VU VICKY Virtual University Assignment Solution, Past Papers, Handouts and other material

Lesson 41

AUDIT PLANNING

Audit Engagement letter

Evaluating Internal Audit Work/Review/Controlling

Where the external auditor has decided to place reliance on the work of internal auditor, he should

review the working papers to satisfy himself as to:- 

i) Audit programs are adequate. 

ii) The work is performed by trained staff and the work of assistants is properly supervised, 

reviewed and documented.

iii) Sufficient appropriate audit evidence was obtained. 

iv) Conclusions made are appropriate. 

v) Reports prepared are based on the work done. 

vi) Exceptions or unusual items have been properly resolved. The external auditor should 

record all the working he has received. The external auditor should also test the work of

internal auditor. 

Testing the Work of Internal Auditing

It can be done in the following ways: 

i) Re-performing the work done by internal auditor, on test basis, to ensure that the same

results are achieved; 

ii) Selecting a few similar items and perform independent test; and

iii) Observation of internal auditing procedures. 

Terms of Audit Engagements

Meaning and Objective

Audit Engagement Letter is written by the auditor to his client. The letter documents terms of

engagement as agreed between the auditor and the client.

Following are the components of Audit Engagement Letter

Principal Contents

i) The objective of financial statements.

ii) Management’s responsibility for financial statements.

iii) The scope of the audit.

iv) The form of any reports or other communications.

v) The fact that due to certain unavoidable factors, the auditors may not be able to detect all 

material misstatements due to fraud or error.

vi) Requirement of unrestricted access to records etc.

Optional Contents

i) Arrangements regarding the planning of the audit.

ii) Expectation of receiving written representations. 

iii) Request for confirmation of terms of engagement.

iv) Description of any other letters or reports the auditor expects to issue to the client.

v) Basis for computation of fees.

Contents to be included under Special Circumstances

i) Arrangements concerning the involvement of other auditors, experts, internal auditors and 

other client staff.

ii) Arrangements to be made with predecessor auditor, in case of initial audit only.

iii) Restriction on auditor’s liability, if any.

iv)

Reference to any further agreements between the auditor and the client.

Note: A specimen engagement letter as given in the AS is given at Annexure-2.

Audit of Components 

In case of components (branch, subsidiary or division) the auditor has to decide whether to send a

separate engagement letter for the component. It would depend on the following: 

i) Who appoints auditor of the component.

ii) Whether a separate audit report is to be issued on the component.

iii) Legal requirements. 

131

  

iv) The extent of any work performed by other auditors.

v) Degree of ownership by parent.

vi) Degree of independence of the component’s management. 

Recurring Audits

Should auditor write an engagement letter every year? Answer to this question is dependent on the

following factors: 

i) If client misunderstands the objective and scope of the audit.

ii) Any revised or special terms of engagement.

iii) A recent change of senior management, board of directors or ownership.

iv) A significant change in nature or size of the client’s business.

v) Legal requirements. 

Example of an Audit Engagement Letter

The following letter is for use as a guide in conjunction with the considerations outlined in this ISA

and will need to be varied according to individual requirements and circumstances.

To the Board of Directors or the appropriate representative of senior management:

You have requested that we audit the balance sheet of …………..as of …………., and the related

statements of income and cash flows for the year then ending. We are pleased to confirm our

acceptance and our understanding of this engagement by means of this letter. Our audit will be made

with the objective of our expressing an opinion on the financial statements.

We will conduct our audit in accordance with International Standards on Auditing (or relevant

national standards or practices). Those ISAs require that we plan and perform the audit to obtain

reasonable assurance about whether the financial statements are free of material misstatements. An

audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the

financial statements. An audit also includes assessing the accounting principles used and significant

estimates made by management, as well as evaluating the overall financial statement presentation.

Because of the test nature and other inherent limitations of an audit, together with the inherent

limitations of any accounting and internal control system, there is an unavoidable risk that even some

material misstatements may remain undiscovered.

In addition to our report on the financial statements, we expect to provide you with a separate letter

concerning any material weaknesses in accounting and internal control systems, which come to our

notice.

We remind you that the responsibility for the preparation of financial statements including adequate 

disclosure is that of the management of the company. This includes the maintenance of adequate

accounting records and internal controls, the selection and application of accounting policies, and the

safeguarding of the assets of the company. As part of our audit process, we will request from

management written confirmation concerning representations made to us in connection with the

audit.

We look forward to full cooperation with your staff and we trust that they will make available to us

whatever records, documentation and other information are requested in connection with our audit.

Our fees, which will be billed as work progress, are based on the time required by the individuals

assigned to the engagement plus out-of-pocket expenses. Individual hourly rates vary according to the

degree of responsibility involved and the experience and skill required. 

This letter will be effective for future years unless it is terminated, amended or superseded.

Please sign and return the attached copy of this letter to indicate that it is in accordance with your

understanding of the arrangements for our audit of the financial statements. 

132

  

XYZ & Co.

Acknowledged on behalf of

ABC Company by

(Signed)

Name and Title

Date ________ 

133

  

Lesson 42

PLANNING AN AUDIT OF FINANCIAL STATEMENTS

Purpose of Planning

The auditor should plan the audit so that the engagement will be performed in an effective manner.

Planning an audit involves:

1. Establishing the overall audit strategy for the engagement and 

2. Developing an audit plan, in order to reduce audit risk to an acceptably low level. 

Planning involves the Engagement Partner (auditor) and other key members of the engagement

team to benefit from their experience and insight and to enhance the effectiveness and efficiency of

the planning process.

Adequate planning helps in achieving the following: 

• Ensure that appropriate attention is devoted to important areas of the audit, like; related parties

transactions, outsourced activities (debt/revenue collection), payroll, sales, acquisition of noncurrent

assets.

