Table of Contents

TABLE OF CONTENTS
TITLE OF STANDARD / T OPIC PAGE
INTERNATIONAL STANDARDS ON AUDITING (ISAS)

ISA-200 Overall Objectives of the Independent Auditor 1

ISA-210 Agreeing the Terms of Audit Engagements 5
ISA-220 Quality Control for an Audit of Financial Statements 11
ISA-230 Audit Documentation 15
ISA-240 Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements 18
ISA-250 Consideration of Laws and Regulations in an Audit of Financial Statements 28
ISA-260 Communication with Those Charged with Governance 32
ISA-265 Communicating Deficiencies in Internal Control to TCWG and Management 39

ISA-300 Planning an Audit of Financial Statements 42

ISA-315 Identifying and Assessing the Risks of Material Misstatement 45
ISA-320 Materiality in Planning and Performing an Audit 57
ISA-330 The Auditor’s Responses to Assessed Risks 59

ISA-402 Audit Considerations Relating to an Entity Using a Service Organization 65

ISA-450 Evaluation of Misstatements Identified during the Audit 71

ISA-500 Audit Evidence 74

ISA-501 Audit Evidence—Specific Considerations for Selected Items 78
ISA-505 External Confirmations 82
ISA-510 Initial Audit Engagements—Opening Balances 86
ISA-520 Analytical Procedures 89
ISA-530 Audit Sampling 91
ISA-540 Auditing Accounting Estimates 95
ISA-550 Related Parties 100
ISA-560 Subsequent Events 108
ISA-570 Going Concern 112
ISA-580 Written Representations 116

ISA-600 Special Considerations—Audits of Group Financial Statements 121

ISA-610 Using the Work of Internal Auditors 135
ISA-620 Using the Work of an Auditor’s Expert 140

ISA-700 Forming an Opinion and Reporting on Financial Statements 144

ISA-701 Communicating Key Audit Matters in the Independent Auditor’s Report 158
ISA-705 Modifications to the Opinion in the Independent Auditor’s Report 161
Table of Contents

ISA-706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in Auditor’s 165
Report
ISA-710 Comparative Information—Corresponding Figures and Comparative F/S 171
ISA-720 The Auditor’s Responsibilities Relating to Other Information 174

ISA-800 Audits of F/S Prepared in Accordance with Special Purpose Frameworks 182
ISA-805 Audits of Single Financial Statements and Specific Elements, Accounts or Items 184
ISA-810 Engagements to Report on Summary Financial Statements 187

INTERNATIONAL STANDARDS ON REVIEW ENGAGEMENTS (ISRE)

Similarities Between ISAs And ISREs 194

ISRE-2400 Engagements to Review Historical Financial Statements 196
ISRE-2410 Review of Interim Financial Information 207

INTERNATIONAL STANDARDS ON RELATED SERVICES (ISRS)

ISRS-4400 Engagements to Perform Agreed-Upon Procedures 213

ISRS-4410 Compilation Engagements 217

INTERNATIONAL STANDARDS ON ASSURANCE ENGAGEMENTS (ISAE)

Assurance Framework 230

Similarities Between ISAs And ISAEs 231
Map of Assurance Standards 233
ISAE 3000 Assurance Engagements other than Audits or Reviews of Historical 235
Financial Information
ISAE 3400 Examination of Prospective Financial Information 249
ISAE 3402 Assurance Reports on Controls at a Service Organization 256
ISAE 3410 Assurance Engagements on Greenhouse Gas Statements 266
ISAE 3420 Assurance Engagements to Report on the Compilation of Pro Forma 280
Financial Information included in a Prospectus

INTERNATIONAL STANDARDS ON QUALITY MANAGEMENT (ISQM)

ISQM-1 Quality Management for Firms that Perform Audits and Reviews of 287
Financial Statements, or Other Assurance or Related Services Engagements
ISQM-2 Engagement Quality Control Review 296
Table of Contents

CODE OF ETHICS

Part 1 - Complying with the Code 302

Part 2 - Chartered Accountants (CAs) in Business 307
Part 3 - Chartered Accountants (CAs) in Practice 324
Part 4a - Independence – Audit & Review Engagements 347

APPOINTMENT OF AUDITOR – LEGAL CONSIDERATIONS

Companies Act 2017 374

Listing Regulations (Selected portion for audit) 378
Banking Companies Ordinance 1962 (Accounts & Audit) 380
Insurance Ordinance 2000 (Accounts & Audit) 382
Code of Corporate Governance 2019 (for reference purposes) 388

OTHER AREAS FOR UNDERSTANDING (MISC.)

Professional Misconduct 405

Money Laundering 412
IAASB Quality Framework 418
ICAP QCR framework 422
Auditors’ Liability and Expectations Gap 427
The Auditor’s Liability 433
Managing the Auditor’s Liability 440
Due Diligence 442

IAS/IFRS Checklist for Auditors 445

Group Audits 453

ANNEXURES

How to Attempt Paper (Before and During the Paper) 468

Important Paras of ISAs, ISREs & ISRS 469
INTERNATIONAL
STANDARDS ON
AUDITING
(ISA)
ISA 200 Page 1

ISA 200 (SELECTED)

An Audit of F/S (Ref: 3-9, A1-A13)

Expression of an opinion by the auditor on whether the F/S are prepared, in all material
respects, in accordance with an AFRF.

Preparation of the Financial Statement

Preparation of F/S requires the:

 Identification of AFRF
 Preparation of F/S in accordance with that framework.
 Adequate description of that framework in F/S.

Premise

Management and TCWG acknowledged and understand responsibilities

 Preparation of F/S in accordance with the AFRF.
 Internal control to enable the preparation of F/S
 To provide the auditor with:
 Access to all information;
 Additional information that the auditor may request
 Unrestricted access to persons within the entity

Overall Objectives of the Auditor

 To obtain reasonable assurance

 To report on the F/S
Reasonable assurance is a high, but not absolute, level of assurance not an absolute level
because there are inherent limitations of an audit which result in most of the audit evidence on
which auditor draws conclusions and bases opinion being persuasive rather than conclusive.

Sufficient Appropriate Audit Evidence and Audit Risk (Ref:17, A30-54)

Reasonable assurance is obtained when the auditor has obtained sufficient appropriate audit
evidence to reduce audit risk to an acceptably low level. (ISA 500 for details)

Ethical Requirements Relating to an Audit of F/S (Ref: 14, A16-A19)

Comply with relevant ethical requirements, including independence.
ISA 200 Page 2

Professional Skepticism (Ref: 15, A20-A24)

An attitude that includes a questioning mind, being alert to conditions which may indicate
possible misstatement due to error or fraud, and a critical assessment of audit evidence.
Professional skepticism includes being alert to:
 Audit evidence that contradicts other audit evidence obtained.
 Information that brings into question the reliability of documents
 Conditions that may indicate possible fraud.
 Circumstances that suggest the need for audit procedures.

Maintaining professional skepticism is necessary to reduce risks of:

 Overlooking unusual circumstances.
 Over generalizing conclusions

Professional Judgment (Ref: 16, A25-A29)

Application of relevant training, knowledge and experience, within the context provided by
auditing, accounting and ethical standards, in making informed decisions about the courses of
action that are appropriate in the circumstances of the audit engagement.

Professional judgment is necessary regarding decisions about:

 Materiality and audit risk.
 Nature, timing and extent of audit procedures
 Evaluating whether sufficient appropriate audit evidence has been obtained
 The evaluation of management's judgments
 The drawing of conclusions based on the audit evidence obtained

Inherent Limitations of an Audit (Ref: A47)

Auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain
absolute assurance. The inherent limitations of an audit arise from:

 Nature of financial reporting

 Nature of audit procedures
 Need for audit to be conducted within a reasonable period of time and at reasonable cost
 Other Matters
- Fraud
- Related party relationships and transactions
- Non-compliance with laws and regulations
- Going concern issues
ISA 200 Page 3

Audit Risk (Ref: A34-A46)

Audit Risk = Risk of Material Misstatement x Detection Risk

(Inherent Risk x Control Risk)

Audit Risk: Risk that auditor expresses an inappropriate audit opinion when F/S are
materially misstated

Inherent Risk: Susceptibility of an assertion to a misstatement that could be material before

consideration of any related controls

Control Risk: Risk that misstatement that could occur in an assertion and that could be
material will not be prevented, or detected and corrected, on a timely basis by entity's
internal control

Detection Risk: Risk that procedures performed by auditor to reduce audit risk to an
acceptably low level will not detect a misstatement that exists and that could be material
ISA 200 Page 4

Conduct of an Audit in Accordance with ISAs (Ref: 18-24, A55-A78)

Complying with ISAs Relevant to the Audit

 Comply with all ISAs relevant to the audit

 Have understanding of the entire text of an ISA
 Not represent compliance unless the auditor has complied with the requirements of this ISA
and all other ISAs

Objectives Stated in Individual ISAs

 Determine whether any additional audit procedures required

 Whether sufficient appropriate audit evidence obtained.

Complying with Relevant Requirements

Auditor shall comply unless

 Entire ISA is not relevant; or
 It is conditional and the condition does not exist.

Failure to Achieve an Objective

Requires auditor to modify the opinion or withdraw from the engagement (where possible
under applicable law or regulation)

Important Paragraphs 14-24, A2, A18, A23, A43, A45, A49, A51

For Notes and Study Material for all subjects of CA-ICAP

Please visit www.canotes.net

If you want to share any useful notes (in soft form)

Please mail us at [email protected] or [email protected]

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ISA 210 Page 5

ISA 210

Preconditions for an Audit (Ref: 6-8, A2-A21)

a) Determine whether FRF to be applied in the preparation of the F/S is acceptable; and

Factors relevant to auditor's determination of acceptability of FRF:

 Nature of entity (e.g. business enterprise or not-for-profit)
 Purpose of F/S (e.g. General purpose F/S or Special Purpose F/S)
 Nature of F/S (e.g. complete set of F/S or a single F/S); and
 Whether law or regulation prescribes AFRF.

Deficiencies in AFRF may be encountered after acceptance of audit engagement.

Management may decide to adopt another framework that is acceptable

Jurisdictions not having standards setting organizations or prescribed FRF

 When these accounting conventions are widely used in that particular jurisdiction,
accounting profession in that jurisdiction may consider acceptability of FRF on
behalf of the auditors.
 Auditor may also make determination by considering whether accounting
conventions exhibit following attributes
 Relevance,
 Completeness
 Reliability,
 Neutrality
 Understandability
 Auditor may also compare accounting conventions with an existing acceptable FRF
(e.g. IFRS)
 Collection of accounting conventions devised to suit individual preferences is not
an acceptable FRF for general purpose F/S.
 Compliance framework will not be an acceptable FRF, unless it is generally accepted
in particular jurisdictions by preparers and users.

b) Agreement of responsibilities of management (premise)

If premise is not present, auditor will be unable to obtain sufficient appropriate audit evidence.
Auditor may need to explain the importance of these matters, and implications for auditor's
report.

1) Preparation of F/S in accordance with the AFRF.

ISA 210 Page 6

Preparation includes presentation

2) Internal control to enable the preparation of F/S

As accounting books and records are an integral part of internal control as defined in ISA
315, no specific reference is made to them. To avoid misunderstanding, it may be
appropriate for auditor to explain to management scope of this responsibility.

3) To provide the auditor with:

 Access to all information;
 Additional information that the auditor may request
 Unrestricted access to persons within the entity

If preconditions are not present, auditor shall discuss the matter with management.
Auditor shall not accept audit engagement
(unless required by law or regulation to do so)
If management/TCWG impose a scope limitation of pervasive nature (requiring to disclaim
opinion), auditor shall not accept engagement, unless required by law or regulation to do
so.

Agreement on Audit Engagement Terms (Ref: 9-12, A22-A29)

Principal contents:
 Objective and scope of audit;
 Responsibilities of the auditor;
 Responsibilities of management;
 Identification of the AFRF for the preparation of F/S; and
 Reference to expected form and content of any reports to be issued by auditor and a
statement that deviations may be expected from its expected form and content.
Optional Contents – Judgment required
 Elaboration of scope of audit + reference to applicable legislation, regulations, ISAs etc.
 Form of any other communication of results.
 Requirements for the auditor to communicate Key Audit Matters (KAM) as per ISA-701
 Fact that because of inherent limitations of audit & internal control, there is risk that some
misstatements may not be detected, even though audit is properly planned & performed
 Arrangements regarding planning and performance of audit, team including composition
 Expectation that management will provide written representation
 Agreement of management to make available to auditor draft F/S and any accompanying
other information on timely basis.
 Agreement of management to inform auditor of facts that may affect F/S during date of
auditor's report to date of issuance of F/S
 Basis on which fees are computed and any billing arrangements.
 Request for management to acknowledge receipt of audit engagement letter and agree.
ISA 210 Page 7

Additional Contents (If relevant)

 Arrangements about involvement of other auditors and experts.
 Arrangements concerning the involvement of internal auditors and other staff of the
entity.
 Arrangements to be made with predecessor auditor (initial audit)
 Any restriction of auditor's liability when such possibility exists.
 A reference to any further agreements between auditor and entity
 Any obligations to provide audit working papers to other parties.

AUDITS OF COMPONENTS
When auditor of a parent entity is also auditor of a component, the factors that may influence
the decision whether to send a separate audit engagement letter to component include the
following:
 Who appoints the component auditor;
 Whether a separate auditor's report is to be issued on component;
 Legal requirements in relation to audit appointments;
 Degree of ownership by parent; and
 Degree of independence of component management from parent.

Recurring Audits (Ref: 13, A30)

Auditor may decide not to send a new audit engagement letter or other written agreement each
period. However, following factors may make it appropriate to revise terms or to remind the
entity:
 Any indication that entity misunderstands the scope of audit.
 Any revised or special terms of the engagement.
 A recent change of senior management.
 A significant change in ownership.
 A significant change in nature or size of entity's business.
 A change in legal or regulatory requirements.
 A change in the FRF adopted in preparation of F/S.
 A change in other reporting requirements.

Acceptance of a Change in the Terms of the Audit Engagement (Ref: 14-17, A31-A35)

Request to Change the Terms of the Audit Engagement

 Such request may result from a
1) Change in circumstances affecting the need for the service
2) A misunderstanding as to nature of an audit as originally requested or
3) A restriction on scope of the audit.
 Auditor shall not agree to such change where there is no reasonable justification for such.
 Reason 1 & 2 may be considered a reasonable basis.
 Not be considered reasonable if change relates to incorrect or unsatisfactory information.
ISA 210 Page 8

Request to Change to a Review or a Related Service

 Auditor shall determine whether there is reasonable justification.

 Auditor may need to assess any legal or contractual implications.
 Audit work performed till date of change may be relevant to new engagement. But changed
report would not include reference to:
- Original audit engagement; or
- Any procedures till date, except where audit is changed to agreed-upon procedures.
 Auditor and management shall agree on and record new terms of engagement.
 If auditor is unable to agree and is not permitted to continue the audit, auditor shall:
- Withdraw from audit engagement
(where possible under applicable law or regulation)
- Determine whether there is any obligation to report the circumstances to other parties
e.g. TCWG/owners/regulators

Additional Considerations in Engagement Acceptance (Ref: 18-21, A36-A39)

Financial Reporting Standards Supplemented by Law/Regulation

 Auditor shall determine whether there are any conflicts between standards and the
requirements of Law.
 If conflict exist, auditor shall agree with management whether:
- Additional requirements can be met through additional disclosures in F/S; or
- Description of AFRF in F/S can be amended accordingly.
 If neither of the above actions is possible, auditor shall determine implications of ISA 705.

FRF Prescribed by Law or Regulation

 If auditor determine that such framework would be unacceptable, but as it is prescribed by

law, auditor shall accept audit engagement only if the following conditions are present:
 Management agrees to provide additional disclosures to avoid F/S being misleading;
and
 It is recognized in terms of the audit engagement that:
- Report will have an “Emphasis of Matter paragraph” referring additional
disclosures.
- Opinion will not include phrases like "present fairly, in all material respects," or
"give a true and fair view" in accordance with AFRF
 If above 2 conditions are not present auditor shall:
- Evaluate the effect of the misleading nature of F/S on the auditor's report; and
- Include appropriate reference to this matter in the terms of the audit engagement.
ISA 210 Page 9

Auditor's Report Prescribed by Law or Regulation

 If wording of report is significantly different from requirements of ISAs, auditor shall

evaluate:
- Whether users might misunderstand the assurance obtained from audit and, if so,
- Whether additional explanation in report can mitigate possible misunderstanding.
 If auditor concludes that additional explanation cannot mitigate possible
misunderstanding, auditor shall not accept the engagement, unless required by law or
regulation.
 Such an audit does not comply with ISAs. Accordingly auditor shall not include any
reference to audit having been conducted in accordance with ISAs.

Appendix 1 - Example of an Audit Engagement Letter

To the appropriate representative of management or those charged with governance of ABC Company:

[The objective and scope of the audit]

You have requested that we audit the financial statements of ABC Company, which comprise the balance
sheet as at December 31, 20X1, and the income statement, 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. We are pleased to confirm our acceptance and our understanding of this audit
engagement by means of this letter. Our audit will be conducted with the objective of our expressing an
opinion on the financial statements.

[The responsibilities of the auditor]

We will conduct our audit in accordance with International Standards on Auditing (ISAs). Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from material misstatement. An
audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or
error. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements.

Because of the inherent limitations of an audit, together with the inherent limitations of internal
control, there is an unavoidable risk that some material misstatements may not be detected, even
though the audit is properly planned and performed in accordance with ISAs.

In making our risk assessments, we consider internal control relevant to the entity’s preparation of the
financial statements 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.
However, we will communicate to you in writing concerning any significant deficiencies in internal
control relevant to the audit of the financial statements that we have identified during the audit.
ISA 210 Page 10

[The responsibilities of management and identification of the applicable financial reporting framework
(for purposes of this example it is assumed that the auditor has not determined that the law or regulation
prescribes those responsibilities in appropriate terms; the descriptions in paragraph 6(b) of this ISA are
therefore used).]

Our audit will be conducted on the basis that [management and, where appropriate, those charged with
governance] acknowledge and understand that they have responsibility:

a) For the preparation and fair presentation of the financial statements in accordance with
International Financial Reporting Standards;
b) 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
c) To provide us with:
I. Access to all information of which [management] is aware that is relevant to the preparation
of the financial statements such as records, documentation and other matters;
II. Additional information that we may request from [management] for the purpose of the audit;
and
III. Unrestricted access to persons within the entity from whom we determine it necessary to
obtain audit evidence.

As part of our audit process, we will request from [management and, where appropriate, those charged
with governance], written confirmation concerning representations made to us in connection with the
audit.

We look forward to full cooperation from your staff during our audit.

[Other relevant information]

[Insert other information, such as fee arrangements, billings and other specific terms, as appropriate.]

[Reporting]
[Insert appropriate reference to the expected form and content of the auditor’s report.]

The form and content of our report may need to be amended in the light of our audit findings.

Please sign and return the attached copy of this letter to indicate your acknowledgement of, and
agreement with, the arrangements for our audit of the financial statements including our respective
responsibilities.

XYZ & Co.

Acknowledged and agreed on behalf of ABC Company by

(signed)
Name and Title
Date

Important Paragraphs 6, 10,17,18-21,A4, A8, A23, A24, A25, A28, A33

ISA 220 Page 11

ISA 220*
* Users are suggested to check the latest status of ISA 220 before using this portion notes. This
standard is due to be changed as and when ICAP adopt revised one instead this.

1. Leadership Responsibilities for Quality on Audits (Ref: 8, A3)

Engagement partner shall take responsibility for overall quality on each of his audit
engagement, emphasizing the fact that quality is essential for audit and the importance to audit
quality of:
 Performing work that complies with professional standards and legal & regulatory
requirement
 Complying with firm's quality control policies and procedures as applicable
 Issuing auditor's reports that are appropriate in circumstances
 Engagement team's ability to raise concerns without fear of reprisals

2. Relevant Ethical Requirements (Ref: 9-11, A4-A7)

Throughout audit, engagement partner shall remain alert, through observation and making
inquiries for evidence of non-compliance with relevant ethical requirements by team members.
Fundamental principles of professional ethics include Integrity, Objectivity, Professional
competence & due care, Confidentiality and Professional behavior.

INDEPENDENCE
Engagement partner shall:
 Obtain relevant information from the firm (& network firms) to identify & evaluate
situations that create threat to independence
 Evaluate information on identified breaches of the firm's independence policies and
procedures
 Apply safeguards to eliminate or reduce such threats or to withdraw from engagement.
 Promptly report to the firm any inability to resolve matter.

3. Acceptance and Continuance of Client Relationships and Audit Engagements

(Ref: 12-13, A8-A10)
Engagement partner shall be satisfied that appropriate procedures regarding acceptance and
continuance have been followed.

Following information assists engagement partner in determining so:

 Integrity of principal owners, key management and TCWG;
 Whether engagement team is competent to perform the audit and has necessary
capabilities, including time and resources;
 Whether firm and engagement team can comply with relevant ethical requirements; and
 Significant matters arisen during current/previous audit & their implications on
continuance.
ISA 220 Page 12

If engagement partner obtains information causing firm to decline the audit (if had received
earlier), engagement partner shall communicate promptly to firm for necessary actions.

4. Assignment of Engagement Teams (Ref: 14, A11-A13)

Be satisfied that engagement team and experts, collectively have appropriate competence &
capabilities to:
 Perform audit in accordance with professional standards and legal & regulatory
requirements
 Enable an auditor's report that is appropriate in the circumstances to be issued.

Engagement partner may consider matters such as the team's:

 Understanding of, and practical experience with, audit of similar nature and complexity
through proper training and participation
 Understanding of professional standards and applicable legal and regulatory requirements.
 Technical expertise, including expertise with relevant technology and specialized areas of
accounting or auditing.
 Knowledge of relevant industries in which the client operates.
 Ability to apply professional judgment.
 Understanding of firm's quality control policies and procedures.

5. Engagement Performance (Ref: 15-18, A14-A23)

DIRECTION
Informing the members of the engagement team of matters such as:
 Responsibilities, ethical requirements & professional skepticism
 Responsibilities of respective partners
(if more than one partner is involved)
 The objectives of the work to be performed.
 The nature of the entity's business.
 Risk-related issues.
 Problems that may arise.
 The detailed approach to the performance of the engagement.

SUPERVISION
 Tracking the progress of the audit engagement.
 Considering competence and capabilities of team members, including availability of time
 Whether they understand instructions
 Whether work is being carried out in accordance with the planned approach.
 Addressing significant matters arising during audit
 Identifying matters for consultation or consideration by more experienced team members.
ISA 220 Page 13

REVIEWS
 Work performed in accordance with professional standards, legal & regulatory
requirements
 Significant matters have been raised for further consideration
 Appropriate consultations taken place and conclusions have been documented &
implemented
 Need to revise nature, timing and extent of work performed;
 Work performed supports conclusions reached and is appropriately documented;
 Evidence obtained is sufficient & appropriate to support report
 Objectives of the engagement procedures have been achieved.

Where a member of engagement team with expertise in a specialized area of accounting or

auditing is used, direction, supervision and review of that member's work may include matters
such as:
 Agreeing nature, scope and objectives of that member's work including communication
 Evaluating adequacy of that member's work.

CONSULTATIONS
The engagement partner shall:
 Take responsibility for team undertaking appropriate consultation on difficult matters;
 Be satisfied that team members have undertaken appropriate consultation during audit,
both within engagement team and between engagement team & others within or outside
the firm;
 Be satisfied that conclusions resulting from consultations are agreed with party consulted
 Determine that conclusions have been implemented.

5.1. Engagement Quality Control Review (Ref: 19-22, A24-A33)

For audits of listed entities and other **selected audit engagements, engagement partner shall:
 Determine that an engagement quality control reviewer has been appointed
 Discuss significant matters arising during audit, including those identified during
engagement quality control review, with the engagement quality control reviewer
 Not date auditor's report until the completion of the engagement quality control review.
** Selected engagements means the engagements that meet the criteria established by the firm
(e.g. all clients over Rs 1 billion turnover etc).

Nature, Timing and Extent of Engagement Quality Control Review

 Discussion of significant matters with the engagement partner;
 Review of the F/S and the proposed auditor's report;
 Review of selected audit documentation relating to significant judgments of the eng. team
 Evaluation of conclusions reached in formulating auditor's report and consideration of
whether the proposed auditor's report is appropriate.
ISA 220 Page 14

Engagement Quality Control Review of Listed Entities – Additional Requirements

For audits of listed entities, engagement quality control reviewer shall also consider following:
 Engagement team's evaluation of the firm's independence;
 Whether appropriate consultation has taken place on matters involving differences of
opinion or other difficult or debatable matters, and conclusions reached; and
 Whether audit documentation selected for review reflects the work performed.

DIFFERENCES OF OPINION
If differences of opinion arise within engagement team, with those consulted or, where
applicable, between engagement partner and engagement quality control reviewer,
engagement team shall follow the firm's policies and procedures for dealing with and resolving
differences of opinion.

6. Monitoring (Ref: 23, A34-A36)

Monitoring process is designed to provide firm with reasonable assurance that its policies and
procedures relating to system of quality control are relevant, adequate, & operating effectively

Engagement partner shall consider results of monitoring process as evidenced in latest

information circulated by the firm (and network firms) and whether deficiencies noted may
affect audit.
 Engagement partner may consider sufficient measures taken by firm to rectify the situation.
 Such deficiency does not necessarily indicate that a particular audit engagement was not
performed in accordance with requirements, or that audit report was not appropriate

Documentation (Ref: 24-25, A34-A36)

 Issues identified regarding compliance with relevant ethical requirements and how
resolved.
 Conclusions on compliance with independence requirements that apply to audit, and any
relevant discussions with firm that support these conclusions.
 Conclusions reached regarding acceptance and continuance of client relationships.
 Nature and scope of, and conclusions resulting from, consultations undertaken

Engagement quality control reviewer shall document that:

 Procedures required by firm on engagement quality control review have been performed;
 Engagement quality control review has been completed on or before date of auditor's
report;
 Reviewer is not aware of any unresolved matters causing reviewer to believe that
significant judgments and the conclusions were not appropriate.

Important Paragraphs 11,15-20, 24, A2, A11, A13, A15, A17, A28
ISA 230 Page 15

ISA 230

Audit documentation
Record of audit procedures performed, relevant audit evidence obtained, and conclusions
the auditor reached (terms such as "working papers" or "workpapers" are also sometimes
used).

Nature and Purposes of Audit Documentation (Ref: 2-3, A2-A20)

Audit documentation serves a number purposes, including:
 Assisting the engagement team to plan and perform the audit.
 Assisting supervisors of engagement team to discharge their review responsibilities (ISA
220)
 Enabling the engagement team to be accountable for its work.
 Retaining a record of matters of continuing significance to future audits.
 Enabling conduct of QCR and inspections in accordance with ISQM or national requirements
 Conduct of external inspections.

Timely Preparation of Audit Documentation (Ref: 7, A1)

 Auditor shall prepare sufficient and appropriate audit documentation on a timely basis.
 Oral explanations by auditor may be used to explain information contained in
documentation but it do not represent adequate support for work performed or
conclusions reached

Form, Content and Extent of Audit Documentation (Ref: 8-11, A2-A19)

Form, content and extent of audit documentation depend on:

 Size and complexity of the entity.
 Nature of the audit procedures to be performed.
 Risks of material misstatement.
 Significance of the audit evidence obtained.
 Nature and extent of exceptions identified.
 The audit methodology and tools used.
 Need to document a conclusion or the basis for a conclusion not readily determinable from
the documentation of the work performed or audit evidence obtained.

Auditor need not include superseded drafts of working papers and F/S, previous copies of
documents corrected, and duplicates.
ISA 230 Page 16

QUALITY OF DOCUMENTATION
Prepare audit documentation that is sufficient to enable experienced auditor, having no
previous connection with the audit, to understand:
 Nature, timing and extent of audit procedures performed
 Results of the audit procedures, and audit evidence obtained
 Significant matters arised, conclusions reached, and significant professional judgments
made.

Significant Matters:
 Matters that give rise to significant risks
 Results of audit procedures indicating
- That F/S could be materially misstated, or
- Need to revise auditor's previous risk assessment and responses to those.
 Circumstances causing difficulty in applying procedure
 Findings that could result in modification of report.

Auditor may consider it helpful to prepare and retain a summary (completion

memorandum)
 Significant matters identified during the audit and
 How they were addressed, or
 Cross-references to other relevant supporting documentation

Documentation of Audit Procedures Performed & Audit Evidence Obtained

Nature, timing and extent of audit procedures performed

 The identifying characteristics of the specific items or matters tested
(e.g invoice numbers, date, amount of transaction etc)
 Who performed audit work and the date such work was completed; and
 Who reviewed audit work performed and date and extent of such review

Discussions of significant matters with management, TCWG, and others

 Records prepared by auditor
 Minutes of meetings prepared by management and agreed by auditor etc.
How inconsistencies have been addressed

Departure from a relevant requirement

Document how alternative audit procedures performed achieve the aim of that
requirement, and the reasons for such departure.
Documentation requirement applies only where relevant. A requirement is not relevant
only in cases where:
 Entire ISA is not relevant
 Requirement is conditional and condition does not exist.
ISA 230 Page 17

Matters arising after the date of the auditor's report

 The circumstances encountered;
 New or additional audit procedures, audit evidence obtained, and conclusions reached,
and their effect on auditor's report
 When and by whom the resulting changes to audit documentation were made and
reviewed.

Assembly of the Final Audit File (Ref: 14-16, A21-A24)

Audit file
One or more folders or other storage media, in physical or electronic form, containing the
records that comprise the audit documentation for a specific engagement.

 Assemble audit documentation in an audit file and complete the administrative process
of assembling the final audit file on a timely basis after the date of the auditor's report.
(Normally its not more than 60 days after auditor’s report)

 Completion of final audit file does not involve performance of new audit procedures

 Changes may be made to audit documentation during final assembly process if they are
administrative in nature. E.g.:
 Deleting or discarding superseded documentation.
 Sorting, collating and cross-referencing working papers.
 Signing off on completion checklists relating to file assembly process.
 Documenting audit evidence that auditor has obtained, discussed and agreed with
the relevant members of the engagement team before the date of the auditor's report.

Auditor shall not delete or discard documentation of any nature before end of its retention
period. (larger of 5 years or local requirement; In Pakistan its 10 years)

if auditor finds it necessary to modify existing documentation or add new documentation

after assembly of final audit file, auditor shall document
 Specific reasons for making them; and
 When and by whom these were made and reviewed.

Important Paragraphs 8, 9, 13, 16, A2, A3, A7, A8, A12, A22
ISA 240 Page 18

ISA 240

Fraud: An intentional act by one or more individuals among management, TCWG, employees,
or third parties, involving the use of deception to obtain an unjust or illegal advantage.

Characteristics of Fraud(Ref: 2-3, A1-A5)

Misstatements in F/S can arise from either fraud or error. Distinguishing factor between fraud
and error is whether the action that results in the misstatement is intentional or unintentional.

Fraud Risk Factors

Incentive or pressure
May exist when management is under pressure, from sources outside or inside entity, to
achieve an expected (and perhaps unrealistic) earnings target or financial outcome.

Perceived opportunity
May exist when an individual believes internal control can be overridden due to his position
or has knowledge of deficiencies in internal control.

Attitudes / Rationalization
Some individuals possess an attitude, character or set of ethical values that allow them
knowingly and intentionally to commit a dishonest act.

Auditor may suspect or identify occurrence of fraud, but he does not make legal determinations
of whether fraud has actually occurred.

Fraud is a broad legal concept but auditor is concerned with fraud that causes a material
misstatement in F/S. There are 2 types of Frauds relevant to F/S:

1) Fraudulent financial reporting

 Manipulation, falsification (including forgery), or alteration of accounting records or

supporting documentation.
 Misrepresentation or intentional omission from F/S of events, transactions or other
significant information.
 Intentional misapplication of accounting principles relating to amounts, classification,
manner of presentation, or disclosure.
ISA 240 Page 19

Also involves management override of controls using techniques as:

 Recording fictitious entries, particularly close to period end, to manipulate operating
results or achieve other objectives.
 Inappropriately adjusting assumptions and changing judgments.
 Omitting, advancing or delaying recognition of events and transactions in F/S.
 Concealing, or not disclosing, facts that could affect F/S.
 Engaging in complex transactions structured to misrepresent the financial position or
financial performance of entity.
 Altering records & terms of significant and unusual transactions.

2) Misappropriation of assets

Involves theft of entity's assets and is often perpetrated by employees & management. It can be
accomplished in a variety of ways including:
 Embezzling receipts.
 Stealing physical assets or intellectual property.
 Causing an entity to pay for goods and services not received.
 Using an entity's assets for personal use.

Misappropriation is often accompanied by false or misleading records or documents in order to

conceal fraud.

Responsibility for the Prevention and Detection of Fraud (Ref: 4-9, A6-A7)

Primary responsibility for prevention and detection of fraud rests with both TCWG and
management.

Responsibilities of the Auditor

 An auditor is responsible for obtaining reasonable assurance that F/S as a whole are free
from material misstatement, whether caused by fraud or error.
 Due to inherent limitations, there is an unavoidable risk that some material misstatements
may not be detected; even the audit is properly planned & performed in accordance with
ISAs
 Risk of not detecting a material misstatement resulting from fraud is higher than risk of not
detecting one resulting from error
 Risk of not detecting a material misstatement resulting from management fraud is greater
than for employee fraud
ISA 240 Page 20

Discussion among the Engagement Team (Ref: 16, A11-A12)

 Exchange of ideas among team members about how and where the entity's F/S may be
susceptible to material misstatement due to fraud, how management could commit and
conceal fraud
 Circumstances that might be indicative of earnings management and practices to manage
earnings leading to fraud.
 Consideration of known external and internal fraud risk factors
 Management's involvement in overseeing employees with access to cash or other assets
susceptible to misappropriation.
 Consideration of any unusual or unexplained changes in behavior or lifestyle of
management or employees.
 An emphasis on maintaining a proper state of mind throughout audit regarding potential
for material misstatement due to fraud.
 How an element of unpredictability will be incorporated into nature, timing and extent of
audit procedures.
 Consideration of audit procedures that might be selected to respond to the susceptibility of
fraud.
 Consideration of any allegations of fraud that have come to the auditor's attention.
 A consideration of the risk of management override of controls.

Identification and Assessment of Risks of Material Misstatement Due to Fraud

(Ref: 26-28, A29-A33)

Risks of Fraud in Revenue Recognition

 Auditor shall evaluate which types of revenue, transactions or assertions give rise to such
risks. (Assuming such risk exists)
 Material misstatement for revenue recognition often results from
- Overstatement of revenues.
- Understatement of revenues

Understanding Entity's Related Controls

Auditor shall treat those assessed risks of material misstatement due to fraud as significant risks
and accordingly shall obtain an understanding of entity's related controls, including control
activities, relevant to such risks.
ISA 240 Page 21

Risk Assessment Procedures and Related Activities (Ref: 17-25, A13-A28)

Inquiries:
To determine whether they have knowledge of any actual, suspected or alleged fraud affecting
the entity, Auditor shall make inquiries of
 Management
 TCWG
 Internal Audit Function
 Others
- Operating personnel not directly involved in F/S process.
- Employees with different levels of authority.
- Employees involved in initiating, processing or recording complex or unusual
transactions and their supervisors.
- In-house legal counsel.
- Chief ethics officer or equivalent person.
- Person or persons charged with dealing allegations of fraud.

Specific Inquiries of management:

 Management's assessment of risk that F/S may be materially misstated due to fraud;
 Management's process for identifying and responding to risks of fraud including fraud
identified by management or brought to its attention or areas for which such risk is likely
to exist;
 Management's communication to TCWG regarding its processes
 Management's communication to employees regarding its views on business practices and
ethical behavior.

Specific Inquiries of TCWG

Unless all of TCWG are involved in managing entity, auditor shall obtain an understanding of
 How TCWG exercise oversight of management's processes for identifying and responding
to the risks of fraud
 Internal control management has established to mitigate risks.

Unusual or Unexpected Relationships Identified

Auditor shall evaluate whether such relationships identified in performing analytical
procedures, including those related to revenue accounts, may indicate risks of material
misstatement due to fraud.

Other Information
Auditor shall consider whether other information obtained by auditor indicates risks of
material misstatement due to fraud.
ISA 240 Page 22

Evaluation of Fraud Risk Factors

 Auditor shall evaluate whether information obtained from other risk assessment
procedures and related activities indicates that one or more fraud risk factors are present.
 The fact that fraud is usually concealed can make it very difficult to detect. However auditor
may identify events or conditions that indicate an incentive or pressure to commit fraud or
provide an opportunity to commit fraud.

Responses to Assessed Risks of Material Misstatement (Ref: 29-31, A34-A41)

At Financial Statement Level

 Assign and supervise personnel taking account of knowledge, skill and ability of individuals
and auditor's assessment of the risks
 Evaluate whether selection and application of accounting policies by entity may be indicative
of fraudulent financial reporting
 Incorporate an element of unpredictability in selection of the nature, timing and extent of
audit procedures.
 Performing substantive procedures on selected account balances and assertions
(neither material nor risky).
 Adjusting timing of audit procedures from expected.
 Using different sampling methods.
 Performing audit procedures at unexpected locations.

At the Assertion Level

Procedures may include changing the nature, timing and extent of audit procedures in the
following ways:
 Nature: To obtain more relevant & reliable audit evidence or to obtain additional
corroborative information
 Timing: Auditor may conclude that performing testing at or near period end better
addresses risk of material misstatement.
 Extent of procedures applied reflects the assessment of risks of material misstatement due
to fraud

Audit Procedures for Risks Related to Override of Controls (Ref: 32-34, A42-A49)

Auditor shall design and perform audit procedures to:

a) Test appropriateness of journal entries recorded in general ledger and other

adjustments made in preparation of F/S:
 Make inquiries of individuals involved in financial reporting process about inappropriate
or unusual activity relating to the processing of journal entries and other adjustments;
 Select journal entries and other adjustments made at period end
 Consider need to test journal entries and other adjustments.
ISA 240 Page 23

For above factors, the following matters are of relevance:

- Assessment of the risks of material misstatement due to fraud
- Controls implemented over journal entries and other adjustments
- Financial reporting process and nature of evidence that can be obtained
- Characteristics of fraudulent journal entries or other adjustments
 Made to unrelated, unusual, or seldom-used accounts
 Made by individuals who typically do not make journal entries,
 Recorded at period end or as post-closing entries that have little or no explanation or
description,
 That do not have account numbers, or
 Containing round numbers or consistent ending numbers.
- Nature and complexity of the accounts
 Contain transactions that are complex or unusual in nature,
 Contain significant estimates and period¬end adjustments,
 Have been prone to misstatements in the past,
 Not been reconciled timely or contain unreconciled differences
 Contain inter-company transactions
 Are associated with an identified risk of material misstatement.
- Journal entries or other adjustments processed outside the normal course of business

b) Review accounting estimates for biases:

 Evaluate whether judgments and decisions made by management in making accounting

estimates indicate a possible bias.
 Perform retrospective review of management judgments and assumptions related to
significant accounting estimates reflected in F/S of prior year.

c) For significant transactions outside normal course of business or that are unusual

 Auditor shall evaluate whether the business rationale of transactions suggests possibility of
fraud.
 Following are indicators of such fraud
 Form of such transactions appears overly complex.
 Management has not discussed nature of and accounting for such transactions with
TCWG
 There is inadequate documentation.
 Management is placing more emphasis on a particular accounting treatment.
 Transactions involving related parties, including special purpose entities, not been
properly approved by TCWG.
 Transactions involve previously unidentified related parties
ISA 240 Page 24

Auditor Unable to Continue the Engagement due to fraud (Ref: 39, A55-A58)
In such exceptional circumstances, auditor shall:
 Determine professional and legal responsibilities applicable
 Consider whether it is appropriate to withdraw from engagement
 If the auditor withdraws, discuss with appropriate level of management and TCWG

Examples of such exceptional circumstances:

 Entity does not take appropriate action regarding fraud that auditor considers necessary,
even where the fraud is not material;
 Auditor's consideration of risks of material misstatement and results of audit tests indicate
a significant risk of pervasive fraud
 Significant concern about competence or integrity of management or TCWG.

Written Representations (Ref: 40, A59-A60)

It is important for auditor to obtain a written representation from management and TCWG
confirming that they have disclosed:
 Results of management's assessment of the risk that F/S may be materially misstated as a
result of fraud
 Knowledge of actual, suspected or alleged fraud affecting entity

Communications to Management and with TCWG (Ref: 41-43, A61-A66)

 Identification of fraud information indicating fraud shall be communicated to appropriate

level of management.
 If auditor has identified or suspects fraud involving management, employees having
significant roles in internal control or others
 Auditor shall communicate to TCWG on a timely basis.
 Discuss with TCWG the nature, timing and extent of audit procedures necessary to
complete audit.

Other Matters Related to Fraud to be discussed with TCWG

 Concerns about nature, extent and frequency of management's assessments of controls in

place to prevent and detect fraud.
 Management failure to address identified significant deficiencies in internal control or to
appropriately respond to identified fraud.
 Auditor's evaluation of control environment, including questions regarding the competence
and integrity of management.
 Management Actions indicative of fraudulent financial reporting
 Concerns about adequacy and completeness of authorization of transactions appear to be
outside normal course of business.
ISA 240 Page 25

Communications to Regulatory and Enforcement Authorities (Ref: 44, A67-A69)

If auditor has identified or suspects a fraud, auditor shall determine whether there is a
responsibility to report the occurrence or suspicion to a party outside the entity.
 Law may require reporting the occurrence of fraud to supervisory authorities
 Auditor may consider it appropriate to obtain legal advice

Documentation (Ref: 45)

 Significant decisions reached during discussion among engagement team regarding
 Identified and assessed risks of material misstatement due to fraud at the F/S level and at
the assertion level.

Appendix 1 - Examples of Fraud Risk Factors (Selected)

Fraudulent Financial Reporting

Incentives/Pressures:
 Financial stability or profitability is threatened
 Pressure for management to meet the exception of third parties
 Personal financial situation of management threatened by entities financial performance
 Excessive pressure on management or operating personnel to meet financial targets

Opportunities:
 Significant related party transaction
 Assets/liabilities , Revenue, Expenditures based on significant estimates
 Domination of management by single person or group
 Complex or unstable organizational structure
 Internal control components are deficient

Attitudes:
 Ineffective communication or enforcement of entities values or ethical standards by
management
 Known history of violation of security laws or other laws
 A practice by management of committing to aggressive or unrealistic forces
 Low morale among senior management

Misappropriation of Assets:

Incentives/Pressures:
 Personal financial obligations
 Adverse relationship b/w the entity and employees with access to cash or other assets
susceptible to theft
ISA 240 Page 26

Opportunities:
 Large amount of cash on hand or processed
 Inventory items that are small in size, of high in value or in high demand
 Easily convertible assets e.g. diamonds, bearer bonds and gold
 Inadequate internal controls over assets

Attitudes/Rationalizations:
 Overriding existing controls
 Failing to correct known internal control deficiencies
 Behavior indicating displeasure or dissatisfaction with the entity
 Changes in behavior or lifestyle

Appendix 3 - Examples of Circumstances that Indicate the Possibility of Fraud

The following are examples of circumstances that may indicate the possibility that the
financial statements may contain a material misstatement resulting from fraud.

Discrepancies in the accounting records, including:

 Transactions that are not recorded in a complete or timely manner or are improperly
recorded as to amount, accounting period, classification, or entity policy.
 Unsupported or unauthorized balances or transactions.
 Last- minute adjustments that significantly affect financial results.
 Evidence of employees’ access to systems and records inconsistent with that necessary to
perform their authorized duties.
 Tips or complaints to the auditor about alleged fraud.

Conflicting or missing evidence, including:

 Missing documents.
 Documents that appear to have been altered.
 Unavailability of other than photocopied or electronically transmitted documents when
documents in original form are expected to exist.
 Significant unexplained items on reconciliations.
 Unusual balance sheet changes, or changes in trends or important financial statement
ratios or relationships - for example, receivables growing faster than revenues.
 Inconsistent, vague, or implausible responses from management or employees arising
from inquiries or analytical procedures.
 Unusual discrepancies between the entity's records and confirmation replies.
 Large numbers of credit entries and adjustments made to accounts receivable records.
 Unexplained or inadequately explained differences between the accounts receivable
subledger and the control account, or between the customer statements and the accounts
receivable subledger.
ISA 240 Page 27

 Missing or non- existent cancelled checks in circumstances where cancelled checks are
ordinarily returned to the entity with the bank statement.
 Missing inventory or physical assets of significant magnitude.
 Unavailable or missing electronic evidence, inconsistent with the entity’s record retention
practices or policies.
 Fewer responses to confirmations than anticipated or a greater number of responses than
anticipated.
 Inability to produce evidence of key systems development and program change testing
and implementation activities for current year system changes and deployments.

Problematic or unusual relationships between the auditor and management, including:

 Denial of access to records, facilities, certain employees, customers, vendors, or others

from whom audit evidence might be sought.
 Undue time pressures imposed by management to resolve complex or contentious issues.
 Complaints by management about the conduct of the audit or management intimidation
of engagement team members, particularly in connection with the auditor’s critical
assessment of audit evidence or in the resolution of potential disagreements with
management.
 Unusual delays by the entity in providing requested information.
 Unwillingness to facilitate auditor access to key electronic files for testing through the use
of computer assisted audit techniques
 Denial of access to key IT operations staff and facilities, including security, operations, and
systems development personnel.
 An unwillingness to add or revise disclosures in the financial statements to make them
more complete and understandable.
 An unwillingness to address identified deficiencies in internal control on a timely basis.

Other

 Unwillingness by management to permit the auditor to meet privately with those charged
with governance.
 Accounting policies that appear to be at variance with industry norms.
 Frequent changes in accounting estimates that do not appear to result from changed
circumstances.
 Tolerance of violations of the entity’s code of conduct.

Important Paragraphs 15, 17, 20, 24, 29, 32, 38, 39 ,41, A3, A4, A5, A10, A11, A36,
A37, A43, A48, A54, A64
ISA 250 (Revised) Page 28

ISA 250 – CONSIDERATION OF LAWS & REGULATIONS IN AN AUDIT OF F/S

This ISA distinguishes auditor’s responsibilities in relation to compliance with 2 different

categories of laws and regulations as follows:
 Provisions of laws and regulations normally having a direct effect on determination of
material amounts and disclosures in F/S (e.g. tax and pension laws etc); and
 Other laws and regulations that do not have such a direct effect, but compliance with which
may be fundamental to operating aspects of business, ability to continue its business, or to
avoid material penalties (e.g. compliance with terms of operating license or compliance
with environmental regulations);
Nature and circumstances of entity may impact whether relevant laws and regulations are
within the first or second category

Responsibility for Compliance with Laws and Regulations (Ref: 3-9, A1-A8)

 It is responsibility of management, with oversight of TCWG, to ensure that operations are

conducted in accordance with provisions of laws and regulations, including compliance
with the provisions of laws and regulations determining amounts and disclosures in F/S.
 Auditor is not responsible for preventing or detecting all non-compliances
 This ISA assist auditor in identifying material misstatement of F/S due to non-compliance
 Detection of non-compliance, regardless of materiality, may also affect other aspects of the
audit including, for example, consideration of the integrity of management or employees.
Non-compliance
Acts of omission or commission intentional or unintentional committed by the entity, or by those
charged with governance, by management or by other individuals working for or under the
direction of the entity, which are contrary to the prevailing laws or regulations. Non-compliance
does not include personal misconduct (unrelated to business activities of the entity)

Consideration of Compliance with Laws and Regulations (Ref: 13-18, A11-A16)

As part of obtaining understanding of entity, auditor shall obtain general understanding of:
 Legal & regulatory framework applicable to entity and industry in which it operates; and
 How the entity is complying with that framework

Auditor shall obtain sufficient appropriate audit evidence regarding compliance with the
provisions of those laws and regulations generally recognized to have a direct effect on
F/S. They could include those that relate to, for example:
 The form and content of F/S;
 Industry-specific financial reporting issues;
 Accounting for transactions under government contracts; or
 The accrual or recognition of expenses for income tax or pension costs.
ISA 250 (Revised) Page 29

Some provisions in those laws and regulations may be directly relevant to specific assertions
(e.g. completeness of income tax provisions), while others may be directly relevant to F/S
as a whole (e.g. required statements constituting a complete set of F/S)

Non-compliance with other provisions of such laws etc may result in fines, litigation or
other consequences for the entity, the costs of which may need to be provided for in the F/S.

Procedures to Identify Instances of Non-Compliance (Ref: 15-16, A13-A15)

Auditor shall perform the following audit procedures to help identify such instances:
 Inquiring of management and, where appropriate, TCWG, as to whether the entity is in
compliance with such laws and regulations; and
 Inspecting correspondence, if any, with the relevant licensing or regulatory authorities.

During audit, auditor shall remain alert to the possibility that other audit procedures applied
may bring instances of non-compliance or suspected non-compliance to auditor’s attention.
(e.g. reading minutes, inquiring legal counsel or performing substantive test of details etc)

Written Representations (Ref: 17-18, A16)

Request management, & where appropriate, TCWG, to provide written representations that all
known instances of non-compliance or suspected non-compliance with laws and regulations,
whose effects should be considered when preparing F/S, have been disclosed to auditor.

Audit Procedures When Non-Compliance Is Identified or Suspected

(Ref: 19-22, A17-A25)
If the auditor becomes aware of information concerning an instance of non- compliance or
suspected non-compliance with laws and regulations, the auditor shall obtain
 An understanding of nature of the act and the circumstances in which it has occurred; and
 Further information to evaluate the possible effect on the F/S including:
- The potential financial consequences of non-compliance on F/S
(e.g. imposition of fines, penalties and enforced discontinuation of operations etc)
- Whether it require disclosure.
- Whether these are so serious as to call into question the fair presentation of the F/S
Indications of Non-Compliance with Laws and Regulations (Examples)
 Investigations by regulatory organizations and Govt. departments or payment of fines or penalties.
 Payments for unspecified services or loans to consultants, related parties, or government employees.
 Sales commissions or agent’s fees that appear excessive in relation to those ordinarily paid by the entity
 Purchasing at prices significantly above or below market price.
 Unusual payments in cash, purchases in form of bearer cheques or transfers to numbered bank
accounts.
 Unusual transactions with companies registered in tax havens.
 Payments for goods or services made other than to the country from which goods or services originated.
 Payments without proper exchange control documentation.
 Unauthorized transactions or improperly recorded transactions.
 Adverse media comment.
ISA 250 (Revised) Page 30

If the auditor suspects there may be non-compliance

 Auditor shall discuss matter with management (unless prohibited by law or regulation)
 Where appropriate auditor may discuss the findings with TCWG where they may be able to
provide additional audit evidence
 If management/TCWG do not provide sufficient information that supports the compliance
and, in he auditor’s judgment, the effect of the suspected non-compliance may be material
to the F/S, the auditor shall consider the need to obtain legal advice.
Auditor shall evaluate implications of non-compliance for other aspects of audit, including risk
assessment and reliability of written representations, and shall take appropriate action.

In certain cases, auditor may consider withdrawal from engagement when management or
TCWG do not take the remedial action or where identified or suspected noncompliance raises
questions about their integrity, even when non-compliance is not material to the F/S.

Auditor may consider appropriate to take legal advice to determine whether withdrawal is
appropriate. Even after withdrawing, he is not relieved of complying with other responsibilities
under law, regulation or relevant ethical requirements to respond to noncompliance.

Communication and Reporting Identified or Suspected Non-Compliance with TCWG (Ref:

23-25)

 Unless all TCWG are involved in management of entity, auditor shall communicate with
TCWG (unless prohibited by law or regulation) significant matters involving non-
compliance that come to auditor’s attention during the course of the audit.
 If, in the auditor’s judgment, the non-compliance is believed to be intentional and material,
auditor shall communicate the matter with TCWG as soon as practicable.
 If auditor suspects that management or TCWG are involved in non-compliance, the auditor
shall communicate the matter to the next higher level of authority at the entity, if it exists.
(e.g. audit committee)
 Auditor shall consider the need to obtain legal advice:
- Where no higher authority exists;
- If the auditor believes that the communication may not be acted upon; or
- If the auditor is unsure as to the person to whom to report,

Implications on Auditor’s Report (Ref: 26-28, A26-A27)

 If auditor concludes that the non-compliance has a material effect on the F/S, and has not
been adequately reflected in F/S, auditor shall express a qualified or an adverse opinion.
 If auditor is precluded by management or TCWG from obtaining sufficient appropriate audit
evidence to evaluate whether non-compliance that may be material to the F/S has, or is
likely to have, occurred, auditor shall express a qualified opinion or disclaim opinion
 If auditor is unable to determine whether non-compliance has occurred because of
limitations imposed by the circumstances rather than by management or TCWG, auditor
shall evaluate the effect on the auditor’s opinion in accordance with ISA 705.
ISA 250 (Revised) Page 31

Law or regulation may preclude public disclosure by either management, TCWG or auditor about
a specific matter (e.g. a communication, or other action, that might prejudice an investigation by
an appropriate authority, as it may alert the entity). Auditor may consider obtaining legal advice
to determine the appropriate course of action

Reporting Non-Compliance to appropriate authority outside entity (Ref: 29, A28-A34)

If the auditor has identified or suspects non-compliance with laws and regulations, auditor shall
determine whether law, regulation or relevant ethical requirements:
 Require the auditor to report to an appropriate authority outside the entity.
(e.g. statutory requirements of a financial institution may require to report occurrence, or
suspected occurrence, of non-compliance to supervisory authority)
 Establish responsibilities under which reporting to an appropriate authority outside the
entity may be appropriate in the circumstances, such as:
- Auditor has determined that it is in accordance with relevant ethical requirements; or
(e.g. IESBA Code requires auditor to take steps to respond to such non-compliance and
determine whether further action is needed including reporting to outside authority)
- Law, regulation or relevant ethical requirements provide auditor with right to do so
(E.g. when auditing F/S of financial institutions, auditor may have legal right to discuss
matters such as identified or suspected non-compliance with a supervisory authority)

Documentation (Ref: 30, A35-A36)

Auditor shall include

 Identified or suspected non-compliance with laws and regulations;
 Procedures performed, significant professional judgments made and conclusions reached;
 Discussions of significant matters related to non-compliance with management, TCWG and
others, including how they responded to the matter

Law, regulation or relevant ethical requirements may also set out additional documentation
requirements regarding identified or suspected non-compliance with laws and regulations

Important Paragraphs 13, 15, 19, 23, 29, A2, A6, A11, A15, A18, A19, A24, A26, A28
ISA 260 Page 32

ISA 260 (REVISED)

Those Charged with Governance (TCWG)

The person(s) or organization(s) (e.g., a corporate trustee) with responsibility for overseeing the
strategic direction of the entity and obligations related to the accountability of entity. This includes
overseeing the financial reporting process. For some entities in some jurisdictions, TCWG may
include management personnel, for example, executive members of a governance board of a private
or public sector entity, or an owner-manager.

Management
The person(s) with executive responsibility for the conduct of the entity’s operations. For some
entities in some jurisdictions, management includes some or all of TCWG, for example, executive
members of a governance board, or an owner-manager.

Those Charged with Governance – TCWG (Ref: 11-13, A1-A8)

The auditor shall determine the appropriate person(s) within entity’s governance structure
with whom to communicate.

Governance structures may vary by jurisdiction and by entity, and the size and ownership
characteristics. Some examples of such governance structures are:
 A supervisory board exists that is separate from an executive board. (two-tier)
 Both supervisory and executive functions are the legal responsibility of a single board
 TCWG hold positions that are integral part of entity’s legal structure (e.g. directors)
 In some government entities, a body that is not part of entity is charged with governance.
 Some or all of TCWG are involved in managing the entity.
 TCWG and management comprise different persons.
 TCWG are responsible for approving the entity’s F/S (in other cases management do so)
 Governance is collective responsibility of governing body; Subgroup e.g. audit committee
or even an individual may be charged with specific task to assist governing body

Such diversity means that it is not possible for this ISA to specify the person(s) with whom
the auditor is to communicate particular matters. In such cases, auditor may need to discuss
and agree with engaging party the relevant person(s) with whom to communicate. In
deciding so, understanding of entity’s governance structure is relevant. The appropriate
person(s) with whom to communicate may vary depending on matter to be communicated.

Communication with a Subgroup of TCWG

If auditor communicates with a subgroup of TCWG (e.g. audit committee), the auditor shall
determine whether the auditor also needs to communicate with the governing body
ISA 260 Page 33

When considering communicating with subgroup of TCWG, auditor may take into account such
matters as:
 The respective responsibilities of the subgroup and the governing body.
 The nature of the matter to be communicated.
 Relevant legal or regulatory requirements.
 Whether the subgroup has authority to take action in relation to the information
communicated, and can provide further required information and explanations.

Good governance principles suggest that:

 The auditor will be invited to regularly attend meetings of the audit committee.
 The chair of audit committee and, when relevant, other members of the audit committee,
will liaise with the auditor periodically.
 The audit committee will meet the auditor without management present at least annually.

When All of TCWG Are Involved in Managing the Entity

If matters are communicated with persons with management responsibilities, and those
persons also have governance responsibilities, matters need not be communicated again.

Auditor shall however be satisfied that communication with persons with management
responsibilities adequately informs all of those with whom auditor would otherwise
communicate in their governance capacity.
(E.g. in a company where all directors are involved in managing entity, one responsible for
marketing may be unaware of discussion with one responsible for preparation of F/S)

Matters to Be Communicated (Ref: 14-17, A9-A32)

Auditor’s Responsibilities in Relation to Financial Statement Audit (Ref: 14, A9-A10)

Auditor shall communicate responsibilities of auditor for F/S audit, including that:
 Auditor is responsible for forming and expressing an opinion on the F/S that have been
prepared by management with the oversight of TCWG; and
 Audit of the F/S does not relieve management or TCWG of their responsibilities.
Auditor’s responsibilities are often included in the engagement letter etc. Law, regulation or
governance structure of entity may require TCWG to agree those terms with auditor. When
this is not the case, providing TCWG with a copy of that engagement letter etc may be an
appropriate way to communicate with them regarding such matters as:
 Auditor’s responsibility for performing audit in accordance with ISAs
 The fact that ISAs do not require auditor to design procedures for purpose of identifying
supplementary matters to communicate with TCWG.
 Auditor’s responsibilities to determine and communicate key audit matters in report.
 Auditor’s responsibility for communicating particular matters required by law or
regulation, by agreement with entity or by additional requirements applicable.
ISA 260 Page 34

Planned Scope and Timing of the Audit (Ref: 15, A11-A16)

Auditor shall communicate overview of planned scope and timing of audit, which includes
communicating about significant risks identified by the auditor. Such communication may:
 Assist TCWG to understand better the consequences of auditor’s work, to discuss issues of
risk and the concept of materiality with auditor, and to identify any areas in which they may
request the auditor to undertake additional procedures; and
 Assist the auditor to understand better the entity and its environment.
Matters communicated may include:
 How auditor plans to address the significant risks of material misstatement.
 How auditor plans to address areas of higher assessed risks of material misstatement.
 The auditor’s approach to internal control relevant to the audit.
 The application of concept of materiality in the context of an audit.
 The nature and extent of specialized skill or knowledge needed to perform planned audit
procedures or evaluate audit results, including use of an auditor’s expert.
 For ISA 701, auditor’s preliminary views about matters that may be key audit matters.
 Planned approach to addressing implications on individual statements and the disclosures
of any significant changes within AFRF or in entity’s environment or financial condition.
Other planning matters that it may be appropriate to discuss with TCWG include:
 How external auditor and internal auditors can work together in a constructive and
complementary manner (where applicable)
 The views of TCWG about:
- Appropriate person(s) in entity’s governance structure with whom to communicate.
- The allocation of responsibilities between TCWG and management.
- Entity’s objectives and strategies, and related business risks that may result in material
misstatements.
- Matters TCWG consider warrant particular attention during audit
- Significant communications between the entity and regulators.
- Other matters TCWG consider may influence the audit of the F/S.
 The attitudes, awareness, and actions of TCWG concerning
- Entity’s internal control and its importance in the entity, including how TCWG oversee
the effectiveness of internal control, and
- Detection or possibility of fraud.
 The actions of TCWG in response to developments in accounting standards, corporate
governance practices, exchange listing rules, and related matters, and effect of such
developments on the overall presentation, structure and content of the F/S, including:
- Relevance, reliability, comparability and understandability of information in F/S; and
- Considering whether F/S are undermined by inclusion of information that is not
relevant or that obscures a proper understanding of the matters disclosed.
 The responses of TCWG to previous communications with the auditor.
 The documents comprising other information (ISA 720) and the planned manner and timing
of the issuance of such documents.
ISA 260 Page 35

Significant Findings from the Audit (Ref: 16, A17-A28)

Auditor shall communicate with TCWG including requesting further information from them:
a) Auditor’s views about significant qualitative aspects of entity’s accounting practices,
including accounting policies, accounting estimates and financial statement disclosures.
 Auditor’s views on subjective aspects of F/S may be particularly relevant to TCWG in
discharging their responsibilities for oversight of the financial reporting process.
 Open and constructive communication about significant qualitative aspects of
entity’s accounting practices also may include comment on acceptability of significant
accounting practices and quality of disclosures.
b) Significant difficulties, if any, encountered during the audit;
 Significant delays by management, unavailability of personnel, or unwillingness by
management to provide necessary information.
 An unreasonably brief time to complete the audit.
 Extensive unexpected effort required to obtain audit evidence
 Unavailability of expected information.
 Restrictions imposed on the auditor by management.
[
 Management’s unwillingness to make or extend its assessment of going concern.
c) Unless all of TCWG are involved in managing the entity:
i). Significant matters arising during audit that were discussed, or subject to the
correspondence, with management;
 Significant events or transactions that occurred during the year.
 Business conditions affecting entity, business plans and strategies affecting risk
 Correspondence in connection with initial or recurring appointment of auditor
regarding accounting practices, application of auditing standards, or fees etc
 Significant matters on which there are disagreement with management
ii). Written representations the auditor is requesting;
d) Circumstances that affect the form and content of the auditor’s report, if any;
 To inform TCWG about circumstances in which auditor’s report may differ from its
expected form and content or may include additional information about audit.
 Circumstances where auditor is required to or may include additional information:
 Auditor expects to modify opinion (ISA 705)
 Material uncertainty related to going concern is reported (ISA 570)
 Key audit matters are communicated (ISA 701)
 Auditor considers it necessary to include an Emphasis of Matter paragraph or Other
Matters paragraph (ISA 706)
 There is an uncorrected material misstatement of other information; Auditor may
consider it useful to provide TCWG with a draft of auditor’s report to facilitate a
discussion of how such matters will be addressed in auditor’s report. (ISA 720)
 Auditor intends, in rare circumstances, not to include the name of engagement
partner in report due to severity of personal security threat (ISA 700)
 Auditor elects not to include description of auditor’s responsibilities in body of
the auditor’s report (ISA 700)
ISA 260 Page 36

e) Any other significant matters arising during audit that, in auditor’s professional judgment,
are relevant to the oversight of the financial reporting process.
 Unexpected events, changes in conditions, or audit evidence obtained, requiring the
auditor to modify the overall audit strategy and audit plan
 Material misstatements of the other information that have been corrected.
 Other matters discussed considered by, engagement quality control reviewer, if any.

