the auditor may still ask for management representation
that the stock has been held on the instruction of the customer.
(vi) This should not be included in the representation letter. This is a matter of incorrect application of accounting
policy, which the auditor should discuss and resolve with the management.
(vii) The auditor must include this matter in the representation letter. The representation would cover that all known
actual or possible litigation and claims, whose effects should be considered when preparing the financial
statements, have been disclosed to the auditor and accounted for and disclosed in the financial statements.

Examiner Comments:
▪ Some of the examinees mentioned that since no subsequent event is identified, it would not be
included in the representation letter.
▪ Some examinees mentioned that it would only be included in the representation letter if the auditor
could not find any evidence for stock held on behalf of the customer.

Marking Scheme:
For each matter:
▪ 0.5 mark for reaching conclusion whether to obtain management representation 2.0
▪ 1.5 marks for discussion on the conclusion reached 6.0
Ch # 14. Audit Finalisation and Reporting Page 378

Answer #16 Q.7 Spring 2021

Representation letter dated 05 March 2021:

Offer of CEO cannot be accepted as the letter of representation is to be dated as near as practicable to the date of audit
report because further matters might also arise during the intervening period for which the auditor may require
management representation.

Representation letter dated 16 March 2021:

The audit report should not be signed unless the written representation has been received as it supports other audit
evidence obtained during the course of audit. If management does not provide the written representation, it will result
in limitation of scope, which would impact the audit opinion.

Verbal Representation:
Verbal evidence is not strong audit evidence. Therefore, in order to improve the quality of this evidence, the auditor
will need to ask for any significant discussions to be confirmed in writing.

Suggestion:
If it is practicable to do so sign the audit report on 16 March 2021 or management representation may be obtained
from the Chief Financial Officer or those charged with governance on the date of signing.

Examiner Comments:
▪ Examinees failed to identify that the offer for signing the representation on 4 March 2021 cannot
be accepted because further matters requiring representation might arise during the intervening
period.
▪ Examinees did not comment on the CEO’s signing on the representation on 16 March 2021 i.e. after
signing of the audit report.
▪ Many examinees failed to suggest the best course of action.

Marking Scheme:
▪ Up to 02 marks for discussing the validity of each option 5.0
▪ Recommending the best course of action 1.0

Answer # 17 Q.6 Spring 2022

Representation from management regarding any knowledge of fraud, which has occurred is required. However, only
obtaining the representation regarding management employees narrows the representation. The representation
should also include management and other employees. Furthermore, the wording is more directed towards an
absolute assurance that no fraud has occurred. Preferably the representation should state that “no frauds...had come
to the attention of management” rather than “no frauds...have occurred”.
The auditor is required to obtain a representation from the management regarding the related party relationship and
transactions. However, in the above statement, management has only given the representation of those related parties
with which transactions have been made. In fact, representation should to be obtained for all the related party
relationships, irrespective of the fact that whether transaction has been made or not. Similarly, disclosures are also
required for all related party relationships.

Materiality of uncorrected misstatement should be evaluated on aggregate basis instead of individually. If aggregate
uncorrected adjustments are immaterial, representation letter may include the effect of any uncorrected immaterial
misstatements.

Examiner Comments:
Instead of critically analyzing the representations related to fraud and related party, examinees
discussed that the auditor cannot rely on management representation and should perform audit
procedures. Therefore, they did not identify the errors in the given representation and mentioned audit
procedures which were not required.
Ch # 14. Audit Finalisation and Reporting Page 379

Furthermore, instead of analyzing the given extract of the representation letter, examinees discussed
about those matters which were not part of the extract. For example, including the date, year-end, client
name etc.

Marking Scheme:
▪ 01 mark for identification of each shortcoming 3.0
▪ Discussion on how to overcome the shortcoming 5.0

ISA –700& Form 35A

Answer #1 Q.5 d,e Autumn 2016

(d) The statement is not appropriate the responsibilities in addition to the main body of the audit report can 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
▪ By a specific reference within the auditor’s report to the location of such description on a website of an
appropriate authority.
(e) The statement is not appropriate as the audit report can either be signed in the name of the audit firm or the
personal name of the auditor or both.

Examiner Comments:
(d) Most of the student got high marks. Errors were rare.
(e) Quite a few students instead of discussing the responsibilities of signing of audit report focused on
differentiating between single member firm and firms having multiple partners which had no
relevance.

Marking Scheme:
(d)
▪ Appropriateness/inappropriateness of the statement 0.5
▪ Justification of appropriateness/inappropriateness of statement in relation to audit report 2.5
(e)
▪ Appropriateness/inappropriateness of the statement 0.5
▪ Justification of appropriateness/inappropriateness of statement in relation to audit report 1.5

Answer #2 Q.1a Autumn 2015

The term ‘expectation gap’ refers to the fact that the public perception of the role and responsibilities of the external
auditor is different from his statutory role and responsibilities. The expectations of the public are often set at a level
higher than that at which the external auditor actually operates.
Some examples of the misunderstandings inherent in the public’s expectations are as follows:
▪ The public believes that the audit opinion in the audit report amounts to a ‘certificate’ that the F/S are correct and
can be relied upon for all decision-making purposes.
▪ The public also believes that the auditor has a duty to prevent and detect fraud and that this is one reason for an
audit.
▪ The public assumes that, in carrying out his audit work, the auditor tests 100% of the transactions undertaken
during the accounting period.

Examiner Comments:
The requirement of this part of the question was to explain the term ‘expectation gap’ and to give three
examples thereof. The performance was above average as generally the candidates performed well.
However, some students explained it as the difference between expected and actual results of the tests
performed by the auditor. Some of them explained it as the differences between the management and
the auditor.
Ch # 14. Audit Finalisation and Reporting Page 380

Marking Scheme:
▪ Explanation of expectation gap 1.0
▪ 01 mark each for any three examples of expectation gap 3.0

Answer #3 Q.5c Spring 2012

The term fair presentation framework is used to refer to a FRF that requires compliance with the requirements of the
framework and:
▪ Acknowledges explicitly or implicitly that, to achieve fair presentation of the F/S, it may be necessary for
management to provide disclosures beyond those specifically required by the framework; or
▪ Acknowledges explicitly that it may be necessary for management to depart from a requirement of the framework
to achieve fair presentation of the F/S. Such departures are expected to be necessary only in rare circumstances.

Term ‘compliance framework’ is used to refer to a FRF that requires compliance with the requirements, but does not
contain acknowledgements of fair presentation framework

Answer #4 Q.6(a) Spring 2010

▪ The statement of responsibility should state the following:

▪ It is the responsibility of the auditor to express an opinion on the F/S.
▪ The audit was conducted in accordance with International Standards on Auditing.
▪ Those standards require that :
the auditor complies with ethical requirements.
the auditor plans and performs the audit to obtain reasonable assurancewhether the F/S are free from
material misstatement.
▪ That an audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
F/S.
▪ As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional
skepticism throughout the audit.

▪ That while selecting the procedures to be performed the auditor exercises judgment, including the assessment of
risks of material misstatements and whether due to fraud or error.
▪ In making the risk assessment the auditor considers internal controls relevant to fair presentation of F/S in order
to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an
opinion on the effectiveness of the entity’s internal control.
▪ That an audit includes evaluation of the appropriateness of the accounting policies used, the reasonableness of
estimatesand the overall presentation of information in the F/S.
▪ That auditor has concluded on the appropriateness of management’s use of the going concern basis of accounting
and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions
that may cast significant doubt on the Company’s ability to continue as a going concern.
▪ That an audit involves evaluating the overall presentation, structure and content of the F/S, including the
disclosures
▪ That auditor communicate with TCWG regarding, among other matters, the planned scope and timing of the audit
and significant audit findings, including any significant deficiencies in internal control that auditor identify during
the audit.
▪ That auditor also provide TCWG with a statement that auditor have complied with relevant ethical requirements
regarding independence, and to communicate with them all relationships and other matters that may reasonably
be thought to bear on auditor’s independence, and where applicable, related safeguards.

Note: ICAP Solution have been revised to incorporate changes in ISA 2015

Answer #5 Q.8 Autumn 2009

The report specified in form 35A in the in the Companies (General Provisions and Forms) Rules, 1985 covers the
following additional reporting responsibilities.
Ch # 14. Audit Finalisation and Reporting Page 381

(i) that proper books of accounts are being maintained by the company as required by the Companies Ordinance,
1984.
(ii) that the balance sheet and the profit and loss account together with notes thereonare in conformity with the
Companies Ordinance, 1984 and in agreement with the books of accounts and are further in accordance with the
accounting policies consistently applied.
(iii) Opinion as regards the following:
▪ whether expenditure incurred during the year was for the purposes of the company’s business and
▪ whether the business conducted, investments made and expenditure incurred during the year were in
accordance with the objects of the company.
(iv) Opinion as regards the following:
▪ whether Zakat deductible at source under the Zakat and Usher Ordinance, 1980; was deducted and
▪ whether the zakat deducted (if any) was deposited in the Central Zakat Fund.

ISA 701

Answer #1 Q.5(f) Autumn 2016

The statement is not appropriate as the Key Audit Matters are selected from the matters communicated with TCWG
and in making those assessments matters pertaining current period only are considered as opposed to matters
pertaining to prior period.

Examiner Comments:
This question consisted of six parts. Each part contained a statement regarding audit report and
contents thereof and the candidates were required to identify whether the statement was appropriate,
based on the relevant ISA. Performance in each part is discussed below:
The performance in this part was poor. Students were generally not able to identify any of the two key
points, i.e. key audit matters are selected from the matters reported to those charged with Governance
and that these relate to the current year as matters only relating to previous years are not covered.

