Answer - 42 In the case of leasehold land the risk and rewards are not transferred to the lessee.

Accordingly, IAS 17 classifies leasehold land as operating lease. However for the schedule of the companies ordinance, 1984 requires that leasehold land should be classified under fixed assets. As the companies ordinance, 1984 prevails over IFRS; the leasehold is accounts for as part of fixed assets and not as operating lease.

If the financial statements as not amended, a qualified opinion will be issued on the grounds of disagreement with management.

Chapter 26 Emphasis of matter paragraphs and other matter paragraphs in the independent auditors report CHAPTER 26 EMPHASIS OF MATTER PARAGRAPHS IN THE INDEPENDENT AUDITORS REPORT (ISA 706) 1. INTRODUCTION ISA 706 deals with two type of additional communication in the auditors report. (a) Emphasis of matter paragraph (b) Other matters paragraph

2. EMPHASIS OF MATTER Emphasis of a matter paragraph is necessary under following circumstances: (a) Significant uncertainly relation to litigation (b) Early application of a new accounting standard (c) A major catastrophe which may have a significant effect on entitys financial position. Emphasis of a matter paragraph is included in audit opinion only when the management has fully disclosed the relevant facts in the notes to the accounts.

3. OTHER MATTERS PARAGRAPH Examples of other matter paragraph in audit opinion are: (a) Where the inability to obtain sufficient and appropriate evidence is so material due to rest restriction imposed by the management is no material and pervasive that the auditor considers that a withdrawal from engagements is necessary, but unable to do so, there auditor may include an other matters paragraph. The paragraph should explain why is not possible for the auditor to withdrawal from engagements. (b) Responsibilities of auditor in addition to those set out in ISAs.

(c) Where an entity has prepared two set of financial statements, for example one in compliance with local regulations and another in accordance with IFRS, if the auditors opinion is required on both set of financial statements, the auditor may include another matter paragraph in the audit report. The paragraph will state that another set of financial statements has been prepared in accordance with another general purpose framework and that the auditor has issued a report on these financial statements. (d) Restriction on distribution of audit report. Question and answers Question 1 Under what circumstances an emphasis of a matter paragraph is included in the audit opinion? Answer 1 Refer to paragraph2 of the text Question 2 Why a widespread use of emphasis of matter paragraph is discouraged by the auditing standard? Answer 2 Wide spread use of emphasis of matter paragraph is discouraged by the auditing standards because: (a) Emphasis of a matter paragraph diminishes the effectiveness of the auditors communication of such matters. (b) Additional information (not disclosed in financial statements) may imply that information in financial statements in not appropriately disclosed. (c) Emphasis of matter paragraph is not a substitute for qualified, adverse or disclaimer of opinion, or inadequate disclosure.

Question 3 Give some examples of other matter paragraph in other matters paragraph. Answer 3 Refer to paragraph 3 of the text Question 4 Give five examples in instances which are excluded from other matter paragraph in audit opinion. Answer 4 Give five examples in instances which are excluded from other matter paragraph in audit opinion are: (a) Proper books of accounts have been kept. (b) Expenditure was incurred for the propose of business (c) Investments made, expenditure incurred and business conducted was in accordance with objects of the company. (d) Ethical standards relating to confidentiality of information (e) Information that is required to be provided by management. Question 5 Identify the situations in which an auditor may modify his report without affecting his opinion. Also explain how such a modification should be presented in the audit report. Answer 5 The situations in which a report in modified without affecting the auditors opinion are as follows:

(i)

If the use of going concern assumption is appropriate but a material uncertainty exists which has been adequately disclosed in the financial statements.

(ii)

In there is a significant uncertainty (other than going concern) the resolution of which is dependent upon future events and which may affect the financial statement.

(iii)

In case, other information attached with the financial statements are inconsistent with information in the financial statements.

How modification is presented: (i) By adding an emphasis of matter paragraph to highlight an important matter affecting the financial statements. (ii) The above paragraph is required to refer to the note to the financial statements that more extensively discussed the matter. (iii) The paragraph should preferably by include after the paragraph containing the auditors opinion but before the section on any other reporting responsibilities. (iv) The emphasis of matter paragraph should ordinary refer to the fact that the auditors opinion in not qualified in this respect.

CHAPTER 27 THE AUDITORS RESPONSIBILITIES RELATING TO OTHER INFORMATION IN DOCUMENTS CONTAINING AUDITED FINANCIAL STATEMNTS (ISA 720) INTRODUCTION The auditor should read the other information included in annual report. The objective is to identify contradictions if any, between the audited accounts and other information. Other information generally included in Pakistani annual reports is: Companys basic information Directors report Review by the chairman 10 Years highlight Financial ratios Pattern of holding of the shares Incorrect reporting in any of the above information resulting in contradiction with the accounts would unnecessarily affect the reliance on the audited accounts INCONSISTENCY BETWEEN OTHE INFORMAITON AND AUDITED ACCOUNTS If the auditor identifies a material inconsistency between other information and audited accounted and he concludes that the financial statements need amendment, which the management does not agree to correct, he would issue a qualified or adverse opinion on the grounds of disagreement with the management. However, if the amendment is required in other information, he should pursue the management to amend the other information. In rare circumstances, the management may refuse to amend the other information. In such a case the auditor should add a paragraph emphasizing the matter describing the inconsistencies.

Chapter 28 SPECIAL CONSIDERATIONS-AUDITS OF FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH SPECIAL PURPOSE FRAMEWORKS (ISA 800) INTRODUCTION ISA 800 provides guidance in connection with special purpose audit engagements including: a) Financial statements prepared in accordance with a comprehensive basis of accounting other than International Accounting Standards or National Standards; b) Specified accounting, element of accounts, or items in a financial statement; c) Compliance with contractual agreements; and d) Summarized financial statement In Pakistans context, the auditors are also required to issue opinion on certain matters required by the companys ordinance, 1984. Two more commonly reports are: a) Statutory report b) Report on prospectus Statutory report Section 157 requires that every company limited by shares and every company limited by guarantee and having a share capital shall, within a period of not less than three months, not more than six months, from the date at which the company is entitled to commence the business, to hold a general meeting of the members of the company, which is called the statutory meeting. The directors shell, at least 21 days before the date on which the meeting is held, forward a report, referred to as the statutory report The contents of the report have been set out in sub sections (3) and (4) of section 157. Section 157 (5) of the Companies Ordinance, 1984 requires that statutory report shall, so far as it relates to the shares allotted by the company, be accompanied by a certificate of the auditors of the company as to the correctness of such allotment, receipts of cash, and receipts and payments. The auditors certificate on statutory report may take following form:

We the undersigned, being the auditors of XYZ limited, hereby certify that so much of this report as to the shares allotted the cash received in respect of such shares, and the receipts and payments of the company is correct.

AB & Co. Chartered Accountants Karachi. May 31, 20x7.

Audit procedures to verify report include: 1. Check that no allotment is made of any share capital of the company unless the amount stated in the prospectus as the minimum amount which in the pinion of directors must be raised by the issue of share capital has been subscribed. 2. Ensure that all moneys received from applicants is deposited and kept in a separate bank account in a scheduled bank until retuned or until certificate to commence the business is obtained. 3. Verify the amount received on application. 4. Ensure that the amount payable on application is the full nominal amount of the share. 5. Check that the company has taken a decision within ten days of the closure of the subscription lists as to what applications have been accepted or are 6. Successful and that a refund has been made in the case of the unaccepted or unsuccessful applications within ten days of such decision. 7. Verify the return of allotment filed with the registrar 8. Check terms of issue with the memorandum and articles of association and prospectus. 9. Inspect the minutes of the directors meeting for the allotment of shares. 10. Reconcile register of members to share capital control account. 11. Ensure that the summary of receipts and payment of the company has been prepared up to a date within seven days of the report.

12. Ensure that the company within 90 days after the allotment of shares and within 45 days after the application of the transfer of any shares has ready for delivery the share certificates. 13. Ensure that commission has been paid to any person in consideration of his subscribing or agreeing to subscribe, for any shares in or debentures of the company, or procuring or agreeing to procure subscription, whether absolute or conditional for any shares in or debentures of the company if: (a) The payment of the commission is authorized by the articles; (b) The commission paid on agreed to be paid does not exceed such rate-cent of the amount as may generally or in a particular case be fixed by the Authority; and (c) The amount or rate per-cent of the commission paid or agreed. 14. Check that separate disclosure has been made for receipts from shares, redeemable capital, other sources, commission or discount on the issue or sale of shares and preliminary expenses. 15. Vouch in detail other receipts and payments not covered above. 16. Count cash and check with the summary of receipts and payments. 17. Reconcile bank accounts.

Contents of the report on prospectus 1. A report by the auditors of the company with respect to: (a) Profits and losses and assets and liabilities; and (b) The rates of the dividends, if any, paid by the company, in respect of each class of shares in the company for each of the five financial years immediately preceding the issue of the prospectus, giving particulars of each class of shares on which such dividends have been paid and particulars of the cases in which no dividends have been paid in respect of any class of shares for any of those years; and, if no accounts have been made up in respect of any part of the period of five year ending on a date three months before the issue of the prospectus, containing a statement of the fact. 2. If the company has no subsidiaries, the report shall: (a) So far as regards profits and losses, deal with the profits or losses of the company (distinguishing items of non-recurring nature) for each of the five financial years immediately preceding the issue of the prospectus; and (b) So far as regards assets and liabilities, deal with the assets and liabilities of the company at the last date to which the accounts of the company were made up.

If the company has subsidiaries, the report shall: So far as regards profit and losses, deal separately with the companys profits or losses as provided by sub-clauses (2) and in addition, deal either: Individually with the profits or losses of each subsidiary, so far as the concern member of the company; Or instead of dealing separately with the companys profit or losses, deal as a whole with the profit or losses of the company, and so far as they concern members of the company, with combined profits or losses of its subsidiaries, and so far as regards assets and liabilities, deal separately with the companys assets and liabilities as provided by sub -clause (2) and in addition, deal either: As a whole with the combined assets and liabilities, of its subsidiaries, with or without the companys assets and liabilities; or individually with the assets and liabilities of each subsidiary;

And shall indicate as respects the assets and liabilities of the subsidiaries, the allowances to be made for persons other then members of the company. If any shares have been or are to be issued or the proceeds or any part of the proceeds, of the issue of the shares or debentures are or is to be applied directly or indirectly: i) ii) In the purchase of any business; or In the purchase of an interest in any business; and by reason of that purchase or anything to be done in consequence thereof, or in connection therewith, the company will become entitled to an interest, as respects either the capital or profits and losses or both, in such business exceeding fifty percent, thereof; A report made by auditors (who shall be named in prospectus) upon: a) The profit or losses of the business for each of the five financial years immediately preceding the issue of the prospectus; and b) The assets and liabilities of the business at the last date to which an account of the business were made up, being a date not more than one hundred and twenty days before the date of the issue of the prospectus. If: a) The proceeds; or any part of the proceeds, of the issue of the shares or debentures are or is to be applied directly or indirectly in any manner resulting in the acquisition by the company of shares in any other body corporate; and b) By reason of that acquisition or anything to be done in consequence thereof or in connection therewith that body corporate will become a subsidiary of the company;