Auditor Independence (Ref: 17, A29-A32)

In the case of listed entities, auditor shall communicate with TCWG:

 A statement that engagement team and others in firm, the firm and, when applicable,
network firms have complied with relevant ethical requirements regarding independence;
 All relationships and other matters between firm, network firms, and entity that, in the
auditor’s professional judgment, may reasonably be thought to bear on independence;
 Related safeguards that have been applied to eliminate identified threats to independence
or reduce them to an acceptable level.

Relevant ethical requirements or law/regulation may also specify communications to TCWG

in circumstances where breaches of independence requirements have been identified.

The Communication Process (Ref: 18-22, A37-A53)

Establishing the Communication Process

Auditor shall communicate form, timing and expected general content of communications.
Clear communication helps establish the basis for effective two-way communication.

Matters that may also contribute to effective communication include discussion of the:
 Purpose of communications.
 Form in which communications will be made.
 Persons in engagement team and in TCWG who will communicate regarding matters.
 Auditor’s expectation that TCWG will also communicate with auditor matters relevant to
audit (e.g. suspicion of fraud or concerns with integrity or competence of management)
 The process for taking action and reporting back on matters communicated by the auditor.
 The process for taking action and reporting back on matters communicated by TCWG.

Before communicating matters with TCWG, auditor may discuss them with management,
unless that is inappropriate (e.g. questions of management’s competence or integrity)

When entity has an internal audit function, the auditor may discuss matters with the internal
auditor before communicating with TCWG.
ISA 260 Page 37

Communication with Third Parties

 TCWG may be required by law or regulation, or may wish, to provide third parties (e.g.
banks, regulators etc), with copies of a written communication from auditor.
 In some cases, disclosure to third parties may be illegal or otherwise inappropriate.
 When such written communication prepared for TCWG is provided to third parties, it may
be important to inform them that the communication was not exactly prepared for them
 Auditor may need prior consent of TCWG before providing a third party with a copy of the
written communications with TCWG, unless that was required by law or regulation.

Forms of Communication
 Auditor shall communicate in writing with TCWG.
 Oral communication would not be adequate.
 Written communications need not include all matters that arose during course of audit.
 Effective communication may involve structured presentations and written reports as
well as less structured communications, including discussions.
 Auditor may communicate matters other than identified above either orally or in writing

In addition to significance of particular matter, form of communication (orally/writing,

extent of detail, structured/unstructured manner etc) may be affected by such factors as:
 Whether a discussion of the matter will be included in auditor’s report.
 Whether the matter has been satisfactorily resolved.
 Whether management has previously communicated the matter.
 The size, operating structure, control environment, and legal structure of the entity.
 In audit of special purpose F/S, whether auditor also audits entity’s general purpose F/S.
 Legal requirements.
 Expectations of TCWG.
 The amount of ongoing contact and dialogue the auditor has with TCWG.
 Whether there have been significant changes in the membership of a governing body.

Timing of Communications
Auditor shall communicate with TCWG on a timely basis
 Communications regarding planning matters may often be made at early time in audit and,
for an initial engagement, may be made as part of agreeing the terms of the engagement.
 Significant difficulty arising during audit shall be communicated as soon as practicable
 Auditor may communicate orally to TCWG as soon as practicable significant deficiencies in
internal control that the auditor has identified, prior to communicating these in writing
 Auditor may communicate preliminary views about key audit matters when discussing the
planned scope and timing of the audit
 Communications regarding independence may be appropriate whenever significant
judgments are made about threats to independence and related safeguards.
 Communications regarding findings from audit, including views about qualitative aspects of
the entity’s accounting practices, may also be made as part of the concluding discussion.
ISA 260 Page 38

Other factors that may be relevant to the timing of communications include:

 Size, operating structure, control environment, and legal structure of the entity
 Any legal obligation to communicate certain matters within a specified timeframe.
 Expectations of TCWG, including arrangements made for periodic meetings etc.
 The time at which auditor identifies certain matters

Adequacy of the Communication Process

Auditor shall evaluate whether two-way communication between auditor and TCWG has been
adequate for audit purposes. Such evaluation may be based on observations such as:
 Appropriateness and timeliness of actions taken by TCWG in response to matters raised
- In case of no action, auditor may inquire the reasons
- Consider raising the point again to highlight its importance.
 Apparent openness of TCWG in their communications with the auditor.
 Willingness and capacity of TCWG to meet with auditor without management present.
 Apparent ability of TCWG to fully comprehend matters raised by auditor
 Difficulty in establishing with TCWG a mutual understanding of form, timing and expected
general content of communications.
 Whether two-way communication between the auditor and TCWG meets applicable legal
and regulatory requirements.

If two-way communication between auditor and TCWG is not adequate and situation cannot be
resolved, the auditor may take such actions as:
 Modifying the auditor’s opinion on the basis of a scope limitation.
 Obtaining legal advice about the consequences of different courses of action.
 Communicating with third parties (e.g., a regulator), or a higher authority in governance
structure that is outside the entity, such as the owners of a business (e.g., shareholders)
 Withdrawing from engagement, where it is possible under applicable law or regulation.

Documentation (Ref: 23, A54)

Where matters have been communicated in writing, auditor shall retain a copy of the
communication as part of the audit documentation.
Where matters required are communicated orally, auditor shall include them in audit
documentation, and when and to whom they were communicated.
(May also include a copy of minutes prepared by entity retained as part of audit documentation
where those minutes are an appropriate record of the communication)

Important Paragraphs 14, 16, 17, A1, A5, A7, A9, A13, A14, A21, A22, A24, A38,
A43, A47, A53
ISA 265 Page 39

ISA 265

Deficiency in internal control

* A control is designed, implemented or operated in such a way that it is unable to prevent, or detect
and correct, misstatements in the F/S on a timely basis; or
* A control necessary to prevent, or detect and correct, misstatements in F/S on a timely basis is missing.

Significant deficiency in internal control

A deficiency or combination of deficiencies in internal control that, in auditor’s professional judgment,
is of sufficient importance to merit the attention of TCWG.

Auditor shall determine whether, on the basis of the audit work performed, the auditor has
identified one or more deficiencies in internal control.
 Auditor may discuss the relevant facts and circumstances of auditor’s findings with the
appropriate level of management.
 Auditor may obtain other relevant information for further consideration, such as:
- Management understanding of the actual or suspected causes of the deficiencies.
- Exceptions arising from deficiencies that management may have noted
(e.g. misstatements that were not prevented by relevant IT controls)
- A preliminary indication from management of its response to the findings.

Significant Deficiencies in Internal Control (Ref: 8, A5-A11)

If auditor has identified one or more deficiencies in internal control, auditor shall determine,
on the basis of the audit work performed, whether, individually or in combination, they
constitute significant deficiencies

Examples of matters that the auditor may consider in determining the significance:
 Likelihood of the deficiencies leading to material misstatements in the F/S in the future.
 The susceptibility to loss or fraud of the related asset or liability.
 Subjectivity and complexity of determining estimated amounts, e.g. fair value estimates.
 The financial statement amounts exposed to the deficiencies.
 The volume of activity that has occurred or could occur in the account balance or class of
transactions exposed to the deficiency or deficiencies.
 The importance of the controls to the financial reporting process; for example:
- General monitoring controls (such as oversight of management).
- Controls over the prevention and detection of fraud.
- Controls over selection and application of significant accounting policies.
- Controls over significant transactions with related parties.
- Controls over significant transactions outside the entity’s normal course of business.
- Controls over the period-end financial reporting process
 Cause and frequency of the exceptions detected as a result of deficiencies in the controls.
 The interaction of the deficiency with other deficiencies in internal control.
ISA 265 Page 40

Indicators of significant deficiencies in internal control:

 Evidence of ineffective aspects of control environment, such as:

- Indications that significant transactions in which management is financially interested
are not being appropriately scrutinized by TCWG.
- Identification of management fraud, that was not prevented by internal control.
- Management’s failure to implement appropriate remedial action on significant
deficiencies previously communicated.
 Absence of a risk assessment process within entity (where it is expected to be present)
 Evidence of an ineffective risk assessment process (fails to identify risks)
 Evidence of an ineffective response to identified significant risks
 Misstatements detected by auditor that were not prevented, or detected and corrected, by
entity’s internal control.
 Restatement of previously issued F/S to reflect correction of a material misstatement.
 Evidence of management’s inability to oversee the preparation of the F/S.

Communication of Deficiencies in Internal Control (Ref: 9, A12-A18)

Auditor shall communicate in writing significant deficiencies in internal control identified

during the audit to TCWG on a timely basis.

 In determining when to issue written communication, auditor may consider whether

receipt of such communication would be an important factor in enabling TCWG to discharge
their oversight responsibilities.
 Auditor may also communicate these orally in the first instance to management and TCWG
 The level of detail at which to communicate significant deficiencies is a matter of auditor’s
professional judgment. Factors that auditor may consider in determining so include:
- The nature of the entity.
(e.g. communication required for public interest entity may be different from others)
- The size and complexity of the entity.
- The nature of significant deficiencies that the auditor has identified.
- The entity’s governance composition.
(e.g. more detail may be needed if TCWG include inexperienced members)
- Legal or regulatory requirements regarding such communication

 The fact that auditor communicated a significant deficiency to TCWG and management in a
previous audit does not eliminate the need for the auditor to repeat the communication if
remedial action has not yet been taken.
- If a previously communicated significant deficiency remains, this year communication
may repeat the description from previous communication, or simply refer it
- Auditor may ask management or TCWG, why the deficiency has not yet been remedied.
- A failure to take remedial action may in itself represent a significant deficiency.
ISA 265 Page 41

Communication of Deficiencies to Management (Ref: Para. 10, A19-A27)

Auditor shall also communicate to appropriate level of management on a timely basis:
 In writing, significant deficiencies in internal control that auditor has communicated or
intends to communicate to TCWG, unless it is inappropriate to communicate to them.
(E.g. where deficiency call into question the integrity or competence of management)
 Other deficiencies in internal control identified during audit that have not been
communicated to management by other parties and that, in auditor’s professional judgment,
are of sufficient importance to merit management’s attention.
Other considerations relating to Communication of Other Deficiencies
 Communication of other deficiencies need not be in writing but may be oral.
 If auditor has communicated other deficiencies in internal control to management in prior
period and management has chosen not to remedy them for cost or other reasons, auditor
need not repeat the communication in the current period.
 Auditor may re- communicate these other deficiencies if there has been a change of
management, or if new information has come to auditor’s attention
 If deemed appropriate, auditor may also inform TCWG of such communication

Content of Written Communication of Significant Deficiencies (Ref: 11, A28-A30)

Auditor shall include in written communication of significant deficiencies in internal control:
 A description of the deficiencies and an explanation of their potential effects; and
 Sufficient information to enable TCWG and management to understand the context of the
communication. In particular, the auditor shall explain that:
- The purpose of the audit was for the auditor to express an opinion on the F/S;
- The audit included consideration of internal control relevant to preparation of F/S in
order to design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on effectiveness of internal control; and
- The matters being reported are limited to those deficiencies that auditor has identified
during audit and that auditor has concluded are of sufficient importance to be reported
Other Considerations
 In explaining potential effects, auditor need not quantify those effects.
 Significant deficiencies may be grouped together for reporting purposes, if appropriate.
 Auditor may also include suggestions for remedial action on deficiencies, management’s
actual or proposed responses, and a statement as to whether auditor has undertaken any
steps to verify whether management’s responses have been implemented.
 Auditor may consider it appropriate to include the indications that:
- By performed more extensive procedures, more deficiencies could also be identified.
- Such communication has been provided for TCWG, and that is not suitable for others.
 Law or regulation may require auditor or management to furnish copy of communication to
appropriate regulatory authorities.
(In this case, auditor’s written communication may identify such regulatory authorities)
Important Paragraphs 10, 11, A2, A6, A7, A15, A29
ISA 300 Page 42

ISA 300

The Role and Timing of Planning (Ref: 2, A1-A3)

Benefits of Adequate planning

 Helps to devote appropriate attention to important areas of audit
 Helps identify and resolve potential problems on a timely basis.
 Helps auditor properly organize and manage the audit
 Helps in assignment of engagement team members & audit work.
 Facilitating direction, supervision and review of audit work.
 Assisting in coordination of work done by component auditors (ISA-600) and experts (ISA-
620).

Planning activities vary according to

 Size of the entity
 Complexity of the entity
 Team member's previous experience with entity
 Changes in circumstances occurring during audit.

Planning includes need to consider, prior to risk assessment, such matters as:
 Analytical procedure to be applied as risk assessment procedure
 Obtaining general understanding of the legal and regulatory framework of the entity.
 Determination of materiality.
 Involvement of experts.
 Performance of other risk assessment procedures.

Auditor may discuss planning with management to facilitate management of the audit, but
should not compromise the effectiveness of the audit by making audit procedures too
predictable.

Involvement of Key Engagement Team Members (Ref: 5, A4)

Engagement partner and other key members shall be involved in the planning

Preliminary Engagement Activities (Ref: 6, A5-A7)

Auditor shall undertake the following activities at the beginning of current audit engagement:
 Procedures regarding continuance of client (ISA-220)
 Evaluating compliance with ethical requirements (ISA 220)
 Establishing an understanding of terms of engagement (ISA 210)
ISA 300 Page 43

It enables auditor to plan an audit engagement for which:

 Auditor maintains necessary independence and ability to perform the engagement.
 No issues with management integrity affecting auditor's willingness to continue
engagement
 There is no misunderstanding with the client as to the terms of the engagement.

Additional Considerations in Initial Audit Engagements (Ref: 13, A22)

 Performing procedures regarding acceptance of client relationship and specific audit

engagement (ISA 220)
 Prior to starting an initial audit, auditor shall communicate with predecessor auditor, in
compliance with ethical requirements.

Additional matters he may consider in establishing overall audit strategy & audit plan includes:
 Arrangements to be made with predecessor auditor e.g. reviewing auditor’s working
papers.
 Any major issues discussed with management in connection with initial selection as
auditor, communicating matters to TCWG and how these matters affect the overall
planning.
 Procedures necessary to obtain sufficient appropriate audit evidence for opening balances.
 Other procedures required by firm's system of quality control for initial audits
(e.g. involvement of another partner or senior individual to review planning activities)

Planning Activities (Ref: 7-11, A8-A17)

Auditor shall establish an “overall audit strategy” that sets the scope, timing and direction of
the audit, and that guides the development of the “audit plan”.

OVERALL AUDIT STRATEGY

Establishing overall audit strategy assists auditor to determine:

 Resources to deploy for specific audit areas
(e.g. experienced team members for risky areas)
 Amount of resources to allocate to specific audit areas
(e.g. number of team members)
 Timing of deployment of these resources
(e.g. whether interim audit stage or at cutoff dates)
 How these resources are managed, directed and supervised
ISA 300 Page 44

AUDIT PLAN
Once overall audit strategy has been established, an audit plan can be developed to address
various matters identified in overall audit strategy

The auditor shall develop an audit plan that shall include a description of the nature, timing and
extent of planned risk assessment procedures and further audit procedures.

Changes to Planning Decisions during the Course of the Audit

Auditor shall update & change overall audit strategy and audit plan, as and when necessary,
during course of audit as a result of unexpected events, changes in conditions, or audit evidence
obtained

Direction, Supervision and Review (factors)

 Size and complexity of the entity.
 Area of the audit.
 Assessed risks of material misstatement.
 Capabilities and competence of the individual team members performing the audit work.

Documentation (Ref: 12, A18-21)

 The overall audit strategy;
 The audit plan
 Any significant changes made during audit to above two and reasons for such change

Important Paragraphs 6, 8, 9, 12, A9, A8, A12, A14, A20

ISA 315 Page 45

ISA 315*
* Users are suggested to check the latest status of ISA 315 before using this portion notes. This
standard is due to be changed as and when ICAP adopt revised one instead this.

Risk Assessment Procedures and Related Activities (Ref: 5-10, A1-A24)

Risk assessment procedures

 Inquiries from management, and others within entity.
 Analytical procedures.
(May help identify the existence of unusual transactions or events, and amounts, ratios, and
trends)
 Observation
 Inspection.

Related activities
 Client Acceptance or Continuance Process
 Other engagements of same entity
 Information from previous audits
 Past misstatements and whether they were corrected timely
 Nature of entity and its environment, and internal control
 Significant changes in entity’s operations.
 Discussion among Engagement Team
 Provides opportunity for senior engagement team members to share their insights
based on their knowledge.
 Allows team members to exchange information about business risks.
 Assists team members to gain a better understanding of potential for material
misstatement of F/s in specific areas
 Helps to understand how the results of audit procedures that they perform may affect
other aspects of the audit
 Provides a basis upon which engagement team members communicate and share new
information obtained

Identifying and Assessing the Risks of Material Misstatement (Ref: 25-31, A122-A152)

1) Financial statement level

 Refer to risks that relate pervasively to the F/S as a whole and potentially affect many
assertions.
 Risks may also derive from a deficient control environment
 Understanding of internal control may raise doubts about auditability of entity's F/S. E.g :
 Integrity of entity's management.
 Condition and reliability of an entity's records
ISA 315 Page 46

2) Assertion Level
Assertions Class of Account
(Description) Transaction Balance
Occurrence: Transactions and events that have been recorded or
disclosed, have occurred and such transactions and events 
pertains to entity
Existence: Assets, liabilities, and equity interests exist 
Accuracy: Amounts and other data relating to recorded
transactions and events have been recorded appropriately and

related disclosures have been appropriately measured &
described.
Accuracy, Valuation & Allocation: Assets, liabilities, and equity

interests are included in the F/S at appropriate amounts
Completeness: Assets, liabilities, equity interests, transactions
and events that should have been recorded have been recorded,  
and all related disclosures have been included in the F/S
Rights and Obligation: the entity holds or controls the rights to

assets, and liabilities are the obligations of the entity
Cut-Off: Transactions and events have been recorded in the

correct accounting period
Classification: Assets, liabilities and equity interests have been

recorded in the proper accounts
Presentation – Transactions, events, assets, liabilities and
equity interest are appropriately aggregated or disaggregated
 
and clearly described, and related disclosures are relevant &
understandable in context of requirements of AFRF
Auditor shall:
 Identify risks throughout during obtaining understanding and by considering assertions.
 Assess identified risks, and evaluate whether they relate more pervasively to F/S as a whole
and affect many assertions
 Relate identified risks to what can go wrong at assertion level, taking account of controls
 Consider likelihood of misstatement
Judgment about significance of a risk
 Whether the risk is a risk of fraud
 Whether risk is related to recent significant economic, accounting or other developments
and, therefore, requires specific attention
 Complexity of transactions
 Whether risk involves significant transactions with related parties
 Degree of subjectivity in measurement of financial information related to risk
 Whether risk involves significant transactions that are unusual or are outside the normal
course of business.
ISA 315 Page 47

Identifying Significant Risks relating to non routine transactions or judgmental matters

(Ref: 28, A140-A143)
Risks for non routine transactions may arise from following:
 Greater management intervention to specify accounting treatment
 Greater manual intervention for data collection and processing.
 Complex calculations or accounting principles.
 Nature of non-routine transactions, making it difficult for entity to implement effective
controls over the risks.
Risks may be greater for significant judgmental matters requiring development of accounting
estimates, arising from following matters:
 Principles for estimates or revenue recognition may be subject to differing interpretation.
 Required judgment may be subjective or complex, or require assumptions about the effects
of future events

Understanding Controls Related to Significant Risks (Ref: 29, A145-A147)

 If auditor has determined that a significant risk exists, he shall obtain an understanding of
the entity's controls.
 Understanding also includes how management responds to risks.
 Responses might include control activities, documented processes and approvals by TCWG

Revision of Risk Assessment (Ref: 31, A151)

 Risk assessment at assertion level may change during the audit as additional audit evidence
is obtained.
 If audit evidence obtained from further audit procedures or new information is inconsistent
with previous audit evidence, auditor shall revise assessment and modify further audit
procedures.

Limitations of Internal Control (Ref: A54-A56)

 Human judgment in decision-making can be faulty
 Breakdowns can occur because of human error
 Collusion of two or more people
 Inappropriate management override of internal control
 Management’s judgments on selection and application of controls.

Documentation (Ref: 32, A153-156)

 Discussion among engagement team and significant decisions;
 Key elements of understanding obtained;
 Sources of information
 Risk assessment procedures performed;
 Risks of material misstatement at F/S level and assertion level
 Risks identified, and related controls
[
ISA 315 Page 48

Understanding the Entity and its environment (Ref: 11, A25-A49)

1) Relevant industry, regulatory & other external factors including applicable financial
reporting framework.

 Industry Factors
 The market and competition, including demand, capacity, and price competition.
 Cyclical or seasonal activity.
 Product technology relating to the entity's products.
 Energy supply and cost.

 Regulatory Factors
 Accounting principles and industry-specific practices.
 Regulatory framework for a regulated industry.
 Legislation and regulation affecting entity's operations
 Taxation
 Government policies affecting conduct of entity's business
 Environmental requirements.

 Other Factors
 General economic conditions
 Interest rates
 Availability of financing, and inflation/currency revaluation.

2) The nature of the entity, including:

 Business operations
 its ownership and governance structures;
 Types of investments by the entity including investments in special-purpose entities;
 The way that the entity is structured and how it is financed
 Financial reporting

3) Entity's selection and application of accounting policies, including the reasons for
changes thereto.

 Methods to account for significant and unusual transactions.

 Effect of significant accounting policies in controversial or emerging areas for which there is
a lack of guidance or consensus.
 Changes in the entity's accounting policies.
 Financial reporting standards and laws and regulations that are new to entity and how entity
will adopt such requirements.
ISA 315 Page 49

4) Objectives and strategies and related business risks that may result in risks of
material misstatement

Example of Strategy Potential related Business Risk might be that:

Industry developments Entity does not have personnel or expertise to deal with
changes in the industry
New products &services There is increased product liability
Expansion of business Demand has not been accurately estimated
New accounting requirements Incomplete or improper implementation, or increased
costs
Regulatory requirements There is increased legal exposure
Current and prospective Loss of financing due to the entity's inability to meet
financing requirements requirements
Use of IT Systems and processes are incompatible

5) The measurement and review of financial performance.

 Key performance indicators (financial and non-financial) and key ratios, trends and
operating statistics.
 Period-on-period financial performance analyses.
 Budgets, forecasts, variance analyses, segment information and divisional, departmental or
other level performance reports.
 Employee performance measures and incentive compensation policies.
 Comparisons of an entity's performance with that of competitors.

Examples of conditions and events that may indicate risks of material misstatement

 Operations exposed to volatile markets e.g. futures trading.

 Operations that are subject to high degree of complex regulation.
 Going concern and liquidity issues
 Loss of significant customers.
 Constraints on the availability of capital and credit.
 Changes in the industry in which the entity operates.
 Changes in the supply chain.
 Developing or offering new products or services.
 Expanding into new locations.
 Changes in entity such as large acquisitions or reorganizations.
 Entities or business segments likely to be sold.
 The existence of complex alliances and joint ventures.
 Use of off balance sheet finance, special-purpose entities etc.
 Significant transactions with related parties.
 Lack of personnel with appropriate financial reporting skills.
 Changes in key personnel including departure of key executives.
ISA 315 Page 50

 Deficiencies in internal control, especially not addressed by entity.

 Inconsistencies between entity's IT strategy & business strategies.
 Changes in the IT environment.
 Installation of significant new financial reporting IT systems.
 Inquiries by regulatory or government bodies.
 Past misstatements or significant adjustments at period end.
 Significant amount of non-routine or non-systematic transactions
 Operations in regions that are economically unstable
 Transactions that are recorded based on management's intent
 Application of new accounting pronouncements.
 Accounting measurements that involve complex processes.
 Events or transactions involving uncertainty
 Pending litigation and contingent liabilities

Manual and Automated Elements of Internal Control (A61-A67)

Controls in a manual system: May include approvals and reviews of transactions, and
reconciliations and follow-up of reconciling items.

Controls in IT systems: Consist of combination of automated controls and manual controls.

Benefits of IT in entity's internal control:

 Consistently apply predefined business rules
 Perform complex calculations in processing large volumes
 Enhance timeliness, availability, and accuracy of information
 Facilitate additional analysis of information;
 Enhance ability to monitor performance of entity
 Reduce the risk that controls will be circumvented
 Enhance ability to achieve effective segregation of duties.

Risks of using IT in internal control:

 Reliance on systems or programs that is faulty.
 Unauthorized access to data
 IT personnel gaining access privileges beyond authority.
 Unauthorized changes to data in master files.
 Unauthorized changes to systems or programs.
 Failure to make necessary changes to systems or programs.
 Inappropriate manual intervention.
 Potential loss of data or inability to access data as required.
ISA 315 Page 51

Manual elements in internal control may be more suitable where judgment and
discretion are required:
 Large, unusual or non-recurring transactions.
 Circumstances where errors are difficult to define or predict.
 In changing circumstances requiring a control response outside the scope of an existing
control.
 In monitoring effectiveness of automated controls.

Manual elements in internal control may be less reliable than automated elements
 High volume or recurring transactions, or situations where anticipated errors can be
prevented, or detected and corrected.
 Control activities where the specific ways to perform the control can be adequately
designed and automated.

General IT controls are policies and procedures that relate to many applications and support
the effective functioning of application controls. General IT controls that maintain the integrity
of information and security of data commonly include controls over following:
 Data center and network operations.
 System software acquisition, change and maintenance.
 Program change.
 Access security.
 Application system acquisition, development, and maintenance.

Application controls are manual or automated procedures that typically operate at a business
process level and apply to the processing of transactions by individual applications. Examples
include
 Edit checks of input data
 Correction at the point of data entry.

Nature and Extent of the Understanding of Relevant Controls (Ref 13, A74-A76)
Risk assessment procedures to obtain audit evidence about design and implementation of
controls may include:
 Inquiring of entity personnel.
 Observing the application of specific controls.
 Inspecting documents and reports.
 Tracing transactions through the information system relevant to financial reporting.

Evaluating design involves considering whether control is capable of effectively preventing, or

detecting and correcting, material misstatements.
Implementation means that control exists and entity is using it. An improperly designed
control may represent significant deficiency in control.
ISA 315 Page 52

Components of Internal Control (Ref 12-24, A50-A121, Appendix 1)

1) Control environment
 Communication and enforcement of integrity and ethical values
 Commitment to competence
 Participation by TCWG
 Management philosophy and operating style
 Organizational structure
 Assignment of authority and responsibility
 Human resource policies and practices

2) The Entity's Risk Assessment Process

Obtain understanding of whether entity has a process for:
 Identifying risks relevant to financial reporting objectives
 Estimating the significance of the risks;
 Assessing the likelihood of their occurrence; and
 Deciding about actions to address those risks.

If the entity has established “risk assessment process

 Auditor shall obtain an understanding of it, and results thereof.
 If auditor identifies risks that management failed to identify, auditor shall obtain an
understanding of why that process failed
 Determine if there is a significant deficiency in internal control with regard to the entity's
risk assessment process.

If entity has not established such a process or has ad hoc process

 Auditor shall discuss with management whether business risks have been identified and
addressed.
 Auditor shall evaluate whether absence of a documented risk assessment process is
appropriate or whether it represents deficiency in internal control.

3) Information System, Including Related Business Processes, Relevant to Financial

Reporting, and Communication

 Classes of transactions that are significant to F/S

 Procedures, within both manual and IT systems
 Related accounting records and supporting information
 How information system captures significant events & conditions
 Financial reporting process used to prepare F/S
 Controls surrounding journal entries, including non-standard journal entries used to record
non-recurring, unusual transactions
ISA 315 Page 53

An information system consists of infrastructure (physical and hardware components),

software, people, procedures, and data. Many information systems make extensive use of
information technology (IT).

Journal entries
 An information system typically includes use of standard journal entries required on a
recurring basis to record transactions
 Financial reporting process also includes use of non-standard journal entries to record non-
recurring, unusual transactions.
 In manual systems, such entries may be identified through inspection of ledgers,
journals & supporting documentation.
 In IT environment, such entries may exist only in electronic form and therefore be more
easily identified through CAAT.

4) Monitoring of Controls

Auditor shall obtain an understanding of

 Major activities that entity uses to monitor internal controls
 How entity initiates remedial actions to deficiencies in controls.
 Sources of information used in the entity's monitoring activities

If the entity has an internal audit function, auditor shall obtain an understanding of the
following:
 Nature of internal audit function's responsibilities
 How it fits in the organizational structure
 Activities of internal audit function.

5) Control Activities

 Performance reviews.
 Reviews and analyses of actual performance versus budgets, forecasts, and prior period
performance
 Information processing.
 Application controls
(apply to the processing of individual applications)
 General IT controls
 Physical controls.
 Physical security of assets, including adequate safeguards such as secured facilities over
access to assets and records.
 Authorization for access to computer programs and files.
 Periodic counting and comparison with amounts on records
ISA 315 Page 54

 Authorization & Segregation of duties

 To reduce opportunities to allow any person to be in a position to both perpetrate and
conceal errors or fraud.
 Assigning different people for
 Authorizing transactions
 Recording transactions
 Custody of assets.

Examples of Control Activities

 Approval and control of documents
 Checking the arithmetical accuracy of records
Tutor’s  Maintaining and reviewing control accounts and trial balances
Note  Reconciliations
 Comparing the results of cash, security and inventory counts with
accounting records
 Comparing internal data with external sources
 Limiting physical access to assets and records

Tutor’s Note: How to deal with Risk Assessment (mix) Question in Exam
ISA 315 Page 55

Important 6, 11, 14, 15, 18, 28, 32, A7, A9, A18, A19, A21, A24, A26, A30, A31,
Paragraphs A35, A39, A45, A61, A62, A63, A64, A77, A89, A104, A133
ISA 315 Page 56
ISA 320 Page 57

ISA 320

Materiality in the Context of an Audit (Ref: 2-6, A1)

Misstatements, including omissions, are considered to be material if they, individually or in

aggregate, could reasonably be expected to influence the economic decisions of users taken on
the basis of F/S

Determining materiality is a matter of professional judgment, auditor assume that users:

 Have a reasonable knowledge of business & economic activities
 Understand that F/S are prepared, presented and audited to levels of materiality;
 Recognize the uncertainties inherent; and
 Make reasonable economic decision

Materiality is applied both in planning and performing audit.

In planning, auditor makes judgments about size of misstatements that will be considered
material.

These judgments provide a basis for:

 Determining nature, timing & extent of risk assessment procedures
 Determining nature, timing & extent of further audit procedures.
 Identifying and assessing risks of material misstatement

Auditor considers not only the size but also the nature of uncorrected misstatements.

Determining Materiality and Performance Materiality When Planning the Audit

(Ref: 10-11, A3-A13)

1) For the F/S as a Whole

Determining materiality involves the exercise of professional judgment. A percentage is often

applied to a chosen benchmark as a starting point in determining materiality.

Factors relevant for identifying benchmark are

 Elements of F/S (e.g. assets, liabilities, equity, revenue, expenses)
 Items on which attention of users of particular entity's F/S tends to be focused
 Nature of entity, current phase of life cycle, and industry & economic environment
 Entity's ownership structure and the way it is financed
 The relative volatility of the benchmark.
ISA 320 Page 58

2) For Particular Classes of Transactions, Account Balances or Disclosures

If there is one or more particular classes of transactions, account balances or disclosures for
which misstatements of lesser amounts than materiality for F/S as a whole could reasonably be
expected to influence the economic decisions of users.

Factors indicating existence such materiality include:

 Whether law, regulation or applicable FRF affect users' expectations regarding
measurement or disclosure of certain items (e.g. related party transactions).
 Key disclosures in relation to industry.
 Whether attention is focused on a particular aspect of entity's business that is separately
disclosed in F/S
(for example, a newly acquired business)

3) Performance Materiality

Performance Materiality:
Amount or amounts set by auditor at less than materiality for the F/S as a whole to reduce to
an appropriately low level the probability that the aggregate of uncorrected and undetected
misstatements exceeds materiality for the F/S as a whole. If applicable, performance
materiality also refers to amount or amounts set by the auditor at less than the materiality
level or levels for particular classes of transactions, account balances or disclosures.

Auditor shall determine performance materiality for purposes of assessing risks of material
misstatement and determining the nature, timing and extent of further audit procedures.

Revision as the Audit Progresses (Ref: 12-13, A14)

Auditor shall revise materiality on becoming aware of information during the audit
(E.g. a decision to dispose of a major part of the entity's business, new information, or a change
in the auditor's understanding of the entity and its operations as a result of performing further
audit procedures.)

Documentation (Ref: 14)

 Materiality for the F/S as a whole
 Materiality level(s) for particular classes of transactions, account balances or disclosures
 Performance materiality
 Any revision in above as the audit progressed

Important Paragraphs 10, 14, A3, A10, A12

ISA 330 Page 59

ISA 330

Substantive procedure
An audit procedure designed to detect material misstatements at the assertion level.
Substantive procedures comprise:
(i) Tests of details; and
(ii) Substantive analytical procedures.

Test of controls
An audit procedure designed to evaluate the operating effectiveness of controls in preventing,
or detecting and correcting, material misstatements at the assertion level.

Overall Responses (Ref: 5, A1-A3)

Auditor shall design and implement overall responses to address the assessed risks of material
misstatement at the F/S level.
Such overall responses may include:
 Emphasizing to the engagement team the need to maintain professional skepticism.
 Assigning more experienced staff or those with special skills or using experts.
 Providing more supervision.
 Incorporating unpredictability in selection of further audit procedures to be performed.
 Making general changes to nature, timing or extent of audit procedures
(e.g. performing substantive procedures at period end instead of at an interim date etc)

Responses to the Assessed Risks at the Assertion Level (Ref: 6, 7, A4-A19)

Auditor shall design and perform further audit procedures whose nature, timing and extent
are based on the assessed risks of material misstatement at assertion level.
Assessment of identified risks at assertion level provides a basis for considering the appropriate
audit approach for designing and performing further audit procedures. For example:
 Only by performing tests of controls
 Performing only substantive procedures is appropriate; or
(auditor excludes the effect of controls from the relevant risk assessment)
 A combined approach using both tests of controls and substantive procedures
In designing further audit procedures to be performed, auditor shall:
 Consider the reasons for risk assessment at the assertion level, including:
- Likelihood of material misstatement due to particular characteristics of relevant class of
transactions, account balance, or disclosure (i.e. inherent risk); and
- Whether the risk assessment takes account of relevant controls (i.e. control risk)
 Obtain more persuasive audit evidence in case of higher assessment of risk.
(May increase quantity of evidence, or obtain more relevant and reliable evidence)
ISA 330 Page 60

Nature of an Audit Procedure

Nature of an audit procedure refers to:

 Its purpose (e.g. test of controls or substantive procedure); and
 Its type (e.g. inspection, observation, inquiry, recalculation, or analytical procedure etc).

Auditor’s assessed risks may affect both the types of audit procedures to be performed and their
combination. For example, when an assessed risk is high, auditor may confirm completeness of
the terms of a contract with counterparty, in addition to inspecting the document.

Timing of an Audit Procedure

Timing of an audit procedure refers to when it is performed, or the period or date to which the
audit evidence applies.

The higher the risk of material misstatement, the more likely it is that auditor may decide it is more
effective to perform substantive procedures nearer to, or at the period end

On other hand, performing audit procedures before period end may assist the auditor in
identifying significant matters at an early stage of audit, and resolving them with management

Certain audit procedures can be performed only at or after the period end, for example:
 Agreeing the F/S to the accounting records;
 Examining adjustments made during the course of preparing the F/S; and
 Procedures to respond to a risk that entity may have entered into improper sales contracts
at period end

Other Relevant factors influencing auditor’s consideration of timing of auditors procedures:

 The control environment.
 Timing of availability of relevant information
 Nature of the risk
 The period or date to which the audit evidence relates

Extent of an Audit Procedure

Extent of an audit procedure refers to quantity to be performed

Extent of an audit procedure is determined after considering materiality, assessed risk, and
the degree of assurance required.

Use of the computer-assisted audit techniques (CAATs) may enable more extensive testing of
electronic transactions and account files, which may be useful when auditor decides to modify extent
of testing. Such techniques can be used to select sample transactions from key electronic files, to
sort transactions with specific characteristics, or to test an entire population instead of a sample.
ISA 330 Page 61

Tests of Controls (Ref: 8-17, A20-A41)

Auditor shall design and perform tests of controls to obtain sufficient appropriate audit
evidence as to the operating effectiveness of relevant controls if:
 Auditor’s assessment of risks at assertion level includes an expectation that controls are
operating effectively (i.e. auditor intends to rely on operating effectiveness of controls); or
(Auditor shall obtain more persuasive audit evidence in test of controls)
 Substantive procedures alone cannot provide sufficient appropriate audit evidence
(e.g. when business is conducted using IT and paper documentation is not maintained)

Testing the operating effectiveness of controls is different from obtaining an understanding of

and evaluating design and implementation of controls (as per ISA 315). Auditor may decide
that it is efficient to test operating effectiveness of controls at same time when evaluating those.

Nature and Extent of Tests of Controls

In designing and performing tests of controls, auditor shall:

 Perform procedures to obtain evidence about operating effectiveness of controls:
- How the controls were applied at relevant times during the accounting period;
- The consistency with which they were applied; and
- By whom or by what means they were applied.
 Determine whether controls are interdependent and whether to check other controls

Nature
Nature of particular control influences the type of procedure required to obtain audit evidence
about whether the control was operating effectively.

Timing
 Evidence pertaining only to a point in time may be sufficient for auditor’s purpose; or
(e.g. when testing controls over entity’s physical inventory counting at the period end)
 Auditor may intend to rely on a control over a period

Extent
Auditor may consider following matters in determining the extent of tests of controls:
 Frequency of the performance of the control by the entity.
 Length of time during period that auditor is relying on operating effectiveness of control
 Expected rate of deviation from a control.
 Relevance and reliability of audit evidence to be obtained
 Extent to which audit evidence is obtained from tests of other controls.

Because of inherent consistency of IT processing, it may not be necessary to increase the extent
of testing of an automated control. It can be expected to function consistently unless the
program (including the tables, files, or other permanent data used by the program) is changed.
ISA 330 Page 62

Using audit evidence obtained about controls during an interim period

Auditor shall:
 Obtain evidence about significant changes to those controls subsequent to that period; and
 Determine the additional audit evidence to be obtained for the remaining period

Relevant factors in determining additional audit evidence include:

 Significance of assessed risks of material misstatement at the assertion level.
 Degree to which audit evidence about those controls was obtained.
 The length of the remaining period.
 Extent to which the auditor intends to rely on controls.
 The control environment.

Using audit evidence obtained in previous audits

Auditor shall consider the following:

 Effectiveness of other elements of internal control
 Risks arising from characteristics of control, including whether it is manual or automated;
 The effectiveness of general IT controls;
 The effectiveness of the control and its application by the entity;
 Whether lack of a change poses a risk due to changing circumstances; and
 The risks of material misstatement and the extent of reliance on the control.

Auditor shall establish the continuing relevance of that evidence by obtaining audit evidence
about whether significant changes in those controls have occurred subsequent to previous audit.
 If there have been changes, auditor shall test the controls in the current audit.
 If there have been no changes, auditor shall test controls at least once in every 3 rd audit

If auditor plans to rely on controls over a significant risk, auditor shall test those controls in the
current period

Evaluating the operating effectiveness of relevant controls

Auditor shall evaluate whether the misstatements detected by the substantive procedures
indicate that controls are not operating effectively.

If deviations from controls are detected, auditor shall make specific inquiries to understand these
matters and their potential consequences, and shall determine whether:
 Performed tests of controls provide an appropriate basis for reliance on the controls;
 Additional tests of controls are necessary; or
 The potential risks of misstatement need to be addressed using substantive procedures.
ISA 330 Page 63

Substantive Procedures (Ref: 18-23, A42-A58)

Irrespective of risks of material misstatement, auditor shall design and perform substantive
procedures for each material class of transactions, account balance, and disclosure

Depending on the circumstances, auditor may determine that:

 Performing only substantive analytical procedures will be sufficient to reduce audit risk;
 Only tests of details are appropriate; or
 A combination of substantive analytical procedures and tests of details are required.

Extent of substantive procedures may need to be increased when the results from tests of
controls are unsatisfactory. This is normally done through increasing the sample size.

Substantive Procedures Related to the Financial Statement Closing Process

Substantive procedures shall include following audit procedures related to F/S closing process:
 Agreeing or reconciling the F/S with the underlying accounting records; and
 Examining material journal entries and other adjustments made during the course of
preparing the F/S. (Ref: Para. A52)

Substantive Procedures Responsive to Significant Risks

Auditor shall perform substantive procedures that are specifically responsive to that risk. When
the approach to a significant risk consists only of substantive procedures, those procedures shall
include tests of details. External confirmations received directly by auditor from appropriate
confirming parties may assist auditor in obtaining audit evidence with high reliability

Timing of Substantive Procedures

If substantive procedures are performed at an interim date, auditor shall cover the remaining
period by performing:
 Substantive procedures, combined with tests of controls for the intervening period; or
 Further substantive procedures only

Factors that may influence whether to perform substantive procedures at an interim date:
 The control environment and other relevant controls.
 The availability at a later date of information necessary for the auditor’s procedures.
 The purpose of the substantive procedure.
 The assessed risk of material misstatement.
 The nature of the class of transactions or account balance and related assertions.
 The ability of the auditor to perform appropriate substantive procedures or substantive
procedures combined with tests of controls to cover the remaining period in order to reduce
the risk that misstatements that may exist at the period end will not be detected.
ISA 330 Page 64

Following factors may influence whether to perform substantive analytical procedures with
respect to the period between the interim date and the period end:
 Whether period-end balances are reasonably predictable.
 Whether the entity’s procedures for analyzing and adjusting such items and for establishing
proper accounting cutoffs are appropriate.
 Whether information system relevant to financial reporting will provide information that is
sufficient to permit investigation of:
- Significant unusual transactions or entries (including those at or near the period end);
- Other causes of significant fluctuations, or expected fluctuations that did not occur; and
- Changes in the composition of the classes of transactions or account balances.

Misstatements detected at an interim date

Auditor shall evaluate whether the related assessment of risk and planned nature, timing or
extent of substantive procedures covering the remaining period need to be modified. Such
modification may include extending or repeating the procedures at the period end.

Adequacy of Presentation and Disclosure (Ref: 24, A59)

Auditor shall perform audit procedures to evaluate whether the overall presentation of F/S,
including the related disclosures, is in accordance with AFRF

Evaluating Sufficiency and Appropriateness of Audit Evidence (Ref: 25-27, A60-A62)

Auditor shall evaluate before conclusion of audit whether the assessments of risks of material
misstatement at the assertion level remain appropriate. Auditor may need to reevaluate planned
audit procedures, based on revised consideration of assessed risks
Auditor shall conclude whether sufficient appropriate audit evidence has been obtained to
enable auditor in forming an opinion (whether it corroborates or contradicts the assertions)
If auditor has not obtained sufficient appropriate audit evidence, auditor shall attempt to obtain
further audit evidence. If auditor is unable to obtain sufficient appropriate audit evidence,
auditor shall express a qualified opinion or disclaim an opinion on the F/S.

Documentation (Ref: 28-30, A63)

Documentation shall demonstrate that F/S reconcile with underlying accounting records
Auditor shall include in the audit documentation:
 Overall responses to address the assessed risks of material misstatement at F/S level, and
the nature, timing and extent of the further audit procedures performed;
 The linkage of those procedures with the assessed risks at the assertion level; and
 Results of audit procedures, including conclusions where these are not otherwise clear.
 Conclusions reached about relying on controls tested in a previous audit (if relevant).

Important Paragraphs 7, 8, 10,13, 14, 17, 20, 22, 28, A1, A22, A28, A33, A38, A48,
A51, A56, A57, A60, A62
ISA 402 Page 65

ISA 402

Report on description and design of controls at a service organization (Type 1 report)

A report that comprises:
(i) A description, prepared by management of service organization, of service organization’s system,
control objectives and related controls that have been designed & implemented as at a specified date;
and
(ii) A report by service auditor with objective of conveying reasonable assurance that includes service
auditor’s opinion on description of service organization’s system, control objectives and related controls
and suitability of the design of the controls to achieve the specified control objectives.

Report on description, design, and operating effectiveness of controls at service organization

(Type 2 report)
A report that comprises:
(i) A description, prepared by management of service organization, of service organization’s system,
control objectives and related controls, their design and implementation as at a specified date or
throughout a specified period and, in some cases, their operating effectiveness throughout a specified
period; and
(ii) A report by service auditor with objective of conveying reasonable assurance that includes:
a. Service auditor’s opinion on description of service organization’s system, control objectives and
related controls, suitability of the design of the controls to achieve the specified control objectives,
and the operating effectiveness of the controls; and
b. A description of service auditor’s tests of the controls and results thereof.

Service organization - A 3rd-party organization (or segment of a third- party organization) that provides
services to user entities that are part of those entities’ information systems relevant to financial reporting.

Service auditor - An auditor who, at the request of the service organization, provides an assurance
report on the controls of a service organization.

Subservice organization
A service organization used by another service organization to perform some of the services provided
to user entities that are part of those user entities’ information systems relevant to financial reporting.

User entity - An entity that uses a service organization and whose F/S are being audited.
User auditor - An auditor who audits and reports on the F/S of a user entity.

Obtaining Understanding of Services Provided by Service Organization (Ref: 9, A1-A11)

Information on nature of services provided by a service organization may be available from:

 User manuals.
 System overviews.
 Technical manuals.
 The contract or service level agreement between the user entity and the service organization.
 Reports by service organizations, internal audit function or regulatory authorities
 Reports by the service auditor, including management letters, if available.
ISA 402 Page 66

When obtaining understanding of user entity, user auditor shall obtain understanding of how
user entity uses services of a service organization in user entity’s operations, including:

a) Nature of services provided by service organization and the significance of those services
to user entity, including effect thereof on user entity’s internal control;

Examples of service organization services that are relevant to the audit include:
- Maintenance of the user entity’s accounting records.
- Management of assets.
- Initiating, recording or processing transactions as agent of the user entity.

b) Nature and materiality of transactions processed or accounts or financial reporting

processes affected by the service organization;

c) Degree of interaction between activities of service organization and those of user entity;

- If high degree of interaction exists (e.g. user entity authorises transactions and service
organisation processes those), it may be practicable for user entity to implement
effective controls
- If lower degree of interaction exists (e.g. service organization initiates or initially
records, processes, and does accounting for user entity’s transactions), user entity may
be unable to implement effective controls and may rely on controls at service
organisation

d) Nature of relationship between user entity and service organization, including relevant
contractual terms for the activities undertaken by the service organization.

- Information to be provided to user entity and responsibilities for initiating transactions

relating to the activities undertaken by the service organization;
- Application of requirements of regulatory bodies concerning the form of records to be
maintained, or access to them;
- Indemnification, if any, to be provided to user entity in event of a performance failure;
- Whether service organization will provide a report on its controls
- Whether such report would be a type 1 or type 2 report;
- Whether user auditor has rights of access to records of user entity maintained by service
organization and other information necessary for conduct of audit; and
- Whether agreement allows for direct communication between user auditor and service
auditor

A user auditor may use a service auditor to perform procedures on user auditor’s behalf, e.g.:
- Tests of controls at the service organization; or
- Substantive procedures on user entity’s F/S transactions and balances maintained by a
service organization.
ISA 402 Page 67

Understanding the Controls Relating to Services Provided by the Service Organization

(Ref: 10-12, A12-A20)

User auditor shall evaluate design and implementation of relevant controls at user entity ,
including those that are applied to the transactions processed by service organization.

These controls may include:

 Comparing the data submitted to service organization with reports of information received
from service organization after data has been processed.
 Recomputing a sample of payroll amounts for clerical accuracy and reviewing total amount
of the payroll for reasonableness.

If user auditor is unable to obtain a sufficient understanding from user entity, the user auditor
shall obtain that understanding from one or more of the following procedures:
 Obtaining a type 1 or type 2 report, if available (as per ISAE 3402);
 Contacting service organization, through user entity, to obtain specific information;
 Visiting service organization and performing procedures providing necessary information
about the relevant controls at the service organization; or
 Using another auditor to perform procedures that will provide the necessary information
about the relevant controls at the service organization.

User auditor’s decision as to selection of procedure(s) may be influenced by such matters as:
 Size of both user entity and service organization;
 Complexity of transactions at user entity and complexity of services provided by service
organization;
 Location of service organization;
 Nature of the relationship between user entity and the service organization.

A user entity may use a service organization that in turn uses a subservice organization to
provide some of the services provided to a user entity that are part of user entity’s information
system relevant to financial reporting.
 Subservice organization may be separate from service organization or may be related
 A user auditor may need to consider controls at subservice organization.

Using Type 1 or Type 2 Report to Support Understanding of the Service Organization

(Ref: 13-14, A21-A23)

User auditor shall be satisfied as to:

 Service auditor’s professional competence
 Service auditor’s independence from service organization; and
 Adequacy of standards under which type 1 or type 2 report was issued.
ISA 402 Page 68

User auditor shall:

 Evaluate whether description and design of controls at service organization is at a date or
for a period that is appropriate for the user auditor’s purposes;
 Evaluate sufficiency and appropriateness of evidence provided by report; and
 Determine whether complementary user entity controls identified by service organization
are relevant and, if so, whether user entity has designed and implemented such controls.

Type 1 or type 2 report, along with information about user entity, may assist user auditor in
obtaining an understanding of:
 Aspects of controls at service organization that may affect processing of user entity’s
transactions, including the use of subservice organizations;
 Flow of significant transactions through service organization to determine the points in the
transaction flow where material misstatements in user entity’s F/S could occur;
 Control objectives at the service organization relevant to the entity’s F/S assertions; and
 Whether controls at service organization are suitably designed and implemented to
prevent, or detect & correct processing errors that could result in material misstatements
in the user entity’s F/S.

Responding to the Assessed Risks of Material Misstatement (Ref: 15-17, A24-A39)

User auditor shall:

 Determine whether sufficient appropriate audit evidence concerning relevant F/S
assertions is available from records held at user entity; and, if not,
 Perform further audit procedures to obtain sufficient appropriate audit evidence or use
another auditor to perform those procedures at service organization on his behalf.

When service organization maintains material elements of accounting records of user entity,
direct access to those records may be necessary. Such access may involve either physical
inspection of records at the service organization’s premises or interrogation of records
maintained electronically from the user entity or another location, or both.

In determining audit evidence to be obtained for assets held or transactions undertaken by a

service organization on behalf of user entity, following procedures may be considered:
 Inspecting records and documents held by the user entity.
 Inspecting records and documents held by service organization
(This access may be defined in contract between user entity and service organization)
 May also use another auditor to gain access to such records at service organisation
(Prime responsibility to obtain sufficient appropriate evidence rests with user auditor)
 Obtaining confirmations of balances and transactions from service organization
(Where user entity maintains independent records of balances and transactions)
 Performing analytical procedures on records maintained by user entity or on the reports
received from the service organization:
ISA 402 Page 69

Tests of Controls

When user expects that controls at service organization are operating effectively, he shall obtain
audit evidence about operating effectiveness of controls by following procedure(s):
 Obtaining a type 2 report, if available;
 Performing appropriate tests of controls at the service organization; or
 Using another auditor to perform tests of controls at service organization on his behalf

If type 2 report is not available, user auditor may contact service organization, through user
entity, to request that a service auditor be engaged to provide a type 2 report

Using a Type 2 Report as Audit Evidence

User auditor shall determine whether type 2 report provides sufficient appropriate audit
evidence about effectiveness of the controls to support user auditor’s risk assessment by:
 Evaluating whether description, design and operating effectiveness of controls at service
organization is at a date or for a period that is appropriate for the user auditor’s purposes;
 Determining whether complementary user entity controls identified by service
organization are relevant to user entity and, if so testing their operating effectiveness;
 Evaluating adequacy of the time period covered by tests of controls; and
 Evaluating whether tests of controls performed by service auditor and the results thereof,
as described in the service auditor’s report, are relevant to the assertions in the user entity’s
F/S and provide sufficient appropriate audit evidence to support the user auditor’s risk
assessment. (Ref: Para. A31-A39)

Additional audit evidence may be obtained (e.g. by extending tests of controls over remaining
period or testing user entity’s monitoring of controls)

If service auditor’s testing period is completely outside user entity’s financial reporting period,
user auditor will be unable to rely on such tests, unless other procedures are performed.

Exceptions noted by service auditor or a modified opinion in type 2 report are considered in
assessment of test of controls performed by service auditor. User auditor may discuss such
matters with service auditor.

Communication of deficiencies in internal control identified during the audit

User auditor is required to communicate in writing significant deficiencies identified

during audit to both management and TCWG of user entity on a timely basis. Matters that
user auditor may identify during audit and may communicate include:
 Any monitoring of controls that could be implemented by user entity;
 Instances where complementary user entity controls are noted in type 1 or type 2 report
and are not implemented at user entity; and
 Controls needed at service organization that do not appear to have been implemented
ISA 402 Page 70

Type 1 & Type 2 Reports that Exclude Services of Subservice Organization (Ref: 18, A40)
Service auditor’s report may either include (inclusive method) or exclude (crave-out method)
the subservice organization’s relevant control objectives and related controls
If those services are relevant to audit of user entity, user auditor shall apply requirements
of this ISA with respect to the services provided by the subservice organization.

Fraud, Non-Compliance with Laws and Regulations, and Uncorrected Misstatements in

Relation to Activities at the Service Organization (Ref: 19, A41)
User auditor shall inquire management of user entity whether the service organization has
reported, or whether user entity is otherwise aware of, any fraud, non-compliance with laws
and regulations or uncorrected misstatements affecting the F/S of user entity.
User auditor shall evaluate how such matters affect nature, timing and extent of further audit
procedures, including effect on user auditor’s conclusions and report
In certain circumstances, user auditor may require additional information, and may request
the user entity to contact the service organization to obtain necessary information.

Reporting by User Auditor (Ref: 20-22, A42-A44)

User auditor shall modify opinion (ISA 705) if user auditor is unable to obtain sufficient
appropriate audit evidence regarding services provided by service organization
This may be the case when:
 User auditor is unable to obtain a sufficient understanding of services provided by service
organization and does not have a basis for identification and assessment of risks of material
misstatement;
 User auditor’s risk assessment includes an expectation that controls at service organization
are operating effectively and user auditor is unable to obtain sufficient appropriate audit
evidence about operating effectiveness of these controls; or
 Sufficient appropriate audit evidence is only available from records held at the service
organization, and the user auditor is unable to obtain direct access to these records.
Reference to the Work of a Service Auditor
 User auditor shall not refer to work of service auditor in report containing an unmodified
opinion unless required by law or regulation to do so.
 If such reference is required by law or regulation, user auditor’s report shall indicate that
reference does not diminish the user auditor’s responsibility for audit opinion.
 If reference to work of a service auditor is relevant to an understanding of a modification
to opinion, user auditor’s report shall indicate that such reference does not diminish the
user auditor’s responsibility for that opinion.
 In such circumstances, user auditor may need the consent of the service auditor before
making such a reference.
Important Paragraphs 8b, 8c, 8d,8h, 8i, 9, 12, 14, 16, 17, A4, A8, A15, A22, A23,
A26, A41, A42
ISA 450 Page 71

ISA 450

Misstatement
A difference between the amount, 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 AFRF. Misstatements can arise from error or
fraud.
When the auditor expresses an opinion on whether the F/S are presented fairly, in all material
respects, or give a true and fair view, misstatements also include those adjustments of amounts,
classifications, presentation, or disclosures that, in the auditor’s judgment, are necessary for the F/S
to be presented fairly, in all material respects, or to give a true and fair view.

Uncorrected misstatements
Misstatements that the auditor has accumulated during audit and that have not been corrected

Accumulation of Identified Misstatements (Ref: 5, A2-A3)

Auditor shall accumulate misstatements identified during the audit, other than those that are
clearly trivial. Auditor may designate an amount below which misstatements would be clearly
trivial and would not need to be accumulated.

Type of Misstatements
 Factual misstatements Misstatements about which there is no doubt.
 Judgmental misstatements Differences arising from the judgments of management
concerning accounting estimates, or selection or application of
accounting policies that the auditor considers inappropriate.
 Projected misstatements Auditor’s best estimate of misstatements in populations,
(See ISA 530)

Consideration of Identified Misstatements as the Audit Progresses (Ref: 6, 7, A4-A6)

Auditor shall determine whether the overall audit strategy and audit plan need to be revised if:
 The nature of identified misstatements and circumstances of their occurrence indicate the
existence of other similar misstatements
(e.g. misstatement arose from a breakdown in internal control or from inappropriate
assumptions or valuation methods that have been widely applied by the entity)
 Aggregate of misstatements accumulated during audit approaches materiality

If management has examined and corrected misstatements that were detected by auditor, the
auditor shall perform additional procedures to determine whether misstatements remain.
ISA 450 Page 72

Communication and Correction of Misstatements (Ref: 8-9, A7-A10)

 Auditor shall communicate on a timely basis all misstatements accumulated during the
audit with the appropriate level of management, unless prohibited by law or regulation.
 Auditor shall request management to correct those misstatements.
(such correction enables management to maintain accurate accounting books and records)
 If management refuses to correct some or all of the misstatements communicated by the
auditor, the auditor shall:
- Obtain an understanding of management’s reasons for not making the corrections; and
- Take that understanding into account when evaluating whether the F/S are free from
material misstatement.

Evaluating the Effect of Uncorrected Misstatements (Ref: 10-13, A11-A23)

Prior to evaluating effect of uncorrected misstatements, auditor shall reassess materiality to

confirm whether it remains appropriate in the context of the entity’s actual financial results.
If reassessment gives rise to a lower amount, then performance materiality and appropriateness of
the nature, timing and extent of the further audit procedures shall also be reconsidered.

Auditor shall determine whether uncorrected misstatements are material, individually or in

aggregate. In making this determination, the auditor shall consider:
 Size and nature of the misstatements, both in relation to particular classes of transactions,
account balances or disclosures and the F/S as a whole, and the particular circumstances of
their occurrence; and
 Effect of uncorrected misstatements related to prior periods on the relevant classes of
transactions, account balances or disclosures, and the F/S as a whole.

