AUDIT AND ASSURANCE Examinable Supplemen PDF

2016
AUDIT AND
ASSURANCE
Examinable Supplements
Certificate in Accounting and Finance
CHAPTER
Audit and Assurance
Obtaining an engagement
Contents
1 Obtaining and accepting a new audit engagement
2 Agreeing the terms of audit engagements (ISA 210)
3 Chapter review
© Emile Woolf International 1 The Institute of Chartered Accountants of Pakistan

Audit and Assurance
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is acquiring knowledge of theory, skill and techniques of
auditing and to enable the students to understand International Standards on Auditing,
Assurance and Ethics.
General concepts and principles of audit
LO 1 On the successful completion of this paper, candidates will be able to
demonstrate knowledge of general concepts governing an audit
LO 1.6.1 Explain how the first and subsequent auditors are appointed
LO 1.6.2 Explain how the first and subsequent auditors are removed
LO 1.6.3 Explain the procedure of resignation of auditors.
LO 1.6.4 Describe qualification and disqualification of the auditor
LO 1.6.5 Describe the powers and duties of auditors
LO 1.6.6 Describe the concept of audit of cost accounts
LO 1.6.8 Discuss the auditor’s responsibilities with respect to attendance at general
meeting and access to books and records
LO 1.7.1 Describe the preconditions for an audit and upon which it is necessary for the
auditor and the entity’s management to agree
LO 1.7.2 Respond if preconditions are not present or limit is imposed on scope of audit
in well explained simple situations
LO 1.7.3 State the contents of an audit engagement letter
LO 1.7.4 Discuss the requirement of issuance of engagement letter and factors that
necessitate the issuance of engagement letter in case of recurring audit
LO 1.7.5 Discuss the circumstances of acceptances of changes in terms of
engagement by the auditor
Professional ethics
LO 5 Respond on audit matters in the light of fundamental principles given in
the Code of Ethics
LO 5.2.1 Explain the advertisement and publicity guidelines of ICAP Code of Ethics for
obtaining the audit work.
LO 5.2.2 Apply the conceptual framework to identify, evaluate and address threats in
case of fees, referral fees and tendering for audit work.
LO 5.2.3 Explain using simple examples the matters to be considered and the
procedures that an audit firm/professional accountant should carry out in the
following circumstances:
 Client acceptance
 Engagement acceptance
 Changes in a professional appointment (including additional work, mid-
term removal and non-reappointment)

Chapter 2: Obtaining an engagement
1 OBTAINING AND ACCEPTING A NEW AUDIT ENGAGEMENT
Section overview
 Introduction
 Obtaining audit work
 Accepting an audit appointment: ethical matters
1.1 Introduction
Several commercial and ethical matters should be considered by an external
auditor when considering the acceptance of a new audit engagement. Auditors
and clients must also follow the legal requirements set out in the Companies
Ordinance 1984.
Audit practices are a business, and their objective is to make a profit. However,
this does not mean that the practice should automatically accept every audit
engagement that is offered to it, in order to maximise profit. Circumstances may
arise where it is appropriate to decline the offer of an audit appointment, for either
commercial or ethical reasons.
1.2 Obtaining audit work
Advertising and publicity – general guidelines

Most audit member body codes of practice around the world allow members to
seek publicity for their services and to advertise their services. However,
whatever medium is used, it must not reflect badly on the member, the
member body or the accountancy profession. Members must also take care
that the way in which they market their services does not create a self-interest
threat to the fundamental principle of professional behaviour (codes of ethics
are discussed further in a later chapter).
Member codes typically also state that advertisements and promotional material
must not:
 discredit the services offered by others (for example by claiming
superiority);
 be misleading; or
 fall short of any local regulations or legislation.
Advertising and publicity - ICAP Code of Ethics

The ICAP Code of Ethics (paragraphs 250.1 and 250.2) states:
250.1 Undue publicity to be avoided
In any communications, announcements and public notices, chartered

accountants should not:
 use means which bring the profession into disrepute;
 make exaggerated claims for the services they are able to offer, the
qualifications they possess, or experience they have gained; and
 denigrate the work of other accountants.

Audit and Assurance
A Chartered Accountant preparing or authorizing the issue of matter falling within

this Section should do so with a due sense of responsibility to the profession and
to the public as a whole. In particular such material should be in good taste both
as to content and presentation and should not belittle services offered by others,
whether members or not, either by claiming superiority for the services of a
particular Chartered Accountant or otherwise. The same attitude should be
adopted towards activities mentioned in subsequent paragraphs.
250.2 Advertising for solicitation must be avoided
All communications, announcements and public notices should be issued in such
a manner and within the limits prescribed in the following paragraphs……
 All announcements, communications and public notices should:-
 be aimed at informing the recipients or the public in an objective
manner;
 conform to the basic principles of legality, decency, clarity, honesty
and truthfulness; and
 not project an image, which is inconsistent with that of a professional
person bound to high ethical and technical standards.
 Activities which may expressly be considered not to meet the above criteria
and are therefore prohibited include those that:
 create false, deceptive or unjustified expectations of favourable
results;
 imply the ability to influence any court, tribunal, regulatory agency or
similar body or official;
 consist of self-laudatory statements that are not based on verifiable
facts;
 make comparisons with other professional accountants in practice;
 contain testimonials or endorsements;
 contain any other representations that would be likely to cause a
reasonable person to misunderstand or be deceived; and
 make unjustified claims to be an expert or specialist in a particular
field of accountancy.
Fees
Where reference is made in promotional material to fees:
 this must not be misleading with regard to the precise range of services and
the time commitment covered;
 comparison may be made to the fees of others, provided that this is not
misleading and that it follows local regulations or legislation; and
 discounts on existing fees may be offered, or a free consultation at which
the level of fees will be discussed.
Introductions
Fees and commissions may be paid to third parties for the introduction of
potential new clients, but safeguards must be in place to reduce the threats to
the fundamental principles. Such safeguards would include disclosure to the
client.

Tendering
When making a decision to appoint a new firm of auditors, it is standard practice
amongst larger companies to invite tenders for the audit work from a number of
audit firms.
A tendering process typically requires the interested audit firms to provide a
detailed written proposal including an approximate fee estimate, based on the
estimated time to be spent on the audit and the grade of staff to be used. A
presentation to the potential client may also be required.
Sometimes, an audit firm may use a technique known as ‘low-balling’ when it
tenders for audit work. Low-balling means deliberately quoting a low (and
perhaps unprofitable) fee in order to obtain the audit work. A low-balling strategy
may be linked to an intention to:
 increase the fee to a more realistic level over a period of years, or
 make up the shortfall in the fee for the basic audit work with more profitable
fees for non-audit services.
Low-balling itself is not considered unethical but it creates a potential self-
interest threat to independence. Therefore the firm must be able to demonstrate
that appropriate time and qualified staff are available to ensure that a quality
audit is performed in accordance with ISAs.
1.3 Accepting an audit appointment: ethical matters

The ICAP Code of Ethics [Section 210.1-23] includes procedures that auditors
must follow to assure that their appointment is valid.
Note: You should refer to the later chapter on ethics for explanation of the ethical
terms and principles referred to below
Client Acceptance
210.1 Before accepting a new client relationship, a chartered accountant in
practice shall determine whether acceptance would create any threats to
compliance with the fundamental principles. Potential threats to integrity or
professional behavior may be created from, for example, questionable issues
associated with the client (its owners, management or activities).
210.2 Client issues that, if known, could threaten compliance with the
fundamental principles include, for example, client involvement in illegal activities
(such as money laundering), dishonesty or questionable financial reporting
practices.
210.3 A chartered accountant in practice shall evaluate the significance of any
threats and apply safeguards when necessary to eliminate them or reduce them
to an acceptable level. Examples of such safeguards include:
• Obtaining knowledge and understanding of the client, its owners, managers
and those responsible for its governance and business activities; or
• Securing the client's commitment to improve corporate governance
practices or internal controls.
210.4 Where it is not possible to reduce the threats to an acceptable level, the
chartered accountant in practice shall decline to enter into the client relationship.
210.5 It is recommended that a chartered accountant in practice periodically
review acceptance decisions for recurring client engagements.

Audit and Assurance
Engagement Acceptance
210.6 The fundamental principle of professional competence and due care
imposes an obligation on a chartered accountant in practice to provide only those
services that the chartered accountant in practice is competent to perform.
Before accepting a specific client engagement, a chartered accountant in practice
shall determine whether acceptance would create any threats to compliance with
the fundamental principles. For example, a self-interest threat to professional
competence and due care is created if the engagement team does not possess,
or cannot acquire, the competencies necessary to properly carry out the
engagement.
210.7 A chartered accountant in practice shall evaluate the significance of threats
and apply safeguards, when necessary, to eliminate them or reduce them to an
acceptable level. Examples of such safeguards include:
• Acquiring an appropriate understanding of the nature of the client's
business, the complexity of its operations, the specific requirements of the
engagement and the purpose, nature and scope of the work to be
performed;
• Acquiring knowledge of relevant industries or subject matters;
• Possessing or obtaining experience with relevant regulatory or reporting
requirements;
• Assigning sufficient staff with the necessary competencies;
• Using experts where necessary;
• Agreeing on a realistic time frame for the performance of the engagement;
or
• Complying with quality control policies and procedures designed to provide
reasonable assurance that specific engagements are accepted only when
they can be performed competently.
210.8 When a chartered accountant in practice intends to rely on the advice or
work of an expert, the chartered accountant in practice shall determine whether
such reliance is warranted. Factors to consider include: reputation, expertise,
resources available and applicable professional and ethical standards. Such
information may be gained from prior association with the expert or from
consulting others.
Procedures after accepting an appointment

After accepting the appointment as auditor, the audit firm should take the
following measures:
 It should ensure that the current auditor (if any) has resigned from the audit
in a proper manner, or has been removed from office in accordance with
any appropriate local legislation.
 It should ensure that its appointment is valid in law and is properly
documented.
 It should prepare and submit an engagement letter to the board of the new
client (see below).
Changes in a Professional Appointment

210.9 A chartered accountant in practice who is asked to replace another
chartered accountant in practice, or who is considering tendering for an

engagement currently held by another chartered accountant in practice, shall

determine whether there are any reasons, professional or otherwise, for not
accepting the engagement, such as circumstances that create threats to
compliance with the fundamental principles that cannot be eliminated or reduced
to an acceptable level by the application of safeguards. For example, there may
be a threat to professional competence and due care if a chartered accountant in
practice accepts the engagement before knowing all the pertinent facts.
210.10 A chartered accountant in practice shall evaluate the significance of any
threats. Depending on the nature of the engagement, this may require direct
communication with the existing accountant to establish the facts and
circumstances regarding the proposed change so that the chartered accountant
in practice can decide whether it would be appropriate to accept the engagement.
For example, the apparent reasons for the change in appointment may not fully
reflect the facts and may indicate disagreements with the existing accountant that
may influence the decision to accept the appointment.
210.11 Safeguards shall be applied when necessary to eliminate any threats or
reduce them to an acceptable level. Examples of such safeguards include:
• When replying to requests to submit tenders, stating in the tender that,
before accepting the engagement, contact with the existing accountant will
be requested so that inquiries may be made as to whether there are any
professional or other reasons why the appointment should not be accepted;
• Asking the existing accountant to provide known information on any facts or
circumstances that, in the existing accountant's opinion, the proposed
accountant needs to be aware of before deciding whether to accept the
engagement; or
• Obtaining necessary information from other sources.
When the threats cannot be eliminated or reduced to an acceptable level through
the application of safeguards, a chartered accountant in practice shall, unless
there is satisfaction as to necessary facts by other means, decline the
engagement.
210.12 A chartered accountant in practice may be asked to undertake work that
is complementary or additional to the work of the existing accountant. Such
circumstances may create threats to professional competence and due care
resulting from, for example, a lack of or incomplete information. The significance
of any threats shall be evaluated and safeguards applied when necessary to
eliminate the threat or reduce it to an acceptable level. An example of such a
safeguard is notifying the existing accountant of the proposed work, which would
give the existing accountant the opportunity to provide any relevant information
needed for the proper conduct of the work.
210.13 An existing accountant is bound by confidentiality. Whether that chartered
accountant is permitted or required to discuss the affairs of a client with a
proposed accountant will depend on the nature of the engagement and on:
(a) Whether the client's permission to do so has been obtained; or
(b) The legal or ethical requirements relating to such communications and
disclosure, which may vary by jurisdiction.
Circumstances where the chartered accountant is or may be required to disclose
confidential information or where such disclosure may otherwise be appropriate
are set out in Section 140 of Part A of the Code (already discussed in para 1.6).

Audit and Assurance
210.14 A chartered accountant in practice will generally need to obtain the

client's permission, preferably in writing, to initiate discussion with an existing
accountant. Once that permission is obtained, the existing accountant shall
comply with relevant legal and other regulations governing such requests. Where
the existing accountant provides information, it shall be provided honestly and
unambiguously. If the proposed accountant is unable to communicate with the
existing accountant, the proposed accountant shall take reasonable steps to
obtain information about any possible threats by other means, such as through
inquiries of third parties or background investigations of senior management or
those charged with governance of the client.
Additional work
A chartered accountant in practice may be asked to undertake work that is
complementary or additional to the work of the existing accountant. Such
circumstances may give rise to potential threats to professional competence and
due care resulting from, for example, a lack of or incomplete information.
Safeguards against such threats include notifying the existing accountant of the
proposed work, which would give the existing accountant the opportunity to
provide any relevant information needed for the proper conduct of the work.
Mid-term removal
Where an existing chartered accountant is removed by the proprietors of the
business before he has completed the audit and submitted his report, the existing
chartered accountant must immediately inform the Institute with relevant facts
about his removal.
The proposed chartered accountant in practice should not only follow the
procedure detailed in the preceding paragraphs of this section, he should also
inform the Institute about the offer of appointment.
The proposed chartered accountant in practice should not accept the offer
without prior clearance from the Institute, which clearance shall not be
unreasonably withheld. Provided, however, in the case where the Institute
refuses to give its clearance, the Institute shall communicate its decision within
15 (fifteen) days with reasons therefore.
Non re-appointment
Where an existing chartered accountant, though willing for reappointment has not
been re-appointed, he shall file with the Institute a copy of the statement which
he may have sent to the proprietors/Board of Directors of the Company for
circulation among the shareholders under section 253 of the Companies
Ordinance, 1984. It shall be obligatory on the proposed chartered accountant
before accepting the appointment, to obtain a copy of such a communication and
follow the procedure detailed in preceding paragraphs of this Section.

2 AGREEING THE TERMS OF AUDIT ENGAGEMENTS (ISA 210)
Section overview
 Preconditions
 Engagement letters
2.1 Preconditions
The objective of the auditor, per ISA 210 Agreeing the terms of audit
engagements, is to accept or continue an audit engagement only when the
basis upon which it is to be performed has been agreed. This is done by:
 establishing whether the preconditions for an audit are present; and
 confirming that there is a common understanding between the auditor
and management.
To establish if the preconditions for an audit are present ISA 210 requires the
auditor to:
 establish if the financial reporting framework to be used in the preparation
of the financial statements is acceptable, for example IFRS or IPSAS; and
 obtain the agreement of management that it acknowledges and
understands its responsibility (the ‘premise’):
 for the preparation of the financial statements;
 for internal controls to ensure that the financial statements are not
materially misstated; and
 to provide the auditor with all relevant and requested information and
unrestricted access to all personnel.
Response if preconditions are not present

If the preconditions for an audit are not present, the auditor shall discuss the
matter with management. The auditor should explain what the preconditions are
and that they are required in order to comply with ISA 210 Agreeing the terms of
audit engagements. The auditor should also explain that one of the purposes of
the preconditions, and agreeing the terms of the audit engagement in general, is
to avoid misunderstanding about the respective responsibilities of management
and the auditor.
Unless required by law or regulation to do so, the auditor shall not accept the
proposed audit engagement where:
 a limitation on scope is imposed by management such that he auditor
would be unable to express an opinion on the financial statements, or
 the financial reporting framework to be used in the preparation of the
financial statements is unacceptable, or
 management do not agree to the above responsibilities (the ‘premise’)
stated in the preconditions.
The only exception allowed by ISA 210 for accepting or continuing the
engagement to the above is when law or regulation requires the auditor to do so.

Audit and Assurance
2.2 Engagement letters

Having accepted an appointment as auditor of a client company, the audit firm
should submit an engagement letter to the board of directors of the client
company. The engagement letter can be seen as the basis for the contract
between the company and the auditor.
The content of the engagement letter

The engagement letter should include details of the following:
 The objective and scope of the audit.
 The responsibilities of the auditor.
 The responsibilities of management.
 Identification of the underlying financial reporting framework.
 Reference to the expected form and content of any reports to be issued.
In addition to the above, the auditor may feel that it is appropriate to include
additional points in the engagement letter, such as:
 more details on the scope of the audit, such as reference to applicable
legislation, regulations, ISAs, and ethical pronouncements;
 the fact that because of the inherent limitations of an audit, and the inherent
limitations of internal control, there is an unavoidable risk that some
material misstatements may not be detected even though the audit was
properly planned and performed in accordance with ISAs;
 arrangements regarding the planning and performance of the audit,
including the composition of the audit team;
 the expectation that management will provide written representations;
 the basis on which fees are computed and any billing arrangements;
 a request for management to acknowledge receipt of the engagement letter
and to agree to its terms;
 arrangements concerning the involvement of other auditors, experts or
internal auditors (or other staff of the entity); and
 any restriction of the auditor’s liability when such possibility exists.
Example:
Explain why the auditor might wish to include each of the following points in the
engagement letter:
 Basis on which fees are charged
 Outline timetable
 Formal acknowledgement of the contents of the letter
 Arrangements for the involvement of client staff

Answer
Basis on which fees are charged – to ensure that there is no misunderstanding
(for example that more senior staff cost more and that “time is money”). This
may help to encourage the client to provide as much assistance as possible and
not to insist that all work is carried out by more senior members of the team.
Outline timetable – to ensure that the client will be prepared for the arrival of the
audit team (for example, draft financial statements and supporting schedules of
all ready and key staff available (and not on holiday). If necessary, the audit
timetable could be changed at this stage.
Formal acknowledgement of the contents of the letter– to ensure that the
directors cannot later claim that they did not understand the scope of the audit
and their responsibility for the financial statements.
Arrangements for the involvement of client staff – to ensure that the client is able
to plan for the involvement of the necessary staff and that they are available at
the required time.
Recurring audits
The engagement letter issued on the initial appointment as auditors may state
that its provisions will apply to all future annual audits, until it is revised. However,
ISA 210 requires the auditor, for recurring audits, to assess whether:
 circumstances mean that the terms of engagement need to be revised
 management need to be reminded of the existing terms of the engagement.
The ISA suggests that the following factors may indicate that the above is
appropriate:
 Any indication that the entity misunderstands the objective and scope of the
audit.
 Any revised or special terms of the audit engagement.
 A recent change of senior management.
 A significant change in ownership.
 A significant change in nature or size of the entity’s business.
 A change in legal or regulatory requirements.
 A change in the financial reporting framework adopted in the preparation of
the financial statements.
 A change in other reporting requirements.
Acceptance of a change in the terms of engagement
The entity might, in certain circumstances, ask the auditor to change the terms of
the audit engagement. This might result from a genuine change in circumstances
or from a misunderstanding as to the nature of an audit as originally requested.
However, it could result from a situation where the auditor is unable to obtain
sufficient appropriate audit evidence regarding a material item. The entity might
then ask for the audit engagement to be changed to a review engagement to
avoid a qualified opinion or a disclaimer of opinion.
ISA 210 requires the auditor to consider the justification for the request and
whether it is “reasonable”.
 If the auditor considers that it is a reasonable request then revised terms
should be agreed and recorded.
 If the auditor is unable to agree to a change of terms he should withdraw
from the engagement and consider whether there is any obligation to report
the circumstances to those charged with governance, owners or regulators.