Marking Scheme:
▪ Appropriateness/inappropriateness of the statement 0.5
▪ Justification of appropriateness/inappropriateness of statement in relation to audit report 2.5

Answer #2 Q.3a Spring 2017

Change in accounting policy has to be reported as a key audit matter. For this purpose it is necessary that it should be
discussed with TCWG. In the key audit matter section, the auditor shall:
▪ include a reference to the related disclosure(s), if any, in the F/S
▪ state why the matter was considered to be one of most significance in the audit;
▪ specify how the matter was addressed in the audit.

Examiner 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) 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.
Ch # 14. Audit Finalisation and Reporting Page 382

Marking Scheme:
▪ Discussion on the possible impact on the audit report 3.0
▪ Audit procedures to be performed 1.0

Answer #3 Q.2 Spring 2019

(a) The audit report should include only those matters in the KAM section which required significant auditor
attention.
Areas which require significant auditor attention are those which:
▪ Involve significant audit risks
▪ Significant judgement on the part of management / auditor.
▪ Significant transactions and events affecting the audit.
Even though KAMs are extracted from the matters communicated with those charged with governance, however,
not all significant risks or matters communicated to those charged with governance are considered as KAMs. The
auditor needs to determine whether the risk of overstatement of revenue fulfills the above mentioned criteria
and is of most significance to the current year audit, only then it can be included as a key audit matter.
(b) Even if the auditor determines, depending on the facts and circumstances of the entity and the audit, that there
are no key audit matters to communicate, the audit report shall include the key audit matter section.
The fact that there are no key audit matters to communicate in the report, should be mentioned under the heading
Key Audit Matters.
(c) A matter giving rise to a qualification by their nature is a key audit matter. However, these matters shall not be
described in the Key Audit Matters section of the audit report, rather the matter is to be reported in accordance
with the requirements of related ISA. However, reference to the basis for qualified opinion is to be included in the
Key Audit Matter section.

Examiner Comments:
(a)
▪ Significant transactions and events affecting the audit were missed out.
▪ Students failed to realize that all significant risks or matters communicated to those charged with
governance are not considered as key audit matters.
▪ It was concluded that if there is a misstatement in revenue then it should be included in key audit
matter section. In fact, in such a case the audit report should be qualified instead of including it in
key audit matter section.
(b) Candidates did not mention that if there are no key audit matters to communicate in the report, this
fact should be reported.
(c)
▪ It was incorrectly concluded that since a qualified opinion has been expressed, it needs to be included
in the key audit matter section.
▪ Reference to the basis for qualified opinion which should be included in the key audit matter section,
was not mentioned.

Marking Scheme:
(a)
▪ Discussion on the matter to be considered for key audit matter 1.0
▪ 0.5 mark for each area which requires significant auditor attention 1.5
▪ Conclusion 1.5
(b)
▪ Brief discussion on inclusion of the key audit matter section as per scenario 1.0
▪ Disclosure of fact in the audit report to communicate that there is no key audit matter 1.0

(c) Discussion on whether to include the qualification details in key audit matter 3.0
Ch # 14. Audit Finalisation and Reporting Page 383

Answer # 4 Q.8(c) Autumn 2023

When the auditor expresses an adverse opinion, communicating key audit matters would still be relevant to enhancing
intended users’ understanding of the audit, and therefore the requirements to determine key audit matters apply.

However, as an adverse opinion is expressed in circumstances when the auditor has concluded that misstatements,
individually or in the aggregate, are both material and pervasive to the financial statements, the auditor may
determine that no other matters are key audit matters. The auditor will include a statement that except for the matters
described in the basis for adverse opinion section, we have determined that there are no other key audit matters to
communicate in our report.

If one or more matters other than the matter(s) giving rise to an adverse opinion are determined to be key audit
matters, it is particularly important that the descriptions of such other key audit matters do not imply that the financial
statements as a whole are more credible in relation to those matters than would be appropriate in the circumstances,
in view of the adverse opinion.

Examiner Comments:
Examinees did not discuss that key audit matters should not imply that the financial statements as a
whole are more credible in relation to those matters when an adverse opinion is expressed.

Marking Scheme:
▪ Discussion on relevance of key audit matter 1.0
▪ Discussion on including a reference to the adverse opinion section 2.0
▪ Discussion on description of the key audit matter 2.0

ISA- 705 & ISA 706

Answer #1 Q.8 Spring 2011

(a) Pervasive is a term used to describe the effects of misstatement on the F/S or the possible effects thereon if any
misstatement remains undetected due to the auditor’s inability to obtain sufficient appropriate audit evidence.
Pervasive effects on the F/S are those that, in the auditor’s judgments:
i. are not confined to specific elements, account or items of the F/S,
ii. if so confined, represent or could represent a substantial proportion of the F/S or
iii. in relation to disclosures, are fundamental to user’s understanding of the F/S

(b)
(i) Issuance of bank guarantee after the year end does not require any adjustment or disclosure. Therefore, there will
be no effect on the audit report on this issue.
(ii) The audit report shall state that “Zakat deductible at source under the Zakat &Ushr Ordinance, 1980, was deducted
and deposited in the Central Zakat Fund established under section 7 of that Ordinance”.
(iii) The auditor should consider the materiality of the amount. If the amount is material, the auditor should express
a qualified or adverse opinion.
(iv)
▪ The audit report shall mention the exception to the consistent application of accounting policies and whether
the auditor concurs with it or not.
▪ The F/S shall be adjusted accordingly and the effect of change in estimate shall be disclosed in the notes to
the F/S unless the differences are material and auditor has reasons to differ with the reviewed estimate. There
would be no impact on the audit report on this issue.
Ch # 14. Audit Finalisation and Reporting Page 384

Answer #2 Q.8 Autumn 2011

(a) Revaluation of Properties:

(i) In accordance with IAS 16, Property, Plant and Equipment, if a policy of revaluation is to be applied, it should be
applied to all the non current assets in a particular class of assets.
(ii) Since compliance with (i) above is not possible, the auditor should advise the client to not to change the accounting
policy and state the values of the property at cost.
(iii) In case of disagreement the auditor may consider issuing a qualified report

(b) Suit for damages:

The reliability of audit evidence provided by the legal advisor is high because it has been obtained from an
independent source outside the entity. As management is also of the view that no liability exists at the balance sheet
date, therefore in the presence of legal advisor’s confirmation a conclusion should not be drawn on the basis of
manager’s legal email.
(i) However, since there is inconsistency in audit evidence obtained and the auditor is unaware of the context in
which the manager (legal) sent the email, he shall investigate the reasons thereof and may need modification or
addition to the audit procedures.
(ii) The auditor should analyze the situation, in the light of IAS 37, Provisions, Contingent Liabilities and Contingent
Assets, and assess whether a disclosure of the event as a contingent liability is required or not.
(iii) If disclosure of contingent liability is required, and the client disagrees the audit report may be qualified.

(c) Warranty Provision:

(i) Management’s claim that amount cannot be measured reliably is not correct because they were charging
customers at 25% above cost prior to July 01, 2010 i.e. when there was no warranty on the sale of television sets
and hence they must be in a position to make a reliable estimate based on their past experience and records
available with them.
(ii) If a provision is not made for the warranty then if the amount of provision is material to the F/S then the audit
report should be qualified

(d) Non Disclosure of Earnings per share in the F/S:

International Accounting Standards 33, Earnings per share does not apply to non listed entities; therefore there is no
requirement of disclosing earnings per share in the F/S./

Answer #3 Q.8 Spring 2012

(b) (i) The amount of Rs. 9.6 million which is due from MIL is material to the F/S.
(ii) With respect to job in progress, if the auditor can satisfy himself that management would be able to recover
the cost of work in process from another customer, he may conclude that a provision is not required in this
respect.
(iii) In making the above decision the auditor should also consider the expenses that are required to be incurred
on the job, subsequent to year end.
(iv) The auditor should ask the management to provide for the loss of Rs. 9.6 million or any part thereof depending
upon the estimated amount of default, plus any further provision that may be necessary in respect of the work
in process. In case of management’s refusal, the auditor shall qualify his report.

(c) The auditor shall qualify the audit report by mentioning that investment of Rs. 150 million was not in accordance
with the objects of the company with a clarification that the object clause was amended a week before the issuance
of audit report, to include the said objective.

Answer #4 Q.1 Spring 2012

The following audit procedures should be applied to assess whether an adjustment is required:
(i) Obtain direct confirmation from the company’s lawyers seeking their opinion as to whether the settlement is
probable and whether Rs. 5 million is the likely amount.

(ii) Review the correspondence with PL to confirm that the amount they are willing to accept is in fact Rs. 5 million.
Ch # 14. Audit Finalisation and Reporting Page 385

(iii) Discuss with management as to whether they intend to accept PL’s offer and obtain a written representation.
If on the basis of the above procedures the auditor concludes that a settlement at 50% of the amount claimed is
likely, he shall ask the management to make a provision.
In case the management refuses to provide for the amount then a qualified opinion may be given, if the amount of
Rs. 5 million is considered material.

Answer #5 Q.2 Autumn 2012

(a)
▪ The audit report will be modified on ground of limitation of scope.
▪ Either a qualified or disclaimer of opinion will be given depending upon the materiality and pervasiveness of the
matter.
▪ We may have to mention that “proper books of accounts as required by the Companies Act 2017 have not been
kept by the Company”.

(b) There will be no impact on the audit report as the change of depreciation method is a change in accounting
estimate.

(c) The auditor will include an other matter paragraph in the auditor’s report, referring to the fact that the F/S of
Samarkand Limited for the Previous year, were audited by another auditor, who expressed an un-modified
opinion on those F/S.