Examples of Particular Circumstances (nature of misstatement)

Circumstances that may affect the evaluation, of any misstatement as material, include the
extent to which the misstatement:
 Affects compliance with regulatory requirements;
 Affects compliance with debt covenants or other contractual requirements;
 Relates to the incorrect selection or application of an accounting policy that has an immaterial
effect on the current period’s F/S but is likely to have a material effect on future periods’ F/S;
 Masks a change in earnings or other trends, especially in the context of general economic
and industry conditions;
 Affects ratios used to evaluate entity’s financial position, results of operations or cash flows;
 Affects segment information presented in F/S;
 Has the effect of increasing management compensation, for example, by ensuring that the
requirements for the award of bonuses or other incentives are satisfied;
 Is significant having regard to auditor’s understanding of the known previous
communications to users, for example, in relation to forecast earnings;
ISA 450 Page 73

 Relates to items involving particular parties (for example, whether external parties to the
transaction are related to members of the entity’s management);
 Is an omission of information not specifically required by AFRF but which, in the judgment of
auditor, is important to users’ understanding of financial position & performance etc; or
 Affects other information that will be communicated in documents containing the audited
F/S (for example, information to be included in a “Management Discussion and
Analysis” or an “Operating and Financial Review”) that may reasonably be expected to
influence the economic decisions of the users of the F/S.

Communication with TCWG (Ref: 12, A21-A23)

 Auditor shall communicate with TCWG uncorrected misstatements and the effect that they
may have on the auditor’s opinion (unless prohibited by law or regulation)
 Where there is a large number of individual immaterial uncorrected misstatements, auditor may
communicate the number and overall monetary effect of uncorrected misstatements
 Auditor shall identify material uncorrected misstatements individually.
 Auditor shall request that uncorrected misstatements be corrected.
 Auditor shall also communicate with TCWG the effect of uncorrected misstatements
related to prior periods on current F/S. (See ISA 710)

Written Representations (Ref: 14, A24)

 Auditor shall request a written representation from management and, where appropriate,
TCWG whether they believe the effects of uncorrected misstatements are immaterial,
individually and in aggregate, to the F/S as a whole.
 A summary of such items shall be included in or attached to the written representation.
 They may add to their written representation words such as: “We do not agree that items
… and … constitute misstatements because [description of reasons].”
 Obtaining representation does not, however, relieve the auditor from his responsibilities

Documentation (Ref: 15, A25)

Auditor shall include in the audit documentation:
 Amount below which misstatements would be regarded as clearly trivial
 All misstatements accumulated during audit and whether they have been corrected; and
 Auditor’s conclusion as to whether uncorrected misstatements are material, individually or
in aggregate and the basis for that conclusion

Important Paragraphs 6,11,15, A1, A3, A16

ISA 500 Page 74

ISA 500

Sufficient Appropriate Audit Evidence (Ref: 6, A1-A25)

Sufficiency is the measure of the quantity of audit evidence.

Appropriateness is the measure of the quality of audit evidence. (Includes Relevance &
Reliability)

a) RELEVANCE
Logical connection with purpose of the audit procedure and the assertion under
consideration.

b) RELIABILITY
Reliability is influenced by its source and nature, and circumstances under which it is
obtained, including controls over its preparation and maintenance.

Generalizations about the reliability

1) Evidence from independent sources is more reliable than outside the entity.
2) Evidence generated internally is increased when related controls are effective.
3) Evidence obtained directly by auditor is more reliable than obtained indirectly.
4) Evidence in documentary form is more reliable than evidence obtained orally.
5) Evidence provided by original documents is more reliable than photocopies or
facsimiles etc

Information produced by entity and used for auditor's purposes(Ref: 7)

When using information produced by entity, auditor shall:
 Obtain audit evidence about accuracy & completeness
 Evaluate whether information is sufficiently precise and detailed for auditor's purposes.

Audit Procedures for Obtaining Audit Evidence (Ref: A10-A25)

 Risk assessment procedures; and

 Further audit procedures, which comprise:
 Tests of controls; and
 Substantive procedures including:
o Tests of details and
o Substantive analytical procedures.
ISA 500 Page 75

Inspection  Examining records or documents

 Physical examination of an asset.
Observation  Looking at a process or procedure being performed by others.
 It is limited to the point in time at which the observation takes place
 It may be affected by knowledge of the fact that it is being observed
External Direct written response to the auditor from a third party.
Confirmation (Account balances ,confirmation of the terms of agreements or
transactions)
Recalculation Checking the mathematical accuracy of documents or records.
Reperformance Independent execution of procedures or controls that were originally
performed as part of the entity's internal control.
Analytical Evaluations of financial information through analysis of probable
Procedures relationships among both financial & non-financial data.
Inquiry Seeking information of knowledgeable persons within entity or outside
entity. Inquiries may range from formal written inquiries to informal
oral inquiries.

Reliability of Information Produced by a Management's Expert (Ref: 8, A35-A52)

Management's expert
An individual or organization possessing expertise in a field other than accounting or
auditing, whose work in that field is used by the entity to assist the entity in preparing F/S.

(a) Evaluate competence, capabilities and objectivity of expert;

- Competence relates to nature and level of expertise.

- Capability relates the ability of expert to exercise that competence.
- Objectivity relates to possible effects that bias, conflict of interest or the influence of others
may have on the professional or business judgment of the expert.

Information regarding competence, capabilities and objectivity may come from:

 Personal experience with previous work of that expert.
 Discussions with that expert.
 Discussions with others who are familiar with that expert's work.
 Knowledge of expert's qualifications, membership of professional body, license to practice
etc.
 Published papers or books written by that expert.
 Auditor's expert used to assist auditor for management's expert.
ISA 500 Page 76

Matters relevant to such evaluation may include

 Whether expert's work is subject to technical standards or other industry requirements
 Relevance of competence, including any areas of specialty within that expert's field.
 Competence with respect to relevant accounting requirements
 Whether it may be necessary to reconsider the initial evaluation of competence, capabilities
and objectivity of the management's expert as the audit progresses.

(b) Obtain an understanding of the work of that expert; and

 Whether that expert's field has areas of specialty within it that are relevant to the audit.
 Whether any professional or other standards, and regulatory or legal requirements apply.
 What assumptions and methods are used by the management's expert, and whether they
are generally accepted within that expert's field and appropriate for financial reporting
purposes.
 The nature of internal and external data or information he uses.

Evaluating engagement letter etc between entity and that expert may assist auditor in
determining the appropriateness of:
 Nature, scope and objectives of that expert's work;
 Respective roles and responsibilities of management and expert
 Nature, timing and extent of communication between them.

(c) Evaluate appropriateness of expert work as audit evidence

 Relevance & reasonableness of expert's findings or conclusions, their consistency with

other audit evidence, and whether they have been appropriately reflected in F/S;
 Relevance & reasonableness of assumptions and methods used;
 Relevance, completeness, and accuracy of source data used.

Nature, timing and extent of audit procedures in relation to Part (a) – (c) may be affected
by

 Nature and complexity of the subject matter.

 Risks of material misstatement in the matter.
 Availability of alternative sources of audit evidence.
 Nature, scope and objectives of the management's expert's work.
 Whether management's expert is employed or is outsourced
 Extent to which management can exercise control or influence over work of that expert.
 Nature and extent of any controls within entity over management's expert's work.
 Auditor's knowledge and experience of expert's field of expertise
 Auditor's previous experience of the work of that expert.
ISA 500 Page 77

Selecting Items for Testing to Obtain Audit Evidence (Ref: 10, A53-A57)

1) Selecting all items (100% examination);

100% examination may be appropriate when:

 Population constitutes a small number of large value items

 There is a significant risk and other means do not provide sufficient appropriate audit
evidence
 Repetitive nature of a calculation or other process performed automatically by an
information system makes a 100% examination cost effective.

2) Selecting specific items; and

 High value or key items.

(e.g. items that are suspicious, unusual, particularly risk-prone or that have a history of error)

 All items over a certain amount.

 Items to obtain information.

3) Audit sampling.
Conclusions to be drawn about an entire population on basis of testing a sample drawn from
it

Inconsistency in, or Doubts over Reliability of Audit Evidence (Ref: 11, A58)

 If audit evidence obtained from one source is inconsistent with that obtained from another;
or
 If auditor has doubts over the reliability of information to be used as audit evidence

Auditor shall determine what modifications or additions to audit procedures are necessary to
resolve the matter, and shall consider the effect of the matter on other aspects of the audit

Important Paragraphs 8, 11, A14-A25, A31, A36, A38, A40, A45, A46, A48, A53,
A54
ISA 501 Page 78

ISA 501

INVENTORY (4-8, A1-A16)

If inventory is material to the F/S, the auditor shall obtain sufficient appropriate audit evidence
regarding the existence and condition of inventory by:
 Attendance at physical inventory counting (unless impracticable) to:
- Evaluate management's instructions and procedures for recording and controlling the
results of the entity's physical inventory counting
- Observe the performance of management's count procedures
- Inspect the inventory
- Perform test counts
 Performing audit procedures over the entity's final inventory records to determine whether
they accurately reflect actual inventory count results.

ATTENDANCE AT PHYSICAL INVENTORY COUNTING (Ref: 4, A1-A8)

Management ordinarily establishes procedures for physical count of inventory at least once a
year to serve as a basis for preparation of F/S and, to ascertain the reliability of entity's
perpetual inventory system (if applicable).

Attendance at physical inventory counting involves:

 Inspecting the inventory to ascertain its existence and evaluate its condition, and
performing test counts;
 Observing compliance with management's instructions and performance of procedures for
recording and controlling the results of the physical inventory count; and
 Obtaining audit evidence as to the reliability of management's count procedures.

Matters relevant in planning attendance at physical inventory counting include:

 Risks of material misstatement related to inventory.
 Nature of the internal control related to inventory.
 Whether adequate procedures are expected to be established and proper instructions
issued for inventory counting.
 The timing of physical inventory counting.
 Whether the entity maintains a perpetual inventory system.
 Whether the assistance of an auditor's expert is needed.(ISA 620)
 Locations at which inventory are held, including the materiality of the inventory and the
risks of material misstatement at different locations, for selecting locations for attendance.
ISA 501 Page 79

PHYSICAL INVENTORY COUNTING CONDUCTED OTHER THAN AT THE DATE OF THE F/S
(Ref: 5, A9-A11)
If physical inventory counting is conducted at a date other than date of F/S, auditor shall, in
addition to given procedures, perform audit procedures to obtain audit evidence about whether
changes in inventory between count date and date of F/S are properly recorded.
Relevant matters for consideration when designing such audit procedures include:
 Whether the perpetual inventory records are properly adjusted.
 Reliability of the entity's perpetual inventory records.
 Reasons for significant differences between the information obtained during the physical
count and the perpetual inventory records.

INABILITY OR IMPRACTICABILITY TO ATTEND PHYSICAL INVENTORY COUNTING

(Ref: 7, A12-A14)

If auditor is unable to attend physical inventory counting due to unforeseen circumstances,

auditor shall make or observe some physical counts on an alternative date, and perform
procedures on intervening transactions.
If attendance at physical inventory counting is impracticable, auditor shall perform alternative
audit procedures to obtain sufficient appropriate audit evidence regarding the existence and
condition of inventory.
(e.g. inspection of documentation of the subsequent sale of specific inventory items acquired or
purchased prior to the physical inventory counting)
If it is not possible to obtain sufficient appropriate audit evidence by performing alternative
audit procedures, auditor shall modify the opinion in accordance with ISA 705.

INVENTORY UNDER THE CUSTODY AND CONTROL OF A THIRD PARTY CONFIRMATION

(Ref: 8, A15-A16)

If such inventory is material to F/S, auditor shall obtain sufficient appropriate audit evidence
regarding existence and condition of that inventory by performing one or both of following:
 Request confirmation from the third party as to the quantities and condition of inventory
held on behalf of the entity. (as per ISA 505)
 Perform inspection or other audit procedures appropriate in the circumstances.
Examples of other audit procedures include:
 Attending, or arranging for another auditor to attend, the third party's physical counting of
inventory, if practicable.
 Obtaining another auditor's report, or a service auditor's report, on adequacy of third party'
s internal control for ensuring that inventory is properly counted and safeguarded.
 Inspecting documentation regarding inventory held by third parties, for example,
warehouse receipts.
 Requesting confirmation from other parties if inventory has been pledged as collateral.
ISA 501 Page 80

Litigation and Claims (9-12, A17-A25)

Auditor shall design and perform audit procedures in order to identify litigation and claims
involving the entity which may give rise to a risk of material misstatement, including:
a) Inquiry of management and, where applicable, others within the entity, including in-house
legal counsel;
b) Reviewing minutes of meetings of TCWG and correspondence between entity and its
external legal counsel;
c) Reviewing legal expense accounts.

Communication with the Entity's External Legal Counsel

If auditor assesses a risk of material misstatement regarding litigation or claims that have been
identified, or when audit procedures performed indicate that other material litigation or claims
may exist, auditor shall, in addition to procedures required by other ISAs, seek direct
communication with entity's external legal counsel.

Auditor shall do seek direct communication through letter of inquiry, prepared by

management and sent by him

In some cases, auditor may seek communication through a letter of general inquiry requesting
external legal counsel to inform the auditor of any litigation and claims that counsel is aware of,
together with an assessment of outcome of the litigation and claims etc

If it is considered unlikely that external legal counsel will respond appropriately to a letter of
general inquiry (e.g. if their professional body prohibits such response), auditor may seek direct
communication through a letter of specific inquiry including:
 A list of litigation and claims;
 Where available, management's assessment of outcome of each of the identified litigation
and claims and its estimate of the financial implications, including costs involved; and
 A request that entity's external legal counsel confirm the reasonableness of management's
assessments and provide auditor with further information if list is incomplete or incorrect

In certain circumstances, auditor also may judge it necessary to meet with the entity's
external legal counsel to discuss the likely outcome of the litigation or claims. This may be the
case, for example, where:
 The auditor determines that the matter is a significant risk.
 The matter is complex.
 There is disagreement between management and the entity's external legal counsel.

Ordinarily, such meetings require management's permission and are held in presence of a
representative of management
ISA 501 Page 81

Written Representations
Auditor shall request management and, where appropriate, TCWG to provide written
representations that all known actual or possible litigation and claims whose effects should be
considered when preparing F/S have been disclosed to auditor and accounted for in accordance
with applicable financial reporting framework.

Auditor’s Response

Auditor shall modify the opinion in the auditor's report in accordance with ISA 705 where:
 Management refuses to give the auditor permission to communicate or meet with the
entity's external legal counsel, or the entity's external legal counsel refuses to respond
appropriately to the letter of inquiry, or is prohibited from responding; and
 Auditor is unable to obtain sufficient appropriate audit evidence by performing alternative
audit procedures.

Segment Information (13, A26-A27)

Depending on the AFRF, entity may be required or permitted to disclose segment information
in F/S. Auditor's responsibility regarding presentation and disclosure of segment information
is in relation to F/S taken as a whole. Accordingly auditor is not required to perform audit
procedures to express an opinion on segment information presented on a standalone basis.

Auditor shall obtain sufficient appropriate audit evidence regarding presentation and
disclosure of segment information in accordance with the AFRF by:
 Obtaining an understanding of methods used by management in determining segment
information, and:
- Evaluating whether such methods are likely to result in the disclosure in accordance
with the AFRF; and
- Where appropriate, testing the application of such methods; and
 Performing analytical procedures or other appropriate audit procedures

Understanding of the Methods Used by Management

Examples of matters that may be relevant when obtaining such an understanding include:
 Sales, transfers and charges between segments, and elimination of inter-segment amounts
 Comparisons with budgets and other expected results
(e.g. operating profits as a percentage of sales)
 The allocation of assets and costs among segments.
 Consistency with prior periods, and adequacy of the disclosures with respect to
inconsistencies.

Important Paragraphs 4, 8 , 9 ,11 ,13, A3, A4, A11, A12, A16, A23, A24, A27
ISA 505 Page 82

ISA 505

External confirmation Audit evidence obtained as a direct written response to the auditor
from a third party (the confirming party), in paper form, or by electronic or other medium.

External Confirmation Procedures (Ref: 7, A1-A7)

Auditor shall maintain following control over confirmation requests

1. Determining the information to be confirmed or requested

(e.g. account balances ,confirm terms of agreements etc)
2. Selecting appropriate confirming party
Sent to confirming party who is knowledgeable about information to be confirmed

3. Designing confirmation requests

 Including valid addresses, method of reply to auditor etc
 It may directly affect confirmation response rate, reliability and nature of audit
evidence
Factors to consider when designing confirmation requests:
 Assertions being addressed.
 Risks of material misstatement.
 Layout and presentation of the confirmation request.
 Prior experience on audit or similar engagements.
 Method of communication
(e.g. in paper form/electronic/other medium).
 Management's authorization or encouragement to confirming parties to respond to
auditor
 Ability of confirming party to confirm information
4. Sending requests, including follow-up requests when applicable, to the confirming
party.
Auditor may after verification of original address, send an additional or follow-up request

Management's Refusal to Allow Auditor to Send a Request (Ref: 8-9, A8-A10)

 Inquire reasons for refusal, and seek audit evidence about their validity and
reasonableness;
 Evaluate implications of refusal on risk assessment and on nature, timing and extent of
other audit procedures
 Perform alternative audit procedures.
ISA 505 Page 83

If management's refusal is unreasonable, or auditor is unable to obtain audit evidence from

alternative audit procedures, auditor shall communicate with TCWG. Auditor Shall also
determine the implications in accordance with ISA 705.

Negative Confirmations (Ref: 15, A23)

Positive confirmation request

A request that the confirming party respond directly to the auditor indicating whether the
confirming party agrees or disagrees with the information in the request, or providing the
requested information.

Negative confirmation request

A request that the confirming party respond directly to auditor only if the confirming party
disagrees with the information provided in the request.

Auditor shall not use negative confirmation requests as sole substantive audit procedure unless
all of the following are present:
 Risk of material misstatement is low and auditor has obtained evidence regarding
operating effectiveness of controls
 Population consists of large number of small, similar items
 A very low exception rate is expected; and
 Auditor is not aware of any unusual circumstances.

Risks of using negative confirmations:

 Failure to receive a response does not indicate receipt by addressee or verification of
information.
 Provides significantly less persuasive audit evidence than positive confirmation request.
 Confirming parties may reply in case of unfavorable balance and may not reply in case of
favorable balance

Evaluating the Evidence Obtained (Ref: 16, A24-A25)

When evaluating results of confirmation requests, auditor may categorize such results as:
 Response indicating agreement of confirming party;
 A response deemed unreliable;
 A non-response; or
 A response indicating an exception.
ISA 505 Page 84

Results of the External Confirmation Procedures

UNRELIABLE RESPONSES
Auditor may conclude that it would be appropriate to revise risk assessment and modify
planned audit procedures.

NON-RESPONSES

Non-response
A failure of the confirming party to respond, or fully respond, to a positive confirmation
request, or a confirmation request returned undelivered.

Shall perform alternative audit procedures to obtain relevant and reliable audit evidence. E.g.

For accounts receivable Examining specific subsequent cash receipts, shipping

documentation, and sales near period end.
For accounts payable Examining subsequent cash disbursements or correspondence
from 3rd parties, and other records, such as goods received notes.

WHEN A RESPONSE TO A POSITIVE CONFIRMATION REQUEST IS NECESSARY

 Information available to corroborate management's assertion(s) is only available outside

entity.
 Specific fraud risk factors prevent auditor from relying on evidence from entity.
Alternative audit procedures will not provide assurance. If auditor does not obtain such
confirmation, he shall determine the implications for audit & opinion in accordance with ISA
705

EXCEPTIONS

Exception: A response that indicates a difference between information requested to be

confirmed, or contained in the entity's records, and information provided by the confirming
party. Some exceptions do not represents misstatement

 Investigate exceptions to determine whether or not they are indicative of misstatements.

 Exceptions may indicate misstatements or potential misstatements in F/S.
- When misstatement is identified, auditor shall evaluate whether it is indicative of fraud.
- Exceptions may create suspect over responses from similar confirming parties or
accounts
- Exceptions also may indicate deficiencies in internal control over financial reporting.
ISA 505 Page 85

RELIABILITY OF RESPONSES TO CONFIRMATION REQUESTS

 Factors that may indicate doubts about reliability of a response include that:
- Response was received by the auditor indirectly; or
- Response appeared not to come from the originally intended confirming party.
 If auditor has doubts over reliability of response, he shall obtain further audit evidence to
resolve those doubts
 Auditor may determine whether to modify or add procedures to resolve such doubts
- May choose to verify source and contents of a response by contacting the confirming
party.
- If response has been returned to auditor indirectly, auditor may request confirming
party to respond directly to auditor

Responses received Involve risks as to reliability because proof of origin and

electronically authority may be difficult to establish, and alterations may be
(e.g. Fax or email) difficult to detect
 Process used by auditor & respondent creating a secure
environment for electronic responses may mitigate risks.
 If auditor is satisfied that process is secure and properly
controlled, reliability of related responses is enhanced.
 Process might incorporate various techniques for
validating identity of sender in electronic form e.g.
encryption, electronic signatures etc.

Confirming party uses Auditor may perform procedures to address the risks that:
a third party to  Response may not be from the proper source
coordinate and  Respondent may not be authorized to respond
provide responses  Integrity of transmission may have been
compromised.

Oral response  Oral response does not meet definition of external

confirmation
 However auditor may, request confirming party to
respond in writing directly to auditor.
 If no such response is received, auditor seeks audit
evidence through alternate procedures.

Restrictive language in Such restrictions do not necessarily invalidate the reliability of

response response as audit evidence.
(As Its only valid for auditor)

Important Paragraphs 7, 8, 13, 15, A4, A8, A11, A13, A18, A20
ISA 510 Page 86

ISA 510

Initial audit engagement

An engagement in which either:
- F/S for prior period were not audited; or
- F/S for prior period were audited by a predecessor auditor

Opening balances
Those account balances that exist at the beginning of period. These are based upon closing
balances of prior period and reflect the effects of transactions and events of prior periods and
accounting policies applied in prior period. Opening balances also include matters requiring
disclosure that existed at beginning of period, such as contingencies & commitments.

Predecessor auditor
The auditor from a different audit firm, who audited F/S of an entity in the prior period and
who has been replaced by the current auditor

Audit Procedures (Ref: 5-9, A1-A7)

Opening Balances

Auditor shall read most recent F/S &predecessor auditor report

Auditor shall obtain sufficient appropriate audit evidence about whether opening balances
contain misstatements that materially affect current period’s F/S by:

 Determining whether prior period’s closing balances have been correctly brought forward
/ restated to current period
 Determining whether opening balances reflect application of appropriate accounting
policies; and

 Performing one or more of the following:

- Where prior year F/S were audited, reviewing predecessor auditor’s working papers to
obtain evidence regarding opening balances;
- Evaluating whether audit procedures performed in current period provide evidence
relevant to opening balances; or
- Performing specific audit procedures to obtain evidence regarding the opening
balances.
ISA 510 Page 87

Nature and extent of audit procedures necessary to obtain sufficient appropriate audit evidence
regarding opening balances depend on:
 Accounting policies followed by the entity.
 Nature of account balances, classes of transactions & disclosures and risks of material
misstatement in current period’s F/S.
 Significance of opening balances relative to current period’s F/S.
 Whether prior period’s F/Swere audited and, if so, whether the predecessor auditor’s
opinion was modified.

If prior period’s F/S were audited by a predecessor auditor, auditor may be able to obtain
sufficient appropriate audit evidence by reviewing his working papers.

If auditor obtains audit evidence that opening balances contain misstatements that could
materially affect current period’s F/S, auditor shall perform such additional audit procedures
appropriate to determine the effect on the current period’s F/S.

If auditor concludes that misstatements exist in current F/S, auditor shall communicate with
appropriate level of management &TCWG

Consistency of Accounting Policies

Auditor shall obtain sufficient appropriate audit evidence about

 Whether accounting policies reflected in opening balances have been consistently applied
in current period’s F/S; and
 Whether changes in accounting policies have been appropriately accounted for and
adequately disclosed in accordance with AFRF

Relevant Information in the Predecessor Auditor’s Report

If there was a modification in predecessor auditor’s report, auditor shall evaluate the effect of
matter giving rise to modification in assessing the risks of material misstatement in current
period’s F/S

Audit Conclusions and Reporting (Ref: 10-13, A8-A9)

Opening Balances

If auditor is unable to obtain sufficient appropriate audit evidence regarding opening balances,
auditor shall express a qualified opinion or disclaim an opinion

If auditor concludes that opening balances contain a misstatement that materially affects
current periodF/S and effect of misstatement is not appropriately accounted for or not
adequately disclosed, the auditor shall express a qualified opinion or an adverse opinion
AUDITING
ISA 510 Page 88

Consistency of Accounting Policies

If the auditor concludes that:

 Current period’s accounting policies are not consistently applied in relation to opening
balances in accordance with AFRF; or
 Change in accounting policies is not appropriately accounted for or not adequately
disclosed in accordance with AFRF

Auditor shall express a qualified opinion or an adverse opinion

Modification to the Opinion in the Predecessor Auditor’s Report

If the modification remains relevant and material to current period’s F/S, auditor shall modify
opinion on current period’s F/S in accordance with ISA 705 & ISA 710

In some cases modification may not be relevant and material to current period’s F/S. (e.g. scope
limitation in prior period has been resolved in current period)

Important Paragraphs 6, 7, 8, 12, 13, A3, A6, A8

ISA 520 Page 89

ISA 520

Analytical procedures means evaluations of financial information through analysis of

probable relationships among both financial and non-financial data. Analytical procedures also
encompass such investigation as is necessary of identified fluctuations or relationships that are
inconsistent with other relevant information or that differ from expected values by a significant
amount

Analytical procedures include consideration of comparisons of entity's financial information

with:
 Comparable information for prior periods.
 Anticipated results of entity (e.g. budgets or forecasts) or auditor expectations (e.g
depreciation)
 Similar industry information

Analytical procedures also include consideration of relationships, e.g :

 Among elements of financial information expected to conform to a predictable pattern
based on the entity's experience e.g. gross margin percentages.
 Between financial information and relevant non-financial information.

Substantive Analytical Procedures (Ref: 5, A4-A16)

May be tests of details, substantive analytical procedures, or a combination of both.

When designing and performing substantive analytical procedures, the auditor shall:

a) Determine suitability of particular substantive analytical procedures for given

assertions, taking account of risks of material misstatement and tests of details, if
any, for these assertions;

Some rules regarding suitability of substantive procedure are:

 More applicable to large volumes of transactions that tend to predictable over time
 Suitability of a particular analytical procedure will depend upon the auditor's
assessment of how effective it will be in detecting a misstatement.
 In some cases, even a straightforward predictive model may be effective.
 Different types of analytical procedures provide different levels of assurance.
 Determination of the suitability is influenced by the nature of the assertion and the
auditor's assessment of the risk of material misstatement.
 Particular substantive analytical procedures may also be considered suitable when
tests of details are performed on the same assertion.
ISA 520 Page 90

b) Evaluate reliability of data from which expectation of recorded amounts or ratios is

developed

Influenced by its source and nature and is dependent on the circumstances under which it
is obtained. Following are relevant when determining reliability of data for analytical
procedures:

 Source of the information available.

 Comparability of information available.
 Nature and relevance of the information available.
 Controls over the preparation of the information

c) Develop an expectation of recorded amounts or ratios and evaluate whether

expectation is sufficiently precise to identify a misstatement

 Accuracy with which expected results of substantive analytical procedures can be

predicted.
 Degree to which information can be disaggregated.
 Availability & reliability of information(financial & non-financial)

d) Determine amount of any difference of recorded amounts from expected values that
is acceptable without further investigation.

Influenced by materiality and the consistency with the desired level of assurance.

Analytical Procedures that Assist When Forming an Overall Conclusion (Ref: 6, A17-
A19)
Conclusions drawn from results of such analytical procedures are intended to corroborate
conclusions formed during audit of individual components or elements of F/S. These analytical
procedures may be similar to those that would be used as risk assessment procedures.

Investigating Results of Analytical Procedures (Ref: 7, A20-A21)

If analytical procedures identify fluctuations or relationships that are inconsistent:

 Inquire management and obtaining appropriate audit evidence relevant to their
responses.
 Perform other audit procedures as necessary in the circumstances.

Important Paragraphs 5,7, A1, A12, A15

ISA 530 Page 91

ISA 530

Sample Design (Ref: 6, A4-A9)

When designing an audit sample, the auditor shall consider
 Specific purpose to be achieved and combination of audit procedures likely to best
achieve that purpose.
 Characteristics of the population
- Tests of controls
Auditor makes an assessment of expected rate of deviation.
- Tests of details
Auditor makes an assessment of expected misstatement.

Auditor may determine stratification or value-weighted selection as appropriate.

Stratification
- Objective is to reduce variability of items within each group
- Allow sample size to be reduced without increasing sampling risk.
- When performing tests of details, population is often stratified by monetary value.
- Misstatement is projected for each group separately.
Value-Weighted Selection
- Identify sampling unit as individual monetary units that make up the population.
- Auditor may examine particular items containing those monetary units
- May be used with “systematic selection” and is most efficient with random selection

Sample Size (Ref: 7, A10-A11)

 Sample size shall be sufficient to reduce sampling risk to an acceptably low level.
 Can be determined by application of statistically-based formula or through exercising
judgment
Test of Controls Test of Details
Factor influencing Sample Sample Factor influencing Sample
Size Size Sample Size Size

Increase in extent to which Increase Increase in auditor's Increase

auditor's risk assessment assessment of the risk of
takes into account relevant material misstatement
controls
Increase in tolerable rate of Decrease Increase in tolerable Decrease
deviation misstatement
Increase in expected rate of Increase Increase in amount of Increase
deviation of the population to misstatement ,auditor
be tested expects in population
ISA 530 Page 92

Test of Controls Test of Details

Factor influencing Sample Sample Factor influencing Sample
Size Size Sample Size Size

Increase in expected rate of Increase Increase in amount of Increase

deviation of the population misstatement ,auditor
to be tested expects in population
Increase in auditor's desired Increase Increase in the auditor’s Increase
level of assurance that the desired level of assurance
tolerable rate of deviation is that tolerable misstatement
not exceeded by actual rate is not exceeded by actual
of deviation in population misstatement in population
No of sampling units in Negligible No of sampling units in Negligible
population population
Increase in use of other Decrease
substantive procedures for
same assertion
Stratification of population Decrease

Selection of Items for Testing (Ref: 8, A12-A13)

Statistical sampling,
Sample items selected in a way that each sampling unit has a known probability of being
selected.

- Random selection
Applied through random number generators, e.g. tables, softwares

- Systematic selection
Number of sampling units in population is divided by sample size

Non-statistical sampling
Judgment is used to select sample items.

- Haphazard selection
Auditor selects sample without following a structured technique.

- Block selection
Block(s) of adjacent items from the population.

Monetary Unit Sampling is a type of value-weighted selection in which sample size, selection
and evaluation results in a conclusion in monetary amounts
ISA 530 Page 93

Performing Audit Procedures (Ref: 9-11, A14-A16)

 Auditor shall perform audit procedures, appropriate to the purpose, on each item selected.
 If audit procedure is not applicable to selected item, he shall perform procedure on a
replacement item.
 If auditor is unable to apply designed audit procedures or alternate procedures to a selected
item, he shall
- Treat that item as a deviation from prescribed control
(for test of controls)
- Treat that item as a misstatement (for tests of details)

Nature and Cause of Deviations and Misstatements (Ref: 12-13, A17)

 Auditor shall investigate nature and cause of any deviations or misstatements identified,
and evaluate their possible effect on the purpose of audit procedure and on other areas of
audit.
 Auditor may observe that many deviations and misstatements have a common feature like
type of transaction, location, product line or time period etc.
- Auditor may decide to identify all items in population that possess this common feature,
and extend audit procedures to those items.
- These items may also be intentional, and may indicate possibility of fraud. (Risk exists)
 In extremely rare circumstances, auditor may consider a misstatement or deviation in a
sample to be an anomaly
- Obtain high degree of certainty that such misstatement or deviation is not
representative of the population by performing additional audit procedures.

Projecting Misstatements (Ref: 14, A18-A20)

Tests of controls
Projection of deviations is not necessary as sample deviation rate is also the projected deviation
rate for the population as a whole.

Test of details:
Projected Misstatement in Population = Misstatement in Sample x Projection Rate

For Anomaly:
Projected Misstatement = [ (Misstatement in Sample – Anomaly) x Projection Rate ] + Anomaly
ISA 530 Page 94

Evaluating Results of Audit Sampling (Ref: 15, A21-A23)

Tests of controls: Unexpectedly high sample deviation rate may lead to an increase in the
assessed risk of material misstatement.

Tests of details: Unexpectedly high misstatement amount in sample may cause auditor to
believe that population is materially misstated.

Projected misstatement is the auditor's best estimate of misstatement in population.

 If it exceeds tolerable misstatement; sample does not provide a reasonable basis for
conclusions
 The closer the projection is to tolerable misstatement, the more likely that actual
misstatement in the population may exceed tolerable misstatement.
 If projected misstatement is greater than auditor's expected misstatement, auditor may
conclude that there is an unacceptable sampling risk.

Where sampling has not provided a reasonable basis for conclusions about population

 Request management to
- Investigate misstatements that have been identified; and
- Investigate the potential for further misstatements; and
- Make any necessary adjustments; or
 Tailor the nature, timing and extent of those procedures to best achieve the required
assurance.

Important Paragraphs 5C, 5 I, 5J , A3, A12, A23, APPENDIX 1, APPENDIX 4

ISA 540 (Revised) Page 95

ISA 540 REVISED – AUDITING ACCOUNTING ESTIMATES & RELATED DISCLOSURES (CORE PARAS ONLY)

Accounting estimate
A monetary amount for which the measurement, in accordance with the requirements of the
AFRF, is subject to estimation uncertainty.

Estimation uncertainty
Susceptibility to an inherent lack of precision in measurement.

Management’s point estimate

Amount selected by management for recognition or disclosure in F/S as an accounting estimate

Management bias
A lack of neutrality by management in the preparation of information.

Auditor’s point estimate or auditor’s range

An amount, or range of amounts, respectively, developed by the auditor in evaluating
management’s point estimate.

Outcome of an accounting estimate

The actual monetary amount that results from the resolution of the transaction(s), event(s) or
condition(s) addressed by an accounting estimate.

 Accounting estimates are required when monetary amounts cannot be directly observed.
 Measurement of these is subject to estimation uncertainty
(which reflects inherent limitations in knowledge or data)
 These limitations give rise to subjectivity and variation in measurement outcomes.
 Process of making accounting estimates involves selecting and applying a method using
assumptions and data, requiring judgment by management and can give rise to complexity
 This process affect accounting estimates’ susceptibility to misstatement. (Ref: Para 2)

Risk Assessment Procedures and Related Activities (Ref: 13-15)

Auditor shall obtain an understanding of following matters related to accounting estimates:

The Entity and Its Environment

 Transactions and events etc that may give rise to need for accounting estimates
 Requirements of AFRF related to accounting estimates; and how they apply in context of
this entity and its environment (including inherent risk factors)
 Regulatory factors & frameworks relevant to entity’s accounting estimates
 Nature of accounting estimates and related disclosures that auditor expects in entity’s F/S
ISA 540 (Revised) Page 96

The Entity’s Internal Control

 Nature and extent of oversight and governance that entity has in place over management’s
financial reporting process relevant to accounting estimates.
 How management identifies need for, and applies, specialized knowledge related to
accounting estimates, including the use of a management’s expert
 How entity’s risk assessment process identifies and addresses risks relating to estimates.
 Entity’s information system as it relates to accounting estimates, including:
(i) Classes of transactions etc , events and conditions, significant to F/S, that give rise to the
need for, or changes in, accounting estimates and related disclosures; and
(ii) For such accounting estimates and related disclosures, how management:
- Identifies the relevant methods, assumptions or sources of data, appropriate in the
context of AFRF, including how management:
a. Selects or designs, and applies, methods used, including the use of models;
b. Selects the assumptions to be used, including consideration of alternatives;
c. Selects the data to be used;
- Understands the degree of estimation uncertainty, including the range of possible
measurement outcomes; and
- Addresses estimation uncertainty, including selecting a point estimate
 Control activities relevant to audit over management’s process for making estimates
 How management reviews the outcome(s) of previous accounting estimates and responds
to the results of that review.

Auditor shall also review the outcome of previous accounting estimates, or their subsequent re-
estimation to assist in assessing risks of material misstatement in current period.
 Shall take into account the characteristics of accounting estimates
 Purpose is not to call into question judgments about previous period accounting estimates
that were appropriate based on information available at that time
 Auditor shall determine whether engagement team requires specialized knowledge to
perform procedures in accordance with ISA 540 (revised)

Identifying and Assessing the Risks of Material Misstatement (Ref: 16-17)

Auditor shall take following into account in identifying the inherent risks:
 Degree to which accounting estimate is subject to estimation uncertainty; and
 Degree to which following are affected by complexity, subjectivity, or other inherent risk:
- Selection and application of method, assumptions and data in making estimate; or
- Selection of management’s point estimate and disclosures for inclusion in the F/S.

Auditor shall determine whether any of risks identified and assessed (as above) are a significant
risk; If so, auditor shall obtain an understanding of the entity’s controls, including control
activities, relevant to that risk
ISA 540 (Revised) Page 97

Responses to the Assessed Risks of Material Misstatement (Ref: 18-30)

Auditor’s further audit procedures shall include one or more of the following approaches:
1) Obtaining audit evidence from events occurring up to the date of the auditor’s report
Auditor shall take into account that changes in circumstances and other relevant conditions
between event and measurement date may affect relevance of such audit evidence

2) Testing how management made the accounting estimate; or

Methods
 Whether method selected (and relevant changes) are appropriate in context of AFRF
 Whether selecting method give rise to indicators of possible management bias;
 Whether calculations are applied in accordance with method and are accurate;
 When method involves complex modeling, whether judgments have been applied
consistently and whether, when applicable:
- Design of model meets the measurement objective of AFRF
- Adjustments to output of the model are consistent with measurement objective of
the AFRF and are appropriate in the circumstances;
 Whether integrity of significant assumptions and data has been maintained in applying
the method.
Significant Assumptions
 Whether significant assumptions (and changes) are appropriate in context of AFRF
 Whether judgments made in selecting significant assumptions give rise to indicators of
possible management bias;
 Whether significant assumptions are consistent with each other and with those used in
other accounting estimates, or with related assumptions used in other areas of F/S
 When applicable, whether management has intent to carry out specific courses of action
and has the ability to do so.
Data
 Whether data (and changes) is appropriate in the context of AFRF;
 Whether judgments made in selecting data give rise to indicators of management bias;
 Whether data is relevant and reliable in the circumstances;
 Whether data has been appropriately understood or interpreted by management,
including with respect to contractual terms.
Management’s Selection of Point Estimate and Disclosures about Estimation Uncertainty
Whether management has taken appropriate steps to:
 Understand estimation uncertainty; and
 Address estimation uncertainty by selecting an appropriate point estimate and by
[
developing related disclosures about estimation uncertainty.
If management has not taken appropriate steps, as such, auditor shall:
 Request management to do so, and then evaluate management’s response(s);
 If their response is not sufficient, develop an auditor’s point estimate or range; and
 Evaluate whether a deficiency in internal control exists; if so, communicate it to TCWG.
ISA 540 (Revised) Page 98

When indicators of management bias are identified, auditor shall evaluate the implications for
audit including consideration regarding fraud as per ISA 240 (Ref: Para 32)

3) Developing an auditor’s point estimate or range

Regardless of whether auditor uses management’s or auditor’s own methods, assumptions
or data auditor shall evaluate whether these are appropriate in context of the AFRF

If auditor develops an auditor’s range, he shall:

 Determine that range includes amounts that are supported by sufficient appropriate
audit evidence and have been evaluated by auditor to be reasonable in context of AFRF
 Design and perform further procedures to obtain sufficient appropriate audit evidence
regarding assessed risks about disclosures in F/S describing estimation uncertainty

Test of Controls

As per ISA 330, auditor shall design and perform tests of controls, if:
 Assessment of risks includes expectation that controls are operating effectively; or
 Substantive procedures alone cannot provide sufficient appropriate audit evidence.
Such test of controls shall be responsive to reasons for assessment given to the risks of material
misstatement. Auditor shall obtain more persuasive audit evidence the greater the reliance the
auditor places on the effectiveness of a control

Disclosures Related to Accounting Estimates (Ref: 31)

Auditor shall design and perform further audit procedures to obtain sufficient appropriate audit
evidence regarding related disclosures, other than related to estimation uncertainty

Overall Evaluation Based on Audit Procedures Performed (Ref: 33-36)

Auditor shall evaluate, whether:

 Assessments of risks of material misstatement at assertion level remain appropriate,
including when indicators of possible management bias have been identified;
 Management’s decisions relating to recognition, measurement, presentation & disclosure
of these accounting estimates in F/S are in accordance with AFRF; and
 Sufficient appropriate audit evidence has been obtained.
In doing so, auditor shall take into account all relevant audit evidence obtained, whether
corroborative or contradictory.
If auditor is unable to obtain sufficient appropriate audit evidence, auditor shall evaluate the
implications for the audit or auditor’s opinion in accordance with ISA 705 (Revised).
ISA 540 (Revised) Page 99

In relation to accounting estimates, the auditor shall evaluate:

 For fair presentation framework, whether management has included disclosures, beyond
those specifically required by AFRF, that are necessary to achieve fair presentation; or
 For compliance framework, whether disclosures are those that are necessary for the F/S
not to be misleading.

Written Representations (Ref: 37)

 Auditor shall request written representations from management and, when appropriate,
TCWG about whether the methods, significant assumptions and data used in making
estimates and related disclosures are appropriate and is in accordance with the AFRF.
 Auditor shall also consider the need to obtain representations about specific accounting
estimates, including in relation to the methods, assumptions, or data used.

Communication with TCWG, Management, or Other Relevant Parties (Ref: 38)

 Auditor shall consider the matters, if any, to communicate regarding accounting estimates
and take into account whether the reasons given to the risks of material misstatement
relate to estimation uncertainty, or the effects of complexity, subjectivity or other inherent
risk factors in making accounting estimates and related disclosures.
 In certain circumstances, auditor is also required by law or regulation to communicate
about certain matters with other relevant parties e.g. regulators or prudential supervisors.

Documentation (Ref: 39)

The auditor shall include in the audit documentation:

 Key elements of understanding of entity, its environment, including internal control;
 Linkage of further audit procedures with assessed risks of material misstatement, taking
into account reasons (inherent risk or control risk) given to the assessment of those risks;
 Auditor’s response(s) when management has not taken appropriate steps to understand
and address estimation uncertainty;
 Indicators of possible management bias related to accounting estimates, if any, and the
auditor’s evaluation of the implications for the audit; and
 Significant judgments relating to auditor's determination of whether accounting estimates
and related disclosures are reasonable in the context of the AFRF, or are misstated.

Important 13, 16, 18, 23-27, 29, 33, 36

Paragraphs A1, A5, A25, A26, A29, A33, A39, A40, A43, A48, A49, A52, A55, A61,
A72, A86, A94, A97, A105, A110, A118, A121, A128, A134, A145,
ISA 550 Page 100

ISA 550

Arm's length transaction

A transaction conducted on such terms and conditions as between a willing buyer and a willing seller
who are unrelated and are acting independently of each other and pursuing their own best interests.

Related party
1. A related party as defined in the applicable financial reporting framework; or
2. Where the applicable financial reporting framework establishes minimal or no related party
requirements:
a) A person or other entity that has control or significant influence, directly or indirectly
through one or more intermediaries, over the reporting entity;
b) Another entity over which the reporting entity has control or significant influence,
directly or indirectly through one or more intermediaries; or
c) Another entity that is under common control with the reporting entity through having:
i. Common controlling ownership;
ii. Owners who are close family members; or
iii. Common key management.

Responsibilities of the Auditor (3-7)

Because related parties are not independent of each other, many FRF establish specific
accounting and disclosure requirements for related party relationships, transactions and
balances to enable users of the financial statements to understand their nature and actual or
potential effects on F/S.
Where the AFRF establishes such requirements,
Auditor has a responsibility to perform audit procedures to identify, assess and respond to
the risks of material misstatement arising from entity's failure to appropriately account for
or disclose these.
Even if AFRF establishes minimal or no related party requirements,
Auditor still needs to obtain an understanding of related party relationships and
transactions sufficient to be able to conclude whether F/S, insofar as they are affected by
those relationships and transactions:
 Achieve fair presentation (for fair presentation frameworks); or
 Are not misleading (for compliance frameworks).

In addition, an understanding of related party is relevant to the auditor's evaluation of whether

one or more fraud risk factors are present, because fraud may be more easily committed
through related parties.
Planning and performing the audit with professional skepticism is therefore particularly
important in this context, given the potential for undisclosed related party relationships and
transactions.
ISA 550 Page 101

Risk Assessment Procedures and Related Activities (11-14, A9, A17-A18)

Auditor shall perform audit procedures and related activities to obtain information relevant to
identifying risks of material misstatement attached with related parties.

Discussion among the Engagement Team

It shall include specific consideration of susceptibility of F/S to material misstatement due to

fraud or error that could result from entity's related party relationships and transactions.

Matters that may be addressed in the discussion among the engagement team include:
 Nature and extent of the entity's relationships and transactions with related parties.
 An emphasis on the importance of maintaining professional skepticism throughout the
audit regarding the potential for material misstatement associated with related party
relationships and transactions.
 Circumstances or conditions of the entity that may indicate the existence of related party
relationships or transactions that management has not identified or disclosed to the auditor
(e.g. a complex organizational structure, use of special-purpose entities for off-balance
sheet transactions, or an inadequate information system).
 The records or documents that may indicate the existence of related party relationships or
transactions.
 Importance that management and TCWG attach to identification, appropriate accounting
for, and disclosure of related party relationships and transactions, and related risk of
management override of controls.

Understanding the entity

The auditor shall inquire management regarding:

 The identity of the entity's related parties, including changes from the prior period;
 The nature of the relationships between the entity and these related parties; and
 Whether the entity entered into any transactions with these related parties during the
period and, if so, the type and purpose of the transactions.

Understanding of the controls over related party relationships and transactions

Auditor shall inquire management and others within entity, and perform other risk assessment
procedures considered appropriate, to obtain an understanding of the controls, if any, that
management has established to:
 Identify, account for, and disclose related party relationships and transactions in
accordance with the applicable financial reporting framework;
 Authorize & approve significant transactions and arrangements with related parties; and
 Authorize and approve significant transactions and arrangements outside the normal
course of business.
ISA 550 Page 102

Auditor may consider features of the control environment relevant to mitigating risks of
material misstatement associated with related party relationships and transactions, such as:
 Internal ethical codes, appropriately communicated to entity's personnel and enforced,
governing the circumstances in which the entity may enter into specific types of related
party transactions.
 Policies and procedures for open and timely disclosure of the interests that management
and TCWG have.
 Assignment of responsibilities within entity for identifying, recording, summarizing, and
disclosing these.
 Timely disclosure and discussion between management and TCWG of significant related
party transactions outside the entity's normal course of business, including whether TCWG
have appropriately challenged the business rationale of such transactions (e.g. by seeking
advice from external professional advisors).
 Clear guidelines for approval of related party transactions involving actual or perceived
conflicts of interest, such as approval by a subcommittee of TCWG comprising individuals
independent of management.
 Periodic reviews by internal auditors, where applicable.
 Proactive action taken by management to resolve related party disclosure issues.
 The existence of whistle-blowing policies and procedures, where applicable.

Maintaining Alertness for Related Party Information When Reviewing Records or

Documents (15-16, A22-A25)

Examples of Records or Documents Records or Documents That the Auditor May Inspect
 Third-party confirmations obtained by auditor (in addition to bank and legal confirmations).
 Entity income tax returns.
 Information supplied by the entity to regulatory authorities.
 Shareholder registers to identify the entity's principal shareholders.
 Statements of conflicts of interest from management and TCWG.
 Records of the entity's investments and those of its pension plans.
 Contracts and agreements with key management or TCWG.
 Significant contracts and agreements not in the entity's ordinary course of business.
 Specific invoices and correspondence from the entity's professional advisors.
 Life insurance policies acquired by the entity.
 Significant contracts re-negotiated by the entity during the period.
 Internal auditors' reports.
 Documents associated with the entity's filings with a securities regulator (for example,
prospectuses).

Examples of Arrangements that may indicate such existence

 Participation in unincorporated partnerships with other parties.
 Agreements for the provision of services to certain parties under terms and conditions that are
outside the entity's normal course of business.
 Guarantees and guarantor relationships.
ISA 550 Page 103

In particular, the auditor shall inspect the following for indications of the existence:
 Bank and legal confirmations obtained as part of the auditor's procedures;
 Minutes of meetings of shareholders and of TCWG; and
 Such other records or documents as the auditor considers necessary in the
circumstances of the entity.

Identification of Significant Transactions outside the Normal Course of Business

If auditor identifies significant transactions outside entity's normal course of business, the
auditor shall inquire management about:
a) The nature of these transactions; and
b) Whether related parties could be involved.

Identification and Assessment of the Risks of Material Misstatement Associated with

Related Party Relationships and Transactions (18-19, A29-A30)
Auditor shall identify and assess the risks of material misstatement associated with related
party relationships and transactions and determine whether any of those risks are significant.

In making this determination, auditor shall treat identified significant related party transactions
outside the entity's normal course of business as giving rise to significant risks.

Responses to Risks of Material Misstatement Associated with Related Party

Relationships and Transactions (20-22, A31-A33, A36)

Auditor designs and performs further audit procedures to obtain sufficient appropriate audit
evidence about the assessed risks of material misstatement associated with related party
relationships and transactions.

Management has not appropriately accounted for or disclosed specific related party
relationship/transactions

The nature, timing and extent of the further audit procedures that the auditor may select to
respond to the assessed risks of material misstatement associated with related party
relationships and transactions depend upon the nature of those risks and the circumstances of
the entity.

Identification of Previously Unidentified or Undisclosed Related Parties or Related Party

Transactions

If auditor identifies arrangements or information that suggests existence of related party

relationships or transactions that management has not previously identified or disclosed,
auditor shall determine whether the given circumstances confirm the existence of those
relationships or transactions.
ISA 550 Page 104

If the auditor identifies related parties or significant related party transactions that
management has not previously identified or disclosed, auditor shall:
a) Promptly communicate the relevant information to other members of engagement team;
b) Where AFRF establishes related party requirements:
 Request management to identify all transactions with the newly identified related
parties;
 Inquire why entity's controls failed to identify or disclosure such relationship or
transaction;
c) Reconsider risk of existence of other related parties/transactions and perform additional
audit procedures
d) If non-disclosure by management appears intentional, evaluate implications for the audit.
e) Perform appropriate substantive audit procedures;

Identified Related Party Transactions outside Normal Course of Business (23-24, A38)

Auditor shall:

a) Inspect the underlying contracts or agreements, if any, and evaluate whether:

(i) The business rationale of the transactions suggests that they may have been entered
into to engage in fraudulent financial reporting or to conceal misappropriation of
assets;
In evaluating the business rationale of such related party transaction, auditor may
consider following:
 Whether the transaction:
- Is overly complex (e.g. it may involve multiple related parties within a
consolidated group).
- Has unusual trade terms e.g. unusual prices, interest rates, guarantees and
repayment terms.
- Lacks an apparent logical business reason for its occurrence.
- Involves previously unidentified related parties.
- Is processed in an unusual manner.
 Whether management has discussed nature of, and accounting for, such
transaction with TCWG.
 Whether management is placing more emphasis on a particular accounting
treatment rather than giving due regard to the underlying economics of the
transaction.
If management's explanations are materially inconsistent with the terms of related
party transaction, auditor is required to consider reliability of management's
explanations and representations on other significant matters. (ISA 500)
ISA 550 Page 105

(ii) The terms of the transactions are consistent with management's explanations; and

(iii) The transactions have been appropriately accounted for and disclosed in accordance
with the applicable financial reporting framework

b) Obtain audit evidence that the transactions have been appropriately authorized and
approved.

Assertions That Related Party Transactions Were Conducted on Terms Equivalent to

Arm's Length Transaction

If management has made an assertion in F/S that a related party transaction was conducted on
terms equivalent to arm's length transaction, auditor shall obtain sufficient appropriate audit
evidence about the assertion.

Evaluation of Accounting for and Disclosure of Identified Related Party Relationships &
Transactions (25, A47)
In forming an opinion in accordance with ISA 700, the auditor shall evaluate:

a) Whether the identified related party relationships and transactions have been
appropriately accounted for and disclosed in accordance with the applicable financial
reporting framework; and

b) Whether the effects of the related party relationships and transactions:

i. Prevent the F/S from achieving fair presentation (for fair presentation
frameworks); or
ii. Cause the F/S to be misleading (for compliance frameworks).

Written Representations (26)

Where the applicable financial reporting framework establishes related party requirements, the
auditor shall obtain written representations from management and, where appropriate, TCWG
that they have:

a) Disclosed to the auditor the identity of the entity's related parties and all the related party
relationships and transactions of which they are aware; and
b) Appropriately accounted for and disclosed such relationships and transactions in
accordance with the requirements of the framework.
ISA 550 Page 106

Related Party Checklist - Extracts from ICAP Audit Practice Manual…….

System Evaluation
1. Inquire of management regarding:
Tutor’s  The identity of the entity’s related parties, including changes from the prior period
Note  The nature of relationships between the entity and these related parties
 Whether the entity entered into any transactions with these related parties during
the period and, if so, the type and purpose of the transactions
2. Inquire of management and others within the entity such as TCWG, internal auditors, legal
counsel and those dealing with significant transactions outside of normal course of
business, to obtain an understanding of the controls, if any that management has
established to:
 Identify, account for, and disclose related party relationships and transactions in
accordance with the applicable reporting framework
 Authorise and approve significant transactions and arrangements with related
parties
 Authorise and approve significant transactions and arrangements outside normal
course of business

Related Parties
3. Obtain from management personnel (or prepare) a list of all related parties (detailing the
name of related party, relationship with each party) and compare with the previous year’s
list and the shareholder’s records. Distribute the list of related parties to all staff assigned
to the engagement for their consideration while performing various audit tests, and attach
copy to this checklist.
4. If secondary auditors, consider obtaining representation from parent company
management as to the existence of related parties, consider enquiring of predecessor
auditors, or other firms involved in the audit, as to their knowledge of RPTs.
5. Document any affiliations directors or senior management have with other entities.

Related Party Transactions

6. Inquire of appropriate management personnel whether there were any transactions with
related parties (including significant transactions that occurred but were not given
accounting recognition).
7. Perform procedures to identify additional related parties and significant (over ____),
unusual, or nonrecurring transactions or balances involving related parties. Such
procedures could include:
 identifying major customers, suppliers, borrowers, and lenders, and significant
changes to these relationships.
 review of lawyer billings
 review of bank guarantees
 review of contract awards
 review of overdue receivables or payables
 review of investment transactions
 transactions at, or near, the year end
 review of transactions with unusual terms of trade
 consider where RPTs may have occurred but not changed
ISA 550 Page 107

8. Where RPTs have been identified prepare (or obtain) a schedule, or a summary where
appropriate of these and obtain an understanding of the business purpose of the
transaction(s).
 examine invoices, agreements etc.
 examine approval for the transaction both by management and local shareholders
 obtain confirmation of any outstanding balances
 obtain information as to the financial standing of the related parties regarding out
 indicate whether disclosure is required or not
 agree with management
9. Where it is uncertain if the transaction is a RPT or not consider:
 obtaining confirmation of significant information directly from third parties
 obtaining further information and references on supplies or customers that
appearing
Transactions outside the Entity's Normal Course of Business
10. For identified significant related party transactions outside the entity’s normal course of
business:
 Inspect the underlying contracts or agreemen
i. The business rationale (or lack thereof) of the transactions suggests
that they may have been entered into to engage in fraudulent financial
reporting or conceal misappropriation of assets.
ii. The terms of the transactions are consistent with management’s
explanations.
iii. The transactions have been appropriately accounted for and disclosed
in accordance with the applicable financial reporting framework.
 Obtain evidence that transactions been appropriately authorised & approved.

Arm's Length Assertion

11. If management has made an assertion in the financial statements to the effect that a related
party transaction was conducted on terms equivalent to those prevailing in an arm’s length
transaction, obtain sufficient appropriate audit evidence about the assertion by
performing procedures such as:
 Comparing the terms to those with unrelated parties.
 Engaging an external expert to determine market value and verify market terms.
 Comparing the terms to known market terms for similar transactions.
Consider impact on the audit report
12. In forming an opinion, evaluate:
 Whether the identified related party relationships or transactions have been
appropriately accounted for and disclosed in accordance with the AFRF.
 Whether the effects of the related party relationships and transactions prevent the
financial statements from achieving fair presentation.

Communication with those charged with governance

Unless all of TCWG are involved in managing the entity, communicate with TCWG significant
matters arising during the audit in connection with the entity’s related parties

Important Paragraphs 13,14, 15, 22, 23, 25, 26, A5, A9, A17, A18, A22, A23, A36,
A38, A50
ISA 560 Page 108

ISA 560

Events Occurring between Date of F/S and Date of Auditor's Report (Ref: 6-9, A6-A10)

Auditor shall perform additional audit procedures to identify all subsequent events occurring
between date of F/S and date of auditor's report.

Auditor shall determine whether each such event is appropriately reflected in F/S in accordance
with applicable financial reporting framework.

Auditor shall take into account risk assessment in determining the nature and extent of such
audit procedures including following:
 Obtaining an understanding of procedures established by management to identify events
 Inquiring management (and TCWG) about any subsequent events which might affect F/S
 Inquiring the current status of items that were accounted for on the basis of preliminary or
incomplete data and may make specific inquiries about whether
- New commitments, borrowings or guarantees have been entered into.
- Sales or acquisitions of assets have occurred or are planned.
- There have been increases in capital or issuance of debt instruments or agreement to
merge or liquidate planned
- Any assets have been appropriated by government or destroyed (e.g. by fire or flood)
- There have been any developments regarding contingencies.
- Any unusual accounting adjustments have been made.
- Any events have occurred or are likely to occur that will bring into question
appropriateness of accounting policies used in F/S (e.g. validity of going concern
assumption)
- Any events have occurred that are relevant to measurement of estimates or provisions
made in F/S.
- Any events have occurred that are relevant to recoverability of assets.
 Reading minutes of meetings of owners, management and TCWG held after date of F/S and
inquiring about matters discussed at any such meetings for which minutes are not yet
available
 Reading the entity's latest subsequent interim F/S (if any)

In addition to the above mentioned audit procedures:

 Read entity's latest available budgets, cash flow forecasts etc for periods after date of F/S;
 Inquire from entity legal counsel concerning litigations & claims
 Consider whether written representations may be necessary to support other audit
evidence
ISA 560 Page 109

Written Representations

Request management (or TCWG), to provide a written representation that all events occurring
subsequent to date of F/S requiring adjustment or disclosure have been adjusted or disclosed

Date of the F/S

The date of the end of the latest period covered by the F/S.

Date of approval of the F/S

The date on which all the statements that comprise F/S, including the related notes, have
been prepared and those with the recognized authority have asserted that they have taken
responsibility for those F/S.

Date of the auditor's report

The date the auditor dates the report on F/S in accordance with ISA 700.

Date the F/S are issued

The date that the auditor's report and audited F/S are made available to third parties.

Subsequent events
Events occurring between the date of F/S and the date of the auditor's report, and facts that
become known to the auditor after the date of the auditor's report.

Facts Become Known after Date of Auditor Report and before Date of issuance of F/S
(Ref: 10-13, A11-A17)

 No obligation to perform any audit procedures regarding F/S after date of auditor's report
 If after date of auditor’s report but before issuance of F/S, auditor comes to know a fact
requiring amendment of auditor’s report, the auditor shall:
- Discuss the matter with management (and where appropriate TCWG)
- Determine whether F/S needs amendment; if so, Inquire how they intends to address
the matter in F/S.

Where Management Amends F/S, auditor shall

 Carry out the audit procedures necessary in the circumstances on the amendment.
 Extend the audit procedures referred in previous section to the date of new auditor's report
(Unless restricted by law, regulation etc)
 Provide a new auditor's report on amended F/S.
(Not be dated earlier than date of approval of amended F/S)
ISA 560 Page 110

Auditor is permitted to apply audit procedures on subsequent events to that amendment where:
 Law, regulation or FRF does not prohibit management (i.e. allows) from amending the F/S
to the effects of subsequent event; and
 Those responsible for approving F/S are not prohibited from approving that amendment

In such cases, the auditor shall either:

 Amend report to include an additional date restricted to that amendment indicating that
auditor's procedures are restricted solely to amendment of F/S; or
 Provide a new or amended report that including an Emphasis of Matter paragraph or Other
Matter paragraph highlighting that auditor's procedures are restricted solely to
amendment.
Illustration of additional date (Dual Dating)
“August 14, 2012, except as to Note 37.1, which is as of September 06, 2012.”

No Amendment of F/S by Management

In some jurisdictions law, regulation or FRF may require management not to issue amended F/S
(Often when issuance of F/S for the next period are forthcoming) and, accordingly auditor need
not to provide an amended or new auditor's report.

Where management does not amend F/S that auditor believes to be amended, then:
 If auditor's report has not been provided to entity, auditor shall modify the opinion before
providing report
 If auditor's report has already been provided to the entity, auditor shall notify management
and TCWG, not to issue F/S to third parties before necessary amendments.

