Session 3

Components of Working paper

Working Paper
Safe custody and retention of documentation
Judgement may have to be used in deciding the duration of holding working papers, and
further consideration should be given to the matter before their destruction. All firms
should have a document retention policy and auditing standards require auditors to keep
all audit working papers for a reasonable period of time from the end of the accounting
period to which they relate.
According to the Companies Act 1994, section 181(5), “The books of accounts of every
company relating to a period of not less than twelve years immediately preceding the
current year together with vouchers relevant to any entry in such books of account shall
be preserved in good order”.
Given that assurance work must be kept confidential (as we shall see in Chapter 16), it is
important that firms have good security procedures over their retained working papers.
Paper documents must be kept securely, in locked premises. Electronic documents should
be protected by electronic controls.
Ownership of and right of access to
documentation
Working papers are the property of the assurance providers. They are not a substitute for, nor
part of, the entity's accounting records. However, the report becomes the property of the client
once it has been issued.
Assurance providers must follow ethical guidance on the confidentiality of working papers.
As working papers belong to the firm, the assurance providers are not required to show them
to the client.
However, the firm may show working papers to the client at their discretion, so long as the
assurance process is not prejudiced. Information should not be made available to third parties
without the permission of the client. An example of when working papers might be shared
with a third party is when a new firm is taking over an audit from the existing auditors.
Going Concern

The going concern concept is fundamental to the way in which

financial statements are prepared and has been so for a very long
time indeed.
The auditor’s responsibility is to obtain sufficient appropriate audit
evidence about the appropriateness of management’s use of the
going concern assumption. The risks of the client not being a going
concern will need to be considered and planned for at the
planning stage, and, at the completion stage, certain specific tasks
will have to be carried out.
Going Concern

These will include:

Consideration of all areas of the statement of financial position to see whether there
are indications that the going concern concept may be inappropriate such as:
– Significant receivables unable to pay
– Lines of inventory and WIP where net realisable value may be less than cost
– Material non-current assets which are no longer usable
– Deferred development expenditure which is irrecoverable against relevant revenues
– Investments (in subsidiaries or other companies) which have lost value.
Review of the company’s borrowing facilities and other sources of finance to ensure
that they will be adequate for the forthcoming year and that conditions and
covenants imposed by lenders will not be breached.
Review of minutes and other information such as correspondence with legal advisers,
for indications of potential going concern problems.
 A list of possible symptoms of going
concern problems
 Financial indications
– Net liability or net current liability position
– Fixed-term borrowings approaching maturity without realistic prospects of
renewal or repayment, or
excessive reliance on short-term borrowings to finance long-term assets
– Indications of withdrawal of financial support by creditors
 Operating indications
– Management intentions to liquidate the entity or to cease operations
– Loss of key management without replacement
– Loss of a major market, key customer(s), franchise, license, or principal supplier(s)
 Other indications
– Non-compliance with capital or other statutory requirements
– Pending legal proceedings against the entity that may, if successful, result in
claims that the entity is
unlikely to be able to satisfy
Events after the Balance Sheet Date
If the audit report says that the financial statements give a true and fair view,
but the company goes under shortly after the financial statements are
published, someone is likely to question whether the auditors knew what they
were talking about.
If it then emerges that there were significant receivables who failed to pay up,
or material amounts of inventory which turned out not to be realisable, you
might think that such questions were justified.

ISA 560 recognises the two different types of subsequent event according to
IAS 10
Those that provide evidence of conditions that existed at the date of the
financial statements (adjusting
events); and
Those that provide evidence of conditions that arose after the date of the
financial statements (non-adjusting
events)
Events after the Balance Sheet Date
 Examples of adjusting events (that should be reflected in the financial
statements):
Resolution of a court case
Bankruptcy of a major customer
Evidence of the NRV of inventories
Discovery of fraud or errors

Examples of non-adjusting events (that are not reflected in the financial

statements but should be disclosed in the
notes if they are material):
Destruction of a major asset by flood or fire
Major share transactions
Announcement of a plan to close part of a business
Dividends proposed/declared after the end of the reporting period
Events after the Balance Sheet Date
Related Party Transactions
Audit Report
BSA 700-799
Audit Report

Audit report is the way of expressing auditor’s opinion.