Answer #6 Q6 Spring 2013

The 2012 statement of financial position shows provisions of Rs. 30 million. Since all known liabilities and claims have
been settled, and according to the legal advisor as well as the company’s management, the chances of payment are
remote, hence inclusion of a provision for liabilities is inappropriate.

Materiality
The amount of Rs. 30 million is material, as it is 8.57% of net assets and 20.69 % of profit before taxation. However,
the auditor’s report for 2012 gives an adverse opinion which is inappropriate because the impact of the misstatement
is material but not pervasive. Hence, a qualified opinion would be appropriate.

Short Comings in Modification paragraphs

▪ The paragraph does not mention the note reference, where the details relating to the Provision can be found in
the F/S.
▪ There is no need to mention the management’s point of view in the report. Managements view point should be
disclosed in the relevant notes to the F/S.
▪ The draft audit opinion is not in accordance with the form recommended by ISA, as the basis of modification
paragraph has been merged with the opinion paragraph. The two paragraphs should be separated and contain
appropriate headings also. Moreover, the phrase “In our opinion” should be used at the beginning of the opinion
paragraph and a qualified opinion should be given as has been discussed above.

Answer #7 Q.10 Spring 2013

(a) The liquidation of SL is a non adjusting event. However, the amount due from SL is only 0.36% of profit before tax
and is not material to the F/S therefore the disclosure relating to uncollectability of amount due from SL is not
required. The cost of plant is 120% of the profit before taxation and 12.5% of the net assets of the company and
it is material to the F/S.

Since plant was purchased exclusively for the production of items to be supplied to SL, an impairment review
under IAS 36 must be carried out. If material impairment is eminent then a disclosure would be required as it is a
non adjusting event. In case of non disclosure, a qualified opinion would be given as the matter is material to the
F/S.
Ch # 14. Audit Finalisation and Reporting Page 386

(b) Under the requirements of the Companies Act, 2017 every company is required to keep a record of sums of money
received and expended by the company and the matters in respect of which the receipts and expenditure takes
place. By tracing the receipts and payments mentioned in the party wise summaries with the bank statement, the
matter in respect of which these receipts and payment took place cannot be verified. Unless the information
relating to the matters in respect of which receipt and expenditure takes place is available elsewhere, the audit
opinion regarding proper books of accounts as required under the Companies Act 2017 shall be qualified .

(c) It will be mentioned in the auditor’s report that “In our opinion, Zakat of Rs. 22,000 was deductible at source
under the Zakat and Ushr Ordinance, 1980, but was not deducted by the Company. However, an equivalent
amount was deposited by the Company in the Central Zakat Fund and is included in other expenses”.

Answer #8 Q.8 Spring 2014

(i) Exception to the consistent application of accounting policies will be mentioned in the audit report along with the
note reference where disclosure is made about change in accounting policy and statement whether the auditor
concurs with it or not.
▪ The auditor will issue a disclaimer of opinion on account of limitation of scope and as the matter is material
and pervasive in nature.
▪ It is also to be mentioned that proper books of accounts as required by the Companies Act, 2017 have not
been kept by the company.

(ii) The responsibility of management regarding establishing and maintenance of system of internal controls is
mentioned in the Audit Report, however, no opinion is required regarding operating effectiveness of internal
controls. There would be no impact on audit report.
(iii) If in the auditor judgement, the matter of destruction of plant is fundamental to users understanding of the
financial statement then an emphasis of matter paragraph is required to be given in the audit report referring to
a note in the F/S where the relevant disclosure is made in the financial statement.

Answer #9 Q.3 Spring 2014

(i)
▪ Bank confirmation contains details such as facilities, securities, additional banking relationships, trade finance,
derivative and commodity trading and custodian arrangements. These information are not available in bank
statement. Moreover, the bank confirmation is supposed to be received directly from the bank whereas the bank
statement has been received through the client.
▪ We need to determine whether a response to a positive confirmation is necessary to obtain sufficient appropriate
audit evidence related to bank balance as at December 31, 2013.
▪ If it is concluded that the response to bank confirmation is not necessary then we would perform alternate audit
procedures to obtain sufficient appropriate audit evidence relating to details not provided by the bank.
▪ If we are unable to obtain sufficient appropriate audit evidence from alternative audit procedures or if we
conclude that the response to the bank confirmation is necessary and we are unable to obtain bank confirmation
, then it will constitute a scope limitation. Accordingly, we would qualify the audit report or issue a disclaimer of
opinion depending on the materiality and pervasiveness of the matter.
(ii)
▪ The request by management for sending negative confirmation requests is not appropriate as these are usually
sent when population comprises of large number of small account balances.
▪ The reason provided by the management for not sending confirmation request to three debtors is not appropriate.
▪ In view of the above, we would ask the client to send positive confirmation request.
▪ If the client refuses to send positive confirmation, we would evaluate the implications of the refusal on the risk of
material misstatement, including the risk of fraud and on the nature timing and extent of other audit procedures.
▪ Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.
▪ If we are unable to obtain sufficient appropriate audit evidence form alternative audit procedures or if we
conclude that the confirmation is necessary and we are unable to obtain confirmation from the debtors, then it
will constitute scope limitation. Based on materiality and pervasiveness of the matter, we would issue a qualified
or disclaimer of opinion as appropriate.
Ch # 14. Audit Finalisation and Reporting Page 387

Answer #10 Q.6 Autumn 2015

(a) The argument that the written representation is not necessary because the provision is incorporated on the basis
of expert’s advice is not correct.
The recognition of provision on basis of expert’s advice will not preclude management from assuming
responsibility for the warranty provision.
If the management do not provide the written representation, the auditor will require to reevaluate the effect
which may have on reliability of representations and audit evidence in general.
The auditor may qualify or disclaim the opinion on the F/S depending on the materiality and pervasiveness of the
matter.
(b) The argument of management relating to additional disclosures is not valid, as this disclosure will make F/S
misleading, as IAS allows disclosure of only those contingent assets which are probable.
If the amount is material and the management refuses to remove the disclosures from the F/S, then the auditor
may qualify the audit report.
(c) It is not a change in Accounting policy. However, if the revenue for the customers to whom the goods are to be
delivered to their premises, is material to the F/S, auditor will ask the management to revise the accounting policy
for revenue recognition to cover all types of sales contracts.
If the management refuses to revise the policy accordingly and record the sales based on such policy then the
audit report will be qualified.

Examiner Comments:
The question contained three observations which were highlighted during the audit of a company. The
candidates were required to discuss the possible impact thereof on the audit report. One of the major
issue in many answer scripts was that the candidates only recommended modification of audit report
without clearly identifying the type of modification i.e. qualification, disclaimer, emphasis of matter
paragraph, etc.

Performance with respect to each part is discussed below:

(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.
(c) The performance in this part was very poor. Most of the students termed it as a case of recording of
revenue in contradiction of the accounting policy and recommended that the report may be
qualified. In fact, in the given scenario, the accounting policy needed to be revised to ensure that in
all cases revenue is recognized when the risks and rewards associated with ownership are
transferred to the customer because it would be inappropriate to follow the existing policy in case
of contracts which required delivery of goods at the customers’ premises. This aspect was discussed
by few students only.

Marking Scheme:
(a)
▪ Need for written representation 1.0
▪ Course of action if management do not provide written representation 1.5
▪ Impact on audit report 1.5
(b)
▪ Invalidity of management argument and its justification 2.0
▪ Impact on audit report 1.0
Ch # 14. Audit Finalisation and Reporting Page 388

(c)
▪ Identification of issue, materiality and course of action to be followed 2.0
▪ Impact on audit report 1.0

Answer #11 Q.3b.c Spring 2017

(b) The verbal confirmation from the legal advisor cannot be taken as sufficient appropriate audit evidence and on
account of inability to obtain sufficient appropriate audit evidence. The auditor may consider to qualify or disclaim
an opinion on the F/S
(c) If in the opinion of the auditor the non-disclosure of information results in material misstatement in the F/S, he
shall:
▪ discuss the non-disclosure with TCWG;
▪ describe in the ‘Basis for opinion section’ the nature of the omitted information; and
▪ issue a qualified opinion on the basis of inability to obtain sufficient appropriate audit evidence.

Examiner 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:
(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.

Marking Scheme:
(b)
▪ Discussion on the possible impact on the audit report 2.0
(c)
▪ Discussion on the possible impact on the audit report 3.0
▪ Audit procedures to be performed 1.0

Answer #12 Q.9 Autumn 2017

(a) Provision of warranty is 10% of the PBT and therefore it is material to the financial statements Since the expert
has been appointed and matters related to his appointment have already been considered, we may need to perform
the following procedures:
▪ Evaluate the reasonableness of significant assumptions and methods used
▪ Evaluate the relevance, completeness and accuracy of source data
▪ Evaluate the reasonableness of the expert’s conclusions
▪ Carry out analytical procedures to assess the reasonableness of the provision as compared to other relevant items
▪ Confirm that the accounting provisions of IAS 37 have been complied with, in making the provision
▪ In case there is a difference between the valuation of the auditor’s expert and the valuation of the management,
discuss the difference with the management.

Reporting implication
In case the difference between the valuation of the auditor’s expert and the valuation of the management is material
and cannot be resolved, we will have to give a qualified opinion.
Ch # 14. Audit Finalisation and Reporting Page 389

However, if we have obtained sufficient appropriate evidence regarding the valuation and presentation of the
warranty provision, then we will have to include relevant details under the heading of key audit matters in our audit
report, because it is an area of higher assessed risk of material misstatement due to involvement of high degree of
uncertainty and significant auditor judgment.

