S.

no STANDARD Page Number

01 ISA 200 1-3
02 ISA 210 4-12
03 ISA 240 13-37
04 ISA 260 38-41
05 ISA 315 42-55
06 ISA 320 56-63
07 ISA 402 64-73
08 ISA 500 74-81
09 ISA 505 82-85
10 Substantive Procedures 86 – 98
11 ISA 510 99-101
12 ISA 520 102-104
13 ISA 530 105-112
14 ISA 540 113-115
15 ISA 550 116-128
16 ISA 560 129-135
17 ISA 570 136-159
18 ISA 580 160-173
19 ISA 600 174-179
20 ISA 610 180-192
21 ISA 620 193-203
22 ISA 700 204-225
23 ISA 701 226-253
24 ISA 705 254-262
25 ISA 706 263-274
26 ISA 710 275-290
27 ISA 720 291-303
28 ISA 800 304-307
29 ISA 805 308-316
30 ISA 810 317-325
31 ISRE 2400 326-333
32 ISRE 2410 334-338
33 ISAE 3000 339-350
34 ISAE 3400 351-360
35 ISAE 3402 361-365
36 ISAE 3420 366-374
37 ISRS 4400 375-379
38 ISRS 4410 380-385
39 IAPN 1000 386-389
40 INTERNAL CONTROL 390-400
41 Recent past papers 401-415
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INTERNATIONAL STANDARD ON AUDITING 200

OVERALL OBJECTIVE OF THE INDEPENDENT AUDITOR AND THE CONDUCT OF AN
AUDIT IN ACCORDANCE WITH ISA

SCOPE:

INDEPENDENT AUDITORS OVERALL RESPONSIBILITY TO CONDUCT AN AUDIT IN ACCORDANCE WITH

INTERNATONAL STANDARD ON AUDITING

OBJECTIVE:

TO OBTAIN REASONABLE ASSURANCE TO REPORT ON

WHETHER FS ARE FFREE FROM FINANCIAL
MATERIAL MISSTATEMENT STATEMENTS
MATERIAL
BEFORE WE DISCUSS AUDITORS RESPONSIBILITY, IT IS NECESSARY TO UNDERSTAND MANAGEMENT
RESPONSIBILITY (Recall the 5 elements of ASSURANCE ENGAGEMENT)

To prepare FS n a/c For such Internal Control To provide the

with AFRF (IFRS) to enable the auditor with all
preparation of FS that information
are free from Material
Misstatement whether
due to error or fraud

NOW LETS DISCUSS OBJECTIVE / RESPONSIBILITY OF AN AUDITOR

AUDITOR IS RESPONSIBLE TO OBTAIN REASONABLE ASURANCE

FS as a whole are free material

To express an opinion whether FS are
misstatement whether due to fraud or
prepared in a/c with AFRF (IFRS)
error

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NOW QUESTION ARISE WHAT IS REASONABLE ASSURANCE

LET’S DISCUSS THIS WORD SEPARATELY

REASONABLE is the ASSURANCE is to

high level of enhance the degree
assurance but not the of confidence of the
absolute assurance intended user

WHY AUDITOR CAN NOT EXPRESS ABSOLOUTE ASSURANCE?

The auditor is not expected to, and cannot, reduce audit risk to Zero and cannot therefore obtain
absolute assurance that the FS are free from Material Misstatement due to fraud or error. This is
because there are inherent limitation of an audit, which result in most of the audit evidence on which
the auditor draws conclusion and bases the auditors opinion being persuasive rather than conclusive
WHAT ARE INHERENT LIMITATION OF AN AUDIT?
The inherent limitation of an audit arises from:

Audit to be
Nature of Financial Nature of Audit conducted with a
Reporting Procedures reasonable period of
time and cost

Preparation of FS Possibility that Fraud may involve

There is an
involved management may sophisticated and
expectation by user
judgement by not provide either carefully organized
of the FS that auditor
management in intentionally or schemes to designed
will form an opinion
applying the unintentionally to conceal it.
within a reasonable
requirement of complete Therefore audit
period of time and
AFRF(IFRS). For information procedures may be
cost
e.g. accounting ineffective to detect
estimates intentional
misstatement. E.g.
falsifying documents

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WHAT ARE THE GENERAL REQUIRMENT SO THAT AUDITOR CAN OBTAIN REASONABLE ASSURANCE

OR

WHAT ARE THE GENERAL REQUIRMENT OF ISA 200

Plan and perform the Exercise professional

Shall obtain Sufficient
Comply with the audit with judgement in
Appropriate Audit
ethical requirement professional planning and
Evidence
skepticism performing an audit
of FS

What is PS? What is PJ?

Integrity An attitude that includes a The application of relevant training ,

questioning mind, being alert knowledge and experience within the
Objectivity
to conditions which may context provided by auditing,
Professional indicate possible misstatement accounting and ethical standards in
competence and due due to error or fraud and making informed decision about the
care critical assessment of audit courses of action that are appropriate in
evidence the circumstances
Confidentiality
Example of PS? Uses of PJ?
Professional
behaviour Audit evidence that Materiality and audit risk
contradicts other audit N,T &E of AP used to obtain AE
evidence
Evaluate whether SAAE has been obtained
Information that bring into
question the reliability of Evaluation of management judgement in
documents applying AFRF

Condition that may indicate Drawing conclusion based on audit evidence

possibility of fraud obtained. For e.g. assessing the
reasonableness of the estimates by the
Advantages of maintaining PS management

Maintaining PS throughout the audit is necessary to

reduce the risk of:

Overlooking unusual transaction

Over generalizing when drawing conclusion from

audit observation

Using inappropriate assumptions in determining the

N,T&E of audit procedures and evaluating result
thereof

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ISA 210

AGREEING THE TERMS OF AUDIT ENGAGEMENT

SCOPE
OBJECTIVE
Auditor’s responsibilities in
agreeing the terms of audit To accept or continue and audit engagement
engagement with only when the basis upon which it is to be
management or TCWG performed has been agreed through:
a. Whether preconditions for an audit are
present
b. Confirm that there is a common
understanding between the auditor and
management of the terms of audit
engagement

FIRST OBJECTIVE:WHAT IS PRECONDITION

2.Agreement of management or TCWG

1.The use by management of an
to the premise on which audit is
acceptable FRF in the preparation of FS
conducted

WHAT IS PREMISE? And what agreement to be obtained?

Obtain the agreement of management that it acknowledge
DETERMING THE APPLICABILITY OF and understand its responsibility:
FINANCIAL REPORTING FRAMEWORK · For the preparation of FS in a/c with AFRF
Nature of the entity for e.g. banks, · For such IC as management determines is necessary
manufacturing and mutual funds to enable the preparation of FS free from Material
Misstatement whether due to error or fraud
Purpose of the FS – general purpose or · To provide the auditor with:
special purpose o Access to all information of which management
Law or regulation prescribed is aware that is relevant to the preparation of
FS
Nature of the FS – Complete or single o Additional information that auditor may request
from the management for the purpose of audit
o Unrestricted access to persons within the entity
from whom auditor determines it necessary to
obtain audit evidence

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SECOND OBJECTIVE: AGREEING THE TERMS OF ENGAGEMENT

The auditor shall agree the terms of audit engagement with management or TCWG in an AUDIT
ENGAGEMENT LETTER

WHAT TERMS OF AUDIT ENGAGEMENT SHOULD BE INCLUDED IN ENGAGEMENT LETTER?

Reference to the
Objective and
Responsibilities Responsibilities Identification of expected form
Scope of Audit of
of Auditor of Management AFRF and content of
FS
Audit report

WHAT ARE THE ADVANTAGES OF ENGAGEMENT LETTER

It is in the interest of both the entity and the auditor that the auditor sends an audit
engagement letter before the commencement of the audit to help avoid misunderstanding
with respect to audit

IS THERE ANY EXCEPTION TO INCLUDE ALL THE CONTENT OF ENGAGEMENT LETTER

If law or regulation prescribes in sufficient detail the terms of the audit

engagement (objective, MR, AR, AFRF, Report), the auditor need not record them in a
written agreement, except for the fact that:

· such law or regulation applies and that

· management acknowledges and understands its responsibilities

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WHAT ADDITIONAL MATTERS CAN BE COMMUNICATED IN ENGAGEMENT LETTER (OPTIONAL)

The fact that To inform The A request for

Arrangement Expectation management
because of regarding that the auditor basis on
inherent about the which to
planning and manageme acknowledge
limitation of an performance of nt will events fees are
audit, there is an occurred compute receipt of the
the audit provide Audit
unavoidable risk including the written after the d and
that some date of any engagement
composition of an representati letter and to
material audit on Auditors billing
misstatement report arrange agree the
may not be ment terms of

Arrangement
Arrangement Any obligation to
regarding the Arrangement to Any restriction of
regarding the provide audit
involvement of be made with the auditors
involvement of working papers
other auditor or previous auditor liability
Internal auditor to other entities
expert

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RECURRING AUDIT

Lets Assume you have finalized 2016 audit now do we need to send Engagement letter again to
Management or TCWG for the audit of 2017 i.e. for RECURRING AUDIT?

The auditor may decide not to send a new engagement letter each period however on
recurring audit, the auditor shall assess whether

· circumstances require the terms of the audit engagement to be revised and

· Whether there is a need to remind the entity of the existing terms of engagement.

A Any
A Any indication
significant
A recent A change A change A change revised or that the
change in
change of significant in the in legal or in other special entity
nature or
senior change in financial regulatory reporting terms of misunders
size of tands the
managem ownership reporting requirem requireme the audit
the objective
ent framewor ents. nts. engagem
entity’s and scope
k ent.
business. of

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ACCEPTANCE OF A CHANGE IN TERMS OF ENGAGEMENT

The auditor shall not agree to a change in terms of the audit engagement where there is no reasonable
justification for doing so
Always consider:
whether there is reasonable
justification for doing so;
Reason for change Information in request of which the
in terms of change is requested by the
management; and
engagement
legal or contractual implication of the
change

Change in Misundersta Restriction on the scope of

circumstanc nding as to audit engagement.
e affecting nature of an
the needs The auditor shall consider the
audit as justification given for request
for the originally
service particularly implication of a
requested restriction on the scope of audit
engagement

Reasonable basis
A change may not be considered reasonable if it
appears that change relates to information that is
incorrect, incomplete or otherwise unsatisfactory
If the terms of the audit E.g.: where auditor is unable to obtain SAAE
engagement are changed, the regarding receivable and entity ask the audit
auditor and management shall
engagement to be changed to review engagement
agree on and record the new
terms of the engagement in an
engagement letter or other
suitable form of written
agreement

If the auditor is unable to agree to a change of

the terms of the audit engagement and is not
permitted by management to continue the original
audit engagement, the auditor shall:
(a) Withdraw from the audit
engagement where possible under
applicable
law or regulation; and
(b) Determine whether there is any
obligation, either contractual or
otherwise, to
report the circumstances to other
parties, such as those charged with
governance, owners or regulators.

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REQUEST TO CHANGE TO A REVIEW OR RELATED SERVICE

If, prior to completing the audit engagement, the auditor is requested to change the audit engagement to an engagement that
conveys a lower level of assurance, the auditor shall determine :
· whether there is reasonable justification for doing so;
· Information in request of which the change is requested by the management; and
· legal or contractual implication of the change

If the auditor concludes that there is reasonable justification to change the audit engagement to a review or a related service, the
audit work performed to the date of change may be relevant to the changed engagement; however, the work required to be
performed and the report to be issued would be those appropriate to the revised engagement. In order to avoid confusing the
reader, the report on the related service would not include reference to:
(a) The original audit engagement; or
(b) Any procedures that may have been performed in the original audit engagement, except where the audit
engagement is changed to an engagement to undertake agreed-upon procedures and thus reference to the procedures
performed is a normal part of the report.

AUDIT OF COMPONENTS

When the auditor of a parent entity is also the auditor of a component, the
factors that may influence the decision whether to send a separate audit
engagement letter to the component include the following

Whether a Degree of
Who Legal requirements Degree of
separate independence of
appoints the in relation to audit ownership by
auditor’s report the component
component appointments; parent
is to be issued management from
auditor
on the the parent
component entity

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LIMITATION ON SCOPE PRIOR TO AUDIT ENGAGEMENT ACCEPTANCE

If management or those charged with governance impose a limitation on the

scope
of the auditor’s work in the terms of a proposed audit engagement such that
the auditor believes the limitation will result in the auditor disclaiming an
opinion on the financial statements, the auditor shall not accept such a limited
engagement as an audit engagement, unless required by law or regulation to
do so.

IF PRECONDITIONS OF AN AUDIT ARE NOT PRESENT

a. MANAGEMENT IS NOT ACKNOWLEDGING ITS RESPONSIBILITY

Management is not acknowledging its responsibility or agree to provide written

representation, the auditor will be unable to obtain SAAE. In such
circumstances it would not be appropriate for the auditor to accept audit
engagement unless law or regulation requires the auditor to do so. In cases
where auditor is required to accept the audit engagement, the auditor may
need to explain to management the importance of these matters and the
implication for the auditor’s report.

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b. FINANCIAL REPORTING FRAMEWORK IS UNACCEPTABLE

Auditor shall not accept engagement

What if Financial Reporting framework is prescribed by law or regulation which is unacceptable

Accept audit engagement only if the following conditions are present

It is recognized in the terms of the audit engagement that:

Management agrees to provide
(i) The auditor’s report on the financial statements will
additional disclosures in the financial
incorporatean Emphasis of Matter paragraph, drawing
statements required to avoid the financial
users’ attention to the additional disclosures, in
statements being misleading
accordance with ISA 706;4 and
(ii) the auditor’s opinion on the financial statements will not
include true and fair view unless required by law or regulation.

Include appropriate reference to this

matter in the terms of the audit
engagement

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If the conditions mentioned above are not present and management is required by law or
regulation to undertake the audit engagement the auditor shall?
And
Evaluate the effect of the misleading
nature of the financial statements on
the auditor’s report;
QUALIFIED OR ADVERSE OPINION

FINANCIAL REPORTING STANDARDS SUPPLEMENTED BY LAWS AND REGULATION

If financial reporting standards established by an authorized or recognized standards setting organization are
supplemented by law or regulation, the auditor shall determine whether there are any conflicts between the financial
reporting standards and the additional requirements. If such conflicts exist, the auditor shall discuss with
management the nature of the additional requirements and shall agree whether:
(a) The additional requirements can be met through additional disclosures
in the financial statements; or
(b) The description of the applicable financial reporting framework in the
financial statements can be amended accordingly.

If neither of the above actions is possible, the auditor shall determine whether it will be necessary to modify the
auditor’s opinion in accordance with ISA 705

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ISA 240

THE AUDITOR’S RESPONSIBILITIES RELATING TO FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS

Scope Objectives
· Auditor’s responsibilities relating to · To identify and assess the ROMM of
fraud in an audit of FS. the FS due to fraud.
· Also deals with how ISA 315 and ISA · To obtain SAAE regarding the
330 are to be applied in relation assessed ROMM due to fraud.
ROMM due to fraud · To respond appropriately to fraud or
suspected fraud.

Characteristics of Fraud

Misstatements in the FS can arise from Fraud is a broad legal concept, the
either: auditor is concerned with fraud that
causes a material misstatement in
the FS.

Fraud (Intentional) Error.(Unintentional) Misstatements resulting Misstatements resulting

from fraudulent financial from misappropriation of
reporting assets.

Examples Examples
· Manipulating, falsification (including forgery), or · Embezzling receipt (Misappropriating collection on
alteration of accounting records or supporting account receivable or diverting receipt in respect of
documentation from which FS are prepared written off accounts to personal bank accounts
· Misrepresenting or intentionally omission from, the · Stealing physical asset or intellectual property( for eg.
financial statement of events ,transactions or other Stealing inventory for personal use or for sale,
significant information stealing scrap for resale, colluding with a competitor
· Intentional misapplication of accounting principles by disclosing technological data in return for payment
relating to amounts, classification, manner of · Causing an entity to pay for goods not received -
presentation, or disclosure Payment to fictitious vendors, kickbacks paid by
vendor to the entity’s purchasing agent in return for
inflating price, payment to fictitious employees

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Responsibility for the Prevention and Detection of Fraud

Responsibilities of TCWG and management

Management with the oversight of TCWG This involves commitment to Considering the potential for
place a strong emphasis on fraud creating a culture of honesty and override of controls or other
prevention, which may reduce ethical behavior which can be inappropriate influence over the
opportunities for fraud to take place, reinforced by an active oversight by financial reporting process
and fraud deterrence, which could TCWG.
persuade individuals not to commit fraud
because of the likelihood of detection and
punishment.

Responsibilitiesof the auditors

An auditor is responsible for obtaining The risk of not detecting a material When obtaining reasonable
reasonable assurance that the FS are misstatementresulting from assurance, the auditor is responsible
free from material misstatement, whether management fraud is greater than for for maintaining professional
caused by fraud or error. Owing to the employee fraud, because management skepticism throughout the audit,
inherent limitations of an audit that some is frequently in a position to directly or considering the potential for
material misstatements of the FS may indirectly manipulate management override of controls and
not be detected, even though the audit accounting records, present fraudulent recognizing the fact that audit
is properly planned and performed in financial information or override control procedures that are effective for
accordance with the ISAs. procedures designed to prevent similar detecting error may not be effective in
frauds by other employees. detecting fraud.
The auditor is required to identify and
assess the ROMM due to fraud and in
designing procedures to detect such
misstatement

Inherent limitations are significant in the case of misstatement resulting from fraud. The risk of not detecting a material misstatement resulting
from fraud is higher than the risk of not detecting one resulting from error because
Fraud may involve sophisticated and carefully organized schemes designed to conceal it. Such attempts at concealment may be even more
difficult to detect when accompanied by collusion. Collusion may cause the auditor to believe that audit evidence is persuasive when it is,
false.
The auditor’s ability to detect a fraud depends on factors such as the skillfulness of the perpetrator, the frequency and extent of manipulation,
the degree of collusion involved, the relative size of individual amounts manipulated, and the seniority of those individuals involved.
While the auditor may be able to identify potential opportunities for fraud to be perpetrated, it is difficult for the auditor to determine whether
misstatements in judgment areas such as accounting estimates are caused by fraud or error.

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Definitions

Fraud
An intentional act by one or more Fraud risk factors
individualsamongmanagement, Events or conditions that indicate an
TCWG, employees, or third parties, incentive orpressure to commit fraud or
involving the use of deception to obtain provide an opportunity to commit fraud.
an unjust or illegal advantage.

REQUIREMENT

Professional Skepticism

Maintain professional skepticism Unless the auditor has reason to Where responses to
throughout the audit, recognising the believe the contrary, the auditor may inquiries of
possibility that a material accept records and documents as management or TCWG
misstatement due to fraud could genuine. If conditions identified to are inconsistent, the
exist, notwithstanding the auditor’s believe that a document may not be auditor shall investigate
past experience of the honesty and authentic or have been modified but the inconsistencies.
integrity of the management and not disclosed to the auditor, the auditor
TCWGbecause there may have shall investigate further.
been changes in circumstances · Confirming directly with the third
party
· Using the work of an expert to
assess the documents authenticity

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Discussion among the Engagement Team

A discussion among the engagement team memberswith engagement partner and a determination by the
engagement partner of which matters are to be communicated to those team members not involved in the
discussion. This discussion emphasis on how and where the entity’s FS may be susceptible to material misstatement due
to fraud and how it might occur. The discussion shall occur setting aside beliefs that the engagement team members
may have that management and TCWG are honest and have integrity.

ADVANTAGES OF DISCUSSION AMONG ENGAGEMENT TEAM

Discussing the susceptibility of the entity’s financial statements to material
misstatement due to fraud with the engagement team:
· Provides an opportunity for more experienced engagement team members to share their insights about how and
where the financial statements may be susceptible to material misstatement due to fraud.
· Enables the auditor to consider an appropriate response to suchsusceptibility and to determine which members of
the engagement team will conduct certain audit procedures.
· Permits the auditor to determine how the results of audit procedureswill be shared among the engagement team
and how to deal with any allegations of fraud that may come to the auditor’s attention.

The discussion may include such matters as:

· An exchange of ideas among engagement team members about how andwhere they believe the entity’s financial
statements may be susceptible to material misstatement due to fraud, how management could perpetrate
and conceal fraudulent financial reporting, and how assets of the entity could be misappropriated.
· A consideration of circumstances that might be indicative of earningsmanagement and the practices that might be
followed by management to manage earnings that could lead to fraudulent financial reporting.
· A consideration of the known external and internal factors affecting theentity that may create an incentive or
pressure for management or others to commit fraud, provide the opportunity for fraud to be perpetrated, and
indicate a culture or environment that enables management or others to rationalize committing fraud.
· A consideration of management’s involvement in overseeing employeeswith access to cash or other assets
susceptible to misappropriation.
· A consideration of any unusual or unexplained changes in behavior orlifestyle of management or employees which
have come to the attention of the engagement team.
· An emphasis on the importance of maintaining a proper state of mindthroughout the audit regarding the potential
for material misstatement due to fraud.
· A consideration of the types of circumstances that, if encountered, mightindicate the possibility of fraud.
· A consideration of how an element of unpredictability will be incorporatedinto the nature, timing and extent of the
audit procedures to be performed.
· A consideration of the audit procedures that might be selected to respond tothe susceptibility of the entity’s
financial statement to material misstatement due to fraud and whether certain types of audit procedures are more
effective than others.
· A consideration of any allegations of fraud that have come to the auditor’sattention.
· A consideration of the risk of management override of controls.

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Risk Assessment Procedures and Related Activities

When obtaining an understanding of the entity and its environment, including the entity’s internal control.The
auditor shall perform below mentioned procedures to obtain information for use in identifying the ROMM due
to fraud.

Inquiries with Management Unusual or Unexpected

· Management assessment Relationships Identified
of the risk that the FS Other Information
Inquiries with TCWG
maybe materially Evaluate whether unusual or Consider whether other
· Obtain an
misstated due to fraud, unexpected relationships that information obtained by
understanding of how
including the nature extent have been identified in the auditorindicates
TCWG exercise
performing analytical ROMM due to fraud.
and frequency of such oversight of
assessment; management’s procedures, including those
· Management process for processes for related to revenue
identifying and responding identifying and accounts,may indicate ROMM
to the risks of fraud that responding to the due to fraud.
management has risks of fraud and the
identified or that have internal control that Evaluation of Fraud Risk
brought to its attention for management has Factors
which risk of fraud is likely established to Evaluate whether the
to exist; mitigate these risks. Inquiries with Internal information obtained from the
· Management’s · Whether they have Audit Functions other riskassessment
communication, if any, knowledge of any The auditor shall make procedures and related
TCWG regarding its actual, suspected or inquiries of appropriate activities performed
processes for identifying alleged fraud individuals within the function indicates that one or more
and responding to the affecting the entity. to determine whether they fraud risk factors are present.
risks of fraud in the entity; These inquiries are have knowledge of any
and made in part to actual, suspected or alleged
· Management’s corroborate the fraud affecting the entity, and
communication, if any,to responses to the to obtain its views about the
employees regarding its inquiries of risks of fraud.
views on business management.
practices and ethical
behavior.
· Whether they have

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Identification and Assessment of the Risks of Material Misstatement Due to Fraud

The auditor shall identify and assess the ROMM due to fraud at FS level, and at assertion level for classes of
transactions, account balances anddisclosures.

Presumed Significant risk on revenue recognition – Significant Risk

Material misstatement due to fraudulent financial reporting relating to revenue recognition often results from an
overstatements of revenue through, for example, premature revenue recognition or recording fictitious revenues.
It may result also from an understatement of revenue through, for example, improperly shifting revenues to a
later period.. The risks of fraud in revenue recognition may be greater in some entities than others. For example,
there may be pressures or incentives on management to commitfraudulent financial reporting through
inappropriate revenue recognition in the case of listed entities when, for example, performance is measured
in terms of year over year revenue growth or profit. Similarly, for example, there may be greater risks of fraud in
revenue recognition in the case of entities that generate a substantial portion of revenues through cash sales.The
presumption that there are risks of fraud in revenue recognition may be rebutted. For example, the auditor
may conclude that there is no risk of material misstatement due to fraud relating to revenue recognition in the
case where a there is a single type of simple revenue transaction, for example,
leasehold revenue from a single unit rental property.

Presumed Significant risk on MOC

Management is in a unique position to perpetrate fraud because of management’s ability to manipulate
accounting records and prepare fraudulent financial statements by overriding controls that otherwise appear to
be operating effectively. Although the level of risk of management override of controls will vary from entity to
entity, the risk is nevertheless present in al entities. Due to the unpredictable way in which such override could
occur, it is a risk of material misstatement due to fraud and thus a significant risk.
Fraudulent financial reporting often involves management override of controls that otherwise may appear to be
operating effectively. Fraud can be committed by management overriding controls using such techniques as:
· Recording fictitious journal entries, particularly close to the end of an accounting period, to manipulate
operating results or archive other objectives.
· Inappropriately adjusting assumptions and changing judgments used to estimate account balances.
· Omitting, advancing or delaying recognition in the financial statements of events and transactions that have
occurred during the reporting period.
· Concealing or not disclosing, facts that could affect the amounts recorded in the financial statements.
· Engaging in complex transactions that are structured to misrepresent the financial position or financial
performance of the entity.
· Altering records and terms related to significant and usual transactions.

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Responses to the Assessed Risks of Material Misstatement Due to Fraud

Overall Responses Audit Audit Procedures (Management Override of Controls)

In determining overall responses Procedures(Assert Irrespective of the auditor’s assessment of the risks of
to address the assessed ROMM ion Level) management override ofcontrols, the auditor shall:
due to fraud at the FS level, the The auditor shall (a) Test the appropriateness of JE recorded in the GL and
auditor shall: design and perform other adjustments made in the preparation of FS. The
(a) Assign and supervise further audit auditor shall:
personnel taking account of procedures whose (i) Make inquiries of individuals involved in the financial
the knowledge, skill and nature, timing and reportingprocess about inappropriate or unusual activity
ability of the individuals to extent are responsive relating to the processing of JE;
be given significant to the assessed (ii) Select JE and other adjustments made at the end of a
engagement responsibilities ROMM due to fraud reporting period; and
and the auditor’s at the assertion level. (iii) consider the need to test JE and other adjustments
assessment of the ROMM (See appendix) throughout the period.
due to fraud for the (b) Review accounting estimates for biases. The auditor
engagement; shall:
(b) Evaluate the selection and (i) Evaluate the judgments and decisions made in making
application of accounting the accounting estimates; and
policies, particularly related (ii) Perform a retrospective review of judgments and
to subjective measurements assumptions on significant accounting estimates in the FS
and complex transactions; of the prior year
and (c) Evaluate business rational for significant transaction
(c) Incorporate an element of outside the normal course of business
unpredictability in the selection
of the nature, timing and
extent of audit procedures.

Unpredictability in the .When identifying and selecting journal entries Business Rationale for significant
selection of Audit procedures and other adjustments for testing and transaction (that are outside the
Incorporating an element of determining the appropriate method of normal course of business
unpredictability in the selection examining the underlying support for the items include:
of the nature, timing and extent selected, the following matters are of relevance The form of such transactions
of audit procedures to be The assessment of the risks of material appears overlycomplex
performed is important as misstatement due to fraud Management has not discussed the
individuals within the entity Controls that have been implemented over nature of and accounting for
who are familiar with the audit journal entries and otheradjustments suchtransactions with those charged
procedures normally performed The entity’s financial reporting process and the with governance of the entity, and
on engagements may be more nature of evidence thatcan be obtained there is inadequate documentation.
able to conceal fraudulent The characteristics of fraudulent journal entries Management is placing more
financial reporting. This can be or other adjustmentsinappropriate journal emphasis on the need for a
achieved by, for example: entries or other adjustments particularaccounting treatment than
•Performing substantive oftenhaveuniqueidentifying characteristics. on the underlying economics of the
procedures on selected account Such characteristics mayincludeentries(a) made transaction
balances andassertions not to unrelated, unusual, or seldom-used Transactions that involve non-
otherwise tested due to their accounts, (b) made by consolidated related parties,
materiality or risk. individuals who typically do not make journal including
•Adjusting the timing of audit entries, (c) recorded at the end of the period or special purpose entities, have not
procedures from that otherwise as post-closing entries that have little been properly reviewed or approved
expected. ornoexplanation or description, (d) made by those charged with governance of
•Using different sampling either before or duringthepreparation of the the entity
methods. financial statements that do not have The transactions involve previously
•Performing audit procedures at accountnumbers, or (e) containing round numbers unidentified related parties or
different locations or at locations or consistent ending numbers. partiesthat do not have the
on anunannounced basis. The nature and complexity of the accounts substance or the financial strength
Journal entries or other adjustments processed to support the transaction without
outside the normalcourse of business assistance from the entity under audit

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Evaluation of Audit Evidence

· The auditor shall evaluate whether analytical procedures that are performednear the end of the audit,
when forming an overall conclusion as to whether the financial statements are consistent with the
auditor’s understanding of the entity, indicate a previously unrecognized risk of material misstatement
due to fraud
· If the auditor identifies a misstatement, the auditor shall evaluate whether such amisstatement is indicative
of fraud. If there is such an indication, the auditor shall evaluate the implications of the misstatement in
relation to other aspects of the audit, particularly the reliability of management representations, recognizing
that an instance of fraud is unlikely to be an isolated occurrence.
· If the auditor identifies a misstatement, whether material or not, and the auditor hasreason to believe that it is
or may be the result of fraud and that management (in particular, senior management) is involved, the
auditor shall reevaluate the assessment of the risks of material misstatement due to fraud and its
resulting impact on the nature, timing and extent of audit procedures to respond to the assessed risks.
The auditor shall also consider whether circumstances or conditions indicate possible collusion involving
employees, management or third parties when reconsidering the reliability of evidence previously obtained.
· If the auditor confirms that, or is unable to conclude whether, the financialstatements are materially
misstated as a result of fraud the auditor shall evaluate the implications for the audit (try to obtain
additional evidence to determine whether fraud occurred and what its effect would be, consider how it
affects the rest of audit, discuss the matter and plan for further investigation with a level of management.
After considering the ROMM, the auditor may determine to withdraw from audit engagement

Auditor Unable to Continue the Engagement

If, as a result of a misstatement resulting from fraud or suspected fraud that bring into question auditor’s
ability to continue performing the audit, the auditor shall:
(a) Determine the professional and legal responsibilities, including whether there is requirement for auditor to
report to person who made the audit appointment or in some case to regulatory authorities
(b) Consider whether it is appropriate to withdraw where withdraw is possible under applicable law or
regulation
(c) If the auditor withdraws:
(i) Discuss with the appropriate level of management and TCWG
(ii) and determine whether there is a professional or legal requirement.to report to the person who made
the audit appointment or in some cases to regulatory authorities, the auditors withdrawal from the
engagement and the reason for the withdrawal

Examples of exceptional circumstances that may arise and that may bring into question the auditor’s ability
to continue performing the audit include:
· The entity does not take the appropriate action regarding fraud that theauditor considers necessary in
the circumstances, even where the fraud is not material to the financial statements;
· The auditor’s consideration of the risks of material misstatement due tofraud and the results of audit
tests indicate a significant risk of material and pervasive fraud; or
· The auditor has significant concern about the competence or integrity ofmanagement or those charged
with governance.

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Written Representations

The auditor shall obtain written representations from management that:

(a) They acknowledge their responsibility for the design, implementation and maintenance of internal control to
prevent and detect fraud;
(b) They have disclosed to the auditor the results of management’s assessment of the risk that the FS may
be materially misstated as a result of fraud;
(c) They have disclosed to the auditor their knowledge of fraud, or suspected fraud, affecting the entity
involving:
(i) Management;
(ii) Employees who have significant roles in internal control; or
(iii) Others where the fraud could have a material effect on the financial statements; and
(d) They have disclosed to the auditor their knowledge of any allegations of fraud, or suspected fraud, affecting
the entity’s FS communicated by employees, former employees, analysts, regulators or others.

Communications to Management and with Those Charged with

Governance

If the auditor has identified a fraud or has obtained information that indicates that a fraud may exist, the auditor
shall communicate these matters on a timely basis to the appropriate level of management in order to inform
those with primary responsibility for the prevention and detection of fraud of matters relevant to their
responsibilities.
Unless all of TCWG are involved in managing the entity, if the auditor has identified or suspects fraud
involving:
(a) management;
(b) employees who have significant roles in internal control; or
(c) others where the fraud results in a material misstatement in the FS,
the auditor shall communicate these matters to TCWG on a timely basis. If the auditor suspects fraud involving
management, the auditor shall communicate these suspicions to TCWG and discuss with them the
nature, timing and extent of audit procedures necessary to complete the audit.
The auditor shall communicate with TCWG any othermatters related to fraud that are, in the auditor’s
judgment, relevant to their responsibilities.

Other matters related to fraud to be discussed with those charged with governance
of the entity may include, for example:
· Concerns about the nature, extent and frequency of management’sassessments of the controls in place to
prevent and detect fraud and of the risk that the financial statements may be misstated.
· A failure by management to appropriately address identified significantdeficiencies in internal control, or to
appropriately respond to an identified fraud.
· The auditor’s evaluation of the entity’s control environment, includingquestions regarding the competence
and integrity of management.
· Actions by management that may be indicative of fraudulent financialreporting, such as management’s
selection and application of accounting policies that may be indicative of management’s effort to manage
earnings in order to deceive financial statement users by influencing their perceptions as to the entity’s
performance and profitability.
· Concerns about the adequacy and completeness of the authorization oftransactions that appear to be outside
the normal course of business.

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Communications to Regulatory and Enforcement Authorities

If the auditor has identified or suspects a fraud, the auditor shall determine whether there is a responsibility
to report the occurrence or suspicion to a party outside the entity. Although the auditor’s professional duty
to maintain the confidentiality of client information may preclude such reporting, the auditor’s legal
responsibilities may override the duty of confidentiality in some circumstances.The auditor may
consider it appropriate to obtain legal advice to determine the appropriate course of action in the
circumstances, the purpose of which is to ascertain the steps necessary in considering the public interest
aspects of identified fraud.

Documentation

The auditor shall include the following in the audit documentation of the auditor’s understanding of the
entity and its environment and the assessment of the ROMM required by ISA 315 (Revised):
(a) The significant decisions reached during the discussion among the engagement team regarding the
susceptibility of the entity’s FS to material misstatement due to fraud; and
(b) The identified and assessed ROMM due to fraud at the FS level and at the assertion level.

The auditor shall include the following in the audit documentation of the auditor’s responses to the assessed
ROMM required by ISA 330:
(a) The overall responses to the assessed ROMM due to fraud at the FS level and the nature, timing and extent
of audit procedures, and the linkage of those procedures with the assessed ROMM due to fraud at the
assertion level; and
(b) The results of the audit procedures, including those designed to address the risk of management override
of controls.

The auditor shall include in the audit documentation communications about fraud made to management, TCWG,
regulators and others.

If the auditor has concluded that the presumption that there is a ROMM due to fraud related to revenue
recognition is not applicable in the circumstances of the engagement, the auditor shall include in the
audit documentation the reasons for that conclusion.

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Examples of Fraud Risk Factors

Risk Factors Relating to Misstatements Arising from Fraudulent Financial Reporting

Incentives/Pressures
Financial stability or profitability is threatened by economic, industry, or entity operating conditions, such as (or as
indicated by):
· High degree of competition or market saturation, accompanied by declining margins.
· High vulnerability to rapid changes, such as changes in technology, product obsolescence, or interest rates.
· Significant declines in customer demand and increasing business failures in eitherthe industry or overall economy.
· Operating losses making the threat of bankruptcy, foreclosure, or hostile takeoverimminent.
· Recurring negative cash flows from operations or an inability to generate cashflows from operations while reporting
earnings and earnings growth.
· Rapid growth or unusual profitability especially compared to that of othercompanies in the same industry.
· New accounting, statutory, or regulatory requirements.

Excessive pressure exists for management to meet the requirements or expectations of third parties due to the following:
· Profitability or trend level expectations of investment analysts, institutionalinvestors, significant creditors, or other
external parties, including expectations created by management in, for example, overly optimistic press releases or
annual report messages.
· Need to obtain additional debt or equity financing to stay competitive – including financing of major research and
development or capital expenditures.
· Marginal ability to meet exchange listing requirements or debt repayment or other debt covenant requirements.
· Perceived or real adverse effects of reporting poor financial results on significant pending transactions, such as business
combinations or contract awards.

Information available indicates that the personal financial situationof management or TCWG is threatened by the
entity’s financial performance arising from the following:
· Significant financial interests in the entity.
· Significant portions of their compensation (for example, bonuses, stock options, and earn-out arrangements) being
contingent upon achieving aggressive targets for stock price, operating results, financial position, or cash flow.
· Personal guarantees of debts of the entity.
There is excessive pressure on management or operating personnel to meet financial targets established by TCWG,
including sales or profitability incentive goals.

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Opportunities
The nature of the industry or the entity’s operations provides opportunities to engage in fraudulent financial reporting that
can arise from the following:
· Significant related-party transactions not in the ordinary course of business or with related entities not audited or audited
by another firm.
· A strong financial presence or ability to dominate a certain industry sector that allows the entity to dictate terms or
conditions to suppliers or customers that may result in inappropriate or non-arm’s-length transactions
· Assets, liabilities, revenues, or expenses based on significant estimates that involve subjective judgments or
uncertainties that are difficult to corroborate.
· Significant, unusual, or highly complex transactions, especially those close to period end that pose difficult
“substance over form” questions.
· Significant operations located or conducted across international borders in jurisdictions where differing business
environments and cultures exist.
· Use of business intermediaries for which there appears to be no clear business justification.
· Significant bank accounts or subsidiary or branch operations in tax-haven jurisdictions for which there appears to
be no clear business justification.

The monitoring of management is not effective as a result of the following:

· Domination of management by a single person or small group (in a non owner-managed business) without
compensating controls.
· Oversight by TCWG over the financial reporting process and internal control is not effective.

There is a complex or unstable organizational structure, as evidenced by the following:

· Difficulty in determining the organization or individuals that have controlling interest in the entity.
· Overly complex organizational structure involving unusual legal entities or managerial lines of authority.
· High turnover of senior management, legal counsel, or those charged with governance.

Internal control components are deficient as a result of the following:

· Inadequate monitoring of controls, including automated controls and controls over interim financial reporting (where
external reporting is required).
· High turnover rates or employment of staff in accounting, information technology, or the internal audit function that are not
effective.
· Accounting and information systems that are not effective, including situations involving significant deficiencies in
internal control.

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Attitudes/Rationalizations
· Communication, implementation, support, or enforcement of the entity’s values or ethical standards by management,
or the communication of inappropriate values or ethical standards, that are not effective.
· Nonfinancial management’s excessive participation in or preoccupation with the selection of accounting policies or
the determination of significant estimates.
· Known history of violations of securities laws or other laws and regulations, or claims against the entity, its senior
management, or TCWG alleging fraud or violations of laws and regulations.
· Excessive interest by management in maintaining or increasing the entity’s stock price or earnings trend.
· The practice by management of committing to analysts, creditors, and other third parties to achieve aggressive or
unrealistic forecasts.
· Management failing to remedy known significant deficiencies in internal control on a timely basis.
· An interest by management in employing inappropriate means to minimize reported earnings for tax-motivated
reasons.
· Low morale among senior management.
· The owner-manager makes no distinction between personal and business transactions.
· Dispute between shareholders in a closely held entity.
· Recurring attempts by management to justify marginal or inappropriate accounting on the basis of materiality.
· The relationship between management and the current or predecessor auditor is strained, as exhibited by the
following:
○ Frequent disputes with the current or predecessor auditor on accounting, auditing, or reporting matters.
○ Unreasonable demands on the auditor, such as unrealistic time constraints regarding the completion of the
audit or the issuance of the auditor’s report.
○ Restrictions on the auditor that inappropriately limit access to people or information or the ability to
communicate effectively with TCWG.
○ Domineering management behavior in dealing with the auditor, especially involving attempts to influence
the scope of the auditor’s work or the selection or continuance of personnel assigned to or consulted on the audit
engagement.

Risk Factors Arising from Misstatements Arising from Misappropriation of Assets

Incentives/Pressures
Personal financial obligations may create pressure on management or employees with access to cash or other
assets susceptible to theft to misappropriate those assets.
Adverse relationships between the entity and employees with access to cash or other assets susceptible to theft
may motivate those employees to misappropriate those assets. For example, adverse relationships may be created
by the following:
· Known or anticipated future employee layoffs.
· Recent or anticipated changes to employee compensation or benefit plans.
· Promotions, compensation, or other rewards inconsistent with expectations.

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Opportunities
Certain characteristics or circumstances may increase the susceptibility of assets to misappropriation. For
example, opportunities to misappropriate assets increase when there are the following:
· Large amounts of cash on hand or processed.
· Inventory items that are small in size, of high value, or in high demand.
· Easily convertible assets, such as bearer bonds, diamonds, or computer chips.
· Fixed assets which are small in size, marketable, or lacking observableidentification of ownership.
Inadequate internal control over assets may increase the susceptibility of misappropriation of those assets. For
example, misappropriation of assets may occur because there is the following:
· Inadequate segregation of duties or independent checks.
· Inadequate oversight of senior management expenditures, such as travel and otherre-imbursements.
· Inadequate management oversight of employees responsible for assets, forexample, inadequate supervision
or monitoring of remote locations.
· Inadequate job applicant screening of employees with access to assets.
· Inadequate record keeping with respect to assets.
· Inadequate system of authorization and approval of transactions (for example, inpurchasing).
· Inadequate physical safeguards over cash, investments, inventory, or fixed assets.
· Lack of complete and timely reconciliations of assets.
· Lack of timely and appropriate documentation of transactions, for example, creditsfor merchandise returns.
· Lack of mandatory vacations for employees performing key control functions.
· Inadequate management understanding of information technology, which enablesinformation technology
employees to perpetrate a misappropriation.
· Inadequate access controls over automated records, including controls over andreview of computer systems
event logs.

Attitudes/Rationalizations
· Disregard for the need for monitoring or reducing risks related to misappropriationsof assets.
· Disregard for internal control over misappropriation of assets by overridingexisting controls or by failing to
take appropriate remedial action on known deficiencies in internal control.
· Behavior indicating displeasure or dissatisfaction with the entity or its treatment ofthe employee.
· Changes in behavior or lifestyle that may indicate assets have been misappropriated.
· Tolerance of petty theft.

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Examples of Circumstances that Indicate the Possibility of Fraud

The following are examples of circumstances that may indicate the possibility that the financial
statements may contain a material misstatement resulting from fraud.
Discrepancies in the accounting records, including:
· Transactions that are not recorded in a complete or timely manner or are improperly recorded as to
amount, accounting period, classification, or entity policy.
· Unsupported or unauthorized balances or transactions.
· Last-minute adjustments that significantly affect financial results.
· Evidence of employees’ access to systems and records inconsistent with that necessary to perform their
authorized duties.
· Tips or complaints to the auditor about alleged fraud.
Conflicting or missing evidence, including:
· Missing documents.
· Documents that appear to have been altered.
· Unavailability of other than photocopied or electronically transmitted documents when documents in
original form are expected to exist.
· Significant unexplained items on reconciliations.
· Unusual balance sheet changes, or changes in trends or important financial statement ratios or
relationships - for example, receivables growing faster than revenues.
· Inconsistent, vague, or implausible responses from management or employees arising from inquiries
or analytical procedures.
· Unusual discrepancies between the entity's records and confirmation replies.
· Large numbers of credit entries and other adjustments made to accounts receivable records.
· Unexplained or inadequately explained differences between the accounts receivable sub-ledger and
the control account, or between the customer statements and the accounts receivable sub-ledger.
· Missing or non-existent cancelled checks in circumstances where cancelled checks are ordinarily returned
to the entity with the bank statement.
· Missing inventory or physical assets of significant magnitude.
· Unavailable or missing electronic evidence, inconsistent with the entity’s record retention practices or
policies.
· Fewer responses to confirmations than anticipated or a greater number of responses than anticipated.
· Inability to produce evidence of key systems development and program change testing and
implementation activities for current-year system changes and deployments.

Problematic or unusual relationships between the auditor and management, including:

· Denial of access to records, facilities, certain employees, customers, vendors, or others from
whom audit evidence might be sought.
· Undue time pressures imposed by management to resolve complex or contentious issues.
· Complaints by management about the conduct of the audit or management intimidation of
engagement team members, particularly in connection with the auditor’s critical assessment
of audit evidence or in the resolution of potential disagreements with management.
· Unusual delays by the entity in providing requested information.
· Unwillingness to facilitate auditor access to key electronic files for testing throughthe use of
computer-assisted audit techniques.
· Denial of access to key IT operations staff and facilities, including security, operations, and
systems development personnel.
· An unwillingness to add or revise disclosures in the financial statements to make them more
complete and understandable.
· An unwillingness to address identified deficiencies in internal control on a timely basis.

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Other
· Unwillingness by management to permit the auditor to meet privately with those charged with
governance.
· Accounting policies that appear to be at variance with industry norms.
· Frequent changes in accounting estimates that do not appear to result from changed circumstances.
· Tolerance of violations of the entity’s code of conduct.

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THE AUDITOR’S RESPONSIBILITIES RELATING TO
FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS Appendix 2
(Ref: Para. A40)

Examples of Possible Audit Procedures to Address the

Assessed Risks of Material Misstatement Due to Fraud
The following are examples of possible audit procedures to address the assessed risks of
material misstatement due to fraud resulting from both fraudulent financial reporting
and misappropriation of assets. Although these procedures cover a broad range of
situations, they are only examples and, accordingly they may not be the most
appropriate nor necessary in each circumstance. Also the order of the procedures
provided is not intended to reflect their relative importance.

Consideration at the Assertion Level

Specific responses to the auditor’s assessment of the risks of material misstatement due
to fraud will vary depending upon the types or combinations of fraud risk factors or
conditions identified, and the classes of transactions, account balances, disclosures and
assertions they may affect.
The following are specific examples of responses:
• Visiting locations or performing certain tests on a surprise or unannounced basis.
For example, observing inventory at locations where auditor attendance has not
been previously announced or counting cash at a particular date on a surprise basis.
• Requesting that inventories be counted at the end of the reporting period or on a date
closer to period end to minimize the risk of manipulation of balances in the period
between the date of completion of the count and the end of the reporting period.
• Altering the audit approach in the current year. For example, contacting major
customers and suppliers orally in addition to sending written confirmation, sending
confirmation requests to a specific party within an organization, or seeking more or
different information.
• Performing a detailed review of the entity’s quarter-end or year-end adjusting
entries and investigating any that appear unusual as to nature or amount.
• For significant and unusual transactions, particularly those occurring at or near
year-end, investigating the possibility of related parties and the sources of financial
resources supporting the transactions.
• Performing substantive analytical procedures using disaggregated data. For
example, comparing sales and cost of sales by location, line of business or month
to expectations developed by the auditor.

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THE AUDITOR’S RESPONSIBILITIES RELATING TO
FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS

• Conducting interviews of personnel involved in areas where a risk of material

misstatement due to fraud has been identified, to obtain their insights about the risk
and whether, or how, controls address the risk.
• When other independent auditors are auditing the financial statements of one or
more subsidiaries, divisions or branches, discussing with them the extent of work
necessary to be performed to address the assessed risk of material misstatement due
to fraud resulting from transactions and activities among these components.
• If the work of an expert becomes particularly significant with respect to a financial
statement item for which the assessed risk of misstatement due to fraud is high,
performing additional procedures relating to some or all of the expert’s
assumptions, methods or findings to determine that the findings are not
unreasonable, or engaging another expert for that purpose.
• Performing audit procedures to analyze selected opening balance sheet accounts of
previously audited financial statements to assess how certain issues involving
accounting estimates and judgments, for example, an allowance for sales returns,
were resolved with the benefit of hindsight.
• Performing procedures on account or other reconciliations prepared by the entity,
including considering reconciliations performed at interim periods.
• Performing computer-assisted techniques, such as data mining to test for anomalies
in a population.
• Testing the integrity of computer-produced records and transactions.
• Seeking additional audit evidence from sources outside of the entity being audited.

Specific Responses—Misstatement Resulting from Fraudulent Financial

Reporting
Examples of responses to the auditor’s assessment of the risks of material misstatement
due to fraudulent financial reporting are as follows:

Revenue Recognition
• Performing substantive analytical procedures relating to revenue using
disaggregated data, for example, comparing revenue reported by month and by
product line or business segment during the current reporting period with
comparable prior periods. Computer-assisted audit techniques may be useful in
identifying unusual or unexpected revenue relationships or transactions.
• Confirming with customers certain relevant contract terms and the absence of side
agreements, because the appropriate accounting often is influenced by such terms
or agreements and basis for rebates or the period to which they relate are often
poorly documented. For example, acceptance criteria, delivery and payment terms,
the absence of future or continuing vendor obligations, the right to return the

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THE AUDITOR’S RESPONSIBILITIES RELATING TO
FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS

product, guaranteed resale amounts, and cancellation or refund provisions often are
relevant in such circumstances.
• Inquiring of the entity’s sales and marketing personnel or in-house legal counsel
regarding sales or shipments near the end of the period and their knowledge of any
unusual terms or conditions associated with these transactions.
• Being physically present at one or more locations at period end to observe goods
being shipped or being readied for shipment (or returns awaiting processing) and
performing other appropriate sales and inventory cutoff procedures.
• For those situations for which revenue transactions are electronically initiated,
processed, and recorded, testing controls to determine whether they provide
assurance that recorded revenue transactions occurred and are properly recorded.

Inventory Quantities
• Examining the entity’s inventory records to identify locations or items that require
specific attention during or after the physical inventory count.
• Observing inventory counts at certain locations on an unannounced basis or
conducting inventory counts at all locations on the same date.
• Conducting inventory counts at or near the end of the reporting period to minimize
the risk of inappropriate manipulation during the period between the count and the
end of the reporting period.
• Performing additional procedures during the observation of the count, for example,
more rigorously examining the contents of boxed items, the manner in which the
goods are stacked (for example, hollow squares) or labeled, and the quality (that is,
purity, grade, or concentration) of liquid substances such as perfumes or specialty
chemicals. Using the work of an expert may be helpful in this regard.
• Comparing the quantities for the current period with prior periods by class or
category of inventory, location or other criteria, or comparison of quantities
counted with perpetual records.
• Using computer-assisted audit techniques to further test the compilation of the
physical inventory counts - for example, sorting by tag number to test tag controls
or by item serial number to test the possibility of item omission or duplication.

Management Estimates
• Using an expert to develop an independent estimate for comparison to
management’s estimate.
• Extending inquiries to individuals outside of management and the accounting
department to corroborate management’s ability and intent to carry out plans that
are relevant to developing the estimate.

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THE AUDITOR’S RESPONSIBILITIES RELATING TO
FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS

Specific Responses—Misstatements Due to Misappropriation of Assets

Differing circumstances would necessarily dictate different responses. Ordinarily, the
audit response to an assessed risk of material misstatement due to fraud relating to
misappropriation of assets will be directed toward certain account balances and classes
of transactions. Although some of the audit responses noted in the two categories above
may apply in such circumstances, the scope of the work is to be linked to the specific
information about the misappropriation risk that has been identified.
Examples of responses to the auditor’s assessment of the risk of material misstatements
due to misappropriation of assets are as follows:
• Counting cash or securities at or near year-end.
• Confirming directly with customers the account activity (including credit memo and
sales return activity as well as dates payments were made) for the period under audit.
• Analyzing recoveries of written-off accounts.
• Analyzing inventory shortages by location or product type.
• Comparing key inventory ratios to industry norm.
• Reviewing supporting documentation for reductions to the perpetual inventory
records.
• Performing a computerized match of the vendor list with a list of employees to
identify matches of addresses or phone numbers.
• Performing a computerized search of payroll records to identify duplicate
addresses, employee identification or taxing authority numbers or bank accounts.
• Reviewing personnel files for those that contain little or no evidence of activity,
for example, lack of performance evaluations.
• Analyzing sales discounts and returns for unusual patterns or trends.
• Confirming specific terms of contracts with third parties.
• Obtaining evidence that contracts are being carried out in accordance with their
terms.
• Reviewing the propriety of large and unusual expenses.
• Reviewing the authorization and carrying value of senior management and
related party loans.
• Reviewing the level and propriety of expense reports submitted by senior
management.

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Summer 2014

Winter 2015

Summer 2018

Winter 2017

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ISA 240 Summary

SCOPE:

· Auditors responsibility relating to fraud in an audit of FS

· Also deals with how ISA 315 and ISA 330 are to be applied in relation ROMM due to fraud

Characteristics of Fraud:

· Intentional
· Fraud is a broader legal concept – auditor is concerned with fraud that causes a material
misstatement in the FS. Two types of intentional misstatement are relevant to auditor
o Misstatement resulting from fraudulent financial reporting
§ Recording fictitious JE close to the end of accounting period
§ Inappropriately adjusting assumption and changing judgement
§ Omitting, advancing or delaying recognition in the FS that have occurred during
the period
§ Concealing or not disclosing the fact that could affect the amount recorded in FS

o Misstatement resulting from misappropriation of asset

§ Misappropriating collection on account receivable
§ Stealing physical asset
§ Causing an entity to pay for goods not received - Payment to fictitious vendors
RESPONSIBILITIES

Management Auditor
· Creating culture of Honesty · Maintain PS
and ethical behavior · Engagement team discussion
· strong emphasis on fraud · Identify and assess the ROMM
prevention · Response to those risk
· Consider the potential for · Respond if circumstances indicate the possibility of fraud
override of control INHERENT LIMITATIONS
Despite of the above responsibilities there are inherent limitation the
auditor may not detect fraud:
· Fraud is properly planned and organized
· Collusion
· Difficult to detect if senior management involved

Objective:

· To identify and assess the ROMM due to fraud

· To obtain SAAE
· To respond appropriately to fraud or suspected fraud

Requirement

A. Maintain Professional Skepticism

· Maintain PS throughout the audit irrespective of past experience of honesty and integrity of
management
· Accept records and documents as genuine unless condition identified – in that case confirm
directly with the third party or involve expert for authentication

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B. Discussion among Engagement Team

· Discussion among the engagement team member about where the entity’s FS may be
susceptible to material misstatement due to fraud
C. Risk Assessment Procedures and Related Activities

C1. Inquiry with the management:

· Management assessment of the risk that FS are materially misstated

· Management process for identifying risk
· Management communication to TCWG regarding its process
· Management communication to its employees regarding business practice and ethical behavior

C2. Inquiry with Internal Audit

· Procedure performed by IA to detect fraud

· Management response on those procedures

C3. Those Charged With Governance

· Obtain an understanding – how TCWG exercise oversight of management process for identifying
and responding to risk of fraud
· Whether they have knowledge of any fraud or suspected fraud

C4. Unusual or unexpected relationship identified

· Perform preliminary analytical procedures to identify unusual or unexpected relationship

C5. Consider fraud risk factor

· Fraud risk factor may not indicate risk of fraud – they often present in circumstances where fraud
have occurred
· 3 categories of fraud risk factors:
o An incentive or pressure to commit fraud
o A perceived opportunity to commit fraud
o An ability to rationalize the fraudulent action
D. Identify and Assess the ROMM due to fraud at FS level and at assertion level – OBJECTIVE
02
· Presumed Significant risk due to fraud on revenue recognition- Exception if revenue
recognition process is very simple
· Presumed Significant risk on MOC- Management is in a unique position to perpetrate
fraud because of management’s ability to manipulate accounting records and prepare
fraudulent financial statements by overriding controls that otherwise appear to be
operating effectively. Due to the unpredictable way in which such override could occur, it
is a risk of material misstatement due to fraud and thus a significant risk
TECHNIQUES FOR MOC
· Recording fictitious journal entries particularly close to the end of an accounting period,
to manipulate operating result
· Inappropriately adjusting assumptions and changing judgments used to estimate
account balances
· Engaging in complex transaction
· Concealing or not disclosing, facts that could affect the amounts recorded in the
financial statements.
· Altering records and terms related to significant and usual transactions.

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E. Omitting, advancing or delaying recognition in the financial statements of events and

transactions that have occurred during the reporting period.

F. Responses to the assessed ROMM due to fraud – OBJECTIVE 02

At FS level · Assign and supervise personnel having knowledge,

skill and ability of the individual;
· Evaluate selection and application of Accounting
policy
· Incorporate element of unpredictability in the
selection of nature, timing and extent of audit
procedures
At assertion level · Change the nature, timing and extent of audit
procedures
Management Override of Control · Test the appropriateness of JE
· Review accounting estimate for bias
· Evaluate business rational for significant transaction
outside the normal course of business

G. Evaluation of Audit Evidence – OBJECTIVE 03

If the auditor identifies misstatement and has an Auditor shall evaluate implication on other aspect of audit –
indication of fraud reliability of management representation and fraud is
unlikely to be an isolated occurrence
If the auditor identifies misstatement whether material or · Reevaluate the assessment of ROMM due to fraud
not and has reason to believe that it is or may be the · Its resulting impact on nature, timing and extent of
result of fraud and management in particular senior audit procedures to respond to the assessed risk
management involved · Reliability of evidence previously obtained may be
called into question
· There may be doubts about the completeness and
truthfulness of the representation made
· May consider to withdraw
· Communicate to TCWG and regulatory authorities
after obtaining legal advice
If the auditor is confirm or unable to conclude whether FS · Evaluate the implication for audit
are materially misstated as a result of fraud

H. Auditor unable to Continue the Engagement

Example:

· Entity does not take appropriate action

· Audit test indicate significant risk of material and pervasive fraud
· Significant concern about competence or integrity of management or those charged with
governance

If a result of MM resulting from fraud or suspected fraud that brings into question auditors ability to
continue performing the audit. The auditor shall

· Determine the professional and legal responsibility

· Consider whether it is appropriate to withdraw
· If withdraw – discuss with appropriate level of management and determine whether there is a
professional or legal requirement

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Winter 2018

Summer2013

Winter2009

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ISA 315: IDENTIFY AND ASSESS THE RISK OF MATERIAL MISSTATEMENT THROUGH UNDERSTANDING
THE ENTITY AND ITS ENVIRONMENT

SCOPE: OBJECTIVE:

Auditors responsibility to identify and assess The objective of the auditor is to identify and assess the
the ROMM in the FS through: risks of material misstatement, whether due to fraud or error,
at the financial statement and assertion levels, through
Understanding the entity and its environment understanding the entity and its environment, including the
including its internal control entity’s internal control, thereby providing a basis for
designing and implementing responses to the assessed
risks of material misstatement.

PURPOSE OF OBTAINING THE

UNDERSTANDING OF THE ENTITY AND
ITS ENVIRONMENT INCLUDING ITS
INTERNAL CONTROL

Considering the Identifying areas

Determining appropriateness of where special audit
Responding to Evaluating the
materiality in the selection and consideration may be
Developing the assessed sufficiency and
accordance application of necessary,
expectations risks of material appropriateness of
with ISA 320 accounting policies, for example, related
for use when misstatement, audit evidence
and the adequacy of party transactions,
performing including obtained, such as the
financial statement the appropriateness
of analytical designing and appropriateness of
disclosures procedures performing assumptions and of
management’s
use of the going further audit management’s oral
concern procedures to and written
assumption, or obtain sufficient representations
considering the appropriate audit
business purpose evidence
of transactions;

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FIRST OBJECTIVE: How to Identify and assess the Risk of Material Misstatement

UNDERSTANDING THE ENVIRONEMNT

a. Relevant industry, regulatory and

other external factors including
the AFRF

REGULATORY
Relevant regulatory factors include the
regulatory environment. The
regulatory environment encompasses, among
other matters, the applicable OTHER EXTERNAL FACTORS
INDUSTRY: financial reporting framework and the legal and
Examples of other external factors
political environment.
Relevant industry factors affecting the entity that the auditor
Examples of matters the auditor may consider
include industry conditions may consider include the general
include:
such as the competitive economic conditions, interest rates
environment, supplier and •Accounting principles and industry-specific and availability of financing, and
customer relationships, and practices. inflation or currency revaluation.
technological developments.
•Regulatory framework for a regulated industry.
Examples of matters the auditor
may consider include: •Legislation and regulation that significantly
affect the entity’s
•The market and competition, operations, including direct supervisory activities.
including demand, capacity, and
price competition. •Taxation (corporate and other).
•Cyclical or seasonal activity. •Government policies currently affecting the
conduct of the entity’s
•Product technology relating to the business, such as monetary, including foreign
entity’s products. exchange controls,
•Energy supply and cost. fiscal, financial incentives (for example,
government aid programs),
and tariffs or trade restrictions policies.

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b. Nature of the Entity including:

Ownership and Types of investment The way that the

Operation governance including special entity is structured
structure purpose entities and how it is
financed

c.The entity’s selection and application of

accounting policies, including the reasons
for changes thereto. The auditor shall
evaluate
whether the entity’s accounting policies
are appropriate for its
business and consistent with the
applicable financial reporting
framework and accounting policies used in
the relevant industry

d.The entity’s objectives and strategies, and

those related business risks that may result in
risks of material misstatement.

e.The measurement and review of the entity’s

financial performance

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2nd Step: Link the risk to assertion level and financial statement level to provide a basis for designing
and performing further audit procedures

Assertion level

What is Assertion? FS level

Representations by management,
explicit or otherwise, that are embodied Risks of material misstatement at the
in the financial statements, as used by financial statement level refer to risks
the auditor to consider the different that relate pervasively to the financial
types of potential misstatements that statements as a whole and potentially
may occur. affect many assertions

Example of risk at FS level

What is risk at Assertion level
Risk at assertion level are those
which relate to specific objective of
the financial statements
Management override of control
Going concern
Why risk at assertion level
Concerns over the Management
integrity
Risks of material misstatement at
Management lack competence
the assertion level for classes of
transactions, account balances, Concern about the condition and
and disclosures need to be reliability of an entitys records
considered
because such consideration directly
assists in determining the nature,
timing
and extent of further audit
procedures at the assertion level
necessary to
obtain sufficient appropriate audit
evidence.

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How to obtain UNDERSTANDING OF THE ENTITY AND ITS ENVIRONMENT INCLUDING ITS
INTERNALCONTROL

RISK ASSESSMENT PROCEDURES

The audit procedures performed to obtain an understanding of the entity and its environment, including
the entity’s internal control, to identify and assess the risks of material misstatement, whether due to fraud or error, at the
financialstatement and assertion levels

INQUIRY ANALYTICAL PROCEDURES

Inquiries of management, of appropriate Analytical procedures may
OBSERVATION AND INSPECTION
individuals within the help identify the existence of
Observation and inspection may
internal audit function (if the function exists), unusual transactions or events,
support inquiries of management and
and of others within the entity who in the and amounts, ratios, and trends
others, and may also provide
auditor’s judgment may have information that that might indicate
information about the entity and its
is likely to assist in identifying risks of matters that have audit
environment.
material misstatement due to fraud or error implications. Unusual or
Examples of such audit procedures
unexpected relationships
include observation or
that are identified may assist the
inspection of the following
auditor in identifying risks of
material misstatement, especially
Inquiries directed towards those charged with risks of material misstatement due
governance may help the auditor understand to fraud
the environment in which the financial
statements are prepared
Inquiries of employees involved in initiating,
processing or recording complex or unusual
The entity’s operations.
transactions may help the auditor to evaluate the
appropriateness of the selection and application Documents (such as business plans and
of certain accounting policies strategies), records, and internal control manuals.
Inquiries directed toward in-house legal Reports prepared by management (such as
counsel may provideinformation about such quarterly management reports and interim
matters as litigation, compliance with laws and financial statements) and those charged with
regulations, knowledge of fraud or suspected governance (such as minutes of board of directors’
fraud affecting the entity, warranties, post-sales meetings).
obligations
Inquiries directed towards marketing or sales The entity’s premises and plant facilities.
personnel may provideinformation about
changes in the entity’s marketing strategies,
sales trends, or contractual arrangements with its
customers
Inquiries directed to the risk management
function (or thoseperforming such roles) may
provide information about operational and
regulatory risks that may affect financial reporting
Inquiries directed to information systems
personnel may provide information about
system changes, system or control failures, or
other information system-related risks

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Additional procedure to be performed

· Engagement Partner and other team member shall discuss the susceptibility of
entity’s FS to material misstatement
· Engagement partner knowledge on other clients
· Information obtained during client acceptance or continuance process

OBJECTIVE 02: How to ASSESS the ROMM?

Risk can be classified in to Normal risk and significant risk

What is significant risk?

An identified and assessed risk of material

misstatement that, in the auditor’s judgment,
requires special audit consideration.
In exercising judgment as to which risks are
significant risks, the auditor shall consider at
least the following

Whether the risk is The Whether the

Whether the risk is The degree of
a risk of fraud complexity of risk involves
related to recent subjectivity in
transactions significant
significant the
transactions Whether the risk
economic, measurement
with related involves significant
accounting or other of financial
parties transactions that
developments and, information
are outside the
therefore, requires related to the
normal course of
specific attention risk, especially
business for the
those
entity, or that
measurements
otherwise appear
involving a wide
to be unusual
range of
measurement
uncertainty

REVISION OF RISK ASSESSEMENT

The auditor’s assessment of the risks of material misstatement at the assertion level may change during the course of the audit as
additional audit evidence is obtained. In circumstances where the auditor obtains audit evidence from performing further audit
procedures, or if new information is obtained, either of which is inconsistent with the audit evidence on which the auditor originally
based the assessment, the auditor shall revise the assessment and modify the further planned audit procedures accordingly.

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WHAT TO DOCUMENT

Key elements of the

understanding obtained
The discussion among regarding each of the
the engagement team aspects of the entity and its The identified and assessed
The risk identified, and
about the susceptibility environment and each risk of material
related control about which
of the entity’s financial internal control component, misstatement at financial
the auditor has obtained an
statements to material the sources of information statement level and
understanding
misstatement and from which the assertion level
decision reached understanding was obtained
and the risk assessment
procedure performed

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Winter 2018

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Summer 2018

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Winter 2017

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Winter 2015

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Winter 2014

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Summer 2013

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Summer 2012

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ISA 320 – MATERIALITY

SCOPE and OBJECTIVE

Auditor’s responsibility to apply the

concept of materiality appropriately in
planning and performing an audit of FS

What is Materiality?

Misstatement, including omissions, are considered to be material if they,

individually or in aggregate, could reasonably be expected to influence
the economic decision of the users taken on the basis of the Financial
statement

If materiality is based on user then what assumptions should auditor consider while determining
materiality?

The auditor’s determination of materiality is a matter of professional

judgment, and is affected by the auditor’s perception of the financial
information needs ofusers of the financial statements. In this context, it is
reasonable for the auditor to assume that users:

Recognize the
Have a reasonable
uncertainties inherent in
knowledge of business Make reasonable
Understand that the measurement of
and economic activities economic decisions on
financial statements are amounts based on the
and accounting and a the basis of the
prepared, presented use of estimates,
willingness to study the information in the
and audited to levels of judgment and the
information in the financial statements
materiality consideration of future
financial statements with
events
reasonable diligence

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What is the use of Materiality

PLANNING
In planning the audit, PERFORMING CONCLUDING
the auditor makes
judgments about the
size of misstatements
that will be considered
material. These
judgments provide a
basis for:

Evaluating the effect of uncorrected misstatements, if any,

on the financial statements and
in forming the opinion in the auditor’s report.
The circumstances related to some misstatements
may cause the auditor to evaluate them as material
even if they are below materiality. Although it is not
Determining the practicable to design audit procedures to detect
Identifying and assessing Determining the misstatements that could be material solely because
nature, timing and
nature, timing and of their nature, the auditor considers not only the size
extent of risk the risks of material
extent of further audit but also the nature of uncorrected misstatements, and
assessment misstatement; and
procedures the particular circumstances of their
procedures
occurrence, when evaluating their effect on the
financial statements

HOW TO DETERMINE MATERIALITY

Determining materiality involves the exercise of professional judgment. A percentage is often applied to a chosen benchmark
as a starting point in determining materiality for the financial statements as a whole. Factors that may affect the identification of an
appropriate benchmark include the following

The nature of the The entity’s ownership

Whether there are items on entity, where the structure and the way it is
The elements of the
which the attention of the entity is in its life financed (for example, if an
financial statements
users of the particular entity’s cycle, and the entity is financed solely by
(for example,
financial statements tends to industry and debt rather than equity, The relative
assets,
be focused (for example, for economic users may put more volatility of the
liabilities,equity,
the purpose of evaluating environment in emphasis on assets, and benchmark.
revenue,
financial performance users which the entity claims on them, than on the
expenses);
may tend to focus on profit, operates; entity’s earnings); and
revenue or net assets)

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MATERIALITY LEVEL FOR PARTICULAR CLASS OF TRANSACTION, ACCOUNT BALANCE AND DISCLOSURE

If, in the specific circumstances of the entity, there is one or more particular classes of transactions, account balances or
disclosures for which misstatements of lesser amounts than materiality for the financial statements as a whole could
reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements, the
auditor shall also determine the materiality level or levels to be applied to those
particular classes of transactions, account balances or disclosures.
Factors that may indicate the existence of one or more particular classes of transactions, account balances or
disclosures for which misstatements of lesser amounts than materiality for the financial statements as a whole could
reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements
include the following:

Whether law, regulation or the

applicable financial reporting framework The key disclosures in relation Whether attention is
affect users’ expectations regarding to the industry in which the focused on a particular
the measurement or disclosure of entity operates (for example, aspect of the entity’s
certain items (for example, related research and development business that is separately
party transactions, and the costs for a pharmaceutical disclosed in the financial
remuneration of management and company). statements (for example, a
those charged with governance). newly acquired business).

PERFORMANCE MATERIALITY
The amount set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the
probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a
whole.
Planning the audit solely to detect individually material misstatements overlooks the fact that the aggregate of individually
immaterial misstatements may cause the financial statements to be materially misstated, and leaves no
margin for possible undetected misstatements

HOW TO DETERMINE PERFORMANCE MATERIALITY

The determination of Performance Materiality is not a simple mechanical calculation and involves the exercise of professional
judgement. It is affected by the:
· Auditor’s understanding of the entity updated during the performance of risk assessment procedures
· Nature and extent of misstatements identified in previous audits and thereby auditors expectation in relation to
misstatements in the current period
· The reliability of Entity’s internal control over financial reporting
· An expected increase in the complexity of the business
· Increased engagement risk
· Any changes in the business

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REVISION AS THE AUDIT PROGRESS

The auditor shall revise materiality for the financial statements as a whole (and, if applicable, the materiality level or levels for particular classes of
transactions, account balances or disclosures) in the event of becoming aware of information during the audit that would have caused the auditor to
have determined a different amount (or amounts) initially.
REASONS FOR CHANGE IN MATERIALITY
· Result of change in circumstances that occurred during the audit (for e.g. a decision to dispose a major part of the entity’s business
· New information
· Change in the auditors understanding of the entity and its operation as a result of performing further audit procedures
For e.g. if during the audit it appears as though actual financial result are likely to be substantially different from the anticipated period-end
financial result that were used initially to determine materiality for the financial statement as a whole, the auditor revises that materiality.
IMPACT / EFFECT OF CHANGE IN MATERIALITY
If the auditor concludes that a lower materiality for the financial statements as a whole (and, if applicable, materiality level or levels for particular
classes of transactions, account balances or disclosures) than that initially determined is appropriate, the auditor shall determine whether it
is necessary to revise performance materiality, and whether the nature, timing and extent of the further audit procedures remain appropriate

DOCUMENTATION
The auditor shall include in the audit documentation the following amounts and the factors considered in their determination

If applicable, the
Materiality for the financial Any revision of Materiality
materiality level or levels
statements as a whole and Performance
for particular classes of Performance materiality
Materiality as the audit
transactions, account
progressed
balances or disclosures

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April 2011

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ISA 402: AUDIT CONSIDERATION RELATING TO AN ENTITY USING A SERVICE ORGANISATION

Commitment

SCOPE:
Objective:
user auditor’s responsibility to obtain
1.To obtain an understanding of the nature and
sufficient appropriate audit evidence
significance of the services provided by the service
when a user entity uses the services of
organization and their effect on the user entity’s internal
one or more service organizations.
control relevant to the audit, sufficient to identify and
Specifically, it expands on how the user
assess the risks of material misstatement; and
auditor applies ISA 315 (Revised) and ISA
330 in obtaining an understanding of the
2. To design and perform audit procedures responsive to
user entity, including internal control
those risks.
relevant to the audit, sufficient to identify
and assess the risks of material
misstatement and in designing and
performing further audit procedures
responsive to those risks.

REQUIRMENT

1. How to obtain and understanding of the service provided by a service organisation , including
Internal Control

USER AUDITOR SHALL OBTAIN AN Internal Control

UNDERSTANDING of A how user entity uses
the service of a service organization: When obtaining an understanding of internal control relevant to
the audit in accordance with ISA 315 (Revised), the user auditor
· Nature of the service shall evaluate the design and implementation of relevant
· Nature and materiality of transaction controls at the user entity that relate to the services provided by
processed the service organization
· Degree of interaction
· Relationship between user entity and
service organisation

The user auditor shall determine whether a sufficient understanding of the nature and significance of
the services provided by the service organization and their effect on the user entity’s internal control
relevant to the audit has been obtained to provide a basis for the identification and assessment of
risks of material misstatement.

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If the user auditor is unable to obtain a sufficient understanding from the user entity, the user
auditor shall obtain that understanding from one or more of the following procedures:

(a) Obtaining a type 1 or type 2 report, if available;

(b) Contacting the service organization, through the user entity, to obtain specific information;
(c) Visiting the service organization and performing procedures that will provide the necessary
information about the relevant controls at the service organization; or
(d) Using another auditor to perform procedures that will provide the necessary information about
the relevant controls at the service Organization.

IMPLICATION OF TYPE 01 AND TYPE 02 REPORT

Using a Type 1 or Type 2 Report to Support the If the user auditor plans to use a type 1 or type 2
User Auditor’s Understanding of the report as audit evidence to support the user
Service Organization. The User auditor shall be auditor’s understanding about the design and
satisfied as to: implementation of controls at the service
organization, the user auditor shall:
(a) The service auditor’s professional competence
and independence (a)Evaluate whether the description and design
from the service organization; and of controls at the service organization is at a date
or for a period that is appropriate for the user
(b)The adequacy of the standards under which auditor’s purposes;
the type 1 or type 2 report was issued. (b) Evaluate the sufficiency and
appropriateness of the evidence provided by
the report for the understanding of the user
entity’s internal control relevant to the audit; and
(c) Determine whether complementary user
entity controls identified by the service
organization are relevant to the user entity and, if
so, obtain an understanding of whether the user
entity has designed and implemented such
controls.

REPORTING IMPLICATIONS
20. The user auditor shall modify the opinion in the user auditor’s report in accordance with ISA 7055
if the user auditor is unable to obtain sufficient appropriate audit evidence regarding the services
provided by the service organization relevant to the audit of the user entity’s financial statements.
When a user auditor is unable to obtain sufficient appropriate audit evidence regarding the services
provided by the service organization relevant to the audit of the user entity’s financial statements, a
limitation on the scope of the audit exists. This may be the case when:
• The user auditor is unable to obtain a sufficient understanding of the services provided by the
service organization and does not have a basis for the identification and assessment of the risks of
material misstatement;

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Objective 02: Responding to the Assessed risk of material misstatement

In responding to assessed risks in accordance with ISA 330, the user auditor shall:
(a) Determine whether sufficient appropriate audit evidence concerning the relevant financial
statement assertions is available from records held at the user entity; and, if not,
(b) Perform further audit procedures to obtain sufficient appropriate audit evidence or use another
auditor to perform those procedures at the service organization on the user auditor’s behalf.

Test Of Control Test Of Details

· Obtaining type 2 report · Inspecting records and documents held by
· Performing appropriate test of controls at the the user entity
service organization or · Inspecting records and documents held by
· Using another auditor to perform test of the service organization
control at the service organization on behalf · Obtaining confirmation of user entity
of the user auditor maintain independent records of balance and
transaction. If user entity does not maintain
independent records confirmation alone
cannot provide reliable audit evidence

IMPLICATION OF TYPE 2 REPORT IS ALSO APPLICABLE HERE

REPORTING IMPLICATIONS
The user auditor shall modify the opinion in the user auditor’s report in accordance with ISA 7055 if
the user auditor is unable to obtain sufficient appropriate audit evidence regarding the services
provided by the service organization relevant to the audit of the user entity’s financial statements.
When a user auditor is unable to obtain sufficient appropriate audit evidence regarding the services
provided by the service organization relevant to the audit of the user entity’s financial statements, a
limitation on the scope of the audit exists. This may be the case when:
•A user auditor’s risk assessment includes an expectation that controls at the service organization are
operating effectively and the user auditor is unable to obtain sufficient appropriate audit evidence
about the operating effectiveness of these controls; or
•Sufficient appropriate audit evidence is only available from records held at the service organization,
and the user auditor is unable to obtain direct access to these records.

USING THE NAME OF SERVICE AUDITOR

The user auditor shall not refer to the work of a service auditor in the user auditor’s report containing
an unmodified opinion unless required by law or regulation to do so. If such reference is required by
law or regulation, the user auditor’s report shall indicate that the reference does not diminish the
user auditor’s responsibility for the audit opinion.
22. If reference to the work of a service auditor is relevant to an understanding of a modification to
the user auditor’s opinion, the user auditor’s report shall indicate that such reference does not
diminish the user auditor’s responsibility for that opinion.

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Winter 2018

SUMMER 2017

WINTER 2015

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The finn applies International Standard on Quality Control 1 4 and accordingly maintains
a comprehensive system of quality control including documented policies and procedures
regarding compliance with ethical requirements, professional standards and applicable
legal and regulato1y requirements.

Serv;ce Auditor :S- Responsibilities

Our responsibility is to express an opinion on XYZ Se1vice Organization's desc1iption
and on the design of controls related to the control objectives stated in that descliption,
based on our procedures. \Ve conducted our engagement in accordance with International
Standard on Assurance Engagements 3402, Assurance Reports on Controls at a Service
Organization, issued by the International Auditing and Assurance Standards Board. That
standard requires that we plan and pe1fom1 our procedures to obtain reasonable assurance
about whether, in all mate1ial respects, the desc1iption is fairly presented and tlle controls
are suitably designed in all material respects.
An assurance engagement to repo1t on the desc1iption and design of controls at a se1vice
organization involves perfo1ming procedures to obtain evidence about the disclosures in
the se1vice organization's descliption of its system, and the design of controls. The
procedures selected depend on the se1vice auditor's judgment, including the assessment
that the descliption is not fairly presented, and that controls are not suitably designed. An
assurance engagement of this type also includes evaluating the overall presentation of the
desc1iption, the suitability of the control objectives stated therein, and the suitability of
the c1ite1ia specified by the se1vice organization and desc1ibed at page [aa}.
As noted above, we did not perfonn any procedures regarding the operating
effectiveness of controls included in the description and, accordingly, do not express
an opinion thereon.
We believe that the evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.
Limitations of Conh·ols at a Service Or gani=ation
XYZ Se1vice Organization's desc1iption is prepared to meet the co1mnon needs of a
broad range of customers and their auditors and may not, therefore, include eve1y aspect
of the system that each individual customer may consider imp01tant in its own particular
,environment. Also, because of their nanire, controls at a se1vice organization may not
prevent or detect all errnrs or omissions in processing or reporting transactions.

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P7 past papers

You are a manager in Ryder & Co, a firm of Chartered Certified Accountants, and you have taken on the
responsibility for providing support and guidance to new members of the firm. Ryder & Co has recently
recruited a new audit junior, Sam Tyler, who has come across several issues in his first few months at
the firm which he would like your guidance on. Sam's comments and questions are shown below:

I worked on the interim audit of Crow Co, a manufacturing company which outsources its payroll
function. I know that for Crow Co payroll is material. How does the outsourcing of payroll affect our
audit planning? (4 marks)

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Winter 2017

Winter 2013

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Summer 2014

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Summer 2016

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Summer 2015

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Winter 2016

Winter 2013

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Summer 2017

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Summer 2018

Summer 2018

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ISA 505

EXTERNAL CONFIRMATIONS

OBJECTIVE
SCOPE
Design and perform external confirmation
Auditor use of external confirmation
procedure to obtain relevant and reliable
procedures to obtain audit evidence
audit evidence

Evaluating the Evidence Obtained

The auditor shall evaluate whether the results of the external confirmation procedures
provide relevant and reliable audit evidence, or whether further audit evidence is
necessary.

WHAT IS EXTERNAL CONFIRMATIONS?

Audit evidence obtained as a direct written response to the auditor from a third party in paper form, or by electronic or
other medium.

OTHER POSSIBILITIES

Non-response Exception
Refusal
A failure of the A response that
indicates a difference in When management
confirming party to refuses to allow the
respond, to only a GL and confirmation
received auditor to send a
positive confirmation confirmation request
request

Relationship between audit evidence and External confirmation

 Audit evidence is more reliable when it is obtained from independent sources.
 Audit evidence is more reliable when it is obtained directly by the auditor.
 Audit evidence is more reliable when it exists in documentary form e.g paper, electronic or
other medium.
ISA 330 – Confirmation is best for those risk which are assessed as high
ISA 240 – to address the risk of fraud at assertion level

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REQUIREMENT

External Confirmation Procedures

Auditor shall maintain control over external confirmation requests, including:

Determining the information

to be confirmed or Selecting the appropriate Designing Confirmation Follow-Up on Confirmation
requested confirming party requests Requests

Responses to  properly addressed Auditor may

 Information regarding confirmation  may use blank confirmation send an
account balances and requests provide  contain return information so that additional
their elements. more relevant and confirmation sent directly to auditor confirmation
 terms of agreements reliable audit  Other factors to consider -The assertion request when
 contracts evidence when being addressed, Specific identified ROMM a reply to a
 or transactions between confirmation including fraud risk, Layout and presentation previous
parties requests are sent to a of the confirmation request, Prior experience request has
 or to confirm the absence confirming party who on the audit or similar engagement, not been
of certain conditions, such is knowledgeable for Management authorization encourage the received
as a “side agreement.” which confirmation is confirming parties to respond to the auditor. within a
requested. it is important because it will affect the reasonable
confirmation response rate and the reliability time.
and nature of the audit evidence obtained

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External confirmation

Management allowed to send confirmation?

When a response to a positive confirmation is necessary to obtain

SAAE: and alternative audit procedure will not provide audit evidence that
auditor required (for e.g. information available to corroborate management
assertion is only available outside entity & specific fraud risk factor such risk
Yes of MOC, prevent the auditor from relying on evidence from the entity). If the No
auditor does not obtain such confirmation, determine the implication for the
audit and audit opinion as per ISA 705.

No
Received?  Inquire as to
management’s reasons for
the refusal, and seek audit
In the case of non- evidence as to their validity
response (it may indicate and reasonableness (a
Yes previously unidentified common reason is the
ROMM), the auditor shall existence of a legal dispute
perform alternative audit or ongoing negotiation with
procedures to obtain confirming party);
relevant and reliable audit  Evaluate the implications
Yes Reliability? No evidence. of management’s refusal
Example on ROMM including the
 For accounts receivable ROF, and on the N, T and
Exceptions Factors identified that may give rise E of other audit
balances – examining
doubt over the reliability of procedure; and
specific subsequent cash
confirmation request such as: receipts, shipping  Perform alternative audit
documentation, and sales procedures to obtain
YES  Was received by the auditor indirectly
near the period end. relevant and reliable audit
No  Appeared not to come from originally evidence (same procedures
intended confirming party  For accounts payable as non response.)
May indicate
MM or  Responses received electronically balances – examining
because proof of origin and authority subsequent cash
PMM. If MM
disbursements or, and If the auditor concludes that
then check No of the respondent is difficult to
other records, such as management refusal to allow the
whether it is further establish goods received notes. auditor to send confirmation is
indicative of audit unreasonable or
fraud. procedur
Exception – obtain further audit evidence to resolve those doubts such as The auditor is unable to obtain
es
may also required  request management for direct confirmation relevant and reliable audit
indicate  contacting the CP – when CP responds by electronic email evidence from alternative audit
deficiency in procedures, the auditor also shall
 encryption and other information transmission technology
IC. Some determine the implications on the
exception do  If received from third party – perform procedure such as – response is audit opinion. Scope Limitation
not from proper source, respondent is authorized, integrity over
represent transmission has not compromised
MM due to ISA 705
timing, If auditor determines that it is not reliable
measureme  implication on the assessment of ROMM at assertion level Material but not
nt including ROF and N, T&E of other audit procedures pervasive -QUALIFIED Material &pervasive-
disclaimer

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Evaluating the Evidence Obtained

The auditor shall evaluate whether the results of the external confirmation procedure provide relevant and reliable
audit evidence, or whether further audit evidence is necessary. When evaluating, the auditor may categorize such
result as follows:
 Response by the appropriate confirming party agreeing with the information provided in the confirmation request
 A response deemed unreliable
 A non-response
 Response indicating an exception

TYPES OF CONFIRMATIONS

Positive confirmation Negative confirmation

A request that the A request that the
confirming party respond confirming party respond
directly to the auditor directly to the auditor
whether agrees or only if disagrees with the
disagrees with the information provided in
information in the request the request.

Negative confirmations
Negative confirmations provide less persuasive audit evidence than positive confirmations.
The auditor shall not use negative confirmation requests as the sole substantive audit procedure to address an
assessed ROMM at the assertion level unless all of the following are present

The population of items Auditor is unaware

subject to negative of circumstances
Auditor has assessed the confirmation procedure A very low
ROMM as low and has obtained that would cause
comprises a large number recipient to exception rate
SAAE regarding the operating of small, homogeneous is expected
effectiveness of controls disregard such
account balances, request
transactions or conditions

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IAS 08 – Change in Accounting policies, change in Accounitng Estimates and Errors

CHANGE IN ACCOUNTING POLICY

Risk Procedures
The change in · Inquire with the management the reason for change in accounting policy
accounting policy · Assess whether change in accounting policy result in the financial statement will
may not provide provide more reliable and more relevant information
relevant and reliable · Whether the revaluation model has been applied for all class of asset i.e.
information property, plant and equipment
· Whether change in accounting policy has been appropriately authorized and
approved by the Board of Directors
· Review the disclosure to ensure its adequacy

The revaluation · Whether the change in accounting policy has been properly account for,
surplus may not be presented and disclosed in the financial statement
calculated and · Inspect the valuation report of professional valuers
account for correctly
· Evaluate the competency, capability and independence of management expert
· Inspect the agreement with the management expert to evaluate the scope of work
· Evaluate the adequacy of the expert work :
o Relevance and reasonableness of the expert finding
o Relevance and reasonableness of the assumption and methodology used
o The relevance, completeness and accuracy of source data
· May consider to use the auditor expert

CHANGE IN ACCOUNTING ESTIMATES

There is a risk that

change in accounting · Inquire with the management the reason for change in depreciation method and
estimates may not be whether there is a change in the expected pattern of consumption of economic
appropriate (there is benefit.
no change in
circumstances) · How management has calculated the expected units to be produced by the plant
And may not have Also, ask the management that whether the change in the depreciation method
been accounted for applied prospectively.
and disclosed as per
IAS 08 · It also needs to be brought in the management’s information that any
depreciation method once adopted needs to be consistently applied unless there
is a change in expected pattern.

· We will also need to discuss with the management that as per IAS 08
management need to provide disclosure in the financial statement with respect
to change in accounting estimates

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IAS 10 – EVENTS AFTER THE REPORTING PERIOD

Risk Procedures
There is a risk that all · Obtaining an understanding of any procedures management has
the there are events established to ensure that subsequent events are identified.
after the reporting
period which may not · Inquiring of management and, where appropriate, those charged with
have identified, governance as to whether any subsequent events have occurred which might
account for and affect the financial statements
disclosed by the
management as per IAS
10 · Reading minutes, if any, of the meetings of the entity’s owners,
management and those charged with governance that have been held after
the date of the financial statements and inquiring about matters discussed
at any such meetings for which minutes are not yet available

· Reading the entity’s latest subsequent interim financial statements, if any.

· The auditor shall perform audit procedures designed to obtain sufficient

appropriate audit evidence that all events occurring between the date of
the financial statements and the date of the auditor’s report.

· The auditor shall request management and, where appropriate, those

charged with governance, to provide a written representation in accordance
with ISA 5803 that all events occurring subsequent to the date of the
financial statements and for which the applicable financial reporting
framework requires adjustment or disclosure have been adjusted or
disclosed.

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IAS 12 – Income Taxes

Risk Procedures
Deferred tax may not be calculated · Obtain Deferred tax working from management
accurately and correctly · Ensure that tax base are determined based on income tax
ordinance and IAS 12
· Trace the Carrying value to Financial statement
· Check that rates used to calculate deferred tax are as per
Income tax ordinance, 2001
· Check that charge for the year are appropriately
recognized in P&L and OCI as per the requirement of IAS
12
Company may have recognized · Understand the management process to recognize
deferred tax asset but sufficient deferred tax asset and evaluate whether it is consistent
taxable profit may not be available with IAS 12
to entity
· Perform procedures to test operating effectiveness of
controls over recognition of deferred tax asset
· Obtain the projections for taxable profit for next 5 years
· Ensure that assumptions used by the management are
reasonable such as forecast sales, purchase, accounting
profit and etc.
· Check that taxable profit is projected based on Income Tax
Ordinance, 2001
· Inspect the latest tax return of the Company to ensure
that projections are made based on the updated returns
and decisions
· Inspect the correspondence file between regulatory
authority and the Company to ensure that projected
taxable profit are calculated based on the updated
decisions
· Inspect subsequent interim FS to compare the projected
results with the actual results

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IAS 16 – Property, plant and equipment

Completeness · Obtain Fixed asset register / schedule of tangible non-current assets

· Match the opening balance with the last year audited Financial statement
· Match the balances appearing in the fixed asset register with the General Ledger
and if not matching obtain the reconciliation
· Select sample from physical asset and trace it to fixed asset register
· Select sample from revenue expenditure account and Inspect the supporting
documents such as invoices to identify any such expenditure which pertains to
capital nature and therefore should be capitalized.
· Select a sample of disposal and Inspect the relevant documentation such as
invoices, authorization and approval to ensure that disposal has not been
recorded in error.

Existence · Select sample from the fixed asset register and physically observer the asset to
determine whether the asset exists.
Rights and · Select sample from addition during the year and for the sample selected Inspect
Obligation supporting documents such as invoices, title deeds and etc.
Valuation · Ensure that all cost includes only those cost that are necessary to get the asset to
its intended use.
· Select a sample from fixed asset register and inspect the relevant documentation
(agreement, invoice etc.) to evaluate whether the fixed asset has been accurately
recorded in the fixed asset register
· Select a sample of addition of fixed assets from the fixed asset register and
inspect relevant documents such as invoice to evaluate whether the additions
pertains to capitalized nature.
· Obtain an understanding of the entity’s depreciation policy
· Review depreciation rates for reasonableness
· Perform substantive analytical procedures to test depreciation expense to
evaluate whether the fixed assets have been depreciated at the appropriate rate
and using the depreciation methodology in accordance with the entity’s
accounting policy
· Recalculate the depreciation
· Obtaining an understanding of management process related to identifying,
estimating and recording impairment for fixed assets to determine whether it is
consistent with the requirement of IAS 36.
· Obtain management’s calculation to write down fixed asset to their recoverable
value and check that whether management methods and assumptions (discount
rate, future cash flow etc are reasonable
· Test the operating effectiveness of control over recording of impairment
· Recalculate the impairment working
· Ensure that disclosure are adequate as per the requirement of IAS 16 and IAS 36
For · Obtain the revaluation report
revaluation · Match the balance appearing in revaluation report with the Financial statement /
GL
· Ensure that all the assets for similar class are revalued
· Evaluate the competence, capabilities and objectivity of management expert
· Obtain an understanding of the work of that expert
· Evaluate the adequacy of the expert work by ensuring that:
o Finding and conclusion are relevant and reasonable
o Assumptions are reasonable
o Source of date is complete and accurate
· Considering the need to use the auditor expert

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IAS 19- Employee Benefit

Risk Procedures
PV of DBO may not be · Obtain the management expert report
calculated, account for · Evaluate the competence, capabilities and objectivity of management
expert
and disclosed as per · Obtain an understanding of the work of that expert
IAS 19 · Evaluate the adequacy of the expert work by ensuring that:
o Finding and conclusion are relevant and reasonable
o Assumptions are reasonable
§ Discount rate by comparing with the market yields on a
high – quality corporate bonds
§ Salary increase rate are consistent with the prior years
§ Mortality rate
§ Return on plan asset

o Source of date is complete and accurate

§ Number of employees
§ Salaries of each employees
§ Remaining years of service
· Considering the need to use the auditor expert
· The disclosure is consistent as per the requirement of IAS 19

IAS 20 – Government Grant

Risk Procedures
There is a · Inspect the agreement with Government to confirm the amount of grant and
risk that conditions attached thereto
Govt grant · Inspect bank statement to confirm that amount has been received
may not · Obtain the management forecast and check the reasonableness of the
management assumption and judgement to ensure that whether it can comply
have been with the Government grant – We can also mention ISA 540 procedures
recognized · Ensure that Government grant is recognized over the useful life of the asset or
as per IAS as the case maybe (to match them with the related cost)
20

IAS 21 – The effect of changes in foreign exchange rates

Risk Procedures
There is a risk that · Obtain the foreign currency working from the management.
monetary asset · Ensure that monetary asset and liabilities has been revalued
and monetary · Ensure that monetary asset and monetary liabilities are translated using
liabilities may not appropriate rate by verifying it from independent source
have been · Ensure that non monetary asset and liabilities are not revalued at the year
end
translated or
translated with
inaccurate rate.

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IAS 23 – Borrowing Cost

Risk Procedures
There is a risk · Inspect the bank agreement to ensure that:
that o loan is directly attributable to the acquisition or construction of
Borrowing qualifying asset
cost may not o rate that is used is accurate
been o amount of loan obtained/utilized for the project
capitalized or o recalculate management working to calculate the total borrowing cost for
may have the period
been
capitalized · for general borrowing ensure that weighted average rate has been used
using · recalculate management working to ensure that borrowing cost allocated is
inappropriate accurate
rate

IAS 28 – Investment in Associates and Joint ventures – How to apply equity method

Risk Procedures
There is a · Inspect the Investment register to verify the number of shares hold by the
risk that investor
equity · Inspect the audited financial statement / form A to determine the % of holding
method may · Check that how many directors are at the investee board to determine the
not be significant influence
accounted · Inspect the investment agreement to verify the cost of investment
accurately · Inspect the audited financial statement to calculate the share of profit form
associates
· Check that whether any dividend has been received during the year
· Ensure that accounting polocies are consistent and determine whether any
adjustment is required
· Ensure that all the adjustment has made accurately
· May consider the need to use component auditor

IAS 40 – Investment Property

There is a risk · Inquire with the management whether there Is any land or building which is
that the held for undetermined use or for rental purpose
property is an · Inspect the rental agreement to identify and land or building that has been
investment rented
property but · Inspect the Minutes of the meeting of those charged with Governance
may not have · Obtain the breakup of land and building and inquire with the management
been the purpose for which it is used
classified as · If any land or building has been used for both purpose ensure that whether
investment it can be separable
property · If separable ensure that amount allocated to IP and OOP is accurate
OR · Ensure the adequacy of disclosure

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IFRS 02- shared based payment

Risk Procedures
There is a risk that · Inspect the MOM of TCWG
share based · Inspect the Shared based payment agreement to determine the:
payment o Number of shares
transaction may not o Eligible employees
be accounted for o Vesting conditions
and disclosed as per o Vesting period
IFRS 02 o Grant date
· If performance condition then evaluate the management expert work

Hedge Accounting

There is a risk that · Ensure that hedging relationship is clearly designated and documented,
hedge accounting measurable and effective by inspecting the risk committee minutes,
may not have been minutes of the meeting of those charged with Governance
accounted · Inspect the purchase agreement to verify the amount and timing of
accurately payment
· Inspect the future to verify the amount and timing of payment
· Verify the fair value of future contract
· Ensure that hedge accounting is effective
· Ensure that relevant gain and loss has been appropriately recorded in
P&l or OCI as the case may be.

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SALES

Assertion Procedures
General · Obtain the schedule of sales ledger / register
procedures ·
Occurrence · Understand the impact of significant accounting policies for sales balances and
compliance with the applicable financial reporting framework. Consider whether the
accounting policies and methods for revenue recognition are appropriate and are
applied consistently.
· Select sample from sales register and inspect goods delivery note.

Cutoff · Select few samples before and after of last goods delivery note and check whether it
has been recorded in the correct accounting period
· Test whether the date of goods delivery note support the recognition of the revenue in
the correct period or not.

Accuracy · Select a sample sales register. For each selection, perform the following:
· Inspect goods delivery note
· Inspect sales invoice
· Agree the sales invoice prices to approved price list
· Perform recalculation based on GDN and sales invoice

Completeness · Select a sample from GDN and trace it to sales register

· Match the balance with the GL

Classification · Select a sample from sales register and inspect JV to ensure that transaction has been
recorded in sales account.

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Purchase

Assertion Procedures
General · Obtain the schedule of purchase register
procedures
Occurrence · Select a sample from purchase register and inspect GRN
Cutoff · Select few samples before and after of last goods received note and check whether it
has been recorded in the correct accounting period
· Test whether the date of goods received note support the recognition of the revenue in
the correct period or not.

Accuracy · Select sample from purchase register and perform For each selection, perform the
following:
· Inspect goods received note
· Inspect purchase invoice
· Perform recalculation based on GRN and purchase invoice

Completeness · Select a sample from GRN and trace it to purchase register

· Match the balance with the GL

Classification · Select a sample from purchase register and inspect JV to ensure that transaction has
been recorded in purchase account.

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Trade Payable

Existence · Obtain the list of trade creditors as at year end

· Match the amount with the General ledger
· For the sample selected (selection of nil balances and low balances) is important),
send confirmation
· For the responses received assess the reliability of confirmation received

Completeness · Match the creditor list with the GL

· Obtain the list of GRN
· Select a sample from GRN and trace it to payable account
· Review the list of account balances who are not in the listing of trade payables but
who could be expected to be in the listing
· Compare the list of trade payables balances with the listing that was prepared for
the previous year audit
· Perform test of unrecorded liability
Rights and · After assessing the reliability, match the amount of confirmation with the list of
obligation & creditors
valuation · In case of differences / exception, obtain the reconciliation from the management
· Perform procedures on reconciling items such as Invoice, GRN and bank statement
· In case confirmation not received, perform alternative testing (subsequent
disbursement and invoices)
Valuation · Same procedures as above – confirmation procedures.

Trade Receivable -
Assertion Procedures
General · Obtain the list of receivable as at year end
Procedures
Existence · For the sample selected from list of receivable balance, send confirmation
· For the confirmation received, assess the reliability of the confirmation received

Completeness · Match the receivable listing with the GL

· Obtain the list of Goods Delivery Note which must be sequentially numbered
· For the sample selected from the list of Goods Delivery Note, trace it to receivable listing
Rights and · After assessing reliability, match the balance with receivable listing
Obligation · In case of difference, obtain the reconciliation from the management
· Inspect supporting documents such as invoice, credit note and bank statement to test
reconciling items
· In case confirmation not received, perform alternative testing such as subsequent receipt
and invoices / GDN issued during the year.
Valuation · Obtain an understanding of management process to record provision and ensure that it is
Procedures for consistent with the AFRF
irrecoverable · Perform test of controls on provision recorded by the management
receivable · Review any correspondence of the Company with the customers and lawyers that deals
with unpaid or disputed debts

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· Obtain the aging of receivable

· Match the balance with the GL and receivable listing
· Recalculate the aging of receivable
· Obtain management working for provision for doubtful debt
· Check that whether assumption, estimates and judgement used by the management are
reasonable
· Inspect subsequent receipts to assess the recoverability of balance
CASH and BANK Balances

Assertion Procedures
· Obtain a listing of all bank accounts which were open at any point during the period being
audited
· Match the balance with the GL
· Inspect the appropriate approval for opening and closing of bank accounts such as minutes of
the meeting of Board of Directors

Existence · Send bank confirmation to the balance selected

· If the confirmation received, assess the reliability

Completeness · Make inquiries of management / those charged with governance and search for any
evidence of additional bank accounts such as review minutes of the meeting of Board of
Directors
· For the confirmation received, review the replies received to evaluate whether
outstanding balance as per the confirmation agrees to the accounting records / GL
Rights and · Match the amount of GL with the Confirmation
obligation & · In case of difference, obtain the reconciliation from the management
valuation · Perform procedure on reconciling items such as subsequent clearance and cheque
Valuation · Same procedures as above – confirmation procedures

Accruals

ASSERTIONS PROCEDURES
General · Obtain the listing of accruals as at year end
Procedures · Match the balance with the GL
Existence · Inspect the subsequent invoice to trace the amount, date and client
Rights and name to ensure the existence, obligation and valuation of accruals
obligation
Valuation
Completeness · Compare the list of accruals with the list obtain in last years and inquire
if any accruals appearing in last year but not appearing in current year
listing
· Review the list of accrual based on auditor’s knowledge of business

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Provision – not pertaining to legal cases such as warranty,

ASSERTION PROCEDURES
General Obtain the listing of provision as at year end
Procedures Match the balance with the GL
Existence and Inspect the supporting documents such as agreement and etc
rights and
obligation
Completeness · Compare the list of provisioning with the list obtain in last years and
inquire if any provision appearing in last year but not appearing in
current year listing

Valuation · Management process – consistent with IAS 37

· Test operating effectiveness of controls
· Ensure that assumptions are reasonable
· Subsequent event procedures
·

Provision pertaining to legal cases

ASSERTION PROCEDURES
General Obtain the listing of provision as at year end
Procedures Match the balance with the GL
Existence, · Inquiry of management including in-house legal counsel to obtain an
obligation and understanding of the legal cases
valuation · Inspect correspondence between the entity and its external legal
counsel
· Send direct confirmation to the external legal counsel to know the
outcome of the case
· Ensure that any provision has been appropriately recorded as per IAS
37

Completeness · Compare the list of provisioning with the list obtain in last years and
inquire if any provision appearing in last year but not appearing in
current year listing
· Reviewing legal expense account to identify any other litigation and
claims
· Inspect minutes of the meeting of TCWG

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Contingent liabilities

ASSERTION PROCEDURES
General Obtain the listing of contingent as at year end
Procedures
Existence, · Inquiry of management including in-house legal counsel to obtain an
obligation and understanding of the legal cases
valuation · Inspect correspondence between the entity and its external legal
counsel
· Send direct confirmation to the external legal counsel to know the
outcome of the case
· Ensure that any contingent liability has been appropriately recorded as
per IAS 37

Completeness · Compare the list of contingencies with the list obtain in last years and
inquire if any contingencies appearing in last year but not appearing in
current year listing
· Reviewing legal expense account to identify any other litigation and
claims
· Inspect minutes of the meeting of TCWG

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ISA 510
Summary

Scope

Auditors responsibility relating to opening balance in an initial audit engagement

Opening balance inlcude amount and disclosure both

Objective
Objective of the auditor w.r.t opening balance is to obtain SAAE about whether

Opening balance contain misstatement that materially affect the current period FS
Accounting policies for the opening balance is appropriate and conssitently applied in the current
period FS or changes are appropriately presented and disclosed in the FS

Definition

Initial audit engagament

FS for the prior period were not audited

FS for the prior period were audited by another auditor

Requirement

A Audit Procedures

1 Opening balance

Read most recent FS along with previous auditor report if any

Obtain SAAE that opening balance contain misstatement that materially affect current period FS by:

prior year balance correctly brought forward

Accounting policies for opening balance are appropriate
Perform one or more of the following:
If prior year FS is audit, review prior year working paper for verifying opening balances
Whether audit procedure performed in the current period provide audit evidence regarding the
opening balance
Perform specific procedure to obtain evidence regarding opening balance

If opening balance are materially misstated, perform procedure to determine the effect in the current
period FS
If auditor concludes that misstatement exist in the current period FS, communicate with management
& TCWG

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2 Consistency of accounting policies

Obtain SAAE that accounting policies are consistently applied and whether changes are appropriately
presented and disclosed in the FS

B Auditor conclusion and Reporting

1 Opening balances

If unable to obtain SAAE regarding opening balance - Qualified or Disclaimer

If opening balance contain missstatement that affect current period FS, if not adjusted in the current
period then - qualified or adverse

2 Consistentcy of Accounting Policies

If current period AP are not consistently applied to opening balance or

Change in AP is not appropriately presented or disclosed in a/c with AFRF
Qualified or adverse opinion

3 Previous AR modified and has an impact in the current year FS then - MODIFIED

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December 2014

Summer 2015

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ISA 520: Analytical Procedures

Scope

This International Standard on It also deals with the auditor’s

Auditing (ISA) deals with the ISA 315 deals with the use of
responsibility to perform analytical analytical procedures as risk
auditor’s use of analytical procedures near the end of the audit that
procedures as substantive assessment procedures.
assist the auditor when forming an overall
procedures (“substantive conclusion on the financial statements.
analytical procedures”).

Objective

To obtain relevant and reliable To design and perform analytical procedures near the end of the
audit evidence when using audit that assist the auditor when forming an overall conclusion as
substantive analytical procedures; to whether the financial statements are consistent with the
and auditor’s understanding of the entity.

What is Analytical Procedures

Evaluations of financial information through analysis of plausible relationships among both financial
and non-financial data. Analytical procedures also encompass such investigation as is necessary of identified
fluctuations or relationships that are inconsistent with other relevant information or that differ from
expected values by a significant amount.

Analytical procedures include the consideration of comparisons Analytical procedures also include
of the entity’s financial information with, for example: consideration of relationships, for example:
•Comparable information for prior periods. • Among elements of financial information
•Anticipated results of the entity, such as budgets or forecasts, that would be expected to conform to a
or expectations of the auditor, such as an estimation of predictable pattern based on the entity’s
depreciation. experience, such as gross margin percentages.
•Similar industry information, such as a comparison of the •Between financial information and relevant
entity’s ratio of sales to accounts receivable with industry non-financial information, such as payroll costs
averages or with other entities of comparable size in the same to number of employees.
industry.

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Steps / Requirements for performing substantive procedures as Analytical Procedures

A. Determine the suitability of particular substantive analytical procedures for given assertions, taking
account of the assessed risks of material misstatement and tests of details, if any, for the assertions;
how effective they will be in detecting particular type of material misstatements.

B. Evaluate the reliability of data and for these auditor needs to consider the following factors:

· Source of information
· Comparability of the information such as industry data and budget
· nature and relevance of information available; and
· controls over preparation of data.

C. Develop an expectation of recorded amounts or ratios and evaluate whether the expectation is sufficiently
precise to identify a misstatement that, individually or when aggregated with other misstatements, may cause
the financial statements to be materially misstated; For these auditor needs to consider the following factors:

· The accuracy with which the expected results of substantive analytical procedures can be predicted.
· The degree to which information can be disaggregated.
· The availability of the information, both financial and non-financial.

D. Determine the amount of any difference of recorded amounts from expected values that is acceptable without
further investigation

The auditor’s determination of the amount of difference from the expectation that can be accepted without further
investigation is influenced by materiality and the consistency with the desired level of assurance, taking account of
the possibility that a misstatement, individually or when aggregated with other misstatements, may cause the
financial statements to be materially misstated.

ISA 330 requires the auditor to obtain more persuasive audit evidence the higher the auditor’s assessment of risk.
Accordingly, as the assessed risk increases, the amount of difference considered acceptable without investigation
decreases in order to achieve the desired level of persuasive evidence.

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E. Investigating Results of Analytical Procedures

If analytical procedures performed in accordance with this ISA identify fluctuations or relationships that are inconsistent
with other relevant information or that differ from expected values by a significant amount, the auditor shall investigate
such differences by:

(a) Inquiring of management and obtaining appropriate audit evidence relevant to management’s responses; and

(b) Performing other audit procedures as necessary in the circumstances.

The need to perform other audit procedures may arise when, for example, management is unable to provide an explanation,
or the explanation, together with the audit evidence obtained relevant to management’s response, is not considered
adequate.

Analytical Procedures that Assist When Forming an Overall Conclusion

The auditor shall design and perform analytical procedures near the end of the audit that assist the auditor when forming
an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding of
the entity.

The conclusions drawn from the results of

The results of such analytical procedures may
analytical are intended to corroborate
identify a previously unrecognized risk of material
conclusions formed during the audit of
misstatement. In such circumstances, ISA 315 (Revised)
individual components or elements of the
requires the auditor to revise the auditor’s assessment
financial statements. This assists the
of the risks of material misstatement and modify the
auditor to draw reasonable conclusions
further planned audit procedures accordingly.
on which to base the auditor’s opinion.

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ISA 530
AUDIT SAMPLING

SCOPE OBJECTIVE
· It deals with the auditor’s use of statistical and To provide a reasonable basis for the auditor to
non-statistical sampling when designing and draw conclusions about the population from
selecting the audit sample, performing TOC and which the sample is selected.
TOD, and evaluating the results from the sample.

a
· Auditor’s responsibility to design and perform audit
procedures to obtain SAAE to be able to draw
reasonable conclusions on which to base the
auditor’s opinion.

Audit sampling (sampling)

The application of audit procedures to less than 100% of items within a population of audit relevance
such that all sampling units have a chance of selection in order to provide the auditor with a reasonable
basis on which to draw conclusions about the entire population.

Population
The entire set of data from which a sample is selected and about which the auditor wishes to draw
D conclusions.

E
F Sampling risk
The risk that the auditor’s conclusion based on a sample may be different from the conclusion if the
I entire population were subjected to the same audit procedure. Sampling risk can lead to two types of
erroneous conclusions:
N
I
T In the case of a TOC, that controls are more In the case of a TOC, that controls are less effective
I effective than they actually are, or in the case of
a TOD, that a material misstatement does not
than they actually are, or in the case of a test of
details, that a material misstatement exists when in
O exist when in fact it does. The auditor is primarily
concerned with this type of erroneous conclusion
fact it does not. This type of erroneous conclusion
affects audit efficiency as it would usually lead to
N because it affects audit effectiveness and is more additional work to establish that initial conclusions
likely to lead to an inappropriate audit opinion. were incorrect.
S
Non-sampling risk
The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk.

Examples of non-sampling risk include use of inappropriate audit procedures, or misinterpretation

of audit evidence and failure to recognize a misstatement or deviation.

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Anomaly
A misstatement or deviation that is demonstrably not representative of misstatements or deviations in
a population.

Sampling unit
The individual items constituting a population. The sampling units might be physical items.

For Example

Checks listed on Credit entries on Sales invoices or

deposit slips bank statements debtors’ balances
D
Statistical sampling
E
An approach to sampling that has the following characteristics:
F (i) Random selection of the sample items; and
I (ii) The use of probability theory to evaluate sample results, including measurement of sampling risk.
NON Statistical Sampling: A sampling approach that does not have characteristics (i) and (ii) is
N considered non-statistical sampling. (also known as judgemental sampling) is any sampling
technique not based on probability theory. Instead, it is based on a judgemental opinion by the auditor
I about the results of the sample.

T Stratification
I The process of dividing a population into sub-populations, each of which is a group of sampling units
which have similar characteristics (often monetary value).
O
N Tolerable misstatement

S A monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate
level of assurance that the monetary amount set by the auditor is not exceeded by the actual
misstatement in the population.
When designing a sample, the auditor determines tolerable misstatement in order to address the risk
that the aggregate of individually immaterial misstatements may cause the FS to be materially
misstated and provide a margin for possible undetected misstatements. Tolerable misstatement is
the application of performance materiality, as defined in ISA 320, to a particular sampling procedure.
Tolerable misstatement may be the same amount or an amount lower than performance materiality.

Tolerable rate of deviation

A rate of deviation from prescribed internal control procedures set by the auditor in respect of which
the auditor seeks to obtain an appropriate level of assurance that the rate of deviation set by the
auditor is not exceeded by the actual rate of deviation in the population.

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Requirements

Sample Design, Size, and Selection of Items for Testing

Sample Design
When designing an audit sample, the auditor shall consider the purpose of the audit procedure and the characteristics of the population
from which the sample will be drawn

SAMPLING APPROACH TO BE USED – STATISTICAL OR NON STATISTICAL

Audit sampling enables the auditor to obtain and evaluate audit evidence about some characteristic of the items selected in
order to form or assist in forming a conclusion. Sampling can be applied either non-statistical or statistical sampling approaches.
The decision whether to use a statistical or non-statistical sampling approach is a matter for the auditor’s judgment; however,
sample size is not a valid criterion to distinguish between statistical and non-statistical approaches.

PURPOSE ANDCHARACTERISTICS OF THE POPULATION FROM WHICH SAMPLE IS DRAWN and WHAT
CONSTITUTES MISSTATEMENT OR DEVIATION
The population is defined by ISA 530 as the entire set of data from which a sample is to be selected and about which the
auditor wishes to draw conclusions. The population from which a sample is to be drawn should be appropriate for the audit
objective to be achieved, and the population should be complete. (In other words, all relevant items must be included in the
population.) For example, if the objective of the audit testing is to confirm the accuracy of trade receivable balances, the
population should include all trade receivables balances as at a specified date. Alternatively, the audit objective might be more
limited in scope – perhaps to confirm the accuracy of those trade receivables balances in excess of Rs.500,000. The
population should then consist of all receivables balances over Rs.500,000.MISSTATEMENT
ISA 530‟s requirement for the auditor to consider the purpose of the audit procedure means thatthe auditor needs a
clear understanding of what constitutes a misstatement or deviation.
For example, in a TOD relating to the existence of accounts receivable, such as confirmation, payments made by the customer
before the confirmation date but received shortly after that date by the client, are not considered a misstatement. Also, a misposting
between customer accounts does not affect the total accounts receivable balance. Therefore, it may not be appropriate to consider
this a misstatement in evaluating the sample results of this particular audit procedure, even though it may have an important effect
on other areas of the audit, such as the assessment of the risk of fraud or the adequacy of the allowance for doubtful accounts.
DEVIATION

In considering the characteristics of a population, for TOC, the auditor makes an assessment of the expected rate of deviation
based on the auditor’s understanding of the relevant controls or on the examination of a small number of items from the
population. This assessment is made in order to design an audit sample and to determine sample size.

In considering the characteristics of the population from which the sample will be drawn, the auditor may determine that
stratification or value-weighted selection is appropriate.

THE TOLERBLE MISSTATEMENT OR RATE OF DEVIATION

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Sample Size - TOD

The auditor shall determine a sample size sufficient to reduce sampling risk to an acceptably low level.
The level of sampling risk that the auditor is willing to accept affects the sample size required. The lower the risk the
auditor is willing to accept, the greater the sample size will need to be.

EFFECT Explanation
ON
FACTOR SAMPLE
SIZE

1. An increase in the Increase The higher the auditor’s assessment of the risk of material misstatement, the larger the
auditor’s sample size needs to be. The auditor’s assessment of the risk of material
assessment of misstatement is affected by inherent risk and control risk. For example, if the auditor
the risk of material does not perform tests of controls, the auditor’s risk assessment cannot be reduced for
misstatement the effective operation of internal controls with respect to the particular assertion.
Therefore, in order to reduc audit risk to an acceptably low level, the auditor needs a
low detection risk and will rely more on substantive procedures. The more audit
evidence that is obtained from tests of details (that is, the lower the detection risk), the
larger the sample size will need to be.

2. An increase in the Decrease The more the auditor is relying on other substantive procedures
use of other (tests of controls or substantive analytical procedures) to reduce
substantive to an acceptable level the detection risk regarding a particular population, the less
procedures directed at assurance the auditor will require from sampling and, therefore, the smaller the
the same assertion sample size can be.
3. An increase in the Increase The greater the level of assurance that the auditor requires that the results of the
auditor’s desired sample are in fact indicative of the actual amount of misstatement in the
level population,the larger the sample size needs to be.
of assurance that
tolerable
misstatement
is not exceeded by
actual
4. An increase in Decrease The lower the tolerable misstatement, the larger the sample size needs to be.
tolerable
misstatement

5. An increase in the Increase The greater the amount of misstatement the auditor expects to find in the
amount of population, the larger the sample size needs to be in order to make a reasonable
misstatement the estimate of the actual amount of misstatement in the population.
auditor expects to
find
in the population

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Sample Size - TOC

EFFECT ON EXPLANATION
FACTOR SAMPLE SIZE

1. An increase in the Increase The more assurance the auditor intends to obtain from the operating
extent to which the effectiveness of controls, the lower the auditor’s assessment of the risk of
auditor’s risk material misstatement
assessment takes into will be, and the larger the sample size will need to be. When the auditor’s
account relevant assessment of the risk of material misstatement at the assertion level
controls includes an expectation of the operating effectiveness of controls, the
auditor is required to perform tests of controls. Other things being equal,
the greater the reliance the auditor places on the operating
effectiveness of controls in the risk assessment, the greater is the extent of
2. An increase in the tolerable Decrease The lower the tolerable rate of deviation, the larger the sample size
rate of deviation needs to be.
The higher the expected rate of deviation, the larger the sample size
3. An increase in the expected Increase
needs to be.
rate of deviation of the
population to be tested

4. An increase in the auditor’s Increase The greater the level of assurance that the auditor desires that the
desired level of assurance that results of the sample are in fact indicative of the actual incidence of
the tolerable rate of deviation is deviation in the population, the larger the sample size needs to be.
not exceeded by the actual rate
of deviation in the population

5. An increase in the number of Negligible effect For large populations, the actual size of the population has little, if
sampling units in the population any, effect on sample size. For small populations however, audit
sampling may not be as efficient as alternative means of obtaining
sufficient appropriate audit evidence.

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Selection of Items for Testing

The auditor shall select items for the sample in such a way that each sampling unit in the population has a chance of
selection.

With statistical sampling, sample items are selected in a way that each sampling unit has a known probability of being
selected. With non-statistical sampling, judgment is used to select sample items. Because the purpose of sampling is to
provide a reasonable basis for the auditor to draw conclusions about the population from which the sample is selected, it is
important that the auditor selects a representative sample, so that bias is avoided, by choosing sample items which
have characteristics typical of the population.

A wide range of sample selection methods is available to the auditor:

Random sampling: (applied through random number generators, for example,random number tables). All
items in the population have an equal chance of selection

Systematic sampling: in which the number of sampling units in the population is divided by the sample size
to give a sampling interval, for example 50, and having determined a starting point within the first 50, each
50th sampling unit thereafter is selected. Although the starting point may be determined haphazardly,
the sample is more likely to be truly random if it is determined by use of a computerized random number
generator or random number tables.
.
Monetary Unit Sampling is a type of value-weighted selection in which sample size, selection and
evaluation results in a conclusion in monetary amounts. When performing tests of details it may be efficient to
identify the sampling unit as the individual monetary units that make up the population. Having selected specific
monetary units from within the population, for example, the account receivable balance, the auditor may then
examine the particular items, for example, individual balances, that contain those monetary units. One benefit of
this approach to defining the sampling unit is that audit effort is directed to the larger value items because they
have a greater chance of selection, and can result in smaller sample sizes.

Haphazard sampling: in which the auditor selects the sample without following a structured technique
The auditor selects the sample on an arbitrary basis, for example, choosing any 100 invoices from a file. This
is not a scientifically valid method and the resulting sample may contain a degree of bias. Haphazard selection
is not appropriate when using statistical sampling.

Block sampling: The auditor selects a complete block of sampling units from the population (for example all
invoices of the month of May). The auditor can not project the result of block sampling to the whole population.
Performing audit procedures on the sample

When designing a sample, the auditor is required by ISA 530 to:

 perform appropriate audit procedures on each item selected

 if the audit procedure is not applicable to the selected item, the auditor must perform the procedure
on a replacement item. For example, the auditor might select a sample of cheques to test for evidence of
authorisation. One of these might be a cheque which has been cancelled. Provided the cheque has been
legitimately and properly cancelled then the auditor may choose another cheque number to test in its place.

 if the auditor is unable to apply the procedure (or a suitable alterative) to the selected

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item (for example, because a document has been lost), that item must be treated as a
misstatement/deviation.

 investigate the nature and cause of any misstatements/deviations and evaluate their possible effect on the
purpose of the audit procedures and on the other areas of audit. Investigation of the nature and cause of the
misstatements/deviations may lead the auditor to conclude that the problem lies within one time period, type of
transaction, or location (for example, perhaps when a temporary member of staff was being employed). In this
case he might decide to extend audit procedures performed on that time-period/type of transaction/location.

 if the auditor considers the misstatement or deviation to be an anomaly he must obtain a high degree of
certainty about this and perform additional audit procedures to obtain sufficient evidence that the misstatement
or deviation does not affect the rest of the population.

Projecting misstatements and evaluating the results of audit sampling

· The auditor is required to evaluate:

· The results of the sample. For tests of details this will include projecting the misstatements
found in the sample to the entire population. The auditor is required to project misstatements for the
population to obtain a broad view of the scale of misstatement but this projection may not be sufficient
to determine an amount to be recorded. For TOC - No explicit projection of deviations is necessary since
the sample deviation rate is also the projected deviation rate for the population as a whole

· When the projected misstatement plus anomalous misstatement, if any, exceeds tolerable
misstatement, the sample does not provide a reasonable basis for conclusions about the population
that has been tested.
· If the auditor concludes that audit sampling has not provided a reasonable basis for conclusions about the
population that has been tested, the auditor may:
· Request management to investigate misstatements that have been identified and the potential for further
misstatements and to make any necessary adjustments; or
· Tailor the nature, timing and extent of those further audit procedures to best achieve the required
assurance.

Stratification
1. Audit efficiency may be improved if the auditor stratifies a population by dividing it into discrete sub-
populations which have an identifying characteristic. The objective of stratification is to reduce the variability of
items within each stratum and therefore allow sample size to be reduced without increasing sampling risk.
2. When performing tests of details, the population is often stratified by monetary value. This allows greater
audit effort to be directed to the larger value items, as these items may contain the greatest potential misstatement
in terms of overstatement. Similarly, a population may be stratified according to a particular characteristic
that indicates a higher risk of misstatement, for example, when testing the allowance for doubtful accounts
in the valuation of accounts receivable, balances may be stratified by age.
3. The results of audit procedures applied to a sample of items within a stratum can only be projected to the items
that make up that stratum. To draw a conclusion on the entire population, the auditor will need to consider the risk
of material misstatement in relation to whatever other strata make up the entire population. For example, 20% of the
items in a population may make up 90% of the value of an account balance. The auditor may decide to
examine a sample of these items. The auditor evaluates the results of this sample and reaches a conclusion on the
90% of value separately from the remaining 10% (on which a further sample or other means of gathering audit
evidence will be used, or which may be considered immaterial).
4. If a class of transactions or account balance has been divided into strata, the misstatement is projected for each
stratum separately. Projected misstatements for each stratum are then combined when considering the possible effect
of misstatements on the total class of transactions or account balance.

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ISA 540 – SUMMARY

SCOPE:

AUDITORS RESPONSIBILITY TO APPLY ISA ISA 315 and 330 and other relevant ISA

OBJECTIVE

The auditor's objective is to obtain sufficient appropriate audit evidence, in the context of the applicable
financial reporting framework, about whether:
 accounting estimates, including fair value accounting estimates, in the financial statements, whether
recognized or disclosed, are reasonable; and
 related disclosures in the financial statements are adequate.

1. RISK ASSESEMENT PROCEDURES

When performing risk assessment procedures to obtain an understanding of the entity the auditor must
obtain an understanding of how the management forms accounting estimates in order to identify and
assess the risks of material misstatement for accounting estimates.*

Evidence on accounting estimates is often more difficult to obtain and less conclusive than evidence
available to support other items in the financial statements. It will often rely on management's "best
guess" under the circumstances (e.g. the possible or probable outcome of litigation) or management's
development of a fair value model. *The more subjective the estimate, the greater the need for the use of
professional judgement and scepticism by the auditor.

1.1 Applicable Financial Reporting Framework

< The auditor must understand the requirements of the applicable financial reporting framework relevant
to accounting estimates, including related disclosures.
 IFRS examples include IAS 2 (inventory net realizable value), IAS 11 (expected contract outcome), IAS
16 (depreciation, fair value for revaluation) and IAS 37 (future economic outflows for provisions).

1.2 Identification by Management

< The auditor must obtain an understanding of how the management identifies transactions, events and
conditions that may give rise to the need for accounting estimates to be recognised.
 The auditor will need to make enquiries directly of management with additional insight being gained
through his own understanding of the business and assessment of internal control.
 This is particularly important when an estimation process has changed or a new estimation process is
required.

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1.3Management Procedures
< The auditor must also obtain an understanding of how the management makes the accounting
estimates and the data on which accounting estimates are based—that is, the method (including the
model, where applicable) used in making the accounting estimate. Considerations include:
 relevant controls;
 whether management uses an expert ;
 reasonableness of underlying assumptions;
 whether there has (or should have) been a change from the prior period methods and, if so, why; and
 whether and how management assesses the effect of estimation uncertainty (e.g. using sensitivity
analysis).
< From these procedures, the auditor can establish the risk ofmaterial misstatements relating to estimates
and plan the work programme accordingly.

RESPONSE TO THE ASSESSED ROMM

The auditor shall determine
· Whether management has appropriately applied the requirement of AFRF
· Whether method is appropriate and applied consistently and whether changes are appropriate in
the circumstances
The auditor shall undertake one or more of the following:
· Event occurring upto the date of audit report provide audit evidence regarding accounting
estimates
· Test how management made the accounting estimates and the data on which it is based
and shall evaluate whether
o Method is appropriate in the circumstances
o Assumptions are reasonable in light of AFRF
· Test operating effectiveness of Control
· Develop a range to evaluate management point estimates
o It will held to identify and assess risk and also determine FAP
o Difference may arise because auditor may use different assumptions
o It will help the auditor to identify highly sensitive assumptions which is subject to high
estimation uncertainity
o Range should encompass reasonable outcome not all possible outcome
o Range shall be equal or less than Performance materiality
· ESTIMATION UNCERTAINITY
o How management has considered alternative assumption
o Assumption are reasonable
o Appropriate application of AFRF
· Obtain SAAE about whether disclosure is adequate

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Summer 2017 (isa 540)

Summer 2015

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ISA 550 – RELATED PARTIES

BACKGROUND:

ENRON SCANDAL:
• Enron used special purpose entities—limited partnerships or companies created to fulfill a temporary or
specific purpose to fund or manage risks associated with specific assets. The company elected to disclose
minimal details on its use of "special purpose entities”.

• These related parties’ companies were created by a sponsor and had used hundreds of related parties to
hide its debt.

WHY IAASB Require the Auditor to obtain SAAE regarding Related Parties

As per ISA 700 Auditor express the following opinion:

“In our opinion the accompanying financial statements presents fairly in all material respect in accordance with
IFRS”

WHAT IS THE RELEVANT IFRS FOR RELATED PARTY:

IAS 24: RELATED PARTY DISCLOSURES:

“The objective of this Standard is to ensure that an entity’s financial statements contain the disclosures necessary
to draw attention to the possibility that its financial position and profit or loss may have been affected by the
existence of related parties and by transactions and outstanding balances, including commitments, with such
parties.”

As management is require to disclose all the transaction with related parties therefore ISA 550 deals with the
auditor’s responsibilities relating to:

· Related party relationships and transactions in an audit of financial statements.

· Specifically, it expands on how ISA 315 (Revised), ISA 330 and ISA 240 are to be applied in relation to
risks of material misstatement associated with related party relationships and transactions.

WHY HIGH Risk of Material Misstatement in Related Party

Auditor shall always give special consideration to related party relationship and transactions irrespective of
materiality because normally transaction with related party is qualitatively material.

There is always a high risk of material misstatement in related party relationship and transaction due to the
following reasons:

• Related parties may operate through an extensive and complex range of relationships and structures, with a
corresponding increase in the complexity of related party transactions.
• Information systems may be ineffective at identifying or summarizing transactions and outstanding balances
between an entity and its related parties.
• Related party transactions may not be conducted under normal market terms and conditions; for example,
some related party transactions may be conducted with no exchange of consideration.

Inherent Limitation of Related Party- Management may be unaware of existence of all RP relationship and
transaction and it represent greater opportunity for fraud.

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Important Note: When Enron entered into fraudulent financial reporting through its related parties and
subsequently becomes bankrupt. Serious criticism were made on the auditor of the Company that why
Auditor was unable to identify those related party relationship and transactions.

DEFINITIONS:

Arm’s length transaction - A transaction conducted on such terms and conditions as between a willing buyer and
a willing seller who are unrelated and are acting independently of each other and pursuing their own best interests.

(b) Related party - A party that is either:

(i) A related party as defined in the applicable financial reporting framework; or

(ii) Where the applicable financial reporting framework establishes minimal or no related party requirements:

a) A person or other entity that has control or significant influence, directly or indirectly through one or more
intermediaries, over the reporting entity;
b) Another entity over which the reporting entity has control or significant influence, directly or indirectly
through one or more intermediaries; or
c) Another entity that is under common control with the reporting entity through having:

i. Common controlling ownership;

ii. Owners who are close family members; or
iii. Common key management.

OBJECTIVE of ISA 550 – RELATED PARTIES

1st objective:

To obtain an understanding of related party relationships and transactions to identify fraud risk factors, if any,
arising from related party relationships and transactions that are relevant to the identification and assessment of the
risks of material misstatement due to fraud.

2nd Objective:

To obtain sufficient appropriate audit evidence about whether related party relationships and transactions have
been appropriately identified, accounted for and disclosed in the financial statements in accordance with the
framework (See IAS 24 objective)

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1st Objective:

Obj 01: To obtain an Understanding of related party relationship and transactions

Obj 1.1 Who is responsible to prepare FS in accordance with IFRS?

Management.

Yes, if management is responsible then to obtain an understanding of the related party relationship and
transactions, auditor shall made inquiries with the management such as:

· The identity of the entity’s related parties, including changes from the prior period;

· The nature of the relationships between the entity and these related parties; and

· Whether the entity entered into any transactions with these related parties during the period and, if so, the
type and purpose of the transactions.

As management is also responsible for design and implementation of internal control therefore auditor shall also
inquire with the management to obtain understanding of the controls that management has established to:

· Identify, account for, and disclose related party relationships and transactions in accordance with the AFRF;

· Authorize and approve significant transactions and arrangements with related parties; and

· Authorize and approve significant transactions and arrangements outside the normal course of business.

Imp Note: If the Controls are not present or ineffective then auditor will not be able to obtain SAAE
therefore modify the opinion in accordance with ISA 705.

Obj 1.2 Sharing Related Party Information

Once the auditor has obtained the understanding of related party relationship and transaction, auditor shall discuss
and share such information with the engagement team such as The nature and extent of the entity’s relationships
and transactions with related parties, emphasis of maintain PS, circumstances or conditions of the entity that may
indicate the existence of RPROT that management has not identified or disclosed to the auditor, The records or
documents that may indicate the existence of RPROT. Some discussion w.r.t fraud such as How SPE used to
facilitate earning management and misappropriation of asset.

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SUMMARY OF FIRST OBJECTIVE:

The auditor has obtained the understanding of the related party relationship and transactions by making inquiry with
the management and considering the control in order to identify and assess the risk of material misstatement as per
ISA 315 and ISA 240.

Obj 2.2 After performing the above-mentioned procedures, auditor may come across with the following risk:
Risk Response

• Related party transaction may not be Procedures to ensure that RPT has been appropriately accounted for
properly account for and disclosed and disclosed
· Confirming or discussing specific aspects of the transactions with
intermediaries such as banks, law firms, guarantors, or agents,.

· Confirming the purposes, specific terms or amounts of the

transactions with the related parties.

· Where applicable, reading the financial statements or other

relevant financial information, if available, of the related parties for
evidence of the accounting of the transactions in the related
parties’ accounting records.

As per ISA 315: Significant related party

transaction outside the normal course of For identified significant related party transactions outside the entity’s
business shall be treated as significant normal course of business, the auditor shall:
risk.
Example of transaction outside the normal · Inspect the underlying contracts or agreements, if any, and
course of business evaluate whether:
• Complex equity transactions o The business rationale (or lack thereof) of the
transactions suggests that they may have been entered
• The leasing of premises or the into to engage in fraudulent financial reporting or to
rendering of management services by conceal misappropriation of assets;
the entity to another party if no
consideration is exchanged. o The terms of the transactions are consistent with
management’s explanations; and
• Sales transactions with unusually
large discounts or returns. o The transactions have been appropriately accounted for
and disclosed in accordance with the applicable financial
• Transactions with circular reporting framework; and
arrangements, for example, sales with
a commitment to repurchase. · Obtain audit evidence that the transactions have been
appropriately authorized and approved
• Transactions under contracts whose In evaluating the business rationale of a significant related party
terms are changed before expiry. transaction outside the entity’s normal course of business, the
auditor may consider the following:
•Whether the transaction:
-Is overly complex (for example, it may involve multiple related
parties within a consolidated group).
-Has unusual terms of trade, such as unusual prices, interest
rates, guarantees and repayment terms.
-Lacks an apparent logical business reason for its occurrence.
Involves previously unidentified related parties.
-Is processed in an unusual manner.

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• Whether management has discussed the nature of, and
accounting for, such a transaction with those charged with
governance.
• Whether management is placing more emphasis on a
particular accounting treatment rather than giving due regard to
the underlying economics of the transaction.

If management’s explanations are materially inconsistent with

the terms of the related party transaction, the auditor is required,
in accordance with ISA 500to consider the reliability of
management’s explanations and representations on other
significant matters.

There is a significant risk due to fraud · Inquiries with management, TCWG, RP, inspection of
Significant contract.

Transaction with the Related party may During the audit, the auditor shall remain alert, when inspecting
not have been identified or disclosed by records or documents, for arrangements or other information that may
the management indicate the existence of related party relationships or transactions
that management has not previously identified or disclosed to the
auditor.

· Bank and legal confirmations obtained as part of the auditor’s

procedures;

· Minutes of meetings of shareholders and of those charged with

governance; and

· Third-party confirmations obtained by the auditor (in addition to

bank and legal confirmations).

· Entity income tax returns.

· Information supplied by the entity to regulatory authorities.

· Shareholder registers to identify the entity’s principal

shareholders.

· Statements of conflicts of interest from management and those

charged with governance.

· Records of the entity’s investments and those of its pension plans.

· Contracts and agreements with key management or those

charged with governance.

· Significant contracts and agreements not in the entity’s ordinary

course of business.

· Specific invoices and correspondence from the entity’s

professional advisors.

· Significant contracts re-negotiated by the entity during the period.

· Reports of the internal audit function.

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Situations Audit Procedures

SITUATION 01: If the auditor identifies related parties or significant related party transactions that
management has not previously identified or disclosed to the auditor, the auditor shall:
Identification of
Previously · Promptly communicate the relevant information to the other members of the
Unidentified or engagement team;
Undisclosed
Related Parties or · Request management to identify all transactions with the newly identified related parties
Significant Related for the auditor’s further evaluation; and
Party Transactions
· Inquire as to why the entity’s controls over related party relationships and transactions
If the auditor failed to enable the identification or disclosure of the related party relationships or
identifies transactions;
arrangements or
information that · Perform appropriate substantive audit procedures on newly identified related party to
suggests the
existence of related · Reconsider the risk that other related parties or significant related party transactions
party relationships may exist that management has not previously identified or disclosed to the auditor, and
or transactions that perform additional audit procedures as necessary; and
management has
not previously · If the non-disclosure by management appears intentional (and therefore indicative of a
identified or risk of material misstatement due to fraud), evaluate the implications for the audit as per
disclosed to the ISA.
auditor, the auditor
shall determine TIPS for Students: Procedures mentioned above are those procedures that auditor
whether the has already performed in objective 01 (obtaining an understanding of the related
underlying party relationship and transactions)
circumstances
confirm the
existence of those
relationships or
transactions.

SITUATION 02 If the auditor identifies Significant transaction outside the entity’s normal course
of business, the auditor shall inquire of management about:
Identify Significant transaction
outside the entity’s normal • The nature of these transactions (understanding the business rationale of
course of business the transactions and terms and conditions under which these have been
entered into; and

• Whether related parties could be involved.

SUMMARY OF 2nd Objective:

Auditor needs to perform certain procedures to address the risk identified in objective 01

EVALUATION OF THE ACCOUNTING FOR AND DISCLOSURE OF IDENTIFIED RELATED PARTY

RELATIONSHIP AND TRANSACTIONS

After performing procedures auditor shall evaluate in forming an opinion in accordance with ISA 700:

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• Whether the identified related party relationships and transactions have been appropriately accounted for and
disclosed in accordance with the applicable financial reporting framework; and
• Whether the effects of the related party relationships and transactions:

o Prevent the financial statements from achieving fair presentation (for fair presentation frameworks);
or
o Cause the financial statements to be misleading (for compliance frameworks).

• Disclosures of related party transactions may not be understandable if:

o The business rationale and the effects of the transactions on the financial statements are unclear or
misstated; or
o Key terms, conditions, or other important elements of the transactions necessary for understanding
them are not appropriately disclosed.

Imp Note: while evaluating always remember that related party transaction are qualitatively material

Written Representation

As already explained in ISA 580 that auditor needs to obtain specific representation on related party to obtain
Sufficient appropriate audit evidence.

• They have disclosed to the auditor the identity of the entity’s related parties and all the related party
relationships and transactions of which they are aware; and

• They have appropriately accounted for and disclosed such relationships and transactions in accordance with
the requirements of the framework.

• Circumstances in which it may be appropriate to obtain written representations from those charged with
governance include:

• When they have approved specific related party transactions that materially affect the financial statements or
involve management.

• When they have made specific oral representations to the auditor on details of certain related party
transactions.

• When they have financial or other interests in the related parties or the related party transactions.

Assertions That Related Party Transactions Were Conducted on Terms Equivalent to

Those Prevailing in an Arm’s Length Transaction
If management has made an assertion in the financial statements to the effect that a related
party transaction was conducted on terms equivalent to those prevailing in an arm’s length
transaction, the auditor shall obtain sufficient appropriate audit evidence about the assertion.

•Comparing the terms of the related party transaction to those of an identical or similar transaction with one
or more unrelated parties.
•Engaging an external expert to determine a market value and to confirm market terms and conditions for
the transaction.
•Comparing the terms of the transaction to known market terms for broadly similar transactions on an open
market.
•Considering the appropriateness of management’s process for supporting the assertion.
•Verifying the source of the internal or external data supporting the assertion, and testing the data to
determine their accuracy, completeness and relevance.
DOMINANT INFLUENCE
•Evaluating the reasonableness of any significant assumptions on which the assertion is based.

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Indicators of dominant influence exerted by a related party includes:

· The RP has significant business decision right

· Significant transaction are referred to RP for final approval
· No debate by management or TCWG regarding business proposal initiated by the RP
· Transaction involving the RP are rarely independently review and approved

LINKING OF ISA 550 WITH OTHER STANDARDS

ISA Description

ISA 240 Management may have an opportunity to commit

fraudulent financial reporting due to the existence of
significant related party transactions not in the ordinary
course of business.
ISA 315
Whether the risk involves significant transactions with
related parties, auditor shall consider it as a significant
risk.

ISA 705 · If the Controls are not present or ineffective then

auditor will not be able to obtain SAAE therefore
modify the opinion in accordance with ISA 705.

· If related party transaction are not appropriately

account for or disclosed in accordance with IAS 24,
auditor shall modify the opinion in accordance with
ISA 705.

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Winter 2018

Summer 2014

Winter 2014

Winter 2014

Winter 2016

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Summer 2016

Winter 2017

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ISA 550 Related Party – Summary

SCOPE:

· Deals with AR relating to related party relationship and transaction.

· It expands on how ISA 315, ISA 330 and ISA 240 are to be applied in relation to RP

Why high ROMM?

· RP operate through extensive and complex range of relationship and transaction

· IS may be ineffective
· RP may not be conducted under normal terms and conditions

Objective:

· Irrespective of whether AFRF establish requirement – obtain an u/s RP relationship and

transaction to be able
o To recognize fraud risk factor
o To conclude based on AE obtained – whether FS affected by those relationship and
transactions
· IF AFRF establish requirement – to obtain SAAE about identification, accounted for and disclosed

REQUIREMENTS

A. Risk Assessment Procedures and Related Activities

A1. Understanding the Entity Related party relationship and transaction

· Make inquiry regarding – identity, relationship and any transaction

· Obtain an u/s of Control regarding – identification, accounted for and disclosure,
authorize and approval of significant transaction with RP and outside normal course of
business
· Where controls are ineffective or non-existent – the auditor may be unable to obtain
SAAE about RP relationship and transaction – consider the implication for the audit
including opinion in AR

A2. Maintaining Alertness for RP information when reviewing records or documents

· Remain alert when inspecting records or documents (bank and legal confirmations, minutes of
the meeting that may indicate existence of RP relationship or transaction that management has
not previously identified or disclosed
· If auditor identified significant transaction ( not from the related party) outside the normal
course of business – inquire management about nature of transactions and whether RP could be
involved

A3. Sharing related party information with the Engagement Team

Based on the above 3 steps, there is a significant risk on related party due to fraud (existent of RP with
dominant influence) or significant transaction outside normal course of business

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B. Response

B1. Substantive procedures for SR that RP transaction may not be accounted for or disclosed may
include

· Confirming transaction with intermediaries such as banks, law firms, guarantors or agents
· Confirm the transaction with RP
· Read the FS to obtain the evidence of the accounting of the transaction in the related party
accounting records

B2. Substantive procedure for SR due to fraud because of the presence of RP with dominant
influence

· Inquiries with management, TCWG, RP, inspection of Significant contract, background search
· Test the entity’s control over completeness and accuracy of related party relationship and
transaction

B3. Substantive procedures to ensure the Completeness of RP

· Inspection of Investment register

· Inspection of shareholder register
· Inspection of Minutes of the Meeting of TCWG
· Bank and legal confirmation
· Invoices
· Inspection of Directors conflict of interest statement

B3A. Identification of previously unidentified or undisclosed related parties or Significant

related party transactions

· If auditor identified RP or significant transaction with RP the auditor shall

o Communicate to other team members
o Request management to identify all transaction with the newly identified RP
o Inquire why control enable to identify RP relation or transaction
o Perform substantive appropriate procedures – inquiries and verifying the new terms and
conditions
o Reconsider the risk that RP relationship and transaction exist and management has not
disclosed to the auditor
o If non-disclosure intentional – evaluate the implication for audit as per ISA 240

B4. significant related party transactions outside the entity’s normal course of business

Example of transaction outside normal course of business

· Complex equity transaction

· Sales transaction with unusually large discount or return
· Sales with commitment to repurchase

For identified significant RP transaction outside the entity’s normal course of business, the auditor shall

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· Inspect the underlying contract or agreement to evaluate:

o business rationale – (whether transaction is overly complex, has unusual terms, lacks an
apparent logical business)
o Terms are consistent with management explanation
o Transaction is appropriately accounted for and disclosed as per AFRF
· Obtain evidence that transaction is appropriately authorized and approved

If management explanation are materially inconsistent with the terms of related party transaction –
consider the reliability of management explanation and representation on other significant matters

B3. Assertions that RP transactions were conducted on terms equivalent to those prevailing on
arm’s length transaction

· If management made assertion in the FS that RP transaction was conducted at arm’s length
transaction – the auditor shall obtain SAAE about the assertion
o Compare the terms with unrelated party
o Engage external expert to determine market value
o Compare the transaction in open market

C. Evaluation of the Accounting for and disclosure of identified Related party relationship and
transaction

In forming an opinion, the auditor shall evaluate:

· Whether identified related party relationship and transaction have been appropriately
accounted for and disclosed in a/c with the AFRF – Disclosure of RP may not be understandable
if:
o Business rationale and effect of the transaction are unclear or misstated
o Key terms or condition are not appropriately disclosed
· Whether effect of related party relationship and transaction
o Prevent the FS from achieving fair presentation
o Cause the FS to be misleading
D. Obtain Written representation – disclosed to the auditor and appropriately accounted for and
disclosed as per AFRF

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ISA 560

SUBSEQUENT EVENT

SCOPE OBJECTIVE

Auditor’s responsibilities The objectives of the auditor are:

relating the subsequent event in (a) To obtain sufficient appropriate audit evidence
an audit of the financial about whether events occurring between the
statements. date of the financial statements and the date of
the auditor’s report that require adjustment of,
or disclosure in, the financial statements are
appropriately reflected in those financial
statements in accordance with the applicable
financial reporting framework; and
(b) To respond appropriately to facts that become
known to the auditor after the date of the
auditor’s report, that, had they been known to the
auditor at that date, may have caused the
auditor to amend the auditor’s report.

FIRST OBJECTIVE: EVENTS OCCURRING BETWEEN THE DATE OF THE FINANCIAL STATEMENTS
AND THE DATE OF THE AUDITOR’S REPORT

The auditor shall perform audit procedures designed to obtain sufficient appropriate audit evidence that all events
occurring between the date of the financial statements and the date of the auditor’s report or as near as practicable that
require adjustment of, or disclosure in, the financial statements have been identified. The auditor is not, however, expected
to perform additional audit procedures on matters to which previously applied audit procedures have provided
satisfactory. The auditor shall take into account auditors risk assessment in determing N,T&E of such audit procedures.

Inquiring of management Reading minutes, if any, of Reading the entity’s latest

Obtaining an and, where appropriate, the meetings of the entity’s subsequent interim financial
understanding of any those charged with owners, management and those statements, if any.
procedures management governance as to whether charged with governance that The auditor shall perform
has established to ensure any subsequent events have been held after the date of audit procedures designed
that subsequent events are have occurred which the financial statements and to obtain sufficient
identified. might affect the financial inquiring about matters appropriate audit evidence
statements discussed at any such that all events occurring
meetings for which minutes
between the date of the
are not yet available
financial statements and the
date of the auditor’s report.

The auditor shall request management and, where appropriate, those charged with governance, to provide a written representation
in accordance with ISA 5803 that all events occurring subsequent to the date of the financial statements and for which the
applicable financial reporting framework requires adjustment or disclosure have been adjusted or disclosed.

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Additional audit procedures or above procedures could not be performed.

Review or testing of Read the entity’s latest

Where no subsequent Inquire, or extend
accounting records or available budgets, cash
interim and Minutes are previous oral or written
transactions flow forecasts and other
prepared – inspect inquiries, of the entity’s
occurring between related management legal counsel
the date of the available books and reports for periods after concerning litigation
financial statements records including bank the date of the financial and claims
and the date of the statement. statements;
auditor’s report

Consider whether written

representations covering
particular subsequent
events may be necessary
to support other audit
evidence and thereby
obtain sufficient
appropriate audit evidence.

The auditor may inquire as to the current status of items that were accounted for on the basis of preliminary or inconclusive data
and may make specific inquiries about the following matters:
Whether new commitments, borrowings or guarantees have been entered into.
Whether sales or acquisitions of assets have occurred or are planned.
Whether there have been increases in capital or issuance of debt instruments, such as the issue of new shares or debentures, or
an agreement to merge or liquidate has been made or is planned.
Whether any assets have been appropriated by government or destroyed, for example, by fire or flood.
Whether there have been any developments regarding contingencies.
Whether any unusual accounting adjustments have been made or are contemplated.
Whether any events have occurred or are likely to occur that will bring into question the appropriateness of accounting policies
used in the financial statements, as would be the case, for example, if such events call into question the validity of the going
concern assumption.
Whether any events have occurred that are relevant to the measurement of estimates or provisions made in the financial
statements.
Whether any events have occurred that are relevant to the recoverability
of assets.

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RESULT OF PROCEDURE PERFORMED

If, as a result of the procedures performed as required, the auditor identifies events that require adjustment of, or
disclosure in, the financial statements, the auditor shall determine whether each such event is appropriately
reflected in those financial statements in accordance with the applicable financial reporting framework

SECOND OBJECTIVE: FACTS WHICH BECOME KNOWN TO THE AUDITOR AFTER THE DATE OF
THE AUDITOR’S REPORT BUT BEFORE THE DATE THE FINANCIAL STATEMENTS ARE ISSUED

The auditor has no obligation to perform any audit procedures regarding the
financial statements after the date of the auditor’s report. However, if, after
the date of the auditor’s report but before the date the financial statements
are issued, a fact becomes known to the auditor that, had it been known to
the auditor at the date of the auditor’s report, may have caused the auditor to
amend the auditor’s report, the auditor shall.

Important note: As explained in ISA

210, the terms of the audit
Discuss the matter with Inquire how management engagement include the agreement of
Determine whether the
management and, where intends to address the management to inform the auditor of
financial statements need
appropriate, those charged matter in the financial facts that may affect the financial
amendment and, if so,
with governance statements statements, of which management
may become aware during the period
from the date of Audit report to the
date Fs are issued.

IF MANAGEMENT AMENDS THE FINANCIAL STATEMENTS, THE AUDITOR SHALL:

Provide a new auditor’s

Carry out the audit report on the amended
procedures Extend the audit
procedures referred financial statements. The new
necessary in the auditor’s report shall not be
circumstances on above to the date of
the new auditor’s dated earlier than the date of
the amendment. approval of the amended
report; and
financial statements

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IF MANAGEMENT DOES NOT AMENDS THE FINANCIAL STATEMENTS, THE AUDITOR SHALL

Audit report provided

Yes No

Shall notify management and TCWG not to issue financial statement

to third parties before necessary amendments have been made.
If FS are nevertheless subsequently issued without the necessary
amendment, the auditor shall take appropriate action to seek to Auditor shall modify opinion as
prevent reliance on auditors report. required by ISA 705 and then provide
auditors report
The auditor’s course of action to prevent reliance on the auditor’s
report on the financial statement depends upon the auditor’s legal
rights and obligation. Consequently auditors may consider it
appropriate to seek legal advice

FACTS WHICH BECOME KNOWN TO THE AUDITOR AFTER THE FINANCIAL STATEMENTS
HAVE BEEN ISSUED:

After the financial statements have been issued, the auditor has
no obligation to perform any audit procedures regarding such
financial statements. However, if, after the financial statements have
been issued, a fact becomes known to the auditor that, had it been
known to the auditor at the date of the auditor’s report, may have
caused the auditor to amend the auditor’s report, the auditor shall:

Discuss the matter with Inquire how management

Determine whether the
management and, where intends to address the
financial statements need
appropriate, those charged matter in the financial
amendment and, if so,
with governance statements

IF MANAGEMENT AMENDS THE FINANCIAL STATEMENTS, THE AUDITOR SHALL:

Review the steps

Carry out taken by the
Extend the management to Provide a new The auditor shall include in the new or
the audit auditor’s report on the amended auditor’s report an Emphasis of
audit ensure that
procedures amended financial Matter paragraph or Other Matter paragraph
procedures anyone in receipt
necessary in referred of the previously statements. The new referring to a note to the financial statements that
the above to the issued FS auditor’s report shall more extensively discusses the reason for the
circumstanc date of the together with not be dated earlier than amendment of the previously issued financial
es on the new auditor’s the auditors the date of approval of statements and to the earlier report provided by
amendment. report report thereon is the amended financial the auditor
informed of the statements
situation

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IF MANAGEMENT DOES NOT TAKE NECESSARY STEPS TO ENSURE THAT ANYONE IN RECEIPT
OF PREVIOUSLY ISSUED FS IS INFORMED OF THE SITUATION AND DOES NOT AMEND THE FS,
THE AUDITOR SHALL:

Notify management and those charged with governance, that the auditor will seek to prevent future reliance on the auditor’s
report. If, despite such notification, management or those charged with governance do not take these necessary steps, the
auditor shall take appropriate action to seek to prevent reliance on the auditor’s report.
The auditor’s course of action depends upon the auditor’s legal rights and obligations. Consequently, the auditor
may consider it appropriate to seek legal advice

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Winter 2012

Winter 2011

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ISA 505 – SUBSEQUENT EVENT

30 June 30 Sep 03 Oct 09 Oct after FS issued

B/S date Approval date Date of Audit Fs Issued date

report No obligation to perform

Obtain SAAE no obligation to perform procedure procedure but facts

But facts known, if known at the DOAR known, if known at DOAR

Auditor may have amend AR Aud may have amend AR

By performing following (SEP): Discuss with M & TCWG Discuss with M & TCWG“

· Management process
· Inquiry whether fs needs amendment, if yes Fs needs amendment
· Reading minutes
· Latest interim FS Inquire how mgt address matter Inquire how Mgt amend
· Budget, cash flow forecast
· Legal counsel Management amend Management amend
· Written representation

Based on the above procedure Yes Yes

Auditor identify events that audit procedure on amendment audit procedure on amendment

Require adjustment or disclosure extend SEP to the date of new AR Review the steps by M to inform

In FS new AR – must not dated earlier anyone receipt of FS & R

Than DOA of Amended FS Extend SEP to the date of new AR

New AR- not dated earlier than

Request Management DoA of amended FS

Include EOMP or OMP – reason for

Agree Disagree Not amended amd in FS and previous AR

Not take step to inform anyone

amended receipt of previous FS & does

Modified accordingly AR not provided AR provided not amend FS

Check the adj / dis

Material Pervasive notify M & TCWG

Qualified Adverse not to issue FS to 3rd party Notify M and TCWG that

Auditor will seek to prevent

Future reliance on AR

If fs issued by M

If M or TCWG do not take

Seek legal advice to prevent reliance on AR

Necessary steps – seek LA

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IAS 01 on Going Concern

2.5.1 Management’s assessment of the entity’s ability to continue as a going concern

[IAS 1] requires management to make an assessment of the entity’s ability to continue as a going concern
when preparing financial statements. Financial statements should be prepared on a going concern basis
unless management intends either to liquidate the entity or to cease trading, or has no realistic
alternative but to do so. [IAS 1:25]

2.5.2 Departure from going concern basis only in exceptional circumstances

It is important to note that when an entity prepares financial statements on a going concern basis, this does not imply an
absolute level of confidence that the entity will be able to continue as a going concern. Even when an entity is in severe
financial difficulties, [IAS 1:25] requires the going concern basis to be used unless management either intends to liquidate
the entity or to cease trading, or has no realistic alternative but to do so.
Accordingly, an entity will depart from the going concern basis only when it is, in effect, clear that it is not a going concern.
When there is significant uncertainty over whether an entity can continue in operational existence, [IAS 1] requires the going
concern basis to be used and appropriate disclosures to be made (see 2.5.4).
When there are doubts about an entity's ability to continue trading, the fact that the going concern basis must be used does
not eliminate the need to consider whether any assets should be written down to their recoverable amounts and whether
provision is required for any unavoidable costs under onerous contracts

2.5.3 Period to be covered by management’s going concern assessment

In assessing whether the going concern assumption is appropriate, management takes into account all
available information about the future. [IAS 1] states that the information should cover at least 12 months
from the end of the reporting period but not be limited to that period. The degree of consideration
depends on the facts in each case. When an entity has a history of profitable operations and ready
access to financial resources, a conclusion that the going concern basis of accounting is appropriate may
be reached without detailed analysis. In other cases, management may need to consider a wide range of
factors relating to current and expected profitability, debt repayment schedules and potential sources of
replacement financing before it can satisfy itself that the going concern basis is appropriate. [IAS 1:26]

2.5.4 Disclosure required of material uncertainties regarding the entity’s ability to continue as a
going concern

When management is aware, in making its assessment, of material uncertainties related to events or
conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, those
uncertainties should be disclosed. [IAS 1:25]
[IAS 1] does not explain what it means for an entity to ‘continue as a going concern’, so it is appropriate to
look to the IASB’s Conceptual Framework for Financial Reporting. [IAS 1:4.1] of the Conceptual
Framework explains that financial statements “are normally prepared on the assumption that an
entity is a going concern and will continue in operation for the foreseeable future. Hence, it is
assumed that the entity has neither the intention nor the need to liquidate or curtail materially the
scale of its operations;

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ISA 570

GOING CONCERN

OBJECTIVE

SCOPE  To obtain sufficient appropriate audit evidence regarding use of the

going concern assumption by management in the preparation of
Auditor’s responsibilities in the audit the financial statements;
of financial statements relating to  To conclude, based on the audit evidence obtained, whether a
management’s use of the going material uncertainty exists related to events or conditions that may
concern assumption cast significant doubt on the entity’s ability to continue as a going
concern; and
 To determine the implications for the auditor’s report.

WHAT IS GOING CONCERN ASSUMPTION

Under the going concern assumption, an entity is viewed as continuing in business for the foreseeable future. When the use
of the going concern assumption is appropriate, assets and liabilities are recorded on the basis that the entity will be able to
realize / disposed it in the normal course of business.

RESPONSIBLITIES

MANAGEMENT
AUDITOR
Management’s assessment of the entity’s ability The auditor’s responsibility is to obtain sufficient
to continue as a going concern involves making appropriate audit evidence about the appropriateness of
a judgment. The following factors are relevant assumption used by management in the preparation of
to that judgment: the FS and to conclude whether material uncertainty exist
• The degree of uncertainty associated with the or not
outcome of an event or condition.
• The size and complexity of the entity, the
nature and condition of its business and the
degree to which it is affected by external
factors.
• Any judgment about the future is based on
information available. Subsequent events may
result in outcomes that are inconsistent with
judgments.

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REQUIREMENT

Risk Assessment Procedures and Related Activities

When performing risk assessment procedures as required by ISA 315
(Revised), the auditor shall consider whether there are events or
conditions that may cast significant doubt on the entity’s ability to
continue as a going concern. In so doing,

If such an assessment has been performed or not

YES NO

The auditor shall discuss the assessment with The auditor shall discuss with management
management and determine whether management the basis for intended use of the going
has identified events or conditions that may cast concern assumption, and inquire about
significant doubt on the entity’s ability to continue events or conditions
as a going concern, if so, management’s plans to
address them.

!!! The auditor shall remain alert through the audit for audit evidence of events or conditions.

Evaluating Management’s Assessment

Auditor shall Shall cover the same If less than 12 months Whether all Evaluation of
evaluate period as used by – request information which process
management management but management to auditor is aware management
assessment to should not be less extend for 12 months are included in followed to make
continue as a going than 12 months assessment assessment
concern
Assumption on which Management plan for
assessment is based future action and whether
such plan are feasible

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Period beyond Management Assessment

Inquire Request Other than inquiry

management of its management to auditor does not
knowledge of Remain alert for
consider that have responsibility
events or condition
events or condition to perform any
beyond events or condition
beyond the period other procedures on
management if it is significant period beyond
of management assessment.
management
assessment. assessment.

What is event and conditions?

FINANCIALS

Fixed-term borrowings
approaching maturity without
Indications of
Net liability or net realistic prospects of renewal or
withdrawal of financial
current liability position. repayment; or excessive reliance
support by creditors.
on short-term borrowings to
finance long-term assets.

Substantial operating losses

or significant deterioration in Arrears or
Adverse key financial the value of assets used to Inability to pay creditors
discontinuance of on due dates.
ratios. generate cash flows. dividends.

Inability to obtain
financing for essential
Inability to comply with Change from credit to cash-on- new product
the terms of loan delivery transactions with development or other
agreements. suppliers. essential investments.

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OPERATING

Loss of a major
market, key
Management intentions customer(s), Labor difficulties.
Loss of key management
to liquidate the entity or franchise, license, or
without replacement.
to cease operations. principal supplier(s).

Shortages of important Emergence of a highly

supplies. successful competitor.

OTHERS

Changes in law or
Pending legal or regulatory regulation or Uninsured or
Non-compliance with proceedings against the government policy underinsured
capital or other statutory entity. expected to catastrophes when they
requirements. adversely affect the occur.
entity.

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Additional Audit Procedures when events or condition are identified

Where management has not Evaluating management’s plans for future Where the entity has prepared a cash flow
yet performed an assessment actions in relation to its going concern forecast, and analysis of the forecast is a
of the entity’s ability to assessment, whether the outcome of these significant factor in considering the future
continue as going concern, plans is likely to improve the situation and outcome of events or conditions in the
requesting management to whether management’s plans are feasible in evaluation of management’s plans for future
make its assessment. the circumstances. (Refer: Para A17) actions: (Refer: Para A18-A19)

i) Evaluating the reliability of the underlying

data generated to prepare the forecast;
and
ii) Determining whether there is adequate
support for the assumptions underlying
the forecast.

Audit Procedures may include the following:

Considering whether any  Analyzing and discussing cash flow, profit
Requesting written representations from
additional facts or information and other relevant forecasts with
management and where appropriate those
have become available since
charged with governance, regarding their  Analyzing and discussing the entity’s latest
the date on which
plans for future actions and the feasibility of available interim financial statements
management made its Reading the terms of debentures and loan
assessment. agreements and determining whether any
have been breached.
 Reading minutes of the meetings of
shareholders, those charged with
governance and relevant committees for
reference to financing difficulties.
 Inquiring of the entity’s legal counsel
regarding the existence of litigation and
claims and the reasonableness of
management’s assessments of their
outcome and the estimate of their financial
implications
 Confirming the existence, legality and
enforceability of arrangements to provide
or maintain financial support with related
and third parties and assessing the financial
ability of such parties to provide additional
funds.
 Evaluating the entity’s plans to deal with
unfilled customer orders.
 Performing audit procedures regarding
subsequent events to identity those that
either mitigate or otherwise affect the
entity’s ability to continue as a going
concern.
 Confirming the existence, terms and
adequacy of borrowing facilities.
 Obtaining and reviewing reports of
regulatory actions.
 Determining the adequacy of support for
any planned disposals of assets.

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Management responsibility

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AUDITOR RESPONSIBILITY – REPORTING IMPLICATIONS

IQ SCHOOL OF FINANCE

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AUDIT BY IBRAHIM
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REPORTING IMPLICATIONS

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 Event or condition

Going concern assessment No Q or DC

IQ SCHOOL OF FINANCE

Going concern assumption appropriate

Yes

No

Material uncertainty exist Alternative basis + adequate disclosure

Yes No Yes No

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AUDIT BY IBRAHIM

KAM Clean+ EOMP Q or adverse

Material uncertainty disclosed

Yes No

Clean+ M M+P
MURTGC Q Adverse
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Report

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Note 1.3

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SUMMER 2013

Summer 2009

Summer 2016

Q.1 Mr. Burhan is working as audit manager in a firm of Chartered Accountants. The audit teams have
brought the following matters to his attention:

(b) There are multiple uncertainties which impact the ability of Link Telecom Limited to operate as a
going concern. An important assumption in the working provided by the client is the continuous
financial support from the parent company. The team incharge wants guidance as to how the validity of
this assumption can be evaluated. (05)

Required: Explain how the audit teams should deal with the above situations.

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lCAEW winter 2017

9. SLP LLP (SLP) is the external auditor of Redtail Ltd (Redtail) which prepares financial statements to 30
September each year. Redtail assembles turbines, in its UK factory, for customers based in the UK and
mainland Europe. Contracts with its customers are agreed many years in advance and prices are
denominated in sterling.

Components for turbines are sourced from international suppliers. Redtail negotiates fixedterm, fixed-
price contracts for the supply of components which are denominated in the supplier’s local currency.
Redtail’s contract with Hawk Gmbh (Hawk), its largest supplier, expired in June 2017. A new contract is
being negotiated but Redtail and Hawk cannot agree on prices. Recent falls in the value of sterling make
Hawk’s products more expensive and Redtail is demanding a higher discount from Hawk to compensate
for this. Redtail has been paying full list price for components purchased from Hawk since the contract
expired. List prices are significantly higher than previous contract prices. Redtail’s management accounts
for the period June to August 2017, show a fall in the gross profit margin from 23% to 18%. Redtail is
unable to source some components, supplied by Hawk, from alternative suppliers.

Redtail is purchasing smaller quantities of components from Hawk whilst the new contract is negotiated.
This has resulted in stockouts which have caused a significant delay in the supply of turbines to Tiberius
SRL (Tiberius). Tiberius is threatening to action a penalty clause in its contract with Redtail due to the
delay.

Requirements

9.2 Identify and explain the factors which give rise to an uncertainty about the going concern status of
Redtail.

9.3 Assuming SLP concludes there is an uncertainty about the going concern status of Redtail, explain
the implications for the auditor's report on the financial statements of Redtail for the year ending 30
September 2017 if the directors:

(a) make appropriate disclosures; or (b) do not make any disclosures.

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ISA 580 – Written representation

Scope Objective
 The auditor’s responsibility to obtain written  To obtain written representations from management
representations from management and, and, where appropriate, TCWG that they believe
where appropriate, TCWG in an audit of FS. that they have fulfilled their responsibility for the
preparation of the FS and for the completeness
 Other ISAs containing subject-matter specific of the information provided to the auditor.
requirements for written representations.
 To support other audit evidence relevant to the FS
or specific assertions in the FS by means of
written representations if determined necessary by
the auditor or required by other ISAs; and

 To respond appropriately to written representations

provided by management and, where appropriate,
TCWG, or if management or, where appropriate,
TCWG do not provide the written representations
requested by the auditor.

What is written representation?

A written statement by management provided to the auditor to confirm certain matters or to support other audit
evidence. Written representations in this context do not include FS, the assertions therein, or supporting books
and records.

Written Representations as Audit Evidence (received or not)

Audit evidence is the information used by the auditor in arriving at the conclusions on which the auditor’s opinion
is based. Written representations are necessary information that the auditor requires in connection with the audit of the
entity’s FS. Accordingly, similar to responses to inquiries, written representations are audit evidence.

Although written representations provide necessary audit evidence, they do not provide SAAE on their own about
any of the matters with which they deal. Furthermore, the fact that management has provided reliable written
representations does not affect the nature or extent of other audit evidence that the auditor obtains about the
fulfillment of management’s responsibilities, or about specific assertions.
Written representations are an important source of audit evidence. If management modifies or does not provide the
requested written representations, it may alert the auditor to the possibility that one or more significant issues may
exist. Further, a request for written, rather than oral, representations in many cases may prompt management to
consider such matters more rigorously, thereby enhancing the quality of the representations.

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Written Representations about Management’s Responsibilities

Information Provided and Completeness of

Preparation of the Financial Statements Transactions
The auditor shall request management to provide a written
The auditor shall request management to provide a
representation that it has fulfilled its responsibility for the
written representation that:
preparation of the FS in accordance with the applicable
financial reporting framework, including, where relevant,
their fair presentation, as set out in the terms of the audit
engagement. All transactions
It has provided the auditor
Management responsibilities shall be described in the written with all relevant information have been
representations in the manner in which these responsibilities and access as agreed in the recorded and
are described in the terms of audit engagement. terms of the audit are reflected in
engagement and the FS.

Provided
No

Yes
The auditor shall disclaim an opinion in accordance with ISA
705
- There is sufficient doubt about the integrity of
Significant management such that WR about MR are not reliable.
doubt about the
- Management does not provide the written representations
integrity

Yes

Disclaim

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Obj 2 Other specific and other

information

Required by other ISA WR to support other audit

Appendix 1 evidence

Provided
Yes No

Doubt over the

reliability of WR Discuss the Reevaluate the integrity of Take appropriate actions,
matter management and evaluate including determining the
Yes No with the effect that this may possible effect on the
manageme have on the reliability of opinion in the auditor’s
End representations (oral or report in a/c with ISA
A written) and audit 705, considering the
evidence in general; and requirement of
disclaimer due to MR
Competence, integrity and ethical values If the auditor has concerns
about the competence, integrity, ethical values or diligence of
Inconsistent with other audit evidence
management, or about its commitment to or enforcement of these, the
auditor shall determine the effect that such concerns may have on the If written representations are inconsistent with
reliability of representations (oral or written) and audit evidence other audit evidence, the auditor shall perform audit
in general. It may cause the auditor to conclude that the risk of procedures to attempt to resolve the matter.
management misrepresentation in the financial statements is such that
an audit cannot be conducted. In such a case, the auditor may consider
withdrawing from the engagement, where withdrawal is possible
Perform other audit procedures (whether risk
under applicable law or regulation, unless
assessment remain appropriate and if not
revise the risk assessment and determine N,T
and E of FAP) to resolve the matter

TCWG put in place appropriate corrective measures

Matter resolve
Such measures may not
be sufficient to enable the
End
auditor to issue an
Yes No
unmodified audit opinion A

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 representations and audit evidence in general.

If the auditor concludes that the WR are not reliable, the auditor shall take appropriate actions, including determining the possible
effect on the opinion in the auditor’s report having regard to the requirement mention in management responsibility (Disclaimer).
concluded thath

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responsibilities is not sufficient without

obtaining confirmation from management that it believes that it has fulfilled those responsibilities. This is because the
auditor is not able to judge solely
the FS and provided information to the auditor on the basis

management to reconfirm its acknowledgement and understanding of those

jurisdictions, but in any event may be particularly
appropriate when:
• Those who signed the terms of the audit engagement on behalf of the entity no longer have the relevant
responsibilities;
• The terms of the audit engagement were prepared in a previous year;
• There is any indication that management misunderstands those responsibilities; or
• Changes in circumstances make it appropriate to do so.
Consistent with ISA 2 management’s acknowledgement and understanding of its
responsibilities is not made subject to the best of management’s knowledge and belief.
Additional Written Representations about the Financial Statements

supplement, but do
not form part of, the written representation required by paragraph 10. They may include representations about the following:
• Whether the selection and application of accounting policies are appropriate; and
• applicable financial reporting framework, have been
recognized, measured, presented or disclosed in accordance with that framework:
o Plans or intentions that may affect the carrying value or classification of assets and liabilities;
o Liabilities, both actual and contingent;
o Title to, or control over, assets, the liens or encumbrances on assets, and assets pledged as collateral; and
o Aspects of laws, regulations and contractual agreements that mayaffect the financial statements, including non-
compliance.

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MODIFICATION IN WRITTEN REPRESENTATION – Representation not provided

The auditor is not able to judge solely on other audit evidence whether management has fulfilled the
responsibilities w.r.t management responsibility. Therefore, if, the auditor concludes that the written representations
about these matters are unreliable, or if management does not provide those written representations, the auditor is
unable to obtain sufficient appropriate audit evidence. The possible effects on the financial statements of such
inability are not confined to specific elements, accounts or items of the financial statements and are hence
pervasive. ISA 705 requires the auditor to disclaim an opinion on the financial statements in such circumstances.
A written representation that has been modified from that requested by the auditor does not necessarily mean that
management did not provide the written representation. However, the underlying reason for such
modification may affect the opinion in the auditor’s report. For example:
•The written representation about management’s fulfillment of its responsibility for the preparation of the financial
statements may state that management believes that, except for material non-compliance with a particular requirement
of the applicable financial reporting framework, the financial statements are prepared in accordance with
that framework. The requirement in paragraph 20 (disclaimer due to Management responsibility) does not apply
because the auditor concluded that management has provided reliable
written representations. However, the auditor is required to consider
the effect of the non-compliance on the opinion in the auditor’s report
in accordance with ISA 705.
• The written representation about the responsibility of management to provide the auditor with all relevant information
agreed in the terms of the audit engagement may state that management believes that, except for information
destroyed in a fire, it has provided the auditor with such information. The requirement in paragraph 20 does not apply
because the auditor concluded that management has provided reliable written representations. However, the auditor is
required to consider the effects of the pervasiveness of the information destroyed in the fire on the financial statements
and the effect thereof on the opinion in the auditor’s report in accordance with ISA 705.

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WRITTEN REPRESENTATION ABOUT SPECIFIC REPRESENTATION – Other Representation

When obtaining evidence about, or evaluating, judgments and intentions, the auditor may consider one or more of the following:
• The entity’s past history in carrying out its stated intentions.
• The entity’s reasons for choosing a particular course of action.
• The entity’s ability to pursue a specific course of action.
• The existence or lack of any other information that might have been obtained during the course of the audit that may
be inconsistent with management’s judgment or intent.
In addition, the auditor may consider it necessary to request management to provide written representations about specific
assertions in the financial statements; in particular, to support an understanding that the auditor has obtained from other audit
evidence of management’s judgment or intent in relation to, or the completeness of, a specific assertion. For example, if the intent
of management is important to the valuation basis for investments, it may not be possible to obtain sufficient appropriate audit
evidence without a written representation from management about its intentions. Although such written representations provide
necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own for that assertion.
Communicating a Threshold Amount
. ISA 450 requires the auditor to accumulate misstatements identified during the audit, other than those that are clearly trivial. 6 The
auditor may determine a threshold above which misstatements cannot be regarded as clearly trivial. In the same way, the auditor may
consider communicating to management a threshold for purposes of the requested written representations.

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To whom representation is requested:

The auditor shall request written representations from management with appropriate responsibilities for the financial statements and
knowledge of the matters concerned
Written representations are requested from those responsible for the preparation Those individuals may vary depending on the governance
structure of the entity, and relevant law or regulation; however, management (rather than those charged with governance) is often the
responsible party of the financial statements. Written representations may therefore be requested from the entity’s chief executive officer
and chief financial officer, or other equivalent persons in entities that do not use such titles. In some circumstances, however, other
parties, such as those charged with governance, are also responsible for the preparation of the financial statements.
Due to its responsibility for the preparation of the financial statements, and its responsibilities for the conduct of the entity’s
business, management would be expected to have sufficient knowledge of the process followed by the entity in preparing the financial
statements and the assertions therein on which to base the written representations.
In some cases, however, management may decide to make inquiries of others who participate in preparing and presenting the
financial statements and assertions therein, including individuals who have specialized knowledge relating to the
matters about which written representations are requested. Such individuals may include:
• An actuary responsible for actuarially determined accounting measurements.
• Staff engineers who may have responsibility for and specialized knowledge about environmental liability measurements.
• Internal counsel who may provide information essential to provisions for legal claims.
In some cases, management may include in the written representations qualifying language to the effect that representations are
made to the best of its knowledge and belief. It is reasonable for the auditor to accept such wording if the auditor is satisfied that the
representations are being made by those with appropriate responsibilities and knowledge of the matters included in the
representations.
To reinforce the need for management to make informed representations, the auditor may request that management include in the written
representations confirmation that it has made such inquiries as it considered appropriate to place it in the position to be able to
make the requested written representations. It is not expected that such inquiries would usually require a formal internal process beyond
those already established by the entity.

Date and Period Covered by Written Representation:

The date of the written representations shall be as near as practicable to, but not after, the date of the auditor’s report on the financial
statements. The written representations shall be for all financial statements and period(s) referred to in the auditor’s report. In some
circumstances, it may be appropriate for the auditor to obtain a written representation about a specific assertion in the financial
statements during the course of the audit. Where this is the case, it may be necessary to request an updated written representation. The
written representations are for all periods referred to in the auditor’s report because management needs to reaffirm that the
written representations it previously made with respect to the prior periods remain appropriate. The auditor and management may agree
to a form of written representation that updates written representations relating to the prior periods by addressing whether there
are any changes to such written representations and, if so, what they are

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Form of Written Representation

The written representations shall be in the form of a representation letter addressed to the auditor. If law or regulation requires
management to make written public statements about its responsibilities, and the auditor determines that such statements provide some or
all of the representations required by paragraphs 10 or 11, the relevant matters covered by such statements need not be included in the
representation letter.
IMPACT OF LAW OR REGULATION
Written representations are required to be included in a representation letter addressed to the auditor. In some jurisdictions, however,
management may be required by law or regulation to make a written public statement about its responsibilities. Although such
statement is a representation to the users of the financial statements, or to relevant authorities, the auditor may determine that it is an
appropriate form of written representation in respect of some or all of the representations required by paragraph 10 or 11. Consequently,
the relevant matters covered by such statement need not be included in the representation letter. Factors that may affect the auditor’s
determination include:
• Whether the statement includes confirmation of the fulfillment of the responsibilities w.r.t to FS and information
• Whether the statement has been given or approved by those from whom the auditor requests the relevant written representations.
• Whether a copy of the statement is provided to the auditor as near as practicable to, but not after, the date of the auditor’s report on
the financial statements.

A formal statement of compliance with law or regulation, or of approval of the financial statements, would not contain sufficient information
for the auditor to be satisfied that all necessary representations have been consciously made. The expression of management’s responsibilities
in law or regulation is also not a substitute for the requested written representations

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Appendix 1

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ISA 580 – Written representation

Summary

SCOPE: AR to obtain WR

What is Written Representation?

· Written statement by management provided to auditor to confirm certain matters or to support

other audit evidence

Objective:

· To obtain WR from management that they have fulfilled their responsibility for the preparation
of FS
· To obtain WR as required by other ISA or to support other audit evidence
· To respond appropriately to WR provided by management or when management do not provide
representation

Requirement:

· WR about management responsibility

o Preparation of the FS - in a/c with AFRF, as set out in the terms of engagement
o Information provided and completeness of transaction – provided the auditor with all
relevant information and access as agreed in the terms of engagement and
§ All transaction have been recorded and are reflected in the FS

The above responsibility shall be described in the written representation in the manner in which these
responsibilities are described in the terms of audit engagement.

· Other Written Representation:

o As specifically required by other ISA
o Auditor determines that it is necessary to obtain one or more written representation to
support other audit evidence

· Doubt as to the reliability of Written Representation

o If doubts on the competence, integrity and ethical values – determine the effect on the
reliability of representation – Consider withdrawing from management (risk of
management misrepresentation in the FS is such that audit cannot be conducted –
except TCWG put in place appropriate corrective measures – nevertheless issue
modified opinion
§ If based on above concluded that written representation are still reliable – it is
a significant matter and should be documented as per ISA 230
o If written representation are inconsistent with other audit evidence – Auditor shall
perform other audit procedures (revise risk assessment and determine N,T and E of FAP)
to resolve the matters – if matter remain unresolved – reconsider the assessment of the

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competence, integrity and ethical values and determine the effect on written
representation in general.
o If auditor concludes that written representation are not reliable – determine the
possible effect on the auditor’s report

· Requested Written Representation not Provided

o Discuss the matter with management

o Reevaluate the integrity and evaluate the effect on WR in general
o Impact in Auditors report as per ISA 705

· Written Representation about Management Responsibilities

Disclaim an opinion if:

o Auditor concludes that there is sufficient doubt about the integrity of management such
that representation required (preparation of FS, all information provided and all
transaction has been recorded) are not reliable
o Management does not provide Written representation on its responsibilities

GENERAL RULES

· Date and Period Covered by Written Representation

o Shall not be dated after the date of Auditors report
o At the date of audit report or as near as practicable
o For all financial statement and period referred in auditors report

· Form of Written representation

o Addressed to the auditor
· To whom representation is requested: with appropriate responsibility for the FS ad knowledge
of the matter concerned. Normally CEO and CFO or TCWG
· Can management use the word to the best of our knowledge and belief? Yes
· Can CFO or CEO confirm or discuss with third party or internally before giving representation?
Yes
· Can management modify the language of written representation? Appropriate only in
following circumstances:
o Due to fire – management said that except for the information destroyed in fire we
have provided all the information
o Except for recording impairment – we have prepared the FS in accordance with the IFRS

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ISA 600

Scope
< ISA 600 Special Considerations—Audits of Group Financial
Statements (Including the Work of Component Auditors) applies when an auditor uses the
work of another auditor on the financial information of one or more components included
in the financial statements being reported on.
< It does not deal with:
= the relationship with joint auditors;
= relationships with a predecessor auditor.
< It does not apply when the group auditor concludes that the financial statements of a
component are immaterial.
< Aspects of the standard may also be usefully applied where other auditors are involved
in the audit of financial statements that are not group financial statements (e.g. in
observing inventory counts).

Objective:

· To determine whether to act as an auditor

· If acting as the auditor of group financial statements:
o To communicate clearly with component auditor – scope and timing of their work
o To obtain SAAE regarding the financial information of the component and consolidation
process to express an opinion

Requirements:

A.Responsibility:

The group engagement partner is responsible for:

= the direction, supervision and performance of the group audit engagement;
= compliance with professional standards and regulatory and legal requirements; and
= the auditor's report.
The auditor's report on the group financial statements should not therefore refer to a
component auditor, unless required by law or regulation.
< If such reference is required (e.g. by law) the auditor's report must indicate that the
group engagement partner's responsibility for the group audit opinion is not diminished.
If the group audit opinion is modified due to a limitation in scope relating to one or more
components, the basis for modification paragraph in the auditor's report on the group
financial statements should not refer to the component auditor, unless necessary for an
adequate explanation of the limitation.

B.Acceptance and Continuance

The group engagement partner must:

= determine whether sufficient appropriate audit evidence canreasonably be expected to be
obtained in relation to the consolidation process and the financial information of the
components on which to base the group audit opinion; and
= evaluate whether the group engagement team can be involved in the work of any
component auditors to the extent necessary to obtain such evidence.
< The group engagement team obtains an understanding of thegroup, its components and
their environments (sufficient to identify significant components).

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· Group structure
· Component business activities including industry, regulatory, economic and
political environment
· Use of service organization
· Group wide controls
· Complexity of consolidation process
· Whether component auditor from network firm
· Unrestricted access to information
· In case of continuation engagement check for changes of the abovementioned
· Informaition can be obtained from group management
< The group engagement partner should decline or resign from an engagement if a
material limitation in scope (e.g. limited access to significant components, other auditors,
management or those charged with governance) could result in a disclaimer
of opinion.*

B1.Terms of Engagement

<The group engagement partner must agree the terms of engagement of the group.
· Communication between group engagement team & Component Auditor
· Important communication b/w CA and TCWG of Component including significant
deficiencies shall be communicated GET
· Regulatory authorities and component auditor
· Access to all information

C.Overall audit strategy and audit plan

GET shall establish overall audit strategy and audit plan & GEP shall review

D.Understanding the group, its component and their environment

The auditor is required to identify and assess the ROMM through obtaining an
understanding of the entity and its environment. The GET shall:
· Enhanced its understanding as obtained during client acceptance and continuance
· Obtain u/s of consolidation process including instruction issued by group
management to components
o Accounting policies to be applied
o Related party relationship and transaction
o Intra group transaction unrealized profit
o Intra group account balance
o Reporting timetable
o
Obtain an understanding that is sufficient to:
· Confirm or revise its initial identification of components that are likely to be
significant
· Assess the ROMM of the GFS whether due to error or fraud

D1.Understanding the Component Auditor

If GET plan to request a CA to perform work on the FI of a component, GET shall obtain an
u/s of the following:
Whether the component auditor:
= understands and will comply with relevant ethicalrequirements; and
= is independent.
< The component auditor's professional competence (including industry-specific knowledge
and understanding of theapplicable financial reporting framework).*
The extent of any involvement of the group engagement team

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in the work of the component auditor.

< Whether the component auditor operates in a regulatory
environment that actively oversees auditors

Gaining an initial understanding of the component auditor can

be obtained through:
= visiting the auditor and conducting quality control reviews;
= evaluating the results of quality control reviews carried out on the component auditor
where both auditors are part of the same network;
= use of checklists, questionnaires and confirmation letters to be completed by the
component auditor; and
= obtain confirmations from the professional body or regulatory authority that governs the
component auditor.

The nature timing and extent of procedures depends on common policies, common quality
policies, monitoring policies, education and qualification

If CA does not meet independence requirement – obtain SAAE without CA

E. MATERIALITY
Determine materiality for the Group FS
Component Materiality for those components where CA will perform an audit or review for
the purpose of group audit
If component materiality as per local laws and regulation – assess whether it meets the
requirement of ISA

F. Responding to Assessed Risks

The auditor is required to design and implement appropriate responses to address the assessed risks
of material misstatement of the financial statements. The group engagement team shall determine
the type of work to be performed by the group engagement team, or the component auditors on its
behalf, on the financial information of the components. The group engagement team shall also
determine the nature, timing and extent of its involvement in the work of the component auditors

If the nature, timing and extent of the work to be performed on the consolidation process or the
financial information of the components are based on an expectation that group-wide controls are
operating effectively, or if substantive procedures alone cannot provide sufficient appropriate audit
evidence at the assertion level, the group engagement team shall test, or request a component auditor
to test, the operating effectiveness of those controls.

F1. Determining the type of work to be performed on the FI of the Components

· SIGNIFICANT COMPONENT
Group engagement team or Component auditor on its behalf shall perform an audit of component
using component materiality which is determined by Group Auditor
For a component that is significant because it includes significant ROMM of the Group FS – GET or CA on
behalf of GET shall perform any of the following:
· An audit using CM
· One or more account balance or class of transaction relating to the likely Significant ROMM
· Specified audit procedures relating to likely Significant risk of material misstatement
· Components that are not Significant Component

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1.8 Type of Work on Components

Significant
< Audit using component materiality.
< Audit one or more account balances, classes of
transactions or disclosures.
< Specified audit procedures.
GET shall be involved in the CA risk assessment to identify significant ROMM of the group FS
by:
· Discussing with the CA or CM of business activities
· Discussing with CA susceptibility of Component to material misstatement
· Reviewing the CA documentation identified significant risk of material misstatement
· Once the risk identified shall evaluate the appropriates of the FAP
Not significant
< Analytical procedures at group level (the financial informationof the components may be
aggregated at various levels for this purpose).
< If the work on significant components, group-wide controls and the consolidation
process and analytical procedures at group level does not provide sufficient evidence,
further work may be required on selected components that are not significant. This may
include rotation of those components not considered significant over a period of time.

The decision depends on (newly formed or acquired, significant changes, IAF, OE of GWC,
abnormal fluctuation by AP
The review may be performed as per ISRE 2400

CONSOLIDATION PROCESS
· Test the operating effectiveness of group wide controls if controls operating effectively or
substantive procedures alone cannot provide SAAE
· Design and perform FAP on the CP to respond to the assessed ROMM
· Shall evaluate the appropriateness, completeness and accuracy of consolidation adjustments
· If FI of a component has not been prepared in a/c with the same accounting policies applied to
the group FS – whether appropriate adjustment has been passed
· IF Financial reporting period differ – shall evaluate whether appropriate adjustment has been
passed

SUBSEQUENT EVENT
< A review of events after the reporting period is required before signing the auditor's
report on the group financial statements.
< To some extent, this review can be carried out centrally for the group as a whole,
particularly in respect of non-material subsidiaries.
< Component auditors and subsidiaries may be requested to provide necessary
information up to the date of signing the group auditor's report on the group financial
statements (i.e. extension of the proactive approach after date of signing
audit report).

COMMUNICATION WITH THE COMPONENT AUDITOR

· Confirm that cooperate with GET
· Ethical requirement including independence
· Component Materiality
· Identified Significant ROMM

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· List of related party

COMMUNICATION FROM COMPONENT AUDITOR TO GROUP ENGAGEMENT TEAM

· Whether complied with ethical requirements

· Whether complied with GET requirements
· Identification of the FI on which CA is reporting
· Information of non-compliances with laws and regulations
· List of uncorrected misstatement
· Indicators of possible management bias
· Any other significant matters that expect to communicate with TCWG
· Any other matter including WR
· Component auditors overall finding, conclusion or opinion

Evaluating the Sufficiency and Appropriateness of Audit Evidence

The group engagement team shall:

· Discuss significant matters with component auditor, component management and
group management
· Determine whether it is necessary to review other part of the component auditor
documentation
· If work is insufficient determine what additional procedures to be performed – either
by CA or GET

COMMUNICATION WITH GM

· Deficiencies in GWC
· Deficiencies in internal control of the component identified by GET
· Deficiencies in internal control of the component identified by CA
· FRAUD

COMMUNICATION WITH TCWG

· Type of work to be performed on component
· GET involvement
· Concern about the quality of CA work
·

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Winter 2018

Winter 2015

Summer 2017

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ISA 610
USING THE WORK OF INTERNAL AUDITORS

OBJECTIVE

To determine whether the work of the internal audit

SCOPE function or direct assistance from internal auditors
can be used;
External auditors responsibilities if using the
work of Internal Auditor. This includes · in which areas
· to what extent
· Using the work of the internal auditfunctionin and having made that determination:
obtaining audit evidence and;
· Using internal auditors to provide direct · If using the work of the internal audit function, to
assistanceunder the direction, supervision determine whetherthat work is adequate for
and review of the external auditor purposes of the audit; and
· If using internal auditors to provide direct assistance,
to appropriatelydirect, supervise and review their
work.

When not to use and involve internal audit function

· entity has an internal audit function

- Responsibilities and activities of the function are not relevant to the audit; or
- Based on the auditor’s preliminary understanding, does not expect to use the work of the function in
obtaining audit evidence.
· The external auditor may be prohibited, or restrictedbylaw or regulation from using the work of the internal
audit function or using internal auditors to provide direct assistance. It is relevant for the group auditors to
consider whether the prohibition also extends to component auditors and, if so, to address this in the
communication to the component auditors.
!Itremains the decision of the external auditor to use the work and direct assistanceofinternal audit
function in establishing the overall audit strategy.

Relationship between ISA 315 (Revised) and ISA 610 / Advantages of Using Internal Audit Function
ISA 315 (Revised) addresses:
· The knowledge and experience of the internal audit function can inform the external auditor’s
understanding of the entity and its environment and identification and assessment of ROMM.
· The effective communication between the internal and external auditors also creates an environment in
which the external auditor can be informed of significant matters that may affect the external auditor’s
work.
· The external auditor’s responsibilities when, based on preliminary understanding of the internal audit
function obtained as a result of procedures performed under ISA 315 (Revised), the external auditor
expects to use the work of the internal audit function as part of the audit evidence obtained. Such use
of that work modifies the nature or timing, or reduces the extent, of audit procedures to be performed
directly by the external auditor.

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The External Auditor’s Responsibility for the Audit

The external auditor has sole responsibility for the audit opinion expressed, and that responsibility is not reduced
by the external auditor’s use of the workOR provide direct assistance of the internal audit function
Internal auditor may perform procedures similar to those performed by the external auditor, neither the internal audit
function nor the internal auditors are independent of the entity as is required of the external auditor in an audit of FS
in accordance with ISA 200.

Internal audit function

A function of an entity that performs assurance and consulting activities designed to evaluate
and improve the effectiveness of the entity’s governance, risk management and internal control
processes.

Governance Risk Management Internal Control

Helps in accomplishment of Assist in identifying and § Assigned responsibility for
objectives on ethics and values, evaluating significant reviewing, evaluating,
performance management and exposures to risk and recommending
accountability, communicating contributing to the improvements and provides
D risk and control information to improvement of risk assurance on the control.
appropriate areas of the management and internal § Assigned to review the
E organization and effectiveness control and may assist in means used to identify,
F of communication among
TCWG, external and internal
detection of fraud. recognize, measure, classify
and report financial and
I auditors, and management. operating information.
§ Assigned to review the
N economy, efficiency and

I effectiveness of
operating activities, including
T non-financial activities of an
entity.
I § Assigned
compliance
to
with
review
laws,
O regulations, other external

N requirements, management
policies and directives and
S other internal requirements.

Work of Internal Auditor

The use of work complete by internal audit function while obtaining audit evidence.

Direct assistance
The use of internal auditors to perform auditprocedures under the direction, supervision and
review of the external auditor.

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Determining Whether, in Which Areas, and to What Extent the Work of the Internal Audit Function Can Be Used

Determining whether - Evaluate the Internal Audit Function

The external auditor shall use / not use the work of the internal audit function if the external auditor determines that:

NOT USE

· The extent to which the organizational · The organizational status and relevant
statusand relevant policies and policies and proceduresdo not adequately
proceduressupport the objectivityof support the objectivity of internalauditors;
the internal auditors; · Lacks sufficient competence; or
· The level of competence; and · Not apply a systematic and disciplined
· Whether Internal audit function applies a approach, including quality control.
systematicanddisciplinedapproach,
including quality control.

Objectivity
The ability to perform tasks without bias, conflict of interest or undue influence of others to override professional
judgments.

For example

Reports to TCWG or Having managerial or Determining the Restrictions in place in Membership of

an officer with operational duties or appropriate communicating the professional bodies
appropriate authority, responsibilities that are remuneration policy by finding to the external and their compliance
or if the function outside of the internal TCWG. auditor with professional
reports to audit function. standards
management, whether
it has direct access to
TCWG.

Competence
The attainment and maintenance of knowledge and skills as a whole which are required to enable assigned tasks to be
performed diligently and in accordance with applicable professional standards.
For example

Whether the function Established policies for Adequate technical Possession of required Member of relevant
is adequately and hiring, training training knowledgerelating to professional bodies
appropriately andassigning internal andproficiency in the entity’s financial that comply with the
resourced compare to auditors to internal auditing. reporting and the relevant professional
the size of the entity audit engagements. applicable financial standards including
and the nature of its reporting framework continuing
professional
operations. and industry-specific
development
knowledge
requirements.

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Systematic and Disciplined Approach

The application of planning, performing, supervising, reviewing and documenting its activities
distinguishes the activities of the internal audit function from other monitoring control activities

The existence, adequacy and use of documented internal audit

procedures OR Appropriate quality control
Guidance covering such areas as risk assessments, work policies and procedures
programs, documentation and reporting

Determining the Nature and Extent of Work of the Internal Audit Function that Can Be Used

While determining the areas and extent to which the work of the internal audit function can be used, the external
auditor shall consider the nature and scope of the work that has been performed, or to be performed, by the
internal audit function and its relevance to the external auditor’s overall audit strategy and audit plan.
The external auditor shall make all significant judgments in the auditengagement and, to prevent undue
use of the work of the internal audit function,shall plan to use less of the work of the function and perform moreof
the work directly:

The more judgment is involved The higher the Less organizational The lower the level
in: assessed ROMM at the status and relevant of competence of
(i) Planning and performing assertion level, with policies and the internal audit
relevant audit procedures; special consideration procedures function.
and given to risks identified adequately support
(ii) Evaluating the audit evidence as significant; the objectivity ofthe
gathered; internal auditors and;

Significant judgement includes the following:

Assessing the ROMM, evaluating the sufficiency of test performed, evaluating going concern assumption, evaluating
significant accounting estimates, evaluating adequacy of disclosure affecting the auditor’s report

EXAMPLES OF WORK OF INTERNAL AUDIT FUNCTION THAT CAN BE USED BY THE EXTERNAL AUDITOR

Testing of the Substantive Observations of Tracing transactions Testing of In some

operating procedures inventory counts. through the compliance with circumstances,
effectiveness of involving limited information system regulatory audits or reviews
controls judgment. relevant to financial requirements. of the financial
reporting informationof
subsidiaries that
are not significant
components to the
group

The external auditor shall also evaluate whether, in aggregate, using the work of the internal audit function to the
extentplanned would sufficient to give the external auditor’s sole responsibility for the audit opinion expressed.
The external auditor shall, in communicating with TCWGan overview of the planned scope and timingand how the external
auditor has planned to use the work of the internal audit function.

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Using the Work of the Internal Audit Function

If the external auditor plans to use the work of the internal audit function, the external auditor shall discuss the planned use of its
work with the function as a basis for coordinating their respective activities

Timing of such work, nature of the Coordination between the external auditor and the internal audit function is effective
work performed, extent of audit when, for example:
coverage, materiality, proposed • Discussions take place at appropriate intervals throughout the period.
method of item selection and • The external auditor informs the internal audit function of significant
sample size, documentation of the matters that may affect the function.
work performed, review and • The external auditor is advised of and has access to relevant reports of the internal
reporting procedures. audit function and is informed of any significant matters that come to the attention of
the function when such matters may affect the work of the external auditor so that
the external auditor is able to consider the implications of such matters for the audit
engagement.

The external auditor shall read the reports relatingto the work of the function which they plans to use to obtain an understanding of
the nature and extent of audit procedures it performed and the related findings.

The external auditor shall perform sufficient audit procedures on the body ofwork of the internal audit function as a whole that the
external auditor plans to use to determine its adequacy for purposes of the audit, including evaluating whether:

The work of the function had Sufficient appropriate Conclusions are appropriate Additional procedures
been properly planned, evidence had been and reports prepared by the Making inquiries,
performed,supervised, obtained to enable the function are consistent with observing procedure,
reviewed and documented; function to draw reasonable the work performed review IAF work
conclusions program

The nature and extent of the external auditor’s audit procedures shall be responsive to the external auditor’s evaluation of:

The amount of The assessed Organizational statusand Level of competence of the And shall include
judgment risk of material relevant policies and function and include reperformance of
involved misstatement procedures support the reperformance of some of some of the work –
objectivity of the internal the work. independent
auditors execution of
procedure to validate
conclusion

The external auditor shall also evaluate whether the conclusions regarding the internal audit function and the determination of
the nature and extent of use of work of the function for purposes of the audit remain appropriate.

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Determining Whether, in Which Areas, and to What Extent Internal Auditors Can Be Used to Provide Direct
Assistance

Whether Internal Auditors Can Be Used to Provide Direct

Assistance for Purposes of the Audit

Allowed in Law & Regulation

Yes No

The external auditor shall evaluate

The external auditor cannot use
the internal auditor for direct
assistence
The existence The level of
and competence who
significance of will be providing
threats to such assistance.
objectivity

The external auditor shall make inquiry to

the internal auditorsregardinginterests and
relationships that may create a threat to their
objectivity

The extent to which Family and personal Association with Significant financial
the internal audit relationships with an the division or interests in the entity
function’s individual working in, department in the other than
organizational orresponsible for, the entity to which remuneration onterms
statusand relevant aspect of the entity thework relates consistent with those
policies and to which the work applicable to other
procedures support relates. employees at a similar
the objectivity of level of seniority.
the internal
auditors.

Not use an internal auditor to provide direct

Yes No assistance if:
(a) Significant threats to the objectivity of the internal
auditor;or
(b) Lack of sufficient competence

Can use internal auditor

for direct assistance

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Determining the Nature, Extent, timing, direction, supervision and review of Work that Can Be Assigned to
Internal Auditors Providing Direct Assistance
The external auditor shall consider:

The amount of judgment involved The assessed risk of material Evaluation of the existence and
in: misstatement significance ofthreats to the
(i)Planning and performing objectivity and level of competence of
relevant audit procedures; and the internalauditors who will be
(ii) Evaluating the audit evidence providing such assistance.
gathered;

In determing the nature of the work that may be assigned to IA,the external auditor is careful to limit such work to
those areas that would be appropriate to be assigned. Examples of activities and tasks that would not be
appropriate to use internal auditors to provide direct assistance include the following:

Discussion of fraud risks. Determination of Since in accordance with ISA 50530 the external
However, the external unannounced Amount of auditor isrequired to maintain control over external
auditors may audit procedures judgement involved confirmation requests and evaluate the results of
makeinquiries of internal as addressed in and risk of material external confirmation procedures, it would not be
auditors about fraud risks ISA240 misstatement appropriate to assign these responsibilities to internal
in the organization in auditors. However, internal auditors may assist in
accordance with ISA 315 assembling information necessary for the external
auditor to resolve exceptions in confirmation
responses.

The external auditor shall not use internal auditors to provide direct assistance to perform procedures that:

Involve making Higher assessed ROMM Work with which the Decisions of external
significant judgments in where the judgment internal auditors have been auditor makes in
the audit; required in performing the involved and which has accordance with this ISA
relevant audit procedures already been, or will be, regarding the internal
or evaluating the audit reported to management audit function and the
evidence gathered is or TCWG by the internal use of its work or direct
more than limited audit function assistance.

Having appropriately evaluated to what extent internal auditors can be used to provide direct assistance on the
audit, the external auditor shall, in communicating with TCWG an overview of the planned scope and timing of
the audit in accordance with ISA 260, communicate the nature and extent of the planned use of internal auditors
to provide direct assistance so as to reach a mutual understanding that such use is not excessive in the
circumstances of the engagement.

The external auditor shall evaluate whether, in aggregate, using internal auditors to provide direct assistance to
the extent planned, together with the planned use of the work of the internal audit function, would still result in the
external auditor being sufficiently involved in the audit, given theexternal auditor’s sole responsibility for the
audit opinion expressed.

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Using Internal Auditors to Provide Direct Assistance

Before using internal auditors to provide direct assistance for purposes of the audit, the external auditor shall:

Obtain written agreement from an Obtain written agreement from the

authorized representative of the entity internal auditors that they will
that the internal auditors will be allowed keepconfidential specific matters as
to follow the external auditor’s instructed by the external auditor
instructions, and that the entity will not and inform them of any threat to their
intervene in the work the internal auditor objectivity.
performs for the external auditor

The external auditor shall direct, supervise and review the work performed by internal auditors on the
engagement in accordance with ISA 220.In doing so

The nature, timing and extent of direction, The review procedures shall include the external
supervision, and review shall recognize that the auditor checking back to the underlying audit
internal auditors are not independent of the evidence for some of the work performed by
entity and be responsive to the outcome of the the internal auditors.
evaluation of the factors such as
- Judgment involved
- Assessed ROMM
- Threats to the objectivity and level of
competence

The direction, supervision and review by the external auditor of the work performed by the internal auditors shall be
sufficient in order for the external auditor to be satisfied that the internal auditors have obtained SAAE to support
the conclusions based on that work.

In directing, supervising and reviewing the work performed by internal auditors, the external auditor shall
remain alert for indications that the external auditor’s evaluations on existence and significance of threats to
objectivity and the level of competence are no longer appropriate

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Documentation

If the external auditor uses the work of the internal audit function, theexternal auditor shall include in the audit
documentation:

The evaluation of: The nature and extent of The audit procedures
(i)Organizational status and relevant policies the work used and the performed by the external
and procedures adequately support the basis for thatdecision auditor to evaluate the
objectivity ofthe internal auditors; adequacy of the work used.
(ii)The level of competence of the function
(iii)Application of systematic and
disciplinedapproach, including quality control

If the external auditor uses internal auditors to provide direct assistance onthe audit, the external auditor shall include
in the audit documentation:

Evaluate the existence and The basis for the Who reviewed the The written agreements The working papers
significance of threats to the decision regarding work performed and obtained from an prepared by the
objectivity of internal the nature and the date and extent authorized internal auditors who
auditors, and the level of extent of the of thatreview in representative of the provided direct
competence of the internal workperformed by accordance with ISA entity and the internal assistance on the audit
auditors used to provide the internal auditors 230 auditors. engagement.
direct assistance

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Difference between internal and external audit

Internal and external auditors often carry out their work using similar procedures. This is something to bear in mind
when answering ‘practical’ questions on auditing in an examination.
However, there are a number of fundamental differences between the two audit roles. These are summarised in the
following table:

External Audit Internal Audit

Role and work To express an opinion on the truth and To examine systems and controls and assess
fairness of the annual financial statements. risks in order to make recommendations to
The external auditor will therefore carry out management for improvement. The internal
whatever work he deems necessary to auditor’s work programme will therefore to a
reach that opinion. large extent be dictated by management.
Qualification to act Set out by statute. This ensures that the No statutory requirements – management
external auditor is independent of the entity select a suitably competent person to act as
and suitably qualified internal auditor. It is therefore possible that the
internal auditor may not be as competent as
the external auditor, depending on
management’s recruitment criteria.
Appointed by The shareholders. This ensures Management. In order to give as much
independence. independence as possible the internal auditor
should therefore report to the highest level of
management.
Duties set out by Statute. Management
Report to The shareholders. Management.

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ISA 610 – Using the work of Internal Auditor

Objective:

· Whether the work of IAF can be used?

· If yes, to what areas and what extent
· Evaluate the adequacy of the work

Objective 01:

Evaluate the independence / objectivity, competence and use of systematic disciplined approach

Independence · Appointment -
· Remuneration - Determining the appropriate remuneration policy by
TCWG
· Reporting - Reports to TCWG or an officer with appropriate authority,
or if the function reports to management, whether it has direct
access to TCWG
· Managerial duties - Having managerial or operational duties or
responsibilities that are outside of the internal audit function
· Membership of PB that complies with ethical requirement
Competence · Resources - Whether the function is adequately and appropriately
resourced compare to the size of the entity and the nature of its
operations
· Hiring and training - Established policies for hiring, training
andassigning internal auditors to internal audit engagements
· Technical training - Adequate technical training andproficiency in
auditing
· Industry specific knowledge - Possession of required
knowledgerelating to the entity’s financial reporting and the applicable
financial reporting framework and industry-specific knowledge

· Member of PB - Member of relevant professional bodies that comply

with the relevant professional standards including continuing
professional development requirements
Systematic and · Internal audit work properly planned, supervised, reviewed and
disciplined approach documented
· Appropriate quality control policies and procedures

Objective 02: Which areas and to what extent – depends on

· Judgement – assessing the ROMM, going concern assumption, estimates, disclosure affecting
auditors report
· ROMM
· Organizational policies supporting independence
· Competency

Examples:

· Testing operating effectiveness of IC

· Substantive procedures involving limited judgement
· Observation of inventory count
· Compliance with laws and regulations

Objective 03: Evaluate the adequacy of work

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· The work of the function had been properly planned, performed,supervised, reviewed and
documented;
· Sufficient appropriate evidence had been obtained to enable the function to draw
reasonable conclusions
· Conclusions are appropriate and reports prepared by the function are consistent with the work
performed
· Any exceptions or unusual matters were properly resolved

Perform above procedures through inquiry, observing and review

The external auditor shall also evaluate whether, in aggregate, using the work of the internal audit function to the extentplanned
would sufficient to give the external auditor’s sole responsibility for the audit opinion expressed.
The external auditor shall, in communicating with TCWGan overview of the planned scope and timingand how the external
auditor has planned to use the work of the internal audit function.

Agreeing certain matters in advance should make it more likely that the external auditor will be able to
rely on the work of internal audit. It may therefore be useful for the external auditor to agree the following
in advance with internal audit:
q the timing of such work
q the nature of the work performed
q the extent of audit coverage
q materiality and performance materiality
q methods of item selection and sample sizes
q documentation of work performed
q review and reporting procedures.

Communication with those charged with governance

ISA 610 (Revised) requires the external auditor to communicate the planned use of the work of the
internal audit function to those charged with governance for their understanding of the proposed audit
approach.

Scope 02: Direct Assistance

Objective 01: Whether Direct Assistance can be obtained

Depends on factors such as:

· Organizational policies support independence

· Competency
· Family and personal relationship
· Previous association with any department
· Any financial interest

Objective 02: which areas and to what extent – depends on:

· Judgement
· ROMM
· Independence
· Competence

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Certain areas prohibited by ISA:

· Discussion of fraud risk

· Unannounced audit procedures
· High judgement and ROMM
· relate to work with which the internal auditors have been involved and which has already been, or will be,
reported to management or those charged with governance by the internal audit function; or

Objective 03:

Once the areas determined –

· obtain written agreement from management to not to intervene

· obtain written agreement from internal auditors to keep confidentiality
· The external auditor shall direct, supervise and review the work performed. The nature, timing and
extent will depend on:
o Judgement
o ROMM
o Independence
o Competency

Communication with those charged with governance

· ISA 610 (Revised) requires the external auditor to communicate the planned use of internal audit in
providing direct assistance to those charged with governance

Documentation:

Internal audit function Direct Assistance

· Evaluation of independence, competency and · Evaluation of independence and Competency
systematic and disciplined approach

· basis of decision regarding nature and extent · Basis of decision regarding nature and extent
of work used of work
· Procedures performed to evaluate the · Who reviewed the work, date and extent of
adequacy of work review
· Written agreements

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ISA 620
USING THE WORK OF AN AUDITOR’S EXPERT

SCOPE OBJECTIVE
The auditor’sresponsibilities relating to the work of (a)To determine whether to use the work of an
an individual or organization in a fieldof expertise auditor’s expert; and
other than accounting or auditing, when that work is
(b) If using the work of an auditor’s expert, to
used to assistthe auditor in obtaining sufficient
determine whether that work is adequate for the
appropriate audit evidence.
auditor’s purposes.

ISA 620 does not deal with:

· Where the engagement team includes a member, or consults an individual or organization, with expertise in a
specialized area of accounting or auditing, which are dealt with in ISA 220 or
· The auditor’s use of the work of an individual or organizationpossessing expertise in a field other
thanaccountingorauditing, whose work in that field is used by the entity to assist the entity in preparing
the financial statements (a management’s expert), which is dealt with in ISA 500.

ENGAGEMENT PARTNER RESPONSIBILITY

The Auditor’s Responsibility for the Audit Opinion
If the preparation of the financial statements involves
The auditor has sole responsibility for the audit opinion the use of expertise in a field other than accounting,
expressed, and that responsibility is not reduced by the auditor, who is skilled in accounting and auditing,
the auditor’s use of the work of an auditor’s expert. may not possess the necessary expertise to audit
Nonetheless, if the auditor using the work of an auditor’s those financial statements. The engagement partner
expert, having followed this ISA, concludes that the is required to be satisfied that the engagement team,
work of that expert is adequate for the auditor’s and any auditor’s experts who are not part of the
purposes, the auditor may accept that expert’s findings engagement team, collectively have the appropriate
or conclusions in the expert’s field as appropriate audit competence and capabilities to perform the audit
evidence. engagement

DEFINITIONS
USE OF EXPERT
Expertise in a field other than accounting or auditing
Auditor’s expert
may include expertise in
relation to such matters as: An individual or organization possessing
expertise in a field other than accounting or
• The valuation of complex financial instruments, land
auditing, whose work is used by the auditor to
and buildings,plant and machinery, jewelry, works of
assist the auditor in obtaining SAAE.
art, antiques, intangible assets, assets acquired and
liabilities assumed in business combinations and
assets that may have been impaired.
•The actuarial calculation of liabilities associated Auditor’s internalexpert(who An
with insurancecontracts or employee benefit plans. is a partner or staff, including externalexp
temporary staff, of the firm or a ert
•The estimation of oil and gas reserves. network firm)
•The valuation of environmental liabilities, and site
clean-up costs. Expertise
•The interpretation of contracts, laws and regulations. Skills, knowledge and experience in a
particular field.
•The analysis of complex or unusual tax compliance
issues
Management’s expert
An individual or organization possessing
expertise in a field other than accounting or
auditing, whose work is used by the entity in
preparing the FS.

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REQUIREMENTS
a. Determining the Need for an Auditor’s Expert
If expertise in a field other than accounting or auditing is necessary to obtain SAAE, the auditor shall determine
whether to use the work of an auditor’s expert.

A1An expert may be needed to A2The ROMM may increase A3The auditor may determine
assist the auditor in the when expertise in a field other that it is necessary, or may
following: than accounting is needed for choose, to use an auditor’s
• Obtaining an understanding of management to prepare the expert to assist in obtaining
the entity and its environment, FS, for example, SAAE. Considerations when
including its internal control. deciding whether to use an
auditor’s expert may include:
• Identifying and assessing the • Because this may indicate
ROMM. some complexity, or; • Whether management has
used a management’s expert
• Determining and implementing • Because management may
in preparing the FS.
overall responses to assessed not possess knowledge of
risks at theFSlevel. the field of expertise. • The nature and significance of
the matter, including its
• Designing and performing further If in preparing the FS
complexity.
audit procedures to respond to management does not possess
assessed risks at the assertion the necessary expertise, • The ROMM in the matter.
level, comprising tests of amanagement’s expert may • The expected nature of
controls or substantive be used in addressing those procedures to respond to
procedures. risks. Relevant controls, identified risks, including the
• Evaluating the SAAE obtained including controls that relate to auditor’s knowledge of and
informing an opinion on the FS. the work of a management’s experience with the work of
expert, if any, may also reduce experts in
the ROMM. relation to such matters; and the
availability of alternative
sources of audit evidence.

A3iWhen management has used a management’s expert in preparing the financial

statements, the auditor’s decision on whether to use an auditor’s expert may also be
influenced by such factors as:
•The nature, scope and objectives of the management’s expert’s work.
•Whether the management’s expert is employed by the entity, or is a partyengaged by it to
provide relevant services.
•The extent to which management can exercise control or influence over thework of the
management’s expert.
•The management’s expert’s competence and capabilities.
•Whether the management’s expert is subject to technical performancestandards or other
professional or industry requirements
• Any controls within the entity over the management’s expert’s work.

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The Competence, Capabilities and Objectivity of the Auditor’s Expert

The auditor shall evaluate whether the auditor’s expert has the necessary competence, capabilities and
objectivity for the auditor’s purposes. In the case of an auditor’s external expert, the evaluation of objectivity
shall include inquiry regarding interests and relationships that may create a threat to that expert’s
objectivity. CCO are factors that significantly affect whether the work of the auditors expert will be adequate
for the auditors purpose

The Competence, Capabilities and

Objectivity of the Auditor’s Expert

Competence Capabilities Objectivity

Capability relates to the ability of

the auditor’s expert to exercise
that competence in the Objectivity relates to the
Competence relates to the nature circumstances of the possible effects that bias,
and level of expertise of the engagement. Factors that conflict of interest, or the
auditor’s expert. influence capability may influence of others may have on
include, geographic location, the professional or business
and the availability of time and judgment of the auditor’s expert.
resources.

How to evaluate the competence, capabilities and objectivity of the auditor’s expert.

Matters relevent for evaluating the competence,

capabilities of the auditor’s expert includes: SPECIFIC PROCEDURES FOR
OBJECTIVITY
• Technical performance standards or other
professional or industry requirements for example, (a) Inquire of the entity about any known
ethical standards and other membership interests or relationships that the entity has with
requirements of a professional body or industry the auditor’s external expert that may affect that
association, accreditation standards of a licensing expert’s objectivity.
body, or requirements imposed by law or (b) Discuss with that expert any applicable
regulation. safeguards, including any professional
• The relevance of the auditor’s expert’s competence requirements that apply to that expert; and
to the matter for which that expert’s work will be evaluate whether the safeguards are
used, including any areas of specialty within that adequate to reduce threats to an acceptable
expert’s field. For example, actuary specialize in level. Interests and relationships that it may be
property and casualty insurance, but have limited relevant to discuss with the auditor’s expert
expertise regarding pension calculations. include:

• The auditor’s expert’s competence with respect to • Financial interests.

relevant accounting and auditing requirements, for • Business and personal relationships.
example, knowledge of assumptions and
methods, including models where applicable, • Provision of other services by the expert,
that are consistent with the applicable financial including by the organization in the case
reporting framework. of an external expert that is an
organization.
• Whether unexpected events, changes in conditions, or
the audit evidence obtained from the results of audit In some cases, it may also be appropriate for
procedures indicate that it may be necessary to the auditor to obtain a written representation
reconsider the initial evaluation of the competence, from the auditor’s external expert about any
capabilities and objectivity of the auditor’s expert as the interests or relationships with the entity of
audit progresses. which that expert is aware.

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A broad range of circumstances may threaten objectivity, for example, self-interest threats, advocacy threats,
familiarity threats, self-review threats, and intimidation threats. Safeguards may eliminate or reduce such
threats, and may be created by external structures (for example, the auditor’s expert’s profession, legislation or
regulation), or by the auditor’s expert’s work environment (for example, quality control policies and procedures).
There may be some circumstances in which safeguards cannot reduce threats to an acceptable level, for
example, if a proposed auditor’s expert is an individual who has played a significant role in preparing the
information that is being audited, that is, if the auditor’s expert is a management’s expert.

Information regarding the competence, capabilities and objectivity of an auditor’s expert may come from a
variety of sources

Knowledge of that
Discussions expert’s Published
Personal with other qualifications, The auditor’s papers or
experience Discussions auditors or membership of a firm’s quality books
with previous with that others who are professional body or control policies written by
work of that expert. familiar with that industry association, and procedures that
expert. expert’s work. license to practice, expert.
or other forms of
external recognition.

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Obtaining an Understanding of the Field of Expertise of the Auditor’s Expert

The auditor shall obtain a sufficient understanding of the field of expertise of the auditor’s expert to enable the
auditor to:

Determine the nature, scope and objectives of the Evaluate the adequacy of work performed by experts.
expert’s work

HOW AUDITOR CAN OBTAIN SUFFICIENT

U/S OF THATFIELD WITHOUT AUDITOR WHAT U/S NEED TO OBTAIN
EXPERT Aspects of the auditor’s expert’s field relevant to the
An auditor who is not an expert in a relevant field auditor’s understanding may include:
other than accounting or auditing may • Whether that expert’s field has areas of specialty within
nevertheless be able to obtain a sufficient it that arerelevant to the audit
understanding of that field to perform the audit
• Whether any professional or other standards, and
without an auditor’s expert. This understanding
regulatory or legalrequirements apply.
may be obtained through, for example:
• What assumptions and methods, including models where
• Experience in auditing entities that require applicable, areused by the auditor’s expert, and whether they are
such expertise in thePreparation of their financial generally accepted within that expert’s field and appropriate for
statements. financial reporting purposes.
• Education or professional development in the • The nature of internal and external data or information the
particular field. auditor’s expertuses.
• Discussion with auditors who have performed
similar engagements.

Agreement with the Auditor’s Expert

The auditor shall agree, in writing when appropriate, on the below mentioned matters with the auditor’s expert

The nature, timing and extent The need for the

Nature, scope and Roles and of communication between auditor’s expert to
objectives of the responsibilities of the auditor and expert, including observe
expert’s work auditor and expert the form of any report to be confidentiality
provided by the expert requirements.

FACTORS SUGGEST THE NEED FOR A

Agreement on the respective roles Agreement on the respective MORE DETAILED AGREEMENT IN
and responsibilities of the auditor roles and responsibilities of WRITTING
and theauditor’s expert may include: the auditor and the auditor’s
• Whether the auditor or the auditor’s The auditor’s expert will have access to
expert may also include sensitive or confidential entityinformation.
expert will perform detailed testing
agreement about access to, and
ofsource data. •The respective roles or responsibilities of
retention of, each other’s the auditor and the auditor’sexpert are
• Consent for the auditor to discuss
the auditor’s expert’s findings working papers. When the different from those normally expected.
orconclusions with the entity and auditor’s expert is a member of
•Multi-jurisdictional legal or regulatory
others, and to include details of that the engagement team, that
requirements apply.
expert’s findings or conclusions in the expert’s working papers form
basis for a modified opinion in the part of the audit documentation. •The matter to which the auditor’s expert’s work
auditor’s report, if necessary. relates is highly complex.
Subject to any agreement to the
• Any agreement to inform the contrary, auditor’s external •The auditor has not previously used work
auditor’s expert of the auditor’s performed by that expert.
experts’ working papers are
conclusions concerning that expert’s
their own and do not form part •The greater the extent of the auditor’s expert’s
work.
of the audit documentation work, and its significancein the context of the
audit.

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Objective 2
Evaluating the Adequacy of the Auditor’s Expert’s Work

a) The auditor shall evaluate the adequacy of the auditor’s expert’s work for the auditor’s purposes, including

If the expert’s use If the expert’s use source

significant assumptions data that is significant to
The relevance and reasonableness of the expert’s and methods, the that expert’s work, the
findings or conclusions, and their consistency with relevance and relevance, completeness,
other audit evidence reasonableness of those and accuracy of that
assumptions and methods source data.

Relevant factors when

When an
Specific procedures evaluating the relevance
and reasonableness of the When an auditor’s auditor’s expert’s
Specific procedures to findings or conclusions of expert’s work involves work involves the
evaluate the adequacy of the auditor’s expert, whether the use of significant use of source
the auditor’s expert’s work in a report or other form, assumptions and data that is
for the auditor’s purposes may include whether they methods, factors significant to that
may include: are: relevant to the auditor’s expert’s work,
•Inquiries of the auditor’s • Presented in a manner that evaluation of those procedures such
expert. is consistent with any assumptions and as the following
•Reviewing the auditor’s standards of theauditor’s methods include may be used to
expert’s working papers expert’s profession or whether they are: test that data:
and reports. industry;
• Clearly expressed, including •Generally accepted • Verifying the
•Corroborative procedures, within the auditor’s origin of the data,
reference to the objectives
such as: expert’s field; including obtaining
agreed with theauditor, the
Observing the auditor’s scope of the work performed an understanding
•Consistent with the
expert’s work; and standards applied; of,and where
requirements of the
Examining published • Based on an appropriate applicable financial applicable testing,
data, such as statistical period and take into account reporting framework; the internal
reports fromreputable, subsequent events,where controls over the
authoritative sources; relevant; •Dependent on the use data and, where
• Subject to any reservation, of specialized models; relevant, its
Confirming relevant
limitation or restriction on and transmission to the
matters with third parties;
use, and if so,whether this •Consistent with those expert.
Performing detailed
has implications for the of management, and if
analytical procedures; and • Reviewing the
auditor; and not, the reason for,
Re-performing • Based on appropriate data for
andeffects of, the completeness and
calculations. consideration of errors or differences internal
deviations encounteredby the
auditor’s expert. consistency.

b) If the auditor determines that the work of the auditor’s expert is not adequateforthe auditor’s purposes, the
auditor shall

Agree with the expert on the

Perform additional audit
nature and extent of further
work to be performed by that OR procedures appropriate to
the circumstances
expert

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If the auditor concludes that the work of the expert is not adequate for the auditor’s purposes and the auditor
cannot resolve the matter through the additional audit procedures, which may involve further work being
performed by both the expert and the auditor, or include employing or engaging another expert, it may be
necessary to express a modified opinion in the auditor’s report in accordance with ISA 705 because the
auditor has not obtained sufficient appropriate audit evidence.

Nature, Timing and Extent of Audit Procedures For Objective 1

In determining the nature, timing and extent of those procedures, theauditor shall consider;
and 2

Whether that
The significance
The ROMM in the Previous expert is subject
The nature of the of that expert’s
matter to which that knowledge and to the auditor’s
matter to which that work in the
expert’s experience the firm’s quality
expert’s work relates context of the
workrelates expert controlpolicies
audit
and procedures.

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REFERENCE TO THE AUDITOR’S EXPERT IN

THE AUDITOR’S REPORT

Yes
No

Modification?

Yes No

The auditor shall not refer to the

Relevant to an understanding work of an auditor’s expert in an
Required by law or auditor’s report containing an
of a modification to the
regulation
auditor’s opinion unmodified opinion unless
required by law or regulation to do
so.

The auditor may need the

permission of the expert
before making such a
reference.

The auditor shall indicate in the auditor’s report that the above
references do not reduce the auditor’s responsibility for the
auditor’s opinion.

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ISA 620 – USING the Auditor expert

Auditor Expert: An individual or organization possessing expertise in a field other than accounting
or auditing, whose work is used by the auditor to assist the auditor in obtaining SAAE

Use of Expert: Valuation of complex financial instruments, land and building, plant and
machinery, intangible asset, business combination, estimation of oil and gas reserves
Objective 01: To determine whether to use the work of an Expert – Assessing the need
for an expert

· The nature, significance and Complexity of the matter

· ROMM
· Whether management expert is used
o Nature and scope of ME
o Employed or engaged
o Management influence ME
o Competence and capability

Objective 02: Evaluate the Competency, Capability and Independence of Auditor expert
Competency and Capability Independence / Objectivity
· Technical professional standards or other · Inquire about any interest or relationship
professional or industry requirement such as financial interest, business and
· Competency to the matter for which the personal relationship and providing any
work will be used other services to the client
· Expertise related to auditing and
accounting
INFORMATION CAN BE OBTAINED REGARDING COMPETENCY, CAPABILITY AND
INDEPENDENCE
· Personal experience with expert
· Discussion with expert
· Discussion with other auditors
· Knowledge of that expert qualification
· Published papers or books written by that expert

Obtain and understanding of the field of expertise of the Auditor’s expert

· To determine the nature, scope and objective of the expert work

· Evaluate the adequacy of work performed by expert
Agreement with auditor’s expert
· Nature, scope and objectives of the expert’s work
· Roles and responsibilities of the auditor and expert
· The nature, timing and extent of communication between auditor and expert, including
the form of any report to be provided by the expert
· The need for the auditor’s expert to observe confidentiality requirements.

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Objective 03 : Evaluate the adequacy of expert work

Relevance and reasonableness of the · Inquiry, review, recalculation, analytical

expert finding procedures, reperformance and
observation
Relevance and reasonableness of · Consistent with the requirement of IFRS
assumptions
Relevance, completeness and accuracy of · Test controls over data
source data · Review the data for completeness and
internal consistency
Nature timing and extent of audit procedures depends on
· ROMM
· Significance of expert work
· Previous knowledge and experience

IF EXPERT WORK IS NOT ADEQUATE

· Agree with the expert on the nature and extent of further work to be performed by that
expert
· Perform additional audit procedures
o Auditor itself perform procedures
o Engage another auditor expert
· If any of the above 2 procedures could not be performed then this is the scope limitation
and assess the impact on audit report based on ISA 705

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REFERENCE TO THE AUDITOR’S EXPERT IN

THE AUDITOR’S REPORT

Yes
No

Modification?

Yes No

The auditor shall not refer to the

work of an auditor’s expert in an
Relevant to an understanding
Required by law or auditor’s report containing an
of a modification to the
regulation
auditor’s opinion unmodified opinion unless
required by law or regulation to do
so.

The auditor may need the

permission of the expert
before making such a
reference.

The auditor shall indicate in the auditor’s report that the above
references do not reduce the auditor’s responsibility for the
auditor’s opinion.

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Deloitte.
Deloitte Yousuf Adil
Chartered Accountants
Cavish Court, A-35, Block 7 & 8
KCHSU, Shahrah-e-Faisal
Karachi-75350
Pakistan

Tel: +92 (O) 21 3454 6494-7

Fax: +92 (O) 21- 3454 1314

www.deloitte.com

Independent auditors' report to the unit holders

Report on the financial statements

We have audited the accompanying financial statements of Primus Investment Management

Limited - Daily Reserve Fund (the Fund), which comprise the statement of assets and liabilities as at
June 30, 2016, and the related income statement, statement of comprehensive income, distribution
statement, statement of movements in unit holders' fund and cash flow statement for the year then
ended, and a summary of significant accounting policies and other explanatory information.

Management Company's responsibility for the financial statements

Primus Investment Management Limited (the Management Company) is responsible for the preparation
and fair presentation of these financial statements in accordance with the approved accounting
standards as applicable In Pakistan, and for such internal control as Management Company determines
is necessary to enable the preparation of financial statements that are free from material misstatement,
whether due to fraud or error.

Auditors' responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We
conducted our audit in accordance with auditing standards as applicable in Pakistan. Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the financial statements. 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 Fund's
preparation and fair presentation of the financial statements 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 Fund's internal control. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by management, as well
as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.

Opinion

In our opinion, the financial statements give a true and fair view of the financial position of the Fund as
at June 30, 2016, and of Its financial performance, its cash flows and transactions for the year then
ended, In accordance with approved accounting standards as applicable in Pakistan.

Member of
Deloitte Touche Tohmatsu Limited

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Deloitte Deloitte Yousuf Adil

Chartered Accountants

Report on other legal and regulatory requirements

In our opinion, the financial statements have been prepared in accordance with the relevant provisions of the
Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 and Non-Banking Finance
Companies and Notified Entities Regulations, 2008.

deti,,� 'A,)ff'-6 �
Chartered AccouniJs v

Engagement Partner:
Naresh Kumar

Date: August 9, 2016

Place: Karachi

Member of
Deloitte Touche Tohmatsu Limited

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ISA 700 (revised)

FORMING AN OPINION AND REPORTING ON FINANCIAL
STATEMENTS

SCOPE OBJECTIVE

· This ISA deals with the auditor’s a) To form an opinion on the FS based
responsibility to form an opinion on the on an evaluation of the conclusions
financial statements. It also deals with the drawn from the audit evidence
form and content of the auditor’s report obtained; and
b) To express clearly that opinion through a
issued as a result of an audit of FS.
written report.

General purpose financial statements

Financial statements preparedin accordance with a general purpose framework.

D General purpose framework

E A financial reporting framework designed to meet the common financial information needs of a wide
F range of users. The financial reporting framework may be a fair presentation framework or a
compliance framework.
I
The term “fair presentation framework” is used to refer to a financial reporting framework that requires
N compliance with the requirements of the framework and:
A i. Acknowledges explicitly or implicitly that, to achieve fairpresentation of the FS, it may
T be necessary for management to provide disclosures beyond those specifically required
by the framework; or
I
O ii. Acknowledges explicitly that it may be necessary for management to depart from a
requirement of the framework to achieve fair presentation of the FS. Such departures
N are expected to be necessary only in extremely rare circumstances.
The term “compliance framework” is used to refer to a financial reporting framework that requires
compliance with the requirements of the framework, but does not contain the acknowledgements in (i)
or (ii) above.

Unmodified opinion
The opinion expressed by the auditor whenthe auditor concludes that the FS are prepared, in all
material respects, in accordance with the applicable financial reporting framework.

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Forming an Opinion on the Financial Statements

The auditor shall form an opinion on whether the financial statements are prepared, in all material respects, in
accordance with the applicable financial reporting frameworkIn order to form that opinion, the auditor shall
conclude as to whether the auditor has obtained reasonable assurance about whether the FS as a whole
are free from material misstatement, whether due to fraud or error.
That conclusion shall take into account:

The auditor’s conclusion in

The auditor’s conclusion accordance ISA 450, whether
in accordance with ISA uncorrected misstatements
330, whether SAAE has are material, individually or
been obtained in aggregate The evaluations

Evaluate the requirements of the applicable

financial reporting framework:
FS are prepared, (a) The FS appropriately disclose the Evaluate whether the FS Evaluate whether the
in accordance significant accounting policies selected achieve fair presentation. FS adequately refer to
with the and applied. Include consideration of: or describe the
requirements of (b) The accounting policies selected and applicable financial
the applicable (a) The overall
applied are consistent with the reporting framework.
presentation, structure
financial reporting applicable financial reporting framework; and content of the FS;
framework.
(c) The accounting estimates made by and
management are reasonable;
(d) The information presented in the FS is (b) Whether the FS For example
For example relevant, reliable, comparable, and represent Not only compliance with
· Judgments
understandable. In making this theunderlyingtransacti the framework but also
evaluation, the auditor shall consider ons and events in a disclose explicitly or
· Accounting practices
whether manner that achieves implicitly necessary
fair presentation. information
• The information that should have
· Accounting been included has been included and
estimates whether such information is
appropriately classified, aggregated or
disaggregated, and characterized. FS is presented in a clear andconcise manner.

• The overall presentation of the FS has The placement of significant disclosures gives
been undermined by including appropriateprominence to them
information that is not relevant or that
obscures a proper understanding of
the matters disclosed. For example

(e) The FS provide adequate disclosures to · Transactions or events that do not meet the criteria for
enable the intended users to understand recognition established by the applicable financial
the effect of material transactions and reporting framework.
events on the information conveyed in · The nature and extent of ROMM arisingfrom transactions
the FS; and and events.
· The methods used and the assumptions and judgments
(f) The terminology used in the FS, made, and changes to them, that affect amounts
including the title of each FS, is presented orotherwise disclosed, including relevant
appropriate. sensitivity analyses.

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Forming of Opinion
When FS are prepared, in
accordance with the
applicable financial
reporting framework

Unmodified opinion

FS as a whole are not free

from material misstatement

OR

Yes No Unable to obtain SAAE

Auditor shall modify the

opinion in the auditor’s
report in accordance with
ISA 705 (Revised).
End Modification

If FS prepared in accordance with the requirements of a fair presentation framework do not achieve fair presentation,
the auditor shall discuss the matter with management and, depending on the requirements of the applicable financial
reporting framework and how the matter is resolved, shall determine whether it is necessary to modify the opinion in the
auditor’s report in accordance with ISA 705 (Revised).
When the FS are prepared in accordance with a compliance framework, the auditor is not required to evaluate
whether the FS achieve fair presentation. However, if in extremely rare circumstances the auditor concludes that such
FS are misleading, the auditor shall discuss the matter with management and, depending on how it is resolved, shall
determine whether, and how, to communicate it in the auditor’s report.

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Auditor’s Report

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

Addressee The auditor’s report shall be addressed, as appropriate, based on the

circumstances of the engagement.The auditor’s report is normally 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

Auditor’s Opinion The Opinion section of the auditor’s report includes:

a) Identify the entity whose FS have been audited;
b) State that the FS have been audited;
c) Identify the title of each statement comprising the FS;
d) Refer to the notes, including the summary of significant
accountingpolicies; and
e) Specify the date of, or period covered by, each FS comprising the FS.
When expressing an unmodified opinion on FS, the auditor’s opinion shall,
unless otherwise required by law or regulation, use one of the following
phrases, which are regarded as being equivalent:
a) In our opinion, the accompanying FS present fairly, in all material
respects, […] in accordance with [the applicable financial
reporting framework]; or

b) In our opinion, the accompanying FS give a true and fair view of […] in
accordance with [the applicable financial reporting framework]. (Ref:
Para. A24-A31)
When expressing an unmodified opinion on FS prepared in accordance with a
compliance framework, the auditor’s opinion shall be that the accompanying financial
statements are prepared, in all material respects, in accordance with [the applicable
financial reporting framework]. (Ref: Para. A26-A31)

If the reference to the applicable financial reporting framework in the auditor’s

opinion is not to IFRSs, the auditor’s opinion shall identify the jurisdiction of origin of the
framework.

Basis for Opinion The auditor’s report shall include a section, directly following the Opinion
section, with the heading “Basis for Opinion”, that:
a) States that the audit was conducted in accordance with ISA;
b) Refers to the section of the auditor’s report that describes the auditor’s
responsibilities under the ISAs;
c) Includes a statement that the auditor is independent of the entity
inaccordance with the relevant ethical requirements relating to the audit,
and has fulfilled the auditor’s other ethical responsibilities in accordance with
these requirements. The statement shall identify the jurisdiction of origin of
the relevant ethical requirements or refer to the International Ethics
Standards Board for Accountants’ Code of Ethics for Professional
Accountants; and
d) States whether the auditor believes that the audit evidence the auditor has
obtained is sufficient and appropriate to provide a basis for the auditor’s
opinion.

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Going Concern Where applicable, the auditor shall report in accordance with ISA 570
(Revised).
· If adequate disclosure about the MATERIAL UNCERTAINITY is made in
the financial statement, the auditor shall express an unmodified
opinion and the auditor’s report shall include a separate section under
the heading “ MATERIAL UNCERTAINITY RELATIN TO GOING CONCERN”
to:
-Draw attention to note to the FS that disclose the matter
- State that these events or condition indicate that a material uncertainty exist
that may cast significant doubt on the entity’s ability to continue as a going
concern and
-that auditor opinion is not modified in respect of this matter.

Key Audit Matters For audits of complete sets of general purpose FS of listed entities, the auditor
shall communicate key audit matters in the auditor’s report in accordance with
ISA 701.
When the auditor is otherwise required by law or regulation or decides to
communicate key audit matters in the auditor’s report, the auditor shall do so
in accordance with ISA 701.
· Key audit matters are those matters that, in the auditor’s professional
judgment, were of most significance in the audit of the financial statements
[of the current period];and
· These matters were addressed in the context of the audit of thefinancial
statements as a whole, and in forming the auditor’s opinion thereon, and the
auditor does not provide a separate opinion on these matters.
· Include a reference to the related disclosure if any;
· Whythe matter was considered to be one of most significance in theaudit and
therefore determined to be a key audit matter; and
· How the matter was addressed in the audit

Other Information Where applicable, the auditor shall report in accordance with ISA 720
(Revised).

Responsibilities for The auditor’s report shall include a section with a heading “Responsibilities of
the Financial Management for the FS.”.
Statements This section of the auditor’s report shall describe management’s
responsibility for:
a) Preparing the FS in accordance with the applicablefinancial reporting
framework, and for such internal control as management determines is
necessary to enable the preparation of FS that are free from material
misstatement, whether due to fraud or error; and

b) Assessing the entity’s ability to continue as a going concern and whether

the use of the going concern basis of accounting is appropriate as
well as disclosing, if applicable, matters relating to going concern. The
explanation of management’s responsibility for this assessment shall
include a description of when the use of the going concern basis of

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accounting is appropriate.
This section of the auditor’s report shall also identify those responsible for the
oversight of the financial reporting process, when those responsible for such
oversight are different from those who fulfill the responsibilities
When the FS are prepared in accordance with a fair presentation
framework, the description of responsibilities for the financial statements in the
auditor’s report shall refer to “the preparation and fair presentation of these
financial statements” or “the preparation of financial statements that give a
true and fair view,” as appropriate in the circumstances.
Auditor’s The auditor’s report shall include a section with the heading “Auditor’s
Responsibilities for Responsibilities for the Audit of the FS.”
the Audit of the
Financial This section of the auditor’s report shall:
Statements
a) State that the objectives of the auditor are to:
I. Obtain reasonable assurance about whether the FS as a whole are
free from material misstatement, whether due to fraud or error; and
II. Issue an auditor’s report that includes the auditor’s opinion.

b) State that reasonable assurance is a high level of assurance, but is nota

guarantee that an audit conducted in accordance with ISAs willalways
detect a material misstatement when it exists; and
c) State that misstatements can arise from fraud or error, and either:
I. Describe that they are considered material if, individually orin the
aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these FS; or
II. Provide a definition or description of materiality inaccordance
with the applicable financial reporting framework.
The Auditor’s Responsibilities for the Audit of the FS section of the auditor’s
report shall further:
a) State that, as part of an audit in accordance with ISAs, the auditorexercises
professional judgment and maintains professionalskepticism
throughout the audit

b) Describe an audit by stating that the auditor’s responsibilities are:

I. To identify and assess the ROMM ofthe FS, whether due to fraud or
error; to design and perform audit procedures responsive to those risks;
and to obtain audit evidence that is sufficient and appropriate to provide a
basis for the auditor’s opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting from
error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.

II. To obtain an understanding of internal control relevant to the audit 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. 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 FS, the auditor shall omit the phrase
that the auditor’s consideration of internal control is not for the purpose
of expressing an opinion on the effectiveness of the entity’s internal
control.

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III. To evaluate the appropriateness of accounting policies used and the

reasonableness of accounting estimates and related disclosures made by
management.

IV. To conclude 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 entity’s ability to continue as a going concern. If the auditor
concludes that a material uncertainty exists, the auditor is required to
draw attention in the auditor’s report to the related disclosures in the FS
or, if such disclosures are inadequate, to modify the opinion. The
auditor’s conclusions are based on the audit evidence obtained up to the
date of the auditor’s report. However, future events or conditions may
cause an entity to cease to continue as agoing concern

V. When the FS are prepared in accordance witha fair presentation

framework, to evaluate the overall presentation, structure and content
of the FS, including the disclosures, and whether the FS represent the
underlying transactions and events in a manner that achieves fair
presentation

c) When ISA 600 applies, further describe the auditor’sresponsibilities in a

group audit engagement by stating that:

I. The auditor’s responsibilities are to obtain SAAE regarding the

financial information of the entities or business activities within the
group to express an opinion on the group FS;

II. The auditor is responsible for the direction, supervision and

performance of the group audit; and

III. The auditor remains solely responsible for the auditor’s opinion
The Auditor’s Responsibilities for the Audit of the FS section of the auditor’s
report also shall:
a) State that the auditor communicates with TCWGregarding, among
other matters, the planned scope and timing of the audit and significant
audit findings, including any significant deficiencies in internal control that
the auditor identifies during the audit;

b) For audits of FS of listed entities, state that theauditor provides TCWG

with a statement that the auditor has complied with relevant ethical
requirements regarding independence and communicate with them all
relationships and other matters that may reasonably be thought to bear
on the auditor’s independence, and where applicable, related safeguards;
and

c) For audits of FS of listed entities and any otherentities for which key audit
matters are communicated in accordance with ISA 701, state that, from the
matters communicated with TCWG, the auditor determines those matters
that were of most significance in the audit of the FS of the current period
and are therefore the key audit matters. The auditor describes these
matters in the auditor’s report unless law or regulation precludes public
disclosure about the matter or when, in extremely rare circumstances, the
auditor determines that a matter should not be communicated in the

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auditor’s report because the adverse consequences of doing so would

reasonably be expected to outweigh the public interest benefits of such
communication.
Location of the The description of the auditor’s responsibilities (see italic and underline one in
description of the the preceding paragraph) for the audit of the FS shall be included:
auditor’s
a) Within the body of the auditor’s report;
responsibilities for
the audit of the
b) Within an appendix to the auditor’s report, in which case
financial statements
theauditor’s report shall include a reference to the location of
theappendix; or

c) By a specific reference within the auditor’s report to the location ofsuch

a description on a website of an appropriate authority, wherelaw,
regulation or national auditing standards expressly permit the auditor to
do so.
When the auditor refers to a description of the auditor’s responsibilities on a
website of an appropriate authority, the auditor shall determine that such
description addresses, and is not inconsistent with, the requirements of this
ISA.

Other Reporting If the auditor addresses other reporting responsibilities in the auditor’s
Responsibilities report on the FS that are in addition to the auditor’s responsibilities under
the ISAs, these other reporting responsibilities shall be addressed in a
separate section in the auditor’s report with a heading titled “Report on Other
Legal and Regulatory Requirements” or otherwise as appropriate to the
content of the section, unless these other reporting responsibilities address
the same topics as those presented under thereporting responsibilities
required by the ISAs in which case the other reporting responsibilities may
be presented in the same section as the related report elements required by
the ISAs.
If other reporting responsibilities are presented in the same section as the
related report elements required by the ISA, the auditor’s report shall
clearly differentiate the other reporting responsibilities from the reporting that is
required by the ISAs.
If the auditor’s report contains a separate section that addresses other
reporting responsibilities, the content as mentioned above shall be included
under a section with a heading “Report on the Audit of the Financial
Statements.” The “Report on Other Legal and RegulatoryRequirements” shall
follow the “Report on the Audit of the Financial Statements.”

Name of the The name of the engagement partner shall be included in the auditor’s
Engagement Partner report for audits of complete sets of general purpose FS of listed entities
unless, in rare circumstances, such disclosure is reasonably expected to
lead to a significant personal security threat. In the rare circumstances
that the auditor intends not to include the name of the engagement partner
in the auditor’s report, the auditor shall discuss this intention with TCWG to
inform the auditor’s assessment of the likelihood and severity of a significant
personal security threat.

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Signature of the The auditor’s report shall be signed. The auditor’s signature is either in the name
Auditor of audit firm, the personal name of the auditor or both, as appropriate for the
particular jurisdiction. In
addition to the auditor’s signature, in certain jurisdictions, the auditor may be
required to declare in the auditor’s report 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.

Auditor’s Address The auditor’s report shall name the location in the jurisdiction where the
auditor practices.
Date of the Auditor’s The auditor’s report shall be dated no earlier than the date on which the
Report auditor has obtained SAAE on which to base the auditor’s opinion on the FS,
including evidence that:
a) All the statements and disclosures that comprise the FS have been
prepared
b) Those with the recognized authority have asserted that they havetaken
responsibility for those FS.
The date of the auditor’s report informs the user of the auditor’s report that the auditor
has considered the effect of events and transactions of which the auditor became aware
and that occurred up to that date.

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Types of Financial Statement

GENERAL PURPOSE FINANCIAL SPECIAL PURPOSE FINANCIAL

STATEMENT STATEMENT

Financial statement prepared in Financial statement prepared in

accordance with General Purpose accordance with the special purpose

GENERAL PURPOSE FRAMEWORK SPECIAL PURPOSE FRAMEWORK

A financial reporting framework designed A financial reporting framework designed to

to meet the common financial information meet the financial information needs of
needs of a wide range of users. specific users.Eg. tax basis of accounting
that accompany an entity tax return, cash
The financial reporting framework may be receipt and disbursement basis of accounting
fair presentation framework or compliance for creditors, financial reporting provision
framework established by regulator, financial reporting
provision of a contract.
The financial reporting framework may be fair
Fair Presentation Framework
The term “fair presentation framework” is used to refer to a
financial reporting framework that requires compliance with
the requirements of the framework and: Compliance framework
(i) Acknowledges explicitly or implicitly that, to achieve The term “compliance framework” is used
fairpresentation of the financial statements, it may be
to referto a financial
necessary for management to provide disclosures beyond
those specifically required by the framework; or reporting framework that requires
compliance with the requirements
(ii) Acknowledges explicitly that it may be necessary of the framework, but does not contain the
formanagement to depart from a requirement of the
framework to achieve fair presentation of the financial
acknowledgements in (i) or (ii) (see fair
statements. Such departures are expected to be necessary presentation framework
only in extremely rare circumstances.

REPORTING IMPLICATIONS

Fair presentation framework Compliance framework

When expressing an unmodified opinion on financial
(a) In our opinion, the accompanying financial
statements prepared in accordance with a compliance
statements present fairly, in all material respects,
framework, the auditor’s opinion shall be
[…] in accordance with [the applicable financial
that the accompanying financial statements are
reporting framework]; or
prepared, in all material respects, in accordance with
(b) In our opinion, the accompanying financial [the applicable financial reporting framework].
statements give a true and fair view of […] in
accordance with [the applicable financial reporting
framework].

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AUDITORS REPORT FOR THE AUDIT CONDUCTED IN ACCORDANCE WITH BOTH AUDITING STANDARDS
OF A SPECIFIC JURISDICTION ANDINTERNATIONAL STANDARD ON AUDITING

An auditor may be required to conduct an audit in accordance with the auditing

standards ofa specificjurisdiction (the “national auditing standards”), and has
additionally complied with the ISAs in the conduct of the audit. If this is the case, the
auditor’s report may refer to International Standards on Auditing in addition to the national
auditing standards, but the auditor shall do so only if:

(a)There is no conflict between the requirements in The auditor’s report includes, minimum
the national auditing standards and those in ISAs content of the audit report,when the auditor
that would lead the auditor (i) to form a different uses the layout or wording specified bythe
opinion, or(ii) not to include an Emphasis of Matter national auditing standards.
paragraph or Other Matter paragraph that, in
the particular circumstances, is required by ISAs;
and

If there is a conflict, the auditor’s report

refers only to the auditing standards
either ISA or national auditing standards
in accordance with which the auditor’s
report has been prepared

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REFERENCE TO MORE THAN ONE FINANCIAL REPORTING FRAMEWORK

· In some cases, the financial statements may represent that they are prepared in accordance with
two financial reporting frameworks (e.g., the national framework and IFRSs). This may be
because management is required, or has chosen, to prepare the financial statements in
accordance with both frameworks, in which case both are applicable financial reporting
frameworks. Such description is appropriate only if the financial statements comply with each of
the frameworks individually. To be regarded as being prepared in accordance with both
frameworks, the financial statements need to comply with both frameworks simultaneously and
without any need for reconciling statements. In practice, simultaneous compliance is unlikely
unless the jurisdiction has adopted the other framework (e.g., IFRSs) as its own national
framework, or has eliminated all barriers to compliance with it.

· Financial statements that are prepared in accordance with one financial reporting framework
and that contain a note or supplementary statement reconciling the results to those that
would be shown under another framework are not prepared in accordance with that other
framework. This is because the financial statements do not include all the information in the
manner required by that other framework.
· The financial statements may, however, be prepared in accordance with one applicable financial
reporting framework and, in addition, describe in the notes to the financial statements the extent
to which the financial statementscomply with another framework (e.g., financial statements
prepared in
accordance with the national framework that also describe the extent to which they comply
with IFRSs). Such description may constitute supplementary financial information as
discussed in UNAUDITED SUPPLEMENTARY INFORMATION and is covered by the
auditor’s opinion if it cannot be clearly differentiated from the financial statements

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SUPPLEMENTARY INFORMATION PRESENTED WITH THE FINANCIAL STATEMENT

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AUDITORS REPORT PRESCRIBED BY LAW OR REGULATION

If the auditor is required by law or regulation of a specific jurisdiction to use a specific

layout, or wording of the auditor’s report, the auditor’s report shall refer to International
Standards on Auditing only if the auditor’s report includes, at a minimum, each of the
following elements

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INFORMATION REQUIRED BY ISA 701

. Law or regulation may require the auditor to provide additional information about the audit that was
performed, which may include information that is consistent with the objectives of ISA 701, or may
prescribe the nature and extent of communication about such matters.

The ISAs do not override law or regulation that governs an audit of financial statements. When ISA
701 is applicable, reference can only be made to ISAs in the auditor’s report if it is not inconsistent.

For examples:

.Where law or regulation

.Explaining why the information
prescribes the nature and
required by law or regulation
Modifying the heading extent of thedescription,
isbeing provided in the auditor’s supplementing the
“Key Audit Matters”, if
report, for example by making a prescribed information to
law or
reference to the relevant law or achieve an overall
regulationprescribes a
regulation and describing how description of each key
specific heading;
that information relates to the audit matter that is
key audit matters; consistent with the
requirement in 701.

Linking with ISA 210

ISA 210 deals with circumstances where law or regulation of the relevant jurisdiction prescribes
the layout or wording of the auditor’s report in terms that are significantly different from the
requirements of ISAs, which in particular includes the auditor’s opinion. In these circumstances,
ISA 210 requires the auditor to evaluate:
(a) Whether users might misunderstand the assurance obtained from theaudit of the financial
statements and, if so,
(b)Whether additional explanation in the auditor’s report can mitigatepossible misunderstanding.
If the auditor concludes that additional explanation in the auditor’s report cannot mitigate possible
misunderstanding, ISA 210 requires the auditor not to accept the audit engagement, unless
required by law or regulation to do so. In accordance with ISA 210, an audit conducted in
accordance with such law or regulation does not comply with ISAs. Accordingly, the auditor does
not include any reference in the auditor’s report to the audit having been conducted in accordance
with International Standards on Auditing.

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Anne:i.,ire-1

INDEPENDENT AUDITOR'S REPORT

(See regulation 3)

To the members of .............(name of Company)

Report on the Audit of the Financial Statements

Opinion

We have audited the annexed fwancial statements (or revised financial statements, if applicable); of
........(the Company), which comprise the statement of financial position as at ........., and the statement of
profit or loss• and other comprehensive income or the income and expenditure statement, the statement of
changes in equity, the statement of cash flows for the year then ended, and notes to the fwancial statements,
including a summary of significant accounting policies and other explanatory information, 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 the audit.

In our opinion and to the best of our information and according to the explanations given to us, the statement
of financial position, statement of profit or loss and other comprehensive income or the income or
expenditure statement, the statement of changes in equity and the statement of cash flo,vs together with the
notes forming part thereof conform with the accounting and reporting standards as applicable in Pakistan
and give the information required by the Companies Act,2017 (XIX of2017), 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
profit or loss and other comprehensive income or loss, or the surplus or deficit'", the changes in equity and
its cash flows for the year then ended.

Basis for Opinion

We conducted our audit in accordance with In1ernational Standards on Auditing (lSAs) as applicable in
Pakistan. Our responsibilities under those standards are further described in the Auditor's Responsibilities
for the Audit of the Financial Statements section of our report. We are independent of the Company in
acw1<lauce wilh thehtlematiuual Ethics S!aml.u<ls Bu.u<l fut AccuU11lauls' Cudi, ufEthicsfu,-Prufi,ssiunal
Accountants as adopted by the Institute of Chartered Accountants of Pakistan / Institute of Cost and
management Accountants (the Code)"' and we have fulfilled our other ethical responsibilities in accordance
with the Code. We belie,·e that the audit evidence we have obtained is sufficient and appropriate to provide
a basis for our opinion.

Material Uncertainty relating to Going Concern (if applicable)

Emphasis of Matter (if any)

Key Audit Matter(s)'°

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

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audit of the financial statements as a whole, and Ill fomung our opllllon thereon, and we do not provide a
separate opinion on these matters.

Follov,ing are the Key audit matter(s):';

S.No. Key audit matter(s) How the matter was addressed in our audit

Information Other than the Financial Statements and Auditor's Report Thereon

[Reporting in accordance with the reporting requirements in ISA 720 (Revised)]

Responsibilities of Management and Board of Directors for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in
accordance with the accounting and reporting standards as applicable in Pakistan and the requirements of
Companies Act, 2017(XIX of2017) and for such internal control as management determines is necessary
to enable the preparation offinancial statements that are free from material misstatement, whether due to
fraud or error.

In preparing the financial statements, management is responsible for assessing the Company's ability to
continue as a going concern, disclosing, as applicable, matters related to going concem and using the going
concern basis of accounting unless management either intends to liquidate the Company or to cease
operations, or has no realistic alternative but to do so.

Board ofdirectors are responsible for overseeing the Company's f1J1ancial reporting process.

Auditor's Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our
opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted
in accordance with ISAs as applicable in Pakistan will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions ofusers taken on the basis ofthese
financial statements.

As part of an audit in accordance ,,�th ISAs as applicable in Pakistan, we exercise professional judgment
and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the f1J1ancial statements, whether due to
fraud or error, design and perform audit procedures responsive to those risks, and obtain audit
evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not
detecting a material misstatement resulting from fraud is higher than for one resulting from error,
as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override
ofinternal control.
• Obtain an understanding ofinternal control releYant to the audit in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness ofthe Company's internal control.

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Determining and Communicating

Key Audit Matters (“KAM”)
June 2016

Matters communicated
The auditor takes into account the following
with those charged in making this determination:
with governance • Areas of higher assessed risk of material
misstatement, or significant risks

Matters that • Significant auditor judgments relating to

areas in the financial statements that
required
involved significant management
significant auditor judgment, including accounting estimates
attention identified as having high estimation
uncertainty
KAM = matters of In certain limited • Effect on the audit of significant events or
most significance in circumstances, if there are
transactions that occurred during the
the audit of the no KAM to communicate,
current period KAM the auditor’s report period
includes a statement to
that effect

Robust application guidance supports the auditor’s judgment

The nature and extent of communication with those charged The concept of significant auditor attention recognizes
with governance provides an indication of which matters are of that an audit is risk-based.
most significance.
Accordingly, matters that pose challenges to the
Other considerations in determining the relative significance of auditor in obtaining sufficient appropriate audit
a matter include: evidence or in forming an opinion on the financial
statements may be particularly relevant in determining
• Importance of the matter to intended users’ understanding
KAM.
of the financial statements as a whole, in particular its
materiality to the financial statements Areas of significant auditor attention often relate to
• Nature of the underlying accounting policy or complexity areas of complexity and significant management
or subjectivity in management’s selection of an judgment in the financial statements, and therefore
appropriate accounting policy often involve difficult or complex auditor judgments.
• Nature and materiality of corrected and uncorrected In turn, this often affects the overall audit strategy,
misstatements related to the matter allocation of resources, and extent of audit effort.
• Nature and extent of audit effort needed to address the These effects may include, for example, the extent of
matter involvement of senior personnel on the audit
• Nature and severity of difficulties in applying audit engagement or the involvement of an auditor’s expert
procedures or obtaining relevant and reliable audit or individuals with expertise in a specialized area of
evidence accounting or auditing, whether engaged or employed
• Severity of any control deficiencies related to the matter by the firm to address these areas.

The description of KAM in the auditor’s report shall include a reference to the related disclosure(s), if any, in
the financial statements and shall address:
a) Why the matter was considered to be one of most significance in the audit and therefore determined to
be a key audit matter; and
b) How the matter was addressed in the audit.

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ISA 701 KEY AUDIT MATTERS

WHAT IS KAM
Those matters that in auditor’s professional judgement were of most significance
in the audit of FS of Current period (even if comparative FS are presented). Key
audit matters are selected from matters communicated to those charged
with governance

PURPOSE OF KAM
The purpose of communicating KAM is to enhance the communicative value of
the auditor’s report by providing greater transparency about the audit that
was performed.
Communicating KAM provides additional information to intended users of the
financial statement to assist them in understanding those matters that in the
auditor’s professional judgement were of most significance in the audit of FS of
the current period

APPLICABILITY OF KAM
· KAM applies to audit of complete set of general purpose financial
statementsof listed entities
· Circumstances when the auditor otherwise decides to communicate key audit
matters in the auditor’s report.
· when the auditor is required by law or regulation to communicate key
audit matters in the auditor’s report

KAM IS NOT THE SUBSTITUE FOR:

Communicating key audit matters in the auditor’s report is not:
(a) A substitute for disclosures in the financial statements that the
applicable financial reporting framework requires management to
make, or that are otherwise necessary to achieve fair presentation;
(b) A substitute for the auditor expressing a modified opinion when
required by the circumstances of a specific audit engagement in
accordance with ISA 705 (Revised);1
(c) A substitute for reporting in accordance with ISA 570 (Revised)
when a material uncertainty exists relating to events or conditions
that may cast significant doubt on an entity’s ability to continue as a
going concern; or
(d) A separate opinion on individual matters.

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SCOPE
Objective
· Deals with auditors responsibility to
communicate KAM in the auditor’s
report

· Communicate those matters by

· To determine KAM describing them in auditors
report

Matters communicated with Matters that required KAM = matters of most

those charged with governance significant auditor attention significance in the audit of the
current period

Areas of Significant auditor Effect on the audit

higher judgments relating to The nature and extent of
of significant events
assessed risk areas in the financial communication with those
or transactions that
of material statements that charged with governance provides
occurred during the
misstatement, involved significant an indication of which matters are
period.
or significant management of most significance. Other
risks. judgment, including consideration in determining the
accounting estimates relative significance of a matter
identified as having include
high estimation
uncertainty.

Importance of the Nature of the

Nature and matter to intended underlying Nature and
severity of users’ accounting policy materiality of
Nature and
difficulties in Severity of understanding of or complexity or corrected and
extent of
applying audit any control the financial subjectivity in uncorrected
audit effort
procedures or deficiencie statements as a management’s misstatements
needed to
obtaining s related to whole, in particular selection of an related to the
address the
relevant and the matter. its materiality to appropriate matter.
matter.
reliable audit the financial accounting
evidence. statements. policy.

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How to communicate KAM

Introductory Paragraph Description of Individual KAM

The auditor shall describe each key audit

· Include a reference to the related
matter, using an appropriate disclosure if any;
subheading, in a separate section of the · Whythe matter was considered to be
one of most significance in theaudit
auditor’s report under the heading
“Key Audit Matters,” The introductory and therefore determined to be a key
audit matter; and
language in this section of the auditor’s report
shall
· How the matter was addressed in the
state that audit

· Key audit matters are those matters that, in the auditor’s

professional judgment, were of most significance in the
audit of the financial statements [of the current period];and
· These matters were addressed in the context of the audit
of thefinancial statements as a whole, and in forming the
auditor’s opinion thereon, and the auditor does not provide a
separate opinion on these matters.

EXCEPTION TO COMMUNICATE KAM

The auditor shall describe each key audit matter in the auditor’s report unless:
· Law or regulation precludes public disclosure about the matter; or
· In extremely rare circumstances, the auditor determines that the matter should not be communicated in the auditor’s
report becausethe adverse consequences of doing so would reasonably be expected to outweigh the public interest
benefits of such communication. This shall not apply if the entity has publicly disclosed information about the
matter

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INTERACTION OF KAM WITH OTHER ELEMENTS OF AUDIT REPORT

Qualified Opinion OR Material

Uncertainty Relating to Going Adverse opinion Disclaimer opinion
Concern

Qualified opinion and or Material

uncertainty relating to going concern When the auditor express a qualified
are by their nature Key audit matters. opinion or adverse opinion, Unless required by law or
Therefore these matters shall not communicating other matterkey audit regulation, when the auditor
described in the Key audit matters matters would still be relevant to disclaims an opinion on the
sections. Rather the auditor shall: enhancing intended users’ understanding financial statements, the
· Report on these matters in of the audit, and therefore the auditor’s report shall not
accordance with applicable ISA requirements to determine key audit include KAM section in
· Include a reference to the matters apply. accordance with ISA 701
Basis for Qualified (Adverse) However, as an adverse opinion is
Opinion or the Material expressed in circumstances when the
Uncertainty Related to Going auditor has concluded that
Concern section(s) in the Key misstatements, individually or in the
Audit Matters section – ( In aggregate, are both material and
addition to the matter as pervasive to the financial statements
described in basis of qualified
opinion section or material
uncertainity relating to going
concern section we have
determined the matters
described below the key audit
matters to be communicated Depending on the
in our report) If one or more matters
significance of the other than the matter(s)
matter(s) giving rise to an giving rise to an adverse
adverse opinion, the auditor opinion are determined
may determine that no to be key audit matters,
other matters are key audit it is particularly important
matters. that the descriptions of such
Except for the matters other key audit matters do
described in the basis for not imply that the financial
adverse opinion section, statements as a whole are
we have determined that more credible in relation to
there are no other KAM to those matters than would
communicate in our report be appropriate in the
circumstances, in view of the
adverse opinion

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ADVANTAGES OF COMMUNICATION TO THOSE CHAGRED WITH GOVERNANCE

· It will help to have a two way robust two way dialogues about KAM at the time the financial statement are being
finalized for issuance
· Enable them to be aware of the KAM that the auditors intend to communicate in the auditor’s report, and provides
them with an opportunity to obtain further clarification where necessary
· Communication with TCWG recognize their important role in overseeing the financial reporting process

What matters to communicate?

If applicable, depending on the facts

Those matters that auditor has and circumstances of the entity and the
determined to be KAM audit, the auditors determination that
there are no KAM to communicate in
the auditor’s report

DOCUMENTATION
· The matters that required significant auditor’s attentionand the rationale for the auditor’s determination as to
whether or not each of these matters is a key audit matter
· Where applicable, the rationale for the auditor’s determination thatthere are no key audit matters to communicate in
the auditor’s report
· Where applicable, the rationale for the auditor’s determination not tocommunicate in the auditor’s report a matter
determined to be a key audit matter

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Winter 2016

Winter 2017

Summer 2018

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Oil & Gas / Minerals Exploration & Production

1. Closure and rehabilitation provisions

Closure and rehabilitation provisions: US $6.5 billion (2015: US $6.7 billion).

BHP Billiton Plc Extract from Audit Report of Financial Statement 2016

Risk Our Response

Given the nature of its operations, the Group incurs We performed the following key procedures:
obligations to close, restore and rehabilitate its sites.
§ Tested key controls over the estimation
Closure and rehabilitation activities are governed by
of closure and rehabilitation provisions
a combination of legislative requirements and Group
and compliance with accounting standards;
policies. Significant estimates over life of mine and
reserves are made by the Group in determining its § Evaluated the accounting treatment applied
rehabilitation provision. to changes in the closure and rehabilitation
provisions including whether the impact is
The calculation of closure and rehabilitation
expensed or capitalized;
provisions requires significant judgement due to the
inherent complexity in estimating the quantum and § Worked with our specialists to assess the
timing of future costs and determining an reasonableness of estimates of reserve life
appropriate rate to discount these costs back to their used by the Group in its closure and
present value. rehabilitation provisions;

§ Evaluated the competence and objectivity of

the Group’s mine closure specialists based on
their experience and use of industry accepted
methodology;

§ Evaluated the economic assumptions used in

the calculation, including the discount rate
applied to calculate the net present value of
the provision and foreign exchange rates
utilized in translating the future obligation.

Refer to note 14 ‘Closure and rehabilitation provisions’ (Recognition and measurement) and section 2.13.1
Risk and Audit Committee Report (Significant issues – Closure and rehabilitation provisions).

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§ Centrica PLC – Extract from Audit Report of Financial Statement 2015

Impairment assessment
How our audit addressed the area of
Area of focus focus
The Group has £4.6 billion of property, We assessed and challenged the impairment
plant and equipment, the majority of analysis prepared by the Directors as
which relates to gas production and outlined below.
storage assets and power generation With regard to the overall impairment
assets; £1.8 billion of intangible assets assessments performed by the Directors, we
and £2.0 billion of goodwill, arising evaluated the design of internal controls in
predominantly from historical place to check that the Group’s assets are
acquisitions in Centrica Energy valued appropriately including those
Exploration & Production in Europe. controls in place to determine any asset
Impairment assessments of these assets impairments or impairment reversals. We
require significant judgement and there is also reviewed the assets not assessed by
the risk that valuation of the assets may be management for impairment indicators and
incorrect and any potential impairment no indicators were identified.
charge miscalculated. We evaluated the Directors’ assumptions
The value of Centrica’s assets is and estimates used to determine the
supported by either value in use recoverable value of the gas production and
calculations, which are based on future storage assets, power generation assets,
cash flow forecasts or fair value less costs intangible assets, and goodwill. This
of disposal. Market conditions in 2015 includes those relating to operating cost
have been very challenging. Falling forecasts and expected production profiles.
forecast oil and gas prices have had a We tested these assumptions by reference to
significant impact on the Exploration & third party documentation where available,
Production business and outages and such as commodity price forecasts, and
falling power prices have put pressure on consultation with operational management.
power generation. These unfavorable We used PwC valuation specialists to help
macro-economic factors have heightened us assess the commodity prices and
the possibility of a decline in the assets’ discount rates used by the Directors. We
value in use and fair values. As a result, benchmarked these to external data and
taking account of declining oil, gas and challenged the assumptions based on our
power prices and expected future knowledge of the Group and its industry. In
performance, the Directors have addition, we tested management’s
determined that certain Exploration & sensitivity and stress test scenarios and
Production assets and power generation found they had applied. appropriate
assets, including the associated goodwill, judgement.
are impaired. With regard to both the international
This has resulted in a total pre-tax Exploration & Production assets and power
impairment charge of £1,004 million generation assets, we focused on the
being recognized in relation to the UK, Directors’ assertion that the fall in forecast

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The Netherlands and Norwegian gas and commodity prices has been the key driver
oil assets, £210 million being recognized of impairment. We did this through
on Canadian Exploration & Production discussions with management to understand
assets and £42 million in relation to gas the basis of their forecasts, comparing them
assets in Trinidad and Tobago. A further to available industry data, including price
impairment charge of £609 million was and consumption, and performing
recognized in relation to goodwill. sensitivity analysis on their assessments.
Also, in assessing their value in use, as a We also challenged the Directors on the
result of the significant fall in spark assessment of exceptional ‘one-off’ drivers,
spreads and low capacity markets, the such as commodity prices, that have
Group has recognized a pre-tax impacted value as opposed to operational
impairment charge of £31 million in issues incurred in the normal course of
relation to the assets held under a finance business.
lease on the Spalding power station. The We challenged the key assumptions used in
Group also recognized a pre-tax each impairment model and performed
impairment charge of £372 million on its sensitivity analysis around key drivers of
nuclear investment, due to declining cash flow forecasts, including output
forecasts of base load power prices and volumes, commodity prices, operating costs
capacity market auction prices. and expected life of assets.
Impairment indicators were identified for Based on our analysis and the analysis
the Storage facility following operational performed by our valuations team, we did
issues and declining market spreads. No not identify any material issues with the
impairment charge was recorded; valuation of international Exploration &
however, the model remains highly Production, storage, power generation
sensitive to key assumptions. assets and goodwill, the accuracy of the
Refer to pages 56 and 57 for details on the impairment charges and the disclosures in
Audit Committee reviews and the financial statements.
conclusions and notes 3, 7, 13, 15 and S2
in the financial statements.

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Provision for warranty

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1. The accounting for business combinations and acquired intangible assets

Informa plc – Extract from Audit Report of Financial Statement 2016

Risk description How the scope of our audit responded to the risk

The most significant business combination during the We reconfirmed our understanding of the design and
year related to Penton, which was acquired on 2 implementation of controls relating to business
November 2016 for consideration of approximately combinations, and then for each material business
£1.3 billion. During 2016, the Group also completed combination and asset acquisition, we reviewed and
eight additional business combinations for a challenged the acquisition accounting applied by
consideration of approximately £93 million (see Note management. This included:
18) and 22 asset acquisitions for consideration of
§ review of the underlying sale and purchase
approximately £55 million.
agreement;
Accounting for business combinations and asset
§ testing the validity and completeness of
acquisitions can be complex and often requires
consideration to the underlying agreements
judgements to be applied and assumptions to be used
and consideration paid;
when assessing the consideration paid, the fair value
of assets and liabilities acquired, the identification § reviewing the terms of the acquisition to
and valuation of acquired intangible assets and any assess whether components of compensation
associated goodwill that arises (see above risk). and remuneration, if any, had been correctly
identified and whether acquisition costs had
been expensed as required by accounting
standards;

§ auditing the acquisition date balance sheet

and resultant fair value movements;

§ engaging Deloitte internal valuations

specialists to review and challenge the
independent valuation expert’s report utilized
by management. This included assessing the
intangible assets identified, the basis for their
valuation, and benchmarking the
reasonableness of the key valuation
assumptions, such as discount rates, useful
economic lives and growth rates; and

§ evaluating management’s resultant

assumptions and methodology supporting the
fair values of acquired intangible assets.

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British American Tobacco – Extract from Audit Report of Financial Statement 2016

Risk Our response

Dispute Outcome: The Group is subject to a large Our procedures included:

volume of claims including class actions, which could
– Control Design: Evaluation of the processes and
have a significant impact on the results if the potential
controls over litigations operated by management
exposures were to materialize. The Directors apply a
at a Group, regional and local level through regular
number of judgements when considering whether, and
meetings with in-house legal counsels and review of
how much, to provide for the potential exposure of
Board and sub-committee meeting minutes;
each litigation. These include assumptions relating to
the likelihood and/or timing of cash outflows from the – Enquiry and circularization of lawyers: For all
business and the interpretation of local pending or significant legal disputes, assessment of
preliminary court rulings in assessing whether provision correspondence with the Group’s external counsel
arises. We placed specific focus on the judgments in accompanied by formal confirmations from that
respect of the ongoing smoking and health litigation external counsel and discussions with in-house
brought against the operating company in Canada counsel;
which is disclosed in note 28.
– Accounting analysis: Use of KPMG legal specialists
to assess relevant historical and recent judgments
passed by the court authorities, as well as the
formal confirmations of current stats from external
counsel, in order to challenge the basis used for the
accounting treatment and resulting disclosures; and

– Assessing transparency: Assessment of the

Group’s contingent liabilities disclosures in note 28
to determine whether management has presented
the facts and circumstances clearly and accurately.

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5. Share-based payment recognition

£42.9 million (2015 – £55.5 million)

The Berkeley Group Holdings plc- Extract from Audit Report of Financial Statement 2016

Risk Our response

Refer to page 78 (Audit Committee report), page 117 Our audit procedures in respect of this area
(accounting policy) and pages 120 and 121 (financial included:
disclosures).
We made inquiries of the directors to understand
Share-based payments is a complex accounting area the share-based payment schemes in place and the
including assumptions utilized in the fair value changes made to the awards.
calculations and judgements regarding accounting for
We have also inspected communications made to
modifications. There is a risk in the financial statements
scheme members regarding these changes, and
that amounts are incorrectly recognized and/or
evidence of shareholder approval.
inappropriately disclosed.
We considered whether changes to the schemes
The Group has made changes to share-based long term
met the criteria to be treated as a modification to
incentive plan awards which vest in September 2016
the scheme and whether the resulting accounting
and in future periods.
treatment was appropriate.
This requires further complex accounting
For equity-settled options we recalculated the
considerations regarding classification and treatment
estimated charge which reflected the best estimate
of modifications which could result in a material impact
of the number of options expected to vest.
to the Income Statement.
For cash-settled schemes we inspected the vesting
price and recalculated the amounts to be recognized
in the financial statements.

For all schemes, we verified the inputs to the

calculations by reference to, where appropriate,
external data.

We considered the adequacy of the Group’s

disclosures in respect of the treatment of share-
based payments in the financial statements,
including the judgement over equity or cash
settlement, and over the disclosure of this choice in
its accounting policies.

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The goodwill and David Wilson Homes brand Our work involved the following:
intangible asset arose upon the acquisition of
§ We have assessed the design and implementation of
Wilson Bowden (see note 4.2).
the Group’s controls relating to Management’s
The Group’s assessment of impairment of impairment review of goodwill and intangible assets.
goodwill and intangible assets is a judgmental
§ We have tested the accuracy of the underlying
process which requires estimates concerning
model to assess whether the processes are applied
the forecast future cash flows associated with
to the correct input data and the outputs are
the goodwill and brand assets held, the
mapped accurately.
discount rates and the growth rate of revenue
and costs to be applied in determining the § We challenged each of the key assumptions
value in use. employed in the annual goodwill impairment test.
This included reference to our internal valuation
As described in the previous significant risk,
specialists’ benchmarking of the weighted average
the outcome of the EU referendum has
cost of capital rate (‘WACC’) employed as the
resulted in greater political and economic
discount rate employed, including its methodology
uncertainty which may impact selling prices,
and constituent inputs, comparison to independent
sales rates and build costs, especially in the
market forecasts of revenue and cost growth in the
longer term.
housebuilding sector and an assessment of the
There were no impairments in the current year Group’s historic forecasting accuracy.
(2015: £nil).
§ We have tested Management’s sensitivity analysis in
relation to the key inputs to the goodwill
impairment test model, as well as performing our
own sensitivity analysis which included changes to
volume, margin, incentives and the discount rate
applied. This included consideration of the outcome
of the EU referendum.

§ We have reviewed the appropriateness of the

disclosures provided in accordance with IAS 36
‘Impairment of Assets’.

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Qualified opinion - MM

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Adverse opinion

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Qualified opinion - SL

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INTERNATIONAL STANDARD ON AUDITING 705

MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDIOTR’S REPORT

Modification to the Auditor’s Opinion

No Yes

Report as per ISA 700 Report as per ISA 705

ISA 705

SCOPE: INDEPENDENT AUDITORS RESPONSIBILITY TO ISSUE

AN APPROPRIATE AUDIT REPORT

1. When the Auditor concludes that 2. How the form and content of
a Modification to the Auditor’s & the auditor’s report is affected
Opinion on the Financial when auditor express
Statements is necessary modification

Types of Modified Opinion?

1. Qualified 2. Adverse 3. Disclaimer

Which type of Opinion is appropriate?

Nature of Matter giving rise to the modification

&

Auditor’s Judgement about pervasiveness of the Matter

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sOBJECTIVE: TO EXPRESS MODIFIED OPINION ON FINANCIAL STATEMENTS

WHEN

Based on AE obtained, 1. When the Auditor

concludes that FS are not Or concludes
Unable that
to obtain a
SAAE
free from MM Modification to the
(Scope Limitation)
(Material Misstatement) Auditor’s Opinion on the
Financial Statements is

WHAT IS MISSTATEMENT

A Difference btw the reported amount, classification, presentation or disclosure of a FS item and the amount, classification,
presentation or disclosure that is required for the item in accordance with AFRF

MATERIAL MISSTATEMENT MAY ARISE:

A) Appropriateness of selected B) Application of selected C) Appropriateness or adequacy of disclosure

accounting policies accounting policy in the FS
· AP is not consistent with the · Not applied consistently · Do not include all disclosure required by
AFRF · Due to the method of AFRF
· FS do not represent the application of selected · Not presented in a/c with the AFRF
accounting policies · Do not provide disclosure necessary to
underlying transaction and
(unintentional error achieve fair presentationa
events in a manner that
achieves fair presentation

If the impact is MATERIAL +

If the impact is material – PERVASIVE

QUALIFIED OPINION ADVERSE OPINION

What is QUALIFIED OPINION? What is ADVERSE OPINION?

Except for the effect of the matter described in Because of the significance of the matter discussed
basis for qualified opinion, the FS prepared in in the basis for adverse opinion, the FS is not
accordance with IFRS prepared in accordance with IFRS

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SCOPE LIMITATION MAY ARISE:

A) Circumstances beyond B) Circumstances relating to C) Limitation imposed by the

the control of the entity nature or timing of auditors management
work
1. Entity’s accounting 1. Prevent auditor from
record has been 1. Timing of the auditor observing inventory count
destroyed appointment is such that 2. Prevent auditor from
2. Accounting record unable to observe physical sending confirmation
seized by Govt. observation
authorities 2. Substantive procedure cannot
provide SAAE
3.

If the impact is MATERIAL +

If the impact is material PERVASIVE

QUALIFIED OPINION DISCLAIMER OPINION

If the impact is material If the impact is MATERIAL +

PERVASIVE
Except for the effect of the matter
described in basis for qualified Because of the significance of the
opinion, the FS prepared in matter described in the basis for
accordance with IFRS disclaimer opinion, we have not been
able to obtain SAAE to provide a
basis for an audit opinion.

Important Note: An inability to perform a specific procedure does not constitute a

limitation on the scope of the audit if the auditor is able to obtain SAAE by performing
alternative audit procedures. If this is not possible then auditor shall express qualified
or disclaimer as applicable.
Limitation imposed by the management may have other implications for the audit,
such as for the auditor’s assessment of fraud risk and consideration of engagement
continuance

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WHAT IS PERVASIVE?

A term used in the context of:

· Misstatement, to describe the effect on the financial statement of misstatement
OR
· Possible effect on the financial statements of misstatements, if any, that are undetected due
to the inability to obtain SAAE

Pervasive effect on the FS are those that, in the auditors judgement

Are not confined to specific In relation to disclosures, are

If so confined, represent or could
elements, accounts or item of FS fundamental to users
represent substantial portion of FS
understanding of FS

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CONSEQUENCES of an INABILITY to OBTAIN SAAE Due to management imposed

limitation after the audit has accepted engagement

If after accepting the If unable to obtain SAAE the audit shall determine the following
If management implications:
engagement, the
refuse – · If possible effect is material – auditor shall qualify opinion
auditor becomes
communicate to
aware that · If possible effect is material and pervasive
TCWG and
management has o Withdraw if withdraw is possible under applicable law
determine
imposed a limitation or regulation. The practicality of withdrawing from the
whether it is
on the scope of audit audit may depends on the stage of completion of the
possible to
that the auditor engagement at the time management imposes the
perform
consider will likely to scope limitation. If the auditor withdraws, before
Alternative
express a qualified or withdrawing communicate to TCWG any misstatement
procedures to
disclaimer – Shall identified during the audit that would have given rise
obtain SAAE
request the to modification.
management o If the auditor has substantially completed the audit,
remove limitation the auditor may decide to complete the audit to the
extent possible, disclaim an opinion and explain the
scope limitation in the basis for disclaimer opinion
o If withdrawal is not possible or practicable, disclaim an
opinion on the FS

When the auditor concludes that withdrawal from the audit is

necessary becauseof a scope limitation, there may be a
professional, legal or regulatoryrequirement for the auditor to
communicate matters relating to the withdrawalfrom the
engagement to regulators or the entity’s owners.

Other Considerations Relating to an Adverse Opinion or Disclaimer of Opinion

When the auditor considers it necessary to express an adverse opinion ordisclaim an opinion on the
financial statements as a whole, the auditor’sreport shall not also include an unmodified opinion with
respect to the samefinancial reporting framework on a single financial statement or one or
morespecific elements, accounts or items of a financial statement. To includesuch an unmodified
opinion in the same report in these circumstanceswould contradict the auditor’s adverse opinion or
disclaimer of opinion onthe financial statements as a whole.

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Form and content of Auditors report when the opinion is modified

Content of Changes due to modification

audit report
Basis for · Basis for qualified, adverse or disclaimer
opinion · If MM – include in the basis for qualification paragraph a description and
quantification of the financial effect (effect on income tax, income before tax, net
income and equity) of the misstatement unless impracticable. If not practicable,
the auditor shall state this fact in the basis for modification paragraph
· If MM that relates to narrative disclosure – explain how disclosure are misstated
· If MM relates to non-disclosure – discuss the non-disclosure withTCWG, describe
in the basis for modification paragraph the nature of omitted information, unless
prohibited by law or regulation, include the omitted disclosure provided it is
practicable (not prepared by management or not readily available to auditor and in
auditors judgement disclosure would be voluminous in relation to the report) and
auditor has obtained SAAE about the omitted information
· If modification result from an inability to obtain SAAE, include reason for inability
· Even if adverse or disclaimer, the auditor shall describe in the basis for
modification paragraph the reason for any other matters of which the auditor is
aware that would have required a modification to the opinion and the effects
thereof
· For qualified or adverse opinion – audit evidence obtained is sufficient and
appropriate to provide a basis for adverse / qualified opinion.
Opinion · Qualified opinion, Adverse opinion, or Disclaimer opinion. Not appropriate use
paragraph phrase such as “ with the foregoing explanation or “ subject to”
· Qualified opinion due to MM: Except for the effect of the matter described in Basis
for qualified opinion Fs gives true and fair view
· Qualified opinion due to scope limitation – Except for the possible effect
· Adverse opinion – because of the significance of the matter described in basis for
adverse opinion the Fs do not give true and fair view
· Disclaimer - Because of the significance of the matter(s) described in the Basis
forDisclaimer of Opinion paragraph, the auditor has not been able to
obtainsufficient appropriate audit evidence to provide a basis for an auditopinion;
and, accordingly,the auditor does not express an opinion on the financial
statements. + Change “ Financial statements has been audited to auditor was
engaged to audit the FS”
Auditors · Disclaimer: When the auditor disclaims an opinion due to an inability to obtain
Responsibility sufficient appropriate audit evidence, the auditor shall amend the description of the
auditors responsibility to include only the following
· A statement that auditor’s responsibility is to conduct an audit of the entity’s
financial statement in a/c with ISA and to issue and auditor’s report;
· A statement that, however because of the matter described in the basis for
disclaimer of opinion section, the auditor was not able to obtain SAAE to provide a
basis for an audit opinion on the FS; and
· The statement about auditor’s independence and other ethical responsibilities
No need to include KAM

Communication with Those Charged with Governance

When the auditor expects to modify the opinion in the auditor’s report, the auditor shall communicate with those charged with
governance the circumstances that led to the expected modification and the proposed wording of the modification.
Communicating with those charged with governance the circumstances that lead to an expected modification to the auditor’s
opinion and the proposed wording of the modification enables:
(a) The auditor to give notice to those charged with governance of the intended modification(s) and the reasons (or circumstances)
for the modification(s);
(b) The auditor to seek the concurrence of those charged with governance regarding the facts of the matter(s) giving rise to
the expected modification(s), or to confirm matters of disagreement with management as such; and
(c) Those charged with governance to have an opportunity, where appropriate, to provide the auditor with further
information and explanations in respect of the matter(s) giving rise to the expectedmodification(s).

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Summer 2012

Summer 2011

P7 - ACCA

You are the manager responsible for the audit of Yew Co, a company which designs and develops
aircraft engines. The audit for the year ended 31 July 20X1 is nearing completion and the audit senior
has left the following file note for your attention.

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'I have just returned from a meeting with the management of Yew Co, and there is a matter I want to
bring to your attention. Yew Co's statement of financial position recognises an intangible asset of $12.5
million in respect of capitalised research and development costs relating to new aircraft engine designs.
However, market research conducted by Yew Co in relation to these new designs indicated that there
would be little demand in the near future for such designs. Management has provided written
representation that they agree with the results of the market research. 'Currently, Yew Co has a cash
balance of only $125,000 and members of the management team have expressed concerns that the
company is finding it difficult to raise additional finance

'Yew Co's draft financial statements include profit before tax of $23 million, and total assets of $210
million.

Requirment: Discuss the matter that should be considered by the auditor and the possible implication
on the auditor’s report

Summer 2018

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Autumn 2017

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ISA 706:EMPHASIS OF MATTER PARAGRAPHS AND

OTHER MATTER PARAGRAPHS IN THE INDEPENDENT
AUDITOR’S REPORT

SCOPE OBJECTIVE

This International Standard on To draw user attentionwhen in

Auditing (ISA) deals the auditor’s judgment it is
with additional communication necessary to do so, by way of
in the auditor’s report when clear additional
the auditor considers it communication in the auditor’s
necessary to report, to:

OMP
EOMP Draw users’ attention to any
matter or matters other than
Draw users’ attention to a matter or
those
matters presented or disclosed in Relationship between KAM,
presented or disclosed in the
the financial statements that are EOMP and OMP
financial statements that are
of such importance that they are
relevant to users’ understanding
fundamental to users’
understanding of the financial
of the audit, the auditor’s
statements; or responsibilities or the
auditor’s report.

DEFINITIONS

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

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EMPHASIS OF MATTER PARAGRAPH

If the auditor considers it necessary to draw users’ attention 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, the auditor shall include an Emphasis of Matter
paragraph in the auditor’s report provided:

The auditor would not be When ISA 701 applies, the matter
required to modify the opinion has not been determined to be
in accordance with ISA 705 akey audit matter to be
(Revised)4 as a result of the communicated in the auditor’s
matter; and report

CONTENT OF EMPHASIS OF MATTER PARAGRAPH

When the auditor includes an Emphasis of Matter paragraph in the auditor’s report, the auditor shall

Include the paragraph within a Include in the paragraph a clear

separate section of the auditor’s reference to the matter
reportwith an appropriate heading beingemphasized and to where
Indicate that the auditor’s
that includes the term “Emphasis relevant disclosures that fully describe
opinion is not modified in
of Matter” the matter can be found in the
respect of thematter
financial statements. The paragraph
emphasized
shall refer only to information
presented or disclosed in the financial
statements; and

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MANDATORY REQUIRMENT TO INCLUDE EOMP AS PER SPECIFIC ISA

ISA 210- When a financial

ISA 560 When facts become
reporting framework
known to the auditor after the date ISA 800 - To alert users that the
prescribed by law
of theauditor’s report and the financial statements are
orregulation would be
auditor provides a new or prepared inaccordance with a
unacceptable but for the
amended auditor’s report (i.e., special purpose framework.
fact that it is prescribed by
subsequent events).
law or regulation.

CIRCUMSTANCES WHERE AUDITOR MAY CONSIDER IT NECESSARY TO INCLUDE EOMP

A significant Early application A major catastrophe

An uncertainty subsequent event
(where permitted) of that has had, or
relating to the that occurs between
a new accounting continues to have, a
future outcome of the date of
thefinancial standardthat has a significanteffect on
exceptional litigation
statements and the material effect on the the entity’s financial
or regulatory action.
date of the auditor’s financial statements. position.
report.

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OTHER MATTER PARAGRAPH

If the auditor considers it necessary to communicate a matter other than those that are 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, the auditor shall include an Other Matter paragraph in
the auditor’s report, provided

When ISA 701 applies, the

This is not prohibited by law matter has not been
or regulation; and determined to be akey audit
matter to be communicated
in the auditor’s report.

CONTENT OF EMPHASIS OF MATTER PARAGRAPH

When the auditor includes an Other Matter paragraphin the auditor’s

report, the auditor shall include the paragraph within a separate section with
the heading “Other Matter,” or other appropriate heading.

An Other Matter paragraph

The content of an Other does not include information
Matter paragraph reflects that the auditor is prohibited
An Other Matter paragraph
clearly that such other from providing by law,
also does not include
matter is not required to regulation or other
information that is required to be
be presented and professional standards, for
provided by management.
disclosed in the financial example, ethical standards
statements. relating toconfidentiality of
information

MANDATORY REQUIRMENT TO INCLUDE OMP AS PER SPECIFIC ISA

ISA 710 -If the financial statements of the

ISA 560 – Dual Date prior period were audited by a predecessor
ISA 560 When facts auditor, in addition to expressing an opinion
Where the auditor has on the current period’s financial statements,
become known to the the auditor shall state in an Other Matter
restricted the audit auditor after the date of paragraph: a.that the financial statements of
procedure on subsequent theauditor’s report and the prior period were audited by a
events to that amendment, the auditor provides a predecessor auditor; b.the type of opinion
convey in EOMP or OMP new or amended expressed by the predecessor auditor and, if
that auditors procedure on the opinion was modified, the reasons
auditor’s report (i.e., therefore; and the date of that report
SE are restricted solely to subsequent events). ISA 710 – If the prior period FS were not
that amendment audited, the auditor shall state in an OMP that
the Comparative financial statement /
corresponding figure are unaudited

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CIRCUMSTANCES WHERE AUDITOR MAY CONSIDER IT NECESSARY TO INCLUDE OMP

SCOPE LIMITATION- REPORTING ON MORE THAN RESTRICTION ON

UNABLE TO WITHDRAW ONE SET OF FS DISTRIBUTION OR USE OF
In the rare circumstance An entity may prepare one set THE AUDITOR’s REPORT
where the auditor is unable to of financial statements in Financial statements
withdraw from an accordance with a GPF and prepared for a specific
engagement even though another set of financial purpose may be prepared
the possible effect of an statements inaccordance with inaccordance with a general
inability to obtain sufficient another GPFand engage the purpose framework because
appropriate audit evidence auditor to report on both sets of the intended users have
due to a limitation on the financial statements. If the determined that such general
scope of the audit imposed by auditor has determinedthat purpose financial statements
management is pervasive,10 theframeworks are meet theirfinancial
the auditor may consider it acceptable in the information needs. Since the
necessary to include an Other respectivecircumstances, the auditor’s report is intended
Matter paragraph in the auditor may include an Other forspecific users, the auditor
auditor’s report to explain Matter paragraph in the may consider it necessary in
why it is not possible for the auditor’s report, referring to the the circumstances to include
auditor to withdraw from the fact that another set of financial an Other Matter paragraph,
engagement. statements has been prepared stating that the auditor’s
by the same entity in report is intended solely for
accordance with another GPF the intended users, and
and that the auditor has should not be distributed to or
issued a report on those used by other parties.
financial statements.

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PLACEMENT OF EMPHASIS OF MATTER PARAGRAPH AND OTHER MATTER PARAGRAPH IN THE

AUDITORS REPORT

The placement of an Emphasis of Matter paragraph or Other Matter paragraph in the auditor’s report
depends on the nature of the information to be communicated, and the auditor’s judgment as to the
relative significance of such information to intended users compared to other elements required to be
reported in accordance with ISA 700 (Revised). For example

EOMP OMP

When a Key Audit Matters When relevant to all

When the Emphasis of section is presented in the When a Key Audit the auditor’s
Matter paragraph relates to auditor’s report, an Matters section is responsibilities or
the applicablefinancial Emphasis of Matter presented in the users’understanding
reporting framework, paragraph may be auditor’s report of the auditor’s report,
including circumstances presented either directly and an Other Matter the Other Matter
where the auditor before or after the Key Audit paragraph is also paragraph may be
determines that the Matters section, based on
considered necessary, included as a
the auditor’s judgment as to
financial reporting the separate section
the relative significance of
framework prescribed by the information included in auditor may add further following the Report
law or regulation would the Emphasis of Matter context to the heading on the Audit of the
otherwise be unacceptable, paragraph. The auditor may “Other Matter”, such Financial Statements
the auditor may consider it also add further context to as “Other Matter - and the Report on
necessary toplace the the heading “Emphasis of Other Legal and
Scope of the Audit”, to
paragraph immediately Matter”, such as “Emphasis Regulatory
of Matter- Subsequent differentiate the Other
following the Basis of Requirements.
Event”, to differentiate the Matter paragraph from
Opinion section to provide
Emphasis of Matter the individual matters
appropriate context
paragraph from the described in the Key
to the auditor’s opinion. individual matters described Audit Matters section.
in the Key Audit Matters
section.

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We have audited the accompanying Schedule of Fixed Assets Capitalized ("the Schedule") of ("the Company")
and the relevant notes (here-in-after referred to as "the Schedule and Notes") for the year ended June 30,
2016.

The Schedule and Notes have been prepared by management in accordance with the basis of preparation as
disclosed in note 2.

Management's Responsibility

Management is responsible for the preparation of the Schedule and Notes in accordance with the basis of
preparation as disclosed in note 2 and for such internal controls as management determines is necessary to
enable the preparation of the Schedule and Notes that are free from material misstatement, whether due to
fraud or error.

Auditors' Responsibility

Our responsibility is to express an opinion on the Schedule and Notes based on our audit. We conducted our
audit in accordance with the auditing standards as applicable in Pakistan. Those standards require that we
comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about
whether the Schedule and Notes are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
Schedule and Notes. The procedures selected depend on the auditors' judgment, including the assessment of
the risks of material misstatement of the Schedule and Notes, whether due to fraud or error.

In making those risk assessments, the auditor considers internal controls relevant to the entity’s preparation of
the Schedule and Notes 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 controls. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the Schedule.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.

Opinion

In our opinion, the Schedule and Notes for the year ended June 30, 2016 are prepared in all material respects,
in accordance with the basis of preparation as disclosed in note 2.

Basis of Preparation and Restriction on Distribution

Without modifying our opinion, we draw attention to the note 2, which describes the basis of preparation. The
Schedule and Notes have been prepared by the Company in meeting the requirement of). As a result, the
Schedule and Notes may not be suitable for another purpose. Our report is intended solely for the Company
and and should not be distributed to or used by parties other than the Company and .

Chartered Accountants

Date:
Place: Karachi

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Winter 2011 – Other Matter paragraph

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Deloitte. Deloitte Yousuf Adil

Chartered Accountants
Cavish Court, A-35, Block 7 & 8
KCHSU, Shahrah-e-Faisal
Karachi-75350
Pakistan

Tel: +92 (0) 21 3454 6494-7

Fax: +92 (O) 21- 3454 1314

www.deloitte.com

AUDITORS' REPORT TO THE MEMBERS

We have audited the annexed unconsolidated balance sheet of Sui Southern Gas Company Limited ("the Company'')
as at June 30, 2015, and the related unconsolidated profit and loss account, unconsolidated statement of comprehensive
income, unconsolidated cash flow statement and unconsolidated statement of changes in equity together with the notes
forming part thereof (here-in after referred to as unconsolidated financial statements), for the year then ended and we
state that except for the matter as stated in paragraphs (a) and (b) below, 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.

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.

Except for the matter as stated in paragraphs (a) and (b) below, 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:

a) as described in notes 27.1 and 27.2 to the unconsolidated financial statements, trade debts include receivables of
Rs. 40,073 million (2014: Rs. 41,302 million) and Rs. 20,879 million (2014: Rs. 16,944 million) from K-Electric
Limited (KE) and Pakistan Steel Mills Corporation (Private) Limited (PSML) respectively. As described in the
aforesaid notes, significant portion of such receivables include overdue amounts, which have been considered
good by the management and classified as current assets in these financial statements. Further, KE and PSML
have disputed Late Payment Surcharge (LPS) on their respective balances and the financial condition of PSML is
such that it has not been able to pay its obligations, due to which management has decided to recognize LPS on a
receipt basis from the aforesaid entities effective from July 01, 2012.

Due to the adverse financial condition of PSML, disputes by KE and PSML with the Company on LPS, and large
accumulation of their respective overdue amounts, we were unable to detem,ine the extent to which the total
amounts due from KE and PSML are likely to be recovered and the time frame over which such recovery will be
made;

b) as described in note 31.2, and 31.2.1 to the unconsolidated financial statements, Rs. 2, 122 million is receivable
from Sui Northern Gas Pipelines Limited (SNGPL), which is being disputed by SNGPL for the reasons mentioned
in note 31.2.1, due to which we were unable to determine the extent to which the receivable amount is likely to be
recovered and time frame over which such recovery will be made;

c) in our opinion, except for the possible effects of the matter stated in paragraphs (a) and (b) above, proper books of
account have been kept by the Company as required by the Companies Ordinance, 1984;

Member of
Deloitte Touche Tohmatsu Limited
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Deloitte. Deloitte Yousuf Adil

Chartered Accountants

d) in our opinion:

(i) except for the possible effects of the matter stated in paragraphs (a) and (b) above, the unconsolidated
balance sheet and unconsolidated 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;

(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;

e) except for the possible effects of the matter stated in paragraphs (a) and (b) above, in our opinion and to the best
of our information and according to the explanations given to us, the unconsolidated balance sheet,
unconsolidated profit and loss account, unconsolidated statement of comprehensive income, unconsolidated
cash flow statement and the unconsolidated statement of changes in equity, together with the notes forming part
thereof conform with approved accounting standards as 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 June 30, 2015 and of the loss, total comprehensive loss, its cash flows and
changes in equity for the year then ended; and

f) in our opinion, no Zakat was deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of
1980).

We draw attention to:

(i) note 1.3 to the unconsolidated financial statements that describes that revenue requirements for the years
ended June 30, 2011, 2012, 2013, 2014 and 2015, have been determined provisionally on the basis of stay
orders of the High Court of Sindh (the Court) which was considered by OGRA while determining revenue
requirements, except for impact of the orders dated November 20, 2015 and March 29, 2016, whereby
OGRA was directed to treat income from royalty (arrears) and income from Liquefied Petroleum Gas (LPG)
and Natural Gas Liquids (NGL) as non-operating income which was not considered by OGRA while
determining revenue requirements of the Company for the years ended June 30, 2013, 2014 and 2015. Our
opinion is not qualified in respect of the said matter.

���c:�4 � �

Audit Engagement Partner:

Naresh Kumar

Date: April 09, 2016

Place: Karachi

Member of
Deloitte Touche Tohmatsu Limited

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2.10 Comparative information

2.10.1 Comparative information – general requirements
Except when IFRSs permit or require otherwise, comparative information in respect of the preceding
period should be presented for all amounts reported in the financial statements. [IAS 1:38]
An entity is required to present the following statements, as a minimum, together with related
notes:
[IAS 1:38A]

· two statements of financial position;

· two statements of profit or loss and other comprehensive income;
· two separate statements of profit or loss (if presented);
· two statements of cash flows; and

· two statements of changes in equity

2.10.2 Comparative information for narrative and descriptive information

Comparative information is included for narrative and descriptive information if it is relevant to
understanding the current period’s financial statements. [IAS 1:38]
Narrative information provided in the financial statements for the preceding period(s) may, in some cases,
continue to be relevant in the current period. [IAS 1] gives the example of a legal dispute, the outcome of
which was uncertain at the end of the preceding period and is yet to be resolved. Users of the financial
statements may benefit from the disclosure of information that the uncertainty existed at the end of the
preceding period and from the disclosure of information about the steps that have been taken during the
current period to resolve the uncertainty. [IAS 1:38B]

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ISA 710
Comparative Information

Scope
Auditors responsibility relating to Comparative information

Types of Comparative information

Corresponding figure - Auditors opinion for current period only
Comparative financial statement - Auditors opinion refer to each period

Objective

To obtain SAAE that CI included in the FS in a/c with the AFRF

To report in a/c with the Auditors reporting responsibilities

Definition

Comparative financial information

Amount and disclosure included in the FS for one or more prior period in a/c with AFRF

Corresponding Figure

Amount and disclosure of prior period are included as integral part of current period FS and are intended
to be read only in relation to the current period figures.
The level of details presented in the corresponding amount and disclosure is dictated primarily by its
relevance to the current period figures

Comparative financial statement

Amount and disclosure of the prior period are included for comparision with the FS of current period and
also referred in auditors opinion (if audited).
The level of inforamtion is comparable with the FS of current period

Requirement

1 Audit Procedures

Whether financial statement include the comparative information required by AFRF and whether such
information is appropirately classified. For this purpose:
i Comparative information agrees with the amount and disclosure presented in the prior period
ii Accounting policies are consistent

2 Audit Reporting

A Corresponding figure

Audit opinion shall not refer to corresponding figure because audit opinion is on the current period
financial statement as a whole which include corresponding figure

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Following are exceptions for referring corresponding figures
If the audit report on the prior period includes Qualification, adverse or disclaimer.

ai Unresolved

shall modify the auditors opinion on the current period FS

In the basis of modification paragraph do:
Refer to both current figure and corresponding figure when impact is material in current FS or
audit opinion has been modified because of the effect of comparability of current period figure and
corresponding figure

a2 Unresolved but not relevant for current period

Modification in the current period FS because of the unresolved matter on the comparability of the
current and corresponding figures

a3 Resolved

Auditors opinion on the current period not refer to the previous modification if the matter is
resolved and properly account for and disclosed

b Misstatement in the Prior Period FS and unmodified opinion in prior period

If corresponding figure have not been properly restated - Q,Ad,DC in the current period FS, modified
w.r.t CF
If restated then may give EOMP
c Prior Period Financial statement not audited
state in OMP that corresponding figures are unaudited
However it will not relieve the auditor to obtain SAAE on opening balances

ab Prior period FS audited by Another auditor

If not prohibit by law and regulation:

Include OMP - last year audit by another auditor, type of report and date of audit report

B Comparative Financial Statement

Auditors opinion shall refer to each period for which FS are presented
could be different opinion for different period

If the prior opinion differs from the opinion previously expressed, the audior shall express reason for the
different opinion in OMP

B1 Prior Period FS audited by Previous auditor

Report on current period FS and OMP

Exception for OMP
When last year report reissued with FS

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B2 Material Misstatement in the Prior Period FS and unqualified opinion by Another auditor
Communicate misstatement to TCWG
If FS are amended and revised report issued by Previous auditor - Report only on current figures

If not issued by previous auditor but managemet make adjustment, include in OMP that we have
reviewed the amendment but is not giving opinion on whole FS

B3 Prior Period FS not audited

OMP - Comparative FS are unaudited, however need to obtain AE about OB

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Winter 2014

Winter 2018

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Winter 2013

Winter 2012

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Money Market Fund

Money Market Fund (MMF) is an Open-End Money Market Scheme.

Investment Objective of the Fund

The objective of Money Market Fund is to provide stable income stream with preservation of capital
by investing in AA and above rated banks and money market instruments.

Fund Performance Review

This is the Seventh Annual report since the launch of the Fund on February 23, 2012. The Fund size
has increased notably by 56% during FY18 and stands at Rs. 23.192 Billion as on June 30, 2018. The
Fund’s return since its inception is 7.6% versus the benchmark return of 6.0%. This translates into
an outperformance of 1.6% p.a. The Fund posted 5.6% return during FY18 versus the benchmark
return of 5.4%, thus registering an outperformance of 0.2%. This outperformance is net of
management fee and all other expenses. Thus the Fund has achieved its investment objectives.

NMMF's stability rating awarded by PACRA is ‘AA (f)', which denotes a very strong capacity to
maintain relative stability in returns and very low exposure to risks. Being a money market scheme,
the Fund has stringent investment guidelines. The authorized investments of the Fund include T-
Bills, Bank Deposits and Money Market instruments. Minimum rating requirement is AA, while the
Fund is not allowed to invest in any security exceeding six months maturity. The weighted average
time to maturity of the Fund cannot exceed 90 days.

During FY 2018, State Bank of Pakistan (SBP) held six (06) bi-monthly monetary policy reviews.
During the first half, the SBP maintained the policy rate at 5.75% owing to strong likelihood of
continued growth momentum; contained inflation; and anticipation of gain in exports due to
improvement in domestic energy supplies and incentives given to exporting industry. However, in
the latter half, the SBP increased the policy rate by 75 basis points to 6.5% in response to growing
pressures on the external front driven by ballooning Current Account Deficit (CAD), preempt
overheating of the economy, and rein in inflationary pressures. Sovereign yields responded to
increase in the policy rate whereby 3-month, 6-month, and 12-month T-Bills yields went up by 79
bps, 90 bps, and 116 bps, respectively.

Asset Allocation of Fund (% of NAV)

Particulars 30-Jun-18 30-Jun-17

Placements with DFIs - 9.43%
Money Market Placements - -
Cash, Bank Placements & Other Assets 100% 90.57&
Total 100% 100%

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ISA 720 Revised

Auditors responsibilities relating to other informataion

SCOPE

Auditors responsibility relating to other information included in annual report. Other information
could be financial and non financial.
Auditors opinion does not cover other information nor ISA require to obtain such kind of audit
evidence Infact read and consider the other information to identify material inconsistencies
because material misstatement may undermine the credibility of financial statements

This ISA assist the auditor in complying with the ethical requirement
This ISA does not apply to
Preliminary announcement
prospectus

This ISA does not constitute an assurance engagment Nor impose an

obligation on auditor to obtain assurance

Law or regulation may impose additional obligation which are beyond the scope of this ISA

Objective

Any MI between OI and FS

Any MI between OI and AK
Respond when MI identified
To report in a/c with ISA

Definition

Annual Report
A document prepared annually by management to provide owner with information on entitys
operation, financial result and financial position

Other Information
Financial or non financial information included in annual report other than AR and FS

Misstatement of Other information

When OI is misleading or incorrectly stated

Where is the materiality defined for OI

Use same framework such as

Common financial need of a user
Does it effect economic decision of user

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Consider both qualitative and quantitative

Requirement

A Obtaining the other Information

Discuss with management which document are included in the annual report

Make arrangement to obtain final version of such information on a timely basis prefaraly before AR
If information are not available until the date of audit report, request WR that final version will be
provided prior to issuance by the entity

Important Points

When TCWG approve OI, fV is the one that is approved by TCWG

If at the Date of Audit Report, entity is considering the development of a document but unable to
confirm the timing or purpose of such informaiton then the document is not considered OI

Auditor does not have responsibility to search for OI in the entitys website.
The auditor is not precluded from dating AR, if the auditor has not obtained OI

Specific Written representaiton w.r.t OI

All OI has been provided
OI is not materially misstated
If OI is not obtained prior to the date of Audit report, intends and expected timing of such issue.
Author:
Significance (such as KEY RATIO)
B Reading and Considering the Other Information
quantitative - size of the amount
B1 sesitivity
Consider MI between FS and OI by selecting amount in the OI with FS
Consider significance (key ratio), size of the amount and senssitivity (shared based payment, RP,
Director fee

Nature and extent of procedure is a matter of professional judgement

Compare OI with the FS
Compare words and interpretations for disclosure

EP is responsible for overall supervision and direction by ensuring experience, knowledge and etc.

B2 Consider MI between OI and AK

Ensure that understanding of the entity and its environment and its internal control are consistent
with OI

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B3 Remain alert for OI not related to FS and Ak which appears to be materially misstated

Difference between OI and General Knowledge

Internal inconsistency (directors report and fund manager report)

C Results of the procedures performed in the previous steps

C1 Material misstatement of the other information exist

C2 Material misstatement of the financial statement exist
C3 Auditors understanding need to be updated
Author:
C1 When Auditor concludes that Material Misstatement of Other
It will Information Exist
create doubt on Management integrity,
obtain legal advice, report to Regulator if
Request management to correct other information required by regulations.
Auditor in rare circumstances can issue
If management refuse, request TCWG
disclaimer because it creates doubt on all the
evidence obtained.
IF not corrected
OI obtained prior to the date of AR

Implication in AR Withdraw from Engagement

Other information section
Or disclaimer

OI obtained after the date of Audit report

If corrected If not corrected

Perform procedures (correction made) Take action considering auditors legal rights and
obligation

Seek legal advice

Provide new audit report
inform at AGM
communicate with SECP or ICAP
implicaiton on engagement continuance

C2 When Material Misstatement in Financial Statement exist

OR
C3 Auditors understanding needs to be updated

may need to revise risk assessment

evaluate misstatement
Auditors responsibility relating to subsequent event

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D Reporting

D1 Content of OI section
D2 Modification in the FS
Qualified or adverse might not have impact on Financial statement. For eg non disclosure
Qualified opinion due to material misstatement - Consideration should be given whether OI is
materially misstated
Qualified opinion due to scope limitation - unable to conclude on other information therefore
modification
Adverse opinion - OI should be modified w.r.t adverse matter and also report any other Material
misstatement
Disclaimer of Opinion - Not even include a section of Other Information

D3 Reporting presecribed by law and regulation

Minimum content
Identification of OI obtained
Description of auditors responsibility
Outcome of Auditors work

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Summer 2012 OTHER INFORMATION

Winter 2010 Other Information

Winter 2014

Summer 2016

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QUESTION 01

You are the manager responsible for the audit of Yew Co, a company which designs and develops
aircraft engines. The audit for the year ended 31 July 20X1 is nearing completion and the audit senior
has left the following file note for your attention. 'I have just returned from a meeting with the
management of Yew Co, and there is a matter I want to bring to your attention.

Yew Co's statement of financial position recognises an intangible asset of $12.5 million in respect of
capitalised research and development costs relating to new aircraft engine designs. However, market
research conducted by Yew Co in relation to these new designs indicated that there would be little
demand in the near future for such designs.

Management has provided written representation that they agree with the results of the market
research. 'Currently, Yew Co has a cash balance of only $125,000 and members of the management
team have expressed concerns that the company is finding it difficult to raise additional finance.

'The new aircraft designs have been discussed in the chairman's statement which is to be published with
the financial statements. The discussion states that 'developments of new engine designs are underway,
and we believe that these new designs will become a significant source of income for Yew Co in the next
12 months.'

'Yew Co's draft financial statements include profit before tax of $23 million, and total assets of $210
million. 'Yew Co is due to publish its annual report next week, so we need to consider the impact of this
matter urgently.'

Required Discuss the implications of the audit senior's file note on the completion of the audit and on
the auditor's report, recommending any further actions that should be taken by the auditor. (12 marks)

QUESTION 03

You are the manager responsible for four audit clients of Axis & Co, a firm of Chartered Certified
Accountants. The year end in each case is 30 June 20X8. You are currently reviewing the audit working
paper files and the audit seniors' recommendations for the auditor's reports. Details are as follows.

The directors' report of Abrupt Co states that investment property rental forms a major part of revenue.
However, a note to the financial statements shows that property rental represents only 1.6% of total
revenue for the year. The audit senior is satisfied that the revenue figures are correct. The audit senior
has noted that an unmodified opinion should be given as the audit opinion does not extend to the
directors' report. (4 marks)

Required For each situation, comment on the suitability or otherwise of the audit senior's proposals for
the auditor's reports. Where you disagree, indicate what audit modification (if any) should be given
instead

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Other information

June 2017

Oxford plc (Oxford)

During the external audit of Oxford, a listed company, you read the strategic report to be included in
Oxford's annual report. The strategic report contains a statement that “the company’s expansion into
China has been a success and is responsible for generating 20% of revenue”. However, the notes to the
financial statements disclose that only 10% of revenue originated from China. You are satisfied that the
error is in the strategic report and not the financial statements. The directors have refused to amend the
strategic report.

9.1 For each of the situations described above, state, with reasons, the implications for your firm’s audit
or assurance reports. 05

March 2016

Bear plc (Bear) During the external audit of Bear for the year ended 31 December 2015 you have read
the information contained in the Chairman’s Statement which includes a statement that all Bear’s
products are fair trade certified. However, a number of new product lines introduced by Bear during
2015 have not been certified by the independent fair trade body. The directors refuse to amend the
Chairman’s Statement as they claim they are currently in the process of obtaining certification and are
concerned about the impact on the company’s reputation if they do not include this statement.

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No material Misstatement

EXPECT TO OBTAIN AFTER DATE OF AUDIT REPORT

MISSTATEMENT IN OTHER INFORMATION EXIST

QUALIFICATION DUE TO SCOPE LIMITATION AND ALSO AFFECT OTHER INFORMATION

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Adverse Opinion

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ISA 800

Summary

SCOPE:

· 100 – 700 series applies to audit of FS

· 800 applies to complete set of FS prepared in a/c with the SPF

OBJECTIVE: special consideration that are relevant to

· Acceptance of audit engagement

· Planning and performance of that engagement
· Forming an opinion and reporting on FS

Definition:

· Special Purpose FS: Prepared in a/c with Special Purpose framework.

· Special Purpose framework: designed to meet the financial information need of specific users.
Could be FPF or CF

For eg:

· tax basis of accounting

· Cash receipt and disbursement basis for creditors
· Financial reporting provision established by regulator
· Financial reporting provision of a contract

· Special Purpose framework based on FRF established by SSG or law or regulation but does
not comply with all requirement – refer to financial reporting provision of the contract.
Therefore it could not be fair presentation because all the requirement of that framework are
not complied.
· If prepared on the basis of SPF and it is only FS that management prepared and used by the
user other than those for whom FRF is designed. Despite the broad distribution it is FS it is
still Special purpose FS

Requirement

A. When to Accept Engagement:

· Acceptability of FRF – purpose, intended user & steps by management to determine that FRF is
acceptable
· Could be determined by org, law or mutually agreed between parties

B. Planning and Performing

· Comply with relevant ethical requirement including independence
· Adapt other ISA as necessary
· If lower threshold determined by the user, still needs to calculate materiality
· Check management selection and application of accounting policy
· If SPFS prepared in a/c with contract – read and understand contract

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C. Forming an opinion and Reporting on FS

C1. Application of ISA 700 revised when reporting on SPFS

· Going Concern: Going concern may or may not be prepared – for e.g. FS prepared for tax
purpose
· KAM: If required by law or regulation or auditor decides to communicate
· Other Information: ISA 720 apply
· Name of EP: Applied to the Special purpose FS of listed entities
· Inclusion of reference in the Auditors report on complete set of General purpose FS: may
deem it appropriate to refer in OMP to the auditor’s report on complete set of General purpose FS

C2. Description of AFRF: adequately disclose in the FS about the basis of preparation. If
management has choice, include in the MR that Management is responsible for determining the
acceptability of FRF

C3. Alerting Reader and Restriction on distribution use:

EOMP – FS are prepared in a/c with SPF and may not be suitable for another purpose and restriction on
distribution

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ISA 805

Summary

SCOPE:

· Audit of single FS or specific element of FS

· Single FS or specific element could be prepared in a/c with GPF or SPF. If SPF than ISA 800 also
apply (EOMP)

OBJECTIVE:

· Acceptance
· Planning and performing
· Forming an Opinion

REQUIRMENT:

A. Consideration when accepting the Engagement

· Comply with relevant ethical requirement including independence
· Compliance with the requirement of ISA relevant to audit of single FS may not be practicable if
auditor is not engaged to audit complete set of General purpose FS
· Because auditor may not have same level of understanding of entity and its environment
including its internal control – therefore request management for another type of engagement

A1. Acceptability of Financial Reporting Framework

· Whether application of financial reporting framework will result in a presentation that provides
adequate disclosure to enable the intended user to understand the information conveyed in the
FS

B. Planning and Performing

· Adapt all ISA relevant to the audit as necessary in the circumstances for e.g. Materiality
determined for a single FS may be lower than the materiality determined for complete set of FS

C. Forming an Opinion

· If opinion on complete set is in a/c with fair presentation – use give true and fair view or
presents fairly
· If opinion on complete set is in a/c with compliance framework – FS prepared in a/c with
framework
· To use phrases such as presents fairly or give true and fair view – additional consideration
required such as:
o Whether AFRF is explicitly restricted to preparation of complete set of FS
o Whether single FS will:

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§ Comply with each of those requirement of AFRF

§ Provide disclosure beyond those required by AFRF
§ Depart from requirement of AFRF

C1. Going Concern: management and auditor responsibility will be change based on the
circumstances

C2. Key Audit Matters: not applicable unless required by law or regulation or auditor otherwise
decided to include KAM

C3. Other Information: Applicable if your report is part of other information

C4. Name of Engagement Partner: Applicable to specific elements or single FS of listed entities

For other than listed entities: law or regulation may require to include or auditor may decide

D. Reporting on complete set of FS and specific elements or single FS

· Separate opinion
· Do not issue opinion until satisfy that it is differentiated from opinion on complete set of FS

D1. If auditors report on complete set of FS include:

· Modified, EOMP, OMP, Material uncertainty relating to GC, KAM, Uncorrected material
misstatement in other information
· Check the implication on audit of single fs, or account balance and auditors opinion
· For e.g.: qualification on receivable due to classification may not be relevant for single account
balance
· Even if there is no implication auditor may consider it necessary to include OMP
· KAM may be useful in auditors determination to how to address the matter

D2. Adverse Opinion or Disclaimer of Opinion in AR on complete set of FS

· If adverse or disclaimer on complete set of FS – cannot give unmodified opinion on single FS or

specific account balance
· Exception when auditor still consider it appropriate to express unmodified opinion on that
element (only for specific account balance):
o Not prohibited by law or regulation;
o Opinion is not published together with AR containing adverse or disclaimer opinion; and
o The element does not constitute major portion of entity’s complete set of FS
· Single FS deemed to constitute major portion of those FS there could not give unmodified
opinion
· Exception:
o Expression of disclaimer regarding the result of operations and cashflows – unmodified
opinion regarding financial position is permitted

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DRAFT AUDITORS' REPORT TO THE MANAGING DIRECTOR OF

ON CAPITALIZATION OF FIXED ASSETS

We have audited the accompanying Schedule of Fixed Assets Capitalized ("the Schedule") of ("the Company")
and the relevant notes (here-in-after referred to as "the Schedule and Notes") for the year ended June 30,
2016.

The Schedule and Notes have been prepared by management in accordance with the basis of preparation as
disclosed in note 2.

Management's Responsibility

Management is responsible for the preparation of the Schedule and Notes in accordance with the basis of
preparation as disclosed in note 2 and for such internal controls as management determines is necessary to
enable the preparation of the Schedule and Notes that are free from material misstatement, whether due to
fraud or error.

Auditors' Responsibility

Our responsibility is to express an opinion on the Schedule and Notes based on our audit. We conducted our
audit in accordance with the auditing standards as applicable in Pakistan. Those standards require that we
comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about
whether the Schedule and Notes are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
Schedule and Notes. The procedures selected depend on the auditors' judgment, including the assessment of
the risks of material misstatement of the Schedule and Notes, whether due to fraud or error.

In making those risk assessments, the auditor considers internal controls relevant to the entity’s preparation of
the Schedule and Notes 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 controls. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the Schedule.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.

Opinion

In our opinion, the Schedule and Notes for the year ended June 30, 2016 are prepared in all material respects,
in accordance with the basis of preparation as disclosed in note 2.

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Basis of Preparation and Restriction on Distribution

Without modifying our opinion, we draw attention to the note 2, which describes the basis of preparation. The
Schedule and Notes have been prepared by the Company in meeting the requirement of). As a result, the
Schedule and Notes may not be suitable for another purpose. Our report is intended solely for the Company
and and should not be distributed to or used by parties other than the Company and .

Chartered Accountants

Date:
Place: Karachi

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SCHEDULE OF FIXED ASSETS CAPITALIZED

FOR THE YEAR ENDED JUNE 30, 2016

Rupees in ‘000

Transmission pipeline

1. Construction equipment
2. Pipelines (new / replacements)
3. Compressors / turbines
4. Supervisory Control and Data Acquisition (SCADA)
5. Telecommunication
A

Distribution pipeline
6. Pipelines (supply mains, extensions, etc.) excluding the
jobs with total value of less than Rs. 10 million B

C=A+B

The annexed notes 1 to 4 form an integral part of this Schedule.

MANAGING DIRECTOR CHIEF FINANCIAL OFFICER

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NOTES TO THE SCHEDULE OF FIXED ASSETS CAPITALIZED

FOR THE YEAR ENDED JUNE 30, 2016

1. PURPOSE

The Schedule of Fixed Assets Capitalized in categories specified below is required by for the purpose
of determination of final revenue requirement of (the Company) for the year ended June 30, 2016.

Transmission

- Construction equipment
- Pipelines (new / replacement)
- Compressors / turbines
- Supervisory Control and Data Acquisition (SCADA)
- Telecommunication

Distribution

Pipelines (supply mains, extensions, etc.) excluding the jobs with total value of less than Rs. 10
million.

2. BASIS OF PREPARATION

The Company prepares its financial statements in accordance with the approved accounting standards
as applicable in Pakistan, which comprise of such International Financial Reporting Standards issued
by the International Accounting Standards Board as are notified under the Companies Ordinance,
1984, provisions of and directives issued under the Companies Ordinance, 1984. In case the
requirement differ, the provisions of, or directives issued under the Companies Ordinance, 1984 shall
prevail.

For preparation of financial information in the Schedule and Notes, the requirements of the approved
accounting standards as applicable in Pakistan have been followed to the extent which is relevant and
necessary for the information in the Schedule and Notes.

3. ACCOUNTING POLICIES

Initial recognition

The cost of an item of fixed asset is recognised as an asset if it is probable that future economic
benefits associated with the item will flow to the entity and the cost of such item can be measured
reliably.

Recognition of the cost in the carrying amount of an item of fixed asset ceases when the item is in the
location and condition necessary for it to be capable of operating in the manner intended by
management.

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Measurement of cost

The cost of the fixed asset capitalized includes:

(a) its purchase price including import duties, non-refundable purchase taxes after deducting trade
discounts and rebates; and

(b) any cost directly attributable to bringing the asset to the location and condition necessary for it to
be capable of operating in the manner intended by management.

Recognition of subsequent expenditure

Expenditure incurred to replace a component of an item of fixed assets is capitalized and the asset so
replaced is retired. Other subsequent expenditure is capitalized only when it is probable that future
economic benefits associated with the item will flow to the entity and the cost of the items can be
measured reliably. All other expenditure (including repairs and normal maintenance) is recognised in
the profit and loss account as an expense when it is incurred.

4. DATE OF AUTHORIZATION

This Schedule and Notes are authorized for issuance on ________________.

MANAGING DIRECTOR CHIEF FINANCIAL OFFICER

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Winter 2012

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ISA 810 – Engagement to Report on Summary Financial Statement

Summary

SCOPE:

· AR to report on SFS derived from FS

OBJECTIVE:

· Whether it is appropriate to accept engagement to report on SFS

· IF yes:
o To form an opinion
o To clearly express that opinion

DEFINITION:

Applied criteria: Criteria applied by management in preparation of SFS

Summary Financial Statement: Contain less detail than the FS

REQUIRMENT:

A. ENGAGEMENT ACCEPTANCE
· When also the auditor of FS from which SFS are derived. Because Application of ISA 810 will not
provide SAAE if auditor has not audited FS
· Whether applied criteria is acceptable. Consider nature of the entity, purpose, need of the
intended user, not to be misleading
o SFS contain aggregated information therefore risk of misleading.
o Risk further increase when there is no acceptable criteria
o Criteria prescribed by standard setting organization or law or regulation are normally
acceptable
o Criteria prepared by management will be acceptable only if:
§ Disclosed the summarized nature and identify the audited FS
§ From whom and where audited FS are available
§ Adequately described the applied criteria
§ Agree or can be recalculated from audited FS
§ Not misleading
· Obtain agreement of management that it acknowledged and u/s its responsibility
o Preparation of FS in a/c with criteria
o To make audited FS available to the intended user of the SFS
o To include the AR on SFS in any documents that contains SFS
· Agree with the management the form of opinion on SFS
· If applied criteria is unacceptable or unable to obtain agreement of management – shall not
accept engagement unless required by law or reg – in that case does not state that engagement
conducted in a/c with ISA

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B. Nature of Procedures
o Whether SFS adequately disclose their summarized nature and identify the audited FS
o When summary financial statements are not accompanied by the audited financial statements,
evaluate whether they describe clearly:
o From whom or where the audited financial statements are available; or
o The law or regulation that specifies that the audited financial statements need not be
made available to the intended users of the summary financial statements and
establishes the criteria for the preparation of the summary financial statements.
o Evaluate whether the summary financial statements adequately disclose the applied criteria.
o Compare the summary financial statements with the related information in the audited financial
statements to determine whether the summary financial statements agree with or can be
recalculated from the related information in the audited financial statements.
o Evaluate whether the summary financial statements are prepared in accordance with the
applied criteria.
o Evaluate, in view of the purpose of the summary financial statements, whether the summary
financial statements contain the information necessary, and are at an appropriate level of
aggregation, so as not to be misleading in the circumstances.
o Evaluate whether the audited financial statements are available to the intended users of the
summary financial statements without undue difficulty, unless law or regulation provides that
they need not be made available and establishes the criteria for the preparation of the summary
financial statements

C. Form of Opinion
o If unmodified opinion on SFS is unmodified use one of the following phrase
o SFS are consistent, in all material respect, with audited FS, in accordance with AC
o SFAS are a fair summary of the audited FS, in a/c with AC
o If law or reg prescribed the wording that are different
o Perform additional procedure to express prescribed opinion
o If user misunderstand – whether additional explanation can mitigate possible
misunderstanding – if not – shall not accept engagement unless req by law or reg – in
that case do not say that engagement conducted in a/c with ISA

o Subsequent Event

o SFS may be dated later than the date of AR – state that SFS and AFS do not reflect event
that occurred subsequent to date of AR on FS
o If aware not issue report on SFS until requirement of ISA 560 has been completed

o Elements of Auditors Report on Summary Financial Statement

o See paragraph 16 and illustration 01

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o Reference to the Auditors Report on Audited FS

o When auditors report on FS includes Q, EOMP or OMP, MURTGC,KAM, misstatement in
OI
o State that AR on FS includes Q, EOMP or OMP, MURTGC, KAM, misstatement in OI and
describe the effect as well

o When auditors report on audited FS includes adverse or disclaimer – Auditors report on SFS
shall:
o State AR on FS contain adverse or disclaimer
o Basis for adverse or disclaimer
o As a result it is inappropriate to express opinion on SFS

o Modified Opinion on SFS

o IF SFS are not consistent with audited FS in accordance with the applied criteria – shall
express adverse opinion
o Restriction on distribution of use or alerting reader to the basis of accounting
o When such restriction or alertness in audited FS – the same restriction on SFS
o Comparative
o If audited Fs contain comparative but FS do not – the auditor shall determine effect on
unreasonable omission on AR on SFS
o OTHER INFORMATION
o ISA 720 will apply

o Auditor Association
o If auditor become aware that entity plan to state in a document containing SFS that
auditor has reported on SFS but does not plan to include AR – request management
o If management refuse – seek legal advice
o The auditor may be engage to report on FS but no engaged to report on SFS and entity
plans to make a statement that SFA are derived from FS audited by auditor – the auditor
shall be satisfied that:
§ Reference is made in the context of AR on audited FS; and
§ Statement does not give impression that auditor has reported on SFS
o If above 2 conditions not met – request management to change the statement to meet
them or not to refer to the auditor in the document or entity may engage auditor to
report on SFS – if refuse seek legal advice

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Clean report + KAM & MURTGC in complete set of FS

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Clean report + qualified opinion on complete set of FS

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Adverse opinion on complete set of FS

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Summer 2016

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ISRE 2400

Engagement to Review Historical Financial Statements

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Requirement Description
ETHICAL REQUIREMENT Same
PROFESSIONAL SKEPTICISM Same
ENGAGMENT LEVEL QUALITY CONTROL Engagement partner shall take responsibility of
· Overall quality of each review
engagmene to which that partner is
assigned
· Direction, supervision, planning and
performance of the review engagement
· Report being appropriate in the
circumstances
· Engagement being performed in a/c with
the firm’s quality control policies
including proper client acceptance and
continuance are satisfied, engagemen
team has appropriate competency and
capabilities
COMPLIANCE WITH ETHICAL REQUIREMENT SAME
FACTORS AFFECTING ACCEPTANCE AND Unless required by law shall not accept
CONTINUANCE OF CLIENT RELATIONSHIP engagement if:
· the practitioner is not satisfied that there is a
rationale purpose (intend to associate name
in an inappropriate manner and requirement
is for audit) of the engagement and review
engagement would be appropriate in the
circumstances
· ethical requirment including indepence
would not be satisfied
· doubt over management integrity
· imposed limitation

PRECONDITION Same
ENGAGEMENT LETTER Same
A statement that engagement is not an audit and
that the practitioners will not express an opinion
on the financial statement
Recurring engagement and acceptance for same
change in terms of review engagement
Materiality Same
Practitioners understanding Same as isa 315
Designing and performing procedures Same as different
Related parties Same
Fraud and non compliance with laws and Indication or suspected fraud or non compliance:
regulations · communicate to appropriate level
· request management assessement
· consider the effect of above on practitioner
conclusion

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· should communicate to any other party

Going concern Same: Procedures should be inquiry
Use of work performed by others Same
Subsequent event Same
Written representation Same

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REASONABLE ASSURANCE LIMITED ASSURANCE

A high but not absolute level of Moderate level of assurance
assurance
Expressed in positive form Expressed in negative form
The objective of statutory audit is to The objective of review engagement
provide reasonable assurance is to provide limited assurance
Extensive audit procedures such as Procedures primary limited to inquiry
confirmation, vouching, bank and analytical procedures
statement etc.

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December 2016

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Sep 2015

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ISAE 3000 – SUMMARY

Objective

· To establish basic principles and essential procedures for, and to provide guidance to professional
accountants in public practice for the performance of assurance engagements other than audits or
reviews of historical financial information covered by International Standards on Auditing (ISAs) or
International Standards on Review Engagements (ISREs).
· To obtain either reasonable assurance or limited assurance whether subject matter information is
free from material misstatement
· To express a conclusion through a written report

General Principles and Approach

COMPLIANCE

· Comply with the ISAE and any other relevant ISAEs.

· ISAs and ISRE may generally provide guidance.

ETHICAL REQUIRMENT

· Comply with "Code of Ethics for Professional Accountants".

ACCEPTANCE AND CONTINUANCE

· Engagement Partner shall be satisfied that appropriate procedure regarding acceptance and
continuance of client relationship
· The practitioner shall accept or continue an assurance engagement only when:
o Ethical requirement including independence complied
o Appropriate competence and capability of engagement team
o Precondition are present (for Public sector entitites PC are normally present (Roles, access
to all information, type of assurance and rational for assurance because it is covered under
legislation and regulation):
§ Roles and responsibilities of each parties
§ Subject matter is appropriate ( it does not depends on level of assurance)
§ Criteria is suitable (relevance, completeness, reliability, neutrality and
understandability. If law or regulation prescribes criteria, such are presumed to be
accebtable and are knows as established criteria. If such criteria are present and
specific user had their own detailed criteria. In such case assurance report alert
readers subject matter is prepared in a/c with special purpose criteria and may not
be suitable for another purpose and the criteria are not embodied in law or
regulation that follows transparent due process. IF such criteria is misleading
acknowledgement from specific user that such criteria are suitable for their purpose
§ Criterial will be available to the intended user. (publicly, include in subject matter
information, include in assurance report,
§ Expect to obtain evidence
§ Written report
§ A rational purpose (intended user of the SM and AR, aspect of the SM are excluded
from AE, relationship between RP, evaluator and the engaging party, who selected

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the criteria, it has rational if it is selected by intended user, significant limitations on

the scope of practitioners work.

Agree on terms of engagement

§ Agree in terms of engagement

§ Assess on recurring engagement
§ Request to change by management

Assurance report prescribed by law or regulation

§ Whether intended user misunderstood and whether that misunderstanding can be mitigate
from additional explanation. If not don’t say in AR that conducted in a/c with ISAE

QUALITY CONTROL

Characteristics of EP

§ Member of firm that applies ISQC 01

§ Overall competent and competency on SM

Assignment of team

§ Engagement team have appropriate competency and capability to

o Perform the engagement in a/c relevant standards
o Issue AR that is appropriate in the circumstances
o To be involved in the practitioner expert and another practitioner work

Responsibilities of EP

§ Appropriate procedures regarding acceptance and continuance

§ Engagement being planned and performed to comply with all requirements
§ Review properly performed
§ Appropriate documentation
§ Appropriate consultation
§ Inquire with ET for any non compliance with ethical requirements

Engagement Quality Control Review

§ Discussing significant matter with EQCR

§ EQCR objective evaluation

Maintain professional skepticism, Professional Judgement, Assurance skills and technique

Planning

The practitioner shall plan the engagement so that it will be performed in an effective manner, including
setting the scope, timing and direction of the engagement, and determining the nature, timing and
extent of planned procedures that are required to be carried out in order to achieve the objective of the
practitioner.

If after acceptance one or more PC are not present, discuss the matter to determine whether it can be
resolved, whether it is appropriate to continue the engagement and how to communicate the matter in
the AR.

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If after acceptance practitioner determines that criteria is not suitable, consider withdrawing from
engagement.

Materiality

§ Determine materiality for planning, performing and concluding

Understanding the Subject matter and other engagement circumstances

§ Understanding to identify and assess the ROMM in SMI thereby provide a basis for designing
and performing procedures to respond to the assessed risk.
§ Obtain understanding of IC
§ Obtaining evidence
§ Revise risk assessment

Make inquiries:

§ Whether they have knowledge on any non compliance with laws and regulation affecting SM
§ Whether RP has IAF
§ Whether RP used any expert in the preparation of the SMI

Work performed by Practitioners Expert

Competency, understanding of field of expertise, agree the terms of engagement and evaluate the
adequacy of expert work.

Work performed by another practitioner

Whether work is adequate, competence, capability, obtain u/s of work

Written representation

Subsequent event

Other Information

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Assurance Report Content

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INDEPENDENT REASONABLE ASSURANCE REPORT ON STATEMENT OF FREE FLOAT OF SHARES

To
The Managing Director

1. Introduction

We have been engaged to perform a reasonable assurance engagement on the annexed

Statement of Free Float of Shares (the 'Statement') of (the Company) as of March 31, 2017 and
June 30, 2017.

2. Applicable Criteria

The criteria against which the Statement is assessed is Regulation No. 5.7.2(c)(ii) of Pakistan
Stock Exchange Limited Regulations (PSX Regulations) which requires every listed company/
modaraba/mutual fund to submit directly to Pakistan Stock Exchange (PSX) an annual Free-Float
Certificate duly verified by the auditor along with the annual audited accounts as prescribed under
regulation 5.6.4(a) of the PSX Regulations.

3. Management's Responsibility for the Statement

Management is responsible for the preparation of the Statement as of March 31, 2017 and June
30, 2017 in accordance with the applicable criteria. This responsibility includes maintaining
adequate records and internal controls as determined necessary to enable the preparation of the
Statement such that it is free from material misstatement, whether due to fraud or error.

4. Our Independence and Quality Control

We have complied with the independence and other ethical requirements of the Code of Ethics for
Chartered Accountants issued by the Institute of Chartered Accountants of Pakistan, which is
founded on fundamental principles of integrity, objectivity, professional competence and due
care, confidentiality and professional behavior. The firm applies International Standard on Quality
Control 1 "Quality Control for firms that perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services Engagements" and accordingly maintains
a comprehensive system of quality control including documented policies and procedures
regarding compliance with ethical requirements, professional standards and applicable legal and
regulatory requirements.

5. Our responsibility and summary of the work performed

Our responsibility is to carry out an independent reasonable assurance engagement and to

express an opinion as to whether the Statement is prepared in accordance with the applicable
criteria, based on the procedures we have performed and the evidence we have obtained.

We conducted our reasonable assurance engagement in accordance with International Standard

on Assurance Engagements 3000 (Revised), 'Assurance Engagements other than audits or
reviews of historical financial statements' (ISAE 3000) (Revised) issued by the International
Auditing and Assurance Standards Board. That standard requires that we plan and perform this
engagement to obtain reasonable level of assurance about whether the Statement is free from
material misstatement.

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A reasonable assurance engagement in accordance with ISAE 3000 (Revised) involves performing
procedures to obtain evidence about the free float of shares and related information in the
Statement. The nature, timing and extent of procedures selected depend on the practitioner's
judgment, including the assessment of the risks of material misstatement, whether due to fraud
or error, in the Statement. In making those risk assessments, we considered internal control
relevant to Sui Southern Gas Company Limited’s preparation of the Statement. A reasonable
assurance engagement also includes assessing the applicable criteria used and significant
estimates made by management, as well as, evaluating the overall presentation of the
Statement.

We have carried out the procedures considered necessary for the purpose of providing reasonable
assurance on the Statement. Our assurance procedures performed included verification of
information in the Statement with the underlying data and record comprising of Central
Depository Company statements, forms submitted by the Company with Securities & Exchange
Commission of Pakistan relating to its pattern of shareholding and other related information.
Verification that the computation of free float of shares is in accordance with the PSX regulation
also forms part of our assurance procedures.

We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.

6. Opinion

In our opinion, the Statement as of March 31, 2017 and June 30, 2017 is prepared, in all material
respects, in accordance with the PSX Regulations.

7. Restriction on use and distribution

This report is issued in relation to the requirements as stipulated under Regulation No.
5.7.2(c){ii) of the PSX Regulations and is not to be used or distributed for any other purpose.
This report is restricted to the facts stated herein and the attachments.

Signature
Date:
Chartered Accountants

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 --
CA
IQ SCHOOL OF FINANCE AUDIT BY IBRAHIM www.iqsf.pk

The Institute of PAKISTAN

Chartered Accountants
of Pakistan HEAD OFFICE

Circular No.1/2017 January 31, 2017

ALL PRACTICING MEMBERS OF THE INSTITUTE

Dear Member

REVISED CSR/ SUSTANIBILITY ASSURANCE REPORT

CSR Assurance Report was issued vide ICAP Circular no. 02/2015, dated February 9, 2015. However,
International Standard on Assurance Engagements (ISAE) 3000, 'Assurance Engagements Other than
Audits or Reviews of Historical Financial Statements', has been revised, effective for assurance reports
dated on or after 15 December 2015. The CSR/ Sustainability Assurance Report has been revised by the
ICAP, in accordance with the requirements of ISAE 3000 (Revised).

In accordance with the requirements of ISAE 3000 (Revised), following additional key elements have
been included in the CSR/ Sustainability Assurance Report:
1. The Criteria: When preparing the report, the auditor should mention the
framework/indicators/guidelines/methodologies used by the Company to prepare the
Sustainability report. (refer para 69(d) of ISAE 3000 (Revised);
2. The Auditor's Independence: The auditor must affirm compliance with the independence and
other ethical requirements of Code of Ethics for Chartered Accountants issued by the ICAP. (refer
para 69(j) of ISAE 3000 (Revised);
3. The Auditor's Quality Control: The auditor must affirm compliance to the requirements of
International Standard on Quality Control 1 (ISQC 1), "Quality Control for Firms that Perform
Audits and Reviews of Historical Financial Information, and Other Assurance and Related
Services Engagements". (refer para 69(i) of ISAE 3000 (Revised);
4. The Auditor's Responsibility: The auditor must clearly express that his responsibility is Limited
Assurance Conclusion. (refer para 69(k) of ISAE 3000 (Revised);
5. Summary of the Work Performed: The auditor must summarize the assurance procedures
performed. However, the suggested work performed mentioned in the CSR report format may be
modified and other procedures added as relevant to the respective engagement conditions. (refer
para 69 of 69(k) of ISAE 3000 (Revised);
6. Description of the matter(s) giving rise to the exceptions: When applicable, the Auditor must
note exceptions causing the company's Sustainability report to be materially misstated. (refer
para 69 (I) (v) of ISAE 3000 (Revised); and
7. The Auditor's Conclusion: The Auditor must express that Limited Assurance Conclusion is
based on sufficient appropriate evidence, on the matters outlined in the CSR/ Sustainability
report. (refer para 69(1) (i) of ISAE 3000 (Revised).

The Council of the Institute has approved the enclosed revised CSR/ Sustainability Assurance Report in
rd
its 283 meeting held on January 25, 2017.
The revised report format will supersede the CSR/ Sustainability Assurance Report issued vide ICAP
Circular No. 02/2015 dated February 9, 2015.
Members are advised to take guidance from the enclosed CSR/ Sustainability Assurance Report format.

Your
t)�() :J

Soh��
Director Technical Services

(Established under the Chartered Accountants Ordinance, 1961 - X of 1961)

Chartered Accountants Avenue, Clifton, Karachi-75600 (Pakistan). Ph: (92-21) 111-000-422, Fax: 99251626
Website: www.icap.org.pk, E-mail: info@icap.org.pk

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SUGGESTED FORMAT

Independent Assurance Report on the Sustainability Report

To the Board of Directors of L.-_____ Company]

1. Introduction
We have undertaken a limited assurance engagement on the Sustainability Report of .........(the
Company) for the year ended . . . . . . . . . .. . .. . . . . . . . . . . . . . . . . prepared by the Board of Directors/
management of the Company.

2. Criteria
The criteria used by the company to prepare the Sustainability Report is (identify framework/basis
of preparation), as described on page X of the Sustainability Report (the Criteria).

3. Management's responsibility
The Company's management is responsible for the preparation of the Sustainability Report in
accordance with the Criteria. This responsibility includes the design, implementation and
maintenance of internal control relevant to the preparation of the Sustainability Report that is free
from material misstatement, whether due to fraud or error.

4. Limitations
(Refer note 1)

5. Our independence and quality control

We have complied with the independence and other ethical requirements of the Code of Ethics
for Chartered Accountants issued by the Institute of Chartered Accountants of Pakistan, which is
founded on fundamental principles of integrity, objectivity, professional competence and due care,
confidentiality and professional behavior.

The firm applies International Standard on Quality Control 1 "Quality Control for firms that perform
Audits and Reviews of Historical Financial Information, and Other Assurance and Related
Services Engagements" and accordingly maintains a comprehensive system of quality control
including documented policies and procedures regarding compliance with ethical requirements,
professional standards and applicable legal and regulatory requirements.

6. Our responsibility and summary of work performed

Our responsibility is to express a limited assurance conclusion on the Sustainability Report based
on the procedures we have performed and the evidence we have obtained. We conducted our
limited assurance engagement in accordance with International Standard on Assurance
Engagements 3000, 'Assurance Engagements other than audits or reviews of historical financial
statements' issued by the International Auditing and Assurance Standards Board. This standard
requires that we plan and perform this engagement to obtain limited assurance about whether the
Sustainability Report is free from material misstatement.

A limited assurance engagement involves assessing the suitability in the circumstances of

Company's use of the Criteria as the basis for the preparation of the Sustainability Report,
assessing the risks of material misstatement of the Report whether due to fraud or error,
responding to the assessed risks as necessary in the circumstances, and evaluating the overall
presentation of the Report. A limited assurance engagement is substantially less in scope than a
reasonable assurance engagement in relation to both the risk assessment procedures, including
an understanding of internal control, and the procedures performed in response to the assessed
risks.

The procedures performed in a limited assurance engagement vary in nature and timing from,
and are less in extent than for, a reasonable assurance engagement; and consequently, the level

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of assuranceobtainedin a limitedassuranceengagementis substantially lower than the

assurancethat would have been obtainedhad a reasonable assuranceengagement been
performed.Accordingly,the proceduresselectedwere based on our professionaljudgement.
Withinthe scopeof our work,we performedamongstotherthe followingprocedures:(theseare
the suggestedworkpeiormed that may be nodified and otherproceduresaddedas peiormed
andrelevantfor the respectiveengagement (Refernote 2)
conditions.)

7. Descriptionof the matter(s)giving rise to the exceptions(if any) (Refernote 3)

a)
0) ; linsertexceptions,
if anyl
8. Limitedassuranceconclusion
Our conclusion has beenformedon the basisof, and is subjectto, the mattersoutlinedin this
report.We believethat the evidencewe haveobtainedis sufficientand appropriateto providea
basisfor ourlimitedassurance conclusion.

Basedon our limitedassurance engagement, nothinghascometo our aftention(exceptfor the

effect of the matters reportedin the paragraphabove),that causes us to believethat the
SustainabilityReportis not prepared,in all materialrespects,in accordancewiththe Criteria.
o Restrictionon distribution
(Refernote 4)

DATE: STcNATURE
CHARTERED
AccoUNTANTS

IPLACE/ CIIYI

ASSURANcEENGAGEMENT
PARTNER

ZIDTS\ICAP\Circular
issuedin 2017.docx

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Note 1: If the engagement was subject to any limitations, reference should be made accordingly. The
limitations may be that the assurance scope excludes:

• Aspects of the Report other than those mentioned;

• Data and information outside the defined reporting period (July1 2016 to June 30 2017);

• The Company's statements that describe expression of opinion, belief, aspiration, expectation,
aim or future intention and national or global socio-economic and environmental aspects;

• Data and information on economic and financial performance of the Company, which, we are
informed, are from the Company's audited financial records

Note 2: Procedures will depend upon the auditor's judgment and may vary with the scope of work. Following
procedures may be relevant for the engagement:

 Interview selected key senior personnel of the Company to understand the current
processes in place for capturing sustainability performance data, the Company’s
sustainability goals and the progress made during the reporting period;

 Review the Company’s approach to stakeholder engagement and processes for

determining material issues through interviews and review of associated documents;

 Review relevant documents and systems for gathering, analyzing and aggregating
sustainability performance data in the reporting period;

 Review of major anomaly within the report as well as between the report and source
data/information;

 Verification of the transcription of data internally verified by the Company;

 Execution of audit trail of selected data streams and information to determine the level of
accuracy in collection, transcription and aggregation processes followed;

 Review of the reliability of the information, assessing related controls and their operating
effectiveness;

 Review of the Company’s plans, policies and practices, pertaining to their social,
environmental and sustainable development;

 Performance of site visits as part of the inspection of processes for collecting, analyzing,
validation and aggregation of sustainability data and their documentation on a sample
basis.

Note 3: Include when it is applicable.

Note 4: Where applicable, use the wording of paragraph 69(f) of revised ISAE 3000 which states that:
‘when the applicable criteria are designed for a specific purpose, a statement alerting readers to
this fact and that, as a result, the subject matter information may not be suitable for another
purpose’.

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WINTER 2017

Winter 2016

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ISAE 3400
Summary

Objective:
examine and report on PFI

What is PFI

FI based on assumptions about events that may occur in the future and possible action by the entity
PFI can be forecast or projection

Forecast
Future events which management expect to take place
and actions management expect to take as at the date of financial information
It is also called best estimate assumptions
Projections

HA about future events and management action which are not necessarily expected to take place
What if scenerio

Purpose of PFI
Could be for internal use and external use

The auditor shall obtain SAAE as to whether

Best estimate assumption are reasonable
Hypothetical assumption are consistent with purpose of PFI
PFI prepared on the basis of assumption
PFI is properly presented and all material assumption are adequately disclosed including whether
they are BE or HA
Consistent with historic FS using appropriate accounting principles

A Auditors Assurance
It relates to events not yet occurred or may not occurred
Highly speculative in nature
Therefore auditor is not in a position to express an opinion that results shown in the PFI will be
achieved
Moderate level of assurance on reasonableness of management assumptions
However when appropriate level of satisfaction obtained - can give positive assurance opinion
Acceptance of Engagement

intended use of information

general or limited distribution
nature of assumption - BE or HA
elements to be included in the PFI

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Period covered
Should not accept or withraw when assumptions are clearly unrealistic
or when PFI will be inappropriate for its intended use
The above points should be the content of EL
In addition include management responsibility for assumption and providing information to Auditor

Knowledge of the Business

a Sufficient level of knowledge to evaluate whether all significant assumptions have been identified
b Familiar with the entitys process for preparing PFI
Internal control, expertise and experience of the person
nature of the documentation supporting management assumptions
extent to which techniques are used
method used to develop and apply assumptions
accuracy of PFI prepared in prior period and reason for variation
c whether PFI is prepared on a basis of Historical FI
d Also consider whether any modified opinion on FS

Period Covered
Consider the period of time covered by FI
Higher the length, management ability to make best estimate assumption decreased
Period based on following
Operating cycle - construction company
need of the user - such as loan application

Examination procedures
Determing nature, timing and extent of procedures depend on :
likelihood of MM
knowledge obtained during previous engagments
Management competence
adequacy and reliability of underlying data
Extent to which PFI is affected by management judgement

Source and reliability of evidence supporting best estimate assumption could be obtained from
internal and external source including historical information and whether within entitys capacity
When Hypothetical assumptions - significant implication of such assumptions for eg. Sales are
assumed to grow beyond current capacity, increase in investment in plant
Although evidence supporting HA need not be obtained, but it should be consistent with purpose
and should not be unrealistic
ensure PFI is prepared from management assumptions , by recomputaion and reviewing internal
consistency (same interest rate are used)
focus on those areas that are sensitive to variation therefore ensure appropriate evidence and
adequacy of disclosures
Interrelationship of FS (BS, P&L, CF)
Procedure on elapsed period on PFI

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Obtain WR from Management - intended use, completeness of assumptions and management

responsibility for PFI
Presentation and Disclosure
presentaion of PFI is informative not misleading
accounting policies are cleary disclosed
assumptions are adequately disclosed in PFI
bifucrated into best estimate and Hypothetical
areas that are subject to high degree of uncertainity , those uncertainity and resulting sensitivity
needs to be disclosed
any change in accounting policy from Historical FS need to be dislosed along with the reason and
its effect on PFI

Report
See paragraph 27

Modification

When presentaiton and disclosure of PFI is not adequate - qualified or adverse or withdraw
Eg: when PFI fails to disclose adequately consequences of assumption which are highly sensitive
When one or more Significant assumptions do not provide a reasonable basis for PFI - adverse or
withdraw

Scope limitation - Discalimer or withdraw

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REPORT ON EXAMINATION OF PROSPECTIVE FINANCIAL INFORMATION TO THE BOARD OF

DIRECTORS OF

We have examined the prospective financial information (here-in-after referred as “Projection”) of the
Company”) prepared by management, comprising of business plan from (FY17 to FY21), that includes
balance sheet, profit and loss account and cash flow statement together with the notes forming part
thereof, in accordance with the International Standard on Assurance Engagement (ISAE) 3400
“The Examination of Prospective Financial Information” (here-in-after referred as “Report”).

We will provide limited assurance on the financial projection of the Company prepared by management
for FY17 - FY21 to assess that the profitability and the possible financial strength, way forward. In these
projections, the Company’s management has emphasized that moderate scenario is more appropriate
and representative of the activities being undertaken in the Company.

Company’s management Responsibility

The Company’s management is responsible for preparation of Projection including the assumptions set
out in section “Scenario” of Projection (Page11-Page18) on which the Projection is based and such
Projection are presented on a basis consistent with the accounting policies of the Company as mentioned
in section “Accounting Policies” of Projection.

To the best knowledge and belief of the Company’s management, the information contained in Projection
is in accordance with the facts and does not omit anything likely to affect the importance of such
information.

The underlying assumptions used in the preparation of Projection is a mix of hypothetical assumptions
and management’s best estimates, based on historical trends and expected activities, reflecting
management’s judgment based on circumstances prevailing at the time of preparation of such
Projection. It is usually the case that some events and circumstances do not occur as expected or are
not anticipated. Therefore, actual results will almost always differ from the Projection and such
differences may be material.

Hypothetical Assumptions under Moderate Scenario are as follows:

• Management expects that the Impact study will be finalized and implemented by FY16-17. The draft
of which has already been issued, however, it is yet to be approved by the authority. (Projection-
Page 9).

• volume savings will be achieved as per management’s plan (including achievement of Key Monitoring
Indicators (KMIs), as per the UFG Impact study) and that the retrospective benefit of will be received
from 2011. (Projection-Page 9).

Accountant’s Responsibility

We have examined the Projection in accordance with ISAE 3400. This Standard requires that we plan
and perform our examination to obtain limited assurance that the assumptions used are in accordance
with the purpose of the financial information and that the Projection has been prepared on the basis of
such assumptions. Our examination has included a review of the Projection for the purpose of assessing
whether the assumptions made by the Management of the Company are in accordance with the purpose
of the prospective financial information, and that there is no reason to believe that they are unrealistic.
Further, we have assessed that the Projection is properly prepared in accordance with the assumptions
as well as the internal correlation in terms of figures in the Projection.

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In a limited assurance engagement, the evidence-gathering procedures are more limited than for a
reasonable assurance engagement and, therefore, less assurance is obtained than in a reasonable
assurance engagement. We believe that our evidence obtained is sufficient and appropriate to provide
a basis for our limited assurance conclusion.

Conclusion

Based on our examination of the evidence supporting the assumptions, nothing has come to our attention
which causes us to believe that these assumptions do not provide a reasonable basis for the Projection,
assuming that hypothetical assumptions as set out in Projection are realized. Further, in our opinion the
Projection is properly prepared on the basis of the assumptions and is presented in accordance with the
approved accounting standards as applicable in Pakistan.
Even if the events anticipated underthe assumptions described above occur, actual results are still likely
to be different from the Projection since other anticipated events frequently do not occur as expected
and the variation may be material.

Restriction on Distribution

This report is strictly confidential and must not be quoted, referred to or released to any third party
without our express written consent which is at our sole discretion. Mere possession of this report does
not convey a right of reliance, nor should any reliance be placed on it by any party.

This report has been prepared solely for the use of the Company’s management and the Board of
Directors of the Company for assessing the Company’s business plan. Our report is solely for the purpose
set forth in second paragraph of this report and for your information and is not to be used for any other
purposes or to be distributed to any other parties without our prior written consent. Accordingly, it may
not be relied upon by any other parties than the addressee of this report, qu oted or referred to in
connection with the issuance of any offering documentation whatsoever or any other documents issued
by the Company.

Chartered Accountants

Date: June 03, 2017

Place: Karachi

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SUMMER 2012

Winter 2013

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Summer 2010

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SUMMER 2017

Winter 2018

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Service Organisation Auditor (ISAE 3402)

SCOPE: Assurance engagement undertaken by a practitioner to provide a report for use by user entities
and their auditors on the controls at a Service organisaiton

· The "service auditor" must obtain reasonable assurance and report on whether, in all material
respects, based on suitable criteria:
o the service organisation's description of its system fairly presents the system as designed
and implemented throughout the specified period (or in the case of a Type 1 report, as at a
specified date);
o the controls related to the control objectives stated in the service organisation's description
of its system were suitably designed throughout the specified period (or in the case of a
Type 1 report, as at a specified date);
o and where included in the scope of the engagement, the controls operated effectively to
provide reasonable assurance that the control objectives stated in the service organisation's
description of its system were achieved throughout the specified period (Type 2 report).

OVERALL REQUIREMENT

COMPLIANCE WITH ISAE 3000

The service auditor shall not represent compliance with this ISAE unless the SO has complied with the
requirement of this ISAE and ISAE 3000 revised.

The approach to the assurance engagement by the service auditor is the same as that for any other
assurance engagement (i.e. applying ISAE 3000 and ISAE 3402) including:

· Ethical requirements does not require to be independent from USER ENTITY.

· Identifying those from management and governance with whom to communicate.
· Acceptance and Continuance
o Capabilities and competence to perform the engagement.
o Suitable criteria applied in preparing the system description by the service organization
and will be available to UE and their auditors.
o Appropriate scope of engagement (so use is not limited).
o Engagement letter with service organisation's management.
· Assessing suitability of the criteria.
· Materiality.
· Obtaining and understanding of the service organisation's system.
· Relevant evidence.
· Reliance on (any) internal audit.
· Written representations.
· Other information.
· Subsequent events.
· Assurance report.

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ENGAGEMENT LETTER

Engagement Letter Contents should include acknowledgement of management's responsibility:

· For the preparation of the description of the system;

· To have a reasonable basis for the service organisation system;
· For stating in the Service organization statement the criteria used to prepare the description of the
system;
· For stating in the description of the system:
o the control objectives; and,
o where they are specified by law or regulation, or another party (e.g. a user group or a
professional body), the party who specified them.
· For identifying the risks that threaten achievement of the control objectives and designing and
implementing controls to provide reasonable assurance that those risks will not prevent
achievement of the control objectives and therefore that the control objectives will be achieved;
and

To provide the service auditor with:

· access to all information (including service level agreements) that is relevant to the description of
the system and the accompanying assertion;
· additional information that the service auditor may request for the purpose of the assurance
engagement; and
· unrestricted access to persons in the service organisation from whom the service auditor
determines it necessary to obtain evidence.

Suitability of Criteria

Type 1 Report

Criteria should encompass, as a minimum that;

· TO evaluate SO description of its system

o The procedures, in both IT and manual systems, by which services are provided, including, as
appropriate, procedures by which transactions are initiated, recorded, processed, corrected and
transferred to the reports and other information prepared for user entities.
o The related records and supporting information, including, as appropriate, accounting records,
supporting information and specific accounts that are used to initiate, record, process and
report transactions; this includes the correction of incorrect information and how information is
transferred to the reports and other information prepared for user entities.
o How the service organisation's system deals with significant events and conditions, other than
transactions.
o The process used to prepare reports and other information for user entities.
o The specified control objectives and controls designed to achieve those objectives.
o In case of type 2 report whether description includes relevant detail of changes during the
period
o Other aspects of the service organisation's control environment, risk assessment process,
information system (including the related business processes) and communication, control
activities and monitoring controls that are relevant to the services provided.

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· to evaluate design of controls

o the service organisation has identified the risks that threaten achievement of the control
objectives; and the controls identified, if operated as described, provide reasonable assurance
that those risks do not prevent the control objectives being achieved.

Type 2 Report

· whether the description includes relevant details of changes to the service organisation's system
during the period covered by the description.
· The service auditor should also determine if the criteria encompass, at a minimum, whether the
controls were consistently applied as designed throughout the specified period.

MATERIALITY

· When planning and performing the engagement, the service auditor shall consider materiality with
respect to the fair presentation of the description, the suitability of the design of controls and, in the
case of a type 2 report, the operating effectiveness of controls.

Obtaining an Understanding of the Service Organization’s System

· The service auditor shall obtain an understanding of the service organization’s system, including
controls that are included in the scope of the engagement.

Evidence Required

Obtain Evidence regarding the description

· Control objectives stated in the service organisation's description of its system are reasonable in the
circumstances; and
· Controls identified in that description were implemented.
· Complementary user entity control, if any, are adequately described
· Service performed by subservice organization are adequately described

Obtain Evidence regarding Design of Controls

· Identifying the risk that threatened the achievement of control objective; and
· Linkage of controls to those risk.

Obtaining Evidence Regarding Operating Effectiveness of Controls (Type 2 Reports)

· performing other procedures in combination with inquiry to obtain evidence about how the control
was applied, the consistency with which the control was applied and by whom or by what means the
control was applied;
· controls to be tested depend upon other controls (indirect controls) and, if so, whether it is
necessary to obtain evidence supporting the operating effectiveness of those indirect controls;
· the characteristics of the population to be tested (number of controls, frequency of application and
the expected rate of deviation); and
· determining means of selecting items for testing that are effective in meeting the objectives of the
procedure (e.g. apply standard sampling approach).
· Sampling – Same as ISA 550
· Nature and cause of Deviation

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ISAE 3420 – Summary

SCOPE: This ISAE deals with the reasonable assurance attestation engagement to report on RP
compilation of proforma financial information (PFI).

No responsibility of Practitioner to compile PFI

Purpose of PFI: To illustrate the impact of significant event or transaction on unadjusted FI of the
ENTITY as if the event had occurred or transaction had been undertaken at an earlier date selected for
the purpose of illustrations. PFI does not represent the entity’s actual financial position, financial
performance or cashflow

Compilation of PFI:

Steps involved in the process includes:

· Identifying the source of the unadjusted FI to be used in compilation of PFI and extracting the
unadjusted financial information from that source
· Making Proforma adjustment to the unadjusted FI
· Presenting the result with disclosure

Nature of Reasonable Assurance

To assess whether Applicable Criteria used by the RP is reasonable, proper allocation of the adjustment
and overall presentation and disclosure

ISAE 3000

Required to comply with ISAE 3000

Objective

The objective of the practitioner are to obtain reasonable assurance and to report

Definitions:

Applicable Criteria: Criteria used by the RP when compiling PFI

Proforma Adjustment: Adjustment to the unadjusted FI that illustrate the impact of significant event or
transactions as if the event had occurred or the transaction had been undertaken at an earlies date
selected for the purpose of illustrations &

Adjustment to the unadjusted FI that are necessary for the pro forma financial information to be
compiled on a basis consistent with the AFRF

Pro forma Financial Information: Financial information shown together with adjustment to illustrate the
impact of an event or transaction on unadjusted FI as if the event had occurred or the transaction had
been undertaken at an earlier date.

Unadjusted Financial Information: Financial information of the entity to which pro forma adjustments
are applied by the RP

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Requirement:

A.ENGAGEMENT ACCEPTANCE

Before agreeing to accept an engagement, the Practitioner shall:

· Competence and capabilities (knowledge and experience of the industry, familiarity with the
process of preparing a prospectus and knowledge of FRF)
· Criteria is suitable
· Source from which unadjusted FI and acquiree have been audited and reviewed and whether
any modified opinion
· If entity HFS never audited – consider whether Practitioner can obtain a sufficient u/s of the
acquire
· PFI not misleading
· Obtain the agreement that RP acknowledged and u/s its responsibility
o Adequately disclose the criteria
o Compiling on the basis of criteria
o Providing Practitioner with all information

PLANNING AND PERFORMING THE ENGAGEMENT

SUITABILITY OF CRITERIA:

· Unadjusted FI extracted from appropriate source

· Proforma adjustment directly attributable to event or transaction
· Factually supportable (purchase and sale agreement, financing documents)
· Consistent with entity’s AFRF and its accounting policies under that framework
· Appropriate presentation to be made and disclosure to be provided to enable the intended
user to u/s the information conveyed ( nature and purpose of PFI including nature of the
event or transaction, and the date such event has assumed to have been occurred, source,
proforma adjustments, does not represents entity’ actual financial performance and cashflow

B. Materiality

C. Obtain an understanding of how the RP has compiled the pro forma financial information

The practitioner shall obtain u/s of the following:

· Event or transaction in respect of which PFI is being compiled

· How the RP has compiled
o Source
o Steps by RP to extract the unadjusted FI from the source
o Identify the appropriate proforma adjustment
o Competence
· Nature of the entity and acquiree including their operations, their asset and liabilities and the
way it is financed
· Relevant industry regulatory and other external factors
· AFRF including their selection and application of accounting policies

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D. Obtain evidence about the appropriatenss of Source from which the unadjusted FI has been
extracted

o Determine whether extracted from appropriate source

o Consider whether audit or review report
o If audit or review report by another Practitioner – satisfied that u/s of entity and its
accounting and financial reporting and source from which unadjusted FI has been
extracted is appropriate and not diminished
o If there is no audit or review report on the source from which Unadjusted FI has been extracted
– perform procedure to be satisfied that source is appropriate for eg Period immediately
preceding that of the source from which unadjusted FI has been audited or reviewed but source
itself not. Following procedures may be performed by the Practitioner:
o Inquire of the RP about:
§ Process
§ Whether all transaction has been recorded
§ Soucrce in a/c with AP
§ Any change in AP from the recent audited or reviewed FS
§ Assessment of fraud
§ Effect of changes in business activities
o Considering the finding of previous audit and review
o Comparing audited an unaudited number and discuss significant changes with the RP
o Historical FI of the entity never audited or reviewed – It is unlikely that law or regulation will
permit an entity to issue a prospectus if the HFI has never been audited or reviewed
E. Obtain Evidence about the appropriateness of the Pro forma adjustments:
o Pro forma adjustment necessary to illustrate the impact of event or transaction at the date
o Evaluating the reasonableness of the RP approach to identifying the appropriate pro
forma adjustment
o Inquire from acquiree to extract relevant FI
o Evaluating specific aspect of relevant contract, agreement
o Evaluating relevant analysis and workseet
o Performing analytical procedures
o Pro forma adjustment in a/c with AC:
o Directly attributable to the event or transaction
o Factually supportable – if acquiree financial information is included in the pro forma
adjustment and there is no audit or review report – perform procedures to be satisfied
that FI is factually supportable
§ In case of divestee – same procedures as for source entity
§ In case of acquiree – if audited by another practitioner – same
§ Prior year audited or reviewed but source not - same
o Consistent with the entity’s AFRF and its accounting policies are under that framework
o Modified Opinion or Review Conclusion or EOMP with respect source or the Source from which
Acquiree FI has been extracted – Practitioner shall evaluate:
o Potential consequences on pro forma financial information
o What further appropriate action to taken;
§ Discussing the matter with RP

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§ Reference in practitioners report

§ Modify the practitioners opinion
§ Withdraw
§ Legal advice
o Sources from which the unadjusted FI has been extracted or proforma adjustment not
appropriate
§ In appropriate source or omitted a pro forma adjustment or not in accordance
with AC – shall evaluate what further action to take

o Obtain Evidence about the calculations within PFI

§ Arithmetical accuracy
o Evaluating the Presentation of PFI
§ Overall presentation and structure
§ Explanatory note illustrate the impact of event or transaction
§ Appropriate disclosure provided
§ Any subsequent event that require disclosure
§ Consistent with Other information
o Written representation
§ In compiling all adjustments has been identified
§ Compiled on the basis of criteria

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objectivity. professional competence and due care, confidentiality and professional

behavior.
The firm applies International Standard on Quality Control 1 2 and accordingly
maintains a comprehensive system of quality control including documented policies
and procedures regarding compliance with ethical requiremenb, professional
standards and applicable legal and regulatory requirements.

Practitioner l Responsibilities
Our responsibility is to express an opinion [, as required by [Securities Regulation XX],]
about whether the pro forma financial information has been compiled, in all material
respects, iby [the responsible parry] on the basis of the [applicable criteria).
\Ve conducted our engagement in accordance t1t1th International Standard on Assurance
Engagements (!SAE) 3420, Assurance Engagements to Report on the Compilation ofPro
Forma Financial Information Included in a Prospectus, issued by the International
Auditing and Assurance Standards Board. This standard requires that the practitioner p-lan
and perform procedures to obtain reasonable assurance about whether [the mpon:;//)/e
par{\,] ha:s compiled, in all material respects, the pro forma financial information on the
basis of the [applicable criteria).
For purposes o f this engagement, we are no·t responsible for updating or reissuing
any reports or opinions on any historical financial information used in compiling the
pro forma financial information, nor have we., in the course of this engagement,
performed an audit or review of the financial information used in compiling the pro
forma financial information.
The purpose of pro forma financial information included in a prospectus is solely to
illustrate the impact of a significant event or transaction on unadjusted financial
information of the entity as if the event had occurred or the transaction had been
undertaken at an earlier date selected for pu.rposes of the illustration. Accordingly,
we do not provide any assurance that the actual outcome of the event or transaction
at [speci,j; date) would have been as presented.
A reasonable as$urance engagement to report on whether the pro forma financial
information has been compiled� in all material respects, on the basis of the applicable
c.riteria involves performing procedures to assess whether the applicable criteria used
by [the responsible party) in the compilation of the pro forma financial information
provide a reasonable basis for presenting the significant effects directly attributable to
the event or transaction, and to obtain sufficie:nt appropriate evidence about whether:
• The related pro forma adjustments give appropriate effect to those crit�ia;
and

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II. Unaudited pro forma consolidated statement of profit or loss and other comprehensive
income of the Enlarged Group for the year ended 31 December 2014

Th• Targ•I
Th, Group Group
for lhe !or the
year ended year ,nded The
31 Dtcemb,r JI Dmmber Pro form.a En!JlrgNI
2014 2014 Sub,tolal adjustme.nt Group
HK!'O/JQ HKS'O/JQ HKS'O/JQ HKS'O/JQ Notts HKS'/J/X/
(Nott I) (Nott 2/

Re\·enue 184.750 30.579 115.329 215)29

Cost of sales (137,451) (6,267) (143.718) (143.718)

firM.� pmfil 41,?QQ ?4,11) 11,611 71 611

Other income 13,620 83 13.703 13.703

Selling and distributioo expenses (4,086) (3,752) (7,838) (7.838)
Administrative expenses (62.975) (2.287) (65,262) {15.700 ) 5 (80.962)

(LOM)/Profit from •P"ralioos (6,1421 18.356 12.214 (3,486 )

lmpainncnl l<X\s on exploration

and e•;aJuation as.sets (44,651) (44,651) (44,651)
Fair value gain on derivative
components of convertible bonds 45.589 45.589 45.589
Share of resuhs of a joint "enture 407 407 407
toss on early redemption of
con,·ertible bonds (8,434) (8,434) (8.4341
Fair value loss on promfasory notes (24,060) (24,060)
Finance costs (6,302) (242) (6,544) (6,544)

(lou)/Profit before rax (19,533) 18.II� (1,419) (�1,179)

luwtut:la.\ (343) (379) (722) 3,025 5 3103

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ISRS 4400

Summary

Objective of an Agreed upon procedures engagement

· For the auditor to carry out procedures of an audit nature to which the auditor and the entity and
any appropriate third parties have agreed and to report on factual findings.
· As the auditor's scope is limited (agreed) by the client and they are only required to report on facts
and not give any opinion or assurance, an agreed-upon procedure assignment is not an assurance
assignment.
· The report is restricted to those parties that have agreed to the procedures to be performed since
others, unaware of the reasons for the procedures, may misinterpret the result.
· In certain circumstances when the procedures are agreed with various representatives such as
regulator and industry, may not be able to discuss with all parties, therefore appropriate to discuss
with the representatives.

Compliance with the Ethical Requirement

Independence is not the requirement for AUP; however the law or regulation may require. If the auditor
is not independent a statement to that effect would be made in the report of factual findings

Terms of Engagement

· Nature of engagement.
· Stated purpose for engagement.
· Identification of financial information to which agreed-upon procedures will be applied.
· Nature, timing and extent of the specific procedures to be applied.
· Anticipated form of the report of factual findings.
· Limitations on distribution of the report of factual findings.

PLANNING

The auditor should plan the work so that an effective engagement will be performed. Concept of
materiality generally does not apply

Procedures and Evidence

Inquiry and analysis.

Recomputation, comparison and other clerical accuracy checks.

Observation.

Inspection.

Obtaining confirmations.

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19-33-A / 0454
September 08, 2016

The Managing Director

Dear Sir,

REPORT ON AGREED UPON PROCEDURES ON CONSISTENT APPLICATION OF ACCOUNTING

POLICIES WITH RESPECT TO DEPRECIATION ON ITEMS OF PROPERTY, PLANT AND EQUIPMENT,
AMORTIZATION OF INTANGIBLE ASSETS AND THE RELEVANT USEFUL LIVES

We have performed the procedures agreed with you through our engagement letter dated ______ and
enumerated below in respect of consistent application of accounting policies with regard to depreciation on
items of property, plant and equipment, amortization of intangible assets and the relevant useful lives by ("the
Company") during the year ended June 30, 2016.

Our engagement was carried out in accordance with the International Standards on Related Services
applicable to agreed-upon procedures engagements - ISRS 4400. The procedures were performed solely to
assist you and the Oil and Gas Regulatory Authority ("OGRA") to evaluate whether the policies for depreciation
on items of property, plant and equipment, amortization of intangible assets and the relevant useful lives used
by the Company during the year ended June 30, 2016 are consistent with those applied by the Company for
the year ended June 30, 2015 and are summarized as follows:

1. Checked that the accounting policy for charging depreciation and amortization in respect of property,
plant and equipment and intangible assets respectively for the year ended June 30, 2016 has been
consistently applied from the previous financial year ended June 30, 2015 and there have been no
changes therein; and

2. Checked that the useful lives used for calculation of depreciation and amortization of property, plant
and equipment and intangible assets respectively have been consistently applied from the previous
financial year ended June 30, 2015 and there have been no changes in useful lives during the year
ended June 30, 2016.

We report as under:

(a) With respect to item 1, we noted that the accounting policy for charging depreciation and amortization
in respect of property, plant and equipment and intangible assets respectively for the year ended June
30, 2016, as stated in the attached notes to the schedule of useful lives has been consistently applied
from the previous financial year ended June 30, 2015 and there have been no changes therein; and

(b) With respect to item 2, we noted that the useful lives of property, plant and equipment and intangible
assets respectively used to calculate depreciation / amortization for the year ended June 30, 2016, as
stated in the attached schedule of useful lives, have been consistently applied from the previous
financial year ended June 30, 2015 and there have been no changes therein.

Because the above procedures do not constitute either an audit or a review made in accordance with
International Standards on Auditing or International Standards on Review Engagements, we do not express
any assurance.

Had we performed additional procedures or had we performed an audit or review in accordance with
International Standards on Auditing or International Standards on Review Engagements, other matters might
have come to our attention that would have been reported to you.

Our report is solely for the purpose set forth in the second paragraph of this report and for the Company’s and
OGRA's information and is not to be used for any other purpose or to be distributed to any other parties.

This report relates only to the information specified above and does not extend to any financial statements of
the Company, taken as a whole.

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Summer 2017

Winter 2017

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ISRS 4410 – COMPILATION ENGAGEMENT

OBJECTIVE

The objective is for the practitioner to apply accounting and financial reporting expertise, as opposed to
auditing (assurance) expertise, to assist management in the preparation and presentation of financial
information within an applicable financial reporting framework based on information provided by
management.

The ISRS may also be appropriately applied to the compilation (i.e. not of an assurance or review nature)
of financial information that is not historical (e.g. pro-forma or prospective financial information,
budgets and forecasts) or information that is not financial (e.g. greenhouse gas statements or schedules
of non-financial data).

Appropriate consideration need to be given whether financial information is required under law or
regulation and whether external parties may be mislead.

COMPILATION ENGAGEMENT

· To assist management with the preparation and presentation of financial information

· Does not require the practitioner to verify the accuracy and completeness of the information
· Management retains the responsibility for the financial information and the basis on which it is
prepared and presented including judgement and selection and application of accounting policy

REQUIREMENT

ETHICAL REQUIREMENT

· Comply with the ethical requirement – Independence is not the requirement

PROFESSIONAL JUDGEMENT:

Shall apply professional judgement:

· Acceptability of FRF
· Application of FRF including
o Selection of accounting policies
o Accounting estimates
o Preparation and presentation in a/c with FRF

ENGAGEMENT LEVEL QUALITY CONTROL

Same as discussed in ISAE 3000 or mentioned in ISQC 01

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ENGAGMENT ACCEPTANCE AND CONTINUANCE

Objective and scope of the compilation engagement.

Nature of the statements to be compiled and the information to be supplied by the client.

Nature of engagement—neither an audit nor a review will be carried out and no assurance will be
expressed.

Engagement cannot be relied upon to disclose errors, illegal acts or other irregularities that may exist.

Basis of accounting and reporting framework on which the (financial) information is to be compiled.

· Acceptability of FRF depends on nature of the entity, intended use of the FI, prescribed by law
or regulation, nature and form of FI to beprepared

Intended use and distribution of information, once compiled.

Arrangements concerning the use of experts, if appropriate.

The timely issue of a communication to management and those charged with governance dealing with
any significant difficulties encountered during the engagement.

The need to obtain written representations concerning management's responsibilities and any oral
explanations conveyed by management during the engagement.

Management's responsibility for:

· the preparation and presentation of the (financial) statements in accordance with the (financial)
reporting framework that is acceptable in view of the intended use of the statement and the
intended users;
· accuracy and completeness of the records, documents, explanations and other information
supplied; and
· the judgements and estimates needed in the preparation and presentation of the statements.

Practitioner's responsibilities:

· to perform compilation in accordance with ISRS 4410 Compilation Engagements;

· to comply with relevant ethical requirements; and
· to issue a compilation report that is not an expression of an audit opinion or a review
conclusion.

Form of report to be provided (attached) regarding the financial information compiled.

COMMUNICATION WITH MANAGEMENT OR TCWG on TIMELY BASIS

PERFORMING THE ENGAGEMENT

PRACTIONERS UNDERSTANDING

· Obtain understanding of entity’s business and operations including accounting system and
records
· Applicable FRF

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COMPILING THE FINANCIAL INFORMATION

· Compile the information using the records and documents

· Discuss with management for applying significant judgements
· Prior to completion read the compiled financial information in light of practioners
understanding of business and FRF
· Obtain acknowledgement from management or TCWG that they have taken the responsibility
for the final version of the final compiled financial information
· If unable to complete the engagement withdraw
· If practitioner becomes aware during the course of engagement that:
o Does not refer to FRF
o Amendments are required but not made by management
o Misleading

The practioners shall propose the amendment to management

If management declines or does not permit the auditor to make the proposed amendments –
withdraw and inform to management and TCWG the reason for withdraw

If withdraw is not possible shall determine professional and legal responsibilitites

Report format

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Summer 2009

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IAPN 1000

Following ISA are particularly relevant:

· ISA 540, ISA 315 and ISA 500

This IAPN does not deal with simple FI such as cash, account receivable and account payable, investment
in un unlisted securities, insurance contracts

Also does not deal with specific accounting issue relevant to FI such as hedge accounting

MANAGEMENT APPROACH

CONTROLS RELATING TO FI:

· Established an appropriate CE
· Establish RAP
· Establish IS
· Control activities and monitoring of control such as authorization, confirmation, reconciliation
and SOD

COMPLETENESS ACCURACY AND EXISTENCE

· Trade confirmation and clearing house

· Reconciliation with bank and custodian

VALUATION OF FI:

· Fair value hierarchy – risk increase as level increase

· Risk increase for inactive market

Valuation techniques

Management may also make use of

· A third party pricing sources

o Pricing services
o Consensus pricing services
o Broker providing broker quotes
· Valuation expert

AUDIT CONSIDERATION RELATING TO FI

REQUIREMENT:

Maintaining professional skepticism

Planning Consideration

· Understanding accounting and disclosure requirement

· Understanding FI

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· Determine whether specialized skills and knowledge are needed

· Understand and evaluate system of IC
· IAF
· Management process
· Using auditor expert

ASSESSING AND RESPONDING TO THE ROMM

Fraud risk factor

Assessing the ROMM

Factors to consider in determining whether, and to what extent, to test the operating effectiveness of
Controls

Substantive procedures

· Asset backed security

o Examining contractual documentation to understand terms of security, underlying
collateral and right of each class of security holder
o Inquire about management process of estimating cash flow
o Evaluating reasonableness of the assumption
o Obtain understanding of the method
o Re performing calculations

Procedures related to C,A,E and R&O

· External confirmation
· Review reconciliation
· Review JE
· Reading individual contract
· Testing controls

Procedures related to valuation

Financial reporting requirement:

In a/c with ISA 540 the auditor consider the entity’s valuation policy, methodology, data and
assumptions. Matters that may be relevant for u/s include:

· Formal valuation policy

· Models used
· Third party pricing source
· Those made models have appropriate skills and expertise
· Indicators of management biaseness

Assessing the ROMM – certain criteria mentioned in paragraph 109

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Significant risk – criteria mentioned in paragraph 110

Developing an audit approach

· Test how management made the accounting estimates

· Test operating effectiveness of controls
· Develop range
· Subsequent event

Audit consideration when management uses a third party pricing source

· Type of third party pricing source – whether information available about their process
· Nature of input used and complexity of valuation technique
· Reputation and experience of third party pricing source
· Objectivity of third party pricing source
· Entity’s control over the use of third party pricing source
· Third party pricing source control

Possible approaches to gather evidence regarding information from third party

· For level 01 – compare with observable market price

· Review disclosure provided by third party pricing source including assumption, techniques,
controls and process
· Testing management controls
· Perform procedure at third party to understand and test controls and process, techniques, input
and assumptions
· Test whether third party price reasonable
· Develop range
· Obtain service auditors report

Audit Consideration when management estimates fair value using a model

Testing a model involve two approach

· Auditor can test management’s model, by considering the appropriateness of the model
used,reasonabless of the assumption and data used and arithmetical accuracy
· Can develop their own estimates

When FI is based on level 3 inputs, matters that the auditor may consider include

· Identification and characteristics market place participants

· How unobservable input are determined on initial recognition
· Modification in its own assumption
· Whether best input informationused
· Sensitivity analysis

Audit Consideration when a management expert is used by the entity

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· Evaluating the competency, capability and objectivity

· Obtaining an understanding of management expert
· Evaluate the appropriateness expert work

Evaluate disclosure and presentation

Obtain written representation

Communication with TCWG

Communication with Regulator

APPENDIX : Example of Controls relating to Financial Instruments

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Internal Control definition – The process designed, implemented and maintained by the management
and TCWG to provide reasonable assurance about the achievement of the entity’s objective with regard
to the reliability of the financial reporting, effectiveness and efficiency of operations and compliance with
applicable laws and regulations.

Components of Internal Control

· The control environment

· The entity’s risk assessment process
· The information system
· Control activities (internal controls)
· Monitoring of controls

A. Control Environment

· General attitude towards internal control by management and TCWG

Following are the elements of Internal Control:

o Participation by TCWG
o Commitment to competence
o Communication and enforcement of integrity and ethical values
o Organisation structure
o Assignment of authority and responsibility
o HR policies and practices

B. Entity’s Risk Assessment Process

a. Identify Business risk relevant to Financial reporting objective

b. Estimate the significance
c. Assess the likelihood of occurrence
d. Action to address those risk

Risk can arise due to circumstances such as

§ Change in operating environment

§ New personnel
§ Rapid growth
§ New technology
§ New products
§ New accounting standards

C. Information system

The auditor shall obtain an understanding of the Information system including related
business process including the following areas:

§ Classes of transaction
§ Procedure by which transaction is initiated, processed and recorded
§ Related accounting records that are used to initiate, processed and recording
§ Process to prepare financial statement
§ Controls surrounding Journal entries

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Important Note:

Walkthrough: The process through which above understanding is obtained is called

WALKTHROUGH

Walk-through testing involves the auditor selecting a small sample of transactions and following them
through the various stages in their processing in order to establish whether his understanding of the
process is correct.

D. Control activities
are the policies and procedures, other than the control environment, used to ensure that the
entity’s objectives are achieved.

o Types of Control Activities:

§ Authorization and approval
§ Segregation of duties
§ Information processing
§ Physical control
§ Performance review

Once the auditor performed walkthrough, he identify various controls, auditor needs to assess
the design and implementation of those controls

The degree of effectiveness of an internal control system will depend on the following two factors:
The design of the internal control system and the individual internal controls. Is the control
system able to prevent material misstatements, or is it able to detect and correct material
misstatements if they occur?
The proper implementation of the controls. Are the controls operated properly by the client’s
management and other employees?

If the design or implementation is weak, auditor will not perform TOC hence will focus more on
substantive procedures

The controls are preventive, detective and corrective.Controls can be exercised manually or
through IT

General IT CONTROLS
PHASES /Area GENERAIL IT CONTROL
General IT controls are policies and
procedures that relate to many different
applications
(such as revenue, purchases and payroll).
They support the effective functioning of
application
controls by ensuring the continued proper
operation of IT systems.
Development of NEW IT system · Appropriate IT standards
· Testing
· Approved by user
· SOD between designer and tester
· training
Documentation and testing of program · Authorisation
changes · Training
· testing

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Prevention or detection of unauthorised · Documentation of all program changes

program changes · Restricted access
· Antivirus
· logs
Prevention of the use of incorrect · Properly trained
programs · Correct version of the program
or data files · Supervision
· Periodic review
Prevention of unauthorized amendments · Restriction to physical access
to data files · Access to program and data files
· firewall
Ensuring continuity of operations · backup copies
· protection against fire, power failure
· disaster recovery plan
· service level agreement

Application Controls

Application controls apply to the processing of individual applications (such as revenue, purchases or
payroll). These controls help to ensure that transactions occurred, are authorized and are completely and
accurately recorded and processed.

There are various types of Internal Control:

· Existence check
· Range check
· Sequence check
· Completeness check
· Batch total

How to verify IT ? - CAAT

Test Data Audit software

Used for test of controls Used for test of details
· Codes don't actually exist, e.g.customer, Applying sampling techniques
s supplier and employee; Check calculations
· Transactions above pre-set limits, e.g. Make aging report
credit limits Embedded Audit software –built into client IT
· Invoices with arithmetical errors system to carry out test at the time that
transactions are being processed
Advantage
· Independently access computer data
· Test the reliability of client software
· Increase the accuracy of audit tests
· Perform audit tests more efficiently

Disadvantage
· CAATs can be expensive and time consuming to set up
· Client permission and cooperation may be difficult to obtain
· Potential incompatibility with the client's computer system
· The audit team may not have sufficient IT skills
· Data may be corrupted or lost during the application of CAATs

Auditing around the computer

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Online System
These are computer-based information systems that allow users direct access to centrally-held
data and programs through remote terminals linked together in a network.
Benefits:
· immediate entry of transactions into the system
· immediate updating of master files
· enquiry systems
There could be many risk which can be reduced by controls
GITC Application Control
Access control Individuals needs to log on to the system
Prevent unauthorized changes to programs Existence check, range check, completeness
and data files check, check digit
Transaction logs should be maintained
Firewall

EDI system

EDI systems are systems that allow the electronic transmission of business documents
EDI systems may operate:
· within organization
· outside organization

Problems Controls
Increased dependency GITC over System continuity
Lack of proper audit trail System logs
Possible loss or corruption of data Controls over transmission of data such as
encryption and authentication codes
Security risk in transmission of data

Control over data transmission

Controls over data transmission help to ensure data is transmitted both intact (complete and as
intended) and also securely without fear of breach of confidentiality.
Controls over data transmission include:
q Programme controls that ensure data is transmitted in the correct format
q Firewalls to prevent intrusion into the programs that send and receive data
q Restricting access to source data that is transmitted
q Only using secured Wi-Fi with password protection
q Using check sums and check digits to ensure that data received is intact
q Data encryption

LOGS: A log file is a file that records events taking place in the execution of a system. This generates an
audit trail that can be used to understand the activity of the system and to diagnose problems.
Example; Which user logged-in, when and where from,q Failed log-in attempts q Who accessed and
amended data in a file q Changes made to a program – what, when and by whom q When
employees entered and left the building q Black box flight recorders q CPU speed q Broadband
speed q Which web pages a user accessed q Attempted cyber intrusions

LOGICAL ACCESS CONTROL Logical access controls are tools and protocols used for identification,
authentication, authorization and accountability in computer information systems. It enables the
organization to identify users, restrict access to specific resources and produce audit trail of systems and
user activity.
 The login account must uniquely identify the person
 The password has to be sophisticated and must be of a certain prescribed length.
 The access to the system must be limited in accordance with roles and responsibilities of the users.
 User must be logged out after a certain period of in-activity.

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Risk Control Control activity Test of Control Control Possible effect
objective weakness
Receiving orders from customer
Customers are Customers Authorised customer Inspect sales No authorized Fraud – sales made to
not authorized should be list order and trace customer list unauthorized customer
authorized the name of such as relatives, friends
customer to on unfavaourble terms.
authorized
customer list
Customers are Amount of sales Authorized credit limit Inspect sales No authorized Maximize profit -Customer
authorized but should be within which is authorized order and trace credit limit may default and may not
sales amount credit limit and approved by the amount to be able to repay resulting in
exceeding the higher management authorized credit a loss to the company
credit limit other than sales limit
department.
Customer Customer Authorized price list. Inspect sales No authorized Maximise profit – excessive
maybe given should not given which is authorized order and trace price list or discount or lower price may
price discount price discount and approved by the price to discount is not be charged.
without without higher management authorized price authorized
authorization authorisation other than sales list
department.
Orders are over Every order Sales order are Obtain a sample sales order are Maximise profit – Company
looked and are should be duly sequentially from purchase not sequentially might loose a customer and
not processed processed. numbered. order and trace numbered its reputation due to
the orders to unprocessed sales order
relevant sales (unsatisfactory service)
order to ensure
orders are
processed.
Orders are Each order Orders should be Inspect a series of No sequential Maximise profit and fraud –
processed should be recorded on sales order and pre-numbering / One sales order might be
twice processed only sequentially- ensure that Overlapping or processed twice / customer
once numbered sales documents are duplicate sales might get goods twice.
order. sequentially pre- order number
numbered and
ensure that sales
order is not
duplicate (or
processed twice).
Sales order Sales order Segregation of Duties Obtain a sample Sales order are Fraud and error –
might not be should be - All the sales order of sales order and not signed and unauthorized sales might
approved authorized / are prepared by one check whether the approved by be made without approval
approved by person (sales clerk) orders are duly head of sales or there might be an error
sales manager and approved by approved by the department. in sales order which might
(or relevant senior person (sales sales manager go undetected.
hierarchy) manager)
Orders are Orders should sales order shall only Select sample sales order is Maximise profit - Risk of
taken for goods only be be approved if the from sales order authorized losing customer loyalty and
not available in confirmed if the inventory is available. and check without revenue in future
inventory inventory is whether goods confirming the
available has been inventory.
delivered by
inspecting GDN

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Risk Control Control activity Test of Control Control Possible effect

objective weakness
Dispatch of goods and invoicing
For some Goods should Every sequentially sales Obtain a sample Sales order are Maximize profit – risk of
sales order, be dispatched order should be attached of sales order not forwarded to losing customer and
goods are for every sales to goods dispatch note to and trace the Warehouse and revenue will decline
not order ensure that no order has orders to are not
dispatched remained undelivered relevant sequentially
therefore sequentially dispatch note to numbered
Sales order shall be ensure that
forward to warehouse goods are
department dispatched
For some Goods should For every dispatch, there Inspect a series GDN is not Maximise profit –
sales order, not be must be sequentially pre- of GDNs and sequentially customer will only pay
goods are dispatched for numbered GDN ensure that numbered and is for goods which were
dispatched same sales There must be a SOD i.e. documents are not signed by ordered and amount of
twice order every GDN must be sequentially pre- warehouse extra goods
signed and approved by numbered manager. despatched will
the Warehouse manager. signed by become a loss.
warehouse
manager
Goods are Goods should There is a authorized Obtain a sample sales made to Maximise profit – goods
dispatched be dispatched credit limit authorized and of GDNs and customer with might be dispatched to
to customer to customer approved by higher trace it to insufficient credit customer with
with with sufficient management other than approved sales limit. insignificant credit limit
insufficient credit limit sales department. order and credit and might need to
credit limit limit written off
(whether
new
customer or
existing)
Customer For every Customer should sign the Obtain a sample The GDNs might Maximise profit- dispute
may claim GDN there GDN as a confirmation of GDNs and not be signed by with customer may
that they not must be a for the receipt of goods test whether the the customer result in loss of
receive customer GDNs are customer
goods acknowledge acknowledged
ment by the customer
Invoices are Invoice should GDN shall be forward to Obtain a sample GDN is not Maximise profit – goods
not be prepared accounts department and of GDN and forward to AD. might be despatched to
prepared for for goods AD shall prepare inspect sales Sales invoice are customer and not billed
goods dispatched sequentially sales invoice prepared not sequentially resulting in loss of
dispatched invoice. against each numbered inventory and loss of
GDN revenue.
Returns of All goods Credit notes should be Obtain a sample Credit notes FRO – inventory, sales
goods from return must be sequentially pre- of credit notes to being recorded return and account
customer recorded numbered and check whether but are not receivable might be
are not signed/authorized these are duly authorized. Some materially misstated.
properly authorized and credit notes might
recorded sequentially be unrecorded
numbered

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Dispatch of goods and invoicing

Risk Control Control activity Test of Control Control Possible effect
objective weakness
There is a risk that invoices and Invoices and Inspect JV to JV is not FRO – Sales and
invoices and credit credit notes credit notes ensure that it is prepared account receivable may
notes may not be are completely should be sequentially Not sequentially be materially misstated
recorded in the recorded in the sequentially numbered and numbered
accounting system. accounting numbered and signed by head Not signed by
system forward to of finance Head of finance
finance department. department
department.
FD shall record
the sales and
receivable in JV
which is
sequentially
numbered
SOD – JV must
be signed and
approved by
Head of finance
department.
There is a risk that Invocies and SOD – JV shoud The auditor can No reconciliations Fraud and error
invoices and credit credit notes be signed and check that are made or no
notes are recorded should be approved by statements are statements are
in the wrong posted in head of finance produced and sent to customers
customer accounts. correct department. despatched to No segregation of
accounts and Regular customers. duties
GLs statements Inspect JV to
should be sent to ensure that it is
customers and signed
reconciliations
should be
prepared. (control
account
reconciliation and
customer balance
reconciliation)
There is a risk that All bad debts Bad debts must There should be Bad debts are not Fraud and FRO- bad
debts may be write off must be authorised. documentary written off even debt expense may be
written off as be authorized There are evidence that though past due. materially misstated.
uncollectable and after due procedures for proper Or the bad debts
(“bad‟) without considerations identification and authorisation is are written off
proper follow-up of given for a debt without
consideration overdue accounts to be written off considerations
and unpaid as bad. and
invoices. authorization.

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Risk Control Control activity Test of Control Control weakness Possible effect
objective
Placing orders to supplier
Suppliers are Suppliers should Authorised Supplier Inspect No authorized supplier Fraud – purchases made
not be authorized list. All purchase purchase order list from unauthorized
authorized orders should and trace the supplier such as relatives,
include reference to name of friends on unfavaourble
approved supplier. Supplier to terms.
authorized
supplier list
Orders are Every order Purchase orders are Obtain a purchase order are not Maximise profit –
over looked should be duly sequentially sample from sequentially numbered Company might not
and are not processed. numbered. purchase order process the order timely
processed ensure that PO and due to the delay it
are sequentially can cause operational
numbered. delays and financial loss
Orders are Each order Orders should be Obtain a No sequential pre- Maximise profit and fraud
processed should be recorded on sample from numbering / – One purchase order
twice processed only sequentially- purchase order Overlapping or might be processed twice
once numbered purchase ensure that PO duplicate purchase / supplier might send
order. are sequentially order number goods twice. Excess
numbered. holding cost and risk of
obsolete inventory

Purchase Purchase order Segregation of Obtain a Purchase order are not Fraud and error –
order might should be duly Duties - All the sample of signed and approved unauthorized purchases
not be authorized / purchase order are purchase order by head of purchase might be made without
approved approved by prepared by one and check department / manager. approval or there might
Purchase person (purchase whether the be an error in purchase
manager (or clerk) and approved orders are duly order which might go
relevant by senior person approved by the undetected.
hierarchy) (purchase manager) purchase
manager
For large Competitive Obtain quotations / Obtain a Quotations/biddingsare Profit maximization and
orders, tenders/quotation bidding from sample of not obtained for fraud:
suppliers are should be sought suppliers purchase order Risk of un-optimized
not asked to from different and check purchases.
submit suppliers for whether orders Causing the company for
tenders. optimum are duly goods/services at higher
purchase cost approved and rates and low quality
are supported
by competitive
bids.
When Lowest price The purchase Obtain a Lowest price quotation Profit maximization and
suppliers are quotation should manager should sample of large might not be selected fraud:
asked to be selected for confirm that the purchase order Risk of un-optimized
submit optimized lowest price and check from purchases.
tender, the purchases quotation is selected bidding Causing the company for
higher unless specific for purchase order documents to goods/services at higher
quotation quality reason unless there is a ensure that rates and loq quality
might be specific reason whether lowest
selected which is price was
without any appropriately selected.
authentic and documented and
genuine approved by senior
reason or management.
approval.

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Risk Control Control activity Test of Control Control Possible effect

objective weaknes
s
Receiving goods and invoicing
Goods may be Goods only A copy of all delivery notes The auditor should GRN is Maximize profit /
accepted from received from should be retained, with a check that not Fraud or error – The
a supplier authorised signature of the member of segregation of prepared company might pay
without having purchases staff who duties exist GRN is for goods / services
been ordered took receipt and checked the between the person not not received.
or suppliers goods. checking the goods sequenti
may claim to Sequentially pre-numbered against delivery ally pre-
have delivered goods received notes should note and person numbere
goods, but be produced for each preparing GRN. d
may actually delivery, from the delivery On a sample basis No
not have done note or after check from a series segregati
a physical count of the items of GRN that it is on of
received sequentially pre- duties.
numbered.
Observe the last
three receipts and
check whether
GRN is being
prepared for every
inward of stock.
The Company Discounts are A member of the accounts On a sample basis Discount Maximize profit –
may fail to availed by staff or purchasing staff must check from s Company will pay
claim company where be responsible for checking documentary available more than what
discounts from these are discounts allowed by evidence (i.e. are not should be paid.
suppliers for available. suppliers. supplier properly
orders above agreement) that monitore
a certain size, discounts are d to be
or as regular checked and claimed.
customers of claimed
the supplier from suppliers
when available.
Suppliers may To prevent All purchase invoices should On sample basis, Invoices Maximise profit –
invoice for recording and be checked against a valid trace invoices to are not Invoices might be
goods that payment of and approved purchase corresponding matched recorded and paid for
have not invoices when order and a signed goods GRN and PO to with GRN goods /service not
actually been goods / service received note, before ensure that and PO received or recived
provided not received recording and payment. payments are by the less than ordered.
made against those accounts
goods that has departme
been ordered and nt
received.

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Recording and accounting for purchases and expenses

Risk Control Control activity Test of Control Control Possible effect
objective weakness
Invoices To prevent All the invoices should be On sample basis test Invoices are not FRO and Maximize
might be double marked with a stamp (i.e. whether invoices are marked as profit – liability is not
recorded/pai recording / recorded/paid) to prevent being marked after paid/recorded recorded correctly
d twice. payment of double recording recording/payment to
invoices prevent double
recording / payment.
Purchase To ensure All purchase invoices should Select sample from PI are not Maximize profit and
invoices will that invoices be checked against a valid PI and inspect matched with fraud/error – The
be recorded are recorded and approved purchase authorized PO and PO and GRN company may pay
for goods or / paid only for order and a signed goods GRN to ensure that . for goods and
services that goods / received note, before services not
were not services recording and payment received.
provided. received
Purchase Purchase SOD + On a sample basis Supplier Fraud or error – by
invoices will invoices Regular statements should check whether statement not posting invoices in
be should be be received from suppliers, supplier being requested. other supplier
incorrectly recorded in and the balance on the reconciliations and account, the
recorded in the correct statement should be control account Reconciliations company might pay
the account of checked against the account reconciliations are are not prepared a supplier for which
accounts of supplier balance in the trade regularly prepared and/or reviewed. the company is not
suppliers payables ledger and regular and reviewed. obliged to pay for.
control account Reconciliations
reconciliations for trade prepared but
payables should be differences are
performed. not properly
recorded.
credit will To ensure Debit note should be created On a sample basis Debit note not Maximize profit –
not be that supplier each time that goods are check that for every raised/recorded company might pay
claimed is returned to a supplier. Debit goods returned a for goods for goods which
from communicate notes should be sequentially debit note is duly returned. were returned to
suppliers for d through a numbered and matched with prepared and supplier.
goods documented the supplier’s credit note recorded, also match Debit note do
returned evidence when it is received. the debit note with not match with
when goods the corresponding credit note of
are returned credit note of supplier.
supplier.
There is a invoices Invoices forward to finance Inspect JV to ensure JV is not FRO – Purchases
risk that should be department. that it is sequentially prepared and accounts
invoices and recorded in FD shall record the purchase numbered and signed Not sequentially payable may be
debit notes the and payable in JV which is by head of finance numbered materially misstated
may not be accounting sequentially numbered department. Not signed by (understatement)
recorded in system SOD – JV must be signed Head of finance
the and approved by Head of department
accounting finance department.
system.
There is a To ensure The payments should be Check whether Aging not Maximize profit – the
risk that timely made by performing regular payments are being reviewed on company might not
suppliers payments to analysis of aging of made after proper regular basis avail early payment
are not paid suppliers outstanding invoices. age analysis. before payment. discount if aging is
timely for Segregation of duties must Outstanding not reviewed.
their goods / exist between the person suppliers The supplier will not
services who performs age analysis, invoices are not do business in future
records invoices, and makes being paid due to late
payments. payments.

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INTERNAL CONTROLS PAST PAPERS

Winter 2013

Summer 2013

Summer 2014

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Certified Finance and Accounting Professional Stage Examination

The Institute of 13 June 2019

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit, Assurance and Related Services

Q.1 Your firm has been appointed as the auditor of Best Industries Limited (BIL) for the year
ending 30 June 2019. BIL is a listed company and has three production plants. Plants A and
B manufacture industrial chemicals whereas Plant C is used in manufacturing of various
cosmetic and skin care products.

The following information has been gathered by the audit team:

(i) Ghufran is the CEO and holds, directly and indirectly, majority of the shareholdings
in BIL. There are seven other directors on the board who meet four times a year to
approve the quarterly financial statements and endorse the decisions taken by Ghufran
during the quarter.

(ii) Considering the decline in demand of the products, BIL has taken the following
decisions during the year:

Close Plant B with effect from 31 August 2019. The public announcement of this
decision was made on 15 April 2019.

Introduce a new incentive package for distributors in January 2019 to boost the
sales of industrial chemicals. The sales commission rate is dependent on achieving
the various annual target levels set by the BIL’s management.

Launch a customer loyalty program in February 2019 in which customers are
awarded loyalty points on each purchase of cosmetic and skin care products from
selected retail outlets and online stores. The management believes that this
initiative would increase the demand of cosmetic and skin care products.

(iii) Staff at production and marketing departments are hired at low salaries but they are
given high annual bonuses on achieving their targets.

(iv) Last year, BIL was selected for tax audit in which the income tax department had
disallowed certain business expenditures. BIL filed an application against the order
issued by the income tax department. However, it lost the first appeal and has recently
filed a second appeal to the relevant income tax authority.

Required:
Discuss the audit risks that exist in the above scenario and suggest the key audit procedures
that you would perform to address those risks. (24)

Q.2 (a) Your firm has been hired by Pedro Limited to assist the management in preparation of
certain financial information. You are in disagreement with some of the adjustments
made by the management in the financial information and consider these to be
inaccurate.

Required:
Discuss how you would resolve the disagreement along with the implication, if any,
on the report. (05)

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Audit, Assurance and Related Services Page 2 of 3

(b) You are the audit manager of a listed company, Brace Limited (BL). During your
discussion with the audit team deputed on the review assignment of BL’s interim
financial statements for the half year ended 31 May 2019, the following matters are
highlighted:
(i) Auditor was not asked to attend the stock count at the end of the period.
Consequently, the audit team relied on the physical count sheets provided by the
management.
(ii) BL has significant accumulated losses and its current liabilities exceed the
current assets.
(iii) Provision for bad debts is in line with the prior period. However, age-analysis of
debtors has not been used.
(iv) Due to time constraints, the review of subsequent events has not been carried
out by the audit team.

Required:
Discuss how you would deal with the above matters and the possible implications of
each of the above matters on the review report. (10)

Q.3 You are a partner in a firm of chartered accountants. Your firm has recently been
approached by an off-shore entity incorporated in British Virgin Island for appointment as
an auditor for the year ending 30 September 2019. The entity is following locally developed
accounting standards in the preparation of its financial statements.

On your query regarding availability of records and information, the entity has informed
you that they will electronically send the scanned copies of the records/information required
for the audit purpose.

Required:
Discuss the matters that your firm should consider before accepting the above audit
engagement. (11)

Q.4 Alpha Textile Limited (ATL) is a long standing listed audit client of your firm. Haris has
been the audit engagement partner of ATL for the last five years. The firm is considering to
appoint Munir as ATL’s engagement partner and Haris either as ATL’s quality control
review partner or client relationship partner.

Required:
In the light of Listed Companies (Code of Corporate Governance) Regulation, 2017 and
ICAP’s Code of Ethics, discuss the validity of Haris’s appointment either as ‘quality control
review partner’ or ‘client relationship partner’. (08)

Q.5 (a) On 25 March 2019, your firm issued the audit report on the financial statements of
Noor Limited (NL) for the year ended 31 December 2018. During the first week of
June 2019, NL’s management has requested you to issue the report on summarized
financial statements for the year ended 31 December 2018 for the use of its potential
investor after incorporating the effect of a material litigation decided in favor of NL on
31 May 2019.

Required:
Discuss your firm’s responsibility in respect of gathering the audit evidence and
issuing a report on summarized financial statements. (05)

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(b) The following situations have arisen at different audit clients of your firm. The
year-end in each case is 31 March 2019:

(i) Afzal Limited is a listed company. During its audit of financial statements, the
provincial sales tax authority has seized the accounting records of the company
on the charges of tax evasion. (05)

(ii) Gems Limited (GL) is a leading manufacturer of jewelry made from precious
stones. GL sources the stones from three suppliers located in
Khyber Pakhtunkhwa (KPK). On 10 May 2019, a severe earthquake struck KPK
destroying the mines and the stone extraction units located in KPK. GL’s plant
was also partially damaged due to the earthquake.

Upon discussion with the management, you came to know that one of the GL’s
plants was affected by the earthquake and due to adequate insurance, they would
be able to claim the loss amount from insurance company. They further informed
that GL could continue to use the other plants for production. (10)

Required:
Discuss your firm’s course of action along with the implications on the audit report.

Q.6 During the audit of Shahid Limited, your IS audit team has reported the following issues:

(i) The client did not have an approved business continuity plan.
(ii) There were several program changes made during the year which were not approved
by the higher management. However, a complete log of program changes was
maintained.
(iii) IDs of the employees who have left the company are not deleted on a timely basis.

Required:
Discuss the possible course of action that you may take in respect of the above identified
issues. (Reporting implications are not required) (12)

Q.7 During the audit of consolidated financial statements of Voltage Limited (VL), for the year
ended 31 May 2019, you have identified the following matters which will be reported as key
audit matters in the audit report:

(i) VL has acquired 65% shares in Pyrus Limited.

(ii) VL has entered into a major project in relation to the development and maintenance
of its electricity transmission infrastructure which is expected to be completed over a
three year period.

Required:
Draft the key audit matters section to be included in the audit report of VL’s consolidated
financial statements. (You may assume necessary details where required) (10)

(THE END)

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Certified Finance and Accounting Professional Stage Examination

The Institute of 5 December 2019

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit, Assurance and Related Services

Instructions to examinees:
(i) Answer all EIGHT questions.
(ii) Answer in black pen only.

Q.1 HT Ragib and Company, Chartered Accountants (HTRC) is a member firm of an

international firm of chartered accountants, HT Network. HTRC has offices in Karachi,
Lahore and Islamabad.

You are the audit manager at Karachi office of HTRC. You are responsible for the audit of
Health Pharma Limited and its group financial statements for the year ended
30 November 2019. The extracts of the draft planning memorandum for the group audit
prepared by the audit senior are as follows:

Profit/(loss) Total
Revenue Materiality
Name of company before tax assets Remarks
------------------ Rs. in million ------------------
Health Group (Consolidated) 70,127 4,764 58,304 286
Health Pharma Limited (HPL) 38,487 5,850 36,563 322 Refer note 1
Fair Cosmetics Limited (FCL) 24,773 (2,371) 24,484 129 Refer note 2
Services (Private) Limited (SPL) 273 (47) 155 2 Refer note 3
Quality Chemicals Limited (QCL) - - - - Refer note 4

Note 1: HPL is the holding company and owns 100% shareholdings in FCL and SPL.
Note 2: FCL is audited by HTRC’s Lahore office. Since FCL is being audited by HTRC’s
Lahore office, no further procedures have been planned for obtaining the
understanding of the component auditor.
Note 3: SPL was incorporated in 2014 in United Arab Emirates (UAE) and is being audited
by a member firm of HT Network in UAE. Since SPL operates in foreign
jurisdiction, detailed audit procedures have been planned and confirmation will be
sent to assess the component auditor’s ethics, competence and the regulatory
environment.
Note 4: HPL has disposed-off its entire shareholdings in QCL, a wholly owned subsidiary
on 30 June 2019 at a gain of Rs. 450 million. QCL is being audited by HTRC’s
Islamabad office. Since QCL is no more part of the group as at 30 November 2019,
no procedures have been planned at the group level.

Required:
(a) Critically evaluate the extracts of the planning memorandum prepared by the audit
senior and advise the course of action. (15)
(b) Suggest five key audit procedures to verify the disposal of the subsidiary. (05)

Q.2 Rehmat Pakistan Limited (RPL) has share based payment plan for its employees. RPL’s
employees receive share options subject to certain vesting conditions. Discuss the key
controls that RPL is expected to employ while carrying out the valuation of share options. (07)

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Q.3 You are the audit manager assigned to the audit of Astron Computers Limited (ACL) for the
year ended 30 November 2019. Following information is available:
(i) The main business of the company is the importation of servers, laptops, desktop
computers, LCD screens and related accessories for sales to large customers and
retailers. ACL was incorporated in 2002 and operated profitably until 2016 when it
turned into a loss-making entity due to increased availability of refurbished computers
in the market.
(ii) Extracts from the draft profit and loss account:
2019 2018
---- Rs. in million ----
Sales 430 648
Cost of sales (388) (583)
Loss before taxation (32) (64)

(iii) Draft statement of financial position:

2019 2018 2019 2018
Assets Equity & liabilities
Rs. in million Rs. in million
Non-current assets Equity and reserves
Fixed assets 45 51 Share capital 6 6
Deferred tax 27 24 Reserves 27 50
72 75 33 56
Current assets Non-current liabilities
Inventories - in hand 97 90 Warranty provision 9 16
Inventories - in transit 12 7
Trade receivables 90 81 Current liabilities
Cash and bank 1 2 Payables 50 30
200 180 Running finance 172 138
Provisions 8 15
230 183
272 255 272 255
(iv) In June 2019, ACL decided to discontinue import and sale of desktop computers and
LCD screens and to concentrate selling servers and laptops. It also decided to
introduce an All-In-One PC which is not currently available in the refurbished market.
To further boost the sales, ACL has started offering extended warranties in addition to
a two-year warranty period for all of its products at a nominal increase in price. ACL is
presently negotiating with its bank to enhance the running finance facility in order to
meet the additional working capital requirements.
(v) In September 2018, ACL had entered into contracts with two leading chains of schools
for supplying 20,000 desktop computers and LCD screens at a nominal margin. ACL
has already supplied 6,000 units before deciding to discontinue this product segment.
ACL is presently negotiating with the management of both schools to change the
contract from the supply of desktop computers and LCD screens to All-In-One PC.
One of the schools has agreed to this change while negotiations with other school is in
progress. In case, the other school does not agree to the change, ACL would either
terminate the contract by paying a penalty of Rs. 6 million or procure the remaining
units from any other supplier whose cost might be even more than the contract price.
(vi) In May 2019, ACL ordered desktop computer accessories at a landed cost of
Rs. 20 million from a company based in Hong Kong. Due to the political unrest in
Hong Kong, the shipment was delayed for more than five months despite the ordered
units were manufactured on time. On discontinuance of the business of desktop
computers and LCD screens, ACL asked the manufacturer to cancel the order.
However, the manufacturer refused to cancel the order. In November 2019, the
manufacturer shipped the ordered units which were received by ACL on
2 December 2019. CEO has informed that they are under negotiation with a local
distributor to dispose of the entire desktop computer accessories.

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Required:
Discuss the audit risks that exist in the above scenario and suggest the key audit procedures
that you would perform to address those risks. (22)

Q.4 Basit and Company, Chartered Accountants has been appointed as auditor of Toys Pakistan
Limited, a subsidiary of a listed company incorporated in China, for the year ended
30 September 2019.

Basit and Company is required to audit following two sets of financial statements:
(i) Financial statements prepared to meet the statutory requirements of Pakistan. The
audit report is expected to be issued on 10 December 2019.
(ii) Financial statements prepared to meet the requirements of consolidation in China.
These financial statements would only be used by the group management in China.
The framework that has been used for the preparation of these financial statements is a
special purpose framework. The audit report is expected to be issued on
20 December 2019.

Required:
Discuss the additional matters that Basit and Company may include in its audit report on
the financial statements prepared for consolidation purpose. (06)

Q.5 Your firm has been appointed as the auditor of Helsinki Limited (HL), a listed company, for
the year ended 30 September 2019. The previous year’s audit was performed by another firm
of chartered accountants who expressed an unmodified opinion. In a recent meeting with
the client, it has been agreed that audit report will be signed on or before 20 December 2019.
The materiality has been determined at Rs. 10 million. Your audit team has brought the
following significant matters to your notice on the completion of audit field work:

(i) A receivable balance of Rs. 6 million with a related party has been identified which
has not been disclosed in the financial statements. HL’s management is of the view
that since the balance is not significant, there is no need to disclose the amount, nature
of transaction and nature of relationship.
(ii) While reviewing the previous year’s annual report, your team has noticed that there
were number of reports and analysis which formed part of the annual report. On
asking the management regarding the date when the current year’s information would
be available to the audit team, the management responded that directors’ report would
be provided on 10 December 2019 and all remaining reports would be provided on
18 December 2019.
(iii) While reviewing the provision for employees’ compensated absences, the audit team
has noticed that the working is prepared on the basis of basic salary, whereas the
employees are entitled for compensated absences on the basis of gross salary. On
further investigation it is found that the same error was made in the last year as well.
The management has agreed to adjust the entire amount in current year.

Required:
Evaluate the above matters and discuss your firm’s course of action along with implications
on the audit report, if any. (20)

Q.6 Your firm, Hatim Manzoor and Company, Chartered Accountants is the auditor of Paints
Limited (PL) for the year ending 31 December 2019. On 1 December 2019, PL has acquired
controlling interest in Brush Limited (BL). Your firm also has a contract with BL for
providing accounting and bookkeeping services until 31 December 2020. BL has requested
your firm to keep providing the services until an alternate solution is worked out.

Required:
Evaluate the threat(s) in the above scenario and discuss whether the firm can continue
providing the services to both the clients till conclusion of the audit. (10)

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Q.7 While conducting the audit of financial statements of Ghurair Limited, it has been
discovered that the company has received a material amount in bank, recorded as sales. On
inquiry, the finance department has informed that this amount represents a price increase
claim received from a foreign customer. It has also confirmed that there is no previous
history of receiving such claim from any foreign customer. Documentary evidence relating
to the transaction has been requested but has not been provided yet.

Required:
Discuss the implications of the above transaction on the completion of the audit. Also
recommend the action(s) in this regard which the firm should take. (05)

Q.8 Masala (Pvt.) Limited (MPL) produces a range of packed spices for last many years.
Currently, MPL sells its products in Karachi and Lahore only. MPL is now planning to
expand its business to all major cities of Pakistan and United Arab Emirates. For this
purpose, it intends to seek a financing of Rs. 2 billion from a local bank. MPL’s CFO has
prepared a five year cash flow forecast and has presented it to your firm for review.
The following further information is available:
(i) MPL signed a three-year contract with a distributor, Asif Brothers (AB) under which
AB was given exclusive right of distribution in Karachi and Lahore. The contract is
about to expire in June 2020. AB makes payment to MPL within 45 days from the
date of sales. The contract specifies AB’s rights to bonus on achieving the sales target.
(ii) MPL is in negotiation with many distributors in Islamabad, Peshawar, Quetta,
Multan and Dubai for distribution of its packed spices. The directors wish to sign a
five-year contract with a credit period of 30 days. It is expected that contract will be
finalised by February 2020.
(iii) In order to meet the additional demand to be raised through expansion, MPL is
planning to set up additional manufacturing facility in Karachi.

Required:
Discuss the key examination procedures that your firm would perform in respect of the
information from (i) to (iii). (10)

(THE END)

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Certified Finance and Accounting Professional Stage Examination

The Institute of 10 December 2020

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit, Assurance and Related Services

Instructions to examinees:
(i) Answer all SEVEN questions.
(ii) Answer in black pen only.

Q.1 You are the audit manager at Haroon Rahim and Company, Chartered Accountants
responsible for the audit of Fit Bit Limited (FBL) for the year ended 30 November 2020.
FBL is a listed company and is engaged in the manufacturing of fitness equipment and
related accessories. FBL sells its products all over the country through a chain of
distributors.

The extracts from the draft financial statements for the year ended 30 November 2020 are as
follows:

2020 2019
------ Rs. in million ------
Revenue from sale of fitness equipment 71,000 70,000
Revenue from subscription of plans 30,000 -
Profit before tax 500 400
Property, plant and equipment 6,600 6,900
Intangible assets 1,000 250
Advance from customers 10,000 200
Stock in trade 16,000 15,800

During the month of October 2020, due to faulty pad used in a newly manufactured fitness
equipment, 60 accidents were reported where FBL had paid compensation aggregating
Rs. 30 million. Upon identification of fault, the sale of this equipment was immediately
suspended until the matter was resolved in a month’s time. The entire compensation amount
paid to customers has been reported in the financial statements as receivable from a supplier
who had supplied such faulty pads.

On 1 January 2020, FBL launched a mobile application that generates personalized exercise
and diet plans considering an individual user’s physical and medical conditions. The
application has received an overwhelming response as large number of domestic and foreign
customers have subscribed for it. Following information is available in this respect:

(i) The application was developed in-house with the support of a leading software house.
(ii) Each customer has an option to subscribe biannual or annual plan.
(iii) All the subscription plans are paid in advance; however, each subscriber has an option
to cancel the plan within 30 days and claim the refund of the entire subscription
amount.

Required:
Discuss the audit risks that exist in the above scenario and suggest the key audit procedures
to be performed in respect of the identified risks. (22)

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Q.2 You are the audit manager at HTC and Company, Chartered Accountants. Following
matters relating to a joint audit of Petro Oil Limited are brought into your attention by audit
team:

(a) The joint auditors have agreed upon an audit strategy through which they have
segregated audit areas for both the firms.

Required:
Discuss how your firm can ensure before finalization of the audit report that the work
carried out by the other joint auditor has been in accordance with the agreed audit
strategy. (05)

(b) There is a difference of opinion on impairment of intangible assets. Your firm wants to
issue a qualified report whereas the joint auditor is convinced with the management’s
explanation and intend to issue an unmodified report.

Required:
Discuss the course of action available to your firm. (04)

Q.3 You are the audit manager at Moosa and Company, Chartered Accountants responsible for
the audit of Beta Bank Limited (BBL). While planning the audit for the year ending
31 December 2020, you come across a news published in a national newspaper that BBL has
suffered a cyber-attack which has resulted in theft of depositors’ confidential data.

Required:
Discuss the course of action you should plan in response to cyber-attack. (12)

Q.4 You are the audit manager responsible for the audit of Kekra Pakistan Limited (KPL). KPL
has various production facilities across the country. Your audit team has brought the
following matters to your notice which require your guidance:

(i) KPL is required to decommission its production facilities and restore the site at the end
of their economic life. Notes to the financial statements for the year ended
30 September 2020 contain the following disclosures related to decommissioning
provision:
Rs. in million
Balance at the beginning of the year 7,126
Provision made during the year 371
Reversal due to changes in estimates (1,471)
Unwinding of discount 720
Balance at the end of the year 6,746

(ii) As a result of decrease in demand, the management adjusted its medium-term and
long-term price assumptions and discount rates, which had a significant impact on asset
valuation. At 30 September 2020, KPL recognized an impairment of Rs. 2,184 million
against the carrying value of cash generating unit.

Required:
Brief the audit team regarding the significance of the above matters and the audit procedures
to be performed in this respect. (15)

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Q.5 Salman Qasim is an audit senior of Ibrahim & Company, Chartered Accountants. He joined
the ongoing audit of Kalam Limited (KL) which was under completion stage. During the
audit, he came to know that the newly appointed Chief Financial Officer (CFO) is a close
friend of the audit manager which was not disclosed by him to the firm. He decided to
disclose this matter to the engagement partner; however, he came to know that the
engagement partner has been out of country for last one month and has not yet discussed the
progress of the audit with the audit team. He then wrote an email to the firm’s quality
control partner and brought all such observations in his knowledge.

Required:
Discuss the professional and ethical issues arising in the above situation and advise the
course of action that the firm’s quality control partner should take. (13)

Q.6 You are the audit manager of Zafar Iqbal & Company, Chartered Accountants. You have
asked one of the team members assigned on the audit of Brown Sugar Limited to draft the
Key Audit Matter section of the audit report for the year ended 30 June 2020. The extracts
from the draft report are as follows:

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. In addition to the matter described in the Basis for Adverse
Opinion section, we have determined the matter described below to be the key audit
matter to be communicated in our report.

How our audit addressed

Key audit matter
key audit matter
In the course of conducting a Our key audit procedures in this area included
sales tax audit for the period amongst others were:
from January 2019 to  We reviewed the correspondence of the
December 2019, FBR raised company with relevant tax authorities and tax
certain issues with respect to advisors including judgements or orders
the company’s sales. On
passed by the competent authorities.
May 2020, the company
received an order in which  We also obtained and reviewed confirmations
demand of Rs. 100 million from the company’s external tax advisor for
was raised. The company has the latest status of the case.
filed an appeal with the  We involved internal tax experts to assess and
appellant board and is review the management’s conclusion on this
confident that it would be matter.
decided in company’s favour.
 We verified all the journal entries posted in
Due to the materiality and the ledgers related to legal expenses.
significance of the above  We obtained representation from the
matter we have considered management regarding the favourable
this tax contingency as a key outcome of the matter.
audit matter.
Based on the procedures performed, we
concluded that there is no material misstatement
and contingency has been adequately disclosed.

Required:
Critically analyse the Key Audit Matter section of the audit report. (13)

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Audit, Assurance and Related Services Page 4 of 4

Q.7 (a) You are employed as an audit manager in Bashir and Company, Chartered
Accountants. One of your clients, Davidsons Pharma Limited (DPL), is considering to
acquire 60% shareholding in Sehat Healthcare (Pvt.) Ltd. (SHPL) and has requested
your firm to carry out a due diligence.

During the fieldwork of due diligence exercise, your team has brought the following
matters to your attention:

(i) A major customer which accounts for 10% of SHPL’s annual sales has refused to
place further sale orders. On inquiry, it was revealed that competitor has offered
significant discount of 12% to increase its market share.

(ii) DPL has central distribution model where single distributor has non-exclusive
rights countrywide with commission rate of 5%. All sales made to the distributor
on 30 days’ credit. On the Other hand, SHPL has a regional distribution model
where multiple distributors are involved country wide with commission rates
ranging from 2% to 4%. Under this model, all sales are made on cash.

Required
Discuss how the above matters are to be investigated for due diligence review and also
recommend the additional procedures to be performed in this respect. (12)

(b) Your firm has been approached by Agar Products Limited for audit of accounts
receivable and accounts payable reported in the financial statements. The financial
statements were prepared in accordance with the general purpose framework and is
audited by another firm of chartered accountants.

Required:
Discuss the matters you would consider before accepting the above assignment. (04)
(Ignore the ethical considerations for the acceptance of the audit)

(THE END)

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Certified Finance and Accounting Professional Stage Examination

The Institute of 10 June 2021

Chartered Accountants 3 hours – 100 marks
of Pakistan Additional reading time – 15 minutes

Audit, Assurance and Related Services

Instructions to examinees:
(i) Answer all SIX questions.
(ii) Answer in black pen only.

Q.1 (a) MF Momin, Shams & Company is a firm of chartered accountants (the firm) which
was initially registered with two partners namely Momin and Shams, in the year 2011
with offices in Karachi and Islamabad. In 2020, the firm got affiliation with a reputed
international firm namely Missouri Fox (MF) which resulted in increase in clientele of
the firm especially in the province of Punjab. As a result, the firm has established its
new office in Lahore.

You are the quality control partner in the firm. While reviewing the annual revenue
earned by the firm for the year ended 31 December 2020, you have extracted the
following information from the firm’s books of accounts:

Firm’s offices Firm’s partners

Clients Karachi Islamabad Lahore Momin Shams Others
------------------------ Rs. in ‘000 ------------------------
Audit and assurance
services
Pervez Limited (PL) 2,730 - - - 2,730 -
Amin (Pvt) Ltd (APL) - - 1,680 - - 1,680
Salman Limited (SL) - 4,000 - 4,000 - -
Tania Limited (TL) 1,100 - - - 1,100 -
Other clients 3,800 3,000 6,000 3,000 1,800 8,000
Consultancy and
other services
Pervez Limited (PL) 500 2,000 500 - - 3,000
Amin (Pvt) Ltd (APL) - - 1,480 - - 1,480
Salman Limited (SL) 1,500 - 1,300 - - 2,800
Tania Limited (TL) 200 - - - 200 -
Other clients 4,170 6,000 2,040 3,000 3,170 6,040
14,000 15,000 13,000 10,000 9,000 23,000

Other information:
(i) PL, SL and TL are listed companies whereas APL is the first multinational
client of the firm.
(ii) All the clients have already re-appointed the firm for their subsequent statutory
audit.
(iii) Shams is also entitled to 20% additional commission of the total fees earned
from PL.

Required:
In the light of ICAP’s Code of Ethics for Chartered Accountants, evaluate the
implications of revenue earned from PL, APL, SL and TL on the firm and suggest the
safeguard(s), if any, available to the firm and partners. (12)

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(b) Other clients in (a) include Hafiz Limited (HL) and Chand Limited (CL) which have
not yet paid the audit fees for the year ended 30 June 2020. The audit report for HL
was issued three months ago but HL has still not paid the balance 50% of audit fee,
while the audit report for CL has not been issued due to certain pending issues.

Required:
Discuss the course of action available to the firm in the above situation. (03)

Q.2 You are the audit manager in a firm of chartered accountants responsible for the statutory
audit of Hackney Pharma Limited (HPL) which is principally engaged in the business of
manufacturing and sale of pharmaceutical products.
Extracts from HPL’s statement of profit or loss for the year ended 31 May 2021 are as
follows:
2021 2020
Description
---------- Rs. in '000 ----------
Sales 3,343,214 3,213,435
Sales returns (72,519) (73,202)
Sales – net 3,270,695 3,140,233
Cost of sales (1,895,590) (1,860,579)
Selling & marketing expenses (94,089) (93,629)

During the planning meeting for the year ended 31 May 2021, HPL’s management informed
you about the recall notice issued in respect of HPL’s flagship product ‘Azteca’. The notice
was published in a local newspaper on 1 May 2021. The notice was issued on the advice of
the drug regulatory authority following complaints received with regard to development of
unexpected side effects in some users of the product.

Azteca is a patent product under the licensing agreement with Global Healthcare
Laboratories (GHL), a multinational company, signed in year 2017. Under the agreement,
HPL manufactures and sells Azteca for 10 years against payment of upfront license fee of
Rs. 300 million. HPL is also subject to penalties in case of use of substandard raw material
in the manufacture of Azteca. The raw material is imported from foreign countries.
Currently, GHL is investigating the reason for the defect/unexpected side effects.

The management has also informed you that this product recall has not only affected HPL’s
sales but has also created working capital issues. HPL took immediate steps such as
commenced negotiation with the bank for financing working capital and launched
aggressive marketing campaign in May 2021 to boost the sale of its other products.

Required:
Discuss the audit risks that exist in the above scenario and suggest the key audit procedures
to be performed in respect of identified risks. (22)

Q.3 You are the audit manager responsible for the audit of Kamran Limited (KL) for the year
ended 31 May 2021. On 1 October 2020, KL raised Rs. 400 million by issuing convertible
bonds (having par value of Rs. 100 each). The bonds are convertible to KL’s ordinary shares
in 5 years' time at the option of bond holders. The convertible bonds carry coupon rate of
5% payable on 30 September each year.

KL’s total shareholders equity as at 31 May 2021 was Rs. 3,250 million.

Required:
(a) Specify the matters to be considered by the auditor while planning the audit of
convertible bonds. Also suggest the related audit procedures. (09)
(b) Discuss the reporting implication(s), assuming that KL believes that at least 30% of
the bonds would be converted to equity at the end of year 5 and have therefore
recorded Rs. 120 million as equity and the remaining amount as liability. (03)

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Q.4 (a) You are the audit manager in a firm of chartered accountants responsible for the
statutory audit of Fazal Limited (FL) for the year ended 31 March 2021.

During the audit, your audit team was informed that on 1 January 2021, FL entered
into a sale and leaseback agreement with Arabian Leasing Company (ALC) for its
head office property situated at premier commercial hub. FL sold the property to ALC
at fair value with useful life of thirty years as assessed on the date of sale.
Subsequently, ALC leased back the property to FL for a period of ten years.

Required:
State the audit procedures which may be performed in respect of the above
transaction. (07)

(b) Saleem & Company, Chartered Accountants is the statutory auditor of Duo Limited
(DL). The management of DL has prepared summary financial statements, which
have been derived from DL’s statutory financial statements for the year ended
31 December 2020. The management intends to make a statement that the summary
financial statements have been derived from the financial statements for which audit
report was issued by Saleem & Company on 25 February 2021.

Required:
Discuss whether DL can include such a statement in the summary financial
statements and the course of action that the firm should take in this regard. (06)

Q.5 Gama Pakistan Limited (GPL) is planning to expand its business by manufacturing
telecommunication accessories. For this purpose, GPL intends to obtain financing from a
bank for the planned expansion. To meet the bank’s requirement, GPL has prepared a five
years’ cash flow forecast based on management’s estimates. GPL has requested your firm to
review the forecast and furnish a report thereon.

Following information is available to you in respect of the forecast:

(i) GPL has secured agreement with two mobile phone manufacturers under which it
would be able to sell 30% of its production capacity. The mobile phone manufacturers
would pay to GPL after selling the accessories to the wholesalers.
(ii) The telecommunication accessories would be sold to mobile phone manufacturers
with one-year warranty.
(iii) During the first year, the supplies to the customers would be made through delivery
trucks; however, in order to reduce the delivery cost to other cities, cargo train would
be used from second year of production. Negotiations with railway authorities are
underway.
(iv) Royalty would be paid to a foreign company for acquiring the right to manufacture
certain accessories.
(v) A significant reduction in the cash outflows on account of income tax has been
forecasted in the years 3, 4 and 5. The management has placed a comment in support
of this reduction that the taxation authorities have principally agreed to reduce tax
rates for companies manufacturing ‘telecommunication equipment and related
accessories’ and the announcement of the reduction in tax rates will be made in the
next budget.

Required:
Discuss the key examination procedures that your firm would perform in respect of the
above information. Also discuss the reporting implication(s), if any. (14)

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 IQ SCHOOL OF FINANCE AUDIT BY IBRAHIM www.iqsf.pk
Audit, Assurance and Related Services Page 4 of 4

Q.6 You are the audit manager at Salman, Pervez and Company, Chartered Accountants. You
are responsible for the audit of United Health Limited and its group financial statements for
the year ended 31 May 2021. Following information have been provided to you by the audit
team:

Profit before Total

Revenue
Name of company tax assets
------------- Rs. in million -------------
United Health Group (Consolidated) 75,000 11,000 69,000
United Health Limited 24,773 2,900 24,484
Quality Labs Limited 54,000 8,100 44,000

United Health Limited (UHL):

Due to COVID-19 pandemic, UHL has witnessed significant decline in sales. In order to
meet the sales target, UHL entered into five large contracts with its customers for supply of
its products. All these customers carried risks of either non-payments or delayed payments.

In addition to the above, UHL also entered into a contract for supply of lab equipment.
UHL had agreed to a pricing model in which 80% of the contract amount will be received as
the regular price of the equipment and 20% will be received as performance bonus subject to
timely delivery of equipment. UHL has always been able to deliver all its equipment within
the agreed time. However, due to COVID-19 lockdown in the country of import, UHL may
not be able to receive the lab equipment on time and consequently UHL may not be able to
timely supply it to the customer.

Quality Labs Limited (QLL):

Up to last year, the group audit team made local site visit to the component auditor team in
Spain to review key audit working papers and attended closing meetings with local
management as Spain does not allow the cross border sharing of health data. However, due
to COVID-19, Spain has imposed a strict lockdown and has placed travel restrictions which
may continue for at least next 30 days.

Required:
(a) Critically evaluate the issues brought to your notice and advise the course of action. (17)
(b) Discuss the reporting implications on the group financial statements due to the
auditor’s inability to obtain sufficient appropriate audit evidence regarding QLL’s
financial statements. (07)

(THE END)

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