 Components of an Audit Report
1. The title
2. The addressee
3. The opinion
4. The basis for opinion
5. Key audit matters
6. Other information
7. Responsibilities of management for the financial report
8. Auditor’s responsibilities for the audit of the financial report
9. Other reporting requirements
10. Name of the engagement partner
11. Signature of the auditor
12. Date and Address
13. DVC
Components of an Audit Report
1. The title: This clearly indicates that the auditor’s report is the report of an independent auditor.
For example, ‘Independent auditor’s report’ distinguishes this report from reports issued by
others.
2. The addressee: The auditor’s report is normally addressed to those for whom the report is
prepared, often either to the shareholders or to those charged with governance.
3. The opinion: This should include the auditor’s opinion, and be headed ‘Opinion’. It should have:
Components of an Audit Report
a) an introductory paragraph that contains the words ‘We have audited the financial report of . . . which comprises . . . ’. The
auditor clearly identifies the components that comprise the financial report and will be covered by the audit. These are: the
statement of financial position, the statement of comprehensive income, the statement of changes in equity, the
statement of cash flows and the accompanying notes to the financial statements.
b) ‘In our opinion . . . ’ An auditor’s opinion is an expression of informed judgment. Auditors are experts in the fields of
accounting and auditing and therefore their opinions carry substantial weight. Nevertheless, they cannot ensure or warrant
the accuracy of the financial report.
4. The basis for opinion: This provides important context about the auditor’s opinion and should directly follow the opinion
section, with the heading ‘Basis for opinion’. This section should:
 a) state that the audit was conducted in accordance with International Standards on Auditing, which conveys to the users
that the audit has been conducted in accordance with established standards.
 b) include a statement that the auditor is independent of the entity in accordance with the relevant ethical requirements
relating to the audit, including being independent of the company, and has fulfilled their other responsibilities in accordance
with these requirements.
 c) state whether the auditor believes that the audit evidence they have obtained is sufficient and appropriate to provide a
basis for their opinion.
Components of an Audit Report
5. Key audit matters: These are matters that, in the auditor’s professional judgment, are of most
significance in their audit of the financial report. They are in response to the desire to have
more information about the auditor’s process, in order to reduce the information gap. These
matters are addressed in the context of the audit of the financial report as a whole, but the
auditor does not provide a separate opinion on these matters (discussed in more detail
immediately below).
6. Other information: Where applicable, the auditor should report their responsibility for other
information in accordance with ISA 720. This section covers the information included in the
annual report other than the financial report and the auditor’s report and outlines that the
auditor has ‘not audited the other information and do[es] not express an opinion or any form of
assurance conclusion thereon’.
7. Responsibilities of management for the financial report: A section outlining the responsibility of
those charged with governance or management for the financial report is required. Words
such as ‘The directors of . . . are responsible for the preparation of the financial report that gives
a true and fair view and Management and the governing body are responsible for the
adequacy and accuracy of the financial report.
Components of an Audit Report
8. Auditor’s responsibilities for the audit of the financial report: A section outlining the
responsibility of the auditor is required. Words such as ‘Our responsibility is to express an
opinion on the financial report based on our audit’ explain the role of the auditor and, in
conjunction with the preceding reference, distinguish between the responsibilities of the
governing body and the auditor. The auditor is conducting the audit to add credibility to
the representations in the financial report prepared by the governing body, by expressing
the auditor’s independent opinion on the financial report to the report addressee.
9. Other reporting requirements: There are some instances in which the auditor may be
required to report on other matters that are additional to their responsibility to express an
opinion on the financial report. For example, under certain legislation the auditor may
need to report on whether certain registers are properly maintained. These other
reporting requirements are included in a separate section of the auditor’s report. By
including these specific reporting requirements in a separate section, the comparability
of the auditor’s report as it relates to the financial report is enhanced.
 Components of an Audit Report
10. Name and signature of the engagement partner: Naming the engagement partner
in the auditor’s report is intended to provide further transparency to the users of the
auditor’s report. As outlined earlier, auditors are known to specialise in industries and
there are limitations on audit partner tenure. Disclosure of the audit partner’s name
helps the user make these assessments.
11. Name and location of the audit firm: In Australia, the signing partner signs their own
name as well as the name of the firm. The report also shows their location, usually the
city in which the auditor’s office is located. This advises the report user of the person
and firm responsible for the report, and their location if contact is necessary.
12. Date of the auditor’s report: The auditor’s report is dated as of the date the auditor
signs that report. This informs the reader that the auditor considered the effect on the
financial report of events and transactions that occurred up until that date and
about which the auditor was aware.
13. DVC:
 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.
Objectives

The objectives of the auditor are to:

+ determine key audit matters and,

+ having formed an opinion on the financial statements, communicate those

matters by describing them in the auditor’s report.
Communicating key audit matters in the
auditor’s report is not:

 A substitute for disclosures in the financial statements

 A substitute for the auditor expressing a modified opinion
 A substitute for reporting in accordance with ISA 570 (Revised) Going
concern
 A separate opinion on individual matters.
 Determining Key Audit Matters

+ 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

+ The effect on the audit of significant events or transactions that occurred during the
period.