If F/S are subsequently issued without necessary amendments, auditor shall take appropriate
action to seek to prevent reliance on auditor's report. (Depending upon auditor's legal rights
and obligations). Auditor may consider seeking legal advice

Facts Which Become Known to the Auditor after the F/S have Been Issued
(Ref: 14-17, A18-A20)

 No obligation to perform any audit procedures regarding F/S after date of auditor's report
 If after the issuance of F/S, auditor comes to know a fact requiring amendment of auditor’s
report, the auditor shall:
- Discuss the matter with management (and where appropriate TCWG)
- Determine whether F/S needs amendment; if so, Inquire how they intends to address
the matter in F/S.
ISA 560 Page 111

Where Management Amends F/S, auditor shall

 Carry out the audit procedures necessary in the circumstances on the amendment.
 Review steps taken by management to inform, all parties to whom F/S are issued, the
situation
 Extend audit procedures referred in previous section to the date of new auditor's report
(Unless restricted by law, regulation etc)
 Provide a new auditor's report on amended F/S.
(Not be dated earlier than date of approval of amended F/S)
 Include in new or amended auditor's report an Emphasis of Matter paragraph or Other
Matter paragraph referring to a note of F/S that extensively discusses reason for such
amendment

Auditor Action to Seek to Prevent Reliance on Auditor's Report

If management does not take necessary steps to ensure that anyone in receipt of the previously
issued F/S is informed of the situation and does not amend F/S:
 Auditor shall notify management and TCWG that auditor will seek to prevent future reliance
on auditor's report.
 If they do not take these necessary steps, auditor shall take appropriate action to seek to
prevent reliance on the report.
 Auditor's course of action depends upon auditor's legal rights & obligations (may consider
legal advice)

Important Paragraphs 7, 10 -15, A8, A9, A12, A18

ISA 570 (Revised) Page 112

ISA 570 (Revised)

Risk Assessment Procedures and Related Activities (Ref: 10-11, A3-A7)

Auditor shall consider whether events or conditions exist that may cast significant doubt on
entity’s ability to continue as going concern.

Examples of such events or conditions

Financial

 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.
 Negative operating cash flows (historical or prospective F/S)
 Adverse key financial ratios.
 Substantial operating losses or deterioration in value of assets used to generate cash flows.
 Arrears or discontinuance of dividends.
 Inability to pay creditors on due dates.
 Inability to comply with the terms of loan agreements.
 Change from credit to cash transactions with suppliers.
 Inability to obtain financing for essential new product development or other essential
investments.

Operating

 Management intentions to liquidate 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).
 Labor difficulties.
 Shortages of important supplies.
 Emergence of a highly successful competitor.

Other

 Non-compliance with capital or other statutory requirements,

 Pending legal or regulatory proceedings against entity that may result in claims that entity
is unlikely to be able to satisfy.
 Changes in law or regulation or government policy expected to adversely affect the entity.
 Uninsured or underinsured disasters when they occur.
ISA 570 (Revised) Page 113

Auditor shall also determine whether management has already performed a preliminary
assessment of continuance as going concern
 If such assessment has been performed, auditor shall discuss with management and
determine whether management has identified such events or conditions and (if so) what
are the plans to address them
 If such assessment has not yet been performed, auditor shall discuss with management
basis for the intended use of the going concern basis of accounting, and inquire whether
events or conditions exist that may cast significant doubt on going concern

Evaluating Management’s Assessment(Ref: 12-14, A8-A13)

 Auditor shall evaluate management’s assessment
 Auditor shall cover the same period as that used by management to make its assessment as
required by AFRF or law/regulation (if it specifies a longer period)
 If assessment covers less than 12 months from date of F/S, auditor shall request
management to extend its assessment period to at least 12 months from that date
 Auditor shall consider whether assessment includes all relevant information of which the
auditor is aware as a result of audit.

Period beyond Management’s Assessment (Ref: 15, A14-A15)

Auditor shall inquire management as to its knowledge of events or conditions beyond the
period of management’s assessment that may cast significant doubt on ability to continue as
going concern

Additional Procedures When Events or Conditions are Identified (Ref: 16, A16-A20)

Auditor shall obtain sufficient appropriate audit evidence to determine whether or not a
material uncertainty exists related to events or conditions that may cast significant doubt on
going concern through additional audit procedures, including following factors

 Analyzing and discussing cash flow, profit and other relevant forecasts with management.
 Analyzing and discussing latest available interim F/S
 Reading the terms of debentures and loan agreements
 Reading minutes of the meetings of shareholders, TCWG and relevant committees for
reference to financing difficulties.
 Inquiring entity’s legal counsel regarding existence of litigation and claims and
reasonableness of management’s assessments of their outcome and estimate of their
financial implications.
 Evaluating entity’s plans to deal with unfilled customer orders.
 Performing audit procedures regarding subsequent events
 Confirming existence, terms and adequacy of borrowing facilities
 Obtaining and reviewing reports of regulatory actions.
ISA 570 (Revised) Page 114

Where management has not yet performed an assessment of going concern; request
management to make its assessment.

Evaluating management’s plans for future actions in relation to its going concern assessment,
whether outcome of these plans is likely to improve situation and whether plans are feasible
(e.g. plans to liquidate assets , borrow money or restructure debt)

Where entity has prepared a cash flow forecast

 Evaluating reliability of underlying data to prepare forecast
 Determining whether there is adequate support for assumptions underlying the forecast.
(auditor may consider requesting written confirmations from 3 rd parties and may obtain
evidence of their ability to provide such support)
Considering whether any additional facts or information have become available since the date
on which management made its assessment.

Requesting written representations from management and TCWG regarding their plans for
future actions and feasibility of these plans.

Implications for the Auditor’sReport(Ref: 17-24, A21-A35)

Scenario Implication on Report

Going Concern Basis is Inappropriate Adverse opinion

Going Concern Basis Is Appropriate but a Material Unmodified opinion with a

Uncertainty Exists separate section in Report
- Adequate Disclosure is made in F/S “Material Uncertainty Related to
Going Concern” (ISA 700)

Going Concern Basis Is Appropriate but a Material Qualified or Adverse Opinion

Uncertainty Exists
- Adequate Disclosure not given in F/S

Management Unwilling to Make or Extend Its Qualified or Disclaimer

Assessment
ISA 570 (Revised) Page 115

Communication with TCWG(Ref: 25)

Auditor shall communicate with TCWG events or conditions identified that may cast significant
doubt on the entity’s ability to continue as a going concern including:
 Whether events or conditions constitute a material uncertainty;
 Whether management’s use of going concern basis of accounting is appropriate in the
preparation of F/S;
 Adequacy of related disclosures in F/S; and
 Where applicable, the implications for the auditor’sreport.

Significant Delay in the Approval of F/S (Ref: 26)

If there is significant delay in approval of F/S by management or TCWG after the date of F/S
 Auditor shall inquire as to the reasons for the delay.
 If auditor believes that delay could be related to events or conditions relating to going
concern assessment, auditor shall perform necessary additional audit procedures

Auditor shall also consider the effect on the auditor’s conclusion regarding the existence of a
material uncertainty

Important Paragraphs 5, 10, 13, 16, 18, 22, 23, 25, 26, A3, A14, A16, A35
ISA 580 Page 116

ISA 580

Management from whom Written Representations Requested (Ref: 9, A2-A6)

Management with appropriate responsibilities for the preparation of F/S and having knowledge
of the matters concerned.
 Management would be expected to have sufficient knowledge of the process followed in
preparing F/S and the assertions therein.
 Management may decide to make inquiries of others who participate in preparing and
presenting F/S, including individuals who have specialized knowledge relating to subject
matter (e.g. actuary, engineer, legal advisor or other experts)
 Auditor may accept qualifying wording in representations, if the auditor is satisfied that
representations are being made by relevant management personal.
 Auditor may request that management include confirmation in the written representations
that it has made appropriate inquiries before making the requested written
representations.

Written Representations about Management's Responsibilities (Ref: 10-12, A7-A9)

Shall be described in written representations in the same manner as described in the terms of
the audit engagement.

The auditor shall request management to provide a written representation that

Preparation of the F/S - Para 10 –

It has fulfilled its responsibility for preparation of F/S in accordance with AFRF, including,
where relevant, their fair presentation, as set out in terms of the audit engagement.

Information Provided & Completeness of Transactions-Para11

a) It has provided the auditor with all relevant information and access as agreed
b) All transactions have been recorded and are reflected in F/S.

Auditor may also ask management to reconfirm its acknowledgement and understanding. It
is common in certain jurisdictions however may be particularly appropriate when:
 Those who signed the terms of audit engagement no longer have the relevant
responsibilities;
 Terms of audit engagement were prepared in a previous year;
 There is any indication that management misunderstands those responsibilities; or
 Changes in circumstances make it appropriate to do so.
ISA 580 Page 117

Communication with TCWG

Auditor shall communicate with TCWG the written representations which the auditor has
requested from management.

Additional / Other Written Representations (Ref: 13, A10-A13)

About the F/S

In addition to Para 10, auditor may consider necessary to request representation about
following:
 Whether selection and application of accounting policies are appropriate; and
 Whether following or similar matters, where relevant under AFRF, have been recognized,
measured, presented or disclosed in accordance with that framework:
- Plans or intentions that may affect carrying value or classification of assets & liabilities;
- Liabilities, both actual and contingent;
- Title to, or control over, assets, liens or encumbrances on assets, and assets pledged; and
- Aspects/Non-compliance of laws, regulations & agreements that may affect F/S

About Information Provided to the Auditor

In addition to Para 11, auditor may request management to provide a written representation
that it has communicated to auditor all deficiencies in internal control (which they knows)
Written Representations about Specific Assertions
When obtaining evidence or evaluating, judgments & intentions, auditor may consider
following:
 Entity's past history in carrying out its stated intentions.
 Entity's reasons for choosing a particular course of action.
 Entity's ability to pursue a specific course of action.
 Existence or lack of any other information that might have been obtained during audit that
may be inconsistent with management's judgment or intent.

Date of and Period Covered by Written Representations (Ref: 14, A15-A18)

Date :
Shall be as near as practicable to, but not after, date of auditor report

Period :
Shall be for all F/S and period(s) referred to in auditor report.

Sometimes auditor may obtain a written representation about a specific assertion in F/S during
the course of the audit. In this case, it may be necessary to request an updated written
representation.
Form of Written Representations (Ref: 15, A19-A21)
ISA 580 Page 118

Shall be in form of a representation letter addressed to auditor.

In some jurisdictions management may be required by law or regulation to make a written

public statement about responsibilities.
 If auditor determines that such statements provide some or all representations required by
this ISA, relevant matters covered by such statements need not be included in
representation letter.
 Factors that may affect the auditor's determination include:
- Whether statement includes confirmation of responsibilities of Para 10 & 11.
- Whether statement has been given or approved by relevant management personnel.
- Whether a copy of statement is provided to auditor as near as practicable to, but not
after, the date of auditor's report.
Formal statement of compliance with law/regulation or approval of F/S would not be a
substitute.

Doubt as to the Reliability and Requested Written Representations Not Provided (Ref:
16-20)

Doubt as to the Reliability of Written Representations

 If auditor has concerns about competence, integrity, ethical values or diligence of
management, auditor shall determine the effect of it on the reliability of representations.
 If written representations are inconsistent with other audit evidence, auditor shall perform
audit procedures to resolve the matter.
 If matter remains unresolved, auditor shall reconsider the assessment of the competence,
integrity etc.

Requested Written Representations Not Provided

 Discuss the matter with management;
 Re-evaluate the integrity of management and evaluate the effect that this may have on the
reliability of representations (oral or written) and audit evidence in general; and
 Take appropriate actions, including determining the possible effect on opinion (ISA 705)

Written Representations about Management's Responsibilities

The auditor shall disclaim an opinion in accordance with ISA 705 if:
 Auditor concludes that there is sufficient doubt about integrity of management; or
 Management does not provide written representations required by paragraphs 10 and 11.

Note: A modified written representation (with qualifying language) does not necessarily mean that
management did not provide written representation. Accordingly disclaimer is not appropriate.
However reason for such modification may affect the opinion in auditor's report (ISA 705)
ISA 580 Page 119

Appendix 2 - Illustrative Representation Letter

(Entity Letterhead)
(To Auditor)(Date)
This representation letter is provided in connection with your audit of the financial
statements of ABC Company for the year ended December 31, 20XX2 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, as set out in the terms of the audit engagement
dated [insert date], for the preparation of the financial statements in accordance with
International Financial Reporting Standards; in particular the financial statements are
fairly presented (or give a true and fair view) in accordance therewith.
 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)
 [Any other matters that the auditor may consider appropriate (see paragraph A10 of this
ISA).]

Information Provided

 We have provided you with:

 Access to all information of which we are aware that is relevant to the preparation
of the financial statements, such as records, documentation and other matters;
 Additional information that you have requested from us for the purpose of the audit;
and o
 Unrestricted access to persons within the entity from whom you determined it
necessary to obtain audit evidence.
ISA 580 Page 120

 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 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)

[Any other matters that the auditor may consider necessary (see paragraph A11 of this ISA).]

Management Management

Important Paragraphs 10, 11, 16, 19, 20, A8, A10, A12, A27
ISA 600 Page 121

ISA 600

 Group engagement partner is responsible for the direction, supervision and performance of
the group audit engagement in compliance with professional standards and applicable legal
and regulatory requirements, and issuance of an appropriate auditor report.
 Auditor’s report on group F/S shall not refer to a component auditor
- Unless required by law or regulation to include such reference.
- If required by law, auditor’s report shall indicate that the reference does not diminish
the group engagement partner’s / firm’s responsibility for the group audit opinion

Acceptance and Continuance

Group engagement team shall obtain an understanding of group, its components, and their
environments
 Group structure, including legal & organizational structure.
 Components' business activities significant to the group
 Use of service organizations, including shared service centers.
 A description of group-wide controls.
 Complexity of the consolidation process.
 Component auditors
 Whether the group engagement team:
- Will have unrestricted access to TCWG and management of group & components
- Will be able to perform necessary work on components.

For continuing engagement, group engagement team's ability to obtain sufficient appropriate
audit evidence may be affected by:
 Changes in group structure.
 Changes in components' business activities significant to group.
 Changes in composition of TCWG of group, group management, or key management of
significant components.
 Concerns with regard to integrity and competence of group or component management.
 Changes in group-wide controls.
 Changes in the AFRF.

If the group engagement partner concludes that:

a) It will not be possible to obtain sufficient appropriate audit evidence due to restrictions
imposed by group management (to obtain information of component or work on it); and
b) Possible effect of inability will result in a disclaimer of opinion on group F/S, the group
engagement partner shall:
o For new engagement; Not accept the engagement
o For continuing engagement; Withdraw from engagement,
o Disclaim opinion (if withdrawal is not possible/practicable)
ISA 600 Page 122

Appendix 3: Examples of Conditions or Events that May Indicate Risks of Material

Misstatement of Group F/S

 A complex group structure.

 Poor corporate governance structures.
 Non-existent or ineffective group-wide controls.
 Components operating in foreign jurisdictions
 Business activities of components that involve high risk
 Uncertainties regarding which components' financial information.
 Unusual related party relationships and transactions.
 Prior occurrences of non matching intra-group account balances
 Complex transactions accounted for in more than 1 component.
 Components' application of accounting policies that differ from those applied to group
F/S.
 Components with different financial year-ends
 Prior occurrences of unauthorized or incomplete adjustments.
 Aggressive tax planning within the group.
 Frequent changes of auditors

Group engagement partner shall agree on the terms of the group audit engagement in
accordance with ISA 210

Additional matters may be included in terms of a group audit engagement, such that:
 The communication between the group engagement team and the component auditors
should be unrestricted to the extent possible under law or regulation;
 Important communications between the component auditors, TCWG of the component, and
component management, including communications on significant deficiencies in internal
control, should be communicated as well to the group engagement team;
 Important communications between regulatory authorities and components related to
financial reporting matters should be communicated to the group engagement team; and
 To the extent the group engagement team considers necessary, it should be permitted:
- Access to component information, TCWG of components, component management, and
the component auditors (including relevant audit documentation sought by the group
engagement team); and
- To perform work or request a component auditor to perform work on the financial
information of the components.

Overall Audit Strategy and Audit Plan

 Group engagement team shall establish an overall group audit strategy and shall develop a
group audit plan in accordance with ISA 300
 Group engagement partner shall review the overall group audit strategy and group audit
plan.
ISA 600 Page 123

Understanding the Group, Its Components, and Their Environments

Auditor is required to identify and assess the risks of material misstatement through obtaining
an understanding of the entity and its environment. The group engagement team shall:
 Enhance its understanding of the group, its components, and their environments, including
group-wide controls, obtained during the acceptance or continuance stage; and
 Obtain an understanding of the consolidation process, including the instructions issued by
group management to components ordinarily including:.
- The accounting policies to be applied;
- Statutory and other disclosure requirements applicable to the group F/S

Group engagement team’s understanding of the instructions may include following:

 The clarity and practicality of the instructions for completing the reporting package.
 Whether the instructions:
- Adequately describe the characteristics of the AFRF;
- Provide for disclosures that are sufficient to comply with requirements of the AFRF
- Provide for the identification of consolidation adjustments, for example, intra-group
transactions and unrealized profits, and intra-group account balances; and
- Provide for the approval of the financial information by component management.

Discussion among Group Engagement Team Members & Component Auditors regarding risks of
Material Misstatement of Group F/S, Including Risks of Fraud provide an opportunity to:
 Share knowledge of components and their environments, including group-wide controls.
 Exchange information about the business risks of the components or the group.
 Exchange ideas about where group F/S may be susceptible to material misstatement due to
fraud or error, how group management and component management could perpetrate and
conceal fraudulent reporting, and how component’s assets could be misappropriated
 Identify practices followed by group or component management that may be biased or
designed to manage earnings that could lead to fraudulent financial reporting, for example,
revenue recognition practices that do not comply with the AFRF.
 Consider known external and internal factors affecting group that may create an incentive
or pressure for group management, component management, or others to commit fraud,
provide the opportunity for fraud to be perpetrated, or indicate environment that enables
group management, component management, or others to rationalize committing fraud.
 Consider the risk that group or component management may override controls.
 Discuss fraud that has been identified in components, or information that indicates
existence of a fraud in a component.

The group engagement team shall obtain an understanding that is sufficient to:
 Confirm or revise its initial identification of components that are likely to be significant;
 Assess risks of material misstatement of group F/S, whether due to fraud or error through:
- Information obtained from understanding of group, components, and environments,
and of consolidation process, including group-wide controls.
- Information obtained from the component auditors.
ISA 600 Page 124

Understanding the Component Auditor

If the group engagement team plans to request a component auditor to perform work on the
financial information of a component, group engagement team shall obtain understanding of:
 Whether the component auditor understands and will comply with the ethical requirements
that are relevant to the group audit and, in particular, is independent. (Ref: Para. A37)
 The component auditor’s professional competence; whether he:
- Possesses an understanding of auditing and other standards applicable to group audit
that is sufficient to fulfill the component auditor’s responsibilities in the group audit;
- Possesses the special skills (for example, industry specific knowledge) necessary to
perform the work on the financial information of the particular component; and
- Where relevant, possesses an understanding of the AFRF that is sufficient to fulfill the
component auditor’s responsibilities in the group audit
 Whether group engagement team will be able to be involved in the work of the component
auditor to the extent necessary to obtain sufficient appropriate audit evidence.
 Whether he operates in a regulatory environment that actively oversees auditors.

Such understanding may be obtained in a number of ways:

In the first year of involving a component auditor, group engagement team may, for example:
 Evaluate the results of quality control monitoring system where the group engagement
team and component auditor are from a firm or network that operates under and complies
with common monitoring policies and procedures;
 Visit the component auditor to discuss the above matters
 Request component auditor to confirm the above matters (Appendix 4)
 Request the component auditor to complete questionnaires about the above matters;
 Discuss the component auditor with colleagues in the group engagement partner’s firm, or
with a reputable third party that has knowledge of the component auditor; or
 Obtain confirmations from professional body or bodies to which the component auditor
belongs, the authorities by which the component auditor is licensed, or other third parties.

In subsequent years, the understanding of the component auditor may be based on the group
engagement team’s previous experience with the component auditor. The group engagement
team may request the component auditor to confirm whether anything in relation to above
understanding has changed since the previous year.

If a component auditor does not meet such independence requirements, or group engagement
team has serious concerns about his competence and independence etc, they shall obtain
sufficient appropriate audit evidence relating to financial information of component without
requesting that component auditor to perform work on financial information of that component.
ISA 600 Page 125

Materiality

 The group engagement team shall determine the following:

- Materiality for the F/S as a whole;
- Materiality of particular class of transaction, account balances or disclosure (if any);
- Component materiality for those components where component auditors will perform
an audit or a review for purposes of the group audit.
- Threshold above which misstatements cannot be regarded as trivial to group F/S.
 Group engagement team shall evaluate the appropriateness of performance materiality
determined at the component level.
 If a component is subject to audit by statute, regulation or other reason, and the group
engagement team decides to use that audit to provide audit evidence for the group audit, the
group engagement team shall determine whether:
- Materiality for the component F/S as a whole; and
- Performance materiality at the component level meet the requirements of this ISA.

Responding to Assessed Risks

 Auditor is required to design and implement appropriate responses to address assessed

risks of material misstatement of the F/S.
 Group engagement team shall determine the type of work to be performed by the group
engagement team, or the component auditors on its behalf, on the financial information of
the components (see flow chart below).
 Group engagement team shall also determine nature, timing and extent of its involvement in
the work of the component auditors
 Such determination of the type of work and its involvement in the work is affected by:
- The significance of the component;
- The identified significant risks of material misstatement of the group F/S;
- The group engagement team’s evaluation of the design of group-wide controls and
determination whether they have been implemented; and
- The group engagement team’s understanding of the component auditor.

Component - An entity or business activity for which group or component management

prepares financial information that should be included in the group F/S

Significant Component - A component identified by the group engagement team

 That is of individual financial significance to the group, or
 That, due to its specific nature or circumstances, is likely to include significant
risks of material misstatement of the group F/S.

Diagram (on next page) explaining all the decision map about above procedures
ISA 600 Page 126

If group engagement team does not consider that sufficient appropriate audit evidence will
be obtained from work performed on financial information of significant components, and
related procedures performed at group level; they shall select components that are not
significant components and perform, or request a component auditor to perform, one or more
of the following on financial information of individual components selected:
 Audit of financial information of component using components materiality
 Audit of one or more of the class of transactions, account balances or disclosures
 Review of financial information of component using components materiality
 Specified procedures
ISA 600 Page 127

Above decision of selecting non significant components depends on

 Extent of audit evidence expected to be obtained from them
 Whether the component has been newly formed or acquired.
 Whether significant changes have taken place in the component.
 Whether an adequate internal audit function has performed work at the component
 Whether the components apply common systems and processes.
 The operating effectiveness of group-wide controls.
 Abnormal fluctuations identified by analytical procedures performed at group level.
 Individual financial significance or the risk of the component in comparison with other
components within this category.
 Whether component is subject to audit required by statute, regulation etc

Significant Components—Risk Assessment

Group engagement team shall be involved in component auditor’s risk assessment to identify
significant risks of material misstatement of the group F/S. Nature, timing and extent of this
involvement are affected by understanding of the component auditor, including at a minimum:
 Discussing with component auditor or component management those of the component’s
business activities that are significant to the group;
 Discussing with component auditor susceptibility of component to material misstatement of
the financial information due to fraud or error; and
 Reviewing component auditor’s documentation of identified significant risks of material
misstatement of group F/S.

Consolidation Process

Group engagement team shall

 Design and perform further audit procedures on the consolidation process
 Evaluate whether all components have been included in the group F/S.
 Evaluate the appropriateness, completeness and accuracy of consolidation adjustments etc
 Evaluate fraud risk factors or indicators of possible management bias including
- Evaluating whether significant adjustments appropriately reflect the underlying events
and transactions;
- Determining whether significant adjustments have been calculated, processed and
authorized by group management and, where applicable, by component management;
- Determining whether significant adjustments are properly supported and documented
- Checking the reconciliation and elimination of intra-group transactions and unrealized
profits, and intra-group account balances.
 If financial information of a component has not been prepared as per same accounting
policies applied to the group F/S, group engagement team shall evaluate whether financial
information of that component has been appropriately adjusted for group F/S.
 Group engagement team shall determine whether financial information identified in the
component auditor’s communication is incorporated in the group F/S.
 For a component with different period-end from group, group engagement team shall
evaluate whether appropriate adjustments have been made to those F/S as per AFRF.
ISA 600 Page 128

Subsequent Events
 If group engagement team or component auditors perform audits on components, they shall
perform procedures to identify and apply procedures on subsequent events.
 If component auditors perform work other than audits of components, group engagement
team shall request him to notify group engagement team if they become aware of subsequent
events that may require an adjustment to or disclosure in the group F/S.

Communication with the Component Auditor

 Group engagement team shall communicate its requirements to component auditor on a
timely basis.
 This communication shall set out work to be performed, use to be made of that work, and
form and content of component auditor's communication with group engagement team.
- Request that component auditor confirms that he will cooperate with them
- Ethical and independence requirements relevant to audit
- Component materiality
- Request him to communicate any identified significant risks of material misstatement of
group F/S.
- A list of related parties
 Group engagement team shall request component auditor to communicate matters relevant
to group engagement team's conclusion with regard to the group audit.
- Whether he has complied with relevant ethical and independence requirements
- Whether he has complied with our requirements;
- Identification of financial information of the component
- Information on instances of non-compliance with laws
- List of uncorrected misstatements
- Indicators of possible management bias;
- Description of significant deficiencies in internal control;
- Other significant matters (e.g. fraud or suspected fraud)
- Any other matters
- Component auditor's findings, conclusions or opinion.

Evaluating the Sufficiency and Appropriateness of Audit Evidence Obtained

 Group engagement team shall:

- Discuss significant matters arising from that evaluation with the component auditor,
component management or group management, as appropriate; and
- Determine whether it is necessary to review other relevant parts of the component
auditor’s audit documentation.
 If group engagement team concludes that the work of the component auditor is insufficient,
the group engagement team shall determine additional procedures to be performed
 Group engagement partner shall evaluate the effect on group audit opinion of any
uncorrected misstatements and any instances where there has been an inability to obtain
sufficient appropriate audit evidence.
ISA 600 Page 129

Communication with Group Management and TCWG of the Group

 Group engagement team shall determine which identified deficiencies in internal control to
communicate to TCWG and group management in accordance with ISA 265 regarding:
- Group-wide internal control that the group engagement team has identified;
- Internal control that group engagement team or component auditor has identified
 If fraud has been identified by group engagement team or component auditor or information
indicates that a fraud may exist, group engagement team shall communicate this on a timely
basis to the appropriate level of group management
 In addition, group engagement team shall communicate these matters with TCWG of group:
- An overview of type of work to be performed on the components.
- An overview of nature of the group engagement team’s planned involvement in work to
be performed by component auditors on significant components.
- Instances where the group engagement team’s evaluation of the work of a component
auditor gave rise to a concern about the quality of that auditor’s work.
- Any limitations on the group audit (e.g restriction on group engagement team’s access)

Documentation (Ref: 49)

Group engagement team shall include in the audit documentation the following matters
 An analysis of components, indicating those that are significant, and the type of work
performed on the financial information of the components.
 Nature, timing and extent of the group engagement team’s involvement in work performed
by component auditors on significant components including, group engagement team’s
review of relevant parts of component audit documentation and conclusions thereon.
 Written communications between group engagement team and the component auditors

Components Subject to Audit by Statute, Regulation or Other Reason (Ref: 3, A1)

 A component auditor may be required by statute, regulation or for another reason, to
express an audit opinion on the F/S of a component.
 Group engagement team may decide to use the audit evidence on which the audit opinion on
the F/S of the component is based to provide audit evidence for the group audit, but the
requirements of this ISA nevertheless apply
 Factors that may affect the decision of whether to use an audit required by statute, regulation
or for another reason to provide audit evidence for group audit include:
- Differences in the AFRF applied in preparing the F/S of the component and that applied
in preparing the group F/S.
- Differences in the auditing and other standards applied by the component auditor and
those applied in the audit of the group F/S.
- Whether the audit of the F/S of the component will be completed in time to meet the
group reporting timetable.
Important Paragraphs 12, 13, 17, 19, 21, 26-29, 40,41, 46,49,50, A11, A12, A20,
A26, A27, A29, A33, A35, A51, A55
ISA 600 Page 130

Appendix 1
(Ref: Para. A19)

“Independent Auditor’s Report Where the Group Engagement Team Is Not Able to Obtain Sufficient
Appropriate Audit Evidence on Which to Base the Group Audit Opinion”

INDEPENDENT AUDITOR’S REPORT

To the Shareholders of ABC Company [or other Appropriate Addressee]

Report on the Audit of the Consolidated F/S

Qualified Opinion

We have audited the consolidated F/S 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
F/S, 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 F/S present fairly, in all material
respects (or give a true and fair view of), the consolidated financial position of the Group as at
December 31, 20X1, and (of) their consolidated financial performance and consolidated cash
flows for the year then
ended in accordance with International Financial Reporting Standards (IFRSs).

Basis for Qualified Opinion

ABC Company’s investment in XYZ Company, a foreign associate acquired during the year and
accounted for by the equity method, is carried at $15 million on the consolidated statement of
financial position as at December 31, 20X1, and ABC’s share of XYZ’s net income of $1 million is
included in the consolidated statement of comprehensive 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.

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 F/S section of our report. We are independent of the Group in accordance
with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional
Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with
ISA 600 Page 131

the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate
to provide a basis for our qualified audit opinion.

Other Information [or another title if appropriate such as “Information Other than the
F/S and Auditor’s Report Thereon”]

[Reporting in accordance with the reporting requirements in ISA 720 (Revised)

Responsibilities of Management and TCWG for the Consolidated F/S

[Reporting in accordance with ISA 700 (Revised)

Auditor’s Responsibilities for the Audit of the Consolidated F/S

[Reporting in accordance with ISA 700 (Revised)

Report on Other Legal and Regulatory Requirements

[Reporting in accordance with ISA 700 (Revised)

[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]

If, in the group engagement partner’s judgment, the effect on the group F/S of the inability to
obtain sufficient appropriate audit evidence is material and pervasive, the group engagement
partner would disclaim an opinion in accordance with ISA 705 (Revised).
ISA 600 Page 132

Appendix 2 (Ref: Para. A23)

“Examples of Matters about Which the Group Engagement Team Obtains Understanding”
Group-Wide Controls
 Regular meetings between group and component management
 Monitoring of components' operations and financial results.
 Group management's risk assessment process
 Monitoring, controlling, reconciling, and eliminating intra-group transactions and
unrealized profits etc.
 Process for monitoring the timeliness and assessing the accuracy and completeness of
financial information from components.
 A central IT system and the control activities within an IT system
 Monitoring of controls
 Consistent policies and procedures, including group financial reporting procedures manual.
 Group-wide programs, such as codes of conduct and fraud prevention programs.
 Arrangements for assigning authority and responsibility to component management.
 Understanding about internal Audit Function (if it is centralized)
Understanding of the AFRF and the Consolidation Process
 The extent to which component management has an understanding of the AFRF.
 The process for identifying and accounting for components.
 Process for identifying reportable segments for segment reporting.
 Process for identifying related party relationships & transactions for reporting
 Accounting policies applied to group F/S, changes from last financial year, and changes
resulting from new or revised standards under the AFRF.
 Procedures for dealing with components with different financial year-ends
 Group management’s process for obtaining an understanding of the accounting policies used
by components, and, where applicable, ensuring that uniform accounting policies are used
to prepare the financial information of the components for the group F/S
 Group management’s process for ensuring complete, accurate and timely financial reporting
by the components for the consolidation.
 Process for translating financial information of foreign components into currency of group.
 How IT is organized for consolidation, including manual and automated stages of process,
and manual and programmed controls in place at various stages of consolidation process.
 Group management’s process for obtaining information on subsequent events.
 Matters relating to consolidation adjustments:
 Process for recording consolidation adjustments, including preparation, authorization and
processing of related journal entries, & experience of personnel responsible for that
 The consolidation adjustments required by the applicable AFRF.
 Business rationale for events and transactions that gave rise to consolidation adjustments.
 Frequency, nature and size of transactions between components.
 Procedures for monitoring, controlling, reconciling and eliminating intra-group transactions
and unrealized profits, and intra-group account balances.
 Steps taken to arrive at the fair value of acquired assets and liabilities, procedures for
amortizing goodwill (where applicable), and impairment testing of goodwill.
ISA 600 Page 133

Appendix 4 (Ref: Para. A35)

Examples of a Component Auditor’s Confirmations
[Component Auditor Letterhead]
[Date]
[To Group Engagement Partner]
This letter is provided in connection with your audit of the group F/S of [name of parent] for the year
ended [date] for the purpose of expressing an opinion on whether the group F/S present fairly, in all
material respects (give a true and fair view of) the financial position of the group as at [date] and (of) its
financial performance and cash flows for the year then ended in accordance with [indicate AFRF].
We acknowledge receipt of your instructions dated [date], requesting us to perform the specified work on
the financial information of [name of component] for the year ended [date].
We confirm that:
 We will be able to comply with the instructions. / We advise you that we will not be able to comply
with the following instructions [specify instructions] for the following reasons [specify reasons].
 The instructions are clear and we understand them. / We would appreciate it if you could clarify the
following instructions [specify instructions].
 We will cooperate with you and provide you with access to relevant audit documentation.
We acknowledge that:
 The financial information of [name of component] will be included in the group F/S of [name of parent].
 You may consider it necessary to be involved in the work you have requested us to perform on the
financial information of [name of component] for the year ended [date].
 You intend to evaluate and, if considered appropriate, use our work for the audit of the group F/S of
[name of parent].
In connection with the work that we will perform on the financial information of [name of component], a
[describe component, for example, wholly-owned subsidiary, subsidiary, joint venture, investee accounted
for by the equity or cost methods of accounting] of [name of parent], we confirm the following:
 We have an understanding of [indicate relevant ethical requirements] that is sufficient to fulfill our
responsibilities in the audit of the group F/S, and will comply therewith. In particular, and with respect
to [name of parent] and the other components in the group, we are independent within the meaning of
[indicate relevant ethical requirements] and comply with the applicable requirements of [refer to
rules] promulgated by [name of regulatory agency].
 We have an understanding of International Standards on Auditing and [indicate other national
standards applicable to the audit of the group F/S] that is sufficient to fulfill our responsibilities in the
audit of the group F/S and will conduct our work on the financial information of [name of component]
for the year ended [date] in accordance with those standards.
 We possess the special skills (for example, industry specific knowledge) necessary to perform the work
on the financial information of the particular component.
 We have an understanding of [indicate AFRF or group financial reporting procedures manual] that is
sufficient to fulfill our responsibilities in the audit of the group F/S.
We will inform you of any changes in the above representations during the course of
our work on the financial information of [name of component].
[Auditor’s signature] [Date]
[Auditor’s address]
ISA 600 Page 134

Appendix 5 (Ref: Para. A58)

Required Additional Matters Included in Group Engagement Team’s Letter of Instruction
 A request for component auditor, knowing the context in which his work would be used, to confirm
that component auditor will cooperate with group engagement team.
 The timetable for completing the audit.
 Dates of planned visits by group management and the group engagement team, and dates of planned
meetings with component management and the component auditor.
 A list of key contacts.
 Work to be performed by the component auditor, the use to be made of that work, and arrangements
for coordinating efforts at the initial stage of and during the audit, including the group engagement
team’s planned involvement in the work of the component auditor.
 Ethical requirements relevant to the group audit and, in particular, independence requirements
 In case of an audit or review of the financial information of the component, component materiality, and
threshold above which misstatements cannot be regarded as clearly trivial to group F/S.
 A list of related parties prepared by group management, and any other related parties that the group
engagement team is aware of, and a request that the component auditor communicates on a timely
basis to the group engagement team related parties not previously identified
 Work to be performed on intra-group transactions and unrealized profits and intra-group balances.
 Guidance on other statutory reporting responsibilities, for example, reporting on group management’s
assertion on the effectiveness of internal control.
 Where time lag between completion of the work on components and the group engagement team’s
conclusion on the group F/S is likely, specific instructions for a subsequent events review.
 Matters that are relevant to the conduct of the work of the component auditor:
 The findings of the group engagement team’s tests of control activities of a processing system that is
common for all or some components, and tests of controls to be performed by the component auditor.
 Identified significant risks of material misstatement of the group F/S that are relevant to the work of
the component auditor, and a request that the component auditor communicates on a timely basis any
other significant risks of material misstatement of the group F/S, due to fraud or error, identified in
the component and the component auditor’s response to such risks.
 Findings of internal audit function, based on work performed on controls at components.
 A request for timely communication of audit evidence obtained from performing work on components
that contradicts the original audit evidence.
 A request for a written representation on component management’s compliance with the AFRF, or a
statement that differences between the accounting policies applied to the financial information of the
component and those applied to the group F/S have been disclosed.
 Matters to be documented by the component auditor. other information
 A request that the following be reported to the group engagement team on a timely basis:
- Significant accounting, financial reporting and auditing matters, including accounting estimates
and related judgments.
- Matters relating to the going concern status of the component.
- Matters relating to litigation and claims.
- Significant deficiencies in internal control that the component auditor has identified during the
performance of the work on the financial information of the component, and information that
indicates the existence of fraud.
 A request that group engagement team be notified of any significant or unusual events earliest
A request that the matters listed in Para 41 be communicated to the group engagement team when the
work on the financial information of the component is completed
ISA 610 Page 135

ISA 610 (REVISED)

External auditor may make use of internal audit function for audit purposes in following ways:
 To obtain information relevant to risk assessment (ISA 315); or
 May decide to use work of internal audit function in partial substitution for own work

Definition of Internal Audit Function

Function of an entity that performs assurance and consulting activities designed to evaluate
and improve effectiveness of entity's governance, risk management and internal control
processes.

Activities Relating to Governance

 Assess governance process in its accomplishment of objectives

Activities Relating to Risk Management

 Identifying and evaluating significant exposures to risk and contributing to
improvement of risk management and internal control - including effectiveness of
financial reporting process
 Assist the entity in detection of fraud.

Activities Relating to Internal Control

 Evaluation of internal control.
 Examination of financial and operating information.
 Review of operating activities.
 Review of compliance with laws and regulations.

In this ISA “internal audit function” also includes relevant activities of other functions similar to
internal audit or outsourced third-party service providers

Determining Whether, in Which Areas, and to What Extent the

Work of Internal Audit Function Can Be Used (Ref: 15-16, A5-A14)
Professional judgment is exercised in determining whether the work of internal audit function
can be used for audit, and the nature and extent of the work. External auditor evaluates the
following:

1) The extent to which the internal audit function's organizational status and relevant
policies and procedures support the objectivity of the internal auditors; and

Objectivity refers to the ability to perform those tasks without allowing bias, conflict of
interest or undue influence of others to override professional judgments.
ISA 610 Page 136

Factors that may affect external auditor evaluation include whether:

- Organizational status of internal audit function, including authority and accountability,
supports the ability to be free from bias, conflict of interest or undue influence of others to
override professional judgments. E.g. whether they reports to TCWG or management
(if reports to management, whether it has direct access to TCWG)
- They are free of any conflicting responsibilities
- TCWG oversee employment decisions of internal audit function.
- There are any restrictions placed by management or TCWG.
- Their internal policies or relevant membership of professional bodies require their
compliance with relevant professional standards relating to objectivity

2) The level of competence of the internal audit function; and

Competence: Attainment and maintenance of knowledge and skills at the level required to
enable assigned tasks to be performed diligently and accordance with professional
standards.

Factors that may affect external auditor evaluation include whether:

- They are properly resourced relative to size of entity and nature of operations.
- Are there established policies for hiring, training & assigning them to their engagements.
- They have adequate technical training and proficiency in auditing
- They possess required knowledge and skills relating to the entity's financial reporting and
the AFRF
- They are members of relevant professional bodies that oblige them to comply with relevant
professional standards including continuing professional development.

3) Whether the internal audit function applies a systematic and disciplined approach,
including quality control.

Factors for such determination include the following:

 Existence, adequacy and use of documented internal audit procedures or guidance covering
such areas as risk assessments, work programs, documentation and reporting, nature and
extent of which is matching with size and circumstances of an entity.
 Whether they has appropriate quality control policies and procedures. (e.g. leadership,
human resources and engagement performance) or quality control requirements in
standards set by relevant professional bodies for internal auditors. Such bodies may also
establish other appropriate requirements such as conducting periodic external quality
assessments

External auditor shall not use the work of the internal audit function if he evaluates that some or
all of the above 3 factors are not present.
ISA 610 Page 137

Factors Affecting the Determination of the Nature and Extent of the Work of the Internal
Audit Function that Can Be Used (Ref: 17-20, A15-A23)

Examples of work of internal audit function that can be used by external auditor
 Testing of the operating effectiveness of controls.
 Substantive procedures involving limited judgment.
 Observations of inventory counts.
 Tracing transactions through the information system relevant to financial reporting.
 Testing of compliance with regulatory requirements.
 Audits or reviews of financial information of subsidiaries that are not significant
components to the group (ISA 600)

External auditor shall make all significant judgments in audit engagement and shall plan to
use less of the work of the internal audit function and perform more of the work directly

Amount of judgment needed in planning, performing and evaluating such work and the
assessed risk of material misstatement at the assertion level are inputs to the external
auditor's determination.

External auditor shall also communicate with TCWG how the external auditor has planned to
use the work of the internal audit function.

Using the Work of the Internal Audit Function (Ref: 21-25, A24-A30)

The external auditor is required to evaluate whether:

 The work was properly planned, performed, supervised, reviewed and documented;
 Sufficient, appropriate evidence was obtained to draw reasonable conclusions;
 Appropriate conclusions were reached, consistent with any reports prepared;
 Any exceptions or unusual matters were properly resolved.

It useful for the external auditor to agree the following in advance with internal audit:
 Nature, timing and extent of such work
 Materiality and performance materiality
 Methods of item selection and sample sizes
 Documentation of work performed
 Review and reporting procedures.

After evaluating specific areas of work, external auditor may then perform further procedures:
 Making inquiries of appropriate individuals within the internal audit function;
 Observing procedures performed by internal audit;
 Reviewing the internal audit function’s work program and working papers;
 Re-performing a sample of the procedures to validate conclusions reached.
ISA 610 Page 138

Nature, timing and extent of testing specific work of internal audit function will depend upon:
 External auditor’s judgment of the risk and materiality of each area concerned;
 Preliminary assessment of the internal audit function; and
 Evaluation of specific work of the internal audit function.

Documentation
 Conclusions about the adequacy of the internal audit function and its work
 The audit procedures performed by him on that work.

Direct assistance (Ref: 26-32, A31-A41)

Direct assistance: Direct assistance is defined as the use of internal auditors to perform audit
procedures under the direction, supervision and review of the external auditor

Internal auditors may not provide direct assistance if:

 There are significant threats to the objectivity of the internal auditor; or
 The internal auditor lacks sufficient competence to perform the proposed work.

When determining nature and extent of work to be assigned, external auditor shall consider:
 Amount of judgment involved;
 Assessed risk of material misstatement;
 External auditor’s evaluation of the existence of threats to the objectivity and level of
competence of the internal auditors;
 Whether in aggregate the external auditor would remain sufficiently involved in audit

ISA 610 precludes the use of internal audit to perform direct assistance procedures that:
 Involve making significant judgements in the audit;
 Relate to higher assessed risks of material misstatement where higher judgment is
required in performing relevant audit procedures or evaluating audit evidence
gathered;
 Relate to work with which internal auditors have been involved and which has already
been, or will be, reported to management or TCWG by the internal audit function; or
 Relate to the decisions of using work of internal auditor or using his direct assistance.

Using internal auditors to provide direct assistance (Ref: 33-35, A24-A30)

Prior to using internal auditors to provide direct assistance, the external auditor shall:
 Obtain written agreement from an authorized representative of the entity that the
internal auditors will be allowed to follow the external auditor’s instructions, and that
the entity will not intervene in that work; and
 Obtain written agreement from internal auditors that they will keep confidential
specific matters as instructed by the external auditor and inform external auditor of
any threat to their objectivity.
ISA 610 Page 139

Direction, supervision and review by external auditor

 It must be sufficient in order to be satisfied that internal auditors have obtained

sufficient appropriate audit evidence to support the conclusions based on that work.
 External auditor shall remain alert for indications that existence and significance of
threats to objectivity and level of competence of the internal auditors are no longer
appropriate.

Documentation (Ref: 36-37)

The external auditor is required to document:

 The evaluation of existence and significance of threats to objectivity of internal
auditors, and the level of competence of the internal auditors used to provide direct
assistance;
 Basis for decision regarding nature and extent of the work performed by internal
auditors;
 Who reviewed the work performed and the date and extent of that review;
 Written agreements obtained from an authorized representative of entity and the
internal auditors; and
 Working papers prepared by internal auditors who provided direct assistance on the
audit.

Communication with those charged with governance

External auditor shall communicate the planned use of the work of the internal audit function
to TCWG for their understanding of the proposed audit approach.

Important Paragraphs 15,16, 18, 23,24,28-30,33, 34, 36, 37, A1, A7, A8, A11, A16,
A24, A25, A32
ISA 620 Page 140

ISA 620

Auditor's expert An individual or organization possessing expertise in a field other than

accounting or auditing, whose work in that field is used by auditor to assist auditor in
obtaining sufficient appropriate audit evidence.
An auditor's expert may be either an auditor's internal expert (who is a partner or staff,
including temporary staff, of auditor's firm or a network firm), or an auditor's external
expert.

Determining the Need for an Expert (Ref: 7, A4-A9)

An auditor may obtain a understanding of the field of expert through:

 Experience in auditing entities that require such expertise.
 Education or training in particular field.
 Discussion with auditors having performed similar engagements

Whether to use Auditor’s expert (Considerations)

 Nature and significance of the matter, including its complexity.

 Risks of material misstatement in the matter.
 Expected nature of procedures including auditor's knowledge of and experience with the
work of experts
 Availability of alternative sources of audit evidence.
 Whether management has used a management's expert
- Nature, scope and objectives of his work.
- Whether he is employee or outsourced
- Extent of possible control or influence of entity over him.
- His competence and capabilities.
- Whether he is subject to technical performance standards or other professional or
industry requirements
- Any controls within entity over his work.

Benefit of using Auditor’s expert

 Understanding of entity & environment including internal control.

 Identifying and assessing the risks of material misstatement.
 Determining and implementing further audit procedures.
 Designing & performing tests of controls or substantive procedures
 Evaluating sufficiency & appropriateness of audit evidence.
ISA 620 Page 141

Nature, Timing and Extent of Audit Procedures(Ref: 8, A10-A13)

Auditor shall consider matters including:

 Nature of the matter to which that expert's work relates;
 Risks of material misstatement;
 Significance of expert's work in context of audit;
 Auditor's knowledge of and previous experience with that expert
 Whether internal expert is subject to firm quality control policies
- Competence and capabilities (Recruitment & training)
- Objectivity (Ethical Requirements).
- Evaluation of the adequacy of the expert's work
- Adherence to regulatory and legal requirements.
- Agreement with the expert.

Need for different or more extensive procedures (factors):

 Work of expert involving subjective and complex judgments.

 Auditor has not previously used expert’s work, and has no prior knowledge of his
competence, capabilities and objectivity.
 Expert is performing procedures that are integral to the audit
 He is external expert (not subject to firm quality control policies)

Competence, Capabilities and Objectivity of Expert & Obtaining an Understanding of the

Field of Expertise of Expert (Ref: 9, A14-A20)
Similar to that of Management Expert (Please Refer to ISA-500)

Agreement with the Expert (Ref: 11, A23-A31)

Following factors may suggest need for more detailed agreement or for the agreement to be set
out in writing:
 Expert will have access to sensitive or confidential information.
 Respective roles or responsibilities of auditor and expert are different from those normally
expected.
 Multi-jurisdictional legal or regulatory requirements apply.
 The matter to which the expert's work relates is highly complex.
 Auditor has not previously used work performed by that expert.
 Greater extent of expert's work, and its significance for audit.

If there is no agreement, evidence of agreement may be included e.g.:

 Planning memoranda or related working papers
 Policies and procedures of the auditor's firm.
ISA 620 Page 142

Agreement between the Auditor and External Expert (Appendix)

Nature, Scope and Objectives of External Expert's Work
- Nature and scope of procedures to be performed.
- Objectives of the external expert's work in context of audit
- Any relevant technical performance standards or other requirements.
- Assumptions and methods, including models, expert will use.
- Effective date and testing period (if applicable) for the subject matter.
The Respective Roles and Responsibilities of the Auditor and the Expert
- Relevant auditing & accounting standards, and regulatory requirements
- Expert's consent to intended use of his report, including any reference
- Nature and extent of the auditor's review of expert's work.
- Whether the auditor or the expert will test source data.
- Expert's access to records, files, personnel and management’s experts.
- Procedures for communication between the expert and the entity.
- Auditor's and the expert's access to each other's working papers.
- Ownership and control of working papers during & after engagement.
- Expert's responsibility to perform work with due skill and care.
- Expert's competence and capability to perform the work.
- Expectation that expert will use all knowledge for subject matter.
- Any restriction on expert's association with auditor's report.
Communications and Reporting
- Methods and frequency of communications, including:
 How expert's findings or conclusions will be reported.
 Identification of team members who will coordinate with expert.
- When expert will complete work and report findings or conclusions.
- Expert's responsibility to communicate
 Promptly any potential delay in completing work and any potential
reservation or limitation.
 Instances of scope limitation imposed by management.
 All information that expert believes may be relevant to the audit.
 Circumstances that may create threats & any relevant safeguards.
Need to observe Confidentiality
- Relevant ethical requirements of confidentiality applicable to auditor.
- Additional requirements that may be imposed by law or regulation.
- Specific confidentiality provisions requested by the entity, if any.
ISA 620 Page 143

Evaluating the Adequacy of the Expert's Work (Ref: 12-13, A32-A40)

a) Relevance and reasonableness of expert's findings or conclusions and consistency with
other audit evidence
Findings and Conclusions of the Expert
- Inquiries of the expert.
- Reviewing the expert's working papers and reports.
- Corroborative procedures, such as:
 Observing the expert's work;
 Examining published data e.g. authentic statistical reports etc;
 Confirming relevant matters with third parties;
 Performing detailed analytical procedures; and
 Re-performing calculations.
- Discussion with another expert with relevant expertise (if inconsistent)
- Discussing the expert's report with management.
Relevance and Reasonableness
- Presented in a manner consistent with standards of expert's profession;
- Clearly expressed, including reference to objectives agreed, scope of the work performed
and standards applied;
- Based on appropriate period and take into account subsequent events
- Subject to any reservation, limitation or restriction on use;
- Based on consideration of errors or deviations encountered.
b) If that expert's work involves use of significant assumptions and methods, relevance and
reasonableness of those assumptions and methods in the circumstances; and
c) If that expert's work involves the use of source data that is significant to that expert's work,
the relevance, completeness, and accuracy of that source data.

INADEQUATE WORK
If auditor determines that work of expert is not adequate, he shall:
 Agree with that expert on nature and extent of further work; or
 Perform additional audit procedures
- If auditor concludes that he cannot resolve matter through additional procedures, he
may express a modified opinion

Reference to the Expert in the Auditor's Report (Ref: 14-15, A41-A42)

Auditor shall not refer to work of an expert in auditor report containing an unmodified opinion
unless required by law
 If such reference is required by law, auditor shall indicate in report that reference does not
reduce auditor's responsibility.
If auditor makes reference to work of expert in report because such reference is relevant to
explain modification to the opinion,
 Indicate that reference does not reduce auditor's responsibility.
 May need the permission of expert before making such reference.
Important Paragraphs 8, 11, 12, 14, 15, A4, A7-A10, A13, A15, A20, A24, A33, A34
ISA 700 Page 144

ISA 700 (REVISED)

Forming an Opinion on the F/S (Ref: 10-15)

 Auditor shall conclude as to whether he has obtained reasonable assurance

 The conclusion shall take into account:
- Whether sufficient appropriate audit evidence has been obtained;
- Whether uncorrected misstatements are material, individually or aggregate;
- Other evaluations required by this ISA.
 Auditor shall form an opinion that F/S are prepared in accordance with AFRF.
 Evaluation shall include consideration of qualitative aspects of accounting practices,
including indicators of possible bias (lack of neutrality) in judgments.
- Such indicators include following:
 Selective correction of misstatements brought to their attention.
 Possible management bias in the making of accounting estimates.

In particular, auditor shall evaluate whether:

 F/S adequately disclose significant accounting policies selected and applied;
 Accounting policies are consistent with AFRF and are appropriate;
 Accounting estimates made by management are reasonable;
 Information presented in F/S is relevant, reliable, comparable, & understandable;
 Terminology used in F/S is appropriate;
 F/S provide adequate disclosures enabling intended users to understand the effect of
material transactions and events

Description of the Applicable Financial Reporting Framework (Ref: A10-A15)

 Auditor shall evaluate whether F/S adequately refer to or describe AFRF

 Such description is appropriate only if F/S comply with all requirements of that framework
that are effective during the period covered by F/S.
 This description should not contain limiting language

Reference to More than One Financial Reporting Framework

Where F/S prepared in accordance with two FRFs. Such reference is

 Appropriate only if F/S comply with both frameworks simultaneously.
 Not appropriate If F/S prepared in accordance with one FRF contains a reconciliation of
results shown under another framework
ISA 700 Page 145

Form of Opinion (Ref: 16-19, A16-A17)

 Express an unmodified opinion when concludes that F/S are prepared, in all material
respects, in accordance with AFRF.
 Modify the opinion ;If auditor concludes that F/S as a whole are not free from material
misstatement or he is unable to obtain sufficient appropriate evidence.

 When F/S, prepared in accordance with fair presentation framework, do not achieve fair
presentation, auditor shall discuss matter with management and consider to modify the
opinion in accordance with ISA 705

 When F/S prepared in accordance with compliance framework,

- Auditor is not required to evaluate whether F/S achieve fair presentation.
- If in extremely rare circumstances auditor concludes that such F/S are misleading,
auditor shall discuss matter with management and may determine to communicate in
report.

Auditor's Report (Ref: 20-49, A18-A69)

1 Title "Independent Auditor's Report"

2 Addressee As required by the circumstances of the engagement.

 Sometimes law or regulation specifies the addressee
 Normally it is addressed to shareholders or TCWG.

3 Auditor's  Identify entity whose F/S have been audited;

Opinion  State that F/S have been audited;
 Identify the title of each statement that comprises F/S;
 Refer to accounting policies & other explanatory info
 Specify the date or period covered by F/S.

For Fair presentation framework

Use one of following phrases

 “F/S present fairly, in all material respects, ... in accordance with
AFRF” ; or
 “F/S give a true and fair view of …. in accordance with AFRF”

For Compliance framework

“F/S are prepared, in all material respects, in accordance with

AFRF”
ISA 700 Page 146

Description of AFRF

 "... in accordance with IFRS"; or

 "... in accordance with accounting principles generally accepted
in Jurisdiction X ..."

If AFRF contains both reporting standards & legal

requirements
"... in accordance with International Financial Reporting Standards
and the requirements of Jurisdiction X Corporations Act."

If F/S prepared in accordance with two FRF(both applicable)

 If F/S comply with each framework individually, two opinions
are expressed (separately or in a single sentence).
 If F/S comply with one but fail to comply with other framework
an unmodified opinion can be given for one framework but a
modified opinion given with regard to other framework.

4 Basis for This section:

opinion  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.
 The statement shall identify the jurisdiction of origin of the
relevant ethical requirements or refer to the International
Ethics Standards Board for Accountants’ Code of Ethics for
Professional Accountants (IESBA Code); and
 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.

5 Going concern Where applicable, auditor shall report in accordance with ISA 570
(Revised)

6 Key Audit For audits of listed entities and other prescribed or selected
Matters (KAM) entities, auditor shall communicate “Key Audit Matters” in auditor’s
report. (as per ISA 701)
ISA 700 Page 147

7 Management's  Preparation of F/S in accordance with AFRF, and

Responsibility  Internal control necessary for preparation of F/S
 Assessing 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 any matters relating to such.

This section shall also identify those responsible for the oversight of
the financial reporting process, when those responsible for such
oversight are different from the management.

8 Auditor's This section of the report shall state that:

Responsibility  Objectives of the auditor are to:
- Obtain reasonable assurance about whether F/S as a whole
are free from material misstatement, whether due to fraud or
error; and
- Issue auditor’s report that includes the auditor’s opinion.
 Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit will always detect a material
misstatement when it exists; and
 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 F/S; or
- provide a definition or description of materiality in
accordance with AFRF

This section shall further:

 State that auditor exercise professional judgment and maintains
professional skepticism throughout the audit; and
 Describe an audit by stating that the auditor’s responsibilities
are:
- to identify and assess the risks of material misstatement of the
F/S, whether due to fraud or error
- 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 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
ISA 700 Page 148

This section also shall:

 State that the auditor communicates with TCWG 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 F/S of listed entities, state that the auditor
provides TCWG 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
 Where “Key Audit Matters” are communicated, state that, from
the matters communicated with TCWG, the auditor determines
those matters that were of most significance in the audit of the
current period and are therefore the key audit matters.

This section shall be included:

 within the body of the auditor’s report;
 within an appendix to auditor’s report,
(Report shall include a reference to the location of appendix); or
 By a specific reference within auditor’s report to the location of
such a description on a website of an appropriate authority

9 Other Such other reporting responsibilities may be addressed in a

Reporting separate section of the report sub-titled “Report on Other Legal and
Responsibilities Regulatory Requirements”

In this case the auditor’s report would be having two separate

sections.
 Content # 3 – 7 of auditor’s report shall be under the sub-title
"Report on the F/S”
 "Report on Other Legal and Regulatory Requirements" shall
come after "Report on the F/S." (May contain sub-headings)

10 Name of the For Listed Companies only

Engagement
If, if in rare circumstances, such disclosure is reasonably expected to
Partner
lead to significant personal security threat, auditor should not
include the name and shall also discuss the severity with TCWG

11 Signature of the The auditor's report shall be signed; Either in name of audit firm,
Auditor auditor’s personal name or both (as appropriate)
ISA 700 Page 149

12 Auditor's Name the location in the jurisdiction where auditor practices. (not
Address the clients’)

13 Date Shall not be dated earlier than date on which the auditor has
obtained sufficient appropriate audit evidence on which to base the
auditor's opinion on F/S, including evidence that:
 F/S, including related notes, have been prepared; and
 Those with recognized authority have asserted that they have
taken responsibility for F/S.

Auditor's Report Prescribed by Law or Regulation (Ref: 50, A70-A75)

If law or regulation require auditor to use specific layout or wording of report, auditor's report
shall refer to ISA only if auditor's report includes, at a minimum above elements (1-8, 10-13)

Report in Accordance with Auditing Standards of Specific Jurisdiction and ISA

(Ref: 51, A76-A77)
Auditor's report may refer to ISA in addition to national auditing standards, but the auditor shall
do so only if
 There is no conflict between the requirements of both that would lead the auditor to
 Form a different opinion, or
 Not to include Emphasis of Matter paragraph that is required by ISAs; and
 Report includes, at a minimum, above elements (1-8, 10-13) when the auditor uses the layout
or wording specified by national auditing standards.
Auditor's report shall also identify the jurisdiction of origin of national auditing standards.

Supplementary Information Presented with the F/S (Ref: 53-54, A78-A84)

Auditor's evaluation whether unaudited supplementary information is presented in a manner
that could be considered as being covered by auditor's opinion includes its placement and
whether it is clearly labeled as "unaudited."
 If unaudited supplementary information (not required by AFRF) is presented with audited
F/S, auditor shall evaluate whether such information is clearly differentiated from audited
F/S.
 If it is not clearly differentiated from audited F/S, auditor shall ask management to
change its presentation
 If management refuses, auditor shall explain in report that such information has not
been audited.
 Management could change the presentation of unaudited supplementary information by:
 Removing any cross-references from F/S to unaudited supplementary notes so that
segregation between audited and unaudited information is sufficiently clear.
 Placing unaudited supplementary information outside F/S or at a minimum place
unaudited notes together required notes of F/S and clearly label them
ISA 700 Page 150

Illustration 1- Report on F/S of Listed Entity in Accordance with a Fair Presentation

Framework

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).

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 (Revised) - see Illustration 1 in
Appendix 2 of ISA 720 (Revised).]

Responsibilities of Management and Those Charged with Governance for the Financial
Statements
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
ISA 700 Page 151

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 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 this ISA explains that the shaded material below can be located in an Appendix
to the auditor’s report. Paragraph 41(c) 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.
ISA 700 Page 152

 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.

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]
ISA 700 Page 153

Illustration 4 - Report on Financial Statements of an Entity other than a Listed Entity Prepared
in Accordance with a General Purpose Compliance Framework

INDEPENDENT AUDITOR’S REPORT

[Appropriate Addressee]

Opinion
We have audited the financial statements of ABC Company (the Company), which comprise the balance
sheet as at December 31, 20X1, and the income statement, statement of changes in equity and cash flow
statement 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 of the Company are prepared, in all material
respects, in accordance with XYZ Law of Jurisdiction X.