(b) Our firm was not appointed as auditors of the YL until 30 June 2017 and thus did not observe the counting of
physical inventories as the end of year 30 June 2017. In this situation, we may perform the following procedures:
▪ Conduct physical inventory count after the date of the financial statements.
▪ Check whether the changes in inventory between the count date and the date of the financial statements are
properly recorded.
▪ Investigate the reason for significant differences between the information obtained during the physical count and
the inventory records.
▪ Assess the reliability of inventory records.

Reporting implication
If the auditor concludes that it would be impracticable or not possible to work back the inventory then this would be
a scope limitation and depending upon the material and pervasiveness of the amount of inventory, the auditor should
qualify or disclaim his opinion.

Furthermore, the auditor should include other matter paragraph and mention that the prior period financial
statements were audited by another auditor.

Examiner Comments:
This question contained two parts and each part contained an independent situation. The candidates
were required to specify the audit steps to be performed and possible implications on the audit report in
the given scenarios. The overall performance was very poor as only 6% candidates could secure passing
marks. Part wise comments are given below:
Part (a)
According to the given situation, the audit firm had hired an expert for evaluation of provision for
warranty provided to the customers. The amount of provision had been computed by the client internally
using certain complex assumptions.
The performance was extremely poor but could have been better. Majority of the candidates did not read
the question carefully and suggested procedures related to assessing the competence and capability of
the expert as they clearly disregarded the fact that according to the question these aspects had already
been considered by the firm. This situation can have been avoided easily. Moreover, while discussing the
implications on the audit report, the reporting of the issue as a key audit matter was mostly ignored.
Complete answers covering all angles were rare.
Part (b)
It was a simple scenario according to which the auditor was not able to perform inventory count because
the appointment was made after year-end. The candidates were generally able to discuss the
requirement to carry out stock taking as soon as possible and verification of the movement. However,
while discussing the reporting implications, very few students could visualize that verification of the
changes between the year-end and inventory count date may not always be possible. Further, besides
inventory, another issue also emerged from the scenario i.e. that it was the first year of audit. The
requirement to include other matter paragraph in such a situation was also not mentioned in majority
of the cases.

Marking Scheme:
(a)
▪ 01 mark for each procedure related to evaluation of expert’s work and verification of warranty
provision 6.0
▪ Discussion on reporting implication 2.0
(b)
▪ 01 mark for each procedure related to inventory verification 4.0
▪ Discussion on reporting implication 3.0
Ch # 14. Audit Finalisation and Reporting Page 390

Answer #13 Q.4(a) Spring 2018

(i)
▪ The intangible asset measured at Rs. 100 million is material as it represents 37% of profit before tax.
▪ IAS 38 requires that the entity should be able to demonstrate the availability of adequate technical, financial and
other resources to complete the development and to use or sell the intangible asset. As ATL appears to be short
of finance, it is questionable whether sufficient funds would be available to complete the development work and
take the product to market. Therefore, it appears that the criteria for capitalization of development costs
contained in IAS 38 Intangible Assets is not met.
▪ Discuss this matter with the management and those charged with governance to assess their plans for arranging
the necessary finance. In case the auditor believes that there is a doubt as regards the company’s ability to
complete the development work, the intangible asset should be derecognized and the auditor should request the
management to amend the financial statements.
▪ If the management fails to resolve the issue appropriately, the auditor may have to qualify the report as the
misstatement is material, but not pervasive.
(ii)
▪ Since the fire has destroyed a significant portion of RL’s plant, the auditor should consider RL’s ability to continue
as a going concern.
▪ Evaluate financial condition of RL as the cost of new plant is expected to be much higher and insurance claim of
Rs. 400 million may not be sufficient to purchase a new plant.
▪ Discuss with the management and those charged with governance that how they intend to finance the new plant
and the operational expenses during the closure of the plant.
▪ Inspect the insurance policy and the correspondence with insurance company for the verification of the insurance
claim.
▪ Read the minutes of those charged with governance for further details.
▪ Analyze the latest available interim financial statements, to assess the impact of the accident on RL’s financial
performance.
▪ In case the going concern basis is inappropriate but the financial statements have not been adjusted accordingly
we will express an adverse opinion.
▪ In case going concern basis is appropriate but material uncertainty exists and the management has not made
appropriate disclosures, we will express a qualified or adverse opinion depending upon the materiality and
pervasiveness of the situation.
▪ If the management has made appropriate disclosures in the financial statements regarding material uncertainty,
we will express an unmodified opinion and will draw attention to the disclosure through a separate section under
the heading material uncertainty related to going concern.

Examiner Comments:
This question consisted of two parts. Part (a) was further sub-divided into two sub-parts. Each sub-part
contained a scenario and the candidates were required to discuss how they would deal with each
scenario. Comment on each part/sub-part is given below:

(i) Though some of the students produced very precise answers, most of them were unable to assess the
situation correctly. A significant number of students tried to relate it with going concern issue which
was totally irrelevant. Some of them only discussed the materiality of the amount involved without
commenting on whether the accounting treatment was correct or not. Moreover, majority of the
students treated Rs. 50 million i.e. the amount further required to complete the project while
considering the materiality which was incorrect as the amount in question was Rs. 100 million i.e.
the amount which had been recognised as intangible. Furthermore, some of them simply stated that
the accounting treatment was incorrect but did not explain why.

It was also observed that despite that the profit for the year and the value of the intangible were
mentioned in the question, students were not able to conclude that whether the effect of the
misstatement would be material or pervasive and discussed consequences of both possibilities.

(ii) In this 7 mark question, most of the students correctly identified the going concern issue but failed
to explain how the auditor should deal with the situation. Most of them only discussed the impact on
Ch # 14. Audit Finalisation and Reporting Page 391

the audit report assuming that the going concern assumption was no more valid, without specifying
any measures to assess the situation. They failed to realise that since the plant was fully insured and
the company had been earning handsome profits, it was more probable that the going concern
assumption was still valid.
On the other hand, many students did not feel the need to discuss the going concern issue at all and
stressed only upon the recoverability of the insurance claim. A number of students mentioned steps
such as verification of purchase price of the plant and recalculation of written down value, etc. which
were totally irrelevant.

Marking Scheme:
(i)
▪ Determination of materiality 1.0
▪ Discussion on:
- whether the capitalization criteria as per IAS-38 was met or not 2.0
- the procedures to be followed and the reporting implications 2.0
(ii) Discussion on:
▪ assessment of whether RL is a going concern 2.0
▪ the procedures to be followed 4.0
▪ reporting implications 1.0

Answer #14 Q.3(a) Autumn 2018

(a)
(i) The return of goods due to quality issues is an adjusting event for which condition existed at the year end. Revenue
reported in the financial statements should be reduced by Rs. 3,000,000 by recording sales return. The cost of
sales should also be reduced accordingly.
The auditor should also consider that there may be quality issues with other inventory items as well requiring
them to be written down to NRV.

In term of the impact on the audit report, the level of misstatement is not material as the materiality has been set
at Rs. 8 million, consequently this issue will have no impact on the audit report; unless there are other
misstatements and the aggregate of such misstatements is material to the financial statements.
(ii)
▪ HML’s liquidity issues, adverse key financial ratios and recurring net loss cast a doubt on HML’s ability to
continue as a going concern.

We need to satisfy that there is no doubt over the going concern assumption.
If the going concern basis is appropriate but a material uncertainty exists, which is adequately disclosed in
the financial statements, then a paragraph related to material uncertainty would have to be included in the
audit report. In case adequate disclosures are not given, audit report may express qualified or an adverse
opinion.

If the going concern basis is not appropriate an adverse opinion would be given, unless HML agrees to present
the financial statements on other than going concern basis.

▪ Sale of office to a company managed by the director of HML is a related party transaction and needs to be
disclosed specifically as a related party transaction.

The disclosure and the magnitude of transaction are both material to the financial statements. If it is not
disclosed in the financial statements appropriately, it will be considered as a misstatement on account of
application of accounting policy. The opinion will be modified accordingly.

(iii) Declaration of a customer as bankrupt is an adjusting subsequent event and the remaining 50% of the balance
also needs to be written off.
Ch # 14. Audit Finalisation and Reporting Page 392

The above issue individually is not material to the financial statement, therefore has no impact on audit report.
However, if this misstatement is not corrected and aggregate of all uncorrected misstatements is material to the
financial statements, the report will be modified accordingly.

Examiner Comments:
The overall performance in this question was poor as only 23% candidates secured passing marks. The
question was based on a scenario according to which three issues had been identified by the audit team,
during the audit. There were two requirements set out in part (a) and (b) of the question. Performance
in each part is discussed below:

In this part the candidates were required to identify the impact of each of the three issues on the audit
report along with proper justification. Impact on the audit report was mostly described correctly but
proper justification was not provided. Justification included considering matters such as materiality,
whether it was an adjusting or non-adjusting event, etc.

Marking Scheme:
▪ Up to 01 mark for discussion of each issue 4.0
▪ Up to 01 mark for each possible impact on the audit report 6.0

Answer #15 Q.7 Autumn 2019

(a) (i)
▪ Review minutes of the board meeting in which such matter were discussed.
▪ Review the client’s correspondence with the tax advisers and invoices for tax services.
▪ Obtain direct confirmation from tax adviser.
▪ Obtain and review the correspondence with the tax authorities.
▪ Consider whether expert advice may be required from outside sources other than tax advisor.
▪ Consider any legal precedent or case law by assessing relevant historical and recent judgments passed by the
courts and other authorities in similar situation.
▪ Obtain written representation from the management.
▪ Evaluate the adequacy of the disclosure in the financial statement.
From the information provided it seem to indicate that the accounting treatment adopted is in line with IAS 37
which requires a contingent liability to be disclosed. Therefore there would be no impact on the audit report of
BL.
We may have to include an emphasis of matter paragraph in the audit report highlighting the matter with a
reference to the note to the financial statements.