 Communicating Key Audit Matters

Using an appropriate subheading under the heading “Key Audit Matters,”

The introductory language:
Key audit matters are those matters that, in the auditor’s professional judgment, were of
most significance in the audit of the financial statements for 20X0; 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.
Descriptions of Individual Key Audit Matters

shall include a reference to the related disclosure(s), if any and shall address:
 Why the matter was considered to be one of most significance in the audit
and therefore determined to be a key audit matter; and

 How the matter was addressed in the audit.

Unmodified opinion

The opinion expressed by the auditor when the auditor concludes that the
financial statements are prepared, in all material respects, in accordance
with the applicable financial reporting framework.
Standard Unmodified/ Unqualified
Opining
 Clean report
 No material misstatement is found
 Sufficient appropriate audit evidence is collected
 No additional matters to report
 Evaluation of Financial Reporting Framework
 The financial statements adequately disclose the significant accounting policies
selected and applied;
 The accounting policies selected and applied are consistent with the applicable
financial reporting framework and are appropriate;
 The accounting estimates made by management are reasonable;
 The information presented in the financial statements is relevant, reliable,
comparable, and understandable;
 The financial statements provide adequate disclosures to enable the intended users
to understand the effect of material transactions and events on the information
conveyed in the financial statements;
 INDEPENDENT AUDITOR'S REPORT
To the Shareholders of ABC Ltd.
Report on the Financial Statements

Opinion
We have audited the accompanying financial statements of the ABC Company, which comprise the statement of financial position as at 31 December, 20X1, and
the statement of comprehensive income, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant
accounting policies and other explanatory information.

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 ABC
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.

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. th International Stan

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.]
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial
Reporting Standards, and for such internal control as management determines 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.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated 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….

Report on Other Legal and Regulatory Requirements

In accordance with the Companies Act 1994 and the Securities and Exchange Rules 1987, we also report the following:
i) 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 and made due verification thereof;
ii) in our opinion, proper books of account as required by law have been kept by the company so far as it appeared from our examination of these
books;
iii) the statement of financial position and statement of profit or loss and other comprehensive income dealt with by the report are in agreement
with the books of account and returns; and
iv) the expenditure incurred was for the purposes of the Company’s business.

Auditor’s Sign
[Date of auditor's report]
[Auditor's address]
Modification Through Additional
Paragraphs
 matters already presented/disclosed in the financial statements that are
fundamental to understand the financial statements. These are presented
in "emphasis of matter" paragraphs;

 other matters relevant to users’ understanding of the audit, the auditor's

responsibilities or the audit report. These are presented in "other matter"
paragraphs

Opinion is still unqualified

 Emphasis of Matter(s) paragraph-
Examples
 Uncertainty regarding future outcome of exceptional litigation or regulatory action.

 New accounting standard that has a pervasive effect on the financial statements in
advance of its effective date.

 A major catastrophe having significant effect on the entity’s financial position.

Emphasis of Matter
We draw attention to Note X to the financial statements. The
Company is the defendant in a lawsuit alleging infringement of
certain patent rights and claiming royalties and punitive damages.
The Company has filed a counter action, and preliminary hearings
and discovery proceedings on both actions are in progress. The
ultimate outcome of the matter cannot presently be determined,
and no provision for any liability that may result has been made in
the financial statements. Our opinion is not qualified in respect of
this matter.
List of ISAs Requiring Emphasis of Matter
Para
 ISA 210, “Agreeing the Terms of Audit Engagements” – paragraph 19(b)
 ISA 560, “Subsequent Events” – paragraphs 12(b) and 16
 ISA 570, “Going Concern” – paragraph 19
 ISA 800, “Special Considerations—Audits of Financial Statements Prepared
in accordance with Special Purpose Frameworks” – paragraph 14
Other Matter Paragraph