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 ethical requirements that are relevant to our audit of the financial statements in
[jurisdiction], and we have fulfilled our other 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.

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 (Revised) - see Illustration 1 in
Appendix 2 of ISA 720 (Revised).]

Responsibilities of Management and Those Charged with Governance for the Financial
Statements
Management is responsible for the preparation of the financial statements in accordance with XYZ Law
of Jurisdiction X,12 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.

Auditor’s Responsibilities for the Audit of the Financial Statements

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
ISA 700 Page 154

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 this ISA explains that the shaded material below can be located in an Appendix to the
auditor’s report. Paragraph 41 (c) 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.

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.

[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]

Important Paragraphs 13, 24, 28, 34, 38, 39, 41, A4, A6, A44, A73, A74, A79, A83
ISA 700 Page 155

Illustration - Format of Report - Auditors (Reporting Obligations) Regulations 2018

INDEPENDENT AUDITOR’S REPORT

To the members of ………………… [name of company]

Report on the Audit of the Financial Statements

Opinion

We have audited the annexed financial statements (or revised financial statements, if applicable)i of
……..(the Company), which comprise the Statement of Financial Position as at ........., and the statement of
profit or loss ii and other comprehensive income or the income and expenditure statement, the statement
of changes in equity, the statement of cash flows for the year then ended and notes to the financial
statements, including a summary of significant accounting policies and other explanatory information 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.

In our opinion and to the best of our information and according to the explanations given to us, the
statement of financial position, statement of profit or loss and other comprehensive income or the income
or expenditure statement, the statement of changes in equity and the statement of cash flows together
with the notes forming part thereof conform with the accounting and reporting standards as applicable in
Pakistan and give the information required by the Companies Act, 2017 (XIX of 2017), in the manner so
required and respectively give a true and fair view of the state of Company’s affairs as at ................... and of
the profit or loss and other comprehensive income or loss, or the surplus or deficit iii, the changes in equity
and its cash flows for the year then ended.

Basis of opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs) as applicable in
Pakistan. 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 as adopted by the Institute of Chartered Accountants of Pakistan (the Code) and we have
fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence
we have obtained is sufficient and appropriate to provide a basis for our opinion.

Material Uncertainty relating to Going Concern (if applicable)

Emphasis of Matter (if applicable)

Key Audit Matter(s)

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.
ISA 700 Page 156

Following are the Key audit matter(s):

Sr.No. Key audit matter(s) How the matter was addressed in our audit

Information Other than the Financial Statements and Auditor’s Report Thereon

[Reporting in accordance with the reporting requirements in ISA 720 (Revised)]

Responsibilities of Management and Board of Directors for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in
accordance with approved accounting standards as applicable in Pakistan and the requirements of
Companies Act, 2017 (XIX of 2017) 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. Board of Directors 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 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.

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
ISA 700 Page 157

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 the board of directors 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 the board of directors 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 the board of directors, 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.

Report on Other Legal and Regulatory Requirements

Based on our audit, we further report that in our opinion:

a) proper books of account have been kept by the Company as required by the Companies Act, 2017 (XIX
of 2017);
b) the statement of financial position, the statement of profit or loss and other comprehensive income or
the income and expenditure account, the statement of changes in equity and the statement of Cash flows
together with the notes thereon have been drawn up in conformity with the Companies Act, 2017 (XIX of
2017), and are in agreement with the books of account and returns;
c) investments made, expenditure incurred and guarantees extended during the year were for the purpose
of the Company’s business; and
d) 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 viii.

Other Matter(s)
Prior Year Financial Statements Audited by Predecessor Auditor

The engagement partner on the audit resulting in this independent auditor’s report is [name]

[Signature]
[Place/ location]
[Date]
ISA 701 Page 158

ISA 701

Scope of the ISA 701

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

Key Audit Matters(KAM)

Those matters that, in auditor’s professional judgment, were of most significance in the audit
of the F/S of current period. KAM are selected from matters communicated with TCWG.

Auditor shall communicate KAM in report for audits of

 Listed entities
 Entities other than listed entities (if required by law etc.)
 Other entities decided by auditor using his professional judgment
(e.g. those of significant public interest due to large number and wide range of stakeholders
and considering nature and size of the business like Banks, Insurance and charities etc).

Communicating KAM provides additional information to intended users of F/S to assist them in
understanding those matters that, in the auditor’s professional judgment, were of most
significance in the audit of the F/S of the current period.

Determining KAM (Ref: 9-10, A9-A30)

Auditor shall determine, from the matters communicated with TCWG, those matters that
required significant attention in performing audit.

In making this determination, auditor shall take into account:

 Areas of higher assessed risk of material misstatement, or significant risks identified (ISA-
315)
 Significant auditor judgments relating to areas in F/S involving 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.

E.g. Auditor may have had extensive discussions with management and TCWG at various stages
throughout the audit about the effect of significant transactions with related parties or
significant transactions outside the normal course of business for the entity or that otherwise
appear to be unusual.
ISA 701 Page 159

Determining the relative significance of a matter

Other considerations that may be relevant to determining the relative significance of a matter
communicated with TCWG and whether such a matter is a key audit matter include:
 Importance of the matter to intended users’ understanding.
 Complexity or subjectivity involved in management’s selection of an appropriate policy
compared to other entities within industry.
 Nature and materiality (quantitatively or qualitatively) of the misstatements due to fraud or
error related to the matter, if any.
 Nature and extent of audit effort needed to address the matter, including:
- Extent of specialized skill or knowledge needed to apply audit procedures to address the
matter or evaluate the results of those procedures, if any.
- Nature of consultations outside the engagement team regarding the matter.
 Severity of any control deficiencies identified relevant to matter.

Communicating KAM (Ref: 11-12, A31-A33)

Auditor shall describe each matter, using an appropriate sub-heading, in a separate section of
report under the heading “KAM,” unless:
 Law or regulation precludes public disclosure about the matter
 Auditor determines that (in extremely rare circumstances) the matter should not be
communicated in report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
(not applicable if entity has publicly disclosed information about the matter)

Introductory language in this section shall state that:

 KAM are those matters that, in auditor’s professional judgment, were of most significance in
the audit of F/S [of current period]; and
 These matters were addressed in the context of audit of F/S as a whole, and in forming the
auditor’s opinion thereon, and the auditor does not provide a separate opinion on these
matters.

No KAM to communicate

If auditor determines (depending on the facts and circumstances of the entity and the audit)
that there are no KAM to communicate, the auditor shall include a statement to this effect in a
separate section of the auditor’s report under the heading “KAM.”

Illustration – Suggested wording in case of no KAM to communicate: [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] KAM to
communicate in our report.
ISA 701 Page 160

Note:
Auditor shall not communicate a matter in KAM section, when auditor would be required to
modify the opinion (ISA 705 – Revised)

Descriptions of Individual Key Audit Matters (Ref: 13-16, A34-A51)

Description of each matter in the KAM section of the report shall

 Include a reference to the related disclosure(s), if any, in F/S;
 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,

Description may also make reference to the principal considerations that led the auditor to
determine the matter to be one of the most significance, for example:
 New or emerging accounting policies
(E.g. Entity/industry specific matters on which engagement team consulted within the firm)
 Changes in entity’s strategy or business model that had a material effect on F/S.

Reference to the related disclosure(s)

Entity may decide to include new or enhanced disclosures in F/S or elsewhere in the annual
report relating to a KAM in light of the fact that the matter will be communicated in the auditor’s
report.Auditor may also draw attention to key aspects of them.

Communication with TCWG (Ref: 17, A60-A63)

Communication with TCWG enables them to be made aware of the KAM and provides them an
opportunity to obtain further clarification.

Auditor shall communicate with TCWG:

 Those matters the auditor has determined to be the KAM; or
 Auditor’s determination that there are no KAM to communicate
(depending on facts and circumstances of entity and audit)

Important Paragraphs 11-18, A7, A12, A29, A41, A45, A46, A54, A58
ISA 705 Page 161

ISA 705 (REVISED)

Types of Modified Opinions (Ref: 2, A1)

Material &
Material
Pervasive
Materially misstatement
Qualified Adverse
(Disagreement)
Inability to obtain sufficient appropriate audit
Qualified Disclaimer
evidence(Scope Limitation)

In extremely rare circumstances involving multiple uncertainties if auditor concludes that it

is not possible to form opinion due to potential interaction of uncertainties and their possible
cumulative effect, auditor shall “Disclaim” the opinion
Modified Opinion
A Qualified opinion, an Adverse opinion or a Disclaimer of Opinion
Pervasive
A term used, in the context of misstatements, to describe the effects on the F/S of
misstatements or the possible effects on the F/S of misstatements, if any, that are undetected
due to an inability to obtain sufficient appropriate audit evidence. Pervasive effects on the
F/S are those that, in the auditor's judgment:
 Are not confined to specific elements, accounts or items of the F/S;
 If so confined, represent or could represent a substantial proportion of the F/S; or
 In relation to disclosures, are fundamental to users' understanding of the F/S.

Nature of Material Misstatements (Ref:3-10, A2-A12)

 Appropriateness of the Selected Accounting Policies
- Selected accounting policies are not consistent with AFRF
- F/S do not represent underlying transactions and events to achieve fair presentation
 Application of the Selected Accounting Policies
- Management has not applied the selected accounting policies consistently; or
- Method of application of selected accounting policies
 Appropriateness or Adequacy of Disclosures in F/S
- F/S do not include all disclosures required by AFRF;
- Disclosures are not presented in accordance with AFRF;
- F/S do not provide the disclosures necessary to achieve fair presentation.
ISA 705 Page 162

Nature of an Inability to Obtain Sufficient Appropriate Audit Evidence

Inability does not constitute a limitation if auditor is able to obtain sufficient appropriate audit
evidence by alternative procedures. Limitations may have other implications e.g. fraud risks and
engagement continuance.
 Circumstances beyond the control of the entity;
- Accounting records have been destroyed.
- Accounting records seized by Government.
 Circumstances relating to nature or timing of the auditor's work;
- Auditor is unable to observe counting of inventories due to timing of auditor's
appointment.
- Auditor determines that performing substantive procedures alone is not sufficient, but
entity's controls are not effective.
 Limitations imposed by management.
- Preventing from observing physical inventory counting.
- Preventing auditor from requesting external confirmation.

Consequence of an Inability to Obtain Sufficient Appropriate Audit Evidence Due to

Management-Imposed Limitation after the Auditor Has Accepted the Engagement
(Ref: 11-13, A13-A15)

Auditor shall request management to remove the

limitation.
If management refuses to remove the limitation, auditor shall
 Communicate the matter to TCWG; and
 Determine whether to perform alternative procedures.

If auditor is unable to obtain sufficient appropriate audit evidence:

 If possible effects could be material; auditor shall qualify opinion;
 If possible effects on F/S could be both material and pervasive; the auditor shall:
- Withdraw from the audit, where practicable and possible; or
- Give disclaimer of opinion
(If withdrawal is not practicable or possible)

Practicality of withdrawing may depend on stage of completion of the engagement at the time
that management imposes the scope limitation.
Possibility may depend on legal binding on auditor to continue e.g.
 Auditor appointed to audit public sector entities.
 Jurisdictions where auditor is appointed to audit specific period and is prohibited from
withdrawing before completion of audit
ISA 705 Page 163

If auditor decides to withdraws; auditor shall communicate to TCWG any matters giving rise to
a modification of the opinion
Other Considerations Relating to an Adverse or Disclaimer of Opinion (Ref: 15, A16)
When expressing an adverse opinion or disclaimer, report shall not also include an unmodified
opinion

Exceptions:
 Unmodified opinion under one FRF and expression of an adverse opinion on same F/S
under any other FRF.
 Disclaimer of opinion regarding results of operations and cash flows only, and unmodified
opinion regarding financial position.

Form and Content of Auditor's Report When Opinion Is Modified (Ref: 16-29, A17-A26)

Opinion Paragraph

Qualified Except for the effects (or possible effects) of matter(s) described in the Basis
Opinion for Qualified Opinion paragraph:
 F/S present fairly, in all material respects (or give true and fair view) in
accordance with AFRF (fair presentation framework)
 F/S have been prepared, in all material respects, in accordance with AFRF
(compliance framework)
Adverse Because of the significance of the matter(s) described in the Basis for Adverse
Opinion Opinion paragraph:
 F/S do not present fairly (or give a true and fair view) in accordance with
the AFRF
(Fair presentation framework); or
 F/S have not been prepared, in all material respects, in accordance with
AFRF
(Compliance framework)
Disclaimer  The auditor does not express an opinion on F/S.
of opinion  Because of significance of matter(s) described in Basis for Disclaimer
paragraph, auditor has not been able to obtain sufficient appropriate audit
evidence to provide a basis for an audit opinion; and, accordingly,
 Auditor was engaged to audit the F/S
Use the heading "Qualified Opinion," "Adverse Opinion," or "Disclaimer of Opinion," for the
opinion paragraph

Basis for Opinion Paragraph

 Amend the heading of “Basis for Opinion” to “Basis for Qualified Opinion,” “Basis for Adverse
Opinion,” or “Basis for Disclaimer of Opinion,” as appropriate; and
 Include a description of the matter giving rise to the modification in this section.
ISA 705 Page 164

 Include description & quantification of financial effects.

- If it is not practicable to quantify the financial effects, the auditor shall state the fact.
- If it relates to narrative disclosures; include an explanation of how these are misstated
 If material misstatement relates to non-disclosure of information:
- Discuss the non-disclosure with TCWG;
- Describe in basis for opinion section the nature of the omitted information;
- Unless prohibited by law or regulation, include omitted disclosures, if it is practicable to
do so
(Not be practicable where Disclosures not been prepared by management or not available;
or it would be voluminous)
 If modification results from inability to obtain sufficient appropriate audit evidence, auditor
shall include in the basis for opinion section the reasons for that inability.
 Even in case of adverse opinion or disclaimer, auditor shall describe the reasons for any
other matters that would have required a modification to the opinion

Auditor's Responsibility

Qualified or adverse opinion

Auditor shall amend the description by stating…
“the auditor believes that the audit evidence the auditor has obtained is sufficient and
appropriate to provide a basis for the auditor's modified audit opinion.”

Effect of disclaimer of opinion on “Key Audit Matters”

When auditor disclaims an opinion, the auditor’s report shall not include a KAM section (ISA
701)

Communication with TCWG (Ref: 30, A27)

This enables:
 Auditor to give notice to TCWG;
 Auditor to seek agreement of TCWG regarding the facts; and
 TCWG to provide further information and explanations.

Important Paragraphs 6-28, A1, A3, A4, A6, A7, A11, A16, A27
ISA 706 Page 165

ISA 706 (REVISED)

EMPHASIS OF MATTER PARAGRAPHS (Ref: 8-9)

Emphasis of Matter paragraph

A paragraph included in auditor's report that refers to a matter appropriately presented or
disclosed in the F/S thatin the auditor's judgmentis of such importance that it is fundamental
to users' understanding of the F/S.

Emphasis of Matter paragraph is not a substitute for either:

 Modified Opinion (ISA 705)
 Any Disclosure in F/S
 Reporting in accordance with ISA 570 when material uncertainty exists that may cast
significant doubt on going concern

The matter highlighted must not be a matter determined to be a key audit matter to be
communicated in report (ISA 701)

Examples
 An uncertainty relating to future outcome of exceptional litigation or regulatory action.
 A significant subsequent event that occurs between the date of F/S and the date of auditor’s
report
 Early application of a new accounting standard.
 A major disaster having a significant effect on financial position.

Presentation
 Include it as a separate section in auditor’s report;
 Use any appropriate heading including the term “Emphasis of Matter”;
 Clear reference to matter being emphasized and reference of relevant disclosure; and
 Indicate that auditor's opinion is not modified due to this matter.

OTHER MATTER PARAGRAPHS (Ref: 10-11)

Other Matter paragraph

A paragraph included in auditor's report that refers to a matter other than those presented
or disclosed in F/S that, in auditor's judgment, is relevant to
- Users' understanding of audit; or
- Auditor's responsibilities; or
- Auditor's report.
“Other Matter para” is not a substitute of the “Other Reporting Responsibilities” (ISA 700)
ISA 706 Page 166

The matter highlighted must not be a matter determined to be a key audit matter to be
communicated in report (ISA 701)

Examples

 Where auditor is unable to withdraw from an engagement, auditor may consider it necessary
to include this para to explain why it is not possible for auditor to withdraw
 Reporting on one set of F/S referring any other F/S audited by him
 Restriction on distribution or use of the auditor's report

Presentation

 Shall be included as a separate section in auditor’s report;

 Use “other matters” or any other appropriate heading.

Placement of the emphasis of matter or other matter paragraph in an auditor’s report

(Ref: A16-A17)
Depends on nature of the information to be communicated and the auditor’s judgment of the
relative significance of such information to intended users.

Emphasis of matter paragraph

 When it relates to the applicable FRF, the auditor may place it immediately following the
Basis of Opinion section
 When a KAM section is presented in auditor’s report, an Emphasis of Matter paragraph may
be presented either directly before or after the KAM section, based on the auditor’s judgment
as to the relative significance of the information included in this para.
 To differentiate it from the KAM section, Auditor may also add further context to its heading
(e.g. “Emphasis of Matter – Subsequent Event”)

Other Matter Paragraphs

 When a KAM section is presented in auditor’s report, the auditor may add further context to
its heading to differentiate it from the individual matters described in the KAM section.
(e.g. “Other Matter – Scope of the Audit”)

Communication with TCWG (Ref: 12, A18)

If auditor expects to include an Emphasis of Matter or an Other Matter paragraph, the auditor
shall communicate with TCWG regarding this expectation and proposed wording
ISA 706 Page 167

Appendix 3 - Illustration of an Auditor’s Report that Includes a Key Audit Matters Section, an
Emphasis of Matter Paragraph, and an Other Matter Paragraph

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).

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 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

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 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.
ISA 706 Page 168

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 (Revised) - see Illustration 1 in
Appendix 2 of ISA 720 (Revised).]

Responsibilities of Management and Those Charged with Governance for the Financial
Statements

[Reporting in accordance with ISA 700 (Revised) - see Illustration 1 in ISA 700 (Revised).]

Auditor’s Responsibilities for the Audit of the Financial Statements

[Reporting in accordance with ISA 700 (Revised) - see Illustration 1 in ISA 700 (Revised).]

Report on Other Legal and Regulatory Requirements

[Reporting in accordance with ISA 700 (Revised) - see Illustration 1 in ISA 700 (Revised).]

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]

Important Paragraphs 8-12, A5, A7, A16

How to deal with case study question in exam

Tutor’s
Note
ISA 706 Page 169
ISA 706 Page 170
ISA 710 Page 171

ISA 710

Comparative information
Amounts and disclosures included in the F/S in respect of one or more prior periods in
accordance with AFRF

Corresponding figures
Comparative info where amounts and other disclosures for the prior period are included as
an integral part of current period F/S, and are intended to be read only in relation to the
amounts and other disclosures relating to the current period (referred to as “current period
figures”).
The level of detail presented in corresponding amounts and disclosures is dictated primarily
by its relevance to the current period figures.

Comparative F/S
Comparative info where amounts and other disclosures for prior period are included for
comparison with the F/S of current period but, if audited, are referred to in the auditor’s
opinion.
The level of info included in those comparative F/S is comparable with that of the F/S of the
current period.

Audit Procedures (Ref: 7-9, A1)

Auditor shall determine whether F/S include the comparative info required by AFRF and
whether such info is appropriately classified. Auditor shall evaluate whether:
 Comparative info agrees with amounts and other disclosures presented in prior period or
(when appropriate, been restated)
 Accounting policies reflected in comparative info are consistent with current one
(If there have been changes in policies, whether those changes have been properly accounted
for & adequately disclosed)

If auditor becomes aware of a possible material misstatement in comparative info, auditor

shall perform additional audit procedures to obtain sufficient appropriate audit evidence
about that.

If auditor had audited prior period’s F/S, auditor shall also follow the relevant requirements
of ISA 560.
(If prior period F/S are amended, auditor shall determine that the comparative info agrees
with amended F/S)

Auditor shall request written representations (as per ISA 580) for all periods referred to in
auditor’s opinion. Shall also obtain specific written representation regarding any restatement
made to correct a material misstatement in prior period F/S.
ISA 710 Page 172

Audit Reporting – Corresponding figures (Ref: 10-12, A2-A6)

When corresponding figures are presented, auditor’s opinion shall not refer to
corresponding figures (except stated below)

If auditor’s report on prior period included a modified opinion and that matter is still
unresolved, auditor shall modify auditor’s opinion on current period’s F/S.

In Basis for Modification paragraph, auditor shall either:

 Refer to both current period’s figures and corresponding figures in description of matter
(when effects of matter is material); or
 Explain that audit opinion has been modified because of the effects/possible effects of
unresolved matter on comparability of current period’s and corresponding figures. (In other
cases)

AUDITING
If auditor’s report on prior period included a modified opinion and matter is resolved and
properly accounted for in F/S, auditor’s opinion on current period need not to refer previous
modification.

If auditor obtains audit evidence that a material misstatement exists in prior periods on which
an unmodified opinion has been previously issued, and corresponding figures have not been
properly restated or appropriate disclosures have not been made, auditor shall express a
qualified opinion or an adverse opinion on the current period F/S

However if corresponding figures have been properly restated or appropriate disclosures have
been made in current period F/S, auditor’s report may include an Emphasis of Matter paragraph

Prior Period F/S Audited by a Predecessor Auditor (Ref: 13, A7)

If auditor is not prohibited by law or regulation from referring to the predecessor auditor’s
report on corresponding figures and decides to do so, auditor shall state in an Other Matter
paragraph:
 That F/S of prior period were audited by the predecessor auditor;
 Type of opinion expressed by the predecessor auditor
(if the opinion was modified, the reasons therefore)
 The date of that report

Prior Period F/S Not Audited (Ref: 14,A8)

Auditor shall state in an Other Matter paragraph that the corresponding figures are unaudited
(However such a statement does not relieve the auditor to obtain sufficient appropriate audit
evidence that the opening balances do not contain misstatements that materially affect current
period’s F/S)
ISA 710 Page 173

Audit Reporting – Comparative F/S (Ref: 15-16, A9-A11)

When comparative F/S are presented, auditor’s opinion shall refer to each period for which F/S
are presented and on which an audit opinion is expressed.
(Auditor may add any modification while expressing a different auditor’s opinion on the F/S of
the other period)
When reporting on prior period F/S with the current period’s audit, if auditor’s opinion on such
prior period F/S differs from the opinion previously expressed, auditor shall disclose the
substantive reasons for the different opinion in an Other Matter paragraph

Prior Period F/S Audited by a Predecessor Auditor (Ref: 17-18, A12)

Unless predecessor auditor’s report on prior period’s F/S is reissued with F/S, Auditor shall
state in an Other Matter paragraph:
 That F/S of prior period were audited by the predecessor auditor;
 Type of opinion expressed by the predecessor auditor
(if the opinion was modified, the reasons therefore)
 The date of that report
.
If a material misstatement exists that affects prior period F/S on which previously unmodified
opinion was expressed, auditor shall
 Communicate with appropriate level of management and TCWG
 Request that predecessor auditor be informed.

If prior period F/S are amended, and predecessor auditor agrees to issue a new auditor’s report
on amended F/S, auditor shall report only on current period.(Ref:Para. A11)

Prior Period F/S Not Audited (Ref: 19, A13)

Auditor shall state in an Other Matter paragraph that the comparative F/S are unaudited
(However such a statement does not relieve the auditor to obtain sufficient appropriate audit
evidence that the opening balances do not contain misstatements that materially affect current
period’s F/S)

Important Paragraphs 7, 11, 13, 14, 17, A1, A3, A8, A11
ISA 720 Page 174

ISA 720 (REVISED)

Other information
Financial or non-financial information (other than F/S and auditor’s report) included in an
entity’s annual report.

Appendix 1 to this ISA contains examples of other information.

Annual report
A document, or combination of documents, prepared typically on an annual basis by
management or TCWG in accordance with law, regulation or custom, the purpose of which
is to provide owners (or similar stakeholders) with information on the entity’s operations
and the financial results and financial position as set out in the F/S. An annual report
contains or accompanies the F/S and auditor’s report thereon and usually includes
information about the entity’s developments, its future outlook and risks and uncertainties,
a statement by the entity’s governing body, and reports covering governance matters.

Law, regulation or custom may define the content of an annual report

(e.g. Sec 233 of the Companies Ordinance 1984)

Depending on law, regulation or custom in a particular jurisdiction, one or more of the

following documents may form part of the annual report:
 Management report, management commentary, or operating and financial review or
similar reports by TCWG (e.g. a directors’ report).
 Chairman’s statement.
 Corporate governance statement.
 Internal control and risk assessment reports.

Obtaining the Other Information (Ref: 13, A11-A22)

The auditor shall:

 Discuss with management to determine:
- Which document(s) comprises the annual report; and
- Entity’s planned manner and timing of the issuance of same;
 Make appropriate arrangements with management to obtain (timely and, if possible, prior
to date of auditor’s report), the final version of that document(s);and
 Request management to provide a written representation that the final version of the
document(s) will be provided to the auditor when available, and prior to its issuance by the
entity
(When some or all of the document(s) will not be available until after the date of auditor’s
report)
ISA 720 Page 175

In addition, auditor may find it 8useful to request other representations e.g:

 Management has informed the auditor of all the documents that it expects to issue that
may comprise other information;
 F/S and any other information obtained prior to date of auditor’s report are consistent
with one another, and other information does not contain any material misstatements;
and
 Management intends to prepare and issue such other information and the expected timing
of such issuance.

Auditor may communicate with management or TCWG:

 The expectations in relation to obtaining final version of annual report in a timely manner
 Possible implications when other information is obtained after the date of auditor’s report.

Auditor is not precluded from dating or issuing the auditor’s report if the auditor has not
obtained some or all of the other information.

When other information is obtained after the date of auditor’s report, auditor is not required to
update the procedures performed in accordance with ISA 560
7

Reading and Considering the Other Information (Ref: 14-15, A23-A38)

The auditor shall read the other information and, in doing so shall:
10
 Consider whether there is a material inconsistency between the other information and the
F/S
- Comparing the information to the F/S.
- Comparing the words used and considering the significance of differences in wording
used
- Obtaining a reconciliation between an amount within the other information and the F/S
from management along with checking its mathematical accuracy
- Evaluating the consistency of presentation compared to F/S.

 Consider whether there is a material inconsistency between the other information and the
auditor’s knowledge obtained during the audit (e.g. a disclosure of the units produced,
information about launch of new product or business prospects and future cash flows)

- Recollection of evidence obtained & conclusions reached

- Discussions held with management or TCWG
- Reading of Board minutes
- Referring to relevant audit documentation
- Making inquires of the relevant engagement team members
ISA 720 Page 176

 Remain alert for indications that the other information not related to the F/S or auditor’s
knowledge obtained in the audit appears to be materially misstated.

- Differences between other information and the general knowledge (apart from
knowledge obtained in audit), of engagement team member reading other
information; or
- An internal inconsistency in the other information

Responding When a Material Inconsistency Appears to Exist or Other Information

Appears to Be Materially Misstated (Ref: 16, A39-A4)

Auditor shall discuss the matter with management and, if necessary, perform other
procedures to conclude whether:
 A material misstatement of the other information exists;
 A material misstatement of the F/S exists; or
 The auditor’s understanding of entity and its environment needs to be updated.

Such a discussion may:

 Include requesting management to provide support for the basis of management’s
statements in the other information.
 Provide further information that supports auditor’s conclusion

When auditor is unable to conclude that a material inconsistency no longer appears to exist
or that the other information no longer appears to be materially misstated
 He may request management to consult with qualified 3rd party
(e.g. a management’s expert or legal counsel)
 If (after considering responses from management’s consultation), auditor is still not able to
conclude; he may take following actions:
- Obtaining advice from the auditor’s legal counsel;
- Considering the implications for auditor’s report
(e.g. whether to describe the circumstances when there is a limitation imposed by
management); or
- Withdrawing from the audit
(where withdrawal is possible under law or regulation)

Misstatement of the other information

A misstatement of the other information exists when the other information is incorrectly
stated or otherwise misleading (including because it omits or obscures information
necessary for a proper understanding of a matter disclosed in the other information)
ISA 720 Page 177

Responding When the Auditor Concludes That a Material Misstatement of the Other
Information Exists (Ref: 17-19, A44-A50)

In such a case, auditor shall request management to correct other information:

 If management agrees to make the correction, the auditor shall determine that the
correction has been made; or
 If management refuses to make the correction, the auditor shall communicate the matter
with TCWG and request that the correction be made.

If other information is not corrected after communicating with TCWG, the auditor shall take
appropriate action, including:

 Considering implications for auditor’s report and communicating with TCWG about such
implication in auditor’s report; or
(In rare circumstances, a disclaimer may be appropriate when the refusal casts doubt on the
integrity of management and TCWG)

 Withdrawing from the engagement, where withdrawal is possible under applicable law or
regulation.

If auditor concludes that a material misstatement exists in other information obtained after
date of auditor’s report, the auditor shall:

 If other information is corrected, perform the necessary procedures (as listed before); or
 If the other information is not corrected after communicating with TCWG, take appropriate
action considering auditor’s legal rights and obligations, to brought the matter to the
attention of users of the auditor’s report. These actions may include
- Providing a new or amended auditor’s report to management including a modified
section in accordance with this ISA and requesting management to provide this report
to same users
- Addressing the matter in a general meeting of shareholders;
- Communicating with regulator or relevant professional body
- Considering the implications for engagement continuance

Responding When a Material Misstatement in F/S Exists or Auditor’s Understanding of

Entity etc Needs to Be Updated (Ref: 20, A51)
In such case auditor shall respond appropriately in accordance with other ISAs.
 ISA 315 for understanding of the entity and risk assessment
 ISA 450 for effect of identified and uncorrected misstatements
 ISA 560 for subsequent events
ISA 720 Page 178

Reporting (Ref: 21-24, 52-A58)

Auditor’s report shall include a separate section with a heading “Other Information”, or other
appropriate heading, when, at the date of the auditor’s report:
 Auditor has obtained, or expects to obtain, other information
(For audit of listed entity)
 Auditor has obtained some or all of the other information.
(For audit of other than listed entity)
This section shall include:
 A statement that management is responsible for the other information;
 An identification of other information:
- Obtained by auditor prior to date of auditor’s report; and
- Expected to be obtained after the date of auditor’s report
(For audit of listed entity)
 A statement that opinion does not cover other information and that the auditor is not
expressing an audit opinion or assurance;
 A description of auditor’s responsibilities relating to reading, considering and reporting on
other information; and
 When other information has been obtained prior to the date of the auditor’s report, either a
statement that:
- The auditor has nothing to report; or
- Describes uncorrected material misstatement of the other information.

When auditor expresses a qualified or adverse opinion, auditor shall consider implications of
matter giving rise to the modification of opinion for the statement required above in following
ways:

Qualified Opinion Consideration may be given as to whether the other information is also
(Material materially misstated for the same matter as, or a related matter to, the
Misstatement) matter giving rise to the qualified opinion

Qualified Opinion Auditor may need to modify the statement to refer to the inability to
(Scope Limitation) consider management’s description of the matter in other information.
Auditor is however required to report any other identified uncorrected
material misstatements.

Adverse Opinion Auditor may need to appropriately modify the statement for example, to
indicate that the other information is materially misstated for the same
matter as, or a related matter.

Disclaimer of Auditor’s report does not include a section addressing the reporting
Opinion requirements of this ISA
ISA 720 Page 179

Reporting Prescribed by Law or Regulation (Ref: 24, A59)

If auditor is required by law or regulation of a specific jurisdiction to refer to other information

in his report using a specific layout or wording, report shall refer to ISA only if it includes, at a
minimum:
 Identification of other information obtained prior to the date of auditor’s report;
 Description of auditor’s responsibilities for other information; and
 An explicit statement addressing the outcome of auditor’s work for this purpose.

Documentation (Ref: 25)

Auditor shall include in the audit documentation:
 Documentation of the procedures performed under this ISA; and
 The final version of the other information on which the auditor has performed the work
required under this ISA.

Important Paragraphs 13, 14, 16, 17-19, 21, 24 ,

A5,A13,A30,A31,A35,A38,A43,A51
ISA 720 Page 180

Illustration 7 - Report of any entity when auditor has obtained all of other information prior to
date of auditor's report and adverse opinion on consolidated F/S also affects other information

INDEPENDENT AUDITOR’S REPORT

To the Shareholders of ABC Company [or Other Appropriate Addressee]

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 Group 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 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.

Other Information [or another title if appropriate, such as “Information Other than the Financial
Statements and Auditor’s Report Thereon”]
Management is responsible for the other information. The other information comprises the
[information included in the X report, but does not include the consolidated financial statements and
our auditor’s report thereon.]
Our opinion on the consolidated financial statements does not cover the other information and we do
not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the
other information and, in doing so, consider whether the other information is materially inconsistent
ISA 720 Page 181

with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears
to be materially misstated. If, based on the work we have performed, we conclude that there is a
material misstatement of this other information, we are required to report that fact. As described in the
Basis for Adverse Opinion section above, the Group should have consolidated XYZ Company and
accounted for the acquisition based on provisional amounts. We have concluded that the other
information is materially misstated for the same reason with respect to the amounts or other items in
the X report affected by the failure to consolidate XYZ Company.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of 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 Adverse 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.]

Responsibilities of Management and Those Charged with Governance for Financial Statements
[Reporting in accordance with ISA 700 (Revised) - see Illustration 2 in ISA 700 (Revised).]

Auditor’s Responsibilities for the Audit of the Financial Statements

[Reporting in accordance with ISA 700 (Revised) - see Illustration 2 in ISA 700 (Revised).]
[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]
ISA 800 Page 182

ISA 800

This ISA is written in context of a complete set of F/S prepared in accordance with a special
purpose framework.

Special purpose framework

Financial reporting framework designed to meet financial information needs of specific users.
Financial reporting framework may be fair presentation framework or compliance
framework

Examples of special purpose frameworks are:

 A tax basis of accounting for a set of F/S that accompany an entity’s tax return;
 Cash receipts and disbursements basis of accounting for cash flow information that an entity
may be requested to prepare for creditors;
 Financial reporting provisions established by a regulator
 Financial reporting provisions of a contract (e.g. a loan agreement)

Considerations When Accepting the Engagement (Ref: 8, A5-A8)

Auditor shall obtain an understanding of the:

 Purpose for which the F/S are prepared;
 Intended users; and
 Steps taken by management to determine that applicable financial reporting framework is
acceptable in the circumstances.

Acceptability of the Financial Reporting Framework

 Financial information needs of the intended users are a key factor to consider
 Financial reporting standards established by an organization that is authorized or
recognized to promulgate standards for special purpose F/S will be presumed acceptable.
 Reporting framework prescribed by law or regulation (that area) is also acceptable
 In case of financial reporting provisions of a contract etc, acceptability of the financial
reporting framework is determined by considering whether the framework exhibits
attributes normally exhibited by acceptable financial reporting frameworks i.e. :
- Relevance,
- Completeness
- Reliability
- Neutrality
- Understandability
ISA 800 Page 183

Considerations When Planning and Performing the Audit (Ref: 9-10 A9-A12)

Auditor shall determine whether application of the ISAs requires special consideration in the
circumstances of this engagement. Such considerations may be:
 Relevant ethical requirements (including those pertaining to independence)
 Considering all ISAs relevant to the audit. (unless entire ISA or a part of it is not relevant)
 Judgments about materiality (ISA 320) would be based on the consideration of financial
information needs of the intended users (not common financial information needs)
 If financial information is prepared solely for management’s use, Communication with TCWG
(ISA 260 etc) may not be relevant to this audit

In case of F/S prepared in accordance with the provisions of a contract, auditor shall obtain an
understanding of any significant interpretations of the contract that management made in the
preparation of those F/S.

Forming an Opinion and Reporting Considerations (Ref: 11-13, A13-A19)

 Auditor’s report shall also describe the purpose for which the F/S are prepared and, if
necessary, intended users, or refer to a note in special purpose F/S that contains so; and
 If management has a choice of financial reporting frameworks, the explanation of
management’s responsibility for the F/S shall also make reference to its responsibility for
determining that applicable financial reporting framework is acceptable in circumstances.

If F/S are prepared in accordance with provisions of a contract, auditor shall evaluate whether
F/S adequately describe any significant interpretations of the contract on which F/S are based.

Note: See Appendix for illustrations of auditors’ reports on special purpose F/S.

Alerting Readers that F/S Are Prepared in Accordance with Special Purpose Framework
(Ref: 14, A20-A21)

Auditor’s report shall include an Emphasis of Matter paragraph (using an appropriate

heading) alerting users of the report that F/S are prepared in accordance with a special
purpose framework (and that the F/S may not be suitable for another purpose).

Additionally auditor may consider it appropriate to indicate that auditor’s report is intended
solely for the specific users. Depending on the law or regulation of the particular
jurisdiction, this may be achieved by restricting distribution or use of the auditor’s report.

Important Paragraphs 8, 13, A1, A6, A8, A14, A15

ISA 805 Page 184

ISA 805

This ISA deals with special considerations in the application of ISAs to an audit of a single
financial statement or of specific element, account or item of a financial statement.

Single Financial Statement means any one of the F/S (e.g. Statement of Financial position).

Examples of Specific element, account or item of a financial statement

 A Schedule of Net Tangible assets
 Lease disbursement Schedule
 Schedule of Profit Participation or employees bonuses
 Accounts receivable, allowance for doubtful accounts receivable, inventory etc

Considerations When Accepting the Engagement(Ref: 7, A5-A6)

If the auditor is not also engaged to audit entity’s complete set of F/S, auditor shall determine
whether audit of single financial statement or of a specific element of those F/S in accordance
with ISAs is practicable.

Compliance with other ISAs would be impracticable due to:

 Auditor (not being the auditor of complete F/S) often does not have same understanding of
the entity, its environment and its internal control
 Auditor also does not have audit evidence about general quality of the accounting records or
other accounting information
 In the case of an audit of a specific element of a financial statement, complying certain ISAs
(e.g. ISA 570) may not be practicable because of the audit effort required.

If the auditor concludes that an audit of a single financial statement or of a specific element of a
financial statement in accordance with ISAs may not be practicable, the auditor may discuss
with management whether another type of engagement might be more practicable.

Acceptability of the Financial Reporting Framework (Ref: 8, A7)

This shall include whether application of financial reporting framework will result in a
presentation that provides adequate disclosures to enable intended users to understand the
information conveyed in the financial statement or the element, and the effect of material
transactions and events on the information conveyed in financial statement or the element
ISA 805 Page 185

Form of Opinion (Ref: 9, A8-A9)

Auditor shall consider whether expected form of opinion is appropriate in the circumstances.

Factors that may affect the auditor’s consideration as to whether to use the phrases “presents
fairly, in all material respects,” or “gives a true and fair view” in the auditor’s opinion include:
 Whether AFRF is explicitly or implicitly restricted to preparation of a complete set of F/S.
 Whether single financial statement or the specific element of a financial statement will:
- Comply fully with each of relevant requirement of the framework, and presentation of
the financial statement or the element includes the related notes.
- If necessary to achieve fair presentation, provide the disclosures beyond those
specifically required by framework or, in exceptional circumstances, depart from that.

Adopting all ISAs relevant to the audit (Ref: 10, A10-A15)

Auditor shall adapt all ISAs relevant to the audit as necessary in the circumstances of the
engagement. Some considerations are:

 Element could be misstated as a result of fraud (ISA 240), effect of the related party
transactions (ISA 550), or incorrect application of the going concern assumption (ISA 570)
 Written representations from management about complete set of F/S would be replaced by
written representations about the presentation of the financial statement or the element in
accordance with the applicable financial reporting framework.
 When auditing a single financial statement or a specific element of a financial statement in
conjunction with audit of entity’s complete set of F/S, auditor may be able to use audit
evidence obtained (in complete audit)
 Auditor may not be able to consider the financial statement or the element in isolation.
Consequently, the auditor may need to perform procedures in relation to the interrelated
items to meet the objective of the audit.
 Materiality determined for a single financial statement or for a specific element of a financial
statement may be lower than the materiality determined for the complete F/S

Auditor shall apply the requirements in ISA 700 (forming opinion), adapted as necessary in
the circumstances of the engagement.

Appendix 2 contains illustrations of auditors’ reports on a single financial statement and on a

specific element of a financial statement.
ISA 805 Page 186

Reporting on both simultaneously

(Entity’s Complete F/S and on a Single Financial Statement or on a Specific Element)
(Ref: 11-17, A16-A28)

 Auditor shall express a separate opinion for each engagement.

 Audited single financial statement or element may be published together with audited
complete set of F/S.
- If auditor concludes that presentation of single financial statement or element does not
differentiate it sufficiently from complete set of F/S, auditor shall ask management to
rectify the situation.
- Auditor shall also differentiate the opinion on single financial statement or element from
the opinion on complete set of F/S.
- Auditor shall not issue auditor’s report containing the opinion on the single financial
statement or element until satisfied with the differentiation.

Modification (Opinion/Other) in the Auditor’s Report on Complete Set of F/S

 Auditor shall determine the effect that this may have on the auditor’s report on a single
financial statement or on a specific element of those F/S.
 If deemed appropriate, auditor shall accordingly add modification in the report of single
financial statement or element of a financial statement
(If the auditor judges it to be relevant to the users’ understanding)

If auditor concludes that it is necessary to express adverse opinion or disclaim an opinion

on complete set of F/S as a whole,
 ISA 705 does not permit the auditor to include in the same auditor’s report an unmodified
opinion on a single financial statement or element
 If auditor considers it appropriate to express an unmodified opinion on any element, auditor
shall only do so if:
- The auditor is not prohibited by law or regulation from doing so;
- That opinion is expressed in an auditor’s report that is not published together with the
auditor’s report containing the adverse opinion or disclaimer of opinion; and
- That element does not constitute a major portion of the complete set of F/S.
Auditor shall not express an unmodified opinion on single financial statement of a complete
set of F/S if auditor has expressed an adverse opinion or disclaimed an opinion on the
complete set of F/S as a whole. (even if report on single financial statement is not published
together with complete one; This is because a single financial statement is deemed to
constitute a major portion of those F/S)
Expression of a disclaimer of opinion regarding the results of operations and cash flows, where
relevant, and an unmodified opinion regarding the financial position is permitted (ISA 705)

Important Paragraphs 8, 12-17, A8, A9, A15, A17

ISA 810 Page 187

ISA 810

Applied criteria - Criteria applied by management in the preparation of the summary F/S.

Summary F/S - Historical financial information that is derived from F/S but that contains less detail
than F/S, while still providing a structured representation consistent with that provided by the F/S
of entity’s economic resources or obligations at a point in time or the changes therein for a period of
time. Different jurisdictions may use different terminology to describe such historical financial
information.

Conditions for Engagement Acceptance (Ref: 5-7, A1-A7)

Auditor shall accept an engagement to report on summary F/S only when auditor has been
engaged to conduct an audit of the F/S from which the summary F/S are derived.

Before accepting an engagement to report on summary F/S, auditor shall:

 Determine whether the applied criteria are acceptable
 Obtain agreement of management that it acknowledges and understands its responsibility:
- For preparation of summary F/S in accordance with applied criteria;
- To make audited F/S available to the intended users of summary F/S without undue
difficulty (or, if prohibited by law or regulation so to do; describe that law or regulation
in the summary F/S that also establishes the criteria); and
- To include auditor’s report on summary F/S in any document that contains summary
F/S and that indicates that the auditor has reported on them.
 Agree with management the form of opinion to be expressed on summary F/S

If above conditions are not present, auditor shall not accept engagement, unless required by
law or regulation to do so. Accordingly, auditor’s report on summary F/S shall not indicate
that engagement was conducted in accordance with this ISA.

Acceptability of the Criteria

Factors that may affect auditor’s determination of acceptability of the applied criteria include:
 The nature of the entity;
 The purpose of the summary F/S;
 The information needs of the intended users of the summary F/S; and
 Whether the applied criteria will result in summary F/S that are not misleading

Criteria for preparation of summary F/S may be established by an authorized or recognized

standards setting organization or by law or regulation. Auditor may presume that such criteria
are acceptable.
ISA 810 Page 188

Where any established criteria do not exist, criteria may be developed by management. It
would be acceptable if it will result in preparation of summary F/S that:

 Adequately disclose their summarized nature and identify the audited F/S;
(e.g. “Summary F/S Prepared from Audited F/S for the Year Ended December 31, 20X1”)
 Clearly describe from whom or where the audited F/S are available
(If law or regulation provides that audited F/S need not be made available to the intended
users and establishes the criteria for preparation of summary F/S; that law or regulation)
 Adequately disclose the applied criteria;
 Agree with or can be recalculated from the related information in the audited F/S; and
 Contain the information necessary, and are at an appropriate level of aggregation, so as not
to be misleading in the circumstances.

Nature of Procedures (Ref: 8, A8)

Auditor shall perform the following procedures, and any other procedures that the auditor may
consider necessary, as the basis for the auditor’s opinion on the summary F/S:
 Evaluate whether summary F/S
- Adequately disclose their summarized nature and identify the audited F/S.
- Adequately disclose the applied criteria.
- Are prepared in accordance with the applied criteria.
- Contain information necessary, and are at an appropriate level of aggregation, so as not
to be misleading in the circumstances.
 Compare summary F/S with related information in audited F/S to determine whether
summary F/S agree with or can be recalculated from related information in audited F/S.
 When summary F/S are not accompanied by audited F/S, evaluate whether they describe
clearly:
- From whom or where the audited F/S are available; or
- Law or regulation that specifies that the audited F/S need not be made available to the
intended users of the summary F/S and establishes the criteria for preparation of those

Auditor should also evaluate whether the audited F/S are available to intended users of the
summary F/S without undue difficulty, unless law or regulation provides otherwise. Important
factors to be considered are whether:
 Summary F/S describe clearly from whom or where the audited F/S are available;
 The audited F/S are on public record; or
 Management has established a process by which the intended users of the summary
F/S can obtain ready access to the audited F/S.
ISA 810 Page 189

Form of Opinion (Ref: 9-11, A9)

Auditor’s opinion shall, unless required by law or regulation, use one of the following phrases:
 Summary F/S are consistent, in all material respects, with audited F/S, in accordance with
[applied criteria]; or
 Summary F/S are a fair summary of audited F/S, in accordance with [applied criteria].
(Selecting from above 2 depends upon generally accepted practice in that particular jurisdiction)

If law or regulation prescribes a different wording, the auditor shall:

 Apply the regular as well as additional procedures to reach the prescribed opinion; and
 Evaluate whether users of summary F/S might misunderstand auditor’s opinion
 Evaluate whether additional explanation in report can mitigate possible misunderstanding.

If auditor concludes that additional explanation cannot mitigate possible misunderstanding:

 Auditor shall not accept engagement, unless required by law or regulation to do so.
 Auditor’s report on summary F/S shall not indicate that engagement was conducted in
accordance with this ISA.

Modified Opinion on the Summary F/S

If summary F/S are not consistent, in all material respects, with or are not a fair summary
of audited F/S, in accordance with applied criteria, and management does not agree to make
the necessary changes, the auditor shall express an adverse opinion on the summary F/S.

Timing of Work and Events Subsequent to the Date of Auditor’s Report on Audited F/S
(Ref: 12-13, A10)

Auditor’s report on summary F/S may be dated later than date of auditor’s report on audited F/S.
If so, auditor’s report on summary F/S shall state that summary F/S and audited F/S do not reflect
the effects of events that occurred subsequent to date of auditor’s report on audited F/S

Auditor may become aware of facts that existed at date of auditor’s report on audited F/S
but of which the auditor previously was unaware. In such cases, auditor shall not issue
auditor’s report on summary F/S until consideration of such facts in relation to audited F/S
in accordance with ISA 560 has been completed.

Elements of Auditor’s Report on Summary F/S (Ref: 16-20, A5-A23)

 A title clearly indicating it as the report of an independent auditor

 Appropriate addressee (may be different than those of Audit report on audited F/S)
 An introductory paragraph that:
- Identifies the summary F/S, including the title of each statement included in it
(e.g. page numbers may be mentioned on which the summary F/S are presented)
ISA 810 Page 190

- Identifies the audited F/S

- Refers to auditor’s report on audited F/S, date of that report and the fact that an
unmodified opinion is expressed on the audited F/S
- If date of the auditor’s report on summary F/S is later than date of auditor’s report on
audited F/S, states that summary F/S and audited F/S do not reflect the effects of events
that occurred subsequent to date of auditor’s report on the audited F/S; and
- A statement indicating that summary F/S do not contain all the disclosures required by
the financial reporting framework applied in preparation of audited F/S, and that
reading summary F/S is not a substitute for reading the audited F/S.
 A description of management’s responsibility for preparation of the summary F/S in
accordance with the applied criteria.
 A statement that auditor is responsible for expressing an opinion on summary F/S based on
the procedures required by this ISA.
 A paragraph clearly expressing an opinion
 Auditor’s signature.
 Date of auditor’s report.
 Auditor’s address

The auditor shall date auditor’s report on summary F/S no earlier than:
 Date on which auditor has obtained sufficient appropriate evidence, including evidence that
summary F/S have been prepared and those with recognized authority have asserted that they
have taken responsibility for them; and
 Date of the auditor’s report on audited F/S.

Restriction on Distribution or Use or Alerting Readers to the Basis of Accounting

When distribution or use of auditor’s report on audited F/S is restricted, or auditor’s report
on audited F/S alerts readers that these are prepared in accordance with a special purpose
framework, auditor shall include a similar restriction or alert in auditor’s report on summary F/S.

Modifications in the Auditor’s Report on the Audited F/S (Ref: 21-22, A23)

Qualified opinion, emphasis of matter para or other matter para

If auditor is satisfied that the summary F/S requires unmodified opinion, auditor’s report on
summary F/S shall also:
 State that auditor’s report on audited F/S contains such a modification; and
 Describe:
- The basis for such modification in the auditor’s report on the audited F/S; and
- The effect thereof on summary F/S (if any)
ISA 810 Page 191

Adverse opinion or a disclaimer of opinion

Auditor’s report on summary F/S shall also:

 State that auditor’s report on audited F/S contains an adverse opinion or a disclaimer;
 Describe the basis for that adverse opinion or disclaimer of opinion; and
 State that, as a result of the adverse opinion or disclaimer of opinion, it is inappropriate to
express an opinion on the summary F/S.

Comparatives (Ref: 23-24, A24-A25)

 If audited F/S contain comparatives, but summary F/S do not, the auditor shall determine
whether such omission is reasonable (user may expect same comparatives in summary)
 If summary F/S contain comparatives that were reported on by another auditor, auditor’s
report on summary F/S shall also contain the matters required by ISA 710

Unaudited Supplementary Information Presented with Summary F/S (Ref: 25, A26)

Auditor shall evaluate whether any unaudited supplementary information presented with
summary F/S is clearly differentiated from summary F/S.
 If that is not clearly differentiated from summary F/S, auditor shall ask management to
change the presentation of unaudited supplementary information.
 If management refuses to do so, auditor shall explain in auditor’s report on summary F/S
that such information is not covered by that report.

Other Information in Documents Containing Summary F/S

Auditor shall read other information included in a document containing the summary F/S and
related auditor’s report to identify material inconsistencies, if any
 If auditor identifies a material inconsistency, he shall determine whether the summary F/S
or the other information needs to be revised.
 If auditor becomes aware of an apparent material misstatement of fact, the auditor shall
discuss the matter with management.

Auditor Association (Ref: 26-27, A27)

 If auditor becomes aware that entity plans to state that auditor has reported on summary
F/S in a document containing summary F/S, but does not plan to include auditor’s report,
auditor shall request management to include the auditor’s report in the document.
ISA 810 Page 192

 If management does not do so, auditor shall determine and carry out other appropriate
actions designed to prevent management from inappropriately associating the auditor with
the summary F/S in that document. These actions may include:
- Informing intended users and other known third-party users of the inappropriate
reference to the auditor.
- Considering legal advice.

 Auditor may be engaged to report on the F/S of an entity, while not engaged to report on
summary F/S. If, in this case, auditor becomes aware that entity plans to make a statement
in a document that refers to the auditor and the fact that summary F/S are derived from the
F/S audited by the auditor, auditor shall be satisfied that:
- Reference to auditor is made in the context of auditor’s report on the audited F/S; and
- Statement does not give the impression that auditor has reported on the summary F/S.
 Alternatively, entity may engage the auditor to report on the summary F/S and include the
related auditor’s report in the document.
 If none of the above conditions are satisfied, auditor shall determine and carry out other
appropriate actions (discussed above)

Important Paragraphs 6, 8, 9, 10, 14, 17, 19, 23, 26, A4, A6, A8
193

INTERNATIONAL
STANDARDS ON
REVIEW ENGAGEMENTS
(ISRE)
194

SIMILARITIES BETWEEN AUDIT AND REVIEW STANDARDS

Relevant Topic ISRE ISRE Relevant

2400 2410 ISAs
- Conduct of a Engagement in Accordance with 18-23 ISA-200
ISAE/ISRE A15-A25
- Complying with Relevant Requirements
- Ethical Requirements
- Professional Skepticism
- Professional Judgment
- Acceptance & Continuance of Client 29 ISA-210
Relationships & Engagements A34-A35
- Preconditions 30-35 ISA-210
- Additional Considerations When Wording of A39-A51, A142
Practitioner’s Report Is Prescribed by Law or
Regulation
- Agreeing the Terms of Engagement 36-37 10-11 ISA-210
A52-A53, A55
- Recurring Engagements 38-41 ISA-210
- Acceptance of a Change in the Terms of the A57-A62
Review Engagement
- Request to Change Nature of Engagement

- Engagement Level Quality Control 24-28 ISA-220

A26-A33 ISQM
- Documentation 93-96, A145 64 ISA-230
- Fraud and non-compliance with laws or 52 ISA-240
regulations A92 ISA-250
- Communication with Management and Those 42 ISA-260
Charged with Governance A63-A69
- Planning ISA-300
- The Practitioner’s Understanding 45-46 12-18 ISA-315
A75-A78, A87,A89
- Materiality 43-44 ISA-320
A70-A74
- Specific Procedures 47-49 19-24 ISA-330
A79-A91
- Reconciling F/S to the Underlying Accounting 56 25 ISA 330
Records A94
- Evaluating Evidence Obtained from the 66-68 ISA-330
Procedures Performed A103-A105
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- Evaluation of Misstatements 30-33 ISA-450

- Related parties 50-51 ISA-550
- Subsequent Events 58-60 26 ISA-560
- Going Concern 53-54 27-28 ISA-570
A93 55-60
- Written Representations 61-65 34-35 ISA-580
A100-A102
- Components of groups of entities A54 ISA-600
- Use of work performed by others 55 ISA-620
- Consideration of AFRF in Relation to the 69 ISA-700
Financial Statements A106-A110
- Qualitative Aspects of the Entity’s Accounting 70, 71 ISA-700
Practices A111-A112
- Form of the Conclusion 72 ISA-700
- Unmodified Conclusion 73-74 ISA-700
A113-A114
- The Practitioner’s Report 86 43 ISA-700
A118-A132
- Practitioner’s Report Prescribed by Law or A142 44 ISA-700
Regulation
- Practitioner’s Report for Reviews Conducted A143 ISA-700
in Accordance with Both Relevant Standards
of a Specific Jurisdiction and ISRE
- Other Reporting Responsibilities 91, 92 ISA-700
- Date of the Practitioner’s Report A135-A137
- Modified Conclusion 75-85 45-54 ISA-705
A117
- Emphasis of Matter Paragraphs 87, 89-90 ISA-706
- Other Matter Paragraphs
- Responsibilities for accompanying 36-37 ISA-720
information
- Alerting Readers 88 ISA-800
- Restriction on Distribution or Use A133, A134
ISRE 2400 Page 196

ISRE 2400 (REVISED) - (Core Paras)

 This ISRE deals with practitioner’s responsibilities when engaged to perform a review of
historical F/S, when the practitioner is not the auditor of the entity’s F/S
 This ISRE does not address a review of an entity’s F/S or interim financial information
performed by a practitioner who is the independent auditor of the entity’s F/S

Conduct of a Review Engagement in Accordance with this ISRE (Ref: 18-20)

Practitioner shall:
 Have an understanding of the entire text of this ISRE, including its application and other
explanatory material, to understand its objectives and to apply requirements properly.
 Comply with each requirement of this ISRE, unless a requirement is not relevant to the
review engagement.
 Not represent compliance with this ISRE in practitioner’s report unless practitioner
has complied with all the requirements of this ISRE relevant to the review engagement.

Ethical Requirements (Ref: 21)

Practitioner shall comply with relevant ethical requirements, including independence

Professional Skepticism and Professional Judgment (Ref: 22-23)

Practitioner shall:
 Plan and perform the engagement with professional skepticism recognizing that
circumstances may exist that cause the F/S to be materially misstated.
 Exercise professional judgment in conducting a review engagement.

Engagement Level Quality Control (Ref: 24-28)

Engagement partner shall possess competence in assurance skills and techniques, and
competence in financial reporting, appropriate to the engagement circumstances.

Engagement partner shall take responsibility for:

 Overall quality of each review engagement to which that partner is assigned;
 Direction, supervision, planning and performance of review engagement in compliance
with professional standards and applicable legal and regulatory requirements;
 Practitioner’s report being appropriate in the circumstances; and
 Engagement being performed in accordance with firm’s quality control policies, including:
- Being satisfied that appropriate procedures regarding acceptance and continuance of
client relationships and engagements have been followed
- Being satisfied that engagement team collectively has appropriate competence and
capabilities, including assurance skills and techniques and expertise in financial reporting
- Taking responsibility for appropriate engagement documentation being maintained.
ISRE 2400 Page 197

Engagement partner shall remain alert for evidence of non compliance with relevant
ethical requirements by members of the engagement team. If matters come to the
engagement partner’s attention through firm’s system of quality control or otherwise
indicating non compliance, engagement partner shall determine the appropriate action.

Relevant Considerations after Engagement Acceptance

If engagement partner obtains information that would have caused the firm to decline the
engagement had that information been available earlier, engagement partner shall
communicate that information promptly to firm for necessary actions.

Monitoring
A process designed to provide firm with reasonable assurance that policies & procedures
relating to system of quality control are relevant, adequate and operate effectively.
Engagement partner shall consider the results of monitoring process as evidenced in latest
information circulated by firm and impact of deficiencies noted in that information.

Acceptance and Continuance of Client and Review Engagements (Ref: 29-35)

Unless required by law or regulation, practitioner shall not accept a review engagement if:
 Practitioner is not satisfied that:
- There is a rational purpose for the engagement; or
- A review engagement would be appropriate in the circumstances;
 Practitioner has reason to believe that relevant ethical requirements will not be satisfied;
 Practitioner’s preliminary understanding of engagement indicates that the information
needed to perform review engagement is likely to be unavailable or unreliable;
 Management’s integrity in is doubt likely to affect proper performance of the review; or
 Management or TCWG impose a scope limitation in terms of proposed review engagement
that may result in the practitioner disclaiming a conclusion on the F/S.

Preconditions for Accepting a Review Engagement

Determine whether FRF is acceptable including, in the case of special purpose F/S, obtaining an
understanding of the purpose for which the F/S are prepared and of the intended users; and
Obtain agreement of management that it acknowledges and understands its responsibilities:
 For preparation and fair presentation of F/S in accordance with applicable FRF
 For necessary internal control to enable the preparation of F/S; and
 To provide the practitioner with:
- Access to all information of which management is aware that is relevant to preparation
of the F/S, such as records, documentation and other matters;
- Additional information that practitioner may request from management; and
- Unrestricted access to persons within entity from whom the practitioner determines it
necessary to obtain evidence.
ISRE 2400 Page 198

If practitioner is not satisfied as to any precondition

 He shall discuss the matter with management or TCWG.
 If they are unable to satisfy him, he shall not accept the proposed engagement unless
required by law or regulation.
 He shall then not include any reference of compliance with ISRE in his review report

If it is discovered after acceptance of engagement that any of the precondition is not present,
practitioner shall discuss matter with management or TCWG, and shall determine:
 Whether the matter can be resolved;
 Whether it is appropriate to continue with the engagement; and
 Whether and, if so, how to communicate the matter in the report.

Wording of Practitioner’s Report Is Prescribed by Law or Regulation

 Practitioner shall evaluate whether users might misunderstand assurance obtained from
review and, if so, whether additional explanation can mitigate possible misunderstanding
 If additional explanation in report cannot mitigate possible misunderstanding, he shall not
accept review engagement unless required by law or regulation to do so.
 He shall then not include any reference of compliance with ISRE in his review report.

