Auditing and Assurance Services

Introduction to Audit and Assurance Services

APT Support Notes 2Sako Mayrick

Objective

• Understand the coverage requirement including the Handbook by IFAC

• Understand the background, meaning and scope of audit and assurance engagements

• Understanding nature and types of audit• Understand the audit objectives and

objectives of audit• Understand the key Audit Concepts

Introduction

• Key documents– NBAA Examiners’ Report, November, 2012– NBAA Syllabus and Past Examinations (At least 10)– Handbook of International Quality Control, Auditing, Review,

Other Assurance, and Related Services Pronouncements (2012) – downloadable from www.ifac.org

– Accountants and Auditors (Registration) Act No.33 of 1973• NBAA By Law

– National Audit Act– Public Procurement Act and pertinent Regulations– Public Finance Act and pertinent Regulations– Ant-Money Laundering Act

@Sako Mayrick 2012

@Sako Mayrick 2012

Introduction to Audit Audit refers

to an independent examination of the financial statements of an enterprise,

conducted with a view to expressing an opinion as to whether those statements give a true and fair view

AUDITING (broadly defined) is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested parties.

AUDITING (narrowly defined) is a written report on the examinations of financial statements for a client.

Investigation is an inquiry of fact about a particular matter Auditors do not certify the financial statements, but report

that in their opinion the financial statements give a true and fair view.

@Sako Mayrick 2012

True and fair view• This is a requirement of companies Act, the accounts of a Limited

company must show a true and fair view• Truth and fair is a dynamic concept, truth in accounting terms is

quite different from scientific truth. Accounting does not deal with the type of truth that has a fixed and unchanging quality

• True, information is factual and conforms with reality, not false. In addition the information conforms with required standards and law. The accounts have been correctly extracted from the books and records

• Fair, information is free from discrimination and bias and in compliance with expected standards and rules. The accounts should reflect the commercial substance of the company’s underlying transactions.

• True and fair view has become a term of art. It is generally understood to mean presentation of accounts drawn up according to accepted accounting principles using accurate figures as far as possible and reasonable estimates otherwise, and arranging them so as to show within the limits of current accounting practice as objective picture as possible free from willful bias, distortion, manipulation or concealment of material facts.’ (Lee)

@Sako Mayrick 2012

True and fair view• This is a requirement of companies Act, the accounts

of a Limited company must show a true and fair view• Truth and fair is a dynamic concept, truth in accounting

terms is quite different from scientific truth. Accounting does not deal with the type of truth that has a fixed and unchanging quality

• True, information is factual and conforms with reality, not false. In addition the information conforms with required standards and law. The accounts have been correctly extracted from the books and records

• Fair, information is free from discrimination and bias and in compliance with expected standards and rules. The accounts should reflect the commercial substance of the company’s underlying transactions.

@Sako Mayrick 2012

Objectives of Auditing• Primary Objective ( main objective)

– To produce a report by the auditor of his opinion of the truth and fairness of financial statements so that any person reading or using them can have belief in them

• Secondary– To detect errors and fraud ( Consider materiality)– To prevent errors and fraud by the deterrent and moral

effect of the audit– To provide spin- off effects. The auditor will be able to

assist his clients with accounting , systems, taxation , financial , and other problems.

@Sako Mayrick 2012

Audit objectives

• Validity• Completeness• Cutoff• Ownership• Accuracy• Valuation• Classification• Disclosure

@Sako Mayrick 2012

Historical Background

• The role of auditor goes back many hundreds of years. There are records from ancient Egypt and Rome, showing that people were employed to review work done by tax collector and estate managers

• The emphasis was very much on the detection of fraud and other irregularities

• Emphasis has changed and the role of the auditor becomes much more sophisticated

• Stewardship requires an outsider with sufficient independence and objectively to review the accounts of stewardship and to express an opinion as to their honesty or otherwise.

@Sako Mayrick 2012

Advantages of audit• Companies

– Directors• Assurance that statutory responsibilities concerning accounts have

been carried out• Assistance with statutory responsibilities concerning accounts• Availability of expert professional advice• The letter of weakness

– To shareholders• Assurance that accounts show a true and fair view and comply

with statutory requirements• Assurance that directors have fulfilled their statutory

responsibilities for books and accounts, and the safeguarding of assets

• Assurance that directors have fulfilled their statutory responsibilities for books of accounts and the safeguarding of assets

• Assurance that all directors remuneration has been disclosed

@Sako Mayrick 2012

Advantages of audit• Companies

– Other organization with published accounts• Assurance to all users of accounts , that the accounts

show a true and fair view and comply with statute• Assurance that ‘stewards’ have fulfilled their accounting

and financial responsibilities– Private organizations such as partnerships

• Assurance that accounts are reliable• Reasonable assurance that all fraud of consequence

has been disclosed.– In addition they provide reliable accounts to

regulatory bodies such as the Companies Registry, the stock exchange etc.

@Sako Mayrick 2012

Disadvantages of audit– The audit involves the client’s staff and

management in giving time to providing information to the auditor. Professional auditors should therefore plan their audit carefully to minimize the disruption, which their work will cause.

– The audit fee, clearly the services of an auditor must be paid for. It is for this reason that few partnership and even fewer sole trader are likely to have their accounts audited. The accountant’s role as the preparer of financial statements, as tax adviser and general financial adviser, becomes much more important to such concerns.

@Sako Mayrick 2012

Development of modern auditing• Modern auditing as developed since the concept of a company

as a separate legal entity came into existence in the late ninetieth century. This led to the separation of ownership (shareholders) from control (directors) and consequent need to safeguard the interests of the owners, who in all but the smallest of business where shareholders and directors were on and the same) were not involved in the day to day decisions made by the management.

• In previous years it was part of the appointed auditor duties to discover fraudulent misrepresentations, the detection of fraud and error become the major objective of company audits. However in later part of nineteenth century, there was a growing school of thought that the prevention of fraud and error (as opposed to its detection) should be the major objective of the auditor (both external and internal) and that the management of a company should play a greater part.

@Sako Mayrick 2012

Development of modern auditing• The Kingston Cotton Mill case of 1896,

established the fact that the auditor should not be responsible for finding every fraud and error. Here, the judgment pronounced that the auditor’s role should be likened to that of a watchdog rather than bloodhound, and that what was required of auditors was that they should act with such reasonable care and skill as was appropriate circumstances

@Sako Mayrick 2012

Duties of auditors• Carry out procedures designed to obtain sufficient

appropriate audit evidence, in accordance with International Standards of Auditing, to determine with reasonable confidence whether the financial statements are free from materials misstatement

• Evaluate the overall presentation of the financial statements, in order to ascertain whether they have been prepared in accordance with relevant legislation and IFRS/IAS

• Issue a report containing a clear expression of their opinion on the financial statements.

@Sako Mayrick 2012

• The responsibility for preparation and presentation of the financial statements is that of directors of the entity. The audit does not relieve the directors of any of their responsibilities.– Auditors opinion is not a guarantee of the future viability of the entity– Auditors opinion is not an assurance of management’s effectiveness

and efficient• Causes of limitations

– The impracticality of examining all items within an account balance or class of transactions

– The inherent limitation of any accounting and control system– The possibility of collusion or misrepresentation for fraudulent

purposes– Most audit evidence is being persuasive rather than conclusive

Limitations of audit

@Sako Mayrick 2012

Professional skepticism• Material misstatement may exist in financial statement and

auditors should plan their work on this basis, i.e. professional skepticism, ISA, makes it clear that, even where auditors assess that the risk of litigation or adverse publicity as very low , they must still perform sufficient procedures according to auditing standards, ie there can never be a reason for carrying out an audit of a lower quality than that demanded by the ISA’s

• In carrying out his work the auditor should adopt an attitude of professional skepticism, recognizing that circumstances may exist which cause the financial statements to be materially misstated.

• The purpose of the independent audit is to ensure that the financial statements are OBJECTIVE, FREE from BIAS and MANIPULATION and RELEVANT to the need of users.

@Sako Mayrick 2012

Common legislation• The work of an auditor is regulated by two sources

– Statues, the Companies Act No.12 of 2002– The Act also requires auditors to have a recognized

professional qualification, as well as laying down minimum disclosure levels as per accountants and auditors Act (Registration) of 1973 as amended

– Professional pronouncements on Auditing ( issued by NBAA and IFAC)

– Professional pronouncements include the rules of professional conduct issued by NBAA and IFAC,

– The ethical principles that govern auditors’ responsibilities are • Integrity• Objectivity• Independence• Professional competence an due care• Professional behavior• confidentiality

@Sako Mayrick 2012

Types of audit• -Statutory Audit, carried because the law requires

them. Statutes include Companies Act, Specific Parastatal Organization Act

• -Private audits, because of auditor’s desire and not because of law e.g. sole trader and partnership

• -Internal audits, is the one conducted by an employee of a business into any aspect of its affairs.

• -Management audit, an inquiry into efficiency and effectiveness of management

• -Public sector audit, contract audit , computer audit etc

@Sako Mayrick 2012

Types Of Audits-Financial statements audits-Compliance audits-Operational audits-Comprehensive audits-Forensic auditsTypes Of Auditors-External auditors -Internal auditors-Government auditors-Forensic auditors

Issues Affecting The Profession-Expanded services-Globalization-Litigation-Independence issues

@Sako Mayrick 2012

Presentation of the systems audit

Determine the audit approach

Ascertain relevant systems and controls

Document relevant systems and controls

Confirm operation of systems and controls

Evaluate operation of systems and controls

Submit Interim mgt and letter Select and perform test of controls

Carry out final rev iew

Report to members

Select and perform substantive procedures

Select and perform restricted substantive procedures

Submit final management letter

@Sako Mayrick 2012

Planning of the audit

Assessment of the accounting and internal

control systems and audit risk assessments

Consideration of the ways in which audit evidence can be sought

Testing of Internal Controls ‘test of control’

Extensive testing of transactions and balances ‘substantive procedures’

Reduced testing of transactions and balances “substantive procedures’

Review of financial statements

Audit Report

@Sako Mayrick 2012

Key stages• Determine audit approach• Ascertain in the accounting system and internal controls• Assess the accounting system and internal controls• Test the accounting system and internal controls • Test the financial statements ( substantive testing)• Review the financial statements • Express an opinionOR• Client acceptance and continuance• Establish the terms of the engagement• Plan the audit• Consider internal control• Conduct substantive audit procedures• Complete the audit• Issue audit report

@Sako Mayrick 2012

ManagementAssertions

The relationship of evidential matter to the audit report

FinancialStatements

AuditObjectives

AuditProcedures

AuditReport

Evidence

@Sako Mayrick 2012

Management assertions• Existence or occurrence• Completeness• Rights and obligations• Valuation and allocation• Presentation and disclosure• Existence or occurrence• Completeness• Rights and obligations• Valuation and allocation• Presentation and disclosure

@Sako Mayrick 2012

• ATTESTATION occurs when a practitioner is engaged to issue or does issue a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party.

• Examples:– The effectiveness of internal control– Financial information other than the financial

statements– Future-oriented financial information– Compliance with statutory, regulatory, or contractual

obligations– Management’s discussion and analysis

Auditing, attestation, and assurance services

@Sako Mayrick 2012

Assurance engagement• According to ISA, Audit client is an entity in respect of which a firm

conducts an audit engagement. When the audit client is a listed entity, audit client will always include its related entities. Audit engagement (An assurance engagement) to provide a high level of assurance that financial statements are free of material misstatement, such as an engagement in accordance with International Standards on Auditing. This includes a statutory audit which is an audit required by national legislation or other regulation.

• Assurance Engagements is an assignment whereby a professional accountant is required to evaluate or measure a subject matter that is the responsibility of another party against identified suitable criteria, and to express a conclusion that provides the intended user with a level of assurance about the subject matter. It is important to distinguish between the levels of assurance given by an audit ( which gives a high level of assurance) to that given by other assurance engagements which , depending on the nature of the engagement, may give a lower level of assurance.

@Sako Mayrick 2012

Assurance engagement

• There is a broad range of assurance engagements , including any combination of the following :

– Engagements to report on a broad range of subject matters covering financial and non-financial information.

– Engagements intended to provide high or moderate levels of assurance

– Attest and direct reporting engagements– Engagements to report internally or externally– Engagement in the private or public sector.

• ISA states that the objective of a review of financial statements is to enable an auditor to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, any thing has come to the auditor’s attention that causes the auditor to believe that the financial statements are not prepared, in all material respects, in accordance with an identified financial reporting frame work (negative assurance)

@Sako Mayrick 2012

Auditing, attestation, and assurance services… cont

ASSURANCE services are independent professional services that improve the quality of information, or its context, for decision makers.

Examples: Risk assessment Information system reliability Electronic commerce Health care performance measurement

@Sako Mayrick 2012

The relationship between auditing, attestation, and assurance services

AttestationAuditing Assurance

@Sako Mayrick 2012

Three Fundamental Concepts In Conducting An Audit

-Materiality-Audit risk-Evidence***Materiality A misstatement or the aggregate of all misstatements in financial statements is considered to be material if, in light of surrounding circumstances, it is probable that the decision of a person who is relying on the financial statements, and who has a reasonable knowledge of business and economic activities ( the user), would be changed or influenced by such misstatement or the aggregate of all misstatements. ***Audit risk is the risk that the auditor will fail to express a reservation in his or her opinion on financial statements that are materiality misstated***Evidence Evidential matter supporting the financial statements consists of the underlying accounting records and all corroborating information available to the auditor.Relevance refers to whether the evidence relates to the specific audit objective being tested.Reliability refers to the whether or not a particular type of evidence can be relied upon to signal the true state of the assertion or audit objective.

@Sako Mayrick 2012

Internal auditing• An internal audit is an independent activity established by

management to examine and evaluate the organization’s risk management process and systems of control, and to make recommendations for the achievement of company objectives.

• The internal audit staffs may also engage in number of other activities :

– Examination and evaluation of financial and operating information within the organization- in certain organization this can form a type of continuous auditing and may involve sophisticated information systems that capture monitoring of risk and evidencing of controls

– Review of economy, efficiency and effectiveness of operations

– Review of compliance with external laws and regulations and internal policy and procedures

– Review and advice on the development of key orgnaisational systems and on the implementation of major change.

@Sako Mayrick 2012

Internal auditing cont…• The current focus of internal audit is on adding value to an

organization through risk control and reviewing all types of risk and recommending relevant controls. The institute of internal Auditors definition has changed the focus of internal audit toward a more risk-based, consultancy type activity. The internal audit can be referred as

– An independent, objective assurance and consulting activity – Designed to add value and improve an organization’s operations– Helps the organization accomplish its objectives– Bring systematic, disciplined approach to evaluate and improve the

effectiveness of risk management, control and governance processes.• There are four major areas of importance for internal audit that

are addressed– Corporate governance– Risk management– Organizational control– Corporate objectives

@Sako Mayrick 2012

Internal and External AuditingIt is important to understand and recognize the differences and commonalities between internal and external audit. Internal and external auditor should work closely together, in particular to coordinate activity and maximize effectiveness and where appropriate external audit may rely on the work of internal audit. However, there are number of fundamental differences in their objectives, scope and responsibility.

Internal auditing External auditing

Objectives To advise management on whether the organization has sound systems of internal controls to protect the organization against loss

To provide an opinion on whether the financial statements provide a true and fair view

Legal basis All areas of the organization, operational as well as financial

Financial focus

Scope All areas of the organization, operational as well as financial

Financial focus

Approach Increasingly risk baseAssess risksEvaluate system of controlsTest operation of systemMake recommendation for improvements

Increasingly risk basedTest underlying transactions that form the basis of the

financial statements

Responsibility To advice and make recommendations on the internal control and corporate governance

To form opinion on whether the financial statements provide a true and fair view.

@Sako Mayrick 2012

Considering the work of internal auditing ISA 610 requires external auditors to consider the activities of internal auditors and their effect, if any,

on the nature, timing, and extent of the external auditor’s procedures. The external auditor considers the organizational status of the internal audit function, the scope of its function, the technical competence of its members and the professional care they exercise when assessing the work of the department.

The auditing process is very similar between the external and internal auditors however; the audit objectives are often very different.

There are number of factors to consider for an auditor to rely on the work of internal auditor:

• (a) Organizational status: Specific status of internal auditing in the entity and the effect this has on its ability to be objective. In the ideal situation, internal auditing will report to the highest level of management and be free of any other operating responsibility. Any constraints or restrictions placed on internal auditing by management would need to be carefully considered. In particular, the internal auditors will need to be free to communicate fully with the external auditor.

• (b) Scope of function: The nature and extent of internal auditing assignments performed. The external auditor would also need to consider whether management acts on internal audit recommendations and how this is evidenced.

• (c) Technical competence: Whether internal auditing is performed by persons having adequate technical training and proficiency as internal auditors. The external auditor may, for example, review the policies for hiring and training the internal auditing staff and their experience and professional qualifications.

• (d) Due professional care: Whether internal auditing is properly planned, supervised, reviewed and documented. The existence of adequate audit manuals, work programs and working papers would be considered.

@Sako Mayrick 2012

Outsourcing of IA function• The National Board of Accountants and Auditors’ Governing Board at its 132nd meeting held on 11th April 2005,

among other issues, deliberated on the above professional issue and resolved that the outsourcing of the Internal Audit function in the country is a relatively new phenomenon, which needs some guidance. In view of this, it was agreed that institutions wanting to outsource the Internal Audit function may only do so under the following conditions:

• (1) That the service be provided in the form of a consultancy by competent, qualified accountants registered with the Board in the registration category of CPA-PP.

• (2) That the outsourced Internal Auditor be distinct from the External Auditor of the entity.• (3) That the institution seeking such professional services should have in place an Audit Charter.• (4) That such professional services be guided by very clearly worked out “Terms of Reference”

showing: • –the scope of the audit• –the number of man-days to be used• –the reporting requirement including the types and frequencies of reports to be prepared• –the price of the consultancy• (5) That the consultancy be for a specified time frame after which there should be need to change the

internal auditor.• (6) That the client (procuring entity) shall have the powers to pre-maturely terminate the consultancy

contract on unsatisfactory performance of the outsourced Internal Auditor (Consultant).• (7) That the Internal Audit process should be guided by programmes and detailed working papers which

should be available for AQR purposes, should need arise.• (8) That the outsourcing of the Internal Audit function should avoid any kind of conflict of interest among

the parties.• (9) That the Internal Auditor should exercise the pre-requisite independence when rendering such

professional services.• (10) That such professional services should be procured based on competitive bidding processes.• All organizations / entities operating in Tanzania and the general public are required to note this development and

observe the above guidelines.

@Sako Mayrick 2012

Shift of emphasis of audit• The emphasis in approaching an audit has shifted

from detailed checking of individual items towards an overall review of the systems in operation; followed by an examination of the records and the financial statements prepared from them. Amongst the reason for this major shift of emphasis are:– The increasing size and complexity of modern enterprises– The development of more accurate and sophisticated

computerized systems– The requirement that the auditor should also report on the

profit and loss account, which entails a review of all transactions during the period, not simply of year-end balances as before.

@Sako Mayrick 2012

Worked example• NEDCO, parastatal organization dealing with industrial research development has recently decided to

appoint a small internal audit team. The Chief Accountant has sent to you as statutory auditor for a number of years for your comment on the following job specification for the teamJob specification- internal auditYour role is to– Review accounting systems and related internal controls– Examine financial and operating information for management, including detailed testing of

transactions and balances– Review the economy , efficiency and effectiveness of operations and of non financial controls– Review the implementation of corporate policies, plans and procedures.

NEDCO also state that the new internal audit team should enable the statutory auditors to reduce the amount of testing they undertake and thus, to increase overall efficiency and reduce the cost of the statutory audit.

1. Describe the objectives and scope of internal audit function according to ISA 6102. Comment briefly on the four items in the internal audit job specification indicating with examples

the extent, which they might impinge upon the work of the statutory auditor.3. List and explain five criteria which you would have to consider accordance to ISA 610, before

deciding how much reliance you could place on the work done by the internal auditor4. Outline the response, which you would make to NEDCO regarding a possible reduction in the cost

of the statutory audit.5. If the management of NEDCO decided to outsource the internal audit services. Comment briefly

on possible advantages and disadvantages of the procedure. 6. Describe major ethical matters in accordance to ISA which external auditors to NEDCO should

consider in case they decide to undertake the external audit assignment

@Sako Mayrick 2012

Audit as a communication medium• According to ISA 700, the objective of any audit is for the

auditor to obtain sufficient appropriate audit evidence to be able to express an opinion on the financial statements.

• ISA 700, provides authoritative guidance on audit reporting.

• Audit report is the primary means of communication between the auditor and the shareholders of the company.

• In order to convey information of a succinct form, the audit report has become an extremely formalized group of phrases, each of which has special significance. These are similar to legal phrases know as “terms of art’. Such phrases do not mean merely what they appear to mean on the face of it , and have significance much greater that they first appear to. Any deviation from the standard format is regarded by accountants as being significant and may provide more important extra information.

@Sako Mayrick 2012

Auditor's standard unqualified audit report• This is the most common type of audit report.• The standard unqualified audit report contains

seven important elements:– Title– Addressee– Introductory paragraph – Scope paragraph– Opinion paragraph– Name of auditor– Date of report

@Sako Mayrick 2012

Example of unqualified report• AUDITOR’S REPORT TO .....• We have audited the financial statements of ABC Company for the year

ended• December 31, 19X0, from which the summarized financial statements8

were derived, in accordance with International Standards on Auditing (or refer to relevant national standards or practices). In our report dated March 10, 19X1 we expressed an unqualified opinion on the financial statements from which the summarized financial statements were derived.

• In our opinion, the accompanying summarized financial statements are consistent, in all material respects, with the financial statements from which they were derived.

• For a better understanding of the Company’s financial position and the results of its operations for the period and of the scope of our audit, the summarized financial statements should be read in conjunction with the financial statements from which the summarized financial statements were derived and our audit report thereon.

• AUDITOR• Date• Address

@Sako Mayrick 2012

Qualified report

• A qualified report is less common and is where an auditor disagrees with the view presented in the accounts, or if he has not been able to form an opinion because of inadequate evidence. A sample of it can be obtained on ISA 800 appendix 643 as an appendix 4.

• Reasons for qualification– A departure from IFRS– Scope limitation– The auditor is not independent

@Sako Mayrick 2012

Example of qualified report• AUDITOR’S REPORT TO .....• We have audited the financial statements of ABC Company for the year

ended December 31, 19X0, from which the summarized financial statements9 were derived, in accordance with International Standards on Auditing (or refer to relevant national standards or practices). In our report dated March 10, 19X1 we expressed an opinion that the financial statements from which the summarized financial statements were derived gave a true and fair view of (or presented fairly, in all material respects) ...except that inventory had been overstated by ....

• In our opinion, the accompanying summarized financial statements are consistent, in all material respects, with the financial statements from which they were derived and on which we expressed a qualified opinion.

• For a better understanding of the Company’s financial position and the results of its operations for the period and of the scope of our audit, the summarized financial statements should be read in conjunction with the financial statements from which the summarized financial statements were derived and our audit report thereon.

• AUDITOR• Date• Address

@Sako Mayrick 2012

Other reports• In summary the audit report must contain; the

heading which shows the independence of the auditor, the fact that the report is addressed to the shareholders and the name of the company; Respective responsibilities of directors and auditors; the basis of opinion and the opinion. (Please visit google search on the Internet for various samples of audit report).

• Other forms– Qualified– Denial/Disclaimer– Adverse

@Sako Mayrick 2012

Audit qualification matrixNature of Circumstance

Material but not pervasive

Fundamental and pervasive

Limitation of Scope

Except for ..might

Disclaimer

Disagreement Except for Adverse opinion

@Sako Mayrick 2012

Audit Qualification Matrix… Cont.

• Except for ..might auditors disclaim an opinion on a particular aspects of the accounts which is not considered fundamental

• Disclaimer of Opinion- Auditor state they are unable to form an opinion in the truth and fairness

• Except for , auditor expresses adverse opinion on particular aspects of accounts which is not considered fundamental

• Adverse opinion, auditors state that accounts do not give a true and fair view.

@Sako Mayrick 2012

Audit qualification matrix … cont

• Limitation of Scope,– Absence of accounting records– Ownership of material assets

• Disagreement– Inappropriate accounting policies– Facts /amount– Manner or extent of disclosure– Failure to comply with legislation

@Sako Mayrick 2012

Reporting uncertainty• Inherent uncertainty, an uncertainty whose

resolution is dependent upon uncertain future event outside the control of the reporting entity’s directors at the date financial statement are approved.

• Fundamental Uncertainty, is an inherent where the magnitude of its potential impact is so great that, without a clear disclosure of nature and implication of uncertainty the view given by the f/s would be seriously misleading.

• E.g. Going concern• Major litigation

@Sako Mayrick 2012

Worked Example

•During the course of your audit of the fixed assets of NEDCO LTD at 31 March 2004 two problems have arisen.•The calculations of the cost of direct labour incurred on assets in course of construction by the company’s employees have been accidentally destroyed for the early part of the year. The direct labour cost involved is Tsh 10,000/=•The company has received a government grant of Tshs25, 000/= towards the cost of plant and equipment acquired during the year and expected to last for ten years. The grant has been credited in full to the profit and loss account as exceptional income.•Other relevant financial information is as follows.

Tshs.–Profit before tax 100,000/=–Fixed asset additions 133,000/=–Assets constructed by company 34,000/=–Fixed asset at net book value 666,667/=

•Required:–List the general forms of qualification available to auditors in drafting their report and state the circumstance in which each is appropriate.–State whether you feel that a qualified audit report would be necessary with respect to the treatment of the government grant, draft the section of the report describing the matter (the whole report is not required).–On the assumption that you decide that a qualified audit report is necessary with respect to the treatment of the government grant, draft the section of the report describing the matter (the whole report is not required).–Outline the auditor’ general responsibility with regard to the statement in the directors’ report concerning the valuation of land and buildings.

IAS SERIES

PART II