(ii) Since the event occurred after the date of financial statements and the amount of loss is material, the auditor
should obtain evidence that whether the incident has been appropriately disclosed in the financial statements as
a non-adjusting event.
We will need to verify the financial impact to be disclosed in the financial statements by verifying the write down
of stocks, loss of property and equipment, etc.
We will also need to assess the adequacy of the insurance claim and whether it covers all the losses by reviewing
the insurance policy and the correspondence with the insurers.
We will have to include an emphasis of matter paragraph in the audit report highlighting the matter with a
reference to the note to the financial statements.
In case the management disagrees to disclose the incident then we may consider expressing a qualified opinion.
(b) Qualified Opinion We have audited the financial statements of Beluga Limited (the Company), which comprise the
statement of financial position as at 31 August 2019, and the statement of comprehensive income, statement of
changes in equity and statement of cash flows for the year then ended, and notes to the financial statements,
including a summary of significant accounting policies.
In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion section of our
report, the accompanying financial statements present fairly, in all material respects, (or give a true and fair view
of) the financial position of the Company as at 31 August 2019, and (of) its financial performance and its cash
flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs).
Ch # 14. Audit Finalisation and Reporting Page 393

Examiner Comments:
(a)
▪ Most of the examinees did not mention more than one or two audit procedures.
▪ For pending tax litigation, many examinees recommended to qualify the audit report which was
incorrect.
▪ Instead of discussing the subsequent event and its reporting implications due to the fire incident,
examinees mentioned the audit procedures related to going concern and its reporting implications.
(b) A majority of examinees either did not attempt this question or failed to obtain any mark which
reflected selective study on their part.

Marking Scheme:
(a)
▪ 01 mark for each audit procedure 7.0
▪ Brief discussion on reporting implication 3.0
(b)
▪ Disclosure such as name of company audited, component of financial statements, period covered etc.
3.0
▪ Drafting a qualified opinion on the financial statements 2.0

Answer #16 Q.3(b) Spring 2020

The total development cost incurred to date is Rs. 78 million which is 52% of profit before tax and is therefore
material.
Your team should first discuss with the management and those charged with governance to evaluate the contradicting
views obtained from the board minutes and the management’s explanation.

If the view of the board of directors is valid then perform the following audit procedures:
▪ Consider whether CL would be able to arrange the additional funding requirements for completion of the project.
▪ Ask management to provide the revised marketing plans to assess that whether a market at such an increased
price actually exists.
▪ Review revised projections, feasibility and forecasts for using resources and generating future economic benefits.
▪ Obtain written representation from management as to their commitment to complete the project.
▪ Assess whether CL would be able to produce the solar roof at an increased cost.

If the view of the board of directors is not valid then perform the following audit procedures:
▪ Obtain and read the documentation of research team’s notes and conclusions related to completion of the project
and the funding requirements.

Reporting implications:
If the matter is resolved the auditor may consider including it in the key audit matter section of the audit report.
However, if it is established that conditions required for recognition of development cost are not met then auditor
should request the management and those charge with governance to expense out the development cost. If they
disagree, as the matter is not pervasive as it only affects specific items in the financial statements and therefore a
qualified opinion should be issued. The audit report should include an explanation of the issue in the basis for qualified
opinion paragraph.

Examiner Comments:
▪ Discussion with the management and those charged with governance regarding the conflicting
views were not mentioned.
▪ Inquiring about revised marketing plans to assess that whether a market at such an increased price
actually exists was not mentioned.
▪ Reviewing revised projections, feasibility and forecasts for using resources and generating future
economic benefits, were also not mentioned.
▪ Examinees considered the additional Rs. 50 million required to be incurred on the project as
materiality for determining that whether the audit report would be qualified.
Ch # 14. Audit Finalisation and Reporting Page 394

▪ Examinees mentioned inconclusive statements that the qualified opinion would be expressed if
misstatement is material and adverse opinion would be expressed if misstatement is material and
pervasive.

Marking Scheme:
▪ 01 mark for each audit procedure 5.0
▪ Discussion on implications on the audit report 3.0

Answer #17 Q.1 Autumn 2020

(a)
Inventory count:
Audit team should consider whether the physical count can be conducted on 31 October 2020. If the inventory count
can be carried out, then the following procedures should be performed:
▪ Conduct physical inventory count after the date of the financial statements.
▪ Check whether the changes in inventory between the count date and the date of the financial statements are
properly recorded.
▪ Investigate the reason for significant differences identified during the physical count and the inventory records.
▪ Assess the reliability of inventory records.

Audit team should also consider and discuss with the management and the third party that whether the physical count
can be conducted through video link.

If it is impracticable to conduct an inventory count at a later date, then the following procedures should be performed:
▪ Inquire from the management whether third party will carry out any inventory count on 30 September 2020, and
if yes, obtain the inventory count sheets.
▪ Inquire from the management whether third party regularly provides the inventory levels held at their
warehouse, and whether any discrepancies has previously been identified.
▪ Obtain details of the inventory transferred to the third party warehouse and inspect documents of subsequent
sale/transfer out to ascertain the condition and existence of the inventory.
▪ Request confirmation from the third party as to the quantities and condition of inventory held on behalf of the
entity.

Litigation:
▪ Discuss with the OPL’s legal advisor(s) in respect of the outcome of the case.
▪ Obtain the minutes of meeting with regards to discussion on this litigation.
▪ Review the subsequent correspondence with the competitor, if any.
▪ Involve auditor’s legal expert to assess the outcome of the case.
▪ Evaluate the adequacy of the disclosure in the financial statements, in particular the disclosure of the uncertainty
in estimation and its quantification.
▪ Obtain written representation from the management regarding the fact that no estimate can be made about the
outcome of the case.

(b)
Inventory count
▪ If the auditor is able to attend the inventory count or obtains sufficient appropriate audit evidence without
attending the inventory count, an unmodified opinion will be expressed.
▪ If the auditor is not able to attend the inventory count at the third party warehouse and also could not obtain
sufficient appropriate audit evidence through alternate audit procedures, it will be a limitation of scope.
If the auditor attends the inventory count on 31 October 2020 but still could not obtain sufficient appropriate
evidence, it will also be a limitation of scope.

The value of the inventory recorded by management is 13.3% of profit before tax and therefore material but not
pervasive as it is isolated to one account head of the financial statements.
Ch # 14. Audit Finalisation and Reporting Page 395

Therefore, the audit opinion should be modified with a qualified opinion. The auditor needs to include a basis for
qualified opinion, explaining the reasons for inability to obtain sufficient appropriate audit evidence.

Litigation
▪ If the auditor agree with management’s treatment, an unmodified opinion should be issued.
▪ The claim is 667% of profit before tax and represents a significant uncertainty which would turn

OPL’s profit into a loss. Therefore, the audit report should be modified using an Emphasis of Matter paragraph and a
brief description should draw the users’ attention to the relevant disclosure note.
▪ If the auditor does not agree with management’s treatment based on the opinion of the auditors expert, auditor
should modify his opinion accordingly.

Examiner Comments:
(a)
▪ Assessing the reliability of the inventory records, if the inventory count was to be carried out at a
later date, was not discussed.
▪ No audit procedure was mentioned if it was impracticable to conduct an inventory count at a later
date.
▪ Reviewing the minutes of meeting in respect of litigation was not mentioned.

(b)
▪ Reporting implications were not discussed.
▪ Many examinees confined their answer to the inconclusive statements that the qualified opinion
would be expressed if misstatement is material and adverse opinion would be expressed if
misstatement is material and pervasive.
▪ For the legal actions against the audit client related to infringement of patent rights, examinees did
not discuss about inclusion of an emphasis of matter paragraph.

Marking Scheme:
(a) 01 mark for each audit procedure 10.0
(b) 04 marks for discussion on implications of each issue 8.0

Answer #18 Q.6 Spring 2021

(i) (a) Audit procedures:

▪ Inquire from the management that whether any contract was made with the foreign customer.
▪ Review the contract to identify as to whether any recovery can be made from the customer for
exiting/breaching the contract.
▪ Inquire from the management that since the inventory was for specific use, could it be put to some other use.
▪ Inquire from the management that whether they have carried out any exercise to determine the NRV of this
inventory.
▪ Assess the managements working of NRV for accuracy.

(b) Reporting implication:

The value of the inventory recorded by management is 20% of profit before tax and therefore material but not
pervasive as its effect restricted to one account head of the financial statements.
If the management records the NRV adjustment then a clean opinion would be issued. However, the auditor may
consider including it as a key audit matter.
If the auditor considers that no major adjustment is required in the inventory value and the management has not
recorded that adjustment, then the auditor will combine it with other misstatements to assess whether the
combined effect is material.
If the auditor considers that major adjustment is required in the inventory value and the management has not
recorded that adjustment, then the auditor expressed a qualified opinion. The auditor needs to include a basis for
qualified opinion, explaining the reasons for qualifying the opinion.
Ch # 14. Audit Finalisation and Reporting Page 396

(ii) (a) Audit procedures:

▪ Discuss with the management that whether they have carried out a going concern assessment.
▪ Discuss with management that whether there are any contingency plan(s) in place for the loss of this contract.
▪ Review the negotiations with EL regarding the contract renewal being carried out.
▪ Inquire the management that whether any new customer has been identified subsequently.
▪ Review the minutes of board of directors meeting to identify the course of action to be adopted by the
management.
▪ Review the projected cash flow and profit and loss forecast prepared by the management in light of this event.
▪ Review subsequent financial statements of EL to obtain evidence regarding the going concern assumption.
▪ Obtain management representation regarding the fact that EL have sufficient resources/support from
sponsors to continue as a going concern.

(b) Reporting implication:

If there is uncertainty about the going concern status of the company and management is willing to fully disclose
the circumstances, a paragraph headed Material Uncertainty Related to Going Concern should be included,
highlighting the issue and drawing users’ attention to the note in the financial statements. There should be a
specific statement that the opinion is not modified.

If management refuses to disclose the uncertainty, the opinion should be modified due to misstatement/
disagreement. The modification should be a qualified opinion if the issue is considered material but not pervasive
or an adverse opinion if considered material and pervasive.
If the entity’s going concern is not valid and the financial statements are prepared on an inappropriate basis and
consequently many items in the financial statements will be materially misstated. This would be pervasive
requiring an adverse opinion stating that the financial statements do not give true and fair view.

If the management is unwilling to make or extend its assessment a disclaimer of opinion would be given.

Examiner Comments:
(a) Examinees did not mention the following audit procedures:
In the case of Elrond Pakistan Limited:
▪ Assess whether there was any contract with the foreign customer.
▪ Review the contract to identify that whether any recovery can be made.
▪ Determine whether the inventory has any alternative use.
In the case of Stellar Limited:
▪ Discuss with management that whether there are any contingency plan(s) in place for the loss
of this contract.
▪ Review the negotiations with EL regarding the contract renewal being carried out.
▪ Inquire the management that whether any new customer has been identified subsequently.

(b) In the case of Elrond Pakistan Limited:

▪ Examinees considered the matter to be pervasive, which was incorrect.
▪ Examinees erroneously linked the scenario with uncertainty in respect of going concern.
▪ Examinees confined their answer to the inconclusive statements that the qualified opinion
would be expressed if misstatement is material and adverse opinion would be expressed if
misstatement is material and pervasive.
▪ Examinees did not mention that if no major adjustment was required in the inventory value and
the management did not record that adjustment, then the auditor was required to combine it
with other misstatements to assess whether the combined effect was material.
In the case of Stellar Limited:
▪ Examinees did not mention the implication on audit report in case the management did not
assess the entity as going concern.
▪ Instead of including a paragraph titled Material Uncertainty Related to Going Concern,
examinees incorrectly mentioned about inclusion of an emphasis of matter paragraph.
Ch # 14. Audit Finalisation and Reporting Page 397

Marking Scheme:
(a) 01 mark for mentioning each audit procedure 8.0
(b)
▪ Discussing whether cancellation effects are material for EPL 2.5
▪ Discuss the reporting implication on EPL’s audit 2.5
▪ Discussing the materiality uncertainty related to going concern implication on SL 2.0
▪ Discussing the modification in SL’s audit report 3.0

Answer #19 Q.3 Autumn 2021

EPL-Audit Procedures:
(i) Inquire from management when the asset was available for use.
(ii) Obtain the engineer’s certificate / documentation to assess when the asset was completely built.
(iii) Read the management meeting minutes to find out whether any discussion has been made related to the project
completion.
(iv) Obtain management representation regarding when the asset was available for use.
(v) Inspect the purchase invoice of the additions made to this CWIP.
(vi) Review that only capital expenditure has been capitalized and revenue expenses has been recorded in profit and
loss.
(vii)Review the useful life for reasonableness by comparing it with other similar assets.

EPL-Reporting Implications:
EPL should start depreciating the asset when it is available for use and not when it is put to use. If it is established that
the asset has been completed before year end, the management of EPL should be asked to record depreciation.
However, the maximum possible adjustment i.e. Rs. 1.67 million is below the materiality level i.e. Rs. 7.5 million.
Therefore there would not be any impact on the audit report and we will express an unqualified opinion. The potential
adjustment amount would need to be added to the list of uncorrected misstatements and assess that whether they are
material in aggregate. We will also obtain a written representation in this regard that the effects of uncorrected
misstatements are immaterial, both individually and in the aggregate, to the financial statements as a whole.

CEL-Audit Procedures:
(i) Review the legal expense account for any further claims or proceedings against the company.
(ii) Send confirmation to the legal advisor to confirm the current status of the litigation and the expected outcome.
(iii) Review communication with the customers for out of court settlement.
(iv) Review the minutes of the board of directors meeting to assess the possible outcome of the case.
(v) Consider the possibility of any legal proceedings and any proceedings that may be instigated by the public health
authorities as such authorities might impose significant fines.
(vi) Seek written representation from the management about likely outcome of the case.
(vii)Ensure that proper disclosure in this regard in the financial statements should be made.

CEL-Reporting Implications:
Not giving disclosure of the event is qualitatively material to the financial statements. The financial statements should
include the disclosure required by the applicable financial reporting framework. If CEL does not disclose this matter,
it would be considered as a material misstatement that relates to the non-disclosure of information required to be
disclosed. The auditor shall:
▪ discuss the non-disclosure with those charged with governance;
▪ Express a qualified opinion
▪ describe in the basis for opinion section the nature of the omitted information; and
▪ unless prohibited by law or regulation, include the omitted disclosures, provided it is practicable to do so and the
auditor has obtained sufficient appropriate audit evidence about the omitted information.

For the customers with whom out of court settlement has been agreed a provision needs to be recorded. If the
management does not record the provision and if it is material, then the auditor shall express a qualified opinion. The
auditor needs to include a basis for qualified opinion, explaining the reasons for qualifying the opinion.
Ch # 14. Audit Finalisation and Reporting Page 398

Examiner Comments:
(a) For the audit of Elrond (Private) Limited, examinees failed to mention the following audit
procedures:
▪ Inquire from management when the asset was available for use.
▪ Obtain the engineer’s certificate / documentation to assess when the asset was completely built.
▪ Read the management meeting minutes to find out whether any discussion has been made
related to the project completion.
▪ Obtain management representation regarding when the asset was available for use.
▪ For the audit of Café Elixiar (Private) Limited, examinees failed to mention the following audit
procedures:
▪ Review the legal expense account for any further claims or proceedings against the company.
▪ Consider the possibility of any legal proceedings including any proceedings that may be
instigated by the public health authorities as such authorities might impose significant fines.
(b) Following shortcomings were observed while discussing reporting implication for the audit of
Elrond (Private) Limited:
▪ Examinees used the entire amount of capital work in progress for calculating materiality rather
than the depreciation.
▪ Examines concluded that a qualified opinion needs to be expressed.
▪ Examinees also did not mention that the potential adjustment amount would need to be added
to the list of uncorrected misstatements and assess that whether they are material in aggregate.
▪ Examinees did not mention about obtaining a written representation that the effects of
uncorrected misstatements are immaterial, both individually and in the aggregate, to the
financial statements as a whole.
Following shortcomings observed while discussing reporting implication for the audit of Café Elixiar
(Private) Limited:
▪ Communicating the non-disclosure with those charged with governance.
▪ Describing in the basis for opinion section the nature of the omitted information.
▪ Unless prohibited by law or regulation, include the omitted disclosures, provided it is practicable
to do so and the auditor has obtained sufficient appropriate audit evidence about the omitted
information.

Marking Scheme:
(a) 01 mark for mentioning each audit procedure 10.0
(b)
▪ Evaluation of misstatement in the financial statements and its materiality 4.0
▪ Discussion on the audit opinion to be expressed 4.0

Answer # 20 Q.7 Spring 2022

(a) Reporting implication:

Multiple accounts balances of the financial statements are affected for which the auditor has not been able to
obtain sufficient appropriate audit evidence, which is a scope limitation imposed by the circumstances. Since the
undetected misstatements are not confined to single specific element of the financial statements and these also
represent a substantial portion of the financial statements, it will have a pervasive effect on the financial
statements.
Auditor shall disclaim an opinion as they are 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.

Changes in the standard audit report:

When the auditor disclaims an opinion due to an inability to obtain sufficient appropriate audit evidence, the
auditor shall state in the opinion paragraph that:
▪ the auditor does not express an opinion on the financial statements.
▪ because of the significance of the matter(s) described in the Basis for Disclaimer of Opinion paragraph, the
auditor has not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit
opinion;
Ch # 14. Audit Finalisation and Reporting Page 399

▪ the auditor shall amend the opinion section of the auditor’s report to state that the auditor was engaged to
audit the financial statements.
▪ the auditor shall also amend the description of the auditor’s responsibility and the description of the scope
of the audit accordingly.
▪ unless required by law or regulation, when the auditor disclaims an opinion on the financial statements, the
auditor’s report shall not include a Key Audit Matters section in accordance with ISA 701.

(b) Reporting implication:

The matter of application of IFRS 16 is significant as Smart Footwear operates through number of rentals outlets.
Furthermore, the change in accounting policy and related adjustments have taken considerable time of audit
team to verify. The matter was also discussed and brought to the knowledge of those charged with governance
in the meeting of the audit committee and through board letter. Considering all these factors, the auditor will
add the matter of application of IFRS 16 as key audit matter in the audit report.
Changes in the standard audit report:
Since the financial statements of previous year were audited by another auditor, the other matter paragraph will
be added in the report which will mention that the financial statements were audited by another auditor, the
type of opinion expressed and the date of that auditor’s report.

Examiner Comments:
(a)
▪ Examinees mentioned about expressing qualified or adverse opinion, which was not correct.
▪ Examinees who mentioned about disclaiming the audit opinion did not mention the changes to be
made to the audit report when a disclaimer of opinion is given.
(b)
▪ Examinees did not discuss that why the matter was needed to be included as a key audit matter.
▪ Examinees did not know that other matter paragraph was also to be included in the audit report as
the previous year’s financial statements were audited by another firm.

Marking Scheme:
(a)
▪ Discussion on the materiality and pervasiveness of the matter 3.0
▪ Mentioning the audit opinion to be expressed 1.0
▪ 01 mark for mentioning each change to be made in the audit report as illustrated in ISA-700 3.0
(b)
▪ Discussion on the reporting implication 4.0
▪ 01 mark for mentioning each change to be made in the audit report as illustrated in ISA-700 3.0

Answer # 21 Q.3 Autumn 2022

(a) Brief evaluation of the situation:

It is necessary for the auditor to obtain written representation that management has fulfilled its responsibilities.
It supports the overall control and the managements attitude over the financial reporting process. It also supports
the other audit evidence obtained by the auditor.

Managements refusal to provide the written representation is inability to obtain sufficient appropriate audit
evidence arising from a limitation on the scope of the audit imposed by the management.

Reporting implication:
Since the limitation of scope is related to preparation of financial statements, the effect is pervasive.

Auditor will therefore disclaim the opinion and mention it in the opinion paragraph that the auditor does not
express an opinion on the financial statements.
Since the modification results from an inability to obtain sufficient appropriate audit evidence, the auditor shall
include in the basis for opinion section the reasons for that inability.
Implication on key audit matter:
Since we are disclaiming the opinion, key audit matter section will not be made part of the audit report.
Ch # 14. Audit Finalisation and Reporting Page 400

(b) Brief evaluation of the situation:

Inventory is measured at the lower of cost and net realizable value. Increase of fuel prices in international market
will not have any impact on fuel quantities already procured and held by Power Generation Limited. Any upward
valuation of fuel inventories would result in misstatement.

Reporting implication:
The effect of upward valuation is Rs. 250 million which is 10% of the profit before tax. Since the effect is confined
to a single element of the financial statement, the effect is material but not pervasive.

The misstatement being material, auditor will have to express a qualified opinion. The auditor shall include in the
basis for opinion section, a description and quantification of the financial effects of the misstatement.
Implication on key audit matter:
Qualified opinion is by nature a key audit matter. Therefore, a reference to the Basis for Qualified Opinion should
be included in the Key Audit Matters section.

(c) Brief evaluation of the situation:

Since the going concern basis is not appropriate, the management has rightly prepared the financial statements
on liquidation basis.

Reporting implication:
The auditor may be able to express an unmodified opinion on those financial statements, provided there is
adequate disclosure therein about the basis of accounting on which the financial statements are prepared.
However, the auditor will include an Emphasis of Matter paragraph to draw the user’s attention to that alternative
basis of accounting and the reasons for its use.
Implication on key audit matter:
There will not be any impact on the key audit matter section of the audit report and it would be presented as usual.

Examiner Comments:
(a)
▪ In the evaluation, examinees did not discuss the necessity of the management representation
regarding their responsibilities.
▪ Examinees did not realize that it was a scope limitation and therefore a disclaimer of opinion would
be given. Contrary to this, examinees mentioned expressing an adverse opinion or a qualified opinion.
▪ Examinees did not mention that if a disclaimer of opinion is given then key audit matter is not made
part of the audit report.
(b)
▪ The majority of the examinees mentioned that the upward valuation of inventory was correct and a
clean audit opinion would be expressed.
▪ Examinees also mentioned including it as a key audit matter which was not correct.
(c)
▪ The examinees did not mention that an unmodified opinion would be expressed.
▪ Examinees mentioned including it as a key audit matter which was not correct.

Marking Scheme:
(a)
▪ Evaluation of the situation 2.0
▪ Discussion on the reporting implications 2.0
▪ Discussion on the implication on the key audit matter 1.0
(b)
▪ Evaluation of the situation 2.0
▪ Discussion on the reporting implications 2.0
▪ Discussion on the implication on the key audit matter 1.0
(c)
▪ Evaluation of the situation 1.0
▪ Discussion on the reporting implications 3.0
▪ Discussion on the implication on the key audit matter 1.0
Ch # 14. Audit Finalisation and Reporting Page 401

Answer # 22 Q.5 Spring 2023

(a) Evaluation:
Depreciation needs to be recorded despite the production unit being shut down for two months. Furthermore, the
shut down of the production unit due to a reduction in demand may be an indicator of impairment.

Audit procedures:
▪ Obtain the management working of depreciation and impairment and verify its accuracy.
▪ Obtain an understanding of management process related to identifying, estimating and recording impairment
for fixed assets.
▪ Obtain the management working and verify the authenticity of the source data used by the management.
▪ Assess the reasonableness of the assumptions used by the management for the working of the impairment.
▪ Obtain the management fair valuation report of the production unit.
▪ Consider involving the auditor’s expert for valuation of the production unit.
▪ Review the disclosures prepared by the management related to impairment of plant.

(b) Reporting implications:

Although depreciation only amounts to 2% of the profit before tax, and may not be material individually, we would
still ask the management or those charged with governance to record the depreciation for the last two months.
However, being immaterial, an unqualified opinion would be issued.

Additionally, the misstatements must be aggregated with other misstatements to determine if the total amount of
misstatement is material in the aggregate.

It should also be evaluated whether the impairment of the production unit exceeds the materiality threshold. If it
does, the audit report would be qualified and a basis of qualified opinion paragraph would be added, which would
describe the reasons for the qualification.

Examiner Comments:
▪ Examinees failed to understand that the decrease in demand and the non-operational status of a
production plant indicated impairment. Consequently, examinees did not mention any audit
procedure related to this matter.
▪ Examinees also did not discuss the implication of the impairment on the audit report.

Marking Scheme:
(a)
▪ Evaluation of the situation 2.0
▪ 01 mark for each audit procedure 4.0
(b)
▪ Discussion on materiality of the misstatement 2.0
▪ Discussion on reporting implication 2.0

Answer # 23 Q.6 Spring 2023

Evaluation:
Revenue and production records generally constitute a significant portion of financial records, unavailability of these
records could impede the auditor’s the ability to obtain sufficient appropriate audit evidence, and could result in a
scope limitation. It is necessary to assess the availability of electronic records, and to consider verifying these records
through alternate audit procedures.

Implication of fraudulent financial reporting would also be relevant if the management is involved in tax evasion. In
addition, a contingency related to this matter may need to be disclosed in the financial statements, or a provision could
be recognized.
Ch # 14. Audit Finalisation and Reporting Page 402

Reporting implication:
Since the records of a significant portion of revenue have been seized by FBR in order to probe an allegation of tax
evasion, the auditor will consider the scope limitation imposed by circumstances beyond management control on the
sufficiency and appropriateness of audit evidence.

Since revenue and production records constitute a significant portion of the accounting records, the auditor’s inability
to obtain sufficient appropriate audit evidence will have a pervasive effect. Therefore, a disclaimer of opinion will be
expressed. We will discuss the reason for disclaiming the opinion in basis of opinion paragraph. However, a qualified
opinion will be expressed if inability to obtain sufficient appropriate audit evidence has a material impact.

If we are able to obtain sufficient appropriate audit evidence through alternate audit procedures, we will also evaluate
whether management has adequately disclosed the contingency or recorded additional taxes and fines that the entity
may face as a result of the probe. If appropriate accounting/disclosures have not been made, we will have to express
a qualified opinion.

If it is determined that the evasion was intentional, the auditor should consider its earlier assessment regarding the
integrity of the management and consider informing the fact to those charged with governance. The auditor should
also consider resigning from the assignment and obtain a legal opinion in this regard and shall determine whether
there is a responsibility to report to the regulatory authorities.

Examiner Comments:
▪ Examinees mentioned audit procedures that were not required.
▪ Examinees did not evaluate the following aspects and their related reporting implications:
- Fraudulent financial reporting, particularly if management is involved in tax evasion.
- Contingency related to the matter that may require disclosure in the financial statements or
recognition of a provision.

Marking Scheme:
▪ Evaluation of the situation 5.0
▪ Discussion on materiality and scope limitation 3.0
▪ Discussion on reporting implication 2.0

Answer # 24 Q.5(b) Autumn 2023

Audit procedures:
▪ Review the expert’s documentation and report to obtain an understanding of the work of that expert.
▪ Review the management’s work for arriving at the fair value of the specialized asset.
▪ Compare the source data and assumptions used by the auditor expert and the management to assess the value of
the assets.
▪ Obtain the source data used by the expert and verify the relevance, completeness, and accuracy of that source
data.
▪ Assess the relevance and reasonableness of those assumptions and methods in the circumstances.
▪ Assess the relevance and reasonableness of that expert’s findings or conclusions and their consistency with other
audit evidence obtained during the audit.

Implications on audit report:

The effect of Rs. 500 million is 20% of the profit before tax of Rs. 2,500 million. Since the effect is confined to a single
element of the financial statement, the effect is material but not pervasive.

If the difference remains unadjusted then, the misstatement being material in nature, the auditor will have to express
a qualified opinion. The auditor shall include in the basis for opinion section, a description and quantification of the
financial effects of the misstatement.
Ch # 14. Audit Finalisation and Reporting Page 403

Examiner Comments:
▪ Examinees mentioned general procedures for hiring an expert and some audit procedures related to
fixed assets. However, the requirement of the question was to mention the audit procedures to address
the difference in the fair values.
▪ Some of the audit procedures which examinees did not mention are as follows:
- Review the management’s work for arriving at the fair value of the specialized asset.
- Compare the source data and assumptions used by the auditor expert and the management to
assess the value of the assets.
- Assess the relevance and reasonableness of those assumptions and methods in the circumstances.
▪ Examinees mentioned both opinions i.e., expressing a qualified opinion or an adverse opinion, which
was not correct.

Marking Scheme:
(i) 01 mark for each key audit procedure 5.0
(ii)
▪ Discussion on materiality 1.0
▪ Discussion on the audit opinion to be expressed 2.0

ISA 706

Answer #1 Q.2(b) Autumn 2011

(i) Examples of circumstances which necessitate the inclusion of emphasis of matter paragraph:
▪ Early application (where permitted) of a new accounting standard (for example, a new International Financial
Reporting Standard) that has a pervasive effect on the F/S 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.
▪ The existence of material uncertainty relating to the event or condition that may cast significant doubt on the
entity’s ability to continue as a going concern but has been appropriately disclosed.
(ii) Examples of circumstances which necessitate the inclusion of Other matter paragraph:
▪ Any matter which in the auditor’s opinion is relevant to user’s understanding of the Audit
▪ Any matter which in the auditor’s opinion is relevant to User’s Understanding of the Auditor’s responsibilities or
the Auditor’s Report
▪ When the auditor is required to report on more than one set of F/S.
▪ When there is restriction on distribution or use of the auditor’s report.

Answer #2 Q.2(a) Autumn 2011

Emphasis of matter paragraph is a paragraph that is included in the auditor’s report that refers to a matter
appropriately presented or disclosed in the F/S that, in the auditor’s judgment, is of such importance that it is
fundamental to users’ understanding of the F/S.
Other Matter paragraph is a paragraph that is included in the auditor’s report that refers to a matter other than those
presented or disclosed in the F/S that, in the auditor’s judgment, is relevant to the users’ understanding of the audit,
the auditor’s responsibilities or the auditor’s report.

Answer #3 Q.6(d) Spring 2018

Following are circumstances in which an auditor may include other matter paragraph in audit report:
▪ Relevant to Users’ Understanding of the Audit: In the rare circumstance where the auditor is unable to
withdraw from an engagement, the auditor may consider it necessary to include an Other Matter paragraph in
the auditor’s report to explain why it is not possible for the auditor to withdraw from the engagement.
▪ Relevant to Users’ Understanding of the Auditor’s Responsibilities or the Auditor’s Report: Law, regulation
or generally accepted practice in a jurisdiction may require or permit the auditor to elaborate on matters that
provide further explanation of the auditor’s responsibilities in the audit of the financial statements or of the
auditor’s report thereon.
Ch # 14. Audit Finalisation and Reporting Page 404

▪ Reporting on more than one set of financial statements: An entity may prepare set of financial statements in
accordance with more than one framework and engage the auditor to report on both sets of financial statements.
If both the frameworks are acceptable, the auditor may include an Other Matter paragraph in the auditor’s report
▪ Restriction on distribution or use of the auditor’s report: When the financial statements are prepared for a
specific purpose, the auditor may consider it necessary to include an Other Matter paragraph, stating that the
auditor’s report is intended solely for the intended users, and should not be distributed to or used by other
parties.

Examiner Comments:
This question consisted of six short questions. The performance was good as 61% of the candidates
secured passing marks. Brief comments on performance in each part are given below:
The performance remained clearly divided between the good and the poor performing candidates i.e.
between those who secured full marks and those who couldn’t obtain any mark. Most of the students who
secured passing marks in the paper were able to secure high marks in this part as well.

Marking Scheme:
01 mark for each circumstance in which other matter paragraph may be included in the audit report 4.0

Answer #4 Q.7(a) Spring 2023

An emphasis of matter paragraph is included in the auditor’s report to appropriately refer to a matter 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.

An other matter paragraph included in the auditor’s report 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.

Examiner Comments:
The majority of examinees overlooked the fact that the "other matter" paragraph included in the
auditor's report refers to a matter that is separate from those presented or disclosed in the financial
statements.

Marking Scheme:
▪ Discussion on the reason for including emphasis of matter paragraph 2.0
▪ Discussion on the reason for including other matter paragraph 2.0

ISA 570

Answer #1 Q.2(d) Autumn 2019

(i) Analyzing and discussing the cash flow, profit and other relevant forecasts with the management.
(ii) Analyzing and discussing latest available interim financial statements.
(iii) Reading the terms of loan agreements.
(iv) Confirming existence, terms and adequacy of the borrowing facilities.
(v) Reading minutes of meetings of shareholders, those charged with governance and relevant committees for
reference to financing difficulties.
Examiner Comments:
Instead of stating audit procedures for determining whether or not a material uncertainty exists that
may cast doubt on the entity’s ability to continue as a going concern, examinees wrote the examples of
such events and conditions.
Ch # 14. Audit Finalisation and Reporting Page 405

Marking Scheme:
01 mark for each audit procedure 5.0

Answer #2 Q.9 Spring 2022

(a) Financial Statement Impact:

The delay in the renewal and lack of agreement of the overdraft facility raises material uncertainties over going
concern. It needs to be determined that in case the facility is not renewed, then would QFL would still be able to
continue as a going concern. In case there is only a material uncertainty then these should be adequately
disclosed in the financial statements to ensure that the users understand the details of the uncertainties. If it is
concluded that QFL is not a going concern then it’s financial statements should be prepared as not a going
concern.
Audit procedures:
(i) Review the correspondence of the bank with QFL’s management.
(ii) Review the board of director meeting minutes to assess the stage and likely outcome of the with the bank.
(iii) Discuss with the management the status of negotiation with the bank.
(iv) Review the disclosures made by the management regarding the material uncertainty / or the preparation
of financial statement as not a going concern basis.
(v) Obtain the management’s assessment of QFL ability to operate as a going concern.
(vi) Evaluate the reasonableness of the assumptions taken by the QFL’s management.

(b) Financial Statement Impact:

IAS 38 requires that the entity should be able to demonstrate the ability to sell the intangible asset and generate
future economic benefit. As BL’s competitor has successfully launched its product and has captured majority of
the market share, it appears that the criteria for capitalization of development costs contained in IAS 38
Intangible Assets might not be met. Therefore, BL might have to either derecognize the asset or consider booking
an impairment loss.

Audit procedures:
(i) Test a sample of development costs for appropriate capitalisation.
(ii) Discuss the development project with management, to assess the feasibility of the project and product.
(iii) Review revised projections and forecasts for using resources and generating future economic benefits.
(iv) Assess marketing plans and whether a market still actually exists.
(v) Whether the entity will actually be able to use or sell the asset.
(vi) Discuss management’s intention to complete the asset and either use or sell it.
(vii) Inspect development contracts and records supporting and safeguarding patents.

Examiner Comments:
(a)
▪ Some of the examinees ignored the going concern issue and mentioned the audit procedures for
verification of interest expense and the loan amount.
▪ Examinees did not mention the following audit procedures:
- Reviewing the correspondence with the bank.
- Reviewing the minutes of the board of directors' meetings to assess the stage and likely outcome
of negotiation with the bank.
- Reviewing the disclosures made by the management.
(b)
▪ Examinees who identified it as a going concern issue, mentioned irrelevant audit procedures.
▪ Examinees only mentioned audit procedures which are required for a normal intangible asset. They
could not comprehend that launch of the product by the competitor was an impairment condition
and the procedures related to impairment were required.
Ch # 14. Audit Finalisation and Reporting Page 406

Marking Scheme:
(a)
▪ Discussion on the impact on the financial statements 2.0
▪ 01 mark for each audit procedure 5.0
(b)
▪ Discussion on the impact on the financial statements 2.0
▪ 01 mark for each audit procedure 6.0

Answer #3 Q.4(b) Autumn 2022

Going concern assessment:

▪ The imported raw materials are used in their most selling items. Considering this, it would be important to
identify the quantum of revenue attributed to those items. If it constitutes NFL’s major revenue, it may impact the
future revenue and profitability of NFL.
▪ Due to rupee devaluation, raw material costs have risen significantly. However, if NFL is able to find local
substitute of these imported products than they might be able to bring down the operational costs.
▪ NFL’s profitability has significantly declined in the current year. It may further decline in the coming year as there
is a recession in the economy and NFL may witness low customer turnout.
▪ It also needs to be determined that how the increase in interest rates and electricity will impact the profitability
and whether NFL will be able to fulfill its liabilities.

Audit procedures:
▪ Discuss the above situation with the management and obtain management plans to address the ban on import of
raw materials used by the Company.
▪ Review the management plans including identification of substitutes in the local market, availability, impact on
future purchase price, consumption and change in recipe and customer behavior.
▪ Identify the quantum of those materials in the production cycle and related revenue.
▪ Obtain management forecasts for next twelve months including the impact of above factors.
▪ Evaluate the assumptions used by the management in preparation of the forecast.
▪ Review the board minutes to identify the action plan being adopted by the management.
▪ Obtain and review interim financial statements to assess the effect of the above events.
▪ Read the terms of loan agreements and determine whether any of them have been breached.
▪ Confirm the existence, terms and adequacy of the borrowing facilities.
▪ Obtain written representation from the management that their assumptions are reasonable and that NFL will
continue as a going concern.

Examiner Comments:
Examinees did not assess the entity's ability to continue as a going concern in the light of the given
scenario. Instead, they straight away mentioned the audit procedures. The following audit procedures
were not mentioned by the examinees:
▪ Review the management plans including identification of substitutes in the local market, availability,
impact on the future purchase price, consumption and change in recipe and customer behavior.
▪ Identify the quantum of those materials in the production cycle and related revenue.
▪ Read the terms of loan agreements and determine whether any of them have been breached.

Marking Scheme:
▪ Assessment of going concern 3.0
▪ 01 mark for each audit procedure 7.0