Terms of Engagement (Ref: 36-41)

Practitioner shall agree terms with management or TCWG prior to performing engagement.
Agreed terms shall be recorded in an engagement letter or other suitable form of written
agreement, and shall include:
 Intended use and distribution of F/S, and any restrictions on use or distribution, if any;
 Identification of applicable FRF;
 Objective and scope of the review engagement;
 Responsibilities of the practitioner;
 Responsibilities of management
 A statement that it is not an audit, and practitioner will not express an audit opinion; and
 Reference to expected form and content of the report to be issued, and a statement that
there may be circumstances in which report may differ from expected form and content

Recurring Engagements
Practitioner shall evaluate whether circumstances require the terms of engagement to be
revised and whether there is a need to remind management or TCWG of the existing terms

Acceptance of a Change in the Terms of the Review Engagement

 Practitioner shall not agree to a change in terms without any reasonable justification
 If before completion, practitioner is requested to change engagement to an engagement for
which no assurance is obtained, he shall ask for any reasonable justification
 If terms are changed during the engagement, practitioner and management or TCWG shall
agree on and record new terms in an engagement letter etc.
ISRE 2400 Page 199

Communication with Management and TCWG (Ref: 42)

Practitioner shall communicate with management or TCWG on a timely basis during the course
of review, all matters concerning the engagement that are of sufficient importance to merit
the attention of management or TCWG

Performing the Engagement (Ref: 43-49)

Materiality
 Practitioner shall determine materiality for the F/S as a whole, and apply this materiality in
designing the procedures and in evaluating the results obtained from those procedures.
 Practitioner shall revise materiality for the F/S as a whole in the event of becoming aware
of any information during the review that would cause him to decide a different amount.

Practitioner’s Understanding
Obtain an understanding of entity and its environment, and FRF, to identify areas in F/S
where material misstatements are likely to arise. Understanding shall include following:
 Relevant industry, regulatory, and other external factors including the applicable FRF;
 Nature of the entity, including:
- Its operations;
- Its ownership and governance structure;
- The types of investments that the entity is making and plans to make;
- The way that the entity is structured and how it is financed; and
- The entity’s objectives and strategies;
 Entity’s accounting systems and accounting records; and
 Entity’s selection and application of accounting policies.

Designing and Performing Procedures

Practitioner shall design and perform inquiry and analytical procedures:
 To address all material items in the F/S, including disclosures; and
 To focus on addressing areas in the F/S where material misstatements are likely to arise.
Practitioner’s inquiries of management and others within entity shall include the following:
 How management makes significant accounting estimates required under applicable FRF;
 Identification of related parties and related party transactions, including their purpose;
 Whether there are significant, unusual or complex transactions, events or matters that have
affected or may affect the entity’s F/S, including:
- Significant changes in entity’s business activities or operations;
- Significant changes to terms of contracts that materially affect entity’s F/S, including
terms of finance and debt contracts or covenants;
- Significant journal entries or other adjustments to the F/S;
- Significant transactions occurring or recognized near the end of the reporting period;
- Status of any uncorrected misstatements identified during previous engagements; and
- Effects or possible implications of transactions or relationships with related parties;
ISRE 2400 Page 200

 The existence of any actual, suspected or alleged:

- Fraud or illegal acts affecting the entity; and
- Non-compliance with provisions of laws and regulations having a direct effect on the
determination of material amounts and disclosures in F/S;
 Whether management has identified and addressed events occurring between date of F/S
and date of practitioner’s report that require adjustment of, or disclosure in, the F/S;
 Basis for management’s assessment of the entity’s ability to continue as a going concern;
 Whether there are events or conditions that appear to cast doubt on going concern;
 Material commitments, contractual obligations or contingencies that have affected or may
affect the entity’s F/S, including disclosures; and
 Material non-monetary transactions or transactions for no consideration in the financial
reporting period under consideration.

In designing analytical procedures, practitioner shall consider whether data from entity’s
accounting system & accounting records are adequate for performing these procedures.

Procedures to Address Specific Circumstances (Ref: 50-57)

Related parties
 During review, practitioner shall remain alert for arrangements or information that may
indicate existence of related party relationships or transactions that management has not
previously identified or disclosed to the practitioner.
 If practitioner identifies significant transactions outside the entity’s normal course of
business, he shall inquire of management about:
- Nature of those transactions;
- Whether related parties could be involved; and
- The business rationale (or lack thereof) of those transactions.
Going concern
In considering management’s assessment of entity’s ability to continue as a going concern,
practitioner shall cover the same period as that used by management to make its assessment.
If, during review, practitioner becomes aware of events or conditions that may cast significant
doubt about the entity’s ability to continue as a going concern, practitioner shall:
 Inquire of management about plans for future actions and about the feasibility of those
plans, and also whether management believes the outcome will improve the situation;
 Evaluate results of those inquiries, to consider whether it provide a sufficient basis to:
- Continue to present the F/S on going concern basis; or
- Conclude whether F/S are materially misstated, or are otherwise misleading regarding
the entity’s ability to continue as a going concern; and
 Consider management’s responses in light of all relevant known information
Reconciling the F/S to the Underlying Accounting Records
Practitioner shall obtain evidence that the F/S agree with, or reconcile to, these records
ISRE 2400 Page 201

Fraud and non-compliance with laws or regulations

When there is an indication that fraud or non-compliance with laws or regulations, or
suspected fraud or non-compliance, has occurred in the entity, the practitioner shall:
 Communicate that matter to appropriate level of senior management or TCWG;
 Request management’s assessment of the effect(s), if any, on the F/S;
 Consider the effect, if any, on the practitioner’s conclusion and on the report; and
 Determine whether there is a responsibility to report the occurrence or suspicion of fraud
or illegal acts to a party outside the entity.

Use of work performed by others

If practitioner uses work performed by another practitioner or an expert, he shall take
appropriate steps to be satisfied that work performed is adequate for practitioner’s purposes.

Additional Procedures
If practitioner becomes aware of a matter(s) that causes the F/S to be materially misstated,
practitioner shall design and perform additional procedures sufficient to enable him to
decide whether the matter(s) is or is not likely to cause the F/S to be materially misstated

Subsequent Events (Ref: 58-60)

 If practitioner becomes aware of any such events occurring between date of F/S and date
of report, practitioner shall request management to correct those misstatements.
 He has no obligation to perform any procedures after date of report.
 If, after date of report but before date of issuance of F/S, a fact becomes known to the
practitioner that, had it been known to the practitioner at date of report, may have caused
the practitioner to amend the report, the practitioner shall:
- Discuss the matter with management or TCWG, as appropriate;
- Determine whether the F/S need amendment; and
- If so, inquire how management intends to address the matter in the F/S.
 If management does not amend the F/S (where practitioner believes they need to be
amended), and report has already been provided to the entity, practitioner shall notify
management and TCWG not to issue the F/S to third parties before amendments
 If F/S are however subsequently issued without necessary amendments, practitioner shall
take appropriate action to seek to prevent reliance on his report.

Written Representations (61-65)

Practitioner shall request management to provide written representation that management
has fulfilled its responsibilities described in terms of engagement. it shall include that:
 Management has fulfilled its responsibility for the preparation and fair presentation of the
F/S in accordance with the applicable and has provided the practitioner with all relevant
information and access to information; and
 All transactions have been recorded and are reflected in the F/S.
ISRE 2400 Page 202

Practitioner shall also request written representations that management has disclosed:
 Identity of related parties and all known related party relationships and transactions;
 Significant facts relating to any frauds or suspected frauds known to management;
 Known actual or possible non-compliance with laws and regulations;
 All information relevant to use of the going concern assumption in the F/S;
 That all events occurring subsequent to the date of the F/S and for which the applicable FRF
requires adjustment or disclosure, have been adjusted or disclosed;
 Material commitments, contractual obligations or contingencies that have affected or may
affect the entity’s F/S, including disclosures; and
 Material non-monetary (or for no consideration) transactions undertaken by the entity
If management does not provide 1 or more of written representations, practitioner shall:
 Discuss the matter with management and TCWG, as appropriate;
 Re-evaluate the integrity of management, and evaluate the effect that this may have on the
reliability of representations (oral or written) and evidence in general; and
 Take appropriate actions, including determining the possible effect on the conclusion in the
practitioner’s report in accordance with this ISRE.

Practitioner shall disclaim a conclusion, or withdraw from engagement if possible under

applicable law or regulation, as appropriate, if:
 Practitioner concludes that there is sufficient doubt about the integrity of management; or
 Management does not provide the required representations.

The date of written representations shall be as near as practicable to, but not after, the date of
practitioner’s report. It shall be for all F/S and period(s) referred to in the report.

Evaluating Evidence Obtained from the Procedures Performed (Ref: 66-68)

 Practitioner shall evaluate whether sufficient appropriate evidence has been obtained
 If practitioner is not able to obtain sufficient appropriate evidence to form a conclusion, he
shall discuss with management and TCWG, the effects of such scope limitations on review
 Practitioner shall evaluate the evidence to determine the effect on practitioner’s report.

Forming the Practitioner’s Conclusion on the F/S (Ref: 69-71)

In forming the conclusion on the F/S, the practitioner shall:

 Evaluate whether F/S adequately refer to or describe the applicable FRF;
 Consider whether, in the context of requirements of FRF and the results of procedures:
- Terminology used in F/S, including the title of each financial statement, is appropriate;
- F/S adequately disclose the significant accounting policies selected and applied;
- Accounting policies selected and applied are consistent with FRF and are appropriate;
- Accounting estimates made by management appear reasonable;
- Information in F/S appears relevant, reliable, comparable, and understandable; and
- F/S provide adequate disclosures to enable intended users to understand the effects of
material transactions and events on the information conveyed in the F/S.
ISRE 2400 Page 203

Practitioner shall consider the impact of:

 Uncorrected misstatements identified during review, and in previous year’s review; and
 Qualitative aspects of entity’s accounting practices, including indicators of possible bias in
management’s judgments.
In case of a fair presentation framework, practitioner’s consideration shall also include:
 Overall presentation, structure and content of the F/S in accordance with FRF; and
 Whether F/S, including related notes, appear to represent the underlying transactions and
events in a manner that achieves fair presentation or gives a true and fair view

Form of the Conclusion (Ref: 72-85)

Unmodified Conclusion
Practitioner shall express an unmodified conclusion when the practitioner has obtained limited
assurance to be able to conclude that nothing has come to his attention that causes him to believe
that the F/S are not prepared, in all material respects, in accordance with FRF. Practitioner shall,
unless otherwise required by law or regulation, use one of the following phrases, as appropriate:
 “Based on our review, nothing has come to our attention that causes us to believe that the
F/S do not present fairly, in all material respects (or do not give a true and fair view), … in
accordance with the applicable FRF,” (fair presentation framework); or
 “Based on our review, nothing has come to our attention that causes us to believe that the
F/S are not prepared, in all material respects, in accordance with the applicable FRF,”
(compliance framework).

Modified Conclusion
Practitioner shall express a modified conclusion when:
 F/S are materially misstated; or
 Practitioner is unable to obtain sufficient appropriate evidence.
When the practitioner modifies the conclusion expressed on the F/S, he shall:
 Use heading “Qualified Conclusion,” “Adverse Conclusion” or “Disclaimer of Conclusion,” as
appropriate, for the conclusion paragraph in the practitioner’s report; and
 Provide a description of the matter giving rise to the modification, under an appropriate
heading in a separate paragraph in report immediately before conclusion paragraph

F/S are materially misstated

If practitioner determines that F/S are materially misstated, the practitioner shall express:
 A qualified conclusion, when effects of the matter(s) are material, but not pervasive; or
 An adverse conclusion, when effects of the matter(s) are both material and pervasive.
When practitioner expresses a qualified conclusion because of a material misstatement, he
shall, unless otherwise required by law or regulation, use one of the following phrases:
 “Based on our review, except for the effects of the matter(s) described in the Basis for
Qualified Conclusion paragraph, nothing has come to our attention that causes us to believe
that the F/S do not present fairly, in all material respects (or do not give a true and fair
view), … in accordance with the applicable FRF,” (fair presentation framework); or
ISRE 2400 Page 204

 “Based on our review, except for the effects of the matter(s) described in the Basis for
Qualified Conclusion paragraph, nothing has come to our attention that causes us to believe
that the F/S are not prepared, in all material respects, in accordance with the applicable
FRF,” (compliance framework).
When practitioner expresses an adverse conclusion, he shall, unless otherwise required by
law or regulation, use one of the following phrases, as appropriate:
 “Based on our review, due to the significance of the matter(s) described in the Basis for
Adverse Conclusion paragraph, the F/S do not present fairly, in all material respects (or do
not give a true and fair view), … in accordance with the applicable FRF,” (fair presentation
framework); or
 “Based on our review, due to the significance of the matter(s) described in the Basis for
Adverse Conclusion paragraph, the F/S are not prepared, in all material respects, in
accordance with the applicable FRF,” (compliance framework).
In basis for conclusion paragraph, in relation to material misstatements, practitioner shall:
 Describe and quantify financial effects of the misstatement if the material misstatement
relates to specific amounts in the F/S (including quantitative disclosures), unless
impracticable, in which case the practitioner shall so state;
 Explain how disclosures are misstated if material misstatement relates to narrative
disclosures; or
 Describe nature of omitted information if the material misstatement relates to the non-
disclosure of information required to be disclosed.

Inability to obtain sufficient appropriate evidence

If practitioner is unable to form a conclusion on the F/S due to inability to obtain sufficient
appropriate evidence, he shall:
 Express a qualified conclusion if possible effects could be material but not pervasive; or
 Disclaim a conclusion if possible effects could be both material and pervasive.

Practitioner shall withdraw from the engagement if following conditions are present:
 Due to a limitation on scope of review imposed by management after the practitioner has
accepted the engagement, practitioner is unable to obtain sufficient appropriate evidence;
 Practitioner has determined that the possible effects on F/S of undetected misstatements
are material and pervasive; and
 Withdrawal is possible under applicable law or regulation.
When practitioner expresses a qualified conclusion due to inability to obtain sufficient
appropriate evidence, practitioner shall use one of the following phrases, as appropriate:
 “Based on our review, except for the possible effects of the matter(s) described in the Basis
for Qualified Conclusion paragraph, nothing has come to our attention that causes us to
believe that the F/S do not present fairly, in all material respects (or do not give a true and
fair view), … in accordance with applicable FRF,” (fair presentation framework); or
ISRE 2400 Page 205

 “Based on our review, except for the possible effects of the matter(s) described in the Basis
for Qualified Conclusion paragraph, nothing has come to our attention that causes us to
believe that the F/S are not prepared, in all material respects, in accordance with the
applicable FRF,” (compliance framework).
When disclaiming a conclusion the practitioner shall state in the conclusion paragraph that:
 Due to significance of the matter(s) described in Basis for Disclaimer paragraph, he is
unable to obtain sufficient appropriate evidence to form a conclusion on the F/S; and
 Accordingly, the practitioner does not express a conclusion on the F/S.

The Practitioner’s Report (Ref: 86-92)

Practitioner’s report shall be in writing, and shall contain the following elements:
 A title, clearly indicating that it is report of an independent practitioner for a review;
 Addressee(s), as required by the circumstances of the engagement;
 An introductory paragraph that:
- Identifies title of each of the statements contained in the set of F/S and date and period
covered by each financial statement;
- Refers to the summary of significant accounting policies and other explanatory
information; and
- States that the F/S have been reviewed;
 A description of responsibility of management for the preparation of F/S, including an
explanation that management is responsible for:
- Their preparation in accordance with applicable FRF including its fair presentation;
- Such necessary internal control to enable preparation of F/S
 If the F/S are special purpose F/S:
- A description of the purpose for which F/S are prepared and, if necessary, the intended
users, or reference to a note in special purpose F/S that contains that information; and
- If management has a choice of FRFs in preparation of such F/S, a reference within the
explanation of management’s responsibility for the same;
 A description of practitioner’s responsibility to express a conclusion on the F/S including
reference to this ISRE and, where relevant, applicable law or regulation;
 A description of a review of F/S and its limitations, and the following statements:
- A review engagement under this ISRE is a limited assurance engagement;
- He performs procedures, primarily consisting of making inquiries of management and
others and applying analytical procedures, and evaluates evidence obtained; and
- Procedures performed in a review are substantially less than audit conducted in
accordance with ISAs, and, accordingly, practitioner does not express an audit opinion;
 A paragraph under the heading “Conclusion” that contains:
- Practitioner’s conclusion on the F/S as a whole; and
[
- A reference to applicable FRF used to prepare F/S
 When the practitioner’s conclusion on the F/S is modified:
- A paragraph under appropriate heading that contains modified conclusion; and
- A paragraph, under an appropriate heading, that provides a description of matter(s)
ISRE 2400 Page 206

 A reference to his obligation under ISRE to comply with relevant ethical requirements;
 The date of the practitioner’s report;
 The practitioner’s signature; and
 The location in the jurisdiction where the practitioner practices.
Emphasis of Matter Paragraphs
 Practitioner may consider it necessary to draw users’ attention to a matter presented or
disclosed in the F/S that, in his judgment, is of such importance that it is fundamental to
users’ understanding of the F/S.
 Such paragraph shall refer only to information presented or disclosed in the F/S.
 Practitioner’s report on special purpose F/S shall include Emphasis of Matter paragraph
alerting users that F/S are prepared in accordance with special purpose framework
 Practitioner shall include an Emphasis of Matter paragraph immediately after paragraph
that contains the practitioner’s conclusion on the F/S under the heading “Emphasis of
Matter,” or other appropriate heading.
Other Matter Paragraphs
If practitioner considers it necessary to communicate a matter other than those that are
disclosed in the F/S that, in his judgment, is relevant to users’ understanding, practitioner’s
responsibilities or report and this is not prohibited by law or regulation, the practitioner shall
do so in a paragraph with the heading “Other Matter” or other appropriate heading.

Other Reporting Responsibilities

A practitioner may be requested to address other reporting responsibilities in report that are in
addition to practitioner’s responsibilities under this ISRE. Those responsibilities shall be
addressed in a separate section in report headed “Report on Other Legal and Regulatory
Requirements,” or otherwise as appropriate, after the section of “Report on the F/S.”

Documentation (Ref: 93-96)

Practitioner shall document following aspects in a timely manner, sufficient to enable an
experienced practitioner, having no previous connection with engagement, to understand:
 The nature, timing and extent of the procedures performed to comply with this ISRE and
applicable legal and regulatory requirements;
- Who performed the work and the date such work was completed; and
- Who reviewed the work performed and the date and extent of the review.
 Results obtained from procedures, and practitioner’s conclusions formed; and
 Significant matters arising during the engagement, the conclusions reached, and the
significant professional judgments made in reaching those conclusions.
Practitioner shall also document discussions with management, TCWG, and relevant others of
significant matters arising during the engagement, including the nature of those matters.
If information is identified that is inconsistent with the practitioner’s findings regarding significant
matters affecting the F/S, the practitioner shall document how the inconsistency was addressed.
Important Paragraphs 48
ISRE 2410 Page 207

ISRE 2410

Differences between ISRE 2400 & ISRE 2410

ISRE 2400 ISRE 2410

Words used for Reviewer Practitioner Auditor
Status of the Reviewer Practitioner is not the Same Auditor who
auditor of the entity’s F/S performed audit of F/S
Period of F/S Full Year Interim
Note: If a practitioner is appointed to perform review of interim financial information and is
not the auditor of the entity, would perform the review in accordance with ISRE 2400

Introduction, Objective and General Principles (Ref: 1-9)

The auditor who is engaged to perform a review of interim financial information should perform
review in accordance with this ISRE.

Objective of an engagement to review interim financial information is to “enable the auditor

to express a conclusion whether, on the basis of the review, anything has come to the
auditor’s attention that causes the auditor to believe that the interim financial
information is not prepared, in all material respects, in accordance with an applicable
financial reporting framework”.

GENERAL PRINCIPLES
 Should comply with the ethical requirements.
 Should implement quality control procedures.
 Plan & perform review with an attitude of professional skepticism

Agreeing the Terms of the Engagement (Ref: 10-11)

 Objective of a review.
 Scope of the review.
 Management’s responsibility for interim financial information.
 Management’s responsibility for effective internal control.
 Management’s responsibility for making all financial records and related information
available.
 Management’s agreement to provide written representations
 Anticipated form, content and addressee of report to be issued
 Management’s agreement that review report will be included in the document claiming
that interim financial information has been reviewed.
ISRE 2410 Page 208

Procedures for a Review of Interim Financial Information (Ref: 12-29)

Understanding Entity and Environment, Including Internal Control

- Reading documentation of related preceding year’s audit & reviews

- Considering significant risks, including risk of management override of controls, identified
in latest audit.
- Considering materiality with reference to AFRF.
- Considering nature of any corrected material misstatements and any identified
uncorrected immaterial misstatements in prior year’s F/S.
- Considering significant financial accounting and reporting matters
- Considering results of any audit procedures performed this year.
- Considering results of any internal audit performed and subsequent actions taken by
management.
- Inquiring management about results of management’s risk assessment due to fraud.
- Inquiring management about effect of changes in business activities.
- Inquiring management about significant changes in internal control and potential effect
on preparation of interim financial information.
- Inquiring management of the process by which interim financial information has been
prepared and reliability of accounting records

Inquiries and Other Review Procedures

- Reading minutes of meetings of shareholders, TCWG, and other appropriate committees

and inquiring about matters dealt with at meetings for which minutes are not available.
- Considering effect of matters giving rise to a modification of report identified in previous
audit or reviews.
- Communicating with other auditors performing review of entity’s significant components.
- Inquiring of members of management responsible for financial and accounting matters,
and others as appropriate about following:
 Whether interim financial information has been prepared and presented in
accordance with AFRF.
 Whether there have been any changes in accounting principles or in the methods of
applying them.
 Whether interim financial information contains any known uncorrected
misstatements.
 Unusual or complex situations e.g. a business combination
 Whether related party transactions have been appropriately accounted for and
disclosed in interim financial information.
 Significant changes in commitments and contractual obligations.
 Significant changes in contingent liabilities including litigation.
 Compliance with debt covenants.
 Questionable Matters
ISRE 2410 Page 209

 Significant transactions occurring in last several days of interim period or the first
several days of the next interim period.
 Knowledge of any fraud or suspected fraud affecting entity involving Management,
Employees or any Others.
 Knowledge of any allegations of fraud, or suspected fraud, communicated by
employees, former employees, analysts, regulators, or others.
 Knowledge of any actual or possible noncompliance with laws
 Significant assumptions relevant to fair value measurement or disclosures and
management’s intention and ability to carry out specific courses of action on behalf of
[
the entity.

Analytical Procedures (Appendix 2)

- Comparing interim financial information with
 Immediately preceding interim periods
 Management expectation for current period
 Most recent audited annual F/S.
 Anticipated results, such as budgets or forecasts
 Relevant non-financial information.
- Comparing recorded amounts, or ratios with auditor’s expectations
- Comparing ratios and indicators with entities in same industry.
- Performing horizontal ratio analysis
- Comparing disaggregated data.
 By period
 By product line or source of revenue.
 By location, for example, by component.
 By single or several attributes of the transaction

 Auditor should obtain evidence that interim financial information agrees or reconciles with
underlying accounting records.
 Auditor should inquire whether management has identified all subsequent events. It is
not necessary for auditor to perform other procedures to identify events after date of review
report.
 Auditor should inquire whether management has changed its assessment of going
concern.
 If there are significant doubt on going concern assumption, auditor should:
 Inquire management as to its plans for future actions, feasibility of these plans, and
whether they believe that the outcome of these plans will improve the situation
 Consider adequacy of disclosure about such matters

Evaluation of Misstatements (Ref: 30-33)

Auditor should evaluate, individually and in aggregate, whether uncorrected misstatements
that have come to the auditor’s attention are material to the interim financial information.
ISRE 2410 Page 210

Management Representations (Ref: 34-35)

 Acknowledges its responsibility for internal control
 information is prepared and presented in accordance with AFRF;
 Believes that effect of uncorrected misstatements are immaterial
 Disclosed to auditor all significant facts relating to frauds
 Disclosed to auditor the results of its risk assessment
 Disclosed to auditor all known actual or possible noncompliance with laws and regulations
 Disclosed to auditor all subsequent events requiring adjustment

Auditor’s Responsibility for Accompanying Information (Ref: 36-37)

 Should read other information that accompanies interim financial information to consider
materially inconsistency (if any).
 If materially inconsistency comes to auditor’s attention, auditor should discuss the matter
with the entity’s management.

Communication (Ref: 38-42)

 When auditor believes that it is necessary to make a material adjustment to interim financial
information, auditor should communicate this matter to appropriate level of management.
 When management does not respond appropriately within a reasonable period of time,
auditor should inform TCWG.
 If TCWG do not respond appropriately, auditor should consider:
 Whether to modify the report
 Possibility of withdrawing from engagement
 Possibility of resigning from appointment to audit.
 When auditor finds existence of fraud or noncompliance of laws, auditor should
communicate to appropriate level of management.
 Auditor should communicate relevant matters of governance interest arising from the
review to TCWG.

Reporting the Nature, Extent and Results of the Review (Ref: 43-63)

Contents of Report:
 An Appropriate title.
 An Addressee, as required by circumstances of engagement.
 Identification of interim financial information reviewed, including title of each statement and
date and period covered.
 A statement that management is responsible for Preparation and (fair) presentation of
interim financial information in accordance with AFRF
 Auditor’s responsibility for expressing a conclusion.
 That review was conducted in accordance with ISRE 2410, and a statement that that review
consists of making inquiries and applying analytical and other review procedures.
ISRE 2410 Page 211

 That a review is substantially less in scope than an audit and accordingly no audit opinion is
expressed.
 A conclusion
 Date of the report.
 Location in country or jurisdiction where the auditor practices.
 Auditor’s signature.

Departure from the Applicable Financial Reporting Framework

Express a qualified or adverse conclusion

Limitation on Scope
If auditor is unable to complete review, auditor should communicate to appropriate level of
management and TCWG
By Management
Auditor does not accept such an engagement if his preliminary knowledge indicates that he
would be unable to complete review
 If, after acceptance, management imposes such limitation, auditor requests removal of
that limitation.
 If management refuses, auditor shall communicate to appropriate level of management
and TCWG
 Auditor also considers legal and regulatory responsibilities. If there is such a
requirement, auditor shall disclaims conclusion

Other Limitations on Scope

 Issue Qualified Conclusion.
 If Audit report was Qualified; Auditor shall consider whether that limitation still exists
and, if so, implications for review.

Going Concern and Significant Uncertainties

 If adequate disclosure about going concern is made, auditor should add an emphasis of
matter paragraph
 If material uncertainty is adequately disclosed, auditor modifies review report by adding an
emphasis of matter paragraph.
 If material uncertainty is not adequately disclosed, auditor should express a qualified or
adverse conclusion, as appropriate.

Documentation (Ref: 64)

Prepare review documentation that is sufficient and appropriate to provide a basis for auditor’s
conclusion and to provide evidence that review was performed in accordance with ISRE and
applicable legal and regulatory requirements.

Important Paragraphs 3,4,15,17,21, ALL APPENDICES

212

INTERNATIONAL
STANDARDS ON
RELATED SERVICES
(ISRS)
ISRS 4400 Page 213

ISRS 4400

An engagement to perform agreed-upon procedures may involve the auditor in performing

certain procedures concerning individual items of financial data (e.g., accounts payable,
accounts receivable, profits of a segment of an entity), a financial statement (for example, a
balance sheet) or even a complete set of F/S.
Auditor normally carries out procedures of an audit nature to which auditor and the entity and
any appropriate third parties have agreed and to report on factual findings.
 No assurance is expressed
 Users of the report assess for themselves the procedures and findings reported by the
auditor and draw their own conclusions from auditor’s work.
 Report is restricted to those parties that have agreed to the procedures to be performed

General Principles of an Agreed-Upon Procedures Engagement (Ref: 7-8)

 Auditor should comply with Code of Ethics for Professional Accountants issued by the
International Ethics Standards Board for Accountants (IESBA Code).
 Ethical principles for this type of engagement are:
- Integrity;
- Objectivity;
- Professional competence and due care;
- Confidentiality;
- Professional behavior; and
- Technical standards.
 Independence is not a requirement for agreed-upon procedures engagements
- Terms or objectives of an engagement or national standards may require the auditor to
comply with the independence requirements of the IESBA Code.
- Where auditor is not independent, a statement to that effect would be made in report.

Defining the Terms of the Engagement (Ref: 9-12)

Auditor should ensure with representatives of entity and other specified addressee of report,
that there is clear understanding regarding agreed procedures and conditions of engagement
Matters to be agreed include the following:
 Nature of engagement including the fact that the procedures performed will not constitute
an audit or a review and that accordingly no assurance will be expressed.
 Stated purpose for the engagement.
 Identification of financial information to which agreed-upon procedures will be applied.
 Nature, timing and extent of the specific procedures to be applied.
 Anticipated form of the report of factual findings.
 Limitations on distribution of the report of factual findings.
(If limitation is in conflict with legal requirements, auditor would not accept engagement)
ISRS 4400 Page 214

An engagement letter confirms the auditor’s acceptance of the appointment and helps avoid
misunderstanding regarding matters such as scope of engagement, extent of auditor’s
responsibilities and form of reports to be issued.

Matters that would be included in the engagement letter include the following:
 A listing of the procedures to be performed as agreed upon between the parties.
 A statement that the distribution of the report of factual findings would be restricted to the
specified parties who have agreed to the procedures to be performed.

Appendix 1 - Engagement Letter for an Agreed-Upon Procedures Engagement

To Board of Directors or other appropriate representatives of the client who engaged auditor:

This letter is to confirm our understanding of the terms and objectives of our engagement and
the nature and limitations of the services that we will provide. Our engagement will be
conducted in accordance with the ISRS (or refer to relevant national standards or practices)
applicable to agreed-upon procedures engagements and we will indicate so in our report.

We have agreed to perform the following procedures and report to you the factual findings
resulting from our work:
(Describe the nature, timing and extent of the procedures to be performed, including specific
reference, where applicable, to the identity of documents and records to be read, individuals to
be contacted and parties from whom confirmations will be obtained.)

The procedures that we will perform are solely to assist you in (state purpose). Our report is
not to be used for any other purpose and is solely for your information.

The procedures that we will perform will not constitute an audit or a review made in
accordance with ISA or ISRE (or refer to relevant national standards or practices) and,
consequently, no assurance will be expressed.

We look forward to full cooperation with your staff and we trust that they will make available
to us whatever records, documentation and other information requested in connection with
our engagement.

Our fees, which will be billed as work progresses, are based on the time required by the
individuals assigned to engagement plus out-of-pocket expenses. Individual hourly rates vary
according to the degree of responsibility involved and the experience and skill required.

Please sign and return the attached copy of this letter to indicate that it is in accordance with
your understanding of the terms of the engagement including the specific procedures which we
have agreed will be performed.
XYZ & Co
Acknowledged on behalf of ABC Company by
(signed)
Name and Title
Date
ISRS 4400 Page 215

Planning (Ref: 13)

Auditor should plan the work so that an effective engagement will beperformed.

Documentation (Ref: 14)

Auditor should document matters which are important in providing evidence to support the
report of factual findings, and evidence that engagement was carried out in accordance with this
ISRS and the terms of the engagement.

Procedures and Evidence (Ref: 15-16)

Auditor should carry out the procedures agreed upon and use the evidence obtained as the basis
for the report of factual findings. Such procedures include the following:
 Inquiry and analysis.
 Recomputation, comparison and other clerical accuracy checks.
 Observation.
 Inspection.
 Obtaining confirmations.

Reporting (Ref: 17-18)

Report of factual findings should contain:
 Title;
 Addressee (ordinarily client who engaged the auditor);
 Identification of specific financial or non-financial information to which the agreed-upon
procedures have been applied;
 A statement that the procedures performed were those agreed upon with the recipient;
 A statement that the engagement was performed in accordance with ISRS applicable to
agreed-upon procedures engagements, or with relevant national standards or practices;
 When relevant a statement that the auditor is not independent of the entity;
 Identification of the purpose for which the agreed-upon procedureswere performed;
 A listing of the specific procedures performed;
 A description of auditor’s factual findings including details of errors and exceptions found;
 Statement that the procedures performed do not constitute either an audit or a review and,
as such, no assurance is expressed;
 A statement that had the auditor performed additional procedures, an audit or a review,
other matters might have come to light that would have been reported;
 A statement that report is restricted to those parties that have agreed to the procedures;
 A statement (when applicable) that report relates only to the elements, accounts, items or
financial and non-financial information specified and that it does not extend to F/S taken as
a whole;
 Date of the report;
 Auditor’s address; and
 Auditor’s signature.
Important Paragraphs 1, 18
ISRS 4400 Page 216

Appendix 2 - Illustration of a Report of Factual Findings in Connection with Accounts Payable

REPORT OF FACTUAL FINDINGS

To (those who engaged the auditor)

We have performed the procedures agreed with you and enumerated below with respect to the
accounts payable of ABC Company as at (date), set forth in the accompanying schedules (not shown in
this example). Our engagement was undertaken in accordance with the ISRS (or refer to relevant
national standards or practices) applicable to agreed-upon procedures engagements. The procedures
were performed solely to assist you in evaluating the validity of the accounts payable and are
summarized as follows:

1.We obtained and checked the addition of the trial balance of accounts payable as at (date) prepared
by ABC Company, and we compared the total to the balance in the related general ledger account.
2. We compared the attached list (not shown in this example) of major suppliers and the amounts owing
at (date) to the related names and amounts in the trial balance.
3. We obtained suppliers’ statements or requested suppliers to confirm balances owing at (date).
4. We compared such statements or confirmations to the amounts referred to in 2.For amounts which
did not agree, we obtained reconciliations from ABCCompany. For reconciliations obtained, we
identified and listed outstanding invoices, credit notes and outstanding checks, each of which was
greater than xxx. We located and examined such invoices and credit notes subsequently received and
checks subsequently paid and we ascertained that they should in fact have been listed as outstanding
on the reconciliations.

We report our findings below:

(a) With respect to item 1 we found the addition to be correct and the total amount to be in agreement.
(b) With respect to item 2 we found the amounts compared to be in agreement.
(c) With respect to item 3 we found there were suppliers’ statements for all such suppliers.
(d)With respect to item 4 we found the amounts agreed, or with respect to amounts which did not agree,
we found ABC Company had prepared reconciliations and that the credit notes, invoices and
outstanding checks over xxx were appropriately listed as reconciling items with the following
exceptions: (Detail the exceptions)

Because the above procedures do not constitute either an audit or a review made in accordance with
International Standards on Auditing or International Standards on Review Engagements (or relevant
national standards or practices), we do not express any assurance on the accounts payable as of (date).

Had we performed additional procedures or had we performed an audit or review of the financial
statements in accordance with ISA or ISRE (or relevant national standards or practices), other matters
might have come to our attention that would have been reported to you.

Our report is solely for the purpose set forth in the first paragraph of this report and for your
information and is not to be used for any other purpose or to be distributed to any other parties. This
report relates only to the accounts and items specified above and does not extend to any financial
statements of ABC Company, taken as a whole.
AUDITOR
Date
Address
ISRS 4410 Page 217

ISRS 4410 (REVISED)

The Compilation Engagement (Ref: 5-10)

Management may request a professional accountant in public practice to assist with the
preparation and presentation of financial information of an entity. Practitioner apply his
professional expertise in accounting and financial reporting and compliance with professional
standards, including relevant ethical requirements

Scope of compilation engagement will vary depending on circumstances of engagement. In

every case it will involve assisting management in preparation and presentation of entity’s
financial information in accordance with FRF, based on information provided by management

Since it is not an assurance engagement, it does not require practitioner to verify the accuracy
or completeness of information provided by management for compilation. Management retains
responsibility for financial information and basis on which it is prepared & presented.

Different FRF can be used to prepare and present financial information, ranging from a simple
entity-specific basis of accounting to established financial reporting standards.

Applicable financial reporting framework (AFRF)

The financial reporting framework adopted by management and, where appropriate, TCWG
in the preparation of financial information that is acceptable in view of the nature of the entity
and the objective of the financial information, or that is required by law or regulation.

Compilation engagement
An engagement in which a practitioner applies accounting and financial reporting expertise
to assist management in the preparation and presentation of financial information of an
entity in accordance with an AFRF, and reports as required by this ISRS.
Throughout this ISRS, the words “compile”, “compiling” and “compiled” are used in this context.

Practitioner
A professional accountant in public practice who conducts the compilation engagement. The
term includes the engagement partner or other members of the engagement team, or, as
applicable, the firm. Where this ISRS expressly intends that a requirement or responsibility
be fulfilled by the engagement partner, the term “engagement partner” rather than
“practitioner” is used. “Engagement partner” and “firm” are to be read as referring to their
public sector equivalents where relevant.
ISRS 4410 Page 218

Conduct of a Compilation Engagement in Accordance with this ISRS (Ref: 18-20)

Practitioner shall
 Have an understanding of entire text of this ISRS, including its application and other
explanatory material, to understand its objectives and to apply its requirements.
 Comply with each requirement of this ISRS unless a particular requirement is not relevant
to the compilation engagement.
 Not represent compliance with this ISRS unless thepractitioner has complied with all
requirements of this ISRS relevant to the compilation engagement.

Ethical Requirements (Ref: 21, A19-A21)

The practitioner shall comply with relevant ethical requirements.

The fundamental principles of professional ethics are:
 Integrity;
 Objectivity;
 Professional competence and due care;
 Confidentiality; and
 Professional behavior.
Under IESBA Code, in applying principle of integrity, a professional accountant is required to
not knowingly be associated with reports, returns, communications or other information where
the professional accountant believes that the information:
 Contains a materially false or misleading statement;
 Contains statements or information furnished recklessly; or
 Omits or obscures information required to be included where such omission or obscurity
would be misleading.
Independence requirements normally do not apply to compilation engagements; National
ethical codes or laws/regulations may specify requirements or disclosure rules regarding that

Professional Judgment (Ref: 22, A22)

The practitioner shall exercise professional judgment in conducting a compilation engagement

Professional judgment is essential to proper conduct of a compilation engagement. This is

because interpretation of relevant ethical requirements and requirements of this ISRS, and the
need for informed decisions throughout performance of a compilation engagement, require the
application of relevant knowledge and experience to the facts and circumstances of the
engagement. Professional judgment is necessary, in particular, when engagement involves
assisting management regarding decisions about:
 Acceptability of FRF that is to be used to prepare and present the financial information, in
view of the intended use of the financial information and the intended users thereof.
 The application of the AFRF
ISRS 4410 Page 219

Engagement Level Quality Control (Ref: 23)

The engagement partner shall take responsibility for:

 The overall quality of each compilation engagement to which that partner is assigned; and
 The engagement being performed in accordance with firm’s quality control policies and
procedures, by:
- Following appropriate procedures regarding acceptance and continuance of client
relationships and engagements;
- Being satisfied that engagement team collectively has the appropriate competence and
capabilities to perform the compilation engagement;
- Being alert for indications of non-compliance by members of the engagement team with
relevant ethical requirements, and determining appropriate action if matters come to
engagement partner’s attention indicating that members of the engagement team have
not complied with relevant ethical requirements;
- Directing, supervising and performing the engagement in compliance with professional
standards and applicable legal and regulatory requirements; and
- Taking responsibility for appropriate engagement documentation being maintained.

Engagement Acceptance and Continuance (Ref: 24-26, A31, A37, A40)

The practitioner shall not accept the engagement unless the practitioner has agreed the terms
of engagement with management, and the engaging party if different, including:
 The intended use and distribution of the financial information, and any restrictions on
either its use or its distribution where applicable;
 Identification of the AFRF; Acceptability may depend on:
- Nature of the entity, and whether it is a regulated form of entity
- Intended use of financial information and intended users.
- Whether AFRF is prescribed or specified, either in applicable law or regulation, or in a
contract or other form of agreement with a third party etc.
- Nature and form of financial information that is to be prepared and presented
 Objective and scope of the compilation engagement;
 Responsibilities of practitioner, including ethical requirements;
 The responsibilities of management for:
- The financial information, and for preparation and presentation in accordance with a
FRF that is acceptable in view of intended use of information and the intended users;
- The accuracy and completeness of the records, documents, explanations and other
information provided by management for the compilation engagement; and
- Judgments needed in preparation and presentation of financial information, including
those for which practitioner may provide assistance; and
 The expected form and content of the practitioner’s report.
ISRS 4410 Page 220

Engagement Letter or Other Form of Written Agreement

Practitioner shall record the agreed terms of engagement in an engagement letter or other
written agreement, prior to performing the engagement. An engagement letter confirms the
practitioner’s acceptance of the engagement and confirms such matters as:
 The objectives and scope of the engagement, including the understanding of the parties to
the engagement that the engagement is not an assurance engagement.
 The intended use and distribution of the financial information, and any restrictions on its
use or distribution (where applicable).
 The responsibilities of management in relation to the compilation engagement.
 The extent of the practitioner’s responsibilities, including that the practitioner will not
express an audit opinion or a review conclusion on the financial information.
 The form and content of the report to be issued by the practitioner for the engagement.

Recurring Engagements

On recurring compilation engagements, practitioner shall evaluate whether circumstances,

including changes in engagement acceptance considerations, require the terms of engagement
to be revised and whether there is need to remind management of existing terms

Practitioner may decide not to send a new engagement letter or other written agreement each
period. However, following factors may indicate that it is appropriate to revise the terms of the
compilation engagement, or to remind management or engaging party of existing terms:
 Any indication that management or engaging party misunderstands objective and scope of
the engagement.
 Any revised or special terms of the engagement.
 A recent change of senior management of the entity.
 A significant change in ownership of the entity.
 A significant change in nature or size of the entity’s business.
 A change in legal or regulatory requirements affecting the entity.
 A change in the AFRF.

Communication with Management and Those Charged with Governance (Ref: 27, A41)

Practitioner shall communicate with management or TCWG on a timely basis during the course
of the compilation engagement, all matters concerning the compilation engagement that, in the
practitioner’s professional judgment, are of sufficient importance to merit the attention of
management or those charged with governance, as appropriate.

Relevant circumstances include the significance and nature of the matter and any action
expected to be taken by management or TCWG. E.g. it may be appropriate to communicate a
significant difficulty encountered during engagement as soon as practicable if management or
TCWG are able to assist the practitioner to overcome the difficulty.
ISRS 4410 Page 221

Performing the Engagement

The Practitioner’s Understanding (Ref: 28, A42-A44)

Practitioner shall obtain an understanding of following matters:

 Entity’s business & operations, including accounting system and accounting records; and
(It is an ongoing process that occurs throughout the compilation engagement)
 The AFRF ,including its application in the entity’s industry.

Examples of matters the practitioner may consider in obtaining such understanding include:
 Size and complexity of the entity and its operations.
 Complexity of the FRF.
 Entity’s financial reporting obligations or requirements
(under applicable laws, under provisions of contract or other form of 3 rd party agreement)
 Level of development of entity’s management and governance structure.
 Level of development and complexity of entity’s financial accounting and reporting systems
and related controls.
 Nature of the entity’s assets, liabilities, revenues and expenses.

Compiling the Financial Information (Ref: 29, 30, 37, A45)

Practitioner shall compile financial information using the records, documents, explanations and
other information, including significant judgments, provided by management

Practitioner shall discuss with management, or TCWG, those significant judgments, for which
the practitioner has provided assistance in the course of compiling the financial information.
(e.g. in relation to a required accounting estimate or helping management with its consideration
of appropriate accounting policies)

Practitioner shall obtain an acknowledgement from management or TCWG that they have taken
responsibility for the final version of the compiled financial information.

Reading the Financial Information (Ref: 31, 32, 37, A46)

Prior to completion of compilation engagement, practitioner shall read the compiled financial
information in light of his understanding of entity’s business and operations, and of the AFRF

It would assist the practitioner in fulfilling the ethical obligations relevant to the engagement.

If, in the course of compilation engagement, practitioner becomes aware that the records,
documents, explanations or other information, including significant judgments, provided by
management for compilation engagement are incomplete, inaccurate or otherwise
unsatisfactory, practitioner shall bring that to the attention of management and request the
additional or corrected information.
ISRS 4410 Page 222

Proposing Amendments to the Financial Information (Ref: 34, A47-A51)

The practitioner shall propose the appropriate amendments to management, If practitioner

becomes aware during the course of the engagement that:
 The compiled financial information does not adequately refer to or describe AFRF;
 Amendments to compiled financial information are required for the financial information
not to be materially misstated; or
 The compiled financial information is otherwise misleading

It is reasonable for the practitioner to assume, in context of materiality, that users:

 Have a reasonable knowledge of business and economic activities and accounting, and a
willingness to study the financial information with reasonable diligence;
 Understand that financial information is prepared and presented to levels of materiality;
 Recognize the uncertainties inherent in the measurement of amounts based on the use of
estimates, judgment and the consideration of future events; and
 Make reasonable economic decisions on the basis of information in financial information.

Conditions Requiring Practitioner to Withdraw from Engagement (Ref: 33-36, A52)

 Practitioner shall withdraw from the engagement and inform management and TCWG of
the reasons for withdrawing where:
- If practitioner is unable to complete the compilation engagement because management
has failed to provide records, documents, explanations or other information, including
significant judgments; or
- If the management declines, or does not permit practitioner to make proposed
amendments to compiled financial information
 Such communication provides an opportunity to explain practitioner’s ethical obligations.
 If withdrawal from engagement is not possible, practitioner shall determine professional
and legal responsibilities applicable in the circumstances.

Documentation (Ref: 38, A54)

Practitioner shall include in the engagement documentation:

 Significant matters arising during the engagement and how those were addressed;
 A record of how compiled financial information reconciles with the underlying records,
documents, explanations and other information, provided by management; and
 A copy of the final version of compiled financial information for which management or
TCWG has acknowledged their responsibility, and the practitioner’s report.

Practitioner may consider also including a copy of trial balance, summary of significant
accounting records or other information that practitioner used to perform compilation.
ISRS 4410 Page 223

The Practitioner’s Report (Ref: 39-41, A56-A62)

Practitioner’s report is not a vehicle to express an opinion or conclusion on financial

information. The practitioner’s report shall be in writing, and shall include following elements:
 The report title;
 The addressee (normally party who engaged practitioner, ordinarily the management)
 A statement that practitioner has compiled the financial information based on the
information provided by management;
 A description of the responsibilities of management or TWG, in relation to compilation
engagement and the financial information;
 Identification of AFRF and, if a special purpose FRF is used, a description or reference to the
description of that special purpose FRF in the financial information;
 Identification of the financial information, including title of each element of the financial
information, and the date of financial information or the period to which it relates;
 A description of practitioner’s responsibilities in compiling the financial information,
including that engagement was in complaint with this ISRS and ethical requirements;
 A description of what a compilation engagement entails in accordance with this ISRS;
 Explanations that:
- Since a compilation engagement is not an assurance engagement, practitioner is not
required to verify the accuracy or completeness of information provided by
management for the compilation; and
- Accordingly, practitioner does not express an audit opinion or a review conclusion on
whether financial information is prepared in accordance with AFRF
 If financial information is prepared using special purpose FRF, explanatory paragraph:
- That describes the purpose for which financial information is prepared and, if necessary,
intended users, or contains a reference to a note in the financial information that
discloses this information; and
- That draws the attention of readers of report to the fact that the financial information is
prepared in accordance with a special purpose framework and that, as a result, the
information may not be suitable for other purposes;
 The date of the practitioner’s report on which compilation engagement was completed;
 The practitioner’s signature; and
 The practitioner’s address.

Practitioner may consider it appropriate to indicate that the practitioner’s report is intended
solely for the specified intended users of the financial information. In case of Special Purpose
Framework, such indication would be beneficial in alerting the readers of the report.

Important Paragraphs 1, 5, 6, 17, 24, 29-40

ISRS 4410 Page 224

Appendix 1

Illustrative Engagement Letter for a Compilation Engagement

This engagement letter illustrates the following circumstances (Assumptions):

 F/S are to be compiled for sole use by management of a company (ABC Company), and use of the F/S
will be restricted to management. Use and distribution of practitioner’s report is also restricted to
management.
 Compiled F/S will comprise only the balance sheet of the company as at December 31, 20X1 and the
income statement for the year then ended, without notes.
 Management has determined that the F/S be prepared on an accrual basis as described.

To the Management1 of ABC Company:

[The objective and scope of the compilation engagement]
You have requested that we provide the following services:

On the basis of information that you will provide, we will assist you in the preparation and
presentation of the following F/S for ABC Company: the balance sheet of ABC Company as at
December 31, 20X1 and the income statement for the year then ended, on the historical cost
basis, reflecting all cash transactions with the addition of trade accounts payable, trade accounts
receivable less an allowance for doubtful accounts, inventory accounted for on an average cost
basis, current income taxes payable as at the reporting date, and capitalization of significant
long-lived assets at historical cost amortized over their estimated useful lives on the straight-
line basis. These F/S will not include explanatory notes, other than a note describing the basis
of accounting as set out in this engagement letter.

The purpose for which the F/S will be used is to provide full-year financial information showing
the entity’s financial position at the financial reporting date of December 31, 20X1 and financial
performance for the year then ended. The financial statements will be solely for your use, and
will not be distributed to other parties.

Our Responsibilities

A compilation engagement involves applying expertise in accounting and financial reporting to

assist you in the preparation and presentation of financial information. Since a compilation
engagement is not an assurance engagement, we are not required to verify the accuracy or
completeness of the information you provide to us for the compilation engagement, or
otherwise to gather evidence to express an audit opinion or a review conclusion. Accordingly,
we will not express an audit opinion or a review conclusion on whether the financial statements
are prepared in accordance with the basis of accounting you have specified, as described above.

We will perform the compilation engagement in accordance with the International Standard on
Related Services (ISRS) 4410(Revised), Compilation Engagements. ISRS 4410(Revised)
requires that, in undertaking this engagement, we comply with relevant ethical requirements,
ISRS 4410 Page 225

including principles of integrity, objectivity, professional competence and due care. For that
purpose, we are required to comply with the International Ethics Standards Board for
Professional Accountants’ Code of Ethics for Professional Accountants (IESBA Code).

Your Responsibilities
The compilation engagement to be performed is conducted on the basis that you acknowledge
and understand that our role is to assist you in the preparation and presentation of the F/S in
accordance with the financial reporting framework you have adopted for the financial
statements. Accordingly, you have the following overall responsibilities that are fundamental to
our undertaking the compilation engagement in accordance with ISRS 4410(Revised):

(a) Responsibility for the F/S and the preparation and presentation thereof in accordance with
a FRF that is acceptable in view of the intended use of the F/S and the intended users.
(b) Responsibility for the accuracy and completeness of the records, documents, explanations
and other information you provide to us for the purpose of compiling the financial
statements.
(c) Responsibility for the judgments needed in the preparation and presentation of the
financial statements, including those for which we may provide assistance in the course of
the compilation engagement.

Our Compilation Report

As part of our engagement, we will issue our report attached to the financial statements
compiled by us, which will describe the financial statements, and the work we performed for
this compilation engagement [see attached]. The report will also note that the use of the
financial statements is restricted to the purpose set out in this engagement letter, and that use
and distribution of our report provided for the compilation engagement is restricted to you, as
the management of ABC Company.

Please sign and return the attached copy of this letter to indicate your acknowledgement of, and
agreement with, the arrangements for our engagement to compile the financial statements
described herein, and our respective responsibilities.
[Other relevant information]
[Insert other information, such as fee arrangements, billings and other specific terms, as
appropriate.]

XYZ & Co.

Acknowledged and agreed on behalf of the management of ABC Company by
(signed)
Name and Title
Date
ISRS 4410 Page 226

Illustration 1: Practitioner’s report for an engagement to compile F/S using a general purpose FRF.

General purpose F/S required under applicable law that specifies that entity’s F/S are to be prepared
applying IFRS for Small- and Medium sized Entities (IFRS for SMEs).

PRACTITIONER’S COMPILATION REPORT

[To Management of ABC Company]

We have compiled the accompanying F/S of ABC Company based on information you have
provided. These financial statements comprise the statement of financial position of ABC
Company as at December 31, 20X1, the statement of comprehensive income, statement of
changes in equity and statement of cash flows for the year then ended, and a summary of
significant accounting policies and other explanatory information.

WeperformedthiscompilationengagementinaccordancewithInternational Standard on Related

Services 4410(Revised), Compilation Engagements.

We have applied our expertise in accounting and financial reporting to assist you in the
preparation and presentation of these F/S in accordance with International Financial Reporting
Standards for Small- and Medium-sized Entities (IFRS for SMEs). We have complied with
relevant ethical requirements, including principles of integrity, objectivity, professional
competence and due care.

These F/S and the accuracy and completeness of the information used to compile them are your
responsibility.

Since a compilation engagement is not an assurance engagement, we are not required to verify
the accuracy or completeness of the information you provided to us to compile these F/S.
Accordingly, we do not express an audit opinion or a review conclusion on whether these F/S
are prepared in accordance with IFRS for SMEs.

[Practitioner’s signature]
[Date of practitioner’s report]
[Practitioner’s address]
ISRS 4410 Page 227

Illustration 3: Practitioner’s report for an engagement to compile F/S using the basis of accounting
specified in a contract.
 F/S prepared to comply with provisions of a contract, applying basis of accounting specified in
contract.
 Practitioner is engaged by a party other than management or TCWG of the entity.
 The F/S are intended for use only by the parties specified in the contract.
 Distribution and use of practitioner’s report is restricted to the intended users specified in the contract.

PRACTITIONER’S COMPILATION REPORT

[To the Engaging Party]

We have compiled the accompanying F/S of ABC Company (“the Company”) based on
information provided by the management of the Company(“management”). These F/S comprise
[name all the elements of the F/S prepared under the basis of accounting specified in the
Contract and the period/date to which they relate].

We performed this compilation engagement in accordance with International Standard on

Related Services 4410(Revised), Compilation Engagements. We have applied our expertise in
accounting and financial reporting to assist management in the preparation and presentation
of these F/S on the basis of accounting described in Note X to the F/S.

We have complied with relevant ethical requirements, including principles of integrity,

objectivity, professional competence and due care.

These F/S and the accuracy and completeness of the information used to compile them are
management’s responsibility.

Since a compilation engagement is not an assurance engagement, we are not required to verify
the accuracy or completeness of the information provided to us by management to compile
these F/S. Accordingly, we do not express an audit opinion or a review conclusion on whether
these F/S are prepared in accordance with the basis of accounting described in Note X.

As stated in Note X, the F/S are prepared and presented on the basis described in Clause Z of
the provisions of the Company’s contract with XYZ Limited dated [insert date of the relevant
contract/agreement] (“the Contract”), and for the purpose described in Note Y to the F/S.
Accordingly, these F/S are intended for use only by the parties specified in the Contract, and
may not be suitable for other purposes.

Our compilation report is intended solely for the parties specified in the Contract, and should
not be distributed to other parties.
[Practitioner’s signature]
[Date of practitioner’s report]
[Practitioner’s address]
ISRS 4410 Page 228

Illustration 5: Practitioner’s report for an engagement to compile financial information that is an

element, account or item, being [insert appropriate reference to information required for a regulatory
compliance purpose].
 Financial information prepared for a special purpose, i.e., to comply with FRF established
by a regulator, in accordance with provisions established by the regulator prescribing the
form and content of the financial information.
 The AFRF is a compliance framework.
 The financial information is intended to meet the needs of particular users, and use of the
financial information is restricted to those users.
 Distribution of the practitioner’s report is restricted to the intended users.

PRACTITIONER’S COMPILATION REPORT

[To the Management of ABC Company]
We have compiled the accompanying schedule of [identify the compiled financial information]
of ABC Company as at December 31, 20X1(“the Schedule”) based on information you have
provided.

We performed this compilation engagement in accordance with ISRS 4410(Revised).

We have applied our expertise in accounting and financial reporting to assist you in the
preparation and presentation of the Schedule as prescribed by [insert name of or reference to
the relevant regulation]. We have complied with relevant ethical requirements, including
principles of integrity, objectivity, professional competence and due care.
This Schedule and the accuracy and completeness of the information used to compile it are your
responsibility.
Since a compilation engagement is not an assurance engagement, we are not required to verify
the accuracy or completeness of the information you provided to us to compile the Schedule.
Accordingly, we do not express an audit opinion or a review conclusion on whether the Schedule
is prepared in accordance with [insert name of or reference to AFRF as specified in the relevant
regulation].
As stated in Note X, the Schedule is prepared and presented on the basis prescribed by [insert
name of or reference to the applicable financial reporting framework as specified in the relevant
regulation], for the purpose of ABC Company’s compliance with [insert name of or reference to
the relevant regulation] Accordingly, the Schedule is for use only in connection with that
purpose and may not be suitable for any other purpose.
Our compilation report is intended solely for the use of ABC Company and Regulator F, and
should not be distributed to parties other than ABC Company or Regulator F.
[Practitioner’s signature]
[Date of the practitioner’s report]
[Practitioner’s address]
Assurance Engagements Page 229

Assurance
Engagements
Assurance Engagements Page 230

ELEMENTS OF ASSURANCE ENGAGEMENT (REF: FRAMEWORK FOR ASSURANCE ENGAGEMENTS )

An engagement in which a practitioner aims to obtain sufficient appropriate evidence in order

to express a conclusion designed to enhance the degree of confidence of the intended users
other than the responsible party about the subject matter information (that is, the outcome of
the measurement or evaluation of an underlying subject matter against criteria).

Source: Handbook of International Quality Control, Auditing, Review, Other Assurance, and
Related Pronouncements, 2016-2017 Edition

An assurance engagement will consist of the following 5 elements:

1) A three party relationship:

 Practitioner (e.g. audit firm)

 Responsible party (e.g. directors and management)
 Intended users: (e.g. shareholders)

2) Subject matter:

This is the data such as the financial statements that have been prepared by the responsible
party for the practitioner to evaluate.

3) Suitable criteria:

Rules against which the subject matter is evaluated in order to reach an opinion. In a statutory
audit this would be the AFRF.

4) Evidence:

Information used by the practitioner in arriving at the conclusion on which their opinion is
based. This must be sufficient and appropriate.

5) Assurance report:

The report containing the practitioner's opinion. This is issued to intended user after the
collection of evidence.
Assurance Engagements Page 231

SIMILARITIES BETWEEN AUDIT AND ASSURANCE STANDARDS

Tutor’s Note:

After covering the ISAs in much detail, users are suggested to skim the contents of ISA 3000 to
make themselves familiar enough with the assurance standards. This is important to note that
ISAEs are written in consistency with the ISAs and much guidance are approximately the same
except with the impact that we are not talking about, we are talking about assurance. Some of
the common replacements of words and jargons could be:

Words used in ISAs Relative words used in ISAEs

Auditor Practitioner
Financial Statements (F/S) Subject Matter
Financial Reporting Framework (FRF) Criteria
Audit Evidence Evidence
Management Responsible Party
Users of the financial statements Intended users

So you may understand that those specific guidance that were available in audit are generalized
over assurance engagements as well in aforesaid words.

ISAE Relevant
Relevant Topic
3000 ISA

 Conduct of a Engagement in Accordance 14-20, 37, 38 ISA-200

with ISAE/ISRE A21-A34, A76-A85, A170
 Complying with Relevant Requirements
 Ethical Requirements
 Professional Skepticism
 Professional Judgment
 Acceptance & Continuance of Client 21-23 ISA-210
Relationships & Engagements A30-A34
 Preconditions 24-26, 30 ISA-210
 Additional Considerations When Wording of A35-A56
Practitioner’s Report Is Prescribed by Law
or Regulation
 Agreeing the Terms of Engagement 27 ISA-210
A57-A58
 Recurring Engagements 28, 29 ISA-210
Assurance Engagements Page 232

 Acceptance of a Change in the Terms of the

Review Engagement
 Request to Change Nature of Engagement
 Engagement Level Quality Control 31-36 ISA-220
A60-A75 ISQM
 Documentation 79-83 ISA-230
A193-A200
 Planning 40-43 ISA-300
A86-A91
 Materiality 44 ISA-320
A92-A100
 Evaluation of Misstatements 51 ISA-450
A118-A119
 Subsequent Events 61 ISA-560
A140-A141
 Written Representations 56-60 ISA-580
A136-A138
 Use of work performed by others 52-55, 70 ISA-620
A120-A135, A185-A187
 Consideration of applicable financial 63 ISA-700
reporting framework in Relation to the A143-A145
Financial Statements
 Form of the Conclusion 64-65 ISA-700
A146-154
 The Practitioner’s Report 67-69 ISA-700
A158-A184
 Practitioner’s Report Prescribed by Law or 30 ISA-700
Regulation
 Modified Conclusion 66, 74-76 ISA-705
A155-A157, A188-A190
 Responsibilities for accompanying 62 ISA-720
information A142

After skimming ISAE 3000, users should make themselves familiar with the subject matter and
differences of different other ISAEs having their own specific guidance over some specific area
(explained in overall map section in upcoming pages).
Assurance Engagements Page 233

Map of Assurance Standards

Key Considerations regarding different ISAEs

Title Key Considerations Annexures

ISAE- Examination of  Difference between Forecast  No Annexure

3400 Prospective & Projection  Report Pattern given
Financial  2 Fold opinion (negative and in Para 28 & 29
Information positive)
ISAE- Controls at Service  Difference between ISAE  Service Organization
3402 Organization 3402 and ISA 402 Statements
 Service entity, User entity and  Assurance reports
auditors  Modified Assurance
 Type 1 & Type 2 Report Reports
 Concept of Subservice Entity
ISAE- Greenhouse Gas  Purpose of Greenhouse Gas  Description of
3410 Statement Statement different scope
 Different type of Emissions emissions
 Assurance Reports
ISAE- Compilation of Pro  Concept of Pro Forma  Report with
3420 Forma Financial Financial Information unmodified opinion
Information  Local example in Pakistan
included in a  (Subsidiary as per 1st
Prospectus Schedule – Securities Act
2015)

Key Definitions (ISAE 3000)

Assurance engagement

An engagement in which a practitioner aims to obtain sufficient appropriate evidence in order

to express a conclusion designed to enhance the degree of confidence of the intended users
other than the responsible party about the subject matter information (that is, the outcome of
the measurement or evaluation of an underlying subject matter against criteria).