Audit and Assurance
3 CHAPTER REVIEW
Chapter review
Before moving on to the next chapter check that you now know how to:
 Explain the commercial legal process around obtaining and accepting new
audit appointments.
 Explain the ethical considerations with respect to client and engagement
acceptance and changes in professional appointment.
 Describe the requirements of ISA 210 with respect to the preconditions for
accepting appointment as an auditor and also for setting up the engagement
letter.

14
CHAPTER
Audit and Assurance
Professional ethics
and codes of conduct
Contents
1 Fundamental principles
2 Conceptual Framework Approach applicable to all
chartered accountants
3 Conceptual Framework Approach applicable to
chartered accountants in practice
4 Chapter review

Audit and Assurance
INTRODUCTION
Learning outcomes
Professional ethics
LO 5 Respond on audit matters in the light of fundamental principles given in
the Code of Ethics
LO 5.1.1 Describe with simple examples the fundamental principles of professional
ethics of integrity, objectivity, professional competence and due care,
confidentiality and professional behavior
LO 5.1.2 Apply the conceptual framework to identify, evaluate and address threats to
compliance with fundamental principles
LO 5.1.3 Understand the threats and circumstances that cause threats of self-interest,
self-review, advocacy, familiarity, and intimidation
LO 5.1.4 Discuss the safeguards to offset the threats to compliance with the
fundamental principles
LO 5.1.5 Discuss the concept of ethical conflict resolution
References to the ICAP Code of Ethics

References to section numbers of the ICAP Code of Ethics are for reference purpose.

Chapter 14: Professional ethics and codes of conduct
1 FUNDAMENTAL PRINCIPLES
Section overview
 The application of professional ethics

 The fundamental principles
 Integrity
 Objectivity
 Professional Competence and Due Care
 Confidentiality
 Professional Behavior
1.1 The application of professional ethics

Company law regulates the requirement for external auditing, but internal
auditing is not normally subject to statutory regulation.
However, all accountants who are members of a professional body such as ICAP
are required to comply with the regulations of that professional body. Such
professional regulations therefore apply to both external auditors and assurance
providers and internal auditors.
The reason for the wide reach of ethical guidelines is that the accountancy
profession accepts that it has a responsibility to act in the public interest.
This section of the chapter describes the code of ethics of ICAP, which must be
followed by all members whether they are operating as external auditors or
assurance providers or internal auditors.
Although these rules apply to all members, the examination is primarily
concerned with how the rules apply to an external auditor or assurance provider.
In providing a code of ethics, ICAP is complying with one of its regulatory
functions, which is to ensure that statutory audits are performed only by fit and
proper persons who act with professional integrity.
1.2 The fundamental principles [s100.5]

A chartered accountant shall comply with the following fundamental principles:
(a) Integrity - to be straightforward and honest in all professional and business
relationships.
(b) Objectivity - to not allow bias, conflict of interest or undue influence of others
to override professional or business judgments.
(c) Professional Competence and Due Care - to maintain professional
knowledge and skill at the level required to ensure that a client or employer
receives competent professional services based on current developments in
practice, legislation and techniques and act diligently and in accordance with
applicable technical and professional standards.
(d) Confidentiality - to respect the confidentiality of information acquired as a
result of professional and business relationships and, therefore, not disclose
any such information to third parties without proper and specific authority,
unless there is a legal or professional right or duty to disclose, nor use the
information for the personal advantage of the chartered accountant or third
parties.

Audit and Assurance
(e) Professional Behavior - to comply with relevant laws and regulations and
avoid any action that discredits the profession.
1.3 Integrity
110.1 The principle of integrity imposes an obligation on all chartered
accountants to be straightforward and honest in all professional and business
relationships. Integrity also implies fair dealing and truthfulness.
110.2 A chartered accountant shall not knowingly be associated with reports,
returns, communications or other information where the chartered accountant
believes that the information:
(a) Contains a materially false or misleading statement;
(b) Contains statements or information furnished recklessly; or
(c) Omits or obscures information required to be included where such omission
or obscurity would be misleading.
When a chartered accountant becomes aware that the accountant has been
associated with such information, the accountant shall take steps to be
disassociated from that information.
110.3 A chartered accountant will be deemed not to be in breach of paragraph
110.2 if the chartered accountant provides a modified report in respect of a
matter contained in paragraph 110.2.
1.4 Objectivity
120.1 The principle of objectivity imposes an obligation on all chartered
accountants not to compromise their professional or business judgment because
of bias, conflict of interest or the undue influence of others.
120.2 A chartered accountant may be exposed to situations that may impair
objectivity. It is impracticable to define and prescribe all such situations. A
chartered accountant shall not perform a professional activity or service if a
circumstance or relationship biases or unduly influences the accountant's
professional judgment with respect to that service.
1.5 Professional Competence and Due Care

130.1 The principle of professional competence and due care imposes the
following obligations on all chartered accountants:
(a) To maintain professional knowledge and skill at the level required to ensure
that clients or employers receive competent professional service; and
(b) To act diligently in accordance with applicable technical and professional
standards when performing professional activities or providing professional
services.
130.2 Competent professional service requires the exercise of sound judgment in
applying professional knowledge and skill in the performance of such service.
Professional competence may be divided into two separate phases:
(a) Attainment of professional competence; and
(b) Maintenance of professional competence.
130.3 The maintenance of professional competence requires a continuing
awareness and an understanding of relevant technical, professional and
business developments. Continuing professional development enables a

chartered accountant to develop and maintain the capabilities to perform

competently within the professional environment.
130.4 Diligence encompasses the responsibility to act in accordance with the
requirements of an assignment, carefully, thoroughly and on a timely basis.
130.5 A chartered accountant shall take reasonable steps to ensure that those
working under the chartered accountant's authority in a professional capacity
have appropriate training and supervision.
130.6 Where appropriate, a chartered accountant shall make clients, employers
or other users of the accountant's professional services aware of the limitations
inherent in the services or activities.
1.6 Confidentiality
140.1 The principle of confidentiality imposes an obligation on all chartered
accountants to refrain from:
(a) Disclosing outside the firm or employing organization confidential
information acquired as a result of professional and business relationships
without proper and specific authority or unless there is a legal or
professional right or duty to disclose; and
(b) Using confidential information acquired as a result of professional and
business relationships to their personal advantage or the advantage of third
parties.
140.2 A chartered accountant shall maintain confidentiality, including in a social
environment, being alert to the possibility of inadvertent disclosure, particularly to
a close business associate or a close or immediate family member.
140.3 A chartered accountant shall maintain confidentiality of information
disclosed by a prospective client or employer.
140.4 A chartered accountant shall maintain confidentiality of information within
the firm or employing organization.
140.5 A chartered accountant shall take reasonable steps to ensure that staff
under the chartered accountant's control and persons from whom advice and
assistance is obtained respect the chartered accountant's duty of confidentiality.
140.6 The need to comply with the principle of confidentiality continues even after
the end of relationships between a chartered accountant and a client or
employer. When a chartered accountant changes employment or acquires a new
client, the chartered accountant is entitled to use prior experience.
The chartered accountant shall not, however, use or disclose any confidential
information either acquired or received as a result of a professional or business
relationship.
140.7 The following are circumstances where chartered accountants are or may
be required to disclose confidential information or when such disclosure may be
appropriate:
(a) Disclosure is permitted by law and is authorized by the client or the
employer;
(b) Disclosure is required by law, for example:
(i) Production of documents or other provision of evidence in the course
of legal proceedings; or

Audit and Assurance
(ii) Disclosure to the appropriate public authorities of infringements of the

law that come to light; and
(c) There is a professional duty or right to disclose, when not prohibited by law:
(i) To comply with the Quality Control Review (QCR) program of the
Institute;
(ii) To respond to an inquiry or investigation by a member body or
regulatory body;
(iii) To protect the professional interests of a chartered accountant in legal
proceedings; or
(iv) To comply with technical standards and ethics requirements.
140.8 In deciding whether to disclose confidential information, relevant factors to
consider include:
• Whether the interests of all parties, including third parties whose interests
may be affected, could be harmed if the client or employer consents to the
disclosure of information by the chartered accountant.
• Whether all the relevant information is known and substantiated, to the
extent it is practicable; when the situation involves unsubstantiated facts,
incomplete information or unsubstantiated conclusions, professional
judgment shall be used in determining the type of disclosure to be made, if
any.
• The type of communication that is expected and to whom it is addressed.
• Whether the parties to whom the communication is addressed are
appropriate recipients.
1.7 Professional Behavior

150.1 The principle of professional behavior imposes an obligation on all
chartered accountants to comply with relevant laws and regulations and avoid
any action that the chartered accountant knows or should know may discredit the
profession. This includes actions that a reasonable and informed third party,
weighing all the specific facts and circumstances available to the chartered
accountant at that time, would be likely to conclude adversely affects the good
reputation of the profession.

2 CONCEPTUAL FRAMEWORK APPROACH APPLICABLE TO ALL

CHARTERED ACCOUNTANTS
Section overview
 Introduction
 Threats and Safeguards
 Safeguards Created by the Profession, Legislation or Regulation
 Conflicts of Interest
 Ethical Conflict Resolution
 Communicating with Those Charged with Governance
2.1 Introduction
100.6 The circumstances in which chartered accountants operate may create
specific threats to compliance with the fundamental principles. It is impossible to
define every situation that creates threats to compliance with the fundamental
principles and specify the appropriate action. In addition, the nature of
engagements and work assignments may differ and, consequently, different
threats may be created, requiring the application of different safeguards.
Therefore, this Code establishes a conceptual framework that requires a
chartered accountant to identify, evaluate, and address threats to compliance
with the fundamental principles. The conceptual framework approach assists
chartered accountants in complying with the ethical requirements of this Code
and meeting their responsibility to act in the public interest. It accommodates
many variations in circumstances that create threats to compliance with the
fundamental principles and can deter a chartered accountant from concluding
that a situation is permitted if it is not specifically prohibited.
100.7 When a chartered accountant identifies threats to compliance with the
fundamental principles and, based on an evaluation of those threats, determines
that they are not at an acceptable level, the chartered accountant shall determine
whether appropriate safeguards are available and can be applied to eliminate the
threats or reduce them to an acceptable level. In making that determination, the
chartered accountant shall exercise professional judgment and take into account
whether a reasonable and informed third party, weighing all the specific facts and
circumstances available to the chartered accountant at the time, would be likely
to conclude that the threats would be eliminated or reduced to an acceptable
level by the application of the safeguards, such that compliance with the
fundamental principles is not compromised.
100.8 A chartered accountant shall evaluate any threats to compliance with the
fundamental principles when the chartered accountant knows, or could
reasonably be expected to know, of circumstances or relationships that may
compromise compliance with the fundamental principles.
100.9 A chartered accountant shall take qualitative as well as quantitative factors
into account when evaluating the significance of a threat. When applying the
conceptual framework, a chartered accountant may encounter situations in which
threats cannot be eliminated or reduced to an acceptable level, either because
the threat is too significant or because appropriate safeguards are not available
or cannot be applied. In such situations, the chartered accountant shall decline or
discontinue the specific professional activity or service involved or, when
necessary, resigns from the engagement (in the case of a chartered accountant

Audit and Assurance
in practice) or the employing organization (in the case of a chartered accountant

in business).
100.10 Sections 290 and 291 contain provisions with which a chartered
accountant shall comply if the chartered accountant identifies a breach of an
independence provision of the Code. If a chartered accountant identifies a breach
of any other provision of this Code, the chartered accountant shall evaluate the
significance of the breach and its impact on the accountant's ability to comply
with the fundamental principles. The accountant shall take whatever actions that
may be available, as soon as possible, to satisfactorily address the
consequences of the breach. The accountant shall determine whether to report
the breach, for example, to those who may have been affected by the breach, a
member body, relevant regulator or oversight authority.
100.11 When a chartered accountant encounters unusual circumstances in which
the application of a specific requirement of the Code would result in a
disproportionate outcome or an outcome that may not be in the public interest, it
is recommended that the chartered accountant consult with a member body or
the relevant regulator.
2.2 Threats and Safeguards

100.12 Threats may be created by a broad range of relationships and
circumstances. When a relationship or circumstance creates a threat, such a
threat could compromise, or could be perceived to compromise, a chartered
accountant's compliance with the fundamental principles. A circumstance or
relationship may create more than one threat, and a threat may affect compliance
with more than one fundamental principle. Threats fall into one or more of the
following categories:
(a) Self-interest threat - the threat that a financial or other interest will
inappropriately influence the chartered accountant's judgment or behavior;
(b) Self-review threat - the threat that a chartered accountant will not
appropriately evaluate the results of a previous judgment made or activity or
service performed by the chartered accountant, or by another individual
within the chartered accountant's firm or employing organization, on which
the accountant will rely when forming a judgment as part of providing a
current service;
(c) Advocacy threat - the threat that a chartered accountant will promote a
client's or employer's position to the point that the chartered accountant's
objectivity is compromised;
(d) Familiarity threat - the threat that due to a long or close relationship with a
client or employer, a chartered accountant will be too sympathetic to their
interests or too accepting of their work; and
(e) Intimidation threat - the threat that a chartered accountant will be deterred
from acting objectively because of actual or perceived pressures, including
attempts to exercise undue influence over the chartered accountant.
100.13 Safeguards are actions or other measures that may eliminate threats or
reduce them to an acceptable level. They fall into two broad categories:
a) Safeguards created by the profession, legislation or regulation; and
b) Safeguards in the work environment.

2.3 Safeguards Created by the Profession, Legislation or Regulation

100.14 Safeguards created by the profession, legislation or regulation include:
• Educational, training and experience requirements for entry into the
profession.
• Continuing professional development requirements.
• Corporate governance regulations.
• Professional standards.
• Professional or regulatory monitoring and disciplinary procedures.
• External review by a legally empowered third party of the reports, returns,
communications or information produced by a chartered accountant.
100.16 Certain safeguards may increase the likelihood of identifying or deterring
unethical behavior. Such safeguards, which may be created by the accounting
profession, legislation, regulation, or an employing organization, include:
• Effective, well-publicized complaint systems operated by the employing
organization, the profession or a regulator, which enable colleagues,
employers and members of the public to draw attention to unprofessional or
unethical behavior.
• An explicitly stated duty to report breaches of ethical requirements.
2.4 Conflicts of Interest

100.17 A chartered accountant may be faced with a conflict of interest when
undertaking a professional activity. A conflict of interest creates threat to
objectivity and may create threats to the other fundamental principles.Such
threats may be created when:
• The chartered accountant undertakes a professional activity related to a
particular matter for two or more parties whose interests with respect to that
matter are in conflict; or
• The interests of the chartered accountant with respect to a particular matter
and the interests of a party for whom the chartered accountant undertakes a
professional activity related to that matter are in conflict.
2.5 Ethical Conflict Resolution

100.19 A chartered accountant may be required to resolve a conflict in complying
with the fundamental principles.
100.20 When initiating either a formal or informal conflict resolution process, the
following factors, either individually or together with other factors, may be
relevant to the resolution process:
a) Relevant facts;
b) Ethical issues involved;
c) Fundamental principles related to the matter in question;
d) Established internal procedures; and
e) Alternative courses of action.
Having considered the relevant factors, a chartered accountant shall determine
the appropriate course of action, weighing the consequences of each possible
course of action. If the matter remains unresolved, the chartered accountant may

Audit and Assurance
wish to consult with other appropriate persons within the firm or employing
organization for help in obtaining resolution.
100.21 Where a matter involves a conflict with, or within, an organization, a
chartered accountant shall determine whether to consult with those charged with
governance of the organization, such as the board of directors or the audit
committee.
100.22 It may be in the best interests of the chartered accountant to document
the substance of the issue, the details of any discussions held, and the decisions
made concerning that issue.
100.23 If a significant conflict cannot be resolved, a chartered accountant may
consider obtaining professional advice from the relevant professional body or
from legal advisors. The chartered accountant generally can obtain guidance on
ethical issues without breaching the fundamental principle of confidentiality if the
matter is discussed with the relevant professional body on an anonymous basis
or with a legal advisor under the protection of legal privilege. Instances in which
the chartered accountant may consider obtaining legal advice vary. For example,
a chartered accountant may have encountered a fraud, the reporting of which
could breach the chartered accountant's responsibility to respect confidentiality.
The chartered accountant may consider obtaining legal advice in that instance to
determine whether there is a requirement to report.
100.24 If, after exhausting all relevant possibilities, the ethical conflict remains
unresolved, a chartered accountant shall, where possible, refuse to remain
associated with the matter creating the conflict. The chartered accountant shall
determine whether, in the circumstances, it is appropriate to withdraw from the
engagement team or specific assignment, or to resign altogether from the
engagement, the firm or the employing organization.
2.6 Communicating with Those Charged with Governance

100.25 When communicating with those charged with governance in accordance
with the provisions of this Code, the chartered accountant or firm shall determine,
having regard to the nature and importance of the particular circumstances and
matter to be communicated, the appropriate person (s) within the entity's
governance structure with whom to communicate. If the chartered accountant or
firm communicates with a subgroup of those charged with governance, for
example, an audit committee or an individual, the chartered accountant or firm
shall determine whether communication with all of those charged with
governance is also necessary so that they are adequately informed.

3 CONCEPTUAL FRAMEWORK APPROACH APPLICABLE TO

CHARTERED ACCOUNTANTS IN PRACTICE
Section overview
 Introduction
 Threats and Safeguards
 Client Acceptance
3.1 Introduction
This Part of the Code describes how the conceptual framework applicable to all
Chartered Accountants applies in certain situations to chartered accountants in
practice.
200.2 A chartered accountant in practice shall not knowingly engage in any
business, occupation, or activity that impairs or might impair integrity, objectivity
or the good reputation of the profession and as a result would be incompatible
with the fundamental principles.
3.2 Threats and Safeguards

200.3 Compliance with the fundamental principles may potentially be threatened
by a broad range of circumstances and relationships. The nature and significance
of the threats may differ depending on whether they arise in relation to the
provision of services to an audit client and whether the audit client is a public
interest entity, to an assurance client that is not an audit client, or to a non-
assurance client. Threats fall into one or more of the following categories:
(a) Self-interest;
(b) Self-review;
(c) Advocacy;
(d) Familiarity; and
(e) Intimidation.
These threats are discussed further in Part A of this Code.
200.4 Examples of circumstances that create self-interest threats for a chartered
accountant in practice include:
• A member of the assurance team having a direct financial interest in the
assurance client.
• A firm having undue dependence on total fees from a client.
• A member of the assurance team having a significant close business
relationship with an assurance client.
• A firm being concerned about the possibility of losing a significant client.
• A member of the audit team entering into employment negotiations with the
audit client.
• A firm entering into a contingent fee arrangement relating to an assurance
engagement.

Audit and Assurance
• A chartered accountant discovering a significant error when evaluating the

results of a previous professional service performed by a member of the
chartered accountant's firm.
200.5 Examples of circumstances that create self-review threats for a chartered
• A firm issuing an assurance report on the effectiveness of the operation of
financial systems after designing or implementing the systems.
• A firm having prepared the original data used to generate records that are
the subject matter of the assurance engagement.
• A member of the assurance team being, or having recently been, a director
or officer of the client.
• A member of the assurance team being, or having recently been, employed
by the client in a position to exert significant influence over the subject
matter of the engagement.
• The firm performing a service for an assurance client that directly affects the
subject matter information of the assurance engagement.
200.6 Examples of circumstances that create advocacy threats for a chartered
• The firm promoting shares in an audit client.
• A chartered accountant acting as an advocate on behalf of an audit client in
litigation or disputes with third parties.
200.7 Examples of circumstances that create familiarity threats for a chartered
• A member of the engagement team having a close or immediate family
member who is a director or officer of the client.
• A member of the engagement team having a close or immediate family
member who is an employee of the client who is in a position to exert
significant influence over the subject matter of the engagement.
• A director or officer of the client or an employee in a position to exert
significant influence over the subject matter of the engagement having
recently served as the engagement partner.
• A chartered accountant accepting gifts or preferential treatment from a
client, unless the value is trivial or inconsequential.
• Senior personnel having a long association with the assurance client.
200.8 Examples of circumstances that create intimidation threats for a chartered
• A firm being threatened with dismissal from a client engagement.
• An audit client indicating that it will not award a planned non- assurance
contract to the firm if the firm continues to disagree with the client's
accounting treatment for a particular transaction.
• A firm being threatened with litigation by the client.
• A firm being pressured to reduce inappropriately the extent of work
performed in order to reduce fees.

• A chartered accountant feeling pressured to agree with the judgment of a

client employee because the employee has more expertise on the matter in
question.
• A chartered accountant being informed by a partner of the firm that a
planned promotion will not occur unless the accountant agrees with an audit
client's inappropriate accounting treatment.
Example:
Your assurance firm is auditor of Happy Goods. The audit manager has just
become engaged to the managing director’s daughter, who he met through a
mutual friend. The managing director (MD) owns 51% of the shares in Happy
Goods.
Required
List the threats to independence which might arise as a result of the above,
explaining clearly why these are threats.
Answer
An intimidation threat might arise because the MD could exert influence over the
audit manager via any influence he might have over his daughter. Alternatively,
as the relationship between the audit manager and his future father-in-law
develops direct intimation might be possible.
A familiarity threat might arise, again, as the relationship between the audit
manager and the MD develops. The audit manager may become less critical of
the reporting or operational practices at this client.
A self-interest threat might arise because the MD owns a majority shareholding in
Happy Goods and his daughter (who may well inherit the shares at some point in
the future) therefore has a vested interest in the performance of the organisation
– as will her husband (i.e. this threat is probably greater once the marriage has
taken place.)
Example of Safeguards
200.9 Safeguards that may eliminate or reduce threats to an acceptable level fall
into two broad categories:
• Safeguards created by the profession, legislation or regulation; and
• Safeguards in the work environment.
Examples of safeguards created by the profession, legislation or regulation are
described in paragraph 100.14 of Part A of this Code.
200.10 A chartered accountant in practice shall exercise judgment to determine
how best to deal with threats that are not at an acceptable level, whether by
applying safeguards to eliminate the threat or reduce it to an acceptable level or
by terminating or declining the relevant engagement. In exercising this judgment,
a chartered accountant in practice shall consider whether a reasonable and
informed third party, weighing all the specific facts and circumstances available to
the chartered accountant at that time, would be likely to conclude that the threats
would be eliminated or reduced to an acceptable level by the application of
safeguards, such that compliance with the fundamental principles is not
compromised. This consideration will be affected by matters such as the

Audit and Assurance
significance of the threat, the nature of the engagement and the structure of the
firm.
200.11 In the work environment, the relevant safeguards will vary depending on
the circumstances. Work environment safeguards comprise firm-wide safeguards
and engagement-specific safeguards.
200.12 Examples of firm-wide safeguards in the work environment include:
• Leadership of the firm that stresses the importance of compliance with the
fundamental principles.
• Leadership of the firm that establishes the expectation that members of an
assurance team will act in the public interest.
• Policies and procedures to implement and monitor quality control of
engagements.
• Documented policies regarding the need to identify threats to compliance
with the fundamental principles, evaluate the significance of those threats,
and apply safeguards to eliminate or reduce the threats to an acceptable
level or, when appropriate safeguards are not available or cannot be
applied, terminate or decline the relevant engagement.
• Documented internal policies and procedures requiring compliance with the
fundamental principles.
• Policies and procedures that will enable the identification of interests or
relationships between the firm or members of engagement teams and
clients.
• Policies and procedures to monitor and, if necessary, manage the reliance
on revenue received from a single client.
• Using different partners and engagement teams with separate reporting
lines for the provision of non-assurance services to an assurance client.
• Policies and procedures to prohibit individuals who are not members of an
engagement team from inappropriately influencing the outcome of the
engagement.
• Timely communication of a firm's policies and procedures, including any
changes to them, to all partners and professional staff, and appropriate
training and education on such policies and procedures.
• Designating a member of senior management to be responsible for
overseeing the adequate functioning of the firm's quality control system.
• Advising partners and professional staff of assurance clients and related
entities from which independence is required.
• A disciplinary mechanism to promote compliance with policies and
procedures.
• Published policies and procedures to encourage and empower staff to
communicate to senior levels within the firm any issue relating to compliance
with the fundamental principles that concerns them.
200.13 Examples of engagement-specific safeguards in the work environment
include:
• Having a chartered accountant who was not involved with the non-
assurance service review the non-assurance work performed or otherwise
advise as necessary.

• Having a chartered accountant who was not a member of the assurance

team review the assurance work performed or otherwise advise as
necessary.
• Consulting an independent third party, such as a committee of independent
directors, a professional regulatory body or another chartered accountant.
• Discussing ethical issues with those charged with governance of the client.
• Disclosing to those charged with governance of the client the nature of
services provided and extent of fees charged.
• Involving another firm to perform or re-perform part of the engagement.
• Rotating senior assurance team personnel.
200.14 Depending on the nature of the engagement, a chartered accountant in
practice may also be able to rely on safeguards that the client has implemented.
However, it is not possible to rely solely on such safeguards to reduce threats to
an acceptable level.
200.15 Examples of safeguards within the client's systems and procedures
include:
• The client requires persons other than management to ratify or approve the
appointment of a firm to perform an engagement.
• The client has competent employees with experience and seniority to make
managerial decisions.
• The client has implemented internal procedures that ensure objective
choices in commissioning non-assurance engagements.
• The client has a corporate governance structure that provides appropriate
oversight and communications regarding the firm's services.
Example:
Following on from the previous example suggest specific, appropriate safeguards
which could be put in place to mitigate the identified threats.
Answer
The most appropriate safeguards would be to:
 remove the manager from the audit of Happy Goods Ltd, and
 ensure that he has no significant influence over the audit team (for
example, by ensuring that the members of the audit team are not close
friends of his).
Failing that, the following safeguards could be implemented:
 Confirm that the MD’s daughter is not dependent on him in any way
(financially or otherwise).
 Review the manager’s work on the audit.
 Ensure that the manager is aware of the requirement for independence.
 Discuss the potential ethical issue with the client and request that the
manager has no involvement with the MD during the course of the audit (he
is more likely to deal with the FD). (Though this will not help if the
relationship between the manager and the MD is already developing (as

Audit and Assurance
they may meet outside the audit environment) or if the MD has significant
influence over his fellow-directors. However, it may be that no such close
relationship is forming, especially if the daughter is not close to her father
and is not financially dependent on him.)

4 CHAPTER REVIEW
Chapter review
 Describe the fundamental principles of the ICAP Code of Ethics
 Apply the conceptual framework to identify threats to the fundamental
principles and suggest appropriate safeguards across a range of common
scenarios
 Explain the ethical considerations with respect to client and engagement
acceptance and changes in professional appointment (in conjunction with
chapter 2)

Audit and Assurance

15
CHAPTER
Audit and Assurance
Audit finalisation and reporting
Contents
1 Subsequent events: ISA 560
2 Written representations: ISA 580
3 Overall review of the financial statements
4 Purpose of the audit report
5 The unmodified audit report: ISA 700 (Revised)
6 Communicating Key Audit Matters in an auditor’s
report: ISA 701
7 Audit reporting and the Companies ordinance 1984
8 Modification to audit opinion
9 Emphasis of matter paragraphs and other matter
paragraphs: ISA 706 (Revised)
10 Chapter review

Audit and Assurance
INTRODUCTION
Learning outcomes
Performance of audit and reporting
demonstrate knowledge of general concepts governing an audit
LO 1.6.7 Discuss the additional matters to be included in the auditor’s report
demonstrate working knowledge in respect of performance of simple
audit procedures and understand the audit report requirement under the
Companies Ordinance, 1984
LO 2.10.1 Understand modified and unmodified audit opinion
LO 2.10.2 Explain qualified opinion, disclaimer of opinion and adverse opinion
LO 2.10.3 Explain emphasis of matter and other matter in the auditor report
LO 2.10.4 Discuss the modification of audit opinion and audit report in different situations
LO 2.10.5 Briefly state the contents of the auditor’s report under International Standards
on Auditing and under the Companies Ordinance 1984
LO 2.10.6 Explain the differences between auditor’s report under International Standards
on Auditing and under the Companies Ordinance 1984
LO 2.10.7 State the penalty for non-compliance with provisions related to the audit report
LO 3 Understand the requirement and application guidelines relating to some
of the specific areas of audit procedures including external confirmation,
review of subsequent event etc.
LO 3.2.1 Explain subsequent events and its relevance with the following critical dates
a) Date of the financial statements
b) Date of approval of the financial statements
c) Date of the auditor’s report
d) Date the financial statements are issued
LO 3.2.2 Explain the subsequent events review procedure
LO 3.2.3 Discuss the classification of subsequent events into adjusting and non-
adjusting events
LO 3.2.4 Describe the auditor’s responsibility in respect of following situations.
a) Events occurring between the date of the financial statements and the
date of the auditor’s report
b) Facts which become known to the auditor after the date of the auditor’s
report but before the date the financial statements are issued
c) Facts which become known to the auditor after the financial statements
have been issued

Chapter 15: Audit finalisation and reporting
LO 3.2.5 Identify the subsequent events and explain the auditor responses
LO 3.3.1 Discuss the nature of written representations as audit evidence
LO 3.3.2 Discuss the circumstances where written representations are necessary and
the matters on which representations are commonly obtained
LO 3.3.3 Discuss the form and content of written representations
LO 3.3.4 Discuss the auditor’s course of action if management refuses to provide
requested written representation

Audit and Assurance
1 SUBSEQUENT EVENTS: ISA 560

Section overview
 IAS 10 and ISA 560

 Events occurring up to the date of the audit report
 Facts discovered after the date of the audit report
1.1 IAS 10 and ISA 560

It is not possible to prepare financial statements that present a true and fair view
by considering only those events and transactions that take place before the date
at which the balance sheet is prepared. Material events that occur after the
reporting period should also be considered when preparing the financial
statements for the year.
Purpose of IAS 10
IAS 10 Events after the reporting period has two main objectives:
 to specify when an entity should adjust its financial statements for events that
occur after the reporting period, but before the financial statements are
authorised for issue, and
 to specify the disclosures that should be given about events that have
occurred after the reporting period but before the financial statements were
authorised for issue.
Events after the reporting period are defined in IAS 10 as ‘those events,
favourable and unfavourable that occur between the end of the reporting period
and the date when the financial statements are authorised for issue.’
There are two types of events after the reporting period:
 Adjusting events. These are events that provide evidence of conditions that
already existed at the end of the reporting period.
 Non-adjusting events. These are events that have occurred due to conditions
arising after the reporting period.
The role of the auditor: ISA 560

The work of the external auditor in this area is covered by ISA 560 Subsequent
events.
The objectives of the auditor, as stated in ISA 560 are as follows:
 The auditor should obtain sufficient, appropriate evidence about whether
events occurring between the date of the financial statements and the date of
the audit report are appropriately reflected in those financial statements.
 The auditor should also respond appropriately to facts that become known to
him after the date of the audit report that, had they been known to him at that
date, may have caused him to amend his report.
This means that audit procedures must be planned and performed so as to
consider all significant transactions occurring after the reporting period. This
means that the audit work does not stop with events only up to the end of the
reporting period. There are two key dates after the end of the reporting period:
the date of the audit report and the date that the financial statements are issued:

 Before the issue of the audit report, the auditor should actively look for
significant subsequent events. This is sometimes referred to as an active
review.
 After the issue of the audit report (and up to the time that the financial
statements are issued), the auditor has to consider the impact of any
significant subsequent events that come to his attention. However, he does
not have to look for these events actively. This is sometimes referred to as a
passive review.
1.2 Events occurring up to the date of the audit report

Between the end of the reporting period and the date of the audit report, the
auditor is required to obtain sufficient appropriate evidence that all events that
require adjustment of or disclosure in the financial statements:
 have been identified, and
 are suitably reported in the financial statements.
Normal audit verification work

The auditor may find sufficient evidence of subsequent events in the course of
his normal audit verification work. Where this is the case he is not required to
perform additional audit procedures. Such normal audit verification work might
include the following:
 The audit of receivables will consider whether receivables at the end of the
reporting period are collectable. Cash receipts after the year-end may indicate
a significant non-payment, suggesting the need to write off a debt as
irrecoverable.
 The audit of inventory includes a review of the net realisable value of
inventory. Sales of inventory after the year-end may indicate that some
inventory in the balance sheet is over-valued (because subsequent events
have shown that its NRV was less than cost).
 A search for unrecorded liabilities may discover the existence of some
unrecorded liabilities, from invoices received after the reporting period but
relating to the period covered by the financial statements.
 A review of the entity’s cash position at the end of the reporting period may
find that a cheque from a customer, recorded as part of the bank balances,
was dishonoured after the reporting period.
Procedures aimed specifically at identifying subsequent events

The auditor should also actively look for ‘subsequent events’, up to the time that
he prepares the audit report. Taking into account his risk assessment of this
area, he should:
 obtain an understanding of management’s procedures for identifying
subsequent events
 inquire of management as to whether any subsequent events have occurred
which might affect the financial statements
 read the entity’s latest subsequent financial statements
 read minutes of shareholders’ meetings, meetings of the board of directors
and senior management meetings held after the date of the financial
statements and inquire about matters discussed at any such meetings where
minutes are not yet available

Audit and Assurance
 obtain written representations in respect of subsequent events (covered in a

later section).
1.3 Facts discovered after the date of the audit report

Even after the date on which the audit report is signed, the auditor retains some
degree of responsibility for events of which he becomes aware, up to the time
that the financial statements are issued. He is not required, during this period, to
actively look for subsequent events. His level of responsibility is therefore much
reduced compared with the period before the signing of the audit report.
Between the date of the audit report and the issue of the financial statements
The auditor has no obligation to perform any audit procedures after the date of
his audit report. However, if he becomes aware of a fact that had it been known
to him at the date of his report, may have caused him to amend his report then
he is required to:
 discuss the matter with management
 determine whether the financial statements need amending, and
 inquire how management intend to address the matter in the financial
statements.
If the financial statements are amended, the auditor is required to:
 carry out the necessary audit procedures on the amendment
 extend his review of subsequent events up to the date of the new audit report.
If management do not amend the financial statements for the subsequent
event, but the auditor feels that an amendment should be made, the auditor is
required to take the following action:
 If the audit report has not yet been provided to the entity, modify his opinion as
appropriate.
 If the audit report has been provided to the entity:
 instruct management not to issue the financial statements before the
necessary amendments have been made
 if they do so, take appropriate action to prevent reliance on the audit
report, after taking legal advice.
Facts discovered after the financial statements have been issued

As above, the auditor has no obligation to perform any audit procedures after the
financial statements have been issued. However, if he becomes aware of a fact
that had it been known to him at the date of his report, may have caused him to
amend his report then he is required to:
 determine whether the financial statements need amending, and
 inquire how management intend to address the matter in the financial
statements.
If the financial statements are amended, the auditor is required to:
 carry out the necessary audit procedures on the amendment
 review the steps taken by management to inform anyone who received the
original financial statements and audit report of the situation

 extend his review of subsequent events up to the date of the new audit report
 issue a new audit report, containing an emphasis of matter paragraph or
other matter paragraph. This should refer to a note in the revised financial
statements that explains in more detail the reason for the re-issue of the
financial statements.
As usual, in the real exam, you are likely to be asked to apply your knowledge to
a given scenario.
Example:
You are the auditor in charge of the audit of Hindsight, which has a 30 June year
end. The subsequent events review for the year ended 30 June Year 5 revealed
that, on 1 August Year 5, a receiver was appointed at a major customer. At 30
June Year 5 that customer owed $200,000 and goods costing $300,000 made to
that customer’s specification were held in inventory. Both these amounts are
material.
Required
List the matters to which you would direct your attention in respect of the above
in relation to the audit for the year ended 30 June Year 5, if the audit report on
the financial statements has not yet been written
Answer
 Check that the directors are willing to adjust the financial statements for
this adjusting event after the reporting period.
 Establish whether any cash has been received from this customer since the
year end.
 Review any correspondence from the receiver to establish to what extent
the outstanding debt will be recovered.
 Consider whether the goods held in inventory are now valued at the lower of
cost and NRV, given that these goods were made to the customer’s
specification. This may depend on whether or not those goods can be sold
to a different customer.
 In the light of the above, consider whether any write downs proposed by the
directors to receivables and/or inventory are reasonable.
 If they are not, or if the directors refuse to adjust the financial statements,
consider the impact on the audit report.
Note
If the event occurs after the date of the audit report but before the financial
statements are issued, the auditor should discuss the matter with the directors of
the client entity and ask what they propose to do.
 If the directors intend to amend the financial statements to include or report
the event, the auditor should re-write the audit report accordingly and give it a
new date.
 If the directors say that they do not intend to amend the financial statements,
the auditor must consider the most appropriate course of action. If it is too late
to re-write the audit report the auditor should consider communicating with the

Audit and Assurance
shareholders in another way; for example by asking to speak at the annual

general meeting of the entity (which is the auditor’s right).
 In the longer term, the auditor should also consider resigning from the audit,
but this would not be appropriate as an immediate response to the problem.
The immediate requirement is to convey the auditor’s opinion to the
shareholders.

2 WRITTEN REPRESENTATIONS: ISA 580

Section overview
 Definition and objectives

 Written representations as audit evidence
 Written representations about management’s responsibilities
 Form and contents of the letter of representation
 Refusal to provide requested written representations
2.1 Definition and objectives
Definition: Written representation

A written statement by management provided to confirm certain matters or to
support other audit evidence.
The objectives of the auditor in this area, per ISA 580, are to:
 obtain written representations from management that it has fulfilled its
responsibilities in respect of the financial statements and the audit
 obtain written representations as appropriate to support other audit evidence
 respond appropriately to written representations provided by management or if
management refuse to provide the written representations requested.
ISA 580 requires appropriate written representations from management (often
referred to as “management representations”) to be in the form of a letter of
representation, addressed to the auditor.
These written representations may be an important source of audit evidence.
2.2 Written representations as audit evidence

If the auditor considers that written representations are needed to support other
audit evidence he is required to request such other written representations.
During the course of the audit, management will make many representations to
the auditor. Some of these will be unsolicited but some will be given in response
to specific enquiries from the auditor. The auditor will have recorded such verbal
discussions with management in the audit working papers. However, verbal
evidence is not strong audit evidence. In order to improve the quality of this
evidence, the auditor will ask for any significant discussions to be confirmed in
writing.
Such representations are likely to be needed:
 to support the auditor’s understanding of management’s intention or judgment
(for example, in respect of future plans for the business or a specific matter
such as the net realisable value of inventory), or
 in respect of the completeness of a specific item (for example, that all liabilities
have been provided for).
However, although such written representations provide necessary audit
evidence, they do not provide sufficient appropriate evidence on their own.

Audit and Assurance
If a representation by management is contradicted by other audit evidence, the

auditor should:
 consider whether his risk assessment of that area is still appropriate
 consider whether additional audit procedures are needed
 if he has concerns about the integrity of management, document those
concerns and consider withdrawing from the audit.
The auditor is also required by specific other ISAs to request certain other
written representations. These requirements are illustrated in the example letter
set out below.
2.3 Written representations about management’s responsibilities

The auditor is also required by ISA 580 to obtain certain other specific written
representations from management. In these representations management
acknowledges that:
 it has fulfilled its responsibility for the preparation and fair presentation of the
financial statements in accordance with the applicable financial reporting
framework
 it has provided the auditor with all relevant information
 all transactions have been recorded and are reflected in the financial
statements.
Again, these points are illustrated in the example letter set out below.
2.4 Form and contents of the letter of representation

The letter of representation is:
 usually drafted by the auditor (since he knows the areas on which he requires
written representations)
 addressed to the auditor
 dated as near as practicable (but not after) the date of the audit report.
A written representation letter may include the following statements.
 The written representation letter relates to the audit of the client company.
 The management of the entity have fulfilled their responsibilities for the
preparation of the financial statements, and the financial statements give a
true and fair view and are free from material misstatement.
 The assumptions made by management to make accounting estimates and
reach fair values are reasonable.
 Related party relationships and transactions have been disclosed.
 All events after the reporting period have been either adjusted or disclosed.
 The effect of any uncorrected misstatements (a list of which should be
attached to the letter) is immaterial.
 The auditors have been provided with all relevant material, including the books
of account, and unrestricted access to individuals within the entity.
 All transactions have been recorded and are included in the financial
statements.

 Management have disclosed to the auditors all information that is relevant to

fraud or suspected fraud.
 Management have disclosed all known instances of non-compliance with laws
or regulations that are relevant to the preparation of the financial statements.
 Representations may also be included that refer to specific assertions in the
financial statements, if the auditors require that such assertions should be
made.
Examples
The following example of a letter of representation shows the minimum contents
of such a letter. However, remember that the auditor may also need to request
management to provide written representations about specific assertions in the
Example of a letter of representation

(Entity Letterhead)
(To Auditor)
(Date)
This representation letter is provided in connection with your audit of the

financial statements of ABC Ltd for the year ended 31 December 31 20X1 for
the purpose of expressing an opinion as to whether the financial statements
are presented fairly, in all material respects, (or give a true and fair view) in
accordance with International Financial Reporting Standards.
We confirm that (to the best of our knowledge and belief, having made such
inquiries as we considered necessary for the purpose of appropriately
informing ourselves):
Financial statements
We have fulfilled our responsibilities for the preparation and presentation of the
financial statements as set out in the terms of the audit engagement dated…..
and, in particular, the financial statements are fairly presented (or give a true
and fair view) in accordance with International Financial Reporting Standards.
Significant assumptions used by us in making accounting estimates, including
those measured at fair value, are reasonable. (ISA 540)
Related party relationships and transactions have been appropriately
accounted for and disclosed in accordance with the requirements of
International Financial Reporting Standards. (ISA 550)
All events subsequent to the date of the financial statements and for which
International Financial Reporting Standards require adjustment or disclosure
have been adjusted or disclosed. (ISA 560)
The effects of uncorrected misstatements are immaterial, both individually and
in the aggregate, to the financial statements as a whole. A list of the
uncorrected misstatements is attached to the representation letter. (ISA 450)

Audit and Assurance
Information provided
We have provided you with:
 all information, such as records and documentation, and other matters that
are relevant to the preparation and presentation of the financial statements
 additional information that you have requested from us; and
 unrestricted access to those within the entity.
All transactions have been recorded in the accounting records and are
reflected in the financial statements.
We have disclosed to you the results of our assessment of the risk that the
financial statements may be materially misstated as a result of fraud. (ISA 240)
We have disclosed to you all information in relation to fraud or suspected fraud
that we are aware of and that affects the entity and involves:
 management
 employees who have significant roles in internal control; or
 others where the fraud could have a material effect on the financial
statements. (ISA 240)
We have disclosed to you all information in relation to allegations of fraud, or
suspected fraud, affecting the entity’s financial statements communicated by
employees, former employees, analysts, regulators or others. (ISA 240)
We have disclosed to you all known instances of non-compliance or suspected
non-compliance with laws and regulations whose effects should be considered
when preparing financial statements. (ISA 250)
We have disclosed to you the identity of the entity’s related parties and all the
related party relationships and transactions of which we are aware. (ISA 550)
2.5 Refusal to provide requested written representations

If management refuse to provide requested written representations the auditor is
required to:
 re-evaluate the integrity of management and reconsider the impact on other
representations and audit evidence
 take appropriate action, including considering the effect on the audit report.
Example:
The following points have arisen during the audit for the year ended 30 June
20X6 of Compo, a nationwide dealer in used cars.
1. During the year, five of Compo’s properties were revalued by an
independent surveyor.
2. One property was sold during the year to the marketing director.
3. The directors have refused to make provision against a bad debt.
Required
Explain whether or not each of the above would be referred to in the letter of
representation for the year ended 30 June 20X6.

Answer
1. No – other evidence should be available (the independent surveyor’s
report).
2. Yes – to support the completeness of disclosure of loans and other
transactions with directors.
3. No – the impact on the audit report will need to be considered. (And if the
directors have refused, and the auditor is sure the debt is bad, the directors
are not going to provide evidence to support this view in the letter of
representation.)

Audit and Assurance
3 OVERALL REVIEW OF THE FINANCIAL STATEMENTS

Section overview
 General review
 Specific review
After the detailed audit work has been completed, the auditor will carry out an
overall review of the financial statements. By this stage of the audit, the financial
statements should be in their final draft form.
This review will normally be carried out by a senior member of the audit team,
often the manager or partner.
3.1 General review

At a general level, the review will check that a clear conclusion has been reached
and documented on each of the financial statement areas. Analytical procedures
may be used as a final check that the information contained in the draft financial
statements ‘makes sense’.
3.2 Specific review

More specifically, the overall review will cover the following matters:
 Compliance by the client with the relevant accounting framework (national
legislation and relevant accounting standards).
 A review of the accounting policies adopted by the entity, to assess whether
they are acceptable (and comply with accounting standards and industry
practice).
 A review of the financial statements for adequate disclosure of relevant
information.
 An assessment of whether the information contained in the financial
statements is consistent with known business facts.

4 PURPOSE OF THE AUDIT REPORT

Section overview
 Introduction
 The expectation gap
4.1 Introduction
The audit report is the end-product of the external audit process. It is the
document in which the auditor expresses his professional judgement on whether
the financial statements present a ‘true and fair view’.
The contents of the audit report are likely to be regulated by national legislation.
In addition, the external audit is governed by:
 ISA 700 (Revised), Forming an Opinion and Reporting on
Financial Statements
 ISA 701, Communicating Key Audit Matters in the Independent Auditor’s
Report
 ISA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s
Report
 ISA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter
Paragraphs in the Independent Auditor’s Report
 ISA 720 (Revised), The Auditor’s Responsibilities Relating to Other
Information
4.2 The expectation gap

The audit report is the only direct means of communication between the auditor
and the users of the financial statements (who are mainly, but not exclusively, the
shareholders). In recent years, auditing has suffered from an ‘expectation gap’ as
the role of the auditor in law does not match what the users of financial
statements expect from an auditor.
The term ‘expectation gap’ refers to the fact that the public perception of the role
and responsibilities of the external auditor is different from his statutory role and
responsibilities. The expectations of the public are often set at a level higher than
that at which the external auditor actually operates.
Some examples of the misunderstandings inherent in the public’s expectations
are as follows:
 The public believes that the audit opinion in the audit report amounts to a
‘certificate’ that the financial statements are correct and can be relied upon for
all decision-making purposes, including decisions about takeovers.
 The public also believes that the auditor has a duty to prevent and detect fraud
and that this is one reason for an audit.
 The public assumes that, in carrying out his audit work, the auditor tests 100%
of the transactions undertaken during the accounting period.
One consequence of these misunderstandings has been an increasing tendency
in some countries to undertake legal action against the auditors, sometimes on a

Audit and Assurance
‘frivolous’ basis, in the belief that the auditor should have prevented
misstatements in the financial statements or should have prevented fraud.
Responses to the problem of the expectation gap have varied between countries.
In some countries, corporate governance codes have been changed to
strengthen the role and responsibilities of directors for good internal control and
accounting systems.
In addition, the new format of the audit report has been introduced to clarify what
is involved in an audit, what were key audit matters and the relative
responsibilities of the management, those charged with governance and the
auditors.
Critics argue that these moves are not likely to be effective as those groups in
society who are promoting the expectation gap may not understand these
attempts that have been made to remedy the problem.

5 THE UNMODIFIED AUDIT REPORT: ISA 700 (REVISED)

Section overview
 Definition of an unmodified audit report

 Reaching the audit opinion
 Core elements of the audit report
 Audit report prescribed by law or regulation
 Unaudited supplementary information presented with the audited financial
statements
5.1 Definition of an unmodified audit report

An unmodified audit report is an audit report containing an audit opinion not
modified in any way – either by changing the unmodified opinion (to a qualified
opinion, an adverse opinion or a disclaimer of opinion) or by adding an extra
paragraph such as an ‘emphasis of matter’ or ‘other matters’ paragraph after the
opinion paragraph.
ISA 700 (Revised) requires the auditor to give an unmodified opinion when he
concludes that the financial statements have been prepared, in all material
respects, in accordance with the applicable financial reporting framework.
If that framework is a “fair presentation framework” then the report will give an
opinion stating whether or not the financial statements “give a true and fair view”
or “present fairly” the position and results of the entity.
An unmodified opinion provides a high level of assurance that a professional,
independent examination of the financial statements has not revealed any
material misstatements in those financial statements.
According to the scope of ISA 700 (Revised):
 The requirements of the ISA 700 (Revised) are aimed at addressing an
appropriate balance between the need for consistency and comparability in
auditor reporting globally and the need to increase the value of auditor
reporting by making the information provided in the auditor’s report more
relevant to users.
 The ISA 700 (Revised) promotes consistency in the auditor’s report, but
recognizes the need for flexibility to accommodate particular circumstances of
individual jurisdictions. Consistency in the auditor’s report, when the audit has
been conducted in accordance with ISAs, promotes credibility in the global
marketplace by making more readily identifiable those audits that have been
conducted in accordance with globally recognized standards. It also helps to
promote the user’s understanding and to identify unusual circumstances when
they occur
5.2 Reaching the audit opinion

In reaching his audit opinion, the auditor is required to evaluate whether:
 he has obtained sufficient appropriate audit evidence as to whether the
financial statements are free from material misstatement
 uncorrected misstatements are material, individually or in aggregate

Audit and Assurance
 the financial statements are prepared in accordance with the requirements of

the applicable financial reporting framework (which for a “fair presentation
framework” will include evaluating whether the financial statements give a true
and fair view)
and, in particular, whether:
 the financial statements adequately refer to or describe the applicable
financial reporting framework;
 the financial statements appropriately disclose the entity’s significant
accounting policies;
In making this evaluation, the auditor shall consider the relevance of the
accounting policies to the entity, and whether they have been prepared in an
understandable manner
 the accounting policies selected and applied are consistent with the applicable
financial reporting framework and are appropriate;
 accounting estimates are reasonable;
the information in the financial statements is relevant, reliable, comparable and
understandable in making this evaluation, the auditor shall consider whether:
 The information that should have been included has been included, and
whether such information is appropriately classified, aggregated or
disaggregated, and characterized.
 The overall presentation of the financial statements has been
undermined by including information that is not relevant or that obscures
a proper understanding of the matters disclosed
 the financial statements provide adequate disclosures

 the terminology used in the financial statements is appropriate.
5.3 Core elements of the audit report

The basic elements of an unmodified audit report, as given in ISA 700 (Revised),
are as follows:
1 Title
2 Addressee
3 Auditor’s Opinion
4 Basis for Opinion
5 Going Concern
6 Key Audit Matters
7 Other Information
8 Responsibilities for the Financial Statements
9 Auditor’s Responsibilities for the Audit of the Financial Statements
10 Location of the Description of the Auditor’s Responsibilities for the Audit of
the Financial Statements
11 Other Reporting Responsibilities
12 Name of the Engagement Partner
13 Signature of the Auditor
14 Auditor’s Address
15 Date of the Auditor’s Report

These elements are designed to achieve the objectives of ISA 700 (Revised).
As per these objectives the auditor is required to:
 form an opinion on the financial statements based on an evaluation of the
conclusions drawn from the audit evidences obtained during the course of
audit, and
 express that opinion clearly through a written report.
Title
The auditor’s report should have a title that clearly indicates that it is the report of
an independent auditor. This is to distinguish this type of auditor’s report from
other reports that might be issued by other auditors (who may not have to abide
by the same ethical requirements and requirement for independence as the
independent auditor - for example, internal auditors).
Addressee
The report should be appropriately addressed, according to the national law or
the terms of the engagement and the circumstances of the engagement. The
report is usually addressed to either:
 the shareholders of the entity whose financial statements are being audited, or
 those charged with the governance of the entity.
Auditor’s Opinion
The first section of the auditor’s report shall include the auditor’s opinion
 The Opinion section of the auditor’s report shall also: identify the entity whose
financial statements have been audited
 state that the financial statements have been audited
 identify the title of each of statement that makes up the complete set of
financial statements (statement of comprehensive income, statement of
financial position, and so on)
 refer to the notes, including the summary of significant accounting policies and
other explanatory information
 specify the date or period covered by each financial statement.
Basis for Opinion

The auditor’s report shall include a section, directly following the Opinion
section,with the heading “Basis for Opinion”, that:
 States that the audit was conducted in accordance with International

Standards on Auditing;
 Refers to the section of the auditor’s report that describes the auditor’s
responsibilities under the ISAs;
 Includes a statement that the auditor is independent of the entity in
accordance with the relevant ethical requirements relating to the audit, and
has fulfilled the auditor’s other ethical responsibilities in accordance with these
requirements.
 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.

Audit and Assurance
Going Concern
The auditor shall report on going concern in accordance with ISA 570 (Revised),
where applicable.
Key Audit Matters

 For audits of complete sets of general purpose financial statements 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.
Other Information
The auditor shall report on other information in accordance with ISA 720
(Revised), where applicable
Responsibilities for the Financial Statements

This section of the auditor’s report shall describe management’s responsibility
for:
 Preparing the financial statements in accordance with the applicable financial
reporting framework, and for such internal control as management determines
is necessary to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error; and
 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.
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 of preparing the
financial statements in accordance with applicable financial reporting framework
and assessing the entity’s ability to continue as going concern.
When the financial statements 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 Responsibilities for the Audit of the Financial Statements

This section of the auditor’s report shall:
(a) State that the objectives of the auditor 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
 Issue an auditor’s report that includes the auditor’s opinion.
(b) State that reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with ISAs will always detect a
material misstatement when it exists; and
(c) State that misstatements can arise from fraud or error, and either:
 Describe that they are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of
users taken on the basis of these financial statements; or

 Provide a definition or description of materiality in accordance with the

applicable financial reporting framework.
The Auditor’s Responsibilities for the Audit of the Financial Statements section of
the auditor’s report shall further:
(a) State that, as part of an audit in accordance with ISAs, the auditor exercises
professional judgment and maintains professional skepticism throughout the
audit; and
(b) Describe an audit by stating that the auditor’s responsibilities are:
 To identify and assess the risks of material misstatement of the financial
statements, 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.
 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 financial statements, 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.
 To evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made by
management.
 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
financial statements 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 a going concern.
 When the financial statements are prepared in accordance with a fair
presentation framework, to evaluate the overall presentation, structure and
content of the financial statements, including the disclosures, and whether the
financial statements represent the underlying transactions and events in a
manner that achieves fair presentation.
In case of Audit of Group financial statements, description of the auditor’s
responsibilities in a group audit engagement will include:
 The auditor’s responsibilities are to obtain sufficient appropriate audit evidence
regarding the financial information of the entities or business activities within
the group to express an opinion on the group financial statements;
 The auditor is responsible for the direction, supervision and performance of
the group audit; and
 The auditor remains solely responsible for the auditor’s opinion.

Audit and Assurance
The Auditor’s Responsibilities for the Audit of the Financial Statements section of
the auditor’s report also shall:
 State that the auditor communicates with those charged with governance
regarding, 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;
 For audits of financial statements of listed entities, state that the auditor
provides those charged with governance 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
 For audits of financial statements of listed entities and any other entities for
which key audit matters are communicated states that, from the matters
communicated with those charged with governance, the auditor determines
those matters that were of most significance in the audit of the financial
statements 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 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 description of the auditor’s responsibilities for the audit of the financial
statements
 The description of the auditor’s responsibilities for the audit of the financial
statements shall be included:
a) Within the body of the auditor’s report;
b) Within an appendix to the auditor’s report, in which case the auditor’s
report shall include a reference to the location of the appendix; or
c) By a specific reference within the auditor’s report to the location of such a
description on a website of an appropriate authority, where law, regulation
or national auditing standards may 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 address is not inconsistent.
Other Reporting Responsibilities

In some countries, the auditor may have additional reporting responsibilities. For
example, he may be required by local legislation to report certain matters if they
come to his attention during the course of the audit, or he may be required to
report on specific matters such as the adequacy of accounting records.
Such other reporting responsibilities should be addressed in a separate section
of the report, following the opinion paragraph, sub-titled “Report on Other Legal
and Regulatory Requirements.
However, 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.

Name of the Engagement Partner

The name of the engagement partner shall be included in the auditor’s report for
audits of complete sets of general purpose financial statements of listed entities
unless, in rare circumstances, such disclosure is reasonably expected to lead to
a significant personal security threat.
Signature of the Auditor

The report shall be signed:
 in the name of the audit firm, or
 in the personal name of the auditor, or
 both.
The report is usually signed in the name of the firm because the firm assumes
responsibility for the audit.
However, in some cases, law or regulation may allow for the use of electronic
signatures in the auditor’s report.
Auditor’s address
The auditor’s report shall name the location in the jurisdiction where the auditor
practices.
Date of the Auditor’s Report
The auditor’s report should be dated no earlier than the date on which the auditor
has obtained sufficient appropriate evidence on which to base his opinion on the
This will not be earlier than the date on which the financial statements are signed
or approved by the directors/management of the client company.
The date of the report informs the reader that the auditor has considered the
effect on the financial statements (and on his audit report) of subsequent events
which occurred after the reporting period and up to that date.
Example:
An example of an unmodified audit report is set out below which is provided in
Illustration 1 of ISA 700 (Revised)
INDEPENDENT AUDITOR’S REPORT

To the Shareholders of ABC Company [or Other Appropriate Addressee]
Report on the Audit of the Financial Statements
Opinion
We have audited the financial statements of ABC Company (the Company),
which comprise the statement of financial position as at December 31, 20X1,
and the statement of comprehensive income, statement of changes in equity
and statement of cash flows for the year then ended, and notes to the financial
statements, including a summary of significant accounting policies.
In our opinion, the accompanying financial statements present fairly, in all
material respects, (or give a true and fair view of) the financial position of the
Company as at December 31, 20X1, and (of) its financial performance and its
cash flows for the year then ended in accordance with International Financial
Reporting Standards (IFRSs).

Audit and Assurance
Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing
(ISAs). 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 accordance with the International
Ethics Standards Board for Accountants’ Code of Ethics for Professional
Accountants (IESBA Code) together with the ethical requirements that are
relevant to our audit of the financial statements in [jurisdiction], and we have
fulfilled our other ethical responsibilities in accordance with these requirements
and the IESBA Code. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
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.
[Description of each key audit matter in accordance with ISA 701.]
Other Information [or another title if appropriate such as “Information Other than
the Financial Statements and Auditor’s Report Thereon”]
[Reporting in accordance with the reporting requirements in ISA 720.]
Responsibilities of Management and Those Charged with Governance for the
Management is responsible for the preparation and fair presentation of the
financial statements in accordance with IFRSs, and for such internal control as
management determines is necessary to enable the preparation of financial
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 concern 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.
Those charged with governance are responsible for overseeing the Company’s
financial reporting process.
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 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 of users taken on the basis of
these financial statements.

Paragraph 41(b) of ISA 700 explains that the shaded material below can be
located in an Appendix to the auditor’s report. Paragraph 41(c) of ISA 700
explains that when law, regulation or national auditing standards expressly
permit, reference can be made to a website of an appropriate authority that
contains the description of the auditor’s responsibilities, rather than including
this material in the auditor’s report, provided that the description on the
website addresses, and is not inconsistent with, the description of the
auditor’s responsibilities below.
As part of an audit in accordance with ISAs, we exercise professional
judgment and maintain professional skepticism throughout the audit. We
also:
 Identify and assess the risks of material misstatement of the financial
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 of
internal control.
 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 Company’s internal control.
 Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made
by management.
 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 Company’s ability to continue as
a going concern. If we conclude that a material uncertainty exists, we
are required to draw attention in our auditor’s report to the related
disclosures in the financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the
audit evidence obtained up to the date of our auditor’s report. However,
future events or conditions may cause the Company to cease to
continue as a going concern.
 Evaluate the overall presentation, structure and content of the financial
statements, including the disclosures, and whether the financial
statements represent the underlying transactions and events in a
manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other
matters, the planned scope and timing of the audit and significant audit findings,
including any significant deficiencies in internal control that we identify during
our audit.
We also provide those charged with governance with a statement that we have
complied with relevant ethical requirements regarding independence, and to
communicate with them all relationships and other matters that may reasonably
be thought to bear on our independence, and where applicable, related
safeguards.
From the matters communicated with those charged with governance, we
determine those matters that were of most significance in the audit of the

Audit and Assurance
financial statements of the current period and are therefore the key audit
matters. We describe these matters in our auditor’s report unless law or
regulation precludes public disclosure about the matter or when, in extremely
rare circumstances, we determine that a matter should not be communicated in
our report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
Report on Other Legal and Regulatory Requirements

[The form and content of this section of the auditor’s report would vary
depending on the nature of the auditor’s other reporting responsibilities
prescribed by local law, regulation, or national auditing standards. The
matters addressed by other law, regulation or national auditing standards
(referred to as “other reporting responsibilities”) shall be addressed within
this section unless the other reporting responsibilities address the same
topics as those presented under the reporting responsibilities required by the
ISAs as part of the Report on the Audit of the Financial Statements section.
The reporting of other reporting responsibilities that address the same topics
as those required by the ISAs may be combined (i.e., included in the Report
on the Audit of the Financial Statements section under the appropriate
subheadings) provided that the wording in the auditor’s report clearly
differentiates the other reporting responsibilities from the reporting that is
required by the ISAs where such a difference exists.
The engagement partner on the audit resulting in this independent auditor’s
report is [name].
[Signature in the name of the audit firm, the personal name of the auditor, or
both, as appropriate for the particular jurisdiction]
[Auditor Address]
[Date]
5.4 Audit 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:
a) A title.
b) An addressee, as required by the circumstances of the engagement.
c) An Opinion section containing an expression of opinion on the financial
statements and a reference to the applicable financial reporting framework
used to prepare the financial statements (including identifying the jurisdiction
of origin of the financial reporting framework that is not International Financial
Reporting Standards).
d) An identification of the entity’s financial statements that have been audited.
e) A statement that the auditor is independent of the entity in accordance with the
relevant ethical requirements relating to the audit, and has fulfilled the
auditor’s other ethical responsibilities in accordance with these requirements.
f) Where applicable, a section that addresses, and is not inconsistent with, the
reporting requirements.

g) Where applicable, a Basis for Qualified (or Adverse) Opinion section that
addresses, and is not inconsistent with, the reporting requirement of ISA 570
(Revised).
h) Where applicable, a section that includes the information required by ISA 701,
or additional information about the audit that is prescribed by law or regulation
and that addresses, and is not inconsistent with, the reporting requirements in
that ISA.
i) Where applicable, a section that addresses the reporting requirements in
paragraph 24 of ISA 720 (Revised).
j) A description of management’s responsibilities for the preparation of the
financial statements and an identification of those responsible for the oversight
of the financial reporting process that addresses, and is not inconsistent with,
the requirements.
k) A reference to International Standards on Auditing and the law or regulation,
and a description of the auditor’s responsibilities for an audit of the financial
statements that addresses, and is not inconsistent with, the requirements
l) For audits of complete sets of general purpose financial statements of listed
entities, the name of the engagement partner unless, in rare circumstances,
such disclosure is reasonably expected to lead to a significant personal
security threat.
m) The auditor’s signature.
n) The auditor’s address.
o) The date of the auditor’s report.
5.5 Unaudited supplementary information presented with the audited financial

statements
The report and accounts issued by a company often contain supplementary
information that is not covered by the auditor’s opinion, such as a chairman’s
statement, employment report or business review. If supplementary information
that is not required by the applicable financial reporting framework is presented
with the audited financial statements, the auditor shall evaluate whether, in the
auditor’s professional judgment, supplementary information is nevertheless an
integral part of the financial statements due to either its nature or how it is
presented. Where it is an integral part of the financial statements, the
supplementary information shall be covered by the auditor’s opinion.
If supplementary information that is not required by the applicable financial
reporting framework is not considered an integral part of the audited financial
statements, the auditor shall evaluate whether such supplementary information is
presented in a way that sufficiently and clearly differentiates it from the audited
financial statements. If this is not the case, then the auditor shall ask
management to change how the unaudited supplementary information is
presented. If management refuses to do so, the auditor shall identify the
unaudited supplementary information and explain in the auditor’s report that such
supplementary information has not been audited.
The auditor’s responsibilities in respect of unaudited supplementary information
are covered by ISA 720 (which is outside the scope of this syllabus).

Audit and Assurance
6 COMMUNICATING KEY AUDIT MATTERS IN AN AUDIT REPORT: ISA

701
Section overview
 Scope of the ISA 701
 Determining Key Audit Matters
 Communicating Key Audit Matters
 Description of Individual Key Audit Matters
 Communication with those charges with governance
6.1 Scope of the ISA 701

This International Standard on Auditing (ISA) deals with the auditor’s
responsibility to communicate key audit matters in the auditor’s report. The
purpose of communicating key audit matters is to enhance the communicative
value of the auditor’s report by providing greater transparency about the audit
that was performed.
Definition: Key Audit Matters

Those matters that, in the auditor’s professional judgment, were of most
significance in the audit of the financial statements of the current period. Key
audit matters are selected from matters communicated with those charged with
governance.
Auditor shall communicate key audit matters in the auditor’s report for audits of
 Listed entities
 Entities other than listed entities, if required by law or regulation of any area
 Other entities decided by the auditor using his professional judgment,
including those that may be of significant public interest, for example because
they have a large number and wide range of stakeholders and considering the
nature and size of the business (E.g. banks, insurance companies, and
charities etc).
Communicating key audit matters provides additional information to intended
users of the financial statements to assist them in understanding those matters
that, in the auditor’s professional judgment, were of most significance in the audit
of the financial statements of the current period.
6.2 Determining Key Audit Matters

The auditor shall determine, from the matters communicated with those charged
with governance, those matters that required significant auditor attention in
performing the audit. In making this determination, the auditor shall take into
account the following:
 Areas of higher assessed risk of material misstatement, or significant risks
identified in accordance with ISA 315 (Revised)

 Significant auditor judgments relating to areas in the financial statements that

involved significant management judgment, including accounting estimates
that have been identified as having high estimation uncertainty.
 The effect on the audit of significant events or transactions that occurred
during the period.
For example, the auditor may have had extensive discussions with management
and those charged with governance at various stages throughout the audit about
the effect on the financial statements of significant transactions with related
parties or significant transactions that are outside the normal course of business
for the entity or that otherwise appear to be unusual.
Note: Auditor’s procedures regarding the related parties have been discussed in
an earlier chapter.
Determining the relative significance of a matter

Other considerations that may be relevant to determining the relative significance
of a matter communicated with those charged with governance and whether such
a matter is a key audit matter include:
 The importance of the matter to intended users’ understanding.
 The complexity or subjectivity involved in management’s selection of an
appropriate policy compared to other entities within its industry.
 The nature and materiality (quantitatively or qualitatively) of the misstatements
due to fraud or error related to the matter, if any.
 The nature and extent of audit effort needed to address the matter, including:
 The extent of specialized skill or knowledge needed to apply audit
procedures to address the matter or evaluate the results of those
procedures, if any.
 The nature of consultations outside the engagement team regarding
the matter.
 The severity of any control deficiencies identified relevant to the matter.
6.3 Communicating Key Audit Matters

The auditor shall describe each key audit matter, using an appropriate
subheading, in a separate section of the auditor’s report under the heading “Key
Audit Matters,”
The introductory language in this section of the auditor’s report shall state that:
 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 the financial
statements as a whole, and in forming the auditor’s opinion thereon, and the
auditor does not provide a separate opinion on these matters.
No key audit matters to communicate
If the auditor determines, depending on the facts and circumstances of the entity
and the audit, that there are no key audit matters to communicate, the auditor
shall include a statement to this effect in a separate section of the auditor’s report
under the heading “Key Audit Matters.”

Audit and Assurance
In such a case the suggested wording to be included in “Key Audit Matters”

portion would be as illustrated
Illustration:
Key Audit Matters
[Except for the matter described in the Basis for Qualified (Adverse) Opinion section or
Material Uncertainty Related to Going Concern section,] We have determined that
there are no [other] key audit matters to communicate in our report.
Note: The auditor shall not communicate a matter in the Key Audit Matters
section of the auditor’s report when the auditor would be required to modify the
opinion, in respect of that matter, in accordance with ISA 705 (Revised).
6.4 Descriptions of Individual Key Audit Matters

The description of each key audit matter in the Key Audit Matters section of the
auditor’s report shall
 Include a reference to the related disclosure(s), if any, in the financial
statements;
 State that why the matter was considered to be one of most significance in the
audit; and
 Specify how the matter was addressed in the audit
 A brief overview of procedures performed;
 An indication of the outcome of the auditor’s procedures; or
 Key observations with respect to the matter,
The description may also make reference to the principal considerations that led
the auditor, in the circumstances of the audit, to determine the matter to be one
of most significance, for example:
 New or emerging accounting policies, for example entity-specific or industry-
specific matters on which the engagement team consulted within the firm.
 Changes in the entity’s strategy or business model that had a material effect
on the financial statements.
Reference to the related disclosure(s)
Management or those charged with governance may decide to include new or
enhanced disclosures in the financial statements or elsewhere in the annual
report relating to a key audit matter in light of the fact that the matter will be
communicated in the auditor’s report.
A reference to any related disclosures enables the intended users to further
understand how management has addressed the matter in preparing the financial
statements. Auditor may also draw attention to key aspects of them.
6.5 Communication with those charged with governance

Communication with those charged with governance enables them to be made
aware of the key audit matters that the auditor intends to communicate in the
auditor’s report, and provides them with an opportunity to obtain further
clarification where necessary.
The auditor shall communicate with those charged with governance:

 Those matters the auditor has determined to be the key audit matters; or
 If applicable, depending on the facts and circumstances of the entity and the
audit, the auditor’s determination that there are no key audit matters to
communicate in the auditor’s report.

Audit and Assurance
7 AUDIT REPORTING AND THE COMPANIES ORDINANCE 1984

Section overview
 Reporting requirements of the Companies Ordinance 1984

 Other audit-related matters
 Penalty for non-compliance with the Companies Ordinance 1984
 Comparison of report under form 35A and under ISA 700
7.1 Reporting requirements of the Companies Ordinance 1984 (s255.3 CO84)

The Companies Ordinance requires that the auditor make a report to the
members of the company on the accounts and books of accounts of the company
and on every balance-sheet and profit and loss account or income and
expenditure account and on every other document forming part of the balance-
sheet and profit and loss account or income and expenditure account, including
notes, statements or schedules appended thereto, which are laid before the
company in a general meeting during his tenure of office, and the report shall
state—
 whether or not they have obtained all the information and explanations which
to the best of their knowledge and belief were necessary for the purposes of
the audit;
 whether or not in their opinion proper books of accounts as required by the
Ordinance have been kept by the company;
 whether or not in their opinion the balance-sheet and profit and loss account
or in the income and expenditure account have been drawn up in conformity
with the Ordinance and are in agreement with the books of accounts;
 whether or not in their opinion and to the best of their information and
according to the explanations given to them the said accounts give the
information required by the Ordinance in the manner so required and give a
true and fair view—
 in the case of the balance-sheet, of the state of the company’s affairs
as at the end of its financial year;
 in the case of the profit and loss account or the income and
expenditure account, of the profit or loss or surplus or deficit, as the
case may be, for its financial year; and
 in the case of the statement of changes in financial position or
sources and application of funds of a listed company, of the changes
in the financial position or the sources and application of funds for its
financial year;
 whether or not in their opinion-
 the expenditure incurred during the year was for the purpose of the
company’s business; and
 the business conducted, investments made and expenditure incurred
during the year were in accordance with the objects of the company;

 and whether or not in their opinion

 zakat deductible at source under the Zakat and Usher Ordinance,
1980 (XVIII of 1980), was deducted by the company and deposited in
the Central Zakat Fund established under section 7 of that Ordinance.
Where any of the matters referred to above are answered in the negative or with
a qualification, the report shall state the reason for such answer along with the
factual position to the best of the auditor’s information.
Illustration: Auditors’ report to the members – Form 35A
Auditors’ report to the members – Form 35A

The companies ordinance, 1984 (section 255(3) and rule 17A)
Auditors’ report to the members
We have audited the annexed balance sheet of

____________________________________ as at _________________ and the
related profit and loss account, cash flow statement and statement of changes in
equity together with the notes forming part thereof, for the year then ended and we
state that we have obtained all the information and explanations which, to the best
of our knowledge and belief, were necessary for the purposes of our audit.
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.
We conduct 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) In our opinion, proper books of accounts have been kept by the company as
required by the Companies Ordinance, 1984;
(b) In our opinion—
(i) the balance sheet and profit and loss account together with the notes
thereon have been drawn up in conformity with the Companies
Ordinance, 1984, and are in agreement with the books of accounts and
are further in accordance with accounting policies consistently applied
except for the changes as stated in note(s) with which we concur;
(ii) the expenditure incurred during the year was for the purpose of the
company’s business; and
(iii) the business conducted, investments made and the expenditure
incurred during the year were in accordance with the objects of the
company;

Audit and Assurance
(c) in our opinion and to the best of our information and according to the
explanations given to us, the balance sheet, profits and loss account, cash
flow statement and 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 ___________________
and of the profit/loss, its cash flows and changes in equity for the year then
ended; and
(d) in our opinion Zakat deductible at source under the Zakat and Ushr
Ordinance, 1980(XVIII of 1980), was deducted by the company and
deposited in the Central Zakat Fund established under section 7 of that
Ordinance.
Date:
Signature: [Name(s) of Auditors]
Place:
7.2 Other audit-related matters
Commission – additional matters (s255.5 CO84)

The Commission may, by general or special order, direct that, in the case of all
companies generally or such class or description of companies as may be
specified in the order, the auditor’s report shall also include a statement of such
additional matters as may be so specified.
Attendance at general meetings (s255.6 CO84)

The auditor of a company shall be entitled to attend any general meeting of the
company, and to receive all notices of, and any communications relating to, any
general meeting which any member of the company is entitled to receive, and to
be heard at any general meeting which he attends on any part of the business
which concerns him as auditor:
Provided that, in the case of a listed company, the auditor or a person authorised
by him in writing shall be present in the general meeting in which the balance-
sheet and profit and loss account and the auditor’s report are to be considered.
Auditor access to books and records (s255.7 CO84)

If any officer of a company refuses or fails, without lawful justification, the onus
whereof shall lie on him, to allow any auditor access to any books and papers in
his custody or power, or to give any such information possessed by him as and
when required, or otherwise hinders, obstructs or delays an auditor in the
performance of his duties or the exercise of his powers or fails to give notice of
any general meeting to the auditor, he shall be liable to a fine which may extend
to five thousand rupees and in the case of a continuing offence to a further fine
which may extend to one hundred rupees for every day after the first during
which the default, refusal or contravention continues.

Reading and inspection of the auditor’s report (s256 CO84)

The auditor’s report shall be read before the company in general meeting and
shall be open to inspection by any member of the company.
This is to ensure there is full transparency of the report to the shareholders (to
whom the report is, after all, addressed) and follows best practice corporate
governance principles.
Audit report signature (s257 CO84)

Only the person appointed as auditor of the company, or where a firm is so
appointed in pursuance of sub-section (2) of section 254 of the Ordinance, only a
partner in the firm practising in Pakistan, shall sign the auditor's report or sign or
authenticate any other documents of the company required by law to be signed
or authenticated by the auditor.
The report of auditors shall be dated and indicate the place where it is signed.
Both of these requirements once again promote transparency of the audit
process to the shareholders. However, the addition of the named auditor (or firm)
and a date also help to emphasise the accountability of the auditor in what is,
after all, a process designed to enhance the confidence of the shareholders in
the subject matter.
7.3 Penalty for non-compliance with the Companies Ordinance 1984

Company default (s259 CO84)
If a company defaults on complying with any of the provisions described above in
sections 6.1 and 6.2 (specifically sections 252-254 and 256-258 of the
Ordinance):
 the company and every officer of the company who is knowingly and wilfully a
party to the default may be punishable with a fine of up to fifty thousand
rupees and in the case of continuing default to a further fine which may
extend to two thousand rupees for every day after the first during which the
default continues.
Auditor default (s260 CO84)

If any auditor’s report is made, or any document of the company is signed or
authenticated otherwise than in compliance with the requirements above
(specifically sections 157, 255 and 257 of the Ordinance), or is otherwise untrue
or fails to bring out material facts about the affairs of the company or matters to
which it purports to relate:
 the auditor concerned and the person, if any, other than the auditor who signs
the report or signs or authenticates the document, and in the case of a firm all
partners of the firm, shall, if the default is wilful, be punishable with a fine
which may extend to one hundred thousand rupees.
If the auditor’s report is made with the intent to profit the auditor or any other
person or to put another person to a disadvantage or loss or for a material
consideration:
 the auditor shall, in addition to the penalty provided above, be punishable with
imprisonment for a term which may extend one year and with a fine of up to
one hundred thousand rupees.

Audit and Assurance
7.4 Comparison of report under form 35A and under ISA 700
Illustration 1 of the appendix
Report under Form 35A Comments/ Differences
to ISA 700 (Revised)
AUDITORS’ REPORT TO THE MEMBERS  INDEPENDENT AUDITOR’S REPORT 1. Report under ISA 700 (Revised) has
appropriate headings according to
To the Shareholders of ABC Company [or nature and objectives of paragraphs of
Other Appropriate Addressee] ‘Independent Auditor’s Report’
Report on the Audit of the Financial
Statements [ The sub-title “Report on the
Audit of the Financial Statements” is
unnecessary in circumstances when the
second sub-title “Report on Other Legal
and Regulatory Requirements” is not
applicable ]
We have audited the annexed balance sheet  Opinion [para 1] Report under ISA 700 (Revised) starts
of …………………. as at …………………. and the from Opinion paragraphs. The first para
related profit and loss account, cash flow We have audited the financial statements of is almost the same as the introductory
statement and statement of changes in ABC Company (the Company), which para of the previous report except there
equity together with the notes forming part comprise the statement of financial position is no reference of ‘other explanatory
thereof, for the year then ended and we state as at December 31, 20X1, and the statement information’ in the revised report.
that we have obtained all the information and of comprehensive income, statement of
explanations which, to the best of our changes in equity and statement of cash 1. Wording of report under ISA 700
knowledge and belief, were necessary for the flows for the year then ended, and notes to (Revised) slightly differs from of Form
purposes of our audit. the financial statements, including a 35A
summary of significant accounting policies.
2. Terms like ‘statement of
comprehensive income’ and ‘statement
of financial position’ used instead of
‘related profit and loss account’ and
‘balance sheet’ in report under ISA 700
(Revised)
3. Fact regarding the obtaining of

necessary information and explanation
is clearly mentioned in the paragraph of
report under Form 35A
It is the responsibility of the company’s  Responsibilities of Management and Those 1. Heading is used in report under ISA
management to establish and maintain a Charged with Governance for the Financial 700 (Revised)
system of internal control, and prepare and Statements
present the above said statements in 2. More elaborated wording in report
conformity with the approved accounting Management is responsible for the under ISA 700 as compared to Form
standards and the requirements of the preparation and fair presentation of the 35A
Companies Ordinance, 1984. financial statements in accordance with
3. Objective of internal control for
IFRSs, and for such internal control as
preparation of financial statements is
management determines is necessary to
clearly mentioned in Report under ISA
enable the preparation of financial
700 (Revised)
statements that are free from material
misstatement, whether due to fraud or error. 4. The matters including the
assessment and disclosure of going
In preparing the financial statements,
concern are also included under ISA
management is responsible for assessing the
700 (Revised)
Company’s ability to continue as a going
concern, disclosing, as applicable, matters 5. Responsibilities of those charged
related to going concern and using the going with governance is also explained under
concern basis of accounting unless ISA 700 (Revised)
management either intends to liquidate the
Company or to cease operations, or has no 6. Compliance with requirements of the
realistic alternative but to do so. Companies Ordinance, 1984 for
Those charged with governance are described in Form 35A
responsible for overseeing the Company’s
financial reporting process.
 on
Our responsibility is to express an opinion Auditor’s Responsibilities for the Audit of the 1. Heading is used in Report under ISA
these statements based on our audit. Financial Statements 700 (Revised)
We conduct our audit in accordance with the Our objectives are to obtain reasonable 2. Reference to applicability of
auditing standards as applicable in Pakistan. assurance about whether the financial standards in Pakistan is mentioned in
These standards required that we plan and statements as a whole are free from material Form 35A
perform the audit to obtain reasonable misstatement, whether due to fraud or error,
assurance about whether the above said 3. Reference to compliance with Ethical
and to issue an auditor’s report that includes
statements are free of any material requirements is mentioned in report
our opinion. Reasonable assurance is a high
misstatement. An audit includes examining under ISA 700 (Revised)
level of assurance, but is not a guarantee that


on a test basis, evidence supporting the an audit conducted in accordance with ISAs 4. Following are clearly mentioned in
amounts and disclosures in the above said will always detect a material misstatement report under ISA 700 (Revised) but are
statements. An audit also includes assessing when it exists. Misstatements can arise from not present in Form 35A of the
the accounting policies and significant fraud or error and are considered material if, Companies Ordinance, 1984.
estimates made by management, as well as, individually or in the aggregate, they could
evaluating the overall presentation of the reasonably be expected to influence the  a. exercise of professional judgement
above said statements. We believe that our economic decisions of users taken on the and maintenance of professional
audit provides a reasonable basis of our basis of these financial statements. skepticism.
opinion and, after due verification, we report
that: Paragraph 41(b) of this ISA explains that  b. Identification and assessment of the
the shaded material below can be located risks of material misstatement of the
in an Appendix to the auditor’s report. financial statements, whether due to
Paragraph 41(c) explains that when law, fraud or error
regulation or national auditing standards
expressly permit, reference can be made  c. consideration internal control
to a website of an appropriate authority relevant to the entity’s preparation and
that contains the description of the fair presentation of the financial
auditor’s responsibilities, rather than statements for designing of audit
including this material in the auditor’s procedures
report, provided that the description on the
 d. clear expression ‘not for the purpose
website addresses, and is not inconsistent
of expressing an opinion on the
with, the description of the auditor’s
effectiveness of the entity’s internal
responsibilities below.
control’
As part of an audit in accordance with

ISAs, we exercise professional judgment e. evaluation of appropriateness of
and maintain professional skepticism accounting polices and reasonableness
throughout the audit. We also: of accounting estimates
 f. conclusion on the appropriateness of

 Identify and assess the risks of management’s use of the going
material misstatement of the concern assumption g. evaluation of
financial statements, whether the overall presentation, structure and
due to fraud or error, design and content of the financial statements,
perform audit procedures including the disclosures
responsive to those risks, and
obtain audit evidence that is h. communication of planned scope
sufficient and appropriate to and timing of the audit, significant
provide a basis for our opinion. audit findings and deficiencies in
The risk of not detecting a internal controls to those charged with
material misstatement resulting governance.
from fraud is higher than for one
resulting from error, as fraud may i. provision of those charged with
involve collusion, forgery, governance with a statement that has
intentional omissions, complied with relevant ethical
misrepresentations, or the requirements regarding independence,
override of internal control. j. communication of key audit matters
to those charged with governance and
in auditor’s report.
 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 Company’s internal control.
 Evaluate the appropriateness of

accounting policies used and the
reasonableness of accounting
estimates and related disclosures
made by management.
 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 Company’s ability to
continue as a going concern. If
we conclude that a material
uncertainty exists, we are

Audit and Assurance

required to draw attention in our
auditor’s report to the related
disclosures in the financial
statements or, if such disclosures
are inadequate, to modify our
opinion. Our conclusions are
based on the audit evidence
obtained up to the date of our
auditor’s report. However, future
events or conditions may cause
the Company to cease to
continue as a going concern.
 Evaluate the overall presentation,

structure and content of the
financial statements, including
the disclosures, and whether the
financial statements represent
the underlying transactions and
events in a manner that achieves
fair presentation.
We communicate with those charged with

governance regarding, among other matters,
the planned scope and timing of the audit
and significant audit findings, including any
significant deficiencies in internal control
that we identify during our audit.
We also provide those charged with

governance with a statement that we have
complied with relevant ethical requirements
regarding independence, and to
communicate with them all relationships and
other matters that may reasonably be
thought to bear on our independence, and
where applicable, related safeguards.
From the matters communicated with

those charged with governance, we
determine those matters that were of
most significance in the audit of the
financial statements of the current period
and are therefore the key audit matters.
We describe these matters in our auditor’s
report unless law or regulation precludes
public disclosure about the matter or
when, in extremely rare circumstances, we
determine that a matter should not be
communicated in our report because the
adverse consequences of doing so would
reasonably be expected to outweigh the
public interest benefits of such
communication.
(a) In our opinion, proper books of accounts 1. Form 35A has following
have been kept by the company as required requirements those are not in Report
by the Companies Ordinance, 1984; under ISA 700 (Revised)
(b) in our opinion: (a) opinion about keeping of proper

books of accounts as required by the
(i) the balance sheet and profit and loss account Companies Ordinance, 1984;
together with the notes thereon have been
drawn up in conformity with the Companies (b) opinion about:
Ordinance, 1984 and are in agreement with
the books of accounts and are further in whether financial statements drawn up
accordance with accounting policies in conformity with the Companies
consistently applied except for the changes Ordinance, 1984, and are agreed with
as stated in note(s) with which we concur; the books of accounts and about
consistency in application of accounting
(ii) the expenditure incurred during the year was policies
for the purpose of the company’s business;
and (i) whether the expenditure incurred
during the year was for the purpose of
(iii) the business conducted, investments made the company’s business
and the expenditure incurred during the year


were in accordance with the objects of the (ii) whether the business conducted,
company; investments made and the expenditure
incurred during the year were in
accordance with the objects of the
company
(c) in our opinion and to the best of our Opinion [para 2] 1. The Auditor’s Report starts with
information and according to the Opinion paragraphs under ISA 700
explanations given to us, the balance sheet, In our opinion, the accompanying financial (Revised)
profit and loss account, cash flow statement statements present fairly, in all material
and statement of changes in equity together respects, (or give a true and fair view of) the 2. Reference to applicability of
with the notes forming part thereof conform financial position of the Company as at standards in Pakistan is mentioned in
with approved accounting standards as December 31, 20X1, and (of) its financial Form 35A
applicable in Pakistan, and, give the performance and its cash flows for the year
then ended in accordance with International 3. Compliance with requirements of the
information required by the Companies Companies Ordinance, 1984 for
Ordinance, 1984, in the manner so required Financial Reporting Standards (IFRSs).
and respectively give a true and fair view of described in Form 35A
the state of the company’s affairs as at
………… and of the profit/loss, its cash flows 4. Wordings are slightly different in
and changes in equity for the year then Form 35A as compared to report under
ended; and ISA 700 (Revised)
Basis for Opinion 1. This paragraph is also the

requirement of ISA 700 (Revised).
We conducted our audit in accordance with
International Standards on Auditing (ISAs). 2. It describes that :
Our responsibilities under those standards
are further described in the Auditor’s a. audit was conducted as per ISAs
Responsibilities for the Audit of the Financial b. the auditors were independent of the
Statements section of our report. We are company in accordance of IESBA Code
independent of the Company in accordance and they have also fulfilled the other
with the International Ethics Standards Board ethical responsibilities.
for Accountants’ Code of Ethics for
Professional Accountants (IESBA Code) c. auditors believe that the audit
together with the ethical requirements that evidence they have obtained is
are relevant to our audit of the financial sufficient and appropriate to provide
statements in [jurisdiction], and we have the basis for their opinion.
fulfilled our other ethical responsibilities in
accordance with these requirements and the
IESBA Code. We believe that the audit
evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Key Audit Matters 1. This paragraph is also the

requirement of ISA 700 (Revised).
Key audit matters are those matters that, in
our professional judgment, were of most 2. It explains the term Key Audit
significance in our audit of the financial Matters (KAMs). It also describe the
statements of the current period. These followings:
matters were addressed in the context of our
audit of the financial statements as a whole, a. The KAMs were addressed in the
and in forming our opinion thereon, and we context of audit conducted and
do not provide a separate opinion on these b. no separate opinion for KAMs will be
matters. provided.
Other Information [or another title if 1. This paragraph is also the

appropriate such as “Information Other than requirement of ISA 700 (Revised).
the Financial Statements and Auditor’s
Report Thereon”] 2. This para relates to the other
information.
(d) in our opinion Zakat deductible at source 1. Form 35A has the requirement of
under the Zakat and Ushr Ordinance, 1980 expressing an opinion about proper
(XVIII of 1980) , was deducted by the deduction at source and deposit of
company and deposited in the Central Zakat Zakat which is not in report under ISA
Fund established under section 7 of that 700 (Revised)
Ordinance.
 Report on Other Legal and Regulatory 1. This is a provision in report under ISA
Requirements 700 (Revised) for opinion or reporting
requirement under applicable legal
[The form and content of this section of framework
the auditor’s report would vary depending

Audit and Assurance

on the nature of the auditor’s other
reporting responsibilities prescribed by
local law, regulation, or national auditing
standards. The matters addressed by other
law, regulation or national auditing
standards (referred to as “other reporting
responsibilities”) shall be addressed within
this section unless the other reporting
responsibilities address the same topics
as those presented under the reporting
responsibilities required by the ISAs as
part of the Report on the Audit of the
Financial Statements section. The
reporting of other reporting responsibilities
that address the same topics as those
required by the ISAs may be combined
(i.e., included in the Report on the Audit of
the Financial Statements section under
the appropriate subheadings) provided
that the wording in the auditor’s report
clearly differentiates the other reporting
responsibilities from the reporting that is
required by the ISAs where such a
difference exists.
 The engagement partner on the audit 1. The name of the engagement

resulting in this independent auditor’s partner is required to be mentioned as
report is [name]. per ISA 700 (Revised).
Date:  [Signature in the name of the audit firm, 1. The name of the engagement
the personal name of the auditor, or both, partner shall be included in the
Signature: [Name(s) of Auditors] auditor’s report for the listed entities.
as appropriate for the particular
Place: jurisdiction]
2. The required order of Form 35A is
[Auditor Address] different from the order of ISA 700
(Revised).
[Date]

8 Modification to audit opinion

Section overview
 When auditor modify the opinion

 Nature of material misstatements
 Nature of an inability to obtain audit evidence
 Determining the type of modification to opinion
 Management-imposed limitation after the auditor has accepted the engagement
 Form and content of the modified report
 Communication with those charged with governance
 Illustrations of auditors’ reports with modifications to the opinion
Previous sections of the chapter discussed the unmodified audit repot under ISA 700
(Revised) and under the Companies Ordinance, 1984. Amongst the all the additional
paragraphs, it simply states that the financial statements show a true and fair view.
There are no ‘ifs’, ‘buts’ or ‘additional information provided.’
The standard audit report provides a positive opinion with reasonable assurance that
the financial statements give a true and fair view of the state of the company’s affairs
as on specific date and of profit/loss, its cash flows and changes in equity for the year
then ended in accordance with the approved accounting standards as applicable in
Pakistan.
In order to form an opinion on the financial statements the ISA 700 (Revised) requires
that the auditor should conclude as to whether reasonable assurance has been
obtained about the financial statements are free from material misstatement or not. If
there is any uncorrected misstatement the auditor should consider and evaluate the
effect of such misstatements on financial statements in accordance with ISAs.
8.1 When Auditor Modify the Opinion

The ISA 705 (Revised) states that the auditor shall modify the opinion in the
auditor’s report when:
 The auditor concludes that, based on the audit evidence obtained, the
financial statements as a whole are not free from material misstatement; or
 The auditor is unable to obtain sufficient appropriate audit evidence to
conclude that the financial statements as a whole are free from material
misstatement.
8.2 Nature of Material Misstatements

ISA defines a misstatement as a difference between the amounts, classification,
presentation, or disclosure of a reported financial statement item and the amount,
classification, presentation, or disclosure that is required for the item to be in
accordance with the applicable financial reporting framework.
A material misstatement of the financial statements may arise in relation to the
following:
 The appropriateness of the selected accounting policies;
 The application of the selected accounting policies; or

Audit and Assurance
 The appropriateness or adequacy of disclosures in the financial statements.

Appropriateness of the Selected Accounting Policies
In relation to the appropriateness of the accounting policies that management
has selected, material misstatements of the financial statements may arise when:
 The selected accounting policies are not consistent with the applicable
financial reporting framework; or
 The financial statements do not correctly describe an accounting policy
relating to a significant item in the statement of financial position, the
statement of comprehensive income, the statement of changes in equity or the
statement of cash flows; or
 The financial statements, including the related notes, do not represent the
underlying transactions and events in a manner that achieves fair
presentation.
Financial reporting frameworks often contain requirements for the accounting for,
and disclosure of, changes in accounting policies. Where the entity has changed
its selection of significant accounting policies, a material misstatement of the
financial statements may arise when the entity has not complied with these
requirements.
Application of the Selected Accounting Policies

In relation to the application of the selected accounting policies, material
misstatements of the financial statements may arise:
 When management has not applied the selected accounting policies
consistently with the financial reporting framework, including when
management has not applied the selected accounting policies consistently
between periods or to similar transactions and events (consistency in
application); or
 Due to the method of application of the selected accounting policies (such as
an unintentional error in application).
Appropriateness or Adequacy of Disclosures in the Financial Statements
In relation to the appropriateness or adequacy of disclosures in the financial
statements, material misstatements of the financial statements may arise when:
 The financial statements do not include all of the disclosures required by the
applicable financial reporting framework;
 The disclosures in the financial statements are not presented in accordance
with the applicable financial reporting framework; or
 The financial statements do not provide the disclosures necessary to achieve
fair presentation.
8.3 Nature of an Inability to Obtain Sufficient Appropriate Audit Evidence

The auditor’s inability to obtain sufficient appropriate audit evidence (also referred
to as a limitation on the scope of the audit) may arise from:
 Circumstances beyond the control of the entity;
 Circumstances relating to the nature or timing of the auditor’s work; or
 Limitations imposed by management.

Circumstances beyond the control of the entity

Examples of circumstances beyond the control of the entity include when:
 The entity’s accounting records have been destroyed.
 The accounting records of a significant component have been seized
indefinitely by governmental authorities.
Circumstances relating to the nature or timing of the auditor’s work
Examples of circumstances relating to the nature or timing of the auditor’s work
include when:
 The entity is required to use the equity method of accounting for an associated
entity, and the auditor is unable to obtain sufficient appropriate audit evidence
about the latter’s financial information to evaluate whether the equity method
has been appropriately applied.
 The timing of the auditor’s appointment is such that the auditor is unable to
observe the counting of the physical inventories.
 The auditor determines that performing substantive procedures alone is not
sufficient, but the entity’s controls are not effective.
Limitations imposed by management

Examples of an inability to obtain sufficient appropriate audit evidence arising
from a limitation on the scope of the audit imposed by management include
when:
 Management prevents the auditor from observing the counting of the physical
inventory.
 Management prevents the auditor from requesting external confirmation of
specific account balances.
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 sufficient appropriate audit
evidence by performing alternative procedures. If this is not possible, the
requirements of modification to audit opinion may apply as appropriate.
8.4 Determining the Type of Modification to the Auditor’s Opinion

ISA 705 (Revised) provides guidance on following modifications to the opinion of
the auditor:
 Qualified opinion
 Adverse opinion
 Disclaimer of opinion
Qualified Opinion
Para 7 of ISA 705 (Revised) states that the auditor shall express a qualified
opinion when:
 The auditor, having obtained sufficient appropriate audit evidence, concludes
that misstatements, individually or in the aggregate, are material, but not
pervasive, to the financial statements; or
 The auditor is unable to obtain sufficient appropriate audit evidence on which
to base the opinion, but the auditor concludes that the possible effects on the

Audit and Assurance
financial statements of undetected misstatements, if any, could be material but

not pervasive.
Adverse opinion
Para 8 of ISA 705 (Revised) states that the auditor shall express an adverse
opinion when the auditor, having obtained sufficient appropriate audit evidence,
concludes that misstatements, individually or in the aggregate, are both material
and pervasive to the financial statements.
Disclaimer of opinion
 Para 9 of ISA 705 (Revised) states that the auditor shall disclaim an opinion
when the auditor is unable to obtain sufficient appropriate audit evidence on
which to base the opinion, and the auditor concludes that the possible effects
on the financial statements of undetected misstatements, if any, could be both
material and pervasive.
 Para 10 of ISA 705 (Revised) states that the auditor shall disclaim an opinion
when, in extremely rare circumstances involving multiple uncertainties, the
auditor concludes that, notwithstanding having obtained sufficient appropriate
audit evidence regarding each of the individual uncertainties, it is not possible
to form an opinion on the financial statements due to the potential interaction
of the uncertainties and their possible cumulative effect on the financial
statements.
When the auditor considers it necessary to express an adverse opinion or
disclaim an opinion on the financial statements as a whole, the auditor’s report
shall not also include an unmodified opinion with respect to the same financial
reporting framework on a single financial statement or one or more specific
elements, accounts or items of a financial statement. To include such an
unmodified opinion in the same report in these circumstances would contradict
the auditor’s adverse opinion or disclaimer of opinion on the financial statements
as a whole.
The following are examples of reporting circumstances that would not contradict
the auditor’s adverse opinion or disclaimer of opinion:
 The expression of an unmodified opinion on financial statements prepared
under a given financial reporting framework and, within the same report, the
expression of an adverse opinion on the same financial statements under a
different financial reporting framework.
 The expression of a disclaimer of opinion regarding the results of operations,
and cash flows, where relevant, and an unmodified opinion regarding the
financial position. In this case, the auditor has not expressed a disclaimer of
opinion on the financial statements as a whole.

Types of modifications
Qualified Adverse Disclaimer
Material & Pervasive Material & Pervasive

misstatement inability to obtain
audit evidence
Material Material
misstatement inability to
obtain audit
evidence
Substantial portion of financial
statements (individual items /
combination of items)
Materiality and pervasive on types of scope limitation
Circumstances Limitations imposed Circumstances relating

beyond the control by management to nature & timing of
of entity auditors’ work
Disclaimer of opinion Disclaimer of opinion
Disclaimer of opinion Withdrawal
Disclosure in other Communication with

matter paragraph those charge with
Governance
Following illustrative table is provided by the ISA 705 (Revised) that shows how
the auditor forms judgment about the nature of the matter giving rises to the
modification, and the pervasiveness of its effects or possible effects on the
financial statements, affects the type of opinion to be expressed:
Auditor’s Judgment about the

Pervasiveness of the Effects or Possible
Effects on the Financial Statements
Nature of Matter Giving Material but Not Material and

Pervasive Pervasive
Rise to the Modification
Financial statements are

Qualified opinion Adverse opinion
materially misstated
Inability to obtain sufficient Disclaimer of

Qualified opinion
appropriate audit evidence opinion

Audit and Assurance
Definition: Pervasive
A term used, in the context of misstatements, to describe the effects on the
financial statements of misstatements or the possible effects on the financial
statements of misstatements, if any, that are undetected due to an inability to
obtain sufficient appropriate audit evidence. Pervasive effects on the financial
statements are those that, in the auditor’s judgment:
 Are not confined to specific elements, accounts or items of the financial

statements;
 If so confined, represent or could represent a substantial proportion of the

financial statements; or
 In relation to disclosures, are fundamental to users’ understanding of the

8.5 Management-Imposed Limitation after the Auditor Has Accepted the

Engagement
If, after accepting the engagement, the auditor becomes aware that management
has imposed a limitation on the scope of the audit that the auditor considers likely
to result in the need to express a qualified opinion or to disclaim an opinion on
the financial statements, the auditor shall request that management remove the
limitation.
If management refuses to remove such limitation, the auditor shall communicate
the matter to those charged with governance, unless all of those charged with
governance are involved in managing the entity, and determine whether it is
possible to perform alternative procedures to obtain sufficient appropriate audit
evidence.
If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor
shall determine the implications as follows:
 If the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be material but not pervasive, the
auditor shall qualify the opinion; or
 If the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive so
that a qualification of the opinion would be inadequate to communicate the
gravity of the situation, the auditor shall:
 Withdraw from the audit, where practicable and possible under
applicable law or regulation
 If withdrawal from the audit before issuing the auditor’s report is not
practicable or possible, disclaim an opinion on the financial
statements.
But the practicality of withdrawing from the audit may depend on the stage of
completion of the engagement at the time that management imposes the scope
limitation. If the auditor has substantially completed the audit, 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 of Opinion paragraph prior
to withdrawing.

Moreover, in certain circumstances withdrawal from the audit may not be possible
if the auditor is required by law or regulation to continue the audit engagement.
This may be the case for an auditor that is appointed to audit the financial
statements of public sector entities. It may also be the case in jurisdictions where
the auditor is appointed to audit the financial statements covering a specific
period, or appointed for a specific period and is prohibited from withdrawing
before the completion of the audit of those financial statements or before the end
of that period, respectively. The auditor may also consider it necessary to include
an Other Matter paragraph in the auditor’s report.
If the auditor withdraws as contemplated by ISA 705, before withdrawing, the
auditor shall communicate to those charged with governance any matters
regarding misstatements identified during the audit that would have given rise to
a modification of the opinion.
Moreover, when the auditor concludes that withdrawal from the audit is
necessary because of a scope limitation, there may be a professional, legal or
regulatory requirement for the auditor to communicate matters relating to the
withdrawal from the engagement to regulators or the entity’s owners.
8.6 Form and content of the modified report

As per the previous version of ISA 700, the auditors were required to follow a
standard format of the Auditor’s Report. Consistency in the Auditor’s Report used
to promote users’ understanding and to identify unusual circumstances but due
the consistency, the auditor’s report was not so informative as it could be. The
Auditor’s Report as per ISA 700 (Revised) has enhanced the communicative
value and the relevance of the Auditor’s Report. Accordingly, the wording of a
modified opinion and the description of the basis for the modification paragraph
are now more informative and understandable.
Auditor’s Opinion
When the auditor modifies the audit opinion, the auditor shall use the heading
“Qualified Opinion,” “Adverse Opinion,” or “Disclaimer of Opinion,” as
appropriate, for the Opinion section.
When the auditor expresses a qualified opinion due to a material misstatement in

the financial statements, the auditor shall state that, in the auditor’s opinion,
except for the effects of the matter(s) described in the Basis for Qualified Opinion
section:
(a) When reporting in accordance with a fair presentation framework, the

accompanying financial statements present fairly, in all material respects (or give
a true and fair view of) […] in accordance with [the applicable financial reporting
framework]; or
(b) When reporting in accordance with a compliance framework, the
accompanying financial statements have been prepared, in all material respects,
in accordance with [the applicable financial reporting framework].
When the modification arises from an inability to obtain sufficient appropriate

audit evidence, the auditor shall use the corresponding phrase “except for the
possible effects of the matter(s) ...” for the modified opinion.

Audit and Assurance
When the auditor expresses an adverse opinion, the auditor shall state that, in
the auditor’s opinion, because of the significance of the matter(s) described in
the Basis for Adverse Opinion section:
(a) When reporting in accordance with a fair presentation framework, the

accompanying financial statements do not present fairly (or give a true and fair
view of) […] in accordance with [the applicable financial reporting framework]; or
(b) When reporting in accordance with a compliance framework, the
accompanying financial statements have not been prepared, in all material
respects, in accordance with [the applicable financial reporting framework].
When the auditor disclaims an opinion due to an inability to obtain sufficient

appropriate audit evidence, the auditor shall:
(a) State that the auditor does not express an opinion on the accompanying
financial statements;
(b) State that, because of the significance of the matter(s) described in the Basis
for Disclaimer of Opinion section, the auditor has not been able to obtain
sufficient appropriate audit evidence to provide a basis for an audit opinion on
the financial statements; and
(c) Amend the statement required by ISA 700 (Revised), which indicates that the
financial statements have been audited, to state that the auditor was engaged to
audit the financial statements.
Providing the reasons for the auditor’s inability to obtain sufficient appropriate
audit evidence within the Basis for Disclaimer of Opinion section of the auditor’s
report provides useful information to users in understanding why the auditor has
disclaimed an opinion on the financial statements and may further guard against
inappropriate reliance on them. However, communication of any key audit
matters other than the matter(s) giving rise to the disclaimer of opinion may
suggest that the financial statements as a whole are more credible in relation to
those matters than would be appropriate in the circumstances, and would be
inconsistent with the disclaimer of opinion on the financial statements as a whole.
Accordingly, this ISA prohibits a Key Audit Matters section from being included in
the auditor’s report when the auditor disclaims an opinion on the financial
statements, unless the auditor is otherwise required by law or regulation to
communicate key audit matters.
Basis for Opinion

When the auditor modifies the opinion on the financial statements, the auditor
shall, in addition to the specific elements required by ISA 700 (Revised),
 amend the heading “Basis for Opinion” to “Basis for Qualified Opinion,” “Basis
for Adverse Opinion,” or “Basis for Disclaimer of Opinion,” as appropriate; and
 within this section, include a description of the matter giving rise to the
modification.
If there is a material misstatement of the financial statements that relates to
specific amounts in the financial statements (including quantitative disclosures),
the auditor shall include in the Basis for Opinion section a description and
quantification of the financial effects of the misstatement, unless impracticable. If
it is not practicable to quantify the financial effects, the auditor shall so state in
the Basis for Opinion section.
An example of the financial effects of material misstatements that the auditor may
describe in the basis for modification paragraph in the auditor’s report is the

quantification of the effects on income tax, income before taxes, net income and
equity if inventory is overstated.
If there is a material misstatement of the financial statements that relates to
qualitative disclosures, the auditor shall include in the Basis for Opinion section
an explanation of how the disclosures are misstated.
If there is a material misstatement of the financial statements that relates to the
non-disclosure of information required to be disclosed, the auditor shall:
 Discuss the non-disclosure with those charged with governance;
 Describe in the basis for modification paragraph the nature of the omitted
information; and
 Unless prohibited by law or regulation, include the omitted disclosures,
provided it is practicable to do so and the auditor has obtained sufficient
appropriate audit evidence about the omitted information.
Disclosing the omitted information within the Basis for Opinion section would not
be practicable if:
 The disclosures have not been prepared by management or the disclosures
are otherwise not readily available to the auditor; or
 In the auditor’s judgment, the disclosures would be unduly voluminous in
relation to the auditor’s report.
If the modification results from an inability to obtain sufficient appropriate audit
evidence, the auditor shall include in the Basis for Opinion section the reasons
for that inability.
When the auditor expresses a qualified or adverse opinion, the auditor shall
amend the statement about whether the audit evidence obtained is sufficient and
appropriate to provide a basis for the auditor’s opinion required by ISA 700
(Revised) to include the word “qualified” or “adverse”, as appropriate.
When the auditor disclaims an opinion on the financial statements, the auditor’s
report shall not include the elements required by ISA 700 (Revised). Those
elements are:
(a) A reference to the section of the auditor’s report where the auditor’s
responsibilities are described; and
(b) A statement about whether the audit evidence obtained is sufficient and
appropriate to provide a basis for the auditor’s opinion.
Even if the auditor has expressed an adverse opinion or disclaimed an opinion on
the financial statements, the auditor shall describe in the Basis for Opinion
section the reasons for any other matters of which the auditor is aware that would
have required a modification to the opinion, and the effects thereof.
An adverse opinion or a disclaimer of opinion relating to a specific matter
described within the Basis of Opinion does not justify the omission of a
description of other identified matters that would have otherwise required a
modification of the auditor’s opinion. In such cases, the disclosure of such other
matters of which the auditor is aware may be relevant to users of the financial
statements.
Description of Auditor’s Responsibilities for the Audit of the Financial Statements
When the Auditor Disclaims an Opinion on the Financial Statements

Audit and Assurance
When the auditor disclaims an opinion on the financial statements due to an

inability to obtain sufficient appropriate audit evidence, the auditor shall amend
the description of the auditor’s responsibilities required by ISA 700 (Revised) to
include only the following:
(a) A statement that the auditor’s responsibility is to conduct an audit of the
entity’s financial statements in accordance with International Standards on
Auditing and to issue an auditor’s report;
(b) A statement that, however, because of the matter(s) described in the Basis
for Disclaimer of Opinion section, the auditor was not able to obtain sufficient
appropriate audit evidence to provide a basis for an audit opinion on the financial
statements; and
(c) The statement about auditor independence and other ethical responsibilities
required by ISA 700 (Revised).
Considerations When the Auditor Disclaims an Opinion on the Financial Statements
Unless required by law or regulation, when the auditor disclaims an opinion on

the financial statements, the auditor’s report shall not include a Key Audit Matters
section or an Other Information section in accordance with related ISA.
8.7 Communication with Those Charged with Governance

Para 30 of ISA 705 (Revised) states that 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.
The ISA 705 (Revised) further explains that 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:
 The auditor to give notice to those charged with governance of the intended
modification(s) and the reasons (or circumstances) for the modification(s);
 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
 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 expected modification(s).
8.8 Illustrations of Auditor’s Reports with Modifications to the Opinion as

provided in the appendix to ISA 705 (Revised)
Illustration 1:
An auditor’s report containing a qualified opinion due to a material misstatement
of the financial statements
Illustration 2:
An auditor’s report containing an adverse opinion due to a material misstatement
of the financial statements
Illustration 3:
An auditor’s report containing a qualified opinion due to the auditor’s inability to
obtain sufficient appropriate audit evidence

Illustration 4:
An auditor’s report containing a disclaimer of opinion due to the auditor’s inability
to obtain sufficient appropriate audit evidence about a single element of the
financial statements
Illustration 5:
An auditor’s report containing a disclaimer of opinion due to the auditor’s inability
to obtain sufficient appropriate audit evidence about multiple elements of the
financial statements
Illustration 1 – Qualified Opinion due to a Material Misstatement of the Financial
Statements
For purposes of this illustrative auditor’s report, the following circumstances are
assumed:
• Audit of a complete set of financial statements of a listed entity using a fair
presentation framework.
• The financial statements are prepared by management of the entity in
accordance with IFRSs.
• The terms of the audit engagement reflect the description of management’s
responsibility for the financial statements in ISA 210
• Inventories are misstated. The misstatement is deemed to be material but not
pervasive to the financial statements
• The relevant ethical requirements that apply to the audit are those of the
jurisdiction.
• Based on the audit evidence obtained, the auditor has concluded that a
material uncertainty does not exist related to events or conditions that may cast
significant doubt on the entity’s ability to continue as a going concern in
accordance with ISA 570 (Revised).
• Key audit matters have been communicated in accordance with ISA 701.
• Those responsible for oversight of the financial statements differ from those
responsible for the preparation of the financial statements.
• In addition to the audit of the financial statements, the auditor has other
reporting responsibilities required under local law.
Qualified Opinion
We have audited the financial statements of ABC Company (the Company),
which comprise the statement of financial position as at December 31,
20X1, and the statement of comprehensive income, statement of changes in
equity and statement of cash flows for the year then ended, and notes to the
financial statements, including a summary of significant accounting policies.
In our opinion, except for the effects of the matter described in the Basis for

Audit and Assurance
Qualified Opinion section of our report, the accompanying financial

statements present fairly, in all material respects, (or give a true and fair view
of) the financial position of the Company as at December 31, 20X1, and (of)
its financial performance and its cash flows for the year then ended in
accordance with International Financial Reporting Standards (IFRSs).
Basis for Qualified Opinion
The Company’s inventories are carried in the statement of financial position
at xxx. Management has not stated the inventories at the lower of cost and
net realizable value but has stated them solely at cost, which constitutes a
departure from IFRSs. The Company’s records indicate that, had
management stated the inventories at the lower of cost and net realizable
value, an amount of xxx would have been required to write the inventories
down to their net realizable value. Accordingly, cost of sales would have been
increased by xxx, and income tax, net income and shareholders’ equity would
have been reduced by xxx, xxx and xxx, respectively.
We conducted our audit in accordance with International Standards on
Auditing (ISAs). 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
accordance with the ethical requirements that are relevant to our audit of the
financial statements in [jurisdiction], and we have fulfilled our other ethical
responsibilities in accordance with these requirements. We believe that the
audit evidence we have obtained is sufficient and appropriate to provide a
basis for our qualified opinion.
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 Qualified Opinion section we have determined the
matters described below to be the key audit matters to be communicated in
our report.
[Description of each key audit matter in accordance with ISA 701]
[Reporting in accordance with ISA 700 (Revised) – see Illustration 1 in ISA
700 (Revised).]
700 (Revised).]

700 (Revised).]
report is [name].
[Auditor Address]
[Date]
Illustration 2 – Adverse Opinion due to a Material Misstatement of the

Consolidated Financial Statements
For purposes of this illustrative auditor’s report, the following circumstances
are assumed:
• Audit of a complete set of consolidated financial statements of a listed
entity using a fair presentation framework.
• The consolidated financial statements are prepared by management of the
entity in accordance with IFRSs
responsibility for the consolidated financial statements in ISA 210.
• The consolidated financial statements are materially misstated due to the
non-consolidation of a subsidiary. The material misstatement is deemed to be
pervasive to the consolidated financial statements. The effects of the
misstatement on the consolidated financial statements have not been
determined because it was not practicable to do so (i.e., an adverse opinion is
appropriate).
jurisdiction.
material uncertainty does not exist related to events or conditions that may
cast significant doubt on the entity’s ability to continue as a going concern in
• ISA 701 applies; however, the auditor has determined that there are no key
audit matters other than the matter described in the Basis for Adverse Opinion
section.
• Those responsible for oversight of the consolidated financial statements
differ from those responsible for the preparation of the consolidated financial
statements.
• In addition to the audit of the consolidated financial statements, the auditor
has other reporting responsibilities required under local law.

Audit and Assurance

Report on the Audit of the Consolidated Financial Statements
Adverse Opinion
We have audited the consolidated financial statements of ABC Company and
its subsidiaries (the Group), which comprise the consolidated statement of
financial position as at December 31, 20X1, and the consolidated statement
of comprehensive income, consolidated statement of changes in equity and
consolidated statement of cash flows for the year then ended, and notes to
the consolidated financial statements, including a summary of significant
accounting policies.
In our opinion, because of the significance of the matter discussed in the
Basis for Adverse Opinion section of our report, the accompanying
consolidated financial statements do not present fairly (or do not give a true
and fair view of) the consolidated financial position of the Group as at
December 31, 20X1, and (of) its consolidated financial performance and its
consolidated cash flows for the year then ended in accordance with
International Financial Reporting Standards (IFRSs).
Basis for Adverse Opinion
As explained in Note X, the Group has not consolidated subsidiary XYZ
Company that the Group acquired during 20X1 because it has not yet been
able to determine the fair values of certain of the subsidiary’s material assets
and liabilities at the acquisition date. This investment is therefore accounted
for on a cost basis. Under IFRSs, the Company should have consolidated this
subsidiary and accounted for the acquisition based on provisional amounts.
Had XYZ Company been consolidated, many elements in the accompanying
consolidated financial statements would have been materially affected. The
effects on the consolidated financial statements of the failure to consolidate
have not been determined.
We conducted our audit in accordance with International Standards on
Auditing (ISAs). Our responsibilities under those standards are further
described in the Auditor’s Responsibilities for the Audit of the Consolidated
Financial Statements section of our report. We are independent of the Group
in accordance with the ethical requirements that are relevant to our audit of
the consolidated financial statements in [jurisdiction], and we have fulfilled
our other ethical responsibilities in accordance with these requirements. We
believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our adverse opinion.
Key Audit Matters
Except for the matter described in the Basis for Adverse Opinion section, we
have determined that there are no other key audit matters to communicate
in our report.


700 (Revised).]
Auditor’s Responsibilities for the Audit of the Consolidated Financial
Statements
700 (Revised).]
700 (Revised).]
report is [name].
[Auditor Address]
[Date]
Illustration 3 – Qualified Opinion due to the Auditor’s Inability to Obtain

Sufficient Audit Evidence Regarding a Foreign Associate
are assumed:
• Audit of a complete set of consolidated financial statements of a listed
entity using a fair presentation framework. The audit is a group audit of an
entity with subsidiaries.
entity in accordance with IFRSs.
• The auditor was unable to obtain sufficient appropriate audit evidence
regarding an investment in a foreign associate. The possible effects of the
inability to obtain sufficient appropriate audit evidence are deemed to be
material but not pervasive to the consolidated financial statements (i.e., a
qualified opinion is appropriate).
jurisdiction.

Audit and Assurance

statements.
Qualified Opinion
We have audited the consolidated financial statements of ABC Company and its
subsidiaries (the Group), which comprise the consolidated statement of financial
position as at December 31, 20X1, and the consolidated statement of
comprehensive income, consolidated statement of changes in equity and
consolidated statement of cash flows for the year then ended, and notes to the
consolidated financial statements, including a summary of significant accounting
policies.
In our opinion, except for the possible effects of the matter described in the Basis
for Qualified Opinion section of our report, the accompanying consolidated
financial statements present fairly, in all material respects, (or give a true and fair
view of) the financial position of the Group as at December 31, 20X1, and (of) its
consolidated financial performance and its consolidated cash flows for the year
then ended in accordance with International Financial Reporting Standards
(IFRSs).
Basis for Qualified Opinion
The Group’s investment in XYZ Company, a foreign associate acquired during the
year and accounted for by the equity method, is carried at xxx on the consolidated
statement of financial position as at December 31, 20X1, and ABC’s share of
XYZ’s net income of xxx is included in ABC’s income for the year then ended. We
were unable to obtain sufficient appropriate audit evidence about the carrying
amount of ABC’s investment in XYZ as at December 31, 20X1 and ABC’s share of
XYZ’s net income for the year because we were denied access to the financial
information, management, and the auditors of XYZ. Consequently, we were
unable to determine whether any adjustments to these amounts were necessary.
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
section of our report. We are independent of the Group in accordance with the
ethical requirements that are relevant to our audit of the consolidated financial
statements in [jurisdiction], and we have fulfilled our other ethical responsibilities
in accordance with these requirements. We believe that the audit evidence we
have obtained is sufficient and appropriate to provide a basis for our qualified

opinion.
Key Audit Matters
most significance in our audit of the consolidated financial statements of the
current period. These matters were addressed in the context of our audit of the
consolidated 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 Qualified Opinion section, we have determined
the matters described below to be the key audit matters to be communicated in
our report.
[Reporting in accordance with ISA 700 (Revised) – see Illustration 2 in ISA 700
(Revised).]
(Revised).]
(Revised).]
report is [name].
[Auditor Address]
[Date]
Illustration 4 – Disclaimer of Opinion due to the Auditor’s Inability to Obtain

Sufficient Appropriate Audit Evidence about a Single Element of the
are assumed:
• Audit of a complete set of consolidated financial statements of an entity
other than a listed entity using a fair presentation framework. The audit is a
group audit of an entity with subsidiaries (i.e., ISA 600 applies).
entity in accordance with IFRSs (a general purpose framework).

Audit and Assurance
• The auditor was unable to obtain sufficient appropriate audit evidence

about a single element of the consolidated financial statements. That is, the
auditor was also unable to obtain audit evidence about the financial
information of a joint venture investment that represents over 90% of the
entity’s net assets. The possible effects of this inability to obtain sufficient
appropriate audit evidence are deemed to be both material and pervasive to
the consolidated financial statements (i.e., a disclaimer of opinion is
appropriate).
jurisdiction.
statements.
• A more limited description of the auditor’s responsibilities section is
required.
Disclaimer of Opinion
We were engaged to audit the consolidated financial statements of ABC Company
and its subsidiaries (the Group), which comprise the consolidated statement of
financial position as at December 31, 20X1, and the consolidated statement of
comprehensive income, consolidated statement of changes in equity and
consolidated statement of cash flows for the year then ended, and notes to the
consolidated financial statements, including a summary of significant accounting
policies.
We do not express an opinion on the accompanying consolidated financial
statements of the Group. Because of the significance of the matter described in
the Basis for Disclaimer of Opinion section of our report, we have not been able to
obtain sufficient appropriate audit evidence to provide a basis for an audit opinion
on these consolidated financial statements.
Basis for Disclaimer of Opinion
The Group’s investment in its joint venture XYZ Company is carried at xxx on the
Group’s consolidated statement of financial position, which represents over 90%
of the Group’s net assets as at December 31, 20X1. We were not allowed access
to the management and the auditors of XYZ Company, including XYZ Company’s
auditors’ audit documentation. As a result, we were unable to determine whether
any adjustments were necessary in respect of the Group’s proportional share of
XYZ Company’s assets that it controls jointly, its proportional share of XYZ
Company’s liabilities for which it is jointly responsible, its proportional share of

XYZ’s income and expenses for the year, and the elements making up the
consolidated statement of changes in equity and the consolidated cash flow
statement.
(Revised).]
Our responsibility is to conduct an audit of the Group’s consolidated financial
statements in accordance with International Standards on Auditing and to issue
an auditor’s report. However, because of the matter described in the Basis for
Disclaimer of Opinion section of our report, we were not able to obtain sufficient
appropriate audit evidence to provide a basis for an audit opinion on these
consolidated financial statements.
We are independent of the Group in accordance with the ethical requirements
that are relevant to our audit of the financial statements in [jurisdiction], and we
have fulfilled our other ethical responsibilities in accordance with these
requirements.
(Revised).]
[Auditor Address]
[Date]
Illustration 5 – Disclaimer of Opinion due to the Auditor’s Inability to Obtain

Sufficient Appropriate Audit Evidence about Multiple Elements of the Financial
Statements
For purposes of this illustrative auditor’s report, the following circumstances are
assumed:
• Audit of a complete set of financial statements of an entity other than a listed
entity using a fair presentation framework. The audit is not a group audit (i.e., ISA
600, does not apply).
accordance with IFRSs (a general purpose framework).
responsibility for the financial statements in ISA 210.
• The auditor was unable to obtain sufficient appropriate audit evidence about
multiple elements of the financial statements, that is, the auditor was also unable
to obtain audit evidence about the entity’s inventories and accounts receivable.

Audit and Assurance
The possible effects of this inability to obtain sufficient appropriate audit evidence
are deemed to be both material and pervasive to the financial statements.
jurisdiction.
• A more limited description of the auditor’s responsibilities section is required.
Disclaimer of Opinion
We were engaged to audit the financial statements of ABC Company (the
Company), which comprise the statement of financial position as at December
31, 20X1, and the statement of comprehensive income, statement of changes in
equity and statement of cash flows for the year then ended, and notes to the
financial statements, including a summary of significant accounting policies.
We do not express an opinion on the accompanying financial statements of the
Company. Because of the significance of the matters described in the Basis for
Disclaimer of Opinion section of our report, we have not been able to obtain
sufficient appropriate audit evidence to provide a basis for an audit opinion on
these financial statements.
Basis for Disclaimer of Opinion
We were not appointed as auditors of the Company until after December 31,
20X1 and thus did not observe the counting of physical inventories at the
beginning and end of the year. We were unable to satisfy ourselves by alternative
means concerning the inventory quantities held at December 31, 20X0 and 20X1,
which are stated in the statements of financial position at xxx and xxx,
respectively. In addition, the introduction of a new computerized accounts
receivable system in September 20X1 resulted in numerous errors in accounts
receivable. As of the date of our report, management was still in the process of
rectifying the system deficiencies and correcting the errors. We were unable to
confirm or verify by alternative means accounts receivable included in the
statement of financial position at a total amount of xxx as at December 31, 20X1.
As a result of these matters, we were unable to determine whether any
adjustments might have been found necessary in respect of recorded or
unrecorded inventories and accounts receivable, and the elements making up the
statement of comprehensive income, statement of changes in equity and
statement of cash flows.

Financial Statements22
(Revised).]
Our responsibility is to conduct an audit of the Company’s financial statements in
accordance with International Standards on Auditing and to issue an auditor’s
report. However, because of the matters described in the Basis for Disclaimer of
Opinion section of our report, we were not able to obtain sufficient appropriate
audit evidence to provide a basis for an audit opinion on these financial
statements.
We are independent of the Company in accordance with the ethical requirements
that are relevant to our audit of the financial statements in [jurisdiction], and we
have fulfilled our other ethical responsibilities in accordance with these
requirements.
(Revised).]
[Auditor Address]
[Date]

Audit and Assurance
9 Emphasis of matter paragraphs and other matter paragraphs: ISA

706 (REVISED)
Section overview
 Emphasis of matter paragraphs

 Other matter paragraphs
 Communication with those charged with governance
ISA 706 (Revised) requires that there may be additional communication in the auditor’s
report when the auditor considers it is necessary to have these additional
communications. ISA 706 (Revised) describes such type of communication as
‘Emphasis of Matter Paragraphs’ and ‘Other Matter Paragraphs.
9.1 Emphasis of Matter Paragraph:

Definition: Emphasis of Matter Paragraph:A paragraph included in the auditor’s
report that refers to a matter appropriately 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.
When the auditor considers it is necessary to draw users’ attention to a matter or

matters presented or disclosed in the financial statements that are of such
importance that they are fundamental to users’ understanding of the financial
statements, the emphasis of matter paragraph shall be included in the auditor’s
report provided:
 The auditor would not be required to modify the opinion in accordance with
ISA 705 (Revised) as a result of the matter; and
 When ISA 701 applies, the matter has not been determined to be a key audit
matter to be communicated in the auditor’s report.
The sufficient appropriate audit evidence should be obtained by the auditor that
the matter is not materially misstated in the financial statements. Such a
paragraph shall refer only to information presented or disclosed in the financial
statements.
When the auditor includes an Emphasis of Matter paragraph in the auditor’s
report, the auditor shall:
 Include the paragraph within a separate section of the auditor’s repost with an
appropriate heading that included the term “Emphasis of Matter” Include in the
paragraph a clear reference to the matter being emphasized and to where
relevant disclosures that fully describe the matter can be found in the financial
statements; and
 Indicate that the auditor’s opinion is not modified in respect of the matter
emphasized.
Circumstances in which an emphasis of matter paragraph may be necessary

Examples of circumstances where the auditor may consider it necessary to
include an Emphasis of Matter paragraph are:

 An uncertainty relating to the future outcome of exceptional litigation or

regulatory action.
 A significant subsequent event that occurs between the date of the financial
statements and the date of auditor’s report.
 Early application (where permitted) of a new accounting standard (for
example, a new International Financial Reporting Standard) that has a
pervasive effect on the financial statements in advance of its effective date.
 A major catastrophe that has had, or continues to have, a significant effect on
the entity’s financial position.
A widespread use of Emphasis of Matter paragraphs diminishes the
effectiveness of the auditor’s communication of such matters.
List of ISAs containing requirements for emphasis of matter paragraphs

The list is not a substitute for considering the requirements and related
application and other explanatory material in ISAs.
 ISA 210, Agreeing the Terms of Audit Engagements – paragraph 19(b)
 ISA 560, Subsequent Events – paragraphs 12(b) and 16
 ISA 800, Special Considerations—Audits of Financial Statements Prepared in
Accordance with Special Purpose Frameworks – paragraph 14
The above mentioned ISAs that contain specific requirements for the auditor to
include the Emphasis of Matter paragraph in the auditor’s report in certain
circumstances, for example:
 When a financial reporting framework prescribed by law or regulation would be
unacceptable but for the fact that it is prescribed by law and regulation.
 To alert users that the financial statement are prepared in accordance with a
special purpose framework.
 When the facts become known to the auditor after the date of the auditor’s
report and the auditor provides a new or amended auditor’s report.
9.2 Other Matter Paragraph:
Definition: Other Matter Paragraph:A paragraph included in the auditor’s report

that refers to a matter other than those 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.
When the auditor considers it is necessary to communicate a matter other than
those presented or disclosed in the financial statements that are relevant to
users’ understanding of the audit, the auditor’s responsibilities or the auditor’s
report the other matter paragraph shall be included in the auditor’s report
provided:
 This is not prohibited by law and regulation; and
 When ISA 701 applies, the matter has not been determined to be a key audit
matter to be communicated in the auditor’s report.

Audit and Assurance
The paragraph will be in the separate section with the heading “Other Matter,” or
other appropriate heading. Circumstances where auditor may include other matter
paragraph in report
The content of an Other Matter paragraph reflects clearly that such other matter
is not required to be presented and disclosed in the financial statements.
Moreover, this paragraph does not include the information that the auditor is
prohibited by law, regulation or professional standards. Further, the paragraph
does not include information that is required to be provided by management.
 Relevant to Users’ Understanding of the Audit: In the rare circumstance
where the auditor is unable to withdraw from an engagement even though the
possible effect of an inability to obtain sufficient appropriate audit evidence
due to a limitation on the scope of the audit imposed by management is
pervasive, the auditor may consider it necessary to include an Other Matter
paragraph in the auditor’s report to explain why it is not possible for the auditor
to withdraw from the engagement.
 Relevant to Users’ Understanding of the Auditor’s Responsibilities or the
Auditor’s Report: Law, regulation or generally accepted practice in a
jurisdiction may require or permit the auditor to elaborate on matters that
provide further explanation of the auditor’s responsibilities in the audit of the
financial statements or of the auditor’s report thereon. Where relevant, one or
more sub-headings may be used that describe the content of the Other Matter
paragraph.
An Other Matter paragraph does not deal with circumstances where the auditor
has other reporting responsibilities that are in addition to the auditor’s
responsibility under the ISAs to report on the financial statements, or where the
auditor has been asked to perform and report on additional specified procedures,
or to express an opinion on specific matters.
 Reporting on more than one set of financial statements: An entity may
prepare one set of financial statements in accordance with a general purpose
framework (for example, the national framework) and another set of financial
statements in accordance with another general purpose framework (for
example, International Financial Reporting Standards), and engage the auditor
to report on both sets of financial statements. If the auditor has determined
that the frameworks are acceptable in the respective circumstances, the
auditor may include an Other Matter paragraph in the auditor’s report, referring
to the fact that another set of financial statements has been prepared by the
same entity in accordance with another general purpose framework and that
the auditor has issued a report on those financial statements.
 Restriction on distribution or use of the auditor’s report: Financial
statements prepared for a specific purpose may be prepared in accordance
with a general purpose framework because the intended users have
determined that such general purpose financial statements meet their financial
information needs. Since the auditor’s report is intended for specific users, the
auditor may consider it necessary in the circumstances to include an Other
Matter paragraph, stating that the auditor’s report is intended solely for the
intended users, and should not be distributed to or used by other parties.

List of ISAs containing requirements for other matter paragraphs

The list is not a substitute for considering the requirements and related
application and other explanatory material in ISAs.
 ISA 560, Subsequent Events – paragraphs 12(b) and 16
 ISA 710, Comparative Information—Corresponding Figures and Comparative
Financial Statements – paragraphs 13–14, 16–17 and 19
ISA 720, The Auditor’s Responsibilities Relating to Other Information in Documents

Containing Audited Financial Statements – paragraph 10(a)9.3 Communication
with those charged with governance
If the auditor expects to include an Emphasis of Matter or an Other Matter
paragraph in the auditor’s report, the auditor shall communicate with those
charged with governance regarding this expectation and the proposed wording of
this paragraph.
Such communication enables those charged with governance to be made aware
of the nature of any specific matters that the auditor intends to highlight in the
auditor’s report, and provides them with an opportunity to obtain further
clarification from the auditor where necessary. Where the inclusion of an Other
Matter paragraph on a particular matter in the auditor’s report recurs on each
successive engagement, the auditor may determine that it is unnecessary to
repeat the communication on each engagement
Illustration of an Auditor’s Report that Includes a Key Audit Matters Section,
an Emphasis of Matter Paragraph, and an Other Matter Paragraph
are assumed:
• Audit of a complete set of financial statements of a listed entity using a fair
presentation framework. The audit is not a group audit (i.e., ISA 6001 does
not apply).
accordance with International Financial Reporting Standards (IFRSs) (a
general purpose framework).
responsibility for the financial statements in ISA 210.
• The auditor has concluded an unmodified (i.e., “clean”) opinion is
appropriate based on the audit evidence obtained.
jurisdiction.
• Between the date of the financial statements and the date of the auditor’s
report, there was a fire in the entity’s production facilities, which was
disclosed by the entity as a subsequent event. In the auditor’s judgment, the
matter is of such importance that it is fundamental to users’ understanding of
the financial statements. The matter did not require significant auditor
attention in the audit of the financial statements in the current period.

Audit and Assurance
• Corresponding figures are presented, and the prior period’s financial
statements were audited by a predecessor auditor. The auditor is not
prohibited by law or regulation from referring to the predecessor auditor’s
report on the corresponding figures and has decided to do so.
Opinion
We have audited the financial statements of ABC Company (the Company), which
comprise the statement of financial position as at December 31, 20X1, and the
statement of comprehensive income, statement of changes in equity and
statement of cash flows for the year then ended, and notes to the financial
statements, including a summary of significant accounting policies.
In our opinion, the accompanying financial statements present fairly, in all
material respects, (or give a true and fair view of) the financial position of the
Company as at December 31, 20X1, and (of) its financial performance and its
cash flows for the year then ended in accordance with International Financial
Reporting Standards (IFRSs).
Basis for Opinion
Auditor’s Responsibilities for the Audit of the Financial Statements section of our
report. We are independent of the Company in accordance with the ethical
requirements that are relevant to our audit of the financial statements in
[jurisdiction], and we have fulfilled our other ethical responsibilities in accordance
with these requirements. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Emphasis of Matter
We draw attention to Note X of the financial statements, which describes the
effects of a fire in the Company’s production facilities. Our opinion is not modified
in respect of this matter.
Key Audit Matters
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.
Other Matter
The financial statements of ABC Company for the year ended December 31,
20X0, were audited by another auditor who expressed an unmodified opinion on
those statements on March 31, 20X1.


(Revised).]
(Revised).]
(Revised).]
report is [name].
[Auditor Address]
[Date]

Audit and Assurance
10 CHAPTER REVIEW
Chapter review
 Describe what is involved in performing the subsequent events review in
accordance with ISA 560
 Explain what a written representation is and discuss the instances in when they
would be used
 Describe what is involved in the final review prior to signing the audit report
 Explain the contents of an unmodified auditor’s report both in terms of the
requirements of ISA 700 and the Companies Ordinance 1984
 Explain modification in auditor’s opinion and report according to circumstances

Head Office-Karachi: Chartered Accountants Avenue, Cli on, Karachi-75600
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Phone: (92-42) 37515910-12, UAN: 111-000-422, e-mail: lahore@icap.org.pk
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UAN: 111-000-422, Fax: (92-51) 9106095, e-mail: islamabad@icap.org.pk
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Phone: (92-41) 8531028, Fax: (92-41) 8503227, e-mail: faisalabad@icap.org.pk
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Phone: (92-61) 6510511-6510611, Fax: (92-61) 6510411, e-mail: multan@icap.org.pk
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Phone: (92-91) 5851648, Fax: (92-91) 5851649, e-mail: peshawar@icap.org.pk
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Phone: (92-55) 3252710, e-mail: gujranwala@icap.org.pk
Sukkur Office: Admin Block Sukkur IBA, Airport Road, Sukkur
Phone: (92-71) 5806109, e-mail: sukkur@icap.org.pk
Que a Office: Civic Business Center, Hali Road, Que a Can
Phone: (92-81) 2865533, e-mail: que a@icap.org.pk
Mirpur AJK Office: Basic Health Unit (BHU) Building Sector D, New City Mirpur, Azad Jammu and Kashmir
e-mail: mirpur@icap.org.pk
2016
AUDIT AND
ASSURANCE
Examinable Supplements

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2016

© Emile Woolf International 1 The Institute of Chartered Accountants of Pakistan

© Emile Woolf International 2 The Institute of Chartered Accountants of Pakistan

1 OBTAINING AND ACCEPTING A NEW AUDIT ENGAGEMENT

1.2 Obtaining audit work

Advertising and publicity – general guidelines

Advertising and publicity - ICAP Code of Ethics

In any communications, announcements and public notices, chartered

© Emile Woolf International 3 The Institute of Chartered Accountants of Pakistan

A Chartered Accountant preparing or authorizing the issue of matter falling within

© Emile Woolf International 4 The Institute of Chartered Accountants of Pakistan

1.3 Accepting an audit appointment: ethical matters

© Emile Woolf International 5 The Institute of Chartered Accountants of Pakistan

Procedures after accepting an appointment

Changes in a Professional Appointment

© Emile Woolf International 6 The Institute of Chartered Accountants of Pakistan

engagement currently held by another chartered accountant in practice, shall

© Emile Woolf International 7 The Institute of Chartered Accountants of Pakistan

210.14 A chartered accountant in practice will generally need to obtain the

© Emile Woolf International 8 The Institute of Chartered Accountants of Pakistan

2 AGREEING THE TERMS OF AUDIT ENGAGEMENTS (ISA 210)

Response if preconditions are not present

© Emile Woolf International 9 The Institute of Chartered Accountants of Pakistan

2.2 Engagement letters

The content of the engagement letter

© Emile Woolf International 10 The Institute of Chartered Accountants of Pakistan

© Emile Woolf International 11 The Institute of Chartered Accountants of Pakistan

© Emile Woolf International 12 The Institute of Chartered Accountants of Pakistan

© Emile Woolf International 13 The Institute of Chartered Accountants of Pakistan

References to the ICAP Code of Ethics

© Emile Woolf International 14 The Institute of Chartered Accountants of Pakistan

 The application of professional ethics

1.1 The application of professional ethics

1.2 The fundamental principles [s100.5]

© Emile Woolf International 15 The Institute of Chartered Accountants of Pakistan

1.5 Professional Competence and Due Care

© Emile Woolf International 16 The Institute of Chartered Accountants of Pakistan

chartered accountant to develop and maintain the capabilities to perform

© Emile Woolf International 17 The Institute of Chartered Accountants of Pakistan

(ii) Disclosure to the appropriate public authorities of infringements of the

1.7 Professional Behavior

© Emile Woolf International 18 The Institute of Chartered Accountants of Pakistan

2 CONCEPTUAL FRAMEWORK APPROACH APPLICABLE TO ALL

© Emile Woolf International 19 The Institute of Chartered Accountants of Pakistan

in practice) or the employing organization (in the case of a chartered accountant

2.2 Threats and Safeguards

© Emile Woolf International 20 The Institute of Chartered Accountants of Pakistan

2.3 Safeguards Created by the Profession, Legislation or Regulation

2.4 Conflicts of Interest

2.5 Ethical Conflict Resolution

© Emile Woolf International 21 The Institute of Chartered Accountants of Pakistan

2.6 Communicating with Those Charged with Governance

© Emile Woolf International 22 The Institute of Chartered Accountants of Pakistan

3 CONCEPTUAL FRAMEWORK APPROACH APPLICABLE TO

3.2 Threats and Safeguards

© Emile Woolf International 23 The Institute of Chartered Accountants of Pakistan

• A chartered accountant discovering a significant error when evaluating the

© Emile Woolf International 24 The Institute of Chartered Accountants of Pakistan

• A chartered accountant feeling pressured to agree with the judgment of a

© Emile Woolf International 25 The Institute of Chartered Accountants of Pakistan

© Emile Woolf International 26 The Institute of Chartered Accountants of Pakistan

• Having a chartered accountant who was not a member of the assurance

© Emile Woolf International 27 The Institute of Chartered Accountants of Pakistan