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 scope limitation 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.
Other Matter Paragraph- examples

 non-compliance but no remedial actions

 restriction on new or amended audit report after subsequent events
 restriction on obtaining sufficient appropriate audit evidence.
 report on two different sets of F/S prepared under framework.
 Where financial statements are prepared for specific purpose / users
List of ISAs Requiring Other Matter
Paragraphs
 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)
Modified Opinion

 the financial statements as a whole are not free from material

misstatement

 The auditor is unable to obtain sufficient appropriate audit evidence to

conclude that the financial statements as a whole are free from material
misstatement.
Meaning of Pervasive
 A term used, in the context of misstatements, to describe the effects on the
financial statements of misstatements
 Pervasive effects on the financial statements are those that, in the auditor’s
judgment:
(i) Are not confined to specific elements, accounts or items of the financial statements;
(ii) If so confined, represent or could represent a substantial proportion of the financial
statements; or
(iii) In relation to disclosures, are fundamental to users’ understanding of the financial
statements.
Modified Opinion
Qualified Opinion
Basis for Qualified Opinion

As discussed in Note X to the financial statements, no depreciation has been provided in the
financial statements which practice, in our opinion, is not in accordance with International
Financial Reporting Standards. The provision for the year ended 31 December, 20X9, should be
$xxx based on the straight-line method of depreciation using annual rates of 5% for the
building and 20% for the equipment. Accordingly, the non-current assets should be reduced by
accumulated depreciation of $xxx and the loss for the year and accumulated deficit should be
increased by $xxx and $xxx, respectively.

Opinion

In our opinion, except for the effect on the financial statements of the matter referred to in the
Basis for Qualified Opinion paragraph, the financial statements present fairly in all material
respects (or give a true and fair view of) the financial position ...................(remainder of wording
as per an unmodified report).
Qualified Opinion
In our opinion, except for the effects of the matter described in the Basis for 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 ABC Company (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).

We have audited the financial statements of 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.

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 within the meaning of [indicate relevant ethical
requirements or applicable law or regulation] and have fulfilled our other responsibilities under those
relevant ethical requirements. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our qualified opinion.
 Qualified Opinion (Scope Limitation)
Basis for Qualified Opinion
We did not observe the counting of the physical inventories as at 31 December 20X9,
since that date was prior to our appointment as auditor to the company. Owing to the
nature of the company's records, we were unable to satisfy ourselves as to inventory
quantities by other audit procedures.
Qualified Opinion
In our opinion, except for the possible effects of the matter described in the Basis for
Qualified Opinion paragraph, the financial statements present fairly (or give a true and fair
view of) the financial position............
 Adverse Opinion

Basis for Adverse Opinion

As explained in Note X, the company has recognized a number of assets acquired under
a lease and the associated liabilities at a fair value of $xxx, accounting for the leases as a
finance leases. The fair value of these assets represent 80% of total assets. Under
International Financial Reporting Standards the leases should have been classified as
operating leases. The companies records indicate that had the leases been correctly
accounted for as operating leases....[explanation of the various effects on the amounts
presented in the financial statements].
Adverse Opinion
In our opinion, because of the significance of the matter discussed in the Basis for Adverse
Opinion paragraph, the financial statements do not present fairly (or give a true and fair
view of) the financial position.......
Adverse Opinion
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 ABC Company and its subsidiaries (the Group) as at December 31, 20X1, and
(of) their consolidated financial performance and their consolidated cash flows for the year then ended in accordance
with International Financial Reporting Standards (IFRSs).
We have audited the consolidated financial statements of 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.
Basis for Adverse Opinion
As explained in Note X, the Group has not consolidated subsidiary XYZ Company it 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 within the meaning of
[indicate relevant ethical requirements or applicable law or regulation] and have fulfilled our other
responsibilities under those ethical requirements. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our adverse opinion.
Disclaimer of Opinion
Basis for Disclaimer of Opinion

A new computerized payroll system was introduced in October 20X1, that has caused significant
errors in the payroll records, amounts paid to employees, and taxation paid in the year. At the date of
our audit report, management was still in the process of identifying and quantifying the volume and
amount of errors, and rectifying and correcting the system and errors that have arisen. We were
unable to confirm or verify by alternative means the payroll expense of $xxx, included in the income
statement for the year ended 31 December 20X1, and associated liabilities of $xxx owed to the tax
authorities and affected employees in the statement of financial position as at 31 December 20X1.

As a result, we were unable to determine whether any adjustments to the financial statements might
have been necessary in respect of recorded or unrecorded liabilities or expenses, and the
associated elements of the statement of changes in equity and cash flow statement.

Disclaimer of Opinion

Because of the significance of the matter described in the Basis of Disclaimer of Opinion paragraph,
we have not been able to obtain sufficient appropriate evidence to provide a basis for an audit
opinion. Accordingly, we do not express an opinion on the financial statements.
Disclaimer of Opinion
We do not express an opinion on the accompanying consolidated financial statements of ABC Company and its
subsidiaries (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.

We were engaged to audit the consolidated financial statements of 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.

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.
 Thank You
for your kind patience