Each assurance engagement is classified on two dimensions;

Assurance Engagements Page 234

(i) Either a reasonable assurance engagement or a limited assurance engagement:

Reasonable assurance engagement

An assurance engagement in which the practitioner reduces engagement risk to an
acceptably low level in the circumstances of the engagement as the basis for the
practitioner’s conclusion. The practitioner’s conclusion is expressed in a form that conveys
the practitioner’s opinion on the outcome of the measurement or evaluation of the
underlying subject matter against criteria.

Limited assurance engagement

An assurance engagement in which the practitioner reduces engagement risk to a level that
is acceptable in the circumstances of the engagement but where that risk is greater than for
a reasonable assurance engagement as the basis for expressing a conclusion in a form that
conveys whether, based on the procedures performed and evidence obtained, a matter(s)
has come to the practitioner’s attention to cause the practitioner to believe the subject
matter information is materially misstated. The nature, timing, and extent of procedures
performed in a limited assurance engagement is limited compared with that necessary in a
reasonable assurance engagement but is planned to obtain a level of assurance that is, in
the practitioner’s professional judgment, meaningful. To be meaningful, the level of
assurance obtained by the practitioner is likely to enhance the intended users’ confidence
about the subject matter information to a degree that is clearly more than inconsequential.

(ii) Either an attestation engagement or a direct engagement:

Attestation engagement
An assurance engagement in which a party other than the practitioner measures or
evaluates the underlying subject matter against the criteria. A party other than the
practitioner also often presents the resulting subject matter information in a report or
statement. In some cases, however, the subject matter information may be presented by the
practitioner in the assurance report. In an attestation engagement, the practitioner’s
conclusion addresses whether the subject matter information is free from material
misstatement. The practitioner’s conclusion may be phrased in terms of:
(i) The underlying subject matter and the applicable criteria;
(ii) The subject matter information and the applicable criteria; or
(iii) A statement made by the appropriate party.

Direct engagement
An assurance engagement in which the practitioner measures or evaluates the underlying
subject matter against the applicable criteria and the practitioner presents the resulting
subject matter information as part of, or accompanying, the assurance report. In a direct
engagement, the practitioner’s conclusion addresses the reported outcome of the
measurement or evaluation of the underlying subject matter against the criteria.
Assurance Engagements Page 235

Assurance Engagements other than Audits or Reviews of Historical

Financial Information (ISAE 3000)

Conduct of an Assurance Engagement in Accordance with ISAE (Para 14-19)

The practitioner shall comply with this ISAE and any subject matter-specific ISAE relevant to
the engagement.

The practitioner shall not represent compliance with this or any other ISAE unless the
practitioner has complied with the requirements of this ISAE and any other ISAE relevant to the
engagement.

Complying with Relevant Requirements

Practitioner shall comply with each requirement of this ISAE and of any relevant subject matter-
specific ISAE unless, in the circumstances of the engagement the requirement is not relevant
because it is conditional and the condition does not exist.

In exceptional circumstances, the practitioner may judge it necessary to depart from a relevant
requirement in an ISAE. In such circumstances, the practitioner shall perform alternative
procedures to achieve the aim of that requirement. This is normally required where the
requirement is for a specific procedure to be performed and, in the specific circumstances of the
engagement, that procedure would be ineffective in achieving it’s aim.

Ethical Requirements (Para 20)

The practitioner shall comply with relevant Parts of the IESBA Code related to assurance
engagements, or other professional requirements, or requirements imposed by law or
regulation, that are at least as demanding.

Acceptance and Continuance (Para 21-30)

The practitioner shall accept or continue an assurance engagement only when:

 The practitioner has no reason to believe that relevant ethical requirements, including
independence, will not be satisfied;
 The practitioner is satisfied that those persons who are to perform the engagement
collectively have the appropriate competence and capabilities; and
 The basis upon which the engagement is to be performed has been agreed, through:
- Establishing that the preconditions for an assurance engagement are present; and
- Confirming that there is a common understanding between the practitioner and the
engaging party of the terms of the engagement, including the practitioner’s reporting
responsibilities.
Assurance Engagements Page 236

If the engagement partner obtains information that would have caused the firm to decline the
engagement had that information been available earlier, the engagement partner shall
communicate that information promptly to the firm, so that the firm and the engagement
partner can take the necessary action.

Preconditions for the Assurance Engagement

Practitioner shall, on the basis of a preliminary knowledge of the engagement circumstances
and discussion with the appropriate party(ies), determine whether:

(a) Roles and responsibilities of the appropriate parties are suitable in the circumstances; and
(b) The engagement exhibits all of the following characteristics:
 The underlying subject matter is appropriate;
 The criteria that the practitioner expects to be applied in the preparation of the subject
matter information are suitable for the engagement circumstances, including that they
exhibit the following characteristics:
- Relevance.
- Completeness.
- Reliability.
- Neutrality.
- Understandability.

 The criteria that the practitioner expects to be applied in the preparation of the subject
matter information will be available to the intended users;
 The practitioner expects to be able to obtain the evidence needed to support the
practitioner’s conclusion;
 The practitioner’s conclusion, in the form appropriate to either a reasonable assurance
engagement or a limited assurance engagement, is to be contained in a written report; and
 A rational purpose including, in the case of a limited assurance engagement that the
practitioner expects to be able to obtain a meaningful level of assurance.

If the preconditions for an assurance engagement are not present, the practitioner shall discuss
the matter with the engaging party. If changes cannot be made to meet the preconditions, the
practitioner shall not accept the engagement as an assurance engagement unless required by
law or regulation to do so. Practitioner shall not include any reference within the assurance
report to the engagement having been conducted in accordance with this ISAE or any other
ISAE(s).

Limitation on Scope Prior to Acceptance of the Engagement

If the engaging party imposes a limitation on the scope of the practitioner’s work in the terms
of a proposed assurance engagement such that the practitioner believes the limitation will
result in the practitioner disclaiming a conclusion on the subject matter information, the
practitioner shall not accept such an engagement as an assurance engagement, unless required
by law or regulation to do so.
Assurance Engagements Page 237

Agreeing on the Terms of the Engagement

The practitioner shall agree the terms of the engagement with the engaging party. The agreed
terms of the engagement shall be specified in sufficient detail in an engagement letter or other
suitable form of written agreement, written confirmation, or in law or regulation.

On recurring engagements, the practitioner shall assess whether circumstances require the
terms of the engagement to be revised and whether there is a need to remind the engaging party
of the existing terms of the engagement.

Acceptance of a Change in the Terms of the Engagement

The practitioner shall not agree to a change in the terms of the engagement where there is no
reasonable justification for doing so. If such a change is made, the practitioner shall not
disregard evidence that was obtained prior to the change.

Assurance Report Prescribed by Law or Regulation

In some cases, law or regulation of the relevant jurisdiction prescribes the layout or wording of
the assurance report. In these circumstances, the practitioner shall evaluate:
 Whether intended users might misunderstand the assurance conclusion; and
 If so, whether additional explanation in the assurance report can mitigate possible
misunderstanding.

If the practitioner concludes that additional explanation in the assurance report cannot mitigate
possible misunderstanding, the practitioner shall not accept the engagement, unless required
by law or regulation to do so. Practitioner shall not include any reference within the assurance
report to the engagement having been conducted in accordance with this ISAE or any other
ISAE.

Quality Control (Para 31-36)

Characteristics of the Engagement Partner

The engagement partner shall:

 Be a member of a firm that applies ISQM, or other professional requirements, or
requirements in law or regulation, that are at least as demanding as ISQM;
 Have competence in assurance skills and techniques developed through extensive training
and practical application; and
 Have sufficient competence in the underlying subject matter and its measurement or
evaluation to accept responsibility for the assurance conclusion
Assurance Engagements Page 238

Assignment of the Team

The engagement partner shall:

 Be satisfied that those persons who are to perform the engagement collectively have the
appropriate competence and capabilities to:
- Perform the engagement in accordance with relevant standards and applicable legal and
regulatory requirements; and
- Enable an assurance report that is appropriate in the circumstances to be issued.
 Be satisfied that the practitioner will be able to be involved in the work of:
- A practitioner’s expert where the work of that expert is to be used; and
- Another practitioner, not part of the engagement team, where the assurance work of that
practitioner is to be used,

to an extent that is sufficient to accept responsibility for the assurance conclusion on

the subject matter information.

Responsibilities of the Engagement Partner

Engagement partner shall take responsibility for overall quality on engagement including
responsibility for:
 Appropriate procedures being performed regarding the acceptance and continuance of
client relationships and engagements;
 The engagement being planned and performed (including appropriate direction and
supervision) to comply with professional standards and applicable legal and regulatory
requirements;
 Reviews being performed in accordance with the firm’s review policies and procedures, and
reviewing the engagement documentation on or before the date of the assurance report;
 Appropriate engagement documentation being maintained to provide evidence of
achievement of the practitioner’s objectives, and that the engagement was performed in
accordance with relevant ISAEs and relevant legal and regulatory requirements; and
 Appropriate consultation being undertaken by the engagement team on difficult or
contentious matters.

Throughout the engagement, the engagement partner shall remain alert, through observation
and making inquiries as necessary, for evidence of non-compliance with relevant ethical
requirements by members of the engagement team. If any non-compliance come to engagement
partner’s attention, the engagement partner, in consultation with others in the firm, shall
determine the appropriate action.

Engagement partner shall consider the results of the firm’s monitoring process as evidenced in
the latest information circulated by the firm and, if applicable, other network firms and whether
deficiencies noted in that information may affect the assurance engagement.
Assurance Engagements Page 239

Engagement Quality Control Review

For those engagements, if any, for which a quality control review is required by law or
regulation or for which the firm has determined that an engagement quality control review is
required:
 The engagement partner shall take responsibility for discussing significant matters arising
during the engagement with the engagement quality control reviewer, and not date the
assurance report until completion of that review; and
 The engagement quality control reviewer shall perform an objective evaluation of the
significant judgments made by the engagement team, and the conclusions reached in
formulating the assurance report. This evaluation shall involve:
- Discussion of significant matters with the engagement partner;
- Review of the subject matter information and the proposed assurance report;
- Review of selected engagement documentation relating to the significant judgments the
engagement team made and the conclusions it reached; and
- Evaluation of the conclusions reached in formulating the assurance report and
consideration of whether the proposed assurance report is appropriate.

Professional Skepticism, Professional Judgment, and Assurance Skills and Techniques

(Para 36-39)

The practitioner shall plan and perform an engagement with professional skepticism,
recognizing that circumstances may exist that cause the subject matter information to be
materiality misstated.

The practitioner shall exercise professional judgment in planning and performing an assurance
engagement, including determining the nature, timing and extent of procedures.

Planning and Performing the Engagement (Para 40-47)

Planning

The practitioner shall plan the engagement so that it will be performed in an effective manner

The practitioner shall determine whether the criteria are suitable for the engagement
circumstances

If it is discovered after engagement acceptance that one or more preconditions for an assurance
engagement is not present, the practitioner shall discuss the matter with the appropriate
party(ies), and shall determine:
 Whether the matter can be resolved to the practitioner’s satisfaction;
 Whether it is appropriate to continue with the engagement; and
 Whether and, if so, how to communicate the matter in the assurance report.
Assurance Engagements Page 240

If it is discovered after the engagement has been accepted that some or all of the applicable
criteria are unsuitable or some or all of the underlying subject matter is not appropriate for an
assurance engagement, the practitioner shall consider withdrawing from the engagement, if
withdrawal is possible under applicable law or regulation. If the practitioner continues with the
engagement, the practitioner shall express a qualified or adverse conclusion, or disclaimer of
conclusion, as appropriate in the circumstances.

Materiality
The practitioner shall consider materiality when:
 Planning and performing the assurance engagement, including when determining the
nature, timing and extent of procedures; and
 Evaluating whether the subject matter information is free from material misstatement.

Understanding the Underlying Subject Matter and Other Engagement Circumstances

The practitioner shall make inquiries of the appropriate party(ies) regarding:

 Whether they have knowledge of any actual, suspected or alleged intentional misstatement
or non-compliance with laws and regulations affecting the subject matter information;
 Whether the responsible party has an internal audit function and, if so, make further
inquiries to obtain an understanding of the activities and main findings of the internal audit
function with respect to the subject matter information; and
 Whether the responsible party has used any experts in the preparation of the subject matter
information.

Obtaining Evidence (Para 48-60)

Risk Consideration and Responses to Risks

Limited Assurance Reasonable Assurance

Based on the practitioner’s Based on the practitioner’s understanding the
understanding, the practitioner shall: practitioner shall:
(a) Identify areas where a material (a) Identify and assess the risks of material
misstatement of the subject matter misstatement in the subject matter
information is likely to arise; and information; and
(b) Design and perform procedures to (b) Design and perform procedures to respond to
address those areas and to obtain the assessed risks and to obtain reasonable
limited assurance to support the assurance to support the practitioner’s
practitioner’s conclusion. conclusion. In addition to any other
If the practitioner becomes aware of a procedures on the subject matter information
matter(s) that causes the practitioner that are appropriate in the engagement
to believe that the subject matter circumstances, the practitioner’s procedures
information may be materially shall include obtaining sufficient appropriate
Assurance Engagements Page 241

misstated, the practitioner shall design evidence as to the operating effectiveness of

and perform additional procedures to relevant controls over the subject matter
obtain further evidence until the information when:
practitioner is able to: (i) The practitioner’s assessment of the risks of
(a) Conclude that the matter is not material misstatement includes an
likely to cause the subject matter expectation that controls are operating
information to be materially effectively, or
misstated; or (ii) Procedures other than testing of controls
(b) Determine that the matter(s) cannot alone provide sufficient
causes the subject matter appropriate evidence.
information to be materially
misstated.

When designing and performing procedures, the practitioner shall consider the relevance and
reliability of the information to be used as evidence. If:
 Evidence obtained from one source is inconsistent with that obtained from another; or
 The practitioner has doubts about the reliability of information to be used as evidence,

The practitioner shall determine what changes or additions to procedures are necessary to
resolve the matter, and shall consider the effect of the matter, if any, on other aspects of the
engagement.

The practitioner shall accumulate uncorrected misstatements identified during the engagement
other than those that are clearly trivial.

Work Performed by a Practitioner’s Expert

When the work of a practitioner’s expert is to be used, the practitioner shall also:
 Evaluate whether the practitioner’s expert has the necessary competence, capabilities and
objectivity for the practitioner’s purposes. In the case of a practitioner’s external expert, the
evaluation of objectivity shall include inquiry regarding interests and relationships that may
create a threat to that expert’s objectivity;
 Obtain a sufficient understanding of the field of expertise of the practitioner’s expert;
 Agree with the practitioner’s expert on the nature, scope and objectives of that expert’s
work; and
 Evaluate the adequacy of the practitioner’s expert’s work for the practitioner’s purposes.

Work Performed by Another Practitioner, a Responsible Party’s or Measurer’s or

Evaluator’s Expert, or an Internal Auditor

When the work of another practitioner is to be used, the practitioner shall evaluate whether
that work is adequate for the practitioner’s purposes.
Assurance Engagements Page 242

If information to be used as evidence has been prepared using the work of a responsible party’s
or a measurer’s or evaluator’s expert, the practitioner shall, to the extent necessary having
regard to the significance of that expert’s work for the practitioner’s purposes:
 Evaluate the competence, capabilities and objectivity of that expert;
 Obtain an understanding of the work of that expert; and
 Evaluate the appropriateness of that expert’s work as evidence.

If the practitioner plans to use the work of internal audit function, practitioner shall evaluate
the following:
 The extent to which the internal audit function’s organizational status and relevant policies
and procedures support the objectivity of the internal auditors;
 The level of competence of the internal audit function;
 Whether the internal audit function applies a systematic and disciplined approach, including
quality control; and
 Whether the work of the internal audit function is adequate for the purposes of the
engagement.

Written Representations

The practitioner shall request from the appropriate party(ies) a written representation:
 That it has provided the practitioner with all information of which the appropriate party(ies)
is aware that is relevant to the engagement.
 Confirming the measurement or evaluation of the underlying subject matter against the
applicable criteria, including that all relevant matters are reflected in the subject matter
information.

If, in addition to required representations, the practitioner determines that it is necessary to

obtain one or more written representations to support other evidence relevant to the subject
matter information, the practitioner shall request such other written representations.

When written representations relate to matters that are material to the subject matter
information, the practitioner shall:
 Evaluate their reasonableness and consistency with other evidence obtained, including
other representations (oral or written); and
 Consider whether those making the representations can be expected to be well-informed on
the particular matters.

The date of the written representations shall be as near as practicable to, but not after, the date
of the assurance report.
Assurance Engagements Page 243

Requested Written Representations Not Provided or Not Reliable

If one or more of the requested written representations are not provided or the practitioner
concludes that there is sufficient doubt about the competence, integrity, ethical values, or
diligence of those providing the written representations, or that the written representations are
otherwise not reliable, the practitioner shall:
 Discuss the matter with the appropriate party(ies);
 Reevaluate the integrity of those from whom the representations were requested or received
and evaluate the effect that this may have on the reliability of representations (oral or
written) and evidence in general; and
 Take appropriate actions, including determining the possible effect on the conclusion in the
assurance report.

Subsequent Events (Para 61)

When relevant to the engagement, the practitioner shall consider the effect on the subject
matter information and on the assurance report of events up to the date of the assurance report,
and shall respond appropriately to facts that become known to the practitioner after the date of
the assurance report, that, had they been known to the practitioner at that date, may have
caused the practitioner to amend the assurance report.

Other Information (Para 62)

When documents containing the subject matter information and the assurance report thereon
include other information, the practitioner shall read that other information to identify material
inconsistencies, if any, with the subject matter information or the assurance report and, if on
reading that other information, the practitioner:
 Identifies a material inconsistency between that other information and the subject matter
information or the assurance report; or
 Becomes aware of a material misstatement of fact in that other information that is unrelated
to matters appearing in the subject matter information or the assurance report,

the practitioner shall discuss the matter with the appropriate party(ies) and take further action
as appropriate.

Description of Applicable Criteria (Para 63)

The practitioner shall evaluate whether the subject matter information adequately refers to or
describes the applicable criteria.
Assurance Engagements Page 244

Forming the Assurance Conclusion (Para 62-66)

The practitioner shall evaluate the sufficiency and appropriateness of the evidence obtained in
the context of the engagement and, if necessary in the circumstances, attempt to obtain further
evidence.

The practitioner shall form a conclusion about whether the subject matter information is free
from material misstatement. In forming that conclusion, the practitioner shall consider the
practitioner’s conclusion regarding the sufficiency and appropriateness of evidence obtained
and an evaluation of whether uncorrected misstatements are material, individually or in the
aggregate.

If the practitioner is unable to obtain sufficient appropriate evidence, a scope limitation exists
and the practitioner shall express a qualified conclusion, disclaim a conclusion, or withdraw
from the engagement, where withdrawal is possible under applicable law or regulation, as
appropriate.

Preparing the Assurance Report (Para 67-71)

The assurance report shall be in writing and shall contain a clear expression of the practitioner’s
conclusion about the subject matter information.

Practitioner’s conclusion shall be clearly separated from information or explanations that are
not intended to affect practitioner’s conclusion, including any Emphasis of Matter, Other Matter,
findings related to particular aspects of the engagements, recommendations or additional
information included in the assurance report.

Assurance Report Content

The assurance report shall include, at a minimum, the following basic elements:
 A title that clearly indicates the report is an independent assurance report.
 An addressee.
 An identification or description of the level of assurance obtained by the practitioner, the
subject matter information and, when appropriate, the underlying subject matter. When the
practitioner’s conclusion is phrased in terms of a statement made by the appropriate
party(ies), that statement shall accompany the assurance report, be reproduced in the
assurance report or be referenced therein to a source that is available to the intended users.
 Identification of the applicable criteria.
 Where appropriate, a description of any significant inherent limitations associated with the
measurement or evaluation of the underlying subject matter against the applicable criteria.
 When the applicable criteria are designed for a specific purpose, a statement alerting readers
to this fact and that, as a result, the subject matter information may not be suitable for
another purpose.
Assurance Engagements Page 245

 A statement to identify the responsible party and the measurer or evaluator if different, and
to describe their responsibilities and the practitioner’s responsibilities.
 A statement that the engagement was performed in accordance with this ISAE or, where
there is a subject-matter specific ISAE, that ISAE.
 A statement that the firm of which the practitioner is a member applies ISQM, or other
professional requirements, or requirements in law or regulation, that are at least as
demanding as ISQM. If the practitioner is not a professional accountant, the statement shall
identify the professional requirements, or requirements in law or regulation, applied that
are at least as demanding as ISQM.
 A statement that the practitioner complies with the independence and other ethical
requirements of the IESBA Code, or other professional requirements, or requirements
imposed by law or regulation, that are at least as demanding as the IESBA Code related to
assurance engagements.
 An informative summary of the work performed as the basis for the practitioner’s
conclusion. In the case of a limited assurance engagement, an appreciation of the nature,
timing and extent of procedures performed is essential to understanding the practitioner’s
conclusion. In a limited assurance engagement, the summary of the work performed shall
state that:
- The procedures performed in a limited assurance engagement vary in nature and timing
from, and are less in extent than for, a reasonable assurance engagement; and
- Consequently, the level of assurance obtained in a limited assurance engagement is
substantially lower than the assurance that would have been obtained had a reasonable
assurance engagement been performed.
- The practitioner’s conclusion: When appropriate, the conclusion shall inform the
intended users of the context in which the practitioner’s conclusion is to be read.
- In a reasonable assurance engagement, the conclusion shall be expressed in a positive
form.
- In a limited assurance engagement, the conclusion shall be expressed in a form that
conveys whether, based on the procedures performed and evidence obtained, a matter(s)
has come to the practitioner’s attention to cause the practitioner to believe that the
subject matter information is materially misstated.
- The conclusion shall be phrased using appropriate words for the underlying subject
matter and applicable criteria given the engagement circumstances and shall be phrased
in terms of:
a) The underlying subject matter and the applicable criteria;
b) The subject matter information and the applicable criteria; or
c) A statement made by the appropriate party(ies).

- When the practitioner expresses a modified conclusion, the assurance report shall
contain:
a) A section that provides a description of the matter(s) giving rise to the modification;
and
b) A section that contains the practitioner’s modified conclusion.
Assurance Engagements Page 246

 The practitioner’s signature.

 The date of the assurance report. Shall be dated no earlier than the date on which the
practitioner has obtained the evidence on which the practitioner’s conclusion is based,
including evidence that those with the recognized authority have asserted that they have
taken responsibility for subject matter information.
 The location in the jurisdiction where the practitioner practices.

Reference to the Practitioner’s Expert in the Assurance Report

If the practitioner refers to the work of a practitioner’s expert in the assurance report, the
wording of that report shall not imply that the practitioner’s responsibility for the conclusion
expressed in that report is reduced because of the involvement of that expert.

Assurance Report Prescribed by Law or Regulation

If the practitioner is required by law or regulation to use a specific layout or wording of the
assurance report, the assurance report shall refer to this or other ISAEs only if the assurance
report includes, at a minimum, each of the elements identified in above unit.

Unmodified and Modified Conclusions (Para 72-77)

The practitioner shall express an unmodified conclusion when the practitioner concludes:
 In the case of a reasonable assurance engagement, that the subject matter information is
prepared, in all material respects, in accordance with the applicable criteria; or
 In the case of a limited assurance engagement, that, based on the procedures performed and
evidence obtained, no matter(s) has come to the attention of the practitioner that causes the
practitioner to believe that the subject matter information is not prepared, in all material
respects, in accordance with the applicable criteria.

If the practitioner considers it necessary to:

 Draw intended users’ attention to a matter presented or disclosed in the subject matter
information that, in the practitioner’s judgment, is of such importance that it is fundamental
to intended users’ understanding of the subject matter information (an Emphasis of Matter
paragraph); or
 Communicate a matter other than those that are presented or disclosed in the subject matter
information that, in the practitioner’s judgment, is relevant to intended users’ understanding
of the engagement, the practitioner’s responsibilities or the assurance report (an Other
Matter paragraph),

If this is not prohibited by law or regulation, the practitioner shall do so in a paragraph in the
assurance report, with an appropriate heading, that clearly indicates the practitioner’s
conclusion is not modified in respect of the matter.
Assurance Engagements Page 247

The practitioner shall express a modified conclusion in the following circumstances:

 When, in practitioner’s professional judgment, a scope limitation exists and the effect of the
matter could be material. In such cases, practitioner shall express a qualified conclusion or a
disclaimer of conclusion.
 When, in the practitioner’s professional judgment, the subject matter information is
materially misstated. In such cases, the practitioner shall express a qualified conclusion or
adverse conclusion.

When the statement made by the appropriate party(ies) has identified and properly described
that the subject matter information is materially misstated, the practitioner shall either:
 Express a qualified conclusion or adverse conclusion phrased in terms of the underlying
subject matter and the applicable criteria; or
 If specifically required by the terms of the engagement to phrase the conclusion in terms of
a statement made by the appropriate party(ies), express an unqualified conclusion but
include an Emphasis of Matter paragraph in the assurance report referring to the statement
made by the appropriate party(ies) that identifies and properly describes that the subject
matter information is materially misstated.

Other Communication Responsibilities (Para 78)

The practitioner shall consider whether, pursuant to the terms of the engagement and other
engagement circumstances, any matter has come to the attention of the practitioner that is to
be communicated with the responsible party, the measurer or evaluator, the engaging party,
those charged with governance or others.

Documentation (Para 79-83)

The practitioner shall prepare on a timely basis engagement documentation that provides a
record of the basis for the assurance report that is sufficient and appropriate to enable an
experienced practitioner, having no previous connection with the engagement, to understand:
 The nature, timing and extent of the procedures performed to comply with relevant ISAE and
applicable legal and regulatory requirements;
 The results of the procedures performed, and the evidence obtained; and
 Significant matters arising during the engagement, the conclusions reached thereon, and
significant professional judgments made in reaching those conclusions.

Practitioner shall assemble the engagement documentation in an engagement file and complete
administrative process of assembling the final engagement file on a timely basis after the date
of the assurance report.
Assurance Engagements Page 248

After the assembly of the final engagement file has been completed, the practitioner shall not
delete or discard engagement documentation of any nature before the end of its retention
period.

If the practitioner finds it necessary to amend existing engagement documentation or add new
engagement documentation after the assembly of the final engagement file has been completed
the practitioner shall, regardless of the nature of the amendments or additions, document:
 The specific reasons for making the amendments or additions; and
 When, and by whom, they were made and reviewed.
Assurance Engagements Page 249

Examination of Prospective Financial Information (ISAE 3400)

Introduction (Para 1-7)

“Prospective financial information” means financial information based on assumptions

about events that may occur in the future and possible actions by an entity. It is highly
subjective in nature and its preparation requires the exercise of considerable judgment.
Prospective financial information can be in the form of a forecast, a projection or a
combination of both, for example, a one year forecast plus a five year projection.

A “forecast” means prospective financial information prepared on the basis of assumptions

as to future events which management expects to take place and the actions management
expects to take as of the date the information is prepared (best-estimate assumptions).

A “projection” means prospective financial information prepared on the basis of:

(a) Hypothetical assumptions about future events and management actions which are not
necessarily expected to take place, such as when some entities are in a start-up phase or
are considering a major change in the nature of operations; or
(b) A mixture of best-estimate and hypothetical assumptions.

Such information illustrates the possible consequences as of the date the information is
prepared if the events and actions were to occur (a “what-if” scenario)

In an engagement to examine prospective financial information, the auditor should obtain

sufficient appropriate evidence as to whether:
 Management’s best-estimate assumptions on which the prospective financial information is
based are not unreasonable and, in the case of hypothetical assumptions, such assumptions
are consistent with the purpose of the information;
 The prospective financial information is properly prepared on the basis of the assumptions;
 The prospective financial information is properly presented and all material assumptions
are adequately disclosed, including a clear indication as to whether they are best-estimate
assumptions or hypothetical assumptions; and
 The prospective financial information is prepared on a consistent basis with historical
financial statements, using appropriate accounting principles.

Prospective financial information can include financial statements or one or more elements of
financial statements and may be prepared:
 As an internal management tool, for example, to assist in evaluating a possible capital
investment; or
 For distribution to third parties in, for example:
Assurance Engagements Page 250

- A prospectus to provide potential investors with information about future expectations.

- An annual report to provide information to shareholders, regulatory bodies and other
interested parties.
- A document for the information of lenders which may include, for example, cash flow
forecasts.

Management is responsible for the preparation and presentation of the prospective financial
information, including the identification and disclosure of the assumptions on which it is based.
The auditor may be asked to examine and report on the prospective financial information to
enhance its credibility whether it is intended for use by third parties or for internal purposes.

The Auditor’s Assurance Regarding Prospective Financial Information (Para 8-9)

Prospective financial information relates to events and actions that have not yet occurred and
may not occur. While evidence may be available to support the assumptions on which the
prospective financial information is based, such evidence is itself generally future oriented and,
therefore, speculative in nature, as distinct from the evidence ordinarily available in the audit
of historical financial information. The auditor is, therefore, not in a position to express an
opinion as to whether the results shown in the prospective financial information will be
achieved.

Acceptance of Engagement (Para 10-12)

Before accepting an engagement, the auditor would consider, amongst other things:
 The intended use of the information;
 Whether the information will be for general or limited distribution;
 The nature of the assumptions, that is, whether they are best-estimate or hypothetical
assumptions;
 The elements to be included in the information; and
 The period covered by the information.

Auditor should not accept, or should withdraw from, engagement when the assumptions are
clearly unrealistic or when auditor believes that the prospective financial information will be
inappropriate for its intended use.

Auditor and client should agree on the terms of the engagement. It is in the interests of both
entity and auditor that the auditor sends an engagement letter to help in avoiding
misunderstandings regarding the engagement.

Knowledge of the Business (Para 13-15)

The auditor would also need to become familiar with the entity’s process for preparing
prospective financial information, for example, by considering the following:
Assurance Engagements Page 251

 The internal controls over the system used to prepare prospective financial information and
the expertise and experience of those persons preparing prospective financial information.
 The nature of documentation prepared by the entity supporting management’s assumptions.
 The extent to which statistical, mathematical and computer-assisted techniques are used.
 The methods used to develop and apply assumptions.
 The accuracy of prospective financial information prepared in prior periods and the reasons
for significant variances.

The auditor should consider the extent to which reliance on the entity’s historical financial
information is justified. The auditor requires a knowledge of the entity’s historical financial
information to assess whether the prospective financial information has been prepared on a
basis consistent with the historical financial information and to provide a historical yardstick
for considering management’s assumptions.

Period Covered (Para 16)

Auditor should consider the period of time covered by the prospective financial information.

Since assumptions become more speculative as the length of the period covered increases, as
that period lengthens, the ability of management to make best-estimate assumptions decreases.
The period would not extend beyond the time for which management has a reasonable basis for
the assumptions.

The following are some of the factors that are relevant to the auditor’s consideration of the
period of time covered by the prospective financial information:
 Operating cycle, for example, in the case of a major construction project the time required to
complete the project may dictate the period covered.
 The degree of reliability of assumptions, for example, if the entity is introducing a new
product the prospective period covered could be short and broken into small segments, such
as weeks or months.
 The needs of users, for example, prospective financial information may be prepared in
connection with an application for a loan for the period of time required to generate
sufficient funds for repayment.

Examination Procedures (Para 17-25)

When determining nature, timing and extent of procedures, considerations should include:
 The likelihood of material misstatement;
 The knowledge obtained during any previous engagements;
 Management’s competence regarding the preparation of prospective financial information;
 The extent to which the prospective financial information is affected by the management’s
judgment; and
 The adequacy and reliability of the underlying data.
Assurance Engagements Page 252

The auditor would assess the source and reliability of the evidence supporting management’s
best-estimate assumptions.

The auditor would consider whether, when hypothetical assumptions are used, all significant
implications of such assumptions have been taken into consideration.

Although evidence supporting hypothetical assumptions need not be obtained, the auditor
would need to be satisfied that they are consistent with the purpose of the prospective financial
information and that there is no reason to believe they are clearly unrealistic.

The auditor will need to be satisfied that the prospective financial information is properly
prepared from management’s assumptions by, for example, making clerical checks such as
recomputation and reviewing internal consistency.

When engaged to examine one or more elements of prospective financial information, such as
an individual financial statement, it is important that the auditor consider the interrelationship
of other components as well.

When any elapsed portion of the current period is included in the prospective financial
information, the auditor would consider the extent to which procedures need to be applied to
the historical information.

The auditor should obtain written representations from management regarding the intended
use of the prospective financial information, the completeness of significant management
assumptions and management’s acceptance of its responsibility for the prospective financial
information.

Presentation and Disclosure (Para 26)

When assessing the presentation and disclosure, auditor will need to consider whether:
 The presentation of prospective financial information is informative and not misleading;
 The accounting policies are clearly disclosed in the notes to the prospective financial
information;
 The assumptions are adequately disclosed in the notes to the prospective financial
information;
 The date as of which the prospective financial information was prepared is disclosed.;
 The basis of establishing points in a range is clearly indicated and the range is not selected
in a biased or misleading manner when results shown in the prospective financial
information are expressed in terms of a range; and
 Any change in accounting policy since the most recent historical financial statements is
disclosed, along with the reason for the change and its effect on the prospective financial
information.
Assurance Engagements Page 253

Report on Examination of Prospective Financial Information (Para 27-32)

The report by an auditor on an examination of prospective financial information should contain

the following:
 Title;
 Addressee;
 Identification of the prospective financial information;
 A reference to the ISAE or relevant national standards or practices applicable to the
examination of prospective financial information;
 A statement that management is responsible for the prospective financial information
including the assumptions on which it is based;
 When applicable, a reference to the purpose and/or restricted distribution of the
prospective financial information;
 A statement of negative assurance as to whether the assumptions provide a reasonable basis
for the prospective financial information;
 An opinion as to whether the prospective financial information is properly prepared on the
basis of the assumptions and is presented in accordance with the relevant financial reporting
framework;
 Appropriate caveats concerning the achievability of the results indicated by the prospective
financial information;
 Date of the report which should be the date procedures have been completed;
 Auditor’s address; and
 Signature.
 Such a report would:
- State whether, based on the examination of the evidence supporting the assumptions,
anything has come to the auditor’s attention which causes the auditor to believe that the
assumptions do not provide a reasonable basis for the prospective financial information.
- Express an opinion as to whether prospective financial information is properly prepared
on the basis of the assumptions and is presented in accordance with the relevant financial
reporting framework.
- State that:
- Actual results are likely to be different from the prospective financial information; and
- In case of a projection, prospective financial information has been prepared for (state
purpose), using a set of assumptions that include hypothetical assumptions.

The following is an example of an extract from an unmodified report on a forecast:

We have examined the forecast1 in accordance with the International Standard on Assurance
Engagements applicable to the examination of prospective financial information. Management
is responsible for the forecast including the assumptions set out in Note X on which it is based.
Assurance Engagements Page 254

Based on our examination of the evidence supporting the assumptions, nothing has come to our
attention which causes us to believe that these assumptions do not provide a reasonable basis
for the forecast. Further, in our opinion the forecast is properly prepared on the basis of the
assumptions and is presented in accordance with

Actual results are likely to be different from the forecast since anticipated events frequently do
not occur as expected and the variation may be material.

The following is an example of an extract from an unmodified report on a projection:

We have examined the projection in accordance with the International Standard on Assurance
Engagements applicable to the examination of prospective financial information. Management
is responsible for the projection including the assumptions set out in Note X on which it is based.

This projection has been prepared for (describe purpose). As the entity is in a start-up phase
the projection has been prepared using a set of assumptions that include hypothetical
assumptions about future events and management’s actions that are not necessarily expected
to occur. Consequently, readers are cautioned that this projection may not be appropriate for
purposes other than that described above.

Based on our examination of the evidence supporting the assumptions, nothing has come to our
attention which causes us to believe that these assumptions do not provide a reasonable basis
for the projection, assuming that (state or refer to the hypothetical assumptions). Further, in
our opinion the projection is properly prepared on the basis of the assumptions and is
presented in accordance with

Even if the events anticipated under the hypothetical assumptions described above occur, actual
results are still likely to be different from the projection since other anticipated events
frequently do not occur as expected and the variation may be material.

When the auditor believes that the presentation and disclosure of the prospective financial
information is not adequate, the auditor should express a qualified or adverse opinion in the
report on the prospective financial information, or withdraw from the engagement as
appropriate. An example would be where financial information fails to disclose adequately the
consequences of any assumptions which are highly sensitive.

When the auditor believes that one or more significant assumptions do not provide a reasonable
basis for the prospective financial information prepared on the basis of best-estimate
assumptions or that one or more significant assumptions do not provide a reasonable basis for
the prospective financial information given the hypothetical assumptions, the auditor should
either express an adverse opinion in the report on the prospective financial information, or
withdraw from the engagement.
Assurance Engagements Page 255

When the examination is affected by conditions that preclude application of one or more
procedures considered necessary in the circumstances, the auditor should either withdraw
from the engagement or disclaim the opinion and describe the scope limitation in the report on
the prospective financial information.
Assurance Engagements Page 256

Assurance Reports on Controls at a Service Organization (ISAE 3402)

The service auditor shall not represent compliance with this ISAE unless the service auditor has
complied with the requirements of this ISAE and ISAE 3000 (Revised).

Ethical Requirements (Para 11)

The service auditor shall comply with IESBA Code relating to assurance engagements or other
professional requirements, or requirements imposed by law or regulation, that are at least as
demanding.

Management and Those Charged with Governance (Para 12)

Service auditor shall determine the appropriate person(s) within the service organization’s
management or governance structure with whom to interact. This shall include consideration
of which person(s) have the appropriate responsibilities for and knowledge of the matters
concerned.

Acceptance and Continuance (Para 13-14)

Before agreeing to accept, or continue, an engagement the service auditor shall:

 Determine whether:
- The service auditor has the capabilities and competence to perform the engagement;
- The criteria the practitioner expects to be applied by the service organization to prepare
the description of its system are suitable and will be available to user entities and their
auditors; and
- The scope of the engagement and the service organization’s description of its system will
not be so limited that they are unlikely to be useful to user entities and their auditors.
 Obtain the agreement of the service organization that it acknowledges and understands its
responsibility:
- For preparation of the description of its system, and accompanying service organization’s
statement, including the completeness, accuracy and method of presentation of that
description and statement;
- To have a reasonable basis for the service organization’s statement accompanying the
description of its system;
- For stating in the service organization’s statement the criteria it used to prepare the
description;
 For stating in the description of its system:
a) The control objectives; and
b) Where they are specified by law or regulation, or another party, the party who specified
them;
Assurance Engagements Page 257

 For identifying the risks that threaten achievement of control objectives stated in description
of its system, and designing and implementing controls to provide reasonable assurance that
those risks will not prevent achievement of the control objectives stated in the description
of its system, and therefore that the stated control objectives will be achieved; and
 To provide the service auditor with:
a) Access to all information, such as records, documentation and other matters, including
service level agreements, of which the service organization is aware that is relevant to
the description of the service organization’s system and the accompanying service
organization’s statement;
b) Additional information that the service auditor may request from the service
organization for the purpose of the assurance engagement; and
c) Unrestricted access to persons within the service organization from whom the service
auditor determines it necessary to obtain evidence.

Acceptance of a Change in the Terms of the Engagement

If the service organization requests a change in the scope of the engagement before the
completion of the engagement, the service auditor shall be satisfied that there is a reasonable
justification for the change.

Assessing the Suitability of the Criteria (Para 15-18)

In determining the suitability of the criteria to evaluate the service organization’s description
of its system, the service auditor shall determine if the criteria encompass, at a minimum:
 Whether the description presents how the service organization’s system was designed and
implemented, including, as appropriate:
- The types of services provided, including, as appropriate, classes of transactions
processed;
- The procedures, within both information technology and manual systems, by which
services are provided, including, as appropriate, procedures by which transactions are
initiated, recorded, processed, corrected as necessary, and transferred to the reports and
other information prepared for user entities;
- The related records and supporting information, including, as appropriate, accounting
records, supporting information and specific accounts that are used to initiate, record,
process and report transactions; this includes the correction of incorrect information and
how information is transferred to the reports and other information prepared for user
entities;
- How the service organization’s system deals with significant events and conditions, other
than transactions;
- The process used to prepare reports and other information for user entities;
- The specified control objectives and controls designed to achieve those objectives;
- Complementary user entity controls contemplated in the design of the controls; and
Assurance Engagements Page 258

- Other aspects of the service organization’s control environment, risk assessment process,
information system (including the related business processes) and communication,
control activities and monitoring controls that are relevant to the services provided.
 In the case of a type 2 report, whether the description includes relevant details of changes to
the service organization’s system during the period covered by the description.

In determining the suitability of the criteria to evaluate the design of controls, the service
auditor shall determine if the criteria encompass, at a minimum, whether:
 The service organization has identified the risks that threaten achievement of the control
objectives stated in the description of its system; and
 The controls identified in that description would, if operated as described, provide
reasonable assurance that those risks do not prevent the stated control objectives from
being achieved.

Materiality (Para 19)

When planning and performing the engagement, the service auditor shall consider materiality
with respect to the fair presentation of the description, the suitability of the design of controls
and, in the case of a type 2 report, the operating effectiveness of controls.

Obtaining an Understanding of the Service Organization’s System (Para 20)

The service auditor shall obtain an understanding of the service organization’s system,
including controls that are included in the scope of the engagement.

Obtaining Evidence Regarding the Description (Para 21-22)

The service auditor shall obtain and read the service organization’s description of its system,
and shall evaluate whether those aspects of the description included in the scope of the
engagement are fairly presented, including whether:
 Control objectives stated in the service organization’s description of its system are
reasonable in the circumstances;
 Controls identified in that description were implemented;
 Complementary user entity controls, if any, are adequately described; and
 Services performed by a subservice organization, if any, are adequately described, including
whether the inclusive method or the carve-out method has been used in relation to them.

Obtaining Evidence Regarding Design of Controls (Para 23)

The service auditor shall determine which of the controls at the service organization are
necessary to achieve the control objectives stated in the service organization’s description of its
system, and shall assess whether those controls were suitably designed. This determination
shall include:
Assurance Engagements Page 259

 Identifying the risks that threaten the achievement of the control objectives stated in the
service organization’s description of its system; and
 Evaluating the linkage of controls identified in the service organization’s description of its
system with those risks.

Obtaining Evidence Regarding Operating Effectiveness of Controls (Para 24-29)

When designing and performing tests of controls, the service auditor shall:
 Perform other procedures in combination with inquiry to obtain evidence about:
- How the control was applied;
- The consistency with which the control was applied; and
- By whom or by what means the control was applied;
 Determine whether controls to be tested depend upon other controls (indirect controls) and,
if so, whether it is necessary to obtain evidence supporting the operating effectiveness of
those indirect controls; and
 Determine means of selecting items for testing that are effective in meeting the objectives of
the procedure.

Sampling
When the service auditor uses sampling, the service auditor shall:
 Consider the purpose of the procedure and the characteristics of the population from which
the sample will be drawn when designing the sample;
 Determine a sample size sufficient to reduce sampling risk to an appropriately low level;
 Select items for sample in such a way that each sampling unit in the population has a chance
of selection;
 If a designed procedure is not applicable to a selected item, perform procedure on a
replacement item; and
 If unable to apply the designed procedures, or suitable alternative procedures, to a selected
item, treat that item as a deviation.

Nature and Cause of Deviations

Service auditor shall investigate the nature and cause of any deviations identified and shall
determine whether:
 Identified deviations are within the expected rate of deviation and are acceptable; therefore,
the testing that has been performed provides an appropriate basis for concluding that the
control is operating effectively throughout the specified period;
 Additional testing of the control or of other controls is necessary to reach a conclusion on
whether the controls relative to a particular control objective are operating effectively
throughout specified period; or
 The testing that has been performed provides an appropriate basis for concluding that the
control did not operate effectively throughout the specified period.
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In extremely rare circumstances when the service auditor considers a deviation discovered in a
sample to be an anomaly and no other controls have been identified that allow to conclude that
the relevant control objective is operating effectively throughout the specified period, the
service auditor shall obtain a high degree of certainty that such deviation is not representative
of the population.

The Work of an Internal Audit Function (Para 30-37)

Obtaining an Understanding of the Internal Audit Function

If the service organization has an internal audit function, the service auditor shall obtain an
understanding of the nature of the responsibilities of the internal audit function and of the
activities performed in order to determine whether the internal audit function is likely to be
relevant to the engagement.

Determining Whether and to What Extent to Use the Work of the Internal Auditors

The service auditor shall determine:

 Whether the work of the internal auditors is likely to be adequate for purposes of the
engagement; and
 If so, the planned effect of the work of the internal auditors on the nature, timing or extent
of the service auditor’s procedures.

In determining whether the work of the internal auditors is likely to be adequate for purposes
of the engagement, the service auditor shall evaluate:
 The objectivity of the internal audit function;
 The technical competence of the internal auditors;
 Whether the work of the internal auditors is likely to be carried out with due professional
care; and
 Whether there is likely to be effective communication between the internal auditors and the
service auditor.

In determining the planned effect of the work of the internal auditors on the nature, timing or
extent of the service auditor’s procedures, the service auditor shall consider:
 The nature and scope of specific work performed, or to be performed, by the internal
auditors;
 The significance of that work to the service auditor’s conclusions; and
 The degree of subjectivity involved in the evaluation of the evidence gathered in support of
those conclusions.
Assurance Engagements Page 261

Using the Work of the Internal Audit Function

In order for the service auditor to use specific work of the internal auditors, the service auditor
shall evaluate and perform procedures on that work to determine its adequacy for the service
auditor’s purposes.

To determine the adequacy of specific work performed by the internal auditors for the service
auditor’s purposes, the service auditor shall evaluate whether:
 The work was performed by internal auditors having adequate technical training and
proficiency;
 The work was properly supervised, reviewed and documented;
 Adequate evidence has been obtained to enable the internal auditors to draw reasonable
conclusions;
 Conclusions reached are appropriate in the circumstances and any reports prepared by the
internal auditors are consistent with the results of the work performed; and
 Exceptions relevant to the engagement or unusual matters disclosed by the internal auditors
are properly resolved.

Written Representations (Para 38-40)

The service auditor shall request the service organization to provide written representations:
 That reaffirm the statement accompanying the description of the system;
 That it has provided the service auditor with all relevant information and access agreed to;9
and
 That it has disclosed to the service auditor any of the following of which it is aware:
- Non-compliance with law and regulations, fraud, or uncorrected deviations attributable
to the service organization that may affect one or more user entities;
- Design deficiencies in controls;
- Instances where controls have not operated as described; and
- Any events subsequent to the period covered by the service organization’s description of
its system up to the date of the service auditor’s assurance report that could have a
significant effect on the service auditor’s assurance report.

The written representations shall be in the form of a representation letter addressed to the
service auditor. The date of the written representations shall be as near as practicable to, but
not after, the date of the service auditor’s assurance report.

Other Information (Para 41-42)

Service auditor shall read other information, if any, included in a document containing service
organization’s description of its system and service auditor’s assurance report, to identify
material inconsistencies, if any, with that description. While reading other information for the
Assurance Engagements Page 262

purpose of identifying material inconsistencies, the service auditor may become aware of an
apparent misstatement of fact in that other information.

Subsequent Events (Para 43-44)

The service auditor shall inquire whether the service organization is aware of any events
subsequent to the period covered by the service organization’s description of its system up to
the date of the service auditor’s assurance report that may have caused the service auditor to
amend the assurance report. If the service auditor is aware of such an event, and information
about that event is not disclosed by the service organization, the service auditor shall disclose
it in the service auditor’s assurance report.

Documentation (Para 45-52)

The service auditor shall prepare on a timely basis engagement documentation that provides a
record of the basis for the assurance report that is sufficient and appropriate to enable an
experienced service auditor, having no previous connection with the engagement, to
understand:
 The nature, timing and extent of the procedures performed to comply with this ISAE and
applicable legal and regulatory requirements;
 The results of the procedures performed, and the evidence obtained; and
 Significant matters arising during the engagement, and the conclusions reached thereon and
significant professional judgments made in reaching those conclusions.

In documenting the nature, timing and extent of procedures performed, the service auditor shall
record:
 The identifying characteristics of the specific items or matters being tested;
 Who performed the work and the date such work was completed; and
 Who reviewed the work performed and the date and extent of such review.

If service auditor finds it necessary to modify existing engagement documentation or add new
documentation after the assembly of the final engagement file has been completed and that
documentation does not affect the service auditor’s report, service auditor shall, regardless of
the nature of modifications or additions, document:
 The specific reasons for making them; and
 When and by whom they were made and reviewed.
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Preparing the Service Auditor’s Assurance Report (Para 53-55)

Content of the Service Auditor’s Assurance Report

The service auditor’s assurance report shall include, at a minimum, the following basic
elements:
 A title that clearly indicates the report is an independent service auditor’s assurance report.
 An addressee.
 Identification of:
- Service organization’s description of its system, and the service organization’s statement.
- Those parts of the service organization’s description of its system, if any, that are not
covered by the service auditor’s opinion.
- If the description refers to the need for complementary user entity controls, a statement
that the service auditor has not evaluated the suitability of design or operating
effectiveness of complementary user entity controls, and that the control objectives
stated in the service organization’s description of its system can be achieved only if
complementary user entity controls are suitably designed or operating effectively, along
with the controls at the service organization.
- If services are performed by a subservice organization, the nature of activities performed
by the subservice organization as described in the service organization’s description of
its system and whether the inclusive method or the carve-out method has been used in
relation to them. Where the carve-out method has been used, a statement that the service
organization’s description of its system excludes the control objectives and related
controls at relevant subservice organizations, and that the service auditor’s procedures
do not extend to controls at the subservice organization. Where the inclusive method has
been used, a statement that the service organization’s description of its system includes
control objectives and related controls at the subservice organization, and that the
service auditor’s procedures extended to controls at the subservice organization.

 Identification of the applicable criteria, and the party specifying the control objectives.
 A statement that the report and, in the case of a type 2 report, the description of tests of
controls are intended only for user entities and their auditors, who have a sufficient
understanding to consider it, along with other information including information about
controls operated by user entities themselves, when assessing the risks of material
misstatements of user entities’ financial statements.
 A statement that the service organization is responsible for:
- Preparing the description of its system, and the accompanying statement, including the
completeness, accuracy and method of presentation of that description and that
statement;
- Providing the services covered by the service organization’s description of its system;
- Stating the control objectives (where not identified by law or regulation, or another party,
for example, a user group or a professional body); and
Assurance Engagements Page 264

- Designing and implementing controls to achieve the control objectives stated in the
service organization’s description of its system.

 A statement that the service auditor’s responsibility is to express an opinion on the service
organization’s description, on the design of controls related to the control objectives stated
in that description and, in case of a type 2 report, on the operating effectiveness of those
controls, based on service auditor’s procedures.
 A statement that the firm of which the practitioner is a member applies ISQM, or other
professional requirements, or requirements in law or regulation, that are at least as
demanding as ISQM. If the practitioner is not a professional accountant, the statement shall
identify the professional requirements, or requirements in law or regulation, applied that
are at least as demanding as ISQM.
 A statement that the practitioner complies with the independence and other ethical
requirements of the IESBA Code, or other professional requirements, or requirements
imposed by law or regulation, that are at least demanding as IESBA Code related to assurance
engagements.
 A statement that the engagement was performed in accordance with ISAE 3402
 A summary of the service auditor’s procedures to obtain reasonable assurance and a
statement of the service auditor’s belief that the evidence obtained is sufficient and
appropriate to provide a basis for the service auditor’s opinion, and, in case of a type 1 report,
a statement that service auditor has not performed any procedures regarding operating
effectiveness of controls and therefore no opinion is expressed.
 A statement of the limitations of controls and, in the case of a type 2 report, of the risk of
projecting to future periods any evaluation of the operating effectiveness of controls.
 Service auditor’s opinion, expressed in positive form, on whether, in all material respects,
based on suitable criteria:
- In the case of a type 2 report:
a) The description fairly presents the service organization’s system that had been
designed and implemented throughout the specified period;
b) The controls related to the control objectives stated in the service organization’s
description of its system were suitably designed throughout the specified period; and
c) The controls tested, which were those necessary to provide reasonable assurance
that the control objectives stated in description were achieved, operated effectively
throughout specified period.
- In the case of a type 1 report:
a) The description fairly presents the service organization’s system that had been
designed and implemented as at the specified date; and
b) The controls related to the control objectives stated in the service organization’s
description of its system were suitably designed as at the specified date.
 The date of service auditor’s assurance report, which shall be no earlier than date on which
the service auditor has obtained the evidence on which the service auditor’s opinion is based.
 Name of service auditor, and the location in jurisdiction where the service auditor practices.
Assurance Engagements Page 265

Modified Opinions

If the service auditor concludes that:

 The service organization’s description does not fairly present, in all material respects, the
system as designed and implemented;
 The controls related to the control objectives stated in the description were not suitably
designed, in all material respects;
 In the case of a type 2 report, the controls tested, which were those necessary to provide
reasonable assurance that the control objectives stated in the service organization’s
description of its system were achieved, did not operate effectively, in all material respects;
or
 The service auditor is unable to obtain sufficient appropriate evidence, the service auditor’s
opinion shall be modified, and the service auditor’s assurance report shall include a section
with a clear description of all the reasons for the modification.

Other Communication Responsibilities (Para 56)

If the service auditor becomes aware of non-compliance with laws and regulations, fraud, or
uncorrected errors attributable to the service organization that are not clearly trivial and may
affect one or more user entities, the service auditor shall determine whether the matter has
been communicated appropriately to affected user entities. If the matter has not been so
communicated and the service organization is unwilling to do so, the service auditor shall take
appropriate action.
Assurance Engagements Page 266

Assurance Engagements on Greenhouse Gas Statements (ISAE 3410)

ISAE 3000 (Revised) (Para 15)

The practitioner shall not represent compliance with this ISAE unless the practitioner has
complied with the requirements of both this ISAE and ISAE 3000 (Revised).

Acceptance and Continuance of the Engagement (Para 16-18)

The engagement partner shall:

 Have competence in assurance skills and techniques developed through extensive training
and practical application, and sufficient competence in the quantification and reporting of
emissions, to accept responsibility for the assurance conclusion; and
 Be satisfied that those persons who are to perform the engagement collectively have the
appropriate competence and capabilities, including in the quantification and reporting of
emissions and in assurance, to perform the assurance engagement in accordance with this
ISAE.

Preconditions for the Engagement

 The engagement partner shall determine that both the GHG statement and the engagement
have sufficient scope to be useful to intended users, considering, in particular:
- If the GHG statement is to exclude significant emissions that have been, or could readily
be, quantified, whether such exclusions are reasonable in the circumstances;
- If the engagement is to exclude assurance with respect to significant emissions that are
reported by the entity, whether such exclusions are reasonable in the circumstances; and
- If the engagement is to include assurance with respect to emissions deductions, whether
the nature of the assurance the practitioner will obtain with respect to the deductions
and the intended content of the assurance report with respect to them are clear,
reasonable in the circumstances, and understood by the engaging party.
 When determining the suitability of the applicable criteria, as required by ISAE 3000
(Revised), the practitioner shall determine whether the criteria encompass at a minimum:
- The method for determining the entity’s organizational boundary;
- The GHGs to be accounted for;
- Acceptable quantification methods, including methods for making adjustments to the
base year (if applicable); and
- Adequate disclosures such that intended users can understand the significant judgments
made in preparing the GHG statement.
 Practitioner shall obtain the agreement of entity that it acknowledges and understands its
responsibility:
- For designing, implementing and maintaining such internal control as the entity
determines is necessary to enable the preparation of a GHG statement that is free from
material misstatement, whether due to fraud or error;
Assurance Engagements Page 267

- For the preparation of its GHG statement in accordance with the applicable criteria; and
- For referring to or describing in its GHG statement the applicable criteria it has used and,
when it is not readily apparent from the engagement circumstances, who developed
them.

The terms of the engagement required to be agreed by ISAE 3000 (Revised) shall include:
 The objective and scope of the engagement;
 The responsibilities of the practitioner;
 The responsibilities of the entity;
 Identification of the applicable criteria for the preparation of the GHG statement;
 Reference to the expected form and content of any reports to be issued by the practitioner
and a statement that there may be circumstances in which a report may differ from its
expected form and content; and
 An acknowledgement that entity agrees to provide written representations at conclusion of
engagement.

Planning (Para 19)

Practitioner shall:
 Identify the characteristics of the engagement that define its scope;
 Ascertain the reporting objectives of the engagement to plan the timing of the engagement
and the nature of the communications required;
 Consider the factors that, in the practitioner’s professional judgment, are significant in
directing the engagement team’s efforts;
 Consider the results of engagement acceptance or continuance procedures and, where
applicable, whether knowledge gained on other engagements performed by the engagement
partner for the entity is relevant;
 Ascertain the nature, timing and extent of resources necessary to perform the engagement,
including the involvement of experts and of other practitioners; and
 Determine the impact of the entity’s internal audit function, if any, on the engagement.

Materiality in Planning and Performing the Engagement (Para 20-22)

When establishing the overall engagement strategy, the practitioner shall determine materiality
for the GHG statement.

The practitioner shall determine performance materiality for purposes of assessing the risks of
material misstatement and determining the nature, timing and extent of further procedures.

The practitioner shall revise materiality for the GHG statement in the event of becoming aware
of information during the engagement that would have caused the practitioner to have
determined a different amount initially.
Assurance Engagements Page 268

Understanding the Entity and Its Environment, Including the Entity’s Internal Control,
and Identifying and Assessing Risks of Material Misstatement (Para 23-34)

Obtaining an Understanding of the Entity and Its Environment

The practitioner shall obtain an understanding of the following:

 Relevant industry, regulatory, and other external factors including the applicable criteria.
 The nature of the entity, including:
- The nature of the operations included in the entity’s organizational boundary, including:
a) The sources and completeness of emissions and, if any, sinks and emissions
deductions;
b) The contribution of each to the entity’s overall emissions; and
c) The uncertainties associated with the quantities reported in the GHG statement.
- Changes from the prior period in the nature or extent of operations; and
- The frequency and nature of interruptions to operations.

 The entity’s selection and application of quantification methods and reporting policies,
including the reasons for changes thereto and the potential for double-counting of emissions
in the GHG statement.
 The requirements of the applicable criteria relevant to estimates, including related
disclosures.
 The entity’s climate change objective and strategy, if any, and associated economic,
regulatory, physical and reputational risks.
 The oversight of, and responsibility for, emissions information within the entity.
 Whether the entity has an internal audit function and, if so, its activities and main findings
on emissions.

Procedures to Obtain an Understanding and to Identify and Assess Risks of Material

Misstatement

The procedures to obtain an understanding of the entity and its environment and to identify
and assess risks of material misstatement shall include the following:
 Inquiries of those within the entity who, in the practitioner’s judgment, have information
that is likely to assist in identifying and assessing risks of material misstatement due to fraud
or error.
 Analytical procedures.
 Observation and inspection.

Obtaining an Understanding of the Entity’s Internal Control

Limited Assurance Reasonable Assurance

(a) The control environment; (a) The control environment;
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(b) The information system, including the (b) The information system, including the
related business processes, and related business processes, and
communication of emissions reporting communication of emissions reporting
roles and responsibilities and significant roles and responsibilities and significant
matters relating to emissions reporting; matters relating to emissions reporting;
and (c) The entity’s risk assessment process;
(c) The results of the entity’s risk (d) Control activities relevant to the
assessment process. engagement; and
(e) Monitoring of controls.

Other Procedures for Understanding and to Identify and Assess Risks of Material
Misstatement

If the engagement partner has performed other engagements for the entity, the engagement
partner shall consider whether information obtained is relevant to identifying and assessing
risks of material misstatement.

The practitioner shall make inquiries of management, and others within the entity as
appropriate, to determine whether they have knowledge of any actual, suspected or alleged
fraud or non-compliance with law or regulation affecting the GHG statement.

The practitioner shall evaluate whether the entity’s quantification methods and reporting
policies, including the determination of the entity’s organizational boundary, are appropriate
for its operations, and are consistent with applicable criteria and quantification and reporting
policies used in relevant industry and in prior periods.

Internal Audit

Where the entity has an internal audit function that is relevant to the engagement, the
practitioner shall:
 Determine whether, and to what extent, to use specific work of the internal audit function;
and
 If using the specific work of the internal audit function, determine whether that work is
adequate for the purposes of the engagement.

