ISAs 700, 705 & 706

AUDIT REPORTS

The Institute of Chartered Accountants of Pakistan

Objective of the session

Audit objective an overview

Audit reports - specified formats

Audit reports under ISAs key requirements

Modified opinions

Emphasis of matter / other matter

Practical examples

The Institute of Chartered Accountants of Pakistan

Audit objective an overview

Objective of audit To express an opinion whether the financial

statements are prepared, in all material respects, in accordance with
the applicable financial reporting framework

Material respects Reasonable assurance that financial statements

are free from material misstatements

Reasonable assurance High level of assurance but not an absolute

assurance

Material misstatements Difference in amount, classification and

presentation

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Audit Reports - specified formats

Entities Audit report

p

Companies incorporated under Companies Ordinance, 1984 From 35 A

Banking Companies From 35 B

Insurance Companies Insurance Rules

Mutual Funds ISA 700

Retirement Funds ISA 700

NGOs ATR - 17 issued by ICAP

Others ISA - 700

The Institute of Chartered Accountants of Pakistan

ISAs on Audit Reports

ISA 700, 705, 706 ISA 800, 805, 810

General purpose Special purpose

framework framework

Fair presentation Compliance

framework framework

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Types of Audit Reports in ISA 700

Audit Report in accordance with ISAs

Audit Report prescribed by local law

Audit Report in accordance with ISAs and local law

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Audit Report in accordance with ISAs
Minimum contents

Title and addressee

Introducing paragraph
Management responsibilities
Auditors
Auditors responsibilities
Opinion
True and fair view
Present fairly in all material respects
Prepared in all material respects
Signature and Addresses
Date of Audit Report
Other
Oth reporting
ti responsibilities
ibiliti

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Audit Report prescribed by local law

If the auditor is required by law to use a specific format (35 A),

the auditor shall refer to ISAs only if the Audit Report includes
all the minimum contents (specifically managements and
auditors responsibilities)

From 35 C (Audit Report on consolidated financial statements)

refers to responsibilities as follows:

These financial statements are the responsibility of the

management. Our responsibility is to express an opinion on
these financial statements based on our audit. Our audit was
conducted in accordance with ISAs and accordingly included
such test of accounting records and such other auditing
procedures as we considered necessary in the circumstances

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Audit Report in accordance with ISAs and local law

One opinion with reference to both

If conflict in the standards, then refer to the primary standards

Two opinions may also be issued

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Modified Audit Reports

When Matters that effect the audit opinion

Circumstances The auditor concludes that financial statements

are not free from material misstatements
The
Th auditor
dit iis unable
bl tto obtain
bt i sufficient
ffi i t
appropriate audit evidence

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 Types of modifications

Qualified Adverse Disclaimer

Material & Pervasive Material & Pervasive

misstatement inability to obtain
Material Material audit evidence
misstatement inability to
obtain
bt i audit
dit
evidence

Substantial portion of financial

statements (individual items /
combination of items

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Material vs. Pervasive

Rupees

Revenue 1,000,000,000
Profit 70,000,000
Equity 30,000,000
Planning
g materiality
y 10,000,000
, ,

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Material vs. pervasive - Examples

Qualified

Auditor was unable to observe physical inventory count. Inventory

valued Rs.
Rs 100 million,
million whereas total assets valued Rs.1
Rs 1 billion

Provision for doubtful debts has not been made in respect of a

debtor applied for liquidation during the year. Provision amounted to
Rs. 20 million whereas, profit for the year was Rs. 200 million

Adverse

Provision for doubtful debts has not been made in respect of a

debtor applied for liquidation during the year. Provision amounted to
Rs. 20 million whereas, profit for the year was Rs. 35 million

Disclaimer

Auditor was unable to observe physical inventory count. Inventory

valued Rs.
Rs 100 million,
million whereas total assets valued Rs.
Rs 300 million

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Modified opinions Key differences in Audit Report

Qualified Adverse Disclaimer

Opening paragraph Audited Audited Engaged

Obtained audit Obtained audit Unable to obtain

Auditor responsibility
evidence to provide evidence to provide evidence to form an
paragraph
qualified opinion adverse opinion opinion

Description & amount

Description &
of qualification Reason for scope
Basis of opinion paragraph amount of
(except if limitation
qualification
impracticable)

Do not give a true Do not issue an

Opinion paragraph Except for
and fair view opinion

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Types of scope limitations

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 TCWG

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Multiple uncertainties disclaimer of opinion

The company has received a notice from tax authorities demanding

additional tax of Rs. 300 million. However,, no provision
p is made for
the demand as the Company believes that the case will be decided in
its favor
A legal case has been decided against the company. The company
has challenged the decision in the High Court where the case is
pending. The financial impact works out to Rs. 200 million. However,
in view of a legal advice, no provision has been made
Trade debts include Rs. 175 million which are outstanding for more
than 3 years. The management has a provided a specific
representation that this amount is recoverable and accordingly, no
provision is required for doubtful debts

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Other considerations for modified opinions

Communication with TCWG

If adverse / disclaimer is issued on full set of financial statements:

Unmodified report is inappropriate for single financial statements

or specific element of financial statements

Exception of different framework

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Implications of modifications on Form 35C
We have audited purpose of our audit.

It is the responsibility of the Companys management .. based on our audit.

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

in Pakistan., we report that:

a) in our opinion, proper books of account 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
Ordinance1984, and are in agreement with the books of account and are
further in accordance with accounting policies consistently applied;

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Implications of modifications on Form 35C
ii) the expenditure incurred during the year was for the purpose of
the Companys business; and

iii) th
the b
business
i conducted,
d t d iinvestments
t t made
d andd th
the expenditure
dit
incurred during the year were in accordance with the objects of the
Company;

c) in our opinion and to the best of our information and according to the
explanations given to us, the balance sheet, profit 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 Companys affairs as at 30 June 2013 and of the profit, its
cash flows and changes in equity for the year then ended;

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Emphasis of matter / other matter
Emphasis
p of matter
- Matters presented / disclosed in
financial statements
- Fundamental to users
understanding
- Restricted to disclosure in the
financial statements but not its
substitute
- Communication with TCWG
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Other matter
- Matters not presented /
disclosed in financial
statements
- Relevant for users
understanding
- Not a substitute for other
requirement paragraph as per
ISA 700
- Communication with TCWG
Example for emphasis / other matter

Emphasis of matter Other matter

- Going concern uncertainty - Prior year financial statements not
audited

- Uncertain outcome of material - Prior year financial statements audited

liti ti
litigation b another
by th A Auditor
dit

- Early adoption of accounting standard - Auditor not able to withdraw from the
that has a ppervasive effect on the engagement
g g and issue a disclaimer of
financial statements opinion

- Other information as per ISA 720

- Restriction on distribution of financial

statements

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Exposure Draft key changes

Opinion

Key audit matters

Going concern

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 PRACTICAL EXAMPLES

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Example 1

Following information is available in the financial statements of an

entity:

Rupees
Revenue 300,000,000
E
Expenses (260 000 000)
(260,000,000)
Profit 40,000,000
Planning materiality 35,000,000

Revenue includes a gain on revaluation of investments of 42

million which the auditor has concluded not in accordance with
the requirements of IAS 39. However, the management has
refused to reverse the said gain in the financial statements.

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Example 2

scope limitations

The management has refused to provide the

representation letter

The management has refused to take the

responsibility of the preparation of the financial
statements in the representation letter

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Example 3

Company A has advanced a loan to its Subsidiary Company B.

However shareholders
However, shareholders approval was not obtained in this respect as
required by the Companies Ordinance, 1984.

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Example 4

During the year ended 30 June 2013, a Company has incurred a loss
of Rs.200
Rs 200 million.
million The accumulated profit as at 30 June 2012
amounted to Rs.350 million.

The Company has declared a dividend of Rs.120 million

The Company has declared a dividend of Rs.170 million

The Institute of Chartered Accountants of Pakistan

Example 5

Deferred tax asset of an entity amounted to Rs.300 million as of the

balance sheet date. The said asset is recognized based on financial
projections for the next 5 years which show the realisibility of the tax
asset in these years. However, the projections are prepared by taking
into account the following assumptions:

Increase in revenue by 20% as a result of a new product. The sale

of product is subject to government approval

Major increase in interest income on term deposits due to

expected increase in discount rate

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Example 6

Entity A has a wholly owned subsidiary Entity B. In accordance with

the requirements of Companies Ordinance
Ordinance, 1984
1984, every holding
company should prepare consolidated financial statements in addition
to standalone financial statements. However, Entity A has not
prepared consolidated financial statements.

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Example 7

Date of Audit Report

Audit Committee Meeting g was held on 15 August

g and financial
statements were signed by the Chief Executive and Chief
Financial Officer for the final approval of the Board of Directors
(meeting to be held on 20 August).
August) Auditors
Auditors Report signed on 15
August

Financial statements were approved by the Board on 20 August.

Relevant approvals and representation letter dated 25 August sent
to the Auditor on the same date. Auditors Report signed on 20
August

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Example 7 (Cont)

Financial statements were approved by the Board on 20 August

August.
Relevant approvals and representation letter dated 20 August sent
to the Auditor on 10 October. Auditors Report signed on 20
August

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Example 8

Consistent accounting policies

A Company has changed the accounting policy in respect of

valuation of fixed assets from cost to revalued amount

A Company has adopted IFRS - 7, which has resulted only on

certain disclosures

A Company has adopted IFRS 7, however, no additional

disclosures are required

The Institute of Chartered Accountants of Pakistan