• Potential problems, like; slow availability of information, application of new regulations etc. are

identified and resolved on a timely basis  

• Audit engagement is properly organized and managed in order to be performed in an effective

and efficient manner.   

• Proper assignment of work to engagement team members, 

• Facilitation of direction and supervision of engagement team members and the review of their 

work

• Coordination of work done by auditors of components and experts.  

The nature and extent of planning activities will vary according to the 

• Size and complexity of the entity

• Auditor’s previous experience with the entity

• Changes in circumstances that occur during the audit engagement. 

Planning is a continual process that often begins shortly after the completion of the previous audit

and continues until the completion of the current audit engagement.

Planning Activities

I The Overall Audit Strategy

The auditor should establish the overall audit strategy for the audit.

The overall audit strategy  

• sets the scope

, timing and direction of the audit, and  

• guides the development of the more detailed audit plan

The establishment of the overall audit strategy involves:

(a) Determining the characteristics of the engagement that define its scope, such as the

financial reporting framework used, industry-specific reporting requirements and the locations of the

components of the entity;

(b) Ascertaining the reporting objectives of the engagement to plan the timing of the audit

and the nature of the communications required, such as:  

 deadlines for interim and final reporting, and 

 key dates for expected communications with management  

(c) Considering the important factors that will determine the focus of the engagement team’s

efforts, such as: 

a.  Determination of appropriate materiality levels

, 

b. Preliminary identification of areas where there may be higher risks of material 

misstatement, 

c. Preliminary identification of material components and account balances,

134

  

d. Evaluation of whether the auditor may plan to obtain evidence regarding the

effectiveness of internal control,

 and  

e. Identification of recent significant entity-specific, industry, financial reporting or other

relevant developments. 

The overall audit strategy sets out clearly,  

(a) The resources to deploy for specific audit areas, such as the use of appropriately

experienced team members for high risk areas or the involvement of experts on complex

matters; 

(b) The amount of resources to allocate to specific audit areas, such as the number of team

members assigned to observe the inventory count at material locations, the extent of review

of other auditors’ work incase of group audits, or the audit budget in hours to allocate to

high risk areas; 

(c) When to deploy these resources?, such as whether at an interim audit stage or at key cutoff

dates;

and

(d) How such resources are managed, directed and supervised?, such as when team

briefing and debriefing meetings are expected to be held, how engagement partner and

manager reviews are expected to take place (for example, on-site or off-site), and whether to

complete engagement quality control reviews. 

II The Audit Plan

Once the overall audit strategy has been established the auditor should develop an audit plan for the

audit in order to reduce audit risk to an acceptably low level. Although the auditor ordinarily

establishes the overall audit strategy before developing the detailed audit plan, the two planning

activities are not necessarily discrete or sequential processes but are closely inter-related since changes in

one may result in consequential changes to the other.

The audit plan is more detailed than the overall audit strategy and includes: 

• The nature, timing and extent of audit procedures to be performed by engagement team

members in order to obtain sufficient appropriate audit evidence to reduce audit risk to an

acceptably low level.  

Documentation of the audit plan also serves as a record of the proper planning and performance of

the audit procedures that can be reviewed and approved prior to the performance of further audit

procedures.

The audit plan includes: 

• A description of the nature, timing and extent of planned risk assessment procedures

sufficient to assess the risks of material misstatement,  

• A description of the nature, timing and extent of planned further audit procedures at the

assertion level for each material class of transactions, account balance, and disclosure. (The

plan for further audit procedures reflects the auditor’s decision whether to test the operating 

effectiveness of controls, and the nature, timing and extent of planned substantive

procedures); and 

• Such other audit procedures required to be carried out for the engagement in order to

comply with ISAs (for example, seeking direct communication with the entity’s lawyers). 

Planning for these audit procedures takes place over the course of the audit as the audit plan for the

engagement develops. For example, planning of the auditor’s risk assessment procedures ordinarily

occurs early in the audit process. However, planning of the nature, timing and extent of specific

further audit procedures depends on the outcome of those risk assessment procedures.  In addition,

the auditor may begin the execution of further audit procedures for some classes of transactions,

account balances and disclosures before completing the more detailed audit plan of all remaining

further audit procedures. 

Changes to Planning Decisions during the Course of the Audit

The overall audit strategy and the audit plan should be updated and changed as necessary during the

course of the audit.

135

  

Planning an audit is a continual process throughout the audit engagement. As a result of unexpected

events, changes in conditions, or the audit evidence obtained from the results of audit procedures, the

auditor may need to modify the overall audit strategy and audit plan, and thereby the resulting

planned nature, timing and extent of further audit procedures.  

Information may come to the auditor’s attention that differs significantly from the information

available when the auditor planned the audit procedures. For example, the auditor may obtain audit

evidence through the performance of substantive procedures that contradicts the audit evidence

obtained with respect to the testing of the operating effectiveness of controls. In such circumstances,

the auditor re-evaluates the planned audit procedures, based on the revised consideration of assessed

risks at the assertion level for all or some of the classes of transactions, account balances or

disclosures.

Direction, Supervision and Review (Audit Program)

The auditor should plan the nature, timing and extent of direction and supervision of engagement

team members and review of their work.

The nature, timing and extent of the direction and supervision of engagement team members and

review of their work vary depending on many factors, including: 

 the size and complexity of the entity, 

 the area of audit, 

 the risks of material misstatement, and 

 the capabilities and competence of personnel performing the audit work 

As the assessed risk of material misstatement increases, a given area of the audit, the auditor ordinarily

increases the extent and timeliness of direction and supervision of engagement team members and

performs a more detailed review of their work.

Documentation

The auditor should document the overall audit strategy and the audit plan, including any significant

changes made during the audit engagement.

The auditor’s documentation of the overall audit strategy records the key decisions considered

necessary to properly plan the audit and to communicate significant matters to the engagement team.

For example, the auditor may summarize the overall audit strategy in the form of a memorandum that

contains key decisions regarding the overall scope, timing and conduct of the audit.

The auditor’s documentation of the audit plan is sufficient to demonstrate the planned nature, timing

and extent of risk assessment procedures, and further audit procedures at the assertion level for each

material class of transaction, account balance, and disclosure in response to the assessed risks. 

The auditor may use standard audit programs or audit completion checklists. However, when such standard

programs or checklists are used, the auditor appropriately tailors them to reflect the particular

engagement circumstances.

The auditor’s documentation of any significant changes to the originally planned overall audit strategy

and to the detailed audit plan includes the reasons for the significant changes and the auditor’s

response to the events, conditions, or results of audit procedures that resulted in such changes. 

For example, the auditor may significantly change the planned overall audit strategy and the audit plan 

as a result of a material business combination or the identification of a material misstatement of the

financial statements. A record of the significant changes to the overall audit strategy and the audit

plan, and resulting changes to the planned nature, timing and extent of audit procedures, explains the

overall strategy and audit plan finally adopted for the audit and demonstrates the appropriate response

to significant changes occurring during the audit.

The form and extent of documentation depend on such matters as the size and complexity of the

entity, materiality, the extent of other documentation, and the circumstances of the specific audit

engagement. 

136

  

Lesson 43

AUDIT PLANNING

(Establishing Overall Audit Strategy)

Audits of Small Entities

In audits of small entities, the entire audit may be conducted by a very small audit team. Many audits

of small entities involve the audit engagement partner (who may be a sole practitioner) working with

one engagement team member (or without any engagement team members). With a smaller team,

coordination and communication between team members are easier. Establishing the overall audit

strategy for the audit of a small entity need not be a complex or time-consuming exercise; it varies

according to the size of the entity and the complexity of the audit. For example, a brief memorandum

prepared at the completion of the previous audit, based on a review of the working papers and

highlighting issues identified in the audit just completed, updated and changed in the current period

based on discussions with the owner-manager, can serve as the basis for planning the current audit

engagement.

Communications with those charged with Governance and Management

The auditor may discuss elements of planning with those charged with governance and the entity’s

management. These discussions may be a part of overall communications required to be made to

those charged with governance of the entity or may be made to improve the effectiveness and

efficiency of the audit. Discussions with those charged with governance ordinarily include  

• The overall audit strategy and timing of the audit, including any limitations thereon, or

any additional requirements.  

When discussions of matters included in the overall audit strategy or audit plan occur, care is required

in order to not compromise the effectiveness of the audit. For example, the auditor considers whether

discussing the nature and timing of detailed audit procedures with management compromises the

effectiveness of the audit by making the audit procedures too predictable.

Additional Considerations in Initial Audit Engagements

The auditor should perform the following activities prior to starting an initial audit:

(a) Perform procedures regarding the acceptance of the client relationship and the specific audit 

engagement.

(b) Communicate with the previous auditor, where there has been a change of auditors, in 

compliance with relevant ethical requirements.

For initial audits, additional matters the auditor may consider in developing the overall audit strategy

and audit plan include the following:

Unless prohibited by law or regulation, an arrangement to be made with the previous auditor for

example to review the previous auditor’s working papers.

Any major issues discussed with management in connection with the initial selection as auditors, the 

communication of these matters to those charged with governance and how these matters affect the

overall audit strategy and audit plan.

The planned audit procedures to obtain sufficient appropriate audit evidence regarding opening

balances.

The assignment of firm personnel with appropriate levels of capabilities and competence to respond

to anticipated significant risks.

Other procedures required by the firm’s system of quality control for initial audit engagements (for

example, the firm’s system of quality control may require the involvement of another partner or

senior individual to review the overall audit strategy prior to commencing significant audit procedures 

or to review reports prior to their issuance).

Examples of Matters the Auditor May Consider In Establishing the Overall Audit Strategy

Following are the examples of matters the auditor may consider in establishing the overall audit

strategy: 

137

  

1. Scope of the audit engagement

2. Reporting objectives

3. Direction of the audit 

1. Scope of the Audit Engagement

The auditor may consider the following matters when establishing the scope of the audit engagement: 

• The financial reporting framework on which the financial information to be audited has been

prepared, including any need for reconciliations to another financial reporting framework. 

• Industry-specific reporting requirements such as reports mandated by industry regulators.

• The expected audit coverage, including the number and locations of components to be 

included.

• The nature of the control relationships between a parent and its components that determine 

how the group is to be consolidated.

• The extent to which components are audited by other auditors.

• The nature of the business segments to be audited, including the need for specialized 

knowledge.

• The reporting currency to be used, including any need for currency translation for the 

financial information audited.

• The need for a statutory audit of standalone financial statements in addition to an audit for 

consolidation purposes.

• The availability of the work of internal auditors and the extent of the auditor’s potential 

reliance on such work.

• The entity’s use of service organizations and how the auditor may obtain evidence 

concerning the design or operation of controls performed by them.

• The expected use of audit evidence obtained in prior audits, for example, audit evidence 

related to risk assessment procedures and tests of controls.

• The effect of information technology on the audit procedures, including the availability of 

data and the expected use of computer-assisted audit techniques.

• The coordination of the expected coverage and timing of the audit work with any reviews of 

interim financial information and the effect on the audit of the information obtained during

such reviews. 

• The discussion of matters that may affect the audit with firm personnel responsible for

performing other services to the entity. 

• The availability of client personnel and data.

2. Reporting objectives, timing of the audit and communications required

The auditor may consider the following matters when ascertaining the reporting objectives of the

engagement, the timing of the audit and the nature of communications required: 

• The entity’s timetable for reporting, such as at interim and final stages.

• The organization of meetings with management and those charged with governance to 

discuss the nature, extent and timing of the audit work.

• The discussion with management and those charged with governance regarding the expected 

type and timing of reports to be issued and other communications, both written and oral,

including the auditor’s report, management letters and communications to those charged

with governance. 

• The discussion with management regarding the expected communications on the status of

audit work throughout the engagement and the expected deliverables resulting from the audit

procedures. 

• Communication with auditors of components regarding the expected types and timing of 

reports to be issued and other communications in connection with the audit of components.

• The expected nature and timing of communications among engagement team members, 

including the nature and timing of team meetings and timing of the review of work

performed. 

138

  

• Whether there are any other expected communications with third parties, including any

statutory or contractual reporting responsibilities arising from the audit. 

3. Direction of the Audit

The auditor may consider the following matters when setting the direction of the audit: 

• With respect to materiality:

• Setting materiality for planning purposes.

• Setting and communicating materiality for auditors of components.

• Reconsidering materiality as audit procedures are performed during the course of the audit.

• Identifying the material components and account balances.

• Audit areas where there is a higher risk of material misstatement.

• The impact of the assessed risk of material misstatement at the overall financial statement 

level on direction, supervision and review.

• The selection of the engagement team (including, where necessary, the engagement quality 

control reviewer) and the assignment of audit work to the team members, including the

assignment of appropriately experienced team members to areas where there may be

higher risks of material misstatement. 

• Engagement budgeting, including considering the appropriate amount of time to set aside

for areas where there may be higher risks of material misstatement. 

• The manner in which the auditor emphasizes to engagement team members the need to

maintain a questioning mind and to exercise professional skepticism in gathering and

evaluating audit evidence. 

• Results of previous audits that involved evaluating the operating effectiveness of internal

control, including the nature of identified weaknesses and action taken to address them. 

• Evidence of management’s commitment to the design and operation of sound internal

control, including evidence of appropriate documentation of such internal control. 

• Volume of transactions, which may determine whether it is more efficient for the auditor

to rely on internal control. 

• Importance attached to internal control throughout the entity to the successful operation

of the business. 

• Significant business developments affecting the entity, including changes in information

technology and business processes, changes in key management, and acquisitions, mergers

and divestments. 

• Significant industry developments such as changes in industry regulations and new

reporting requirements. 

• Significant changes in the financial reporting framework, such as changes in accounting

standards. 

• Other significant relevant developments, such as changes in the legal environment 

affecting the entity. 

139

  

Lesson 44

AUDITOR’S REPORT ON A COMPLETE SET OF GENERAL PURPOSE

FINANCIALSTATEMENTS

(Effective for auditor’s reports dated on or after December 31, 2006).

Auditor’s report is issued as a result of an audit of a complete set of general purpose financial

statements prepared in accordance with a financial reporting framework that is designed to achieve

fair presentation. 

The Auditor’s Report on Financial Statements

The auditor’s report should contain a clear expression of the auditor’s opinion on the financial

statements.

Unless required by law or regulation to use different wording, the auditor’s opinion on a complete set

of general purpose financial statements prepared in accordance with a financial reporting framework

that is designed to achieve fair presentation states whether the financial statements “give a true and

fair view” or “are presented fairly, in all material respects,” in accordance with the applicable

financial reporting framework. These phrases “give a true and fair view” and “are presented fairly, in

all material respects,” are equivalent. Which of these phrases is used in any particular jurisdiction is

determined by the law or regulations governing the audit of financial statements in that jurisdiction, or

by established practice in that jurisdiction.

Forming an Opinion on the Financial Statements

The auditor should evaluate the conclusions drawn from the audit evidence obtained as the basis for

forming an opinion on the financial statements.

When forming an opinion on the financial statements, the auditor evaluates whether, based on the

audit evidence obtained, there is reasonable assurance about whether the financial statements taken as

a whole are free from material misstatement. This involves concluding whether sufficient appropriate

audit evidence has been obtained to reduce to an acceptably low level the risks of material

misstatement of the financial statements and evaluating the effects of uncorrected misstatements

identified.

This evaluation includes considering whether, in the context of the applicable financial reporting

framework:

a. The accounting policies selected and applied are consistent with the financial reporting 

framework and are appropriate in the circumstances;

b. The accounting estimates made by management are reasonable in the circumstances; 

c. The information presented in the financial statements, including accounting policies, is relevant,

reliable, comparable and understandable; and 

d. The financial statements provide sufficient disclosures to enable users to understand the effect of

material transactions and events on the information conveyed in the financial statements, for

example, in the case of financial statements prepared in accordance with International Financial

Reporting Standards (IFRSs), the entity’s financial position, financial performance and cash flows. 

Illustration of the Auditor’s Report

Elements of the Auditor’s Report 

Consistency in the auditor’s report promotes credibility in the global marketplace by making more

readily identifiable those audits that have been conducted in accordance with globally recognized 

standards. It also helps to promote the reader’s understanding and to identify unusual circumstances

when they occur.

Following are the elements of the auditor’s report when the audit has been conducted in accordance

with the ISAs: 

(a) Title; 

140

  

(b) Addressee;

(c) Introductory paragraph;

(d) Management’s responsibility for the financial statements;

(e) Auditor’s responsibility;

(f) Auditor’s opinion;

(g) Other reporting responsibilities;

(h) Auditor’s signature;

(i) Date of the auditor’s report; and

(j) Auditor’s address. 

Title

The auditor’s report should have a title that clearly indicates that it is the report of an independent

auditor.

A title indicating that the report is of an independent auditor, for example, “Independent Auditor’s

Report,” affirms that the auditor has met all of the relevant ethical requirements regarding

independence and, therefore, distinguishes the independent auditor’s report from reports issued by

others.

Addressee

Ordinarily, the auditor’s report on general purpose financial statements is addressed to those for

whom the report is prepared, often either to the shareholders or to those charged with governance of

the entity whose financial statements are being audited.

Introductory Paragraph

The introductory paragraph in the auditor’s report should identify the entity whose financial

statements have been audited and should state that the financial statements have been audited. The

introductory paragraph should also:

a. Identify the title of each of the financial statements that comprise the complete set of financial 

statements;

b. Refer to the summary of significant accounting policies and other explanatory notes; and

c. Specify the date and period covered by the financial statements.

Management’s Responsibility for the Financial Statements

The auditor’s report should state that management is responsible for the preparation and the fair

presentation of the financial statements in accordance with the applicable financial reporting

framework and that this responsibility includes:

a. Designing, implementing and maintaining internal control relevant to the preparation and fair 

presentation of financial statements that are free from material misstatement, whether due to

fraud or error; 

b. Selecting and applying appropriate accounting policies; and 

c. Making accounting estimates that are reasonable in the circumstances.

Auditor’s Responsibility

The auditor’s report should state that the responsibility of the auditor is to express an opinion on the

financial statements based on the audit.

The auditor’s report should state that the audit was conducted in accordance with International

Standards on Auditing. The auditor’s report should also explain that those standards require that the

auditor comply with ethical requirements and that the auditor plan and perform the audit to obtain

reasonable assurance whether the financial statements are free from material misstatement.

The auditor’s report should describe an audit by stating that:

(a) An audit involves performing procedures to obtain audit evidence about the amounts and 

disclosures in the financial statements;

(b) The procedures selected depend on the auditor’s judgment, including the assessment of the risks 

of material misstatement of the financial statements, whether due to fraud or error. In making

those risk assessments, the auditor considers internal control relevant to the entity’s preparation

and fair presentation of the financial statements in order to design audit procedures that are 

141

  

appropriate in the circumstances, but not for the purpose of expressing an opinion on the

effectiveness of the entity’s internal control. In circumstances when the auditor also has a

responsibility to express an opinion on the effectiveness of internal control in conjunction with

the audit of the financial statements, the auditor should omit the phrase that the auditor’s

consideration of internal control is not for the purpose of expressing an opinion on the

effectiveness of internal control; and 

(c) An audit also includes evaluating the appropriateness of the accounting policies used, the

reasonableness of accounting estimates made by management, as well as the overall presentation

of the financial statements. 

The auditor’s report should state that the auditor believes that the audit evidence the auditor has

obtained is sufficient and appropriate to provide a basis for the auditor’s opinion.

Auditor’s Opinion

An unqualified opinion should be expressed when the auditor concludes that the financial statements

give a true and fair view or are presented fairly, in all material respects, in accordance with the

applicable financial reporting framework.

When expressing an unqualified opinion, the opinion paragraph of the auditor’s report should state

the auditor’s opinion that the financial statements give a true and fair view or present fairly, in all

material respects, in accordance with the applicable financial reporting framework (unless the auditor

is required by law or regulation to use different wording for the opinion, in which case the prescribed

wording should be used).

When International Financial Reporting Standards or International Public Sector Accounting

Standards are not used as the financial reporting framework, the reference to the financial reporting

framework in the wording of the opinion should identify the jurisdiction or country of origin of the

financial reporting framework.

The auditor identifies the applicable financial reporting framework in such terms as:

“… in accordance with International Financial Reporting Standards” or

“… in accordance with accounting principles generally accepted in Country X …”

When the applicable financial reporting framework encompasses legal and regulatory requirements,

the auditor identifies the applicable financial reporting framework in such terms as:

“… in accordance with International Financial Reporting Standards and the requirements of Country

X Corporations Act.”

Other Matters

Standards, laws 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. Such matters may be addressed in a

separate paragraph following the auditor’s opinion.

Other Reporting Responsibilities

In some jurisdictions, the auditor may have additional responsibilities to report on other matters that

are supplementary to the auditor’s responsibility to express an opinion on the financial statements.

For example, the auditor may be asked to report certain matters if they come to the auditor’s attention

during the course of the audit of the financial statements. Alternatively, the auditor may be asked to

perform and report on additional specified procedures, or to express an opinion on specific matters,

such as the adequacy of accounting books and records. Auditing standards in the specific jurisdiction

or country often provide guidance on the auditor’s responsibilities with respect to specific additional

reporting responsibilities in that jurisdiction or country.

When the auditor addresses other reporting responsibilities within the auditor’s report on the financial

statements, these other reporting responsibilities should be addressed in a separate section in the 

auditor’s report that follows the opinion paragraph.

Auditor’s Signature

The auditor’s report should be signed. The auditor’s signature is either in the name of the audit firm,

the personal name of the auditor or both, as appropriate for the particular jurisdiction. In addition to 

142

  

the auditor’s signature, in certain jurisdictions, the auditor may be required to declare the auditor’s

professional accountancy designation or the fact that the auditor or firm, as appropriate, has been

recognized by the appropriate licensing authority in that jurisdiction.

Date of the Auditor’s Report

The auditor should date the report on the financial statements no earlier than the date on which the

auditor has obtained sufficient appropriate audit evidence on which to base the opinion on the

financial statements.  Sufficient appropriate audit evidence should include evidence that the entity’s

complete set of financial statements has been prepared and that those with the recognized authority

have asserted that they have taken responsibility for them.

In some jurisdictions, final approval of the financial statements by shareholders is required before the

financial statements are issued publicly. In these jurisdictions, final approval by shareholders is not

necessary for the auditor to conclude that sufficient appropriate audit evidence has been obtained.

The date of approval of the financial statements for purposes of the ISAs is the earlier date on which

those with the recognized authority determine that a complete set of financial statements has been

prepared.

Auditor’s Address

The report should name the location in the country or jurisdiction where the auditor practices.

Auditor’s Report

The auditor’s report should be in writing. A written report encompasses both reports issued in hard

copy format and those using an electronic medium.

Auditor’s Report for Audits Conducted in Accordance with Both ISAs and Auditing

Standards of a Specific Jurisdiction or Country

The auditor’s report should refer to the audit having been conducted in accordance with the

International Standards on Auditing only when the auditor has complied fully with all of the

International Standards on

The auditor may refer to the audit having been conducted in accordance with both ISAs as well as

national auditing standards when the auditor complies with each of the ISAs relevant to the audit and

performs any additional audit procedures necessary to comply with the relevant standards of that

jurisdiction or country. A reference to both the ISAs and national auditing standards is not

appropriate if there is a conflict between the reporting requirements regarding the auditor’s report in

the ISAs and in the national auditing standards that affects the auditor’s opinion or the need to

include an emphasis of matter paragraph in the particular circumstances. For example, some national

auditing standards prohibit the auditor from including an emphasis of matter paragraph to highlight a

going concern problem, whereas ISA 701 requires the auditor to modify the auditor’s report by 

adding an emphasis of matter paragraph in such circumstances. In case of such conflicts, the auditor’s

report refers only to the auditing standards (either ISAs or the relevant national auditing standards) in

accordance with which the auditor has complied with the reporting requirements.

When the auditor’s report refers to both International Standards on Auditing and auditing standards

of a specific jurisdiction or country, the auditor’s report should identify the jurisdiction or country of

origin of the auditing standards.

When the auditor prepares the auditor’s report using the layout or wording specified by the law,

regulation or auditing standards of the specific jurisdiction or country, the auditor’s report should

refer to the audit being conducted in accordance with both International Standards on Auditing and

the auditing standards of the specific jurisdiction or country only if the auditor’s report includes, at a

minimum, each of the following elements: 

a. A title;

b. An addressee, as required by the circumstances of the engagement;

c. An introductory paragraph that identifies the financial statements audited;

d. A description of management’s responsibility for the preparation and fair presentation of the 

financial statements; 

143

  

e. A description of the auditor’s responsibility to express an opinion on the financial statements and

the scope of the audit, that includes:

i) A reference to the International Standards on Auditing and the auditing standards of the 

specific jurisdiction or country, and

ii) A description of the work an auditor performs in an audit. 

f. An opinion paragraph containing an expression of opinion on the financial statements and a

reference to the applicable financial reporting framework used to prepare the financial statements

(including identifying the country of origin of the financial reporting framework when

International Financial Reporting Standards or International Public Sector Accounting Standards

are not used); 

g. The auditor’s signature;

h. The date of the auditor’s report; and

i. The auditor’s address.

Format of Auditor’s Report under Companies Ordinance 1984

The format of Auditor’s report to the members as per companies ordinance 1984 is as under that is to

be followed by all companies incorporated under this ordinance.

 “FORM 35A” THE COMPANIES ORDINANCE, 1984

AUDITORS' REPORT TO THE MEMBERS

Introductory Paragraph

We have audited the annexed balance sheet of ……………….……… as at ……..…….... and the

related *1 profit and loss account, *2 cash flow statement and statement of changes in equity together

with the notes forming part thereof, for the year then ended and we state that we have obtained all

the information and explanations which, to the best of our knowledge and belief, were necessary for

the purposes of our audit.

Management’s Responsibility

It is the responsibility of the company's management to establish and maintain a system of internal

control, and prepare and present the above said statements in conformity with the approved

accounting standards and the requirements of the Companies Ordinance, 1984. Our responsibility is

to express an opinion on these statements based on our audit.

Auditor’s Responsibility

We conducted our audit in accordance with the auditing standards as applicable in Pakistan These

standards require that we plan and perform the audit to obtain reasonable assurance about whether

the above said statements are free of any material misstatement. An audit includes examining, on a

test basis, evidence supporting the amounts and disclosures in the above said statements. An audit

also includes assessing the accounting policies and significant estimates made by management, as well

as, evaluating the overall presentation of the above said statements. We believe that our audit provides

a reasonable basis for our opinion and, after due verification, we report that – 

Opinion

(a) in our opinion, proper books of accounts have been kept by the company as required by the

Companies Ordinance, 1984;

(b) in our opinion -

 (i) the balance sheet and profit and loss account together with the notes thereon have

been drawn-up in conformity with the Companies Ordinance, 1984, and are in agreement with the

books of account and are further in accordance with accounting policies consistently applied *3

except for the changes as stated in note(s) …………… with which we concur;

 (ii) the expenditure incurred during the year was for the purpose of the company's

business; and

 (iii) the business conducted, investments made and the expenditure incurred during the 

year were in accordance with the objects of the company;

(c) in our opinion and to the best of our information and according to the explanations given to

us, the balance sheet, *1 profit and loss account, *2 cash flow statement and statement of changes in

equity together with the notes forming part thereof conform with approved accounting standards as 

144

  

applicable in Pakistan, and, give the information required by the Companies Ordinance, 1984, in the

manner so required and respectively give a true and fair view of the state of the company's affairs as at 

……..and of the *4 profit / loss, its *5 cash flows and changes in equity for the year then ended; and

Other Responsibilities

(d) in our opinion *6 Zakat deductible at source under the Zakat and Ushr Ordinance, 1980

(XVIII of 1980), was deducted by the company and deposited in the Central Zakat Fund established

under Section 7 of the Ordinance.

Signature

[Name(s) of Auditors]

Date ……………..

Place …………….

NOTES

Where applicable -

*1. Substitute "income and expenditure account".

*2. Substitute "sources and application of funds".

*3, Where there is no change in -the accounting policy (ies) the portion “except for the changes

as stated; in note(s) …....with which we concur” may be omitted.

*4, Substitute "surplus or deficit".

*5, Substitute "changes in source and application of funds".

*6. Where no Zakat is deductible, substitute "no Zakat was deductible at source under the Zakat

and Ushr Ordinance, 1980”.

Where any of the matter referred to in the Auditors' Report is answered in the negative or with a

qualification, the report shall state the reason for such answers along with the factual position to the

best of the auditors' information. 

145

  

Lesson 45

MODIFIED AUDITOR’S REPORT

 REPORTS/OPINIONS TREE

 STANDARD  MODIFIED

 Unqualified

          Affect the   Do not affect

     Auditor’s opinion  auditor’s opinion

             (Emphasis of the matter)

   DEPENDS UPON NATURE

      OF CIRCUMSTANCES

 LIMITATION ON  DISAGREEMENT

 SCOPE OF WORK  WITH MANAGEMENT

Material but not so Material  Material but  Material &

Material & Pervasive   & Pervasive not so material  Pervasive

     and Pervasive

        Adverse opinion

Qualified  Disclaimer of opinion    Qualified  (Financial statement

Opinion  (we do not express an      opinion  do not give a true

(Except for) opinion on the financial   (Except for)  and fair view)

statements)

MODIFICATIONS TO THE AUDITOR’S REPORT

(Effective for auditor’s reports dated on or after December 31, 2006).

Here we shall discuss the circumstances when the independent auditor’s report should be modified

and the form and the content of the modifications to the auditor’s report in those circumstances. 

The wording of auditor’s report is modified in the following situations:

Matters that Do Affect the Auditor’s Opinion 

• Qualified opinion,

• Disclaimer of opinion, or

• Adverse opinion. 

Matters that Do Not Affect the Auditor’s Opinion 

• Emphasis of matter

MATTERS THAT DO AFFECT THE AUDITOR’S OPINION 

An auditor may not be able to express an unqualified opinion when either of the following

circumstances exists and, in the auditor’s judgment, the effect of the matter is or may be material to

the financial statements:

(a) There is a limitation on the scope of the auditor’s work; or 

146

  

(b) There is a disagreement with management regarding the acceptability of the accounting

policies selected, the method of their application or the adequacy of financial statement

disclosures. 

Limitation on Scope 

(a) Imposed by the entity

A limitation on the scope of the auditor’s work may sometimes be imposed by the entity (for

example, when the terms of the engagement specify that the auditor will not carry out an audit

procedure that the auditor believes is necessary). However, when the limitation in the terms of a

proposed engagement is such that the auditor believes the need to express a disclaimer of opinion

exists; the auditor would ordinarily not accept such a limited engagement as an audit engagement,

unless required by statute. Also, a statutory auditor would not accept such an audit engagement when

the limitation infringes on the auditor’s statutory duties. 

(b) Imposed by circumstances

A scope limitation may be imposed by circumstances (for example, when the timing of the auditor’s

appointment is such that the auditor is unable to observe the counting of physical inventories). It may

also arise when, in the opinion of the auditor, the entity’s accounting records are inadequate or when

the auditor is unable to carry out an audit procedure believed to be desirable. In these circumstances,

the auditor would attempt to carry out reasonable alternative procedures to obtain sufficient

appropriate audit evidence to support an unqualified opinion.

When there is a limitation on the scope of the auditor’s work that requires expression of a qualified

opinion or a disclaimer of opinion, the auditor’s report should describe the limitation and indicate the

possible adjustments to the financial statements that might have been determined to be necessary had

the limitation not existed.

A qualified opinion should be expressed when the auditor concludes that an unqualified opinion

cannot be expressed but that the effect of any limitation on scope is not so material and pervasive as

to require a disclaimer of opinion. A qualified opinion should be expressed as being ‘except for’ the

effects of the matter to which the qualification relates.

A disclaimer of opinion should be expressed when the possible effect of a limitation on scope is so

material and pervasive that the auditor has not been able to obtain sufficient appropriate audit

evidence and accordingly is unable to express an opinion on the financial statements.

Whenever the auditor expresses an opinion that is other than unqualified, a clear description of all the

substantive reasons should be included in the report and, unless impracticable, a quantification of the

possible effect(s) on the financial statements. Ordinarily, this information would be set out in a

separate paragraph preceding the opinion or disclaimer of opinion on the financial statements and

may include a reference to a more extensive discussion, if any, in a note to the financial statements.

Illustrations of these matters are set out below.

Limitation on Scope—Qualified Opinion 

We have audited……………………

Management is responsible ………………………..

Our responsibility is to express an opinion on these financial statements based o our audit. Except as

discussed in the following paragraph, we conducted our audit in accordance with

……………………………

We did not observe the counting of the physical inventories as of December 31, 20X1, since that date

was prior to the time we were initially engaged as auditors for the Company. Owing to the nature of

the Company’s records, we were unable to satisfy ourselves as to inventory quantities by other audit

procedures.

In our opinion, except for the effects of such adjustments, if any, as might have been determined to

be necessary had we been able to satisfy ourselves as to physical inventory quantities, the financial 

statements give a true and fair view of ... (remaining words are the same as illustrated in the opinion

paragraph) 

Limitation on Scope—Disclaimer of Opinion

We were not able to observe all physical inventories and confirm accounts receivable due to

limitations placed on the scope of our work by the Company.) 

147

  

Because of the significance of the matters discussed in the preceding paragraph, we do not express an

opinion on the financial statements.”

Disagreement with Management

The auditor may disagree with management about matters such as the acceptability of accounting

policies selected, the method of their application, or the adequacy of disclosures in the financial

statements. If such disagreements are material to the financial statements, the auditor should express a

qualified or an adverse opinion.

A qualified opinion should be expressed when the auditor concludes that an unqualified opinion

cannot be expressed but that the effect of any disagreement with management is not so material and

pervasive as to require an adverse opinion. A qualified opinion should be expressed as being ‘except

for’ the effects of the matter to which the qualification relates.

An adverse opinion should be expressed when the effect of a disagreement is so material and

pervasive to the financial statements that the auditor concludes that a qualification of the report is not

adequate to disclose the misleading or incomplete nature of the financial statements.

Illustrations of these matters are set out below.

Disagreement on Accounting Policies—Qualified Opinion

We have audited……………………

Management is responsible ………………………..

Our responsibility is to express an opinion on these financial statements based o our audit. Except as

discussed in the following paragraph, we conducted our audit in accordance with

……………………………

As discussed in Note (Ref no.) to the financial statements, no depreciation has been provided in the

financial statements which practice, in our opinion, is not in accordance with International Financial

Reporting Standards. The provision for the year ended December 31, 2007, should be Rs.___ based

on the straight-line method of depreciation using annual rates of x% for the building and y% for the

equipment.  Accordingly, the fixed assets should be reduced by accumulated depreciation of Rs. __

and the loss for the year and accumulated deficit should be increased by Rs.__ and Rs.__, respectively.

In our opinion, except for the effect on the financial statements of the matter referred to in the

preceding paragraph, the financial statements give a true and fair view of ... (remaining words are the

same as illustrated in the opinion paragraph) 

Disagreement on Accounting Policies—Inadequate Disclosure—Adverse Opinion

“We have audited ... (remaining words are the same as illustrated in the introductory paragraph  

Management is responsible for … (remaining words are the same as illustrated in the management’s

responsibility paragraph – 

Our responsibility is to … (remaining words are the same as illustrated in the auditor’s responsibility

paragraphs)– 

(Paragraph(s) discussing the disagreement.)

In our opinion, because of the effects of the matters discussed in the preceding paragraph(s), the

financial statements do not give a true and fair view of (or ‘do not present fairly, in all material 

respects,’) the financial position of ABC Company as of December 31, 2007, and of its financial

performance and its cash flows for the year then ended in accordance with International Financial

Reporting Standards.”

MATTERS THAT DO NOT AFFECT THE AUDITOR’S OPINION

In certain circumstances, an auditor’s report may be modified by adding an emphasis of matter

paragraph to highlight a matter affecting the financial statements which is included in a note to the

financial statements that more extensively discusses the matter. 

The addition of such an emphasis of matter paragraph does not affect the auditor’s opinion. The

paragraph would preferably be included after the paragraph containing the auditor’s opinion but

before the section on any other reporting responsibilities, if any. The emphasis of matter paragraph

would ordinarily refer to the fact that the auditor’s opinion is not qualified in this respect. 

For example:

The auditor should modify the auditor’s report by adding a paragraph to highlight a material matter

regarding a going concern problem.

148

  

“Without qualifying our opinion, we draw attention to Note (Ref no) in the financial statements

which indicates that the Company incurred a net loss of Rs.__ during the year ended December 31,

2007 and, as of that date, the Company’s current liabilities exceeded its total assets by Rs.__. These

conditions, along with other matters as set forth in Note (Ref no), indicate the existence of a material

uncertainty which may cast significant doubt about the Company’s ability to continue as a going

concern.”

The auditor should consider modifying the auditor’s report by adding a paragraph if there is a

significant uncertainty (other than a going concern problem), the resolution of which is dependent

upon future events and which may affect the financial statements. An uncertainty is a matter whose

outcome depends on future actions or events not under the direct control of the entity but that may

affect the financial statements.

An illustration of an emphasis of matter paragraph for a significant uncertainty in an auditor’s

report follows:

“Without qualifying our opinion we draw attention to Note X to the financial statements. The

Company is the defendant in a lawsuit alleging infringement of certain patent rights and claiming

royalties and punitive damages. The Company has filed a counter action, and preliminary hearings and

discovery proceedings on both actions are in progress. The ultimate outcome of the matter cannot

presently be determined, and no provision for any liability that may result has been made in the

financial statements.”

The addition of a paragraph emphasizing a going concern problem or significant uncertainty is

ordinarily adequate to meet the auditor’s reporting responsibilities regarding such matters. However,

in extreme cases, such as situations involving multiple uncertainties that are significant to the financial

statements, the auditor may consider it appropriate to express a disclaimer of opinion instead of

adding an emphasis of matter paragraph.

In addition to the use of an emphasis of matter paragraph for matters that affect the financial

statements, the auditor may also modify the auditor’s report by using an emphasis of matter

paragraph, preferably after the paragraph containing the auditor’s opinion but before the section on

any other reporting responsibilities, if any, to report on matters other than those affecting the

financial statements. For example, if an amendment to other information in a document containing

audited financial statements is necessary and the entity refuses to make the amendment, the auditor

would consider including in the auditor’s report an emphasis of matter paragraph describing the

material inconsistency.

“Without qualifying our opinion we draw attention to the fact that the figures of dividend proposed 

and earning per share appearing in the director’s report being part of annual report are incorrect and

in conflict with those disclosed in financial statements. The matter has been brought to the notice of

the management but no corrective action has been taken by them in this regard.” 

149