Identifying and Assessing Risks of Material Misstatement

Limited Assurance Reasonable Assurance

The practitioner shall identify and assess The practitioner shall identify and assess
risks of material misstatement: risks of material misstatement:
(a) At the GHG statement level; and (a) At the GHG statement level; and
(b) For material types of emissions and (b) At the assertion level for material types
disclosures, as the basis for designing of emissions and disclosures, as the basis
Assurance Engagements Page 270

Limited Assurance Reasonable Assurance

and performing procedures whose for designing and performing procedures
nature, timing and extent: whose nature, timing and extent:
(c) Are responsive to assessed risks of (c) Are responsive to assessed risks of
material misstatement; and material misstatement; and
(d) Allow the practitioner to obtain limited (d) Allow the practitioner to obtain
assurance about whether the GHG reasonable assurance about whether the
statement is prepared, in all material GHG statement is prepared, in all
respects, in accordance with the material respects, in accordance with the
applicable criteria. applicable criteria.

Causes of Risks of Material Misstatement

When performing the procedures, the practitioner shall consider at least the following factors:
 The likelihood of intentional misstatement in the GHG statement;
 The likelihood of non-compliance with the provisions of those laws and regulations
generally recognized to have a direct effect on the content of the GHG statement;
 The likelihood of omission of a potentially significant emission;
 Significant economic or regulatory changes;
 The nature of operations;
 The nature of quantification methods;
 The degree of complexity in determining the organizational boundary and whether related
parties are involved;
 Whether there are significant emissions that are outside the normal course of business for
the entity, or that otherwise appear to be unusual;
 The degree of subjectivity in the quantification of emissions;
 Whether Scope 3 emissions are included in the GHG statement; and
 How the entity makes significant estimates and the data on which they are based.

Overall Responses to Assessed Risks of Material Misstatement and Further Procedures

(Para 35-56)

Limited Assurance Reasonable Assurance

The practitioner shall: The practitioner shall:
(a) Consider the reasons for the (a) Consider the reasons for the assessment
assessment given to the risks of given to the risks of material misstatement
material misstatement for material at the assertion level for material types of
types of emissions and disclosures; emissions and disclosures, including:
and (i) The likelihood of material misstatement
(b) Obtain more persuasive evidence the due to the particular characteristics of
higher the practitioner’s assessment the relevant type of emission or
of risk. disclosure (that is, the inherent risk);
and
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Limited Assurance Reasonable Assurance

(ii) Whether the practitioner intends to rely
on the operating effectiveness of
controls in determining the nature,
timing and extent of other procedures;
and
(b) Obtain more persuasive evidence the higher
the practitioner’s assessment of risk.

Tests of Controls
The practitioner shall design and perform tests
of controls if:
(a) The practitioner intends to rely on the
operating effectiveness of controls in
determining the nature, timing and extent of
other procedures; or
(b) Procedures other than tests of controls
cannot alone provide sufficient appropriate
evidence at assertion level.

Procedures Other than Tests of Controls

Irrespective of the assessed risks of material
misstatement, the practitioner shall design and
perform tests of details or analytical procedures
in addition to tests of controls, if any, for each
material type of emission and disclosure.
The practitioner shall consider whether external
confirmation procedures are to be performed.
Analytical Procedures Analytical Procedures
The practitioner shall: The practitioner shall:
(a) Determine the suitability of (a) Determine the suitability of particular
particular analytical procedures, analytical procedures for given assertions,
taking account of the assessed risks taking account of the assessed risks of
of material misstatement and tests of material misstatement and tests of details, if
details, if any; any, for these assertions;
(b) Evaluate the reliability of data from (b) Evaluate the reliability of data from which
which the practitioner’s expectation the practitioner’s expectation of recorded
of recorded quantities or ratios is quantities or ratios is developed, taking
developed, taking account of the account of the source, comparability, and
source, comparability, and nature nature and relevance of information
and relevance of information available, and controls over preparation;
available, and controls over and
preparation; and
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Limited Assurance Reasonable Assurance

(c) Develop an expectation with respect (c) Develop an expectation of recorded
to recorded quantities or ratios. quantities or ratios which is sufficiently
precise to identify possible material
misstatements.
Procedures Regarding Estimates Procedures Regarding Estimates
(a) Evaluate whether: Evaluate whether:
(i) The entity has appropriately (a) The entity has appropriately applied the
applied the requirements of the requirements of the applicable criteria
applicable criteria relevant to relevant to estimates; and
estimates; and (b) The methods for making estimates are
(ii) The methods for making appropriate and have been applied
estimates are appropriate and consistently, and whether changes, if any, in
have been applied consistently, reported estimates or in the method for
and whether changes, if any, in making them from prior period are
reported estimates or in the appropriate in circumstances.
method for making them from
the prior period are appropriate The practitioner shall undertake one or more of
in the circumstances; and the following, taking account of the nature of
(b) Consider whether other procedures estimates:
are necessary in the circumstances. (a) Test how entity made the estimate and the
data on which it is based. In doing so,
practitioner shall evaluate whether:
(i) The method of quantification used is
appropriate in the circumstances; and
(ii) The assumptions used by the entity are
reasonable.
(b) Test the operating effectiveness of the
controls over how the entity made estimate,
together with other procedures.
(c) Develop a point estimate or a range to
evaluate the entity’s estimate.
Other Procedures Other Procedures
(a) Agreeing or reconciling GHG (a) Agreeing or reconciling the GHG statement
statement with the underlying with the underlying records; and
records; and (b) Examining material adjustments made
(b) Obtaining, through inquiry of the during the course of preparing the GHG
entity, understanding of material statement.
adjustments made during the course
of preparing GHG statement and
considering whether other
procedures are necessary in the
circumstances.
Assurance Engagements Page 273

Accumulation and communication of Identified Misstatements

The practitioner shall accumulate misstatements identified during the engagement, other than
those that are clearly trivial.

The practitioner shall determine whether the overall engagement strategy and engagement
plan need to be revised if:
 The nature of identified misstatements and the circumstances of their occurrence indicate
that other misstatements may exist that, when aggregated with misstatements accumulated
during the engagement, could be material; or
 The aggregate of misstatements accumulated during the engagement approaches
materiality.

The practitioner shall communicate on a timely basis all misstatements accumulated during the
engagement with the appropriate level within the entity and shall request the entity to correct
those misstatements.

If the entity refuses to correct some or all of the misstatements communicated by the
practitioner, the practitioner shall obtain an understanding of the entity’s reasons for not
making the corrections and shall take that understanding into account when forming the
practitioner’s conclusion.

Using the Work of Another Practitioner (Para 57)

When the practitioner intends to use the work of another practitioner, the practitioner shall:
 Communicate clearly with the other practitioners about the scope and timing of the work
and findings of the other practitioner; and
 Evaluate the sufficiency and appropriateness of evidence obtained and the process for
including related information in the GHG statement.

Written Representations (Para 58-60)

The practitioner shall request written representations from a person(s) within the entity with
appropriate responsibilities for, and knowledge of, the matters concerned:
 That they have fulfilled their responsibility for the preparation of the GHG statement,
including comparative information where appropriate, in accordance with the applicable
criteria, as set out in the terms of the engagement;
 That they have provided the practitioner with all relevant information and access as agreed
in the terms of the engagement and reflected all relevant matters in the GHG statement;
 Whether they believe the effects of uncorrected misstatements are immaterial, individually
and in the aggregate, to the GHG statement. A summary of such items shall be included in, or
attached to, the written representation;
 Whether they believe that significant assumptions used in making estimates are reasonable;
Assurance Engagements Page 274

 That they have communicated to the practitioner all deficiencies in internal control relevant
to the engagement that are not clearly trivial of which they are aware; and
 Whether they have disclosed to the practitioner their knowledge of actual, suspected or
alleged fraud or non-compliance with law or regulation where the fraud or non-compliance
could have a material effect on the GHG statement.

The date of the written representations shall be as near as practicable to, but not after, the date
of the assurance report.

The practitioner shall disclaim a conclusion on the GHG statement or withdraw from the
engagement, where withdrawal is possible under applicable law or regulation, if:
 The practitioner concludes that there is sufficient doubt about the integrity of the person(s)
providing the written representations; or
 The entity does not provide the first 2 essential written representations

Subsequent Events (Para 61)

The practitioner shall:

 Consider whether events occurring between the date of the GHG statement and the date of
the assurance report require adjustment of, or disclosure in, the GHG statement, and
evaluate the sufficiency and appropriateness of evidence obtained about whether such
events are appropriately reflected in that GHG statement in accordance with the applicable
criteria; and
 Respond appropriately to facts that become known to the practitioner after the date of the
assurance report, that, had they been known to the practitioner at that date, may have caused
the practitioner to amend the assurance report.

Comparative Information (Para 62-63)

When comparative information is presented with the current emissions information and some
or all of that comparative information is covered by the practitioner’s conclusion, the
practitioner’s procedures with respect to the comparative information shall include evaluating
whether:
 The comparative information agrees with the amounts and other disclosures presented in
the prior period or, when appropriate, has been properly restated and that restatement has
been adequately disclosed; and (Ref Para. A121)
 The quantification policies reflected in the comparative information are consistent with
those applied in the current period or, if there have been changes, whether they have been
properly applied and adequately disclosed.

If practitioner becomes aware that there may be a material misstatement in comparative

information he shall:
Assurance Engagements Page 275

 Discuss the matter with those person(s) within the entity with appropriate responsibilities
for, and knowledge of, the matters concerned and perform procedures appropriate in the
circumstances; and
 Consider the effect on the assurance report. If the comparative information presented
contains a material misstatement, and the comparative information has not been restated:
- Where the practitioner’s conclusion covers the comparative information, the practitioner
shall express a qualified conclusion or an adverse conclusion in the assurance report; or
- Where the practitioner’s conclusion does not cover the comparative information, the
practitioner shall include an Other Matter paragraph in the assurance report describing
the circumstances affecting the comparative information.

Other Information (Para 64)

The practitioner shall read other information included in documents containing the GHG
statement and the assurance report thereon to identify material inconsistencies, if any, with the
GHG statement or the assurance report and, if on reading that other information, the
practitioner:
 Identifies a material inconsistency between that other information and the GHG statement
or the assurance report; or
 Becomes aware of a material misstatement of fact in that other information that is unrelated
to matters appearing in the GHG statement or the assurance report, the practitioner shall
discuss the matter with the entity and take further action as appropriate.

Documentation (Para 65-70)

In documenting the nature, timing and extent of procedures performed, the practitioner shall
record:
 The identifying characteristics of the specific items or matters tested;
 Who performed the engagement work and the date such work was completed; and
 Who reviewed the engagement work performed and the date and extent of such review.

The practitioner shall document discussions of significant matters with the entity and others,
including the nature of the significant matters discussed, and when and with whom the
discussions took place.

Quality Control

The practitioner shall include in the engagement documentation:

 Issues identified with respect to compliance with relevant ethical requirements and how
they were resolved;
 Conclusions on compliance with independence requirements that apply to the engagement,
and any relevant discussions with the firm that support these conclusions;
Assurance Engagements Page 276

 Conclusions reached regarding the acceptance and continuance of client relationships and
assurance engagements; and
 The nature and scope of, and conclusions resulting from, consultations undertaken during
the course of the engagement.

Matters Arising after the Date of the Assurance Report

If, in exceptional circumstances, the practitioner performs new or additional procedures or

draws new conclusions after the date of the assurance report, the practitioner shall document:
 The circumstances encountered;
 The new or additional procedures performed, evidence obtained, and conclusions reached,
and their effect on the assurance report; and
 When and by whom the resulting changes to engagement documentation were made and
reviewed.

Assembly of the Final Engagement File

The practitioner shall assemble the engagement documentation and complete the
administrative process of assembling the final engagement file on a timely basis after the date
of the assurance report. After the assembly, practitioner shall not discard any engagement
documentation before end of retention period.

Where the practitioner finds it necessary to modify existing engagement documentation or add
new engagement documentation after the assembly of the final engagement file has been
completed, the practitioner shall, regardless of the nature of the modifications or additions,
document:
 The specific reasons for making them; and
 When and by whom they were made and reviewed.

Engagement Quality Control Review (Para 71)

For those engagements, if any, for which a quality control review is required, the engagement
quality control reviewer shall perform an objective evaluation of the significant judgments
made by the engagement team, and the conclusions reached in formulating the assurance
report. This evaluation shall involve:
 Discussion of significant matters with the engagement partner, including the engagement
team’s professional competencies with respect to the quantification and reporting of
emissions and assurance;
 Review of the GHG statement and the proposed assurance report;
 Review of selected engagement documentation relating to the significant judgments the
engagement team made and the conclusions it reached; and
 Evaluation of the conclusions reached in formulating the assurance report and consideration
of whether the proposed assurance report is appropriate.
Assurance Engagements Page 277

Forming the Assurance Conclusion (Para 72-75)

Limited Assurance Reasonable Assurance

Whether anything has come to the practitioner’s Whether the GHG statement is prepared,
attention that causes the practitioner to believe in all material respects, in accordance
that the GHG statement is not prepared, in all with the applicable criteria.
material respects, in accordance with applicable
criteria.

This evaluation shall include consideration of the qualitative aspects of the entity’s
quantification methods and reporting practices, including indicators of possible bias in
judgments and decisions in the making of estimates and in preparing the GHG statement, and
whether, in view of the applicable criteria:
 The quantification methods and reporting policies selected and applied are consistent with
the applicable criteria and are appropriate;
 Estimates made in preparing the GHG statement are reasonable;
 Information presented in GHG statement is relevant, reliable, complete, comparable and
understandable;
 The GHG statement provides adequate disclosure of the applicable criteria, and other
matters, including uncertainties, such that intended users can understand significant
judgments made in its preparation; and
 The terminology used in the GHG statement is appropriate.

This evaluation shall also include consideration of:

 The overall presentation, structure and content of the GHG statement; and
 When appropriate in the context of the criteria, the wording of the assurance conclusion, or
other engagement circumstances, whether the GHG statement represents the underlying
emissions in a manner that achieves fair presentation.

Assurance Report Content (Para 76-77)

The assurance report shall include, at a minimum, the following basic elements:
 A title that clearly indicates the report is an independent assurance report.
 An addressee.
 An identification or description of the level of assurance, either reasonable or limited,
obtained by the practitioner.
 Identification of the GHG statement, including the period(s) it covers
 A description of the entity’s responsibilities.
 A statement that GHG quantification is subject to inherent uncertainty.
 If GHG statement includes emissions deductions covered by practitioner’s conclusion,
identification of those emissions deductions, and a statement of the practitioner’s
responsibility with respect to them.
 Identification of the applicable criteria;
Assurance Engagements Page 278

- Identification of how those criteria can be accessed;

- If those criteria are available only to specific intended users, or are relevant only to a
specific purpose, a statement alerting readers to this fact and that, as a result, the GHG
statement may not be suitable for another purpose.; and
- If established criteria need to be supplemented by disclosures in the explanatory notes
to the GHG statement for those criteria to be suitable, identification of the relevant
note(s).
 A statement that the firm of which the practitioner is a member applies ISQM, or other
professional requirements, or requirements in law or regulation, that are at least as
demanding as ISQM. If the practitioner is not a professional accountant, the statement shall
identify the professional requirements, or requirements in law or regulation, applied that
are as least as demanding as ISQM.
 A statement that the practitioner complies with the independence and other ethical
requirements of the IESBA Code, or other professional requirements, or requirements
imposed by law or regulation, that are at least as demanding as IESBA Code related to
assurance engagements.
 A description of the practitioner’s responsibility, including:
- A statement that the engagement was performed in accordance with ISAE 3410,
Assurance Engagements on Greenhouse Gas Statements; and
- An informative summary of the work performed. In the case of a limited assurance
engagement, an appreciation of the nature, timing and extent of procedures performed is
essential to understanding the practitioner’s conclusion. In that case, the summary of the
work performed shall state that:
- The procedures in a limited assurance engagement vary in nature and timing from,
and are less in extent than for, a reasonable assurance engagement; and
- Consequently, the level of assurance obtained in a limited assurance engagement is
substantially lower than the assurance that would have been obtained in reasonable
assurance engagement.

 The practitioner’s conclusion:

- In a reasonable assurance engagement, the conclusion shall be expressed in a positive
form; or
- In a limited assurance engagement, the conclusion shall be expressed in a form that
conveys whether, based on the procedures performed and evidence obtained, a matter(s)
has come to the practitioner’s attention to cause the practitioner to believe that the GHG
statement is not prepared, in all material respects, in accordance with the applicable
criteria.
- When the practitioner expresses a modified conclusion, the assurance report shall
contain:
a) A section that provides a description of the matter(s) giving rise to the modification;
and
b) A section that contains the practitioner’s modified conclusion.
 The practitioner’s signature.
Assurance Engagements Page 279

 The date of the assurance report. Shall be dated no earlier than the date on which the
practitioner has obtained the evidence on which the practitioner’s conclusion is based,
including evidence that those with the recognized authority have asserted that they have
taken responsibility for the GHG statement.
 The location in the jurisdiction where the practitioner practices.

Emphasis of Matter Paragraphs and Other Matter Paragraphs

If the practitioner considers it necessary to:

 Draw intended users’ attention to a matter presented or disclosed in the GHG statement that,
in the practitioner’s judgment, is of such importance that it is fundamental to intended users’
understanding of the GHG statement (an Emphasis of Matter paragraph); or
 Communicate a matter other than those that are presented or disclosed in the GHG statement
that, in the practitioner’s judgment, is relevant to intended users’ understanding of the
engagement, the practitioner’s responsibilities or the assurance report (an Other Matter
paragraph), and this is not prohibited by law or regulation, the practitioner shall do so in a
paragraph in the assurance report, with an appropriate heading, that clearly indicates the
practitioner’s conclusion is not modified in respect of the matter.

Other Communication Requirements (Para 78)

The practitioner shall communicate, unless prohibited by law or regulation, with those
person(s) with oversight responsibilities for the GHG statement the following matters that come
to the practitioner’s attention during the course of the engagement, and shall determine
whether there is a responsibility to report them to another party within or outside the entity:
 Deficiencies in internal control that, in the practitioner’s professional judgment, are of
sufficient importance to merit attention;
 Identified or suspected fraud; and
 Matters involving identified or suspected non-compliance with laws and regulations, other
than when the matters are clearly trivial.
Assurance Engagements Page 280

Assurance Engagements to Report on the Compilation of Pro Forma

Financial Information included in a Prospectus (ISAE 3420)

The practitioner shall not represent compliance with this ISAE unless the practitioner has
complied with the requirements of both this ISAE and ISAE 3000 (Revised).

Engagement Acceptance (Para 13)

The practitioner shall:

 Determine that those persons who are to perform the engagement collectively have the
appropriate competence and capabilities;
 Determine that the criteria that the practitioner expects to be applied are suitable and that
it is unlikely that the pro forma financial information will be misleading;
 Evaluate the wording of the opinion prescribed by the relevant law or regulation, if any;
 If the entity’s historical financial information has never been audited or reviewed, consider
whether the practitioner can obtain a sufficient understanding of the entity and its
accounting and financial reporting practices to perform the engagement;
 If the event or transaction includes an acquisition and the acquiree’s historical financial
information has never been audited or reviewed, consider whether the practitioner can
obtain a sufficient understanding of the acquiree and its accounting and financial reporting
practices to perform the engagement; and

 Obtain the agreement of the responsible party that it acknowledges and understands its
responsibility for:

- Adequately disclosing and describing the applicable criteria to the intended users if these
are not publicly available;
- Compiling the pro forma financial information on the basis of the applicable criteria; and
- Providing the practitioner with:
a) Access to all information relevant to evaluating whether the pro forma financial
information has been compiled, in all material respects, on the basis of the applicable
criteria;
b) Additional information that the practitioner may request from the responsible party;
c) Access to those within the entity and the entity’s advisors from whom the
practitioner determines it necessary to obtain evidence; and
d) When needed for purposes of the engagement, access to appropriate individuals
within the acquiree(s) in a business combination.
Assurance Engagements Page 281

Planning and Performing the Engagement (Para 14-27)

Determining the Suitability of the Applicable Criteria

Practitioner shall determine whether the applicable criteria are suitable, and in particular shall
determine that they include, at a minimum, that:
 The unadjusted financial information be extracted from an appropriate source;
 The pro forma adjustments be:
- Directly attributable to the event or transaction;
- Factually supportable; and
- Consistent with the entity’s applicable financial reporting framework and its accounting
policies under that framework; and
 Appropriate presentation be made and disclosures be provided to enable the intended users
to understand

In addition, the practitioner shall assess whether the applicable criteria are:
 Consistent, and do not conflict, with relevant law or regulation; and
 Unlikely to result in pro forma financial information that is misleading.

Obtaining an Understanding and evidences of How the Responsible Party Has Compiled
the Pro Forma Financial Information and Other Engagement Circumstances

The practitioner shall obtain an understanding of:

 The event or transaction in respect of which the pro forma financial information is being
compiled;
 How the responsible party has compiled the pro forma financial information;
 The nature of the entity and any acquiree or divestee, including:
- Their operations;
- Their assets and liabilities; and
- The way they are structured and how they are financed;
 Relevant industry, legal and regulatory, and other external factors pertaining to the entity
and any acquiree or divestee; and
 The applicable financial reporting framework and the accounting and financial reporting
practices of the entity and of any acquiree or divestee, including their selection and
application of accounting policies.

The practitioner shall determine whether the responsible party has extracted the unadjusted
financial information from an appropriate source.

If there is no audit or review report on the source from which the unadjusted financial
information has been extracted, the practitioner shall perform procedures to be satisfied that
the source is appropriate.
Assurance Engagements Page 282

In determining whether the pro forma adjustments are in accordance with the applicable
criteria, the practitioner shall determine whether they are:
 Directly attributable to the event or transaction;
 Factually supportable; If acquiree or divestee financial information is included in the pro
forma adjustments and there is no audit or review report on the source from which such
financial information has been extracted; and
 Consistent with the entity’s applicable financial reporting framework and its accounting
policies.

A modified audit opinion or review conclusion may have been expressed with respect to
either the source from which the unadjusted financial information has been extracted or the
source from which the acquiree or divestee financial information has been extracted, or a report
containing an Emphasis of Matter paragraph may have been issued with respect to such source.
In such circumstances, if the relevant law or regulation does not prohibit the use of such a
source, the practitioner shall evaluate:
 The potential consequence on whether the pro forma financial information has been
compiled, in all material respects, on the basis of the applicable criteria;
 What further appropriate action to take; and
 Whether there is any effect on the practitioner’s ability to report in accordance with the
terms of the engagement, including any effect on the practitioner’s report.

If, on the basis of the procedures performed, the practitioner identifies that the responsible
party has:
 Used an inappropriate source from which to extract the unadjusted financial information; or
 Omitted a pro forma adjustment that should be included, applied a pro forma adjustment
that is not in accordance with the applicable criteria or otherwise inappropriately applied a
pro forma adjustment, the practitioner shall discuss the matter with the responsible party.
If the practitioner is unable to agree with the responsible party as to how the matter should
be resolved, the practitioner shall evaluate what further action to take.

Evaluating the Presentation of the Pro Forma Financial Information

This shall include consideration of:

 The overall presentation and structure of the pro forma financial information, including
whether it is clearly labeled to distinguish it from historical or other financial information;
 Whether the pro forma financial information and related explanatory notes illustrate the
impact of the event or transaction in a manner that is not misleading;
 Whether appropriate disclosures are provided with the pro forma financial information to
enable the intended users to understand the information conveyed; and
 Whether the practitioner has become aware of any significant events subsequent to the date
of the source from which the unadjusted financial information has been extracted that may
require reference to, or disclosure in, the pro forma financial information.
Assurance Engagements Page 283

The practitioner shall read the other information included in the prospectus containing the pro
forma financial information to identify material inconsistencies, if any, with the pro forma
financial information or the assurance report.

Written Representations (Para 28)

The practitioner shall request written representations from the responsible party that:
 In compiling the pro forma financial information, the responsible party has identified all
appropriate pro forma adjustments necessary to illustrate the impact of the event or
transaction at the date or for the period of the illustration; and
 The pro forma financial information has been compiled, in all material respects, on the basis
of the applicable criteria.

Forming the Opinion (Para 29-30)

The practitioner shall form an opinion on whether the pro forma financial information has been
compiled, in all material respects, by the responsible party on the basis of the applicable criteria.

Form of Opinion (Para 31-34)

Unmodified Opinion
Express an unmodified opinion when the practitioner concludes that the pro forma financial
information has been compiled, in all material respects, by the responsible party on the basis of
the applicable criteria.

Modified Opinion
In many jurisdictions, the relevant law or regulation precludes publication of a prospectus that
contains a modified opinion with regard to whether the pro forma financial information has
been compiled, in all material respects, on the basis of the applicable criteria. In that case, the
practitioner shall discuss the matter with the responsible party. If the responsible party does
not agree to make the necessary changes, the practitioner shall:
 Withhold the report;
 Withdraw from the engagement; or
 Consider seeking legal advice.

Emphasis of Matter Paragraph

In some circumstances, the practitioner may consider it necessary to draw users’ attention to a
matter presented or disclosed in the pro forma financial information or the accompanying
explanatory notes. This would be the case when, in the practitioner’s opinion, the matter is of
such importance that it is fundamental to users’ understanding of whether the pro forma
financial information has been compiled, in all material respects, on basis of applicable criteria.
Assurance Engagements Page 284

In such circumstances, the practitioner shall include an Emphasis of Matter paragraph in the
practitioner’s report provided that the practitioner has obtained sufficient appropriate
evidence that the matter does not affect whether the pro forma financial information has been
compiled, in all material respects, on the basis of the applicable criteria. Such a paragraph shall
refer only to information presented or disclosed in the pro forma financial information or the
accompanying explanatory notes.

Preparing the Assurance Report (Para 35)

The practitioner’s report shall include, at a minimum, the following basic elements:
 A title that clearly indicates that the report is an independent assurance report;
 An addressee(s), as agreed in the terms of engagement;
 Introductory paragraphs that identify:
- The pro forma financial information;
- The source from which the unadjusted financial information has been extracted, and
whether or not an audit or review report on such a source has been published;
- The period covered by, or the date of, the pro forma financial information; and
- A reference to the applicable criteria on the basis of which the responsible party has
performed the compilation of the pro forma financial information, and the source of the
criteria;
 A statement that the responsible party is responsible for compiling the pro forma financial
information on the basis of the applicable criteria;
 A description of the practitioner’s responsibilities, including statements that:
- Practitioner’s responsibility is to express an opinion about whether pro forma financial
information has been compiled, in all material respects, by the responsible party on the
basis of applicable criteria;
- For purposes of this engagement, the practitioner is not responsible for updating or
reissuing any reports or opinions on any historical financial information used in
compiling the pro forma financial information, nor has the practitioner, in the course of
this engagement, performed an audit or review of the financial information used in
compiling the pro forma financial information; and
- The purpose of pro forma financial information included in a prospectus is solely to
illustrate the impact of a significant event or transaction on unadjusted financial
information of the entity as if the event had occurred or the transaction had been
undertaken at an earlier date selected for purposes of the illustration. Accordingly, the
practitioner does not provide any assurance that the actual outcome of the event or
transaction at that date would have been as presented;
 A statement that the engagement was performed in accordance with ISAE 3420;
 A statement that the firm of which the practitioner is a member applies ISQM, or other
professional requirements, or requirements in law or regulation, that are at least as
demanding as ISQM. If the practitioner is not a professional accountant, the statement shall
identify the professional requirements, or requirements in law or regulation, applied that
are at least as demanding as ISQM.
Assurance Engagements Page 285

 A statement that the practitioner complies with the independence and other ethical
requirements of the IESBA Code, or other professional requirements, or requirements
imposed by law and regulation.
 Statements that:
- A reasonable assurance engagement to report on whether the pro forma financial
information has been compiled, in all material respects, on the basis of the applicable
criteria involves performing procedures to assess whether the applicable criteria used by
the responsible party in the compilation of pro forma financial information provide a
reasonable basis for presenting significant effects directly attributable to event or
transaction, and to obtain sufficient appropriate evidence about whether:
- The related pro forma adjustments give appropriate effect to those criteria; and
- The pro forma financial information reflects the proper application of those
adjustments to the unadjusted financial information;
- The procedures selected depend on the practitioner’s judgment, having regard to the
practitioner’s understanding of the nature of the entity, the event or transaction in
respect of which the pro forma financial information has been compiled, and other
relevant engagement circumstances; and
- Engagement also involves evaluating the overall presentation of the pro forma financial
information;
 Unless otherwise required by law or regulation, practitioner’s opinion using one of the
following phrases:
- The pro forma financial information has been compiled, in all material respects, on the
basis of the [applicable criteria]; or
- The pro forma financial information has been properly compiled on the basis stated;
 The practitioner’s signature;
 The date of the report; and
 The location in the jurisdiction where the practitioner practices.
286

INTERNATIONAL
STANDARDS ON
QUALITY MANAGEMENT
(ISQM)
ISQM Page 287

QUALITY MANAGEMENT FOR FIRMS THAT PERFORM AUDITS AND REVIEWS OF

FINANCIAL STATEMENTS, OR OTHER ASSURANCE OR RELATED SERVICES
ENGAGMENTS (ISQM)

BACKGROUND:

ISQM 01 requires the firm to establish the objectives of quality components that needs to be
achieved and in order to achieve such objectives, firm is required to identify and assess the risk
to that objective and consequently design and implement responses to address the quality risk.

In order to achieve this, ISQM 01 requires the firm to design, implement and operate a System
of Quality Management (SOQM).

The Firm’s System of Quality Management

System of quality management is a system designed, implemented and operated by a firm to

provide the firm with reasonable assurance that:
i. The firm and its personnel fulfill their responsibilities in accordance with professional
standards and applicable legal and regulatory requirements, and conduct engagements in
accordance with such standards and requirements; and
ii. Engagement reports issued by the firm or engagement partners are appropriate in the
circumstances.

For the purposes of this ISQM, a system of quality management addresses the following eight
components:
(a) The firm’s risk assessment process;
(b) Governance and leadership;
(c) Relevant ethical requirements;
(d) Acceptance and continuance of client relationships and specific engagements;
(e) Engagement performance;
(f) Resources;
(g) Information and communication; and
(h) The monitoring and remediation process.

This ISQM requires the firm to apply a risk-based approach in designing, implementing and
operating the components of the system of quality management in an interconnected and
coordinated manner such that the firm proactively manages the quality of engagements
performed by the firm.
ISQM Page 288

The risk-based approach is embedded in the requirements of this ISQM through:

(a) Establishing quality objectives. The quality objectives established by the firm consist of
objectives in relation to the components of the system of quality management that are to be
achieved by the firm. The firm is required to establish the quality objectives specified by
this ISQM and any additional quality objectives considered necessary by the firm to achieve
the objectives of the system of quality management.
(b) Identifying and assessing risks to the achievement of the quality objectives (referred to in
this standard as quality risks). The firm is required to identify and assess quality risks to
provide a basis for the design and implementation of responses.
(c) Designing and implementing responses to address the quality risks. The nature, timing and
extent of the firm’s responses to address the quality risks are based on and are responsive
to the reasons for the assessments given to the quality risks.

This ISQM requires that, at least annually, the individual(s) assigned ultimate responsibility and
accountability for the system of quality management, on behalf of the firm, evaluates the system
of quality management and concludes whether the system of quality management provides the
firm with reasonable assurance that the objectives of the system are being achieved.

Networks and Service Providers

This ISQM addresses the firm’s responsibilities when the firm:

(a) Belongs to a network, and the firm complies with network requirements or uses network
services in the system of quality management or in the performance of engagements; or
(b) Uses resources from a service provider in the system of quality management or in the
performance of engagements.
Even when the firm complies with network requirements or uses network services or resources
from a service provider, the firm is responsible for its system of quality management.

Responsibilities

On the basis of appropriate experience, knowledge, influence and authority, sufficient time,
understanding and accountability for their assigned roles, the firm shall assign:
(a) Ultimate responsibility and accountability for the system of quality management to the
firm’s chief executive officer, managing partner or, if appropriate, board of partners;
(b) Operational responsibility for the system of quality management and specific aspects of the
system of quality management.
ISQM Page 289

Elements of The Firm’s System of Quality Management

The Firm’s Risk Assessment Process

The firm should:

 design and implement a risk assessment process to establish quality objectives, identify and
assess quality risks and design and implement responses to address the quality risks.
 identify and assess quality risks to provide a basis for the design and implementation of
responses by obtaining an understanding of and the degree to which the conditions, events,
circumstances, actions or inactions may adversely affect the achievement of the quality
objective.
 design and implement responses to address the quality risks in a manner that is based on,
and responsive to, the reasons for the assessments given to the quality risks.
 establish policies or procedures that are designed to identify information that indicates
additional quality objectives, or additional or modified quality risks or responses. If such
information is identified, the firm shall consider the information and when appropriate:
(a) Establish additional quality objectives or modify additional quality objectives already
established by the firm;
(b) Identify and assess additional quality risks, modify the quality risks or reassess the
quality risks; or
(c) Design and implement additional responses, or modify the responses.

Specified Responses

In designing and implementing responses, the firm shall include the following responses:
(a) The firm establishes policies or procedures for:
i. Identifying, evaluating and addressing threats to compliance with the relevant ethical
requirements; and
ii. Identifying, communicating, evaluating and reporting of any breaches of the relevant
ethical requirements and appropriately responding to the causes and consequences of
the breaches in a timely manner.

(b) The firm obtains, at least annually, a documented confirmation of compliance with
independence requirements from all personnel required by relevant ethical requirements
to be independent.
(c) The firm establishes policies or procedures for receiving, investigating and resolving
complaints and allegations about failures to perform work in accordance with professional
standards and applicable legal and regulatory requirements, or non-compliance with the
firm’s policies or procedures established in accordance with this ISQM.
(d) The firm establishes policies or procedures that address circumstances when:
i. The firm becomes aware of information subsequent to accepting or continuing a client
relationship or specific engagement that would have caused it to decline the client
ISQM Page 290

relationship or specific engagement had that information been known prior to

accepting or continuing the client relationship or specific engagement; or
ii. The firm is obligated by law or regulation to accept a client relationship or specific
engagement.
(e) The firm establishes policies or procedures that:
i. Require communication with those charged with governance when performing an
audit of financial statements of listed entities about how the system of quality
management supports the consistent performance of quality audit engagements;
ii. Address when it is otherwise appropriate to communicate with external parties about
the firm’s system of quality management; and
iii. Address the information to be provided when communicating externally including the
nature, timing and extent and appropriate form of communication.
(f) The firm establishes policies or procedures that address engagement quality reviews in
accordance with ISQM 2, and require an engagement quality review for:
i. Audits of financial statements of listed entities;
ii. Audits or other engagements for which an engagement quality review is required by
law or regulation; and
iii. Audits or other engagements for which the firm determines that an engagement quality
review is an appropriate response to address one or more quality risk(s).

Governance and Leadership

The firm should establish the following quality objectives that address the firm’s governance
and leadership:
(a) The firm demonstrates a commitment to quality through its culture
(b) Leadership is responsible and accountable for quality.
(c) Leadership demonstrates a commitment to quality through their actions and behaviors.
(d) The organizational structure and assignment of roles, responsibilities and authority is
appropriate to enable the design, implementation and operation of the firm’s system of
quality management.
(e) Resource needs, including financial resources, are planned for and resources are obtained,
allocated or assigned in a manner that is consistent with the firm’s commitment to quality.

Relevant Ethical Requirements

The firm shall establish the following quality objectives that address the fulfillment of
responsibilities in accordance with relevant ethical requirements, including those related to
independence:
i. The firm and its personnel understand and fulfil their responsibilities in relation to the
relevant ethical requirements to which the firm and the firm’s engagements are subject.
ii. Others, who are subject to same relevant ethical requirements understand and fulfil their
responsibilities in relation to the relevant ethical requirements that apply to them.
ISQM Page 291

Acceptance and Continuance of Client Relationships and Specific Engagements

The firm shall establish the following quality objectives that address the acceptance and
continuance of client relationships and specific engagements:
(a) Judgments by the firm about whether to accept or continue a client relationship or specific
engagement are appropriate based on:
i. Information obtained about the nature and circumstances of the engagement and the
integrity and ethical values of the client (including management, and, when
appropriate, those charged with governance) that is sufficient to support such
judgments; and
ii. The firm’s ability to perform the engagement in accordance with professional
standards and applicable legal and regulatory requirements.
(b) The financial and operational priorities of the firm do not lead to inappropriate judgments
about whether to accept or continue a client relationship or specific engagement.

Engagement Performance

The firm shall establish the following quality objectives that address the performance of quality
engagements:
(a) Engagement teams understand and fulfill their responsibilities in connection with the
engagements, including, as applicable, the overall responsibility of engagement partners for
managing and achieving quality on the engagement and being sufficiently and
appropriately involved throughout the engagement.
(b) The nature, timing and extent of direction and supervision of engagement teams and review
of the work performed is appropriate based on the nature and circumstances of the
engagements and the resources assigned or made available to the engagement teams, and
the work performed by less experienced engagement team members is directed, supervised
and reviewed by more experienced engagement team members.
(c) Engagement teams exercise appropriate professional judgment and, when applicable to the
type of engagement, professional skepticism.
(d) Consultation on difficult or contentious matters is undertaken and the conclusions agreed
are implemented.
(e) Differences of opinion within the engagement team, or between the engagement team and
the engagement quality reviewer or individuals performing activities within the firm’s
system of quality management are brought to the attention of the firm and resolved.
(f) Engagement documentation is assembled on a timely basis after the date of the engagement
report, and is appropriately maintained and retained to meet the needs of the firm and
comply with law, regulation, relevant ethical requirements, or professional standards.
ISQM Page 292

Resources

The firm shall establish quality objectives that address appropriately obtaining, developing,
using, maintaining, allocating and assigning following resources in a timely manner to enable
the design, implementation and operation of the system of quality management:
 Human Resources
 Technological Resources
 Intellectual Resources
 Service Providers

Information and Communication

The firm shall establish quality objectives that address obtaining, generating or using
information regarding the system of quality management, and communicating information
within the firm and to external parties on a timely basis to enable the design, implementation
and operation of the system of quality management:

Monitoring and Remediation Process

The firm shall establish a monitoring and remediation process to:

(a) Provide relevant, reliable and timely information about the design, implementation and
operation of the system of quality management.
(b) Take appropriate actions to respond to identified deficiencies such that deficiencies are
remediated on a timely basis.

Designing and Performing Monitoring Activities

The firm shall:

 design and perform monitoring activities to provide a basis for the identification of
deficiencies.
 include the inspection of completed engagements in its monitoring activities and shall
determine which engagements and engagement partners to select.
 establish policies or procedures that:
(a) Require the individuals performing the monitoring activities to have the competence,
capabilities and sufficient time; and
(b) Address the objectivity of the individuals performing the monitoring activities.

Such policies or procedures shall prohibit the engagement team members or the engagement
quality reviewer of an engagement from performing any inspection of that engagement.
ISQM Page 293

Evaluating Findings and Identifying Deficiencies

The firm shall evaluate findings to determine whether deficiencies exist, including in the
monitoring and remediation process.

Evaluating Identified Deficiencies

The firm shall evaluate the severity and pervasiveness of identified deficiencies by:
(a) Investigating the root cause(s) of the identified deficiencies.
(b) Evaluating the effect of the identified deficiencies, individually and in aggregate, on the
system of quality management.

Responding to Identified Deficiencies

The firm shall design and implement remedial actions to address identified deficiencies that are
responsive to the results of the root cause analysis.

The individual(s) assigned operational responsibility for the monitoring and remediation
process shall evaluate whether the remedial actions:
(a) Are appropriately designed; and
(b) Implemented to address previously identified deficiencies are effective.

If the evaluation indicates that the remedial actions are not appropriately designed and
implemented or are not effective, the individual(s) assigned operational responsibility for the
monitoring and remediation process shall take appropriate action to determine that the
remedial actions are appropriately modified such that they are effective.

Findings About a Particular Engagement

The firm shall respond to circumstances when findings indicate that there is an engagement(s)
for which procedures required were omitted during the performance of the engagement(s) or
the report issued may be inappropriate.

Ongoing Communication Related to Monitoring and Remediation

The individual(s) assigned operational responsibility for the monitoring and remediation
process shall communicate on a timely basis to the:
 individual(s) assigned ultimate responsibility and accountability for the system of quality
management.
 individual(s) assigned operational responsibility for the system of quality management:
ISQM Page 294

The firm shall communicate such information to engagement teams and other individuals
assigned activities within the system of quality management to enable them to take prompt and
appropriate action in accordance with their responsibilities.

Network Requirements or Network Services

When the firm belongs to a network, the firm shall:

 understand, when applicable:
(a) network requirements;
(b) network services; and
(c) The firm’s responsibilities for any actions that are necessary to implement the network
requirements or use network services.

 determine how the network requirements or network services are relevant to, and are taken
into account in, the firm’s system of quality management, including how they are to be
implemented; and
 evaluate whether and, if so, how the network requirements or network services need to be
adapted or supplemented by the firm to be appropriate for use in its system of quality
management.

The firm shall not allow compliance with the network requirements or use of network services
to contravene the requirements of this ISQM.

Monitoring Activities Undertaken by the Network on the Firm’s System of Quality

Management

When the network performs monitoring activities relating to the firm’s system of quality
management, the firm shall:
(a) Determine the effect of the monitoring activities performed by the network on the nature,
timing and extent of the firm’s monitoring activities;
(b) Determine the firm’s responsibilities in relation to the monitoring activities, including any
related actions by the firm; and
(c) Obtain the results of the monitoring activities from the network in a timely manner.

Monitoring Activities Undertaken by the Network Across the Network Firms

The firm should:

(a) Understand the overall scope of the monitoring activities undertaken by the network across
the network firms, including monitoring activities to determine that network requirements
have been appropriately implemented across the network firms, and how the network will
communicate the results of its monitoring activities to the firm;
(b) At least annually, obtain information from the network about the overall results of the
network’s monitoring activities across the network firms, if applicable, and:
ISQM Page 295

(i) Communicate the information to engagement teams and other individuals assigned
activities within the system of quality management, as appropriate, to enable them to
take prompt and appropriate action in accordance with their responsibilities; and
(ii) Consider the effect of the information on the firm’s system of quality management.

Deficiencies in Network Requirements or Network Services Identified by the Firm

If the firm identifies a deficiency in the network requirements or network services, the firm
should communicate to the network relevant information about the identified deficiency and
design and implement remedial actions.

Evaluating the System of Quality Management

The individual(s) assigned ultimate responsibility and accountability for the system of quality
management should evaluate, on behalf of the firm, the system of quality management
performed at least annually.

Based on the conclusion of the evaluation, the firm should:

(a) Take prompt and appropriate action; and
(b) Communicate to engagement teams, other individuals assigned activities within the system
of quality management and external parties.

Documentation

The firm should prepare documentation of its system of quality management.

ISQM Page 296

ENGAGEMENT QUALITY CONTROL REVIEW (ISQM 2)

BACKROUND

ISQM 2 replaces the extant provisions relating to engagement quality reviews in ISQM and ISA
220. Having a separate standard for engagement quality reviews provides a number of benefits,
including:

(a) Placing emphasis on the importance of the engagement quality review;

(b) Enhancing the robustness of the requirements for the eligibility of engagement quality
reviewers and the performance and documentation of the review;
(c) Providing a mechanism to more clearly differentiate the responsibilities of the firm and the
engagement quality reviewer; and
(d) Increasing the scalability of ISQM 1 because there may be cases when a firm may determine
that there are no audits or other engagements for which an engagement quality review is
an appropriate response to address one or more quality risk(s).

How Is ISQM 2 Linked to ISQM 1?

ISQM 2 is designed to operate as part of the firm’s system of quality management, and therefore
the requirements in ISQM 1 and ISQM 2 are organized in a manner that provide appropriate
linkages between the standards:
 ISQM 1 addresses the scope of engagements subject to an engagement quality review; and
 ISQM 2 addresses the specific requirements for the appointment and eligibility of the
engagement quality reviewer and the performance and documentation of the review.

How Is ISQM 2 Linked to ISA 220 (Revised)?

Although there are no longer requirements for the performance of engagement quality reviews
in ISA 220 (Revised 2019), the revised standard still contains requirements regarding the
engagement partner’s responsibilities relating to the engagement quality review, which largely
focus on how the engagement partner and the engagement team interact with the engagement
quality reviewer.

Scope of this ISQM

This International Standard on Quality Management (ISQM) deals with:

(a) The appointment and eligibility of the engagement quality reviewer; and
(b) The engagement quality reviewer’s responsibilities relating to the performance and
documentation of an engagement quality review.
ISQM Page 297

Appointment and Eligibility of Engagement Quality Reviewers

The firm should establish policies or procedures that require the assignment of responsibility
for the appointment of engagement quality reviewers to an individual(s) with the competence,
capabilities and appropriate authority within the firm to fulfill the responsibility. Those policies
or procedures require such individual(s) to appoint the engagement quality reviewer.

The firm should establish policies or procedures that set forth the criteria for eligibility to be
appointed as an engagement quality reviewer. Those policies or procedures should require that
the engagement quality reviewer is not a member of the engagement team, and:
(a) Has the competence and capabilities, including sufficient time, and the appropriate
authority to perform the engagement quality review;
(b) Complies with relevant ethical requirements, including in relation to threats to objectivity
and independence of the engagement quality reviewer; and
(c) Complies with provisions of law and regulation, if any, that are relevant to the eligibility of
the engagement quality reviewer.

The firm’s policies or procedures should also address threats to objectivity created by an
individual being appointed as an engagement quality reviewer after previously serving as the
engagement partner. Such policies or procedures should specify a cooling-off period of two
years, or a longer period if required by relevant ethical requirements, before the engagement
partner can assume the role of engagement quality reviewer.

The firm should establish policies or procedures for eligibility of individuals who assist the
engagement quality reviewer that such individuals not be members of the engagement team,
and:
(a) Have the competence and capabilities, including sufficient time, to perform the duties
assigned to them; and
(b) Comply with relevant ethical requirements, including in relation to threats to their
objectivity and independence and, if applicable, the provisions of law and regulation.

The firm should establish policies or procedures that:

(a) Require the engagement quality reviewer to take overall responsibility for the performance
of the engagement quality review; and
(b) Address the engagement quality reviewer’s responsibility for determining the nature,
timing and extent of the direction and supervision of the individuals assisting in the review,
and the review of their work.
ISQM Page 298

Impairment of the Engagement Quality Reviewer’s Eligibility to Perform the Engagement

Quality Review

The firm should establish policies or procedures that address circumstances in which the
engagement quality reviewer’s eligibility to perform the engagement quality review is impaired
and the appropriate actions to be taken by the firm, including the process for identifying and
appointing a replacement in such circumstances.

When the engagement quality reviewer becomes aware of circumstances that impair the
engagement quality reviewer’s eligibility, the engagement quality reviewer should notify the
appropriate individual(s) in the firm, and:

(a) If the engagement quality review has not commenced, decline the appointment to perform
the engagement quality review; or
(b) If the engagement quality review has commenced, discontinue the performance of the
engagement quality review.

Performance of the Engagement Quality Review

The firm should establish policies or procedures regarding the performance of the engagement
quality review that address:
(a) The engagement quality reviewer’s responsibilities to perform procedures during the
engagement to provide an appropriate basis for an objective evaluation of the significant
judgments made by the engagement team and the conclusions reached thereon;
(b) The responsibilities of the engagement partner in relation to the engagement quality
review, including that the engagement partner is precluded from dating the engagement
report until notification has been received from the engagement quality reviewer that the
engagement quality review is complete; and
(c) Circumstances when the nature and extent of engagement team discussions with the
engagement quality reviewer about a significant judgment give rise to a threat to the
objectivity of the engagement quality reviewer, and appropriate actions to take in these
circumstances.

In performing the engagement quality review, the engagement quality reviewer shall:
(a) obtain an understanding of, information communicated by:
i. The engagement team regarding the nature and circumstances of the engagement and
the entity; and
ii. The firm related to the firm’s monitoring and remediation process.
(b) Discuss with the engagement partner and, if applicable, other members of the engagement
team, significant matters and significant judgments made in planning, performing and
reporting on the engagement.
ISQM Page 299

(c) Based on the information obtained in (a) and (b), review selected engagement
documentation relating to the significant judgments made by the engagement team and
evaluate:
i. The basis for making those significant judgments;
ii. Whether the engagement documentation supports the conclusions reached; and
iii. Whether the conclusions reached are appropriate.
(d) For audits of financial statements, evaluate the basis for the engagement partner’s
determination that relevant ethical requirements relating to independence have been
fulfilled.
(e) Evaluate whether appropriate consultation has taken place on difficult or contentious
matters or matters involving differences of opinion and the conclusions arising from those
consultations.
(f) For audits of financial statements, evaluate the basis for the engagement partner’s
determination that the engagement partner’s involvement has been sufficient and
appropriate throughout the audit engagement such that the engagement partner has the
basis for determining that the significant judgments made and the conclusions reached are
appropriate given the nature and circumstances of the engagement.
(g) Review:
i. For audits of financial statements, the financial statements and the auditor’s report
thereon, including, if applicable, the description of the key audit matters;
ii. For review engagements, the financial statements or financial information and the
engagement report thereon; or
iii. For other assurance and related services engagements, the engagement report, and
when applicable, the subject matter information.

The engagement quality reviewer should notify the engagement partner if the engagement
quality reviewer has concerns that the significant judgments made by the engagement team, or
the conclusions reached thereon, are not appropriate. If such concerns are not resolved to the
engagement quality reviewer’s satisfaction, the engagement quality reviewer should notify an
appropriate individual(s) in the firm that the engagement quality review cannot be completed.

Completion of the Engagement Quality Review

The engagement quality reviewer should determine whether the requirements in this ISQM
with respect to the performance of the engagement quality review have been fulfilled, and
whether the engagement quality review is complete. If so, the engagement quality reviewer
should notify the engagement partner that the engagement quality review is complete.
ISQM Page 300

Documentation

The firm should establish policies or procedures that require the engagement quality reviewer
to take responsibility for documentation of the engagement quality review.

The engagement quality reviewer should determine that the documentation of the engagement
quality review is sufficient to enable an experienced practitioner, having no previous
connection with the engagement, to understand the nature, timing and extent of the procedures
performed by the engagement quality reviewer and, when applicable, individuals who assisted
the reviewer, and the conclusions reached in performing the review.

Summary

THE ISQM 01 requires the quality review of those engagements that are subject to Engagement
Quality Review. For that purpose ISQM 02 requires the following:
 Eligibility of Engagement Quality Reviewers
 Compliance with relevant Ethical Requirements
 Overall Responsibility for the performance of the Engagement Quality Review
- Timing of the Engagement Quality Review
- Significant Judgements and Significant matters
- Professional Skepticism
- Independence and consultation
- Sufficient and Appropriate Involvement of the Engagement Partner on the Engagement
- Group Audit Consideration
- Completion of the Engagement Quality Review
- Documentation of the Engagement Quality Review
 CODE OF ETHICS FOR
CHARTERED ACCOUNTANTS
(2019 EDITION)
A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act
in the public interest. A CA’s responsibility is not exclusively to satisfy the needs of an individual
client or employing organization. The Code contains requirements and application material to
enable CAs to meet their responsibility to act in the public interest. (100.1 A1)

The Requirements in the Code, designated with the letter “R” impose obligations. (100.2 A1)

Application material, designated with letter “A” provides context, explanations, suggestions for
actions or matters to consider, illustrations and other guidance relevant to a proper
understanding of the Code. While such application material does not of itself impose a
requirement, consideration of the material is necessary to the proper application of the
requirements of the Code, including application of the conceptual framework. (100.2 A2)

There might be circumstances where laws or regulations preclude an accountant from complying
with certain parts of Code. In such circumstances, those laws and regulations prevail, and the
accountant shall comply with all other parts of the Code (R100.3 A)

Some jurisdictions might have provisions that differ from or go beyond those set out in the Code.
Accountants in those jurisdictions need to be aware of those differences and comply with the more
stringent provisions unless prohibited by law or regulation. (100.3 A1)

A CA might encounter unusual circumstances in which he believes that result of applying a

specific requirement of Code would be disproportionate or might not be in public interest. In
that cases, he is encouraged to consult with a professional or regulatory body (100.3 A2)
Code of Ethics Page 302

PART 1 COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND

CONCEPTUAL FRAMEWORK

INTRODUCTION AND FUNDAMENTAL PRINCIPLES (110)

1) INTEGRITY (111)

 Straightforward & honest in professional & business relationships

 Integrity also implies fair dealing and truthfulness.
 Should not be associated with reports, returns, communications or other information
where they believe that the information:
- Contains a materially false or misleading statement;
- Contains statements or information furnished recklessly; or
- Omits or obscures required information to mislead
 When a CA becomes aware of having been associated with such information, he shall take
steps to be disassociated from that.
 If CA provides a modified report in respect of such information, he is not in breach of code

2) OBJECTIVITY (112)

 Not to compromise their professional or business judgment because of bias, conflict of

interest or the undue influence of others.
 A CA shall not undertake a professional activity if a circumstance or relationship unduly
influences the accountant’s professional judgment regarding that activity.

3) PROFESSIONAL COMPETENCE & DUE CARE (113)

 Maintain & apply professional knowledge and skill to ensure that clients or employers
receive competent professional service (using sound judgements)
 Act diligently in accordance with applicable technical and professional standards (carefully,
thoroughly and on a timely basis) when providing professional services.
 Professional competence may be divided into two separate phases:
- Attainment of professional competence; and
- Maintenance of professional competence.
 Maintaining professional competence requires continuing awareness and understanding of
relevant technical, professional and business developments. Continuing professional
development (CPD) enables a CA to develop and maintain such competence
 CA shall also take reasonable steps to ensure that those working under his authority have
appropriate training and supervision.
 Where appropriate, a CA shall make clients, employers or other users of the professional
services or activities, aware of the limitations inherent in the services or activities.
Code of Ethics Page 303

4) CONFIDENTIALITY (114)

CA should respect the confidentiality of information acquired as a result of professional and

business relationships.
 Be alert to the possibility of inadvertent disclosure, including in a social environment, and
particularly to a close business associate or an immediate or a close family member;
 Maintain confidentiality of information within the firm or employing organization;
 Maintain confidentiality of information disclosed by a prospective client/employer;
 Not disclose confidential information acquired as a result of professional and business
relationships outside firm or employing organization without proper & specific authority;
 Not use such confidential information for personal or any 3rd party advantage;
 Not use or disclose any such confidential information, after that relationship has ended;
 Take reasonable steps to ensure that personnel under CA’s control, and individuals from
whom advice and assistance are obtained, respect the accountant’s duty of confidentiality.

Circumstances where CAs are or may be required to disclose confidential information:

 Disclosure is permitted by law and is authorized by the client or the employer;

 Disclosure is required by law, for example:
- Production of documents or other provision of evidence in the course of legal
proceedings
- Disclosure to appropriate public authorities of violation of law that come to light
 Professional duty or right to disclose, when not prohibited by law:
- To comply with QCR program of ICAP;
- To respond to an inquiry or investigation by ICAP or other regulatory body;
- To protect professional interests of a CA in legal proceedings
- To comply with technical standards and ethics requirements.

In deciding whether to disclose confidential information, CAs should consider following:

 Whether interests of any parties, including 3rd parties, could be harmed if the client or
employing organization consents to the disclosure of information by the CA.
 Whether all relevant information is known and corroborated, to the extent practicable and
does not involve Incomplete information and Unsubstantiated facts or conclusions
 The proposed type of communication, and to whom it is addressed
 Whether the parties to whom the communication is addressed are appropriate recipients

5) PROFESSIONAL BEHAVIOR (115)

 Should comply with relevant laws and regulations and avoid any action that may bring
discredit to the profession.
 A CA shall not knowingly engage in any business, occupation or activity that impairs or
might impair the integrity, objectivity or good reputation of the profession, and as a result
would be incompatible with the fundamental principles
Code of Ethics Page 304

CONCEPTUAL FRAMEWORK (120)

The conceptual framework specifies an approach for a CA to:

 Identify threats to compliance with the fundamental principles;
 Evaluate the threats identified; and
 Address the threats by eliminating or reducing them to an acceptable level.

When applying the conceptual framework, the CA shall:

1) Exercise professional judgment;

 It involves application of relevant training, professional knowledge, skill and experience

matching with the facts and circumstances, including nature and scope of particular
professional activities, and interests and relationships involved.
 An understanding of known facts & circumstances is a prerequisite in applying framework
- Required when the CA applies the conceptual framework in order to make informed
decisions about the courses of actions available and appropriateness of the same
- Also required in determining the actions necessary to obtain this understanding and
coming to conclusion about whether fundamental principles have been complied with
 In exercising professional judgment CA might consider, among other matters, whether:
- A concern that potentially relevant information might be missing from the facts and
circumstances known to the accountant.
- There is an inconsistency between known facts & circumstances and CA’s expectations.
- The expertise and experience are sufficient to reach a conclusion.
- There is a need to consult with others with relevant expertise or experience.
- The information provides a reasonable basis on which to reach a conclusion.
- CA’s own preconception or bias might be affecting exercise of professional judgment.
- There might be other reasonable conclusions that could be reached from available info.

2) Remain alert for new information and to changes in facts and circumstances; and

3) Use the reasonable and informed third party test.

- Whether the same conclusions would likely be reached by another party.

- Consideration is made from the perspective of a reasonable and informed third party,
who weighs all the relevant facts and circumstances that the accountant knows, or could
reasonably be expected to know, at the time the conclusions are made.
- 3rd party does not need to be an accountant, but would possess the relevant knowledge
and experience to understand and evaluate the appropriateness of the actions
Code of Ethics Page 305

Identifying Threats

 It involves understanding of facts and circumstances, including any professional activities,

interests & relationships that might compromise compliance with fundamental principles
 Existence of certain conditions, policies and procedures established by the profession,
legislation, regulation, firm, or employing organization might also help identify threats e.g.
- Corporate governance requirements.
- Educational, training and experience requirements for the profession.
- Effective complaint systems which enable CA and general public to draw attention to
unethical behavior.
- An explicitly stated duty to report breaches of ethics requirements.
- Professional or regulatory monitoring and disciplinary procedures.
 It is not possible to define every situation that creates threats.
 Threats fall into one or more of the following categories:

Threat Description
Self Interest A financial or other interest will inappropriately influence a CA’s
judgment or behavior
Self-review May not appropriately evaluate results of a previous judgment made;
or an activity performed by accountant, or by another within his firm
or employing organization, on which he will rely when forming
judgment
Advocacy CA will promote a client’s or employer’s position to the point that the
accountant’s objectivity is compromised
Familiarity Due to long or close relationship with client, or employer, CA will be
too sympathetic to their interests or too accepting of their work
Intimidation CA will be deterred from acting objectively because of actual or
perceived pressures, including attempts to exercise undue influence
Note: A circumstance might create more than one threat, and a threat might affect compliance
with more than one fundamental principle.

Evaluating Threats

 After identifying a threat, he shall evaluate whether such a threat is at an acceptable level
as per 3rd party test.
 Both qualitative as well as quantitative factors should be considered
 If CA becomes aware of new information or changes in facts and circumstances, he shall re-
evaluate to determine:
- The level of a threat;
- Whether previous safeguards applied continue to be appropriate to address threats; or
- Identification of any new threat
Code of Ethics Page 306

Addressing Threats

The accountant shall address the threats by

 Eliminating the circumstances, including interests or relationships, that creating threats;
 Applying available and applicable safeguards to reduce threats to an acceptable level; or
 Declining or ending the specific professional activity.
In forming the overall conclusion about safeguards applied or planned, the accountant shall:
 Review any significant judgments made or conclusions reached; and
 Use the reasonable and informed third party test.

Considerations for Audits, Reviews and Other Assurance Engagements

Independence

 CAs in practice are required by International Independence Standards to be independent

when performing audits, reviews, or other assurance engagements.
 Independence is linked to the fundamental principles of objectivity and integrity.
 It comprises:
- Independence of mind – the state of mind that permits the expression of a conclusion
without being affected by influences that compromise professional judgment
- Independence in appearance – the avoidance of facts and circumstances that are so
significant that reasonable & informed 3rd party would likely to conclude that firm’s or
team member’s integrity, objectivity or professional skepticism has been compromised
 Categories of threats to compliance with fundamental principles are also the categories of
threats to compliance with independence requirements.

Professional Skepticism

 CAs in practice are required to exercise professional skepticism when planning and
performing audits, reviews and other assurance engagements.
 Professional skepticism and fundamental principles are inter-related concepts
Code of Ethics Page 307

PART 2 CHARTERED ACCOUNTANTS (CAs) IN BUSINESS

APPLYING THE CONCEPTUAL FRAMEWORK

CAS IN BUSINES (SECTION 200)

A CA in business might be an employee, contractor, partner, director (executive or non-

executive), owner-manager, or volunteer of an employing organization. The legal form of the
relationship of the accountant with the employing organization has no bearing on the ethical
responