F8 - AUDIT AND ASSURANCE (HIEN) Flashcards
Under what condition can an auditor issue an unmodified opinion?
When the auditor is able to obtain sufficient appropriate evidence and based on the evidence
obtained, there are no material misstatements in the financial statements
Misstatements
Misstatement exists when there is a difference between what are recorded in the financial
statements and what are required by the applicable financial reporting framework, e.g.
IFRS/IAS, including differences in:
* amount,
* classification,
* presentation, or disclosure
What are Material Misstatements
Misstatements are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these financial
statements.
Material Misstatements: Quantitatively and Qualitatively Material
1.Quantitatively Material Misstatements
-These misstatements are material because the misstatements are large in financial value
-ISA does not specify a financial threshold and auditors rely on their professional judgment whether a
misstatement is quantitatively material or not.
-For your examiner:
* 5% of profit; or
* 1% of assets; or
* 0.5% of revenue
2.Qualitatively Material, i.e. material by nature
For example, a lack of disclosure of a related party transaction (RPT) with key management
personnel is a material misstatement even if the value of the RPT is quantitatively immaterial
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of
most significance in our audit of the financial statements of the current period.
These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not provide
a separate opinion on these matters.
Elements in An Unmodified Audit Report
1.Title
* The title is “Independent Auditor’s Report
* To differentiate from reports issued by others, e.g. internal auditor’s report
2.Addressee
* Usually addressed to the shareholders of the company
* To identify who may rely on the audit report
3.Opinion
To inform users of audit report that the in the opinion of the auditor, the financial
statements are true and fair 9or are fairly presented in all material respects)
4. Basis for Opinion
To inform users that audit opinion is based on sufficient and appropriate evidence
obtained through the performance of an audit in accordance to International Standards on Auditing.
5.Key Audit Matter [KAM]
To communicate those matters, in auditor’s judgment, that are of most significance during
the audit.
6.Other Information [OI]
To communicate whether there are material inconsistencies between the annual report
and the audited financial statements
Elements in An Unmodified Audit Report (continue)
- Management Responsibilities
To clarify it is the responsibilities of management to:
* Prepare true and fair financial statements in accordance to International
Financial Reporting Standards (IFRS); and
* Design and implement internal controls - Auditor’s Responsibilities
To clarify that it is the responsibilities of auditor to audit the financial statements in
accordance to Internal Standards on Auditing (ISA) and to give an opinion on the
financial statements, i.e. whether the financial statements are true and fair. - Other Reporting Responsibilities [ORR]
If auditor is required by local law to give an opinion on another matter besides the
financial statements, auditor will state the opinion in this ORR section. - Date
The date of audit report means audit evidence, including those on subsequent events,
were gathered and evaluated up to this date.
11.Signature
* Auditor signs the audit report in the name of the firm or in the personal name of
the audit engagement partner
* This is inform users who which audit firm performed the audit
12.Address
The address refers to the location where the audit engagement partner practises.
Key Audit Matters (KAM)
Key Audit Matter (KAM) is an element in the unmodified audit report for listed entities.
KAM is not applicable to audit report for non-listed entities
? Identify what a key audit matter (KAM) is and explain how the auditor determines and
communicates KAM
Analysis: There are 3 sub-requirements:
1. What is a KAM
2. How auditor determines a KAM
3. How auditor communicates a KAM
- What is a KAM
Key audit matters (KAM) are those matters which, in the auditor’s professional judgement, were of
most significance in the audit of the financial statements of the current period.
Key audit matters are selected from matters communicated with those charged with governance.
2.How auditor determines a KAM
In determining key audit matters the auditor should take the following into account:
* Areas of higher assessed risk of material misstatement, or significant risks.
* Significant auditor judgements relating to areas in the financial statements which involved
significant management judgement
* The effect on the audit of significant events or transactions which occurred during the
period.
3.How auditor communicates a KAM
The description of each KAM in the Key Audit Matters section of the auditor’s report should:
* Refer to the related disclosures in the financial statements
* Explain why the matter was considered to be one of most significance in the audit and
therefore was determined to be a KAM; and
* Describe how the key audit matter was addressed in the audit.
Unmodified opinion
Qualified opinion
Adverse opinion
Disclaimer of opinion
- Unmodified opinion:
- Immaterial mistatement
-Immaterial limitation - Qualified opinion:
- Material but not pervasive mistatement
- Material but not pervasive limitation - Adverse opinion:
Material and pervasive mistatement - Disclaimer of opinion:
Material and pervasive limitation
Going concern - Management Responsibilities
It is management duty to:
* Evaluate (assess) whether the company is a going concern; the period of assessment should
be at least 12 months from reporting date;
* Determine whether to use going concern basis to prepare the financial statements; and
* Disclose the material going concern uncertainty in the note to the financial statements.
Going concern - Auditor’s Responsibilities
It is auditor’s duty to:
* Evaluate management’s assessment of the company’s ability to continue as a going concern
for at least 12 months from the reporting date;
* Evaluate the appropriateness of management’s use of going concern basis to prepare the
financial statements;
* Evaluate the appropriateness and adequacy of the disclosure note on material going concern
uncertainty;
* Draw attention in the audit report to the FS disclosure on material going concern uncertainty
if it is appropriately and adequately disclosed;
Audit procedures : AEIOR
2 2 2
A E I O R
-A: Analytical procedures, consists of:
+Evaluation: of financial information through analysis of plausible relationships among both financial and non-financial data
+ Investigation: of fluctuations that are unusual or inconsistent with expected values by a significant amount.
-E: Enquiry and External confirmation
-I: Inpection of documents and Inspection of
assets
-O : Observation
-R : Recalculation and Reperformance
Rank the reliable:
External and written
auditor generated
Internal and written
Internal and oral
Most reliable ➔ External and written
2nd most reliable ➔ auditor generated
3rd most reliable ➔ Internal and written
Least reliable ➔ Internal and oral
Assertion in P/L (transaction and events) and Balance sheet (Account balance)
Assertion
P/L: COCA CP Balance sheet: CREV CP
-Completeness -Completeness
-Occurrence -Rights and obligation
-Cut off -Existence
-Accuracy -Accuracy,valuation and
allocation (Valuation)
-Classification -Classification
-Presentation -Presentation
Substantive Procedures
Audit procedures performed by auditor to detect material misstatements at the assertion level.
Substantive procedures consist of:
* Test of details of transactions and account balances; and
* Substantive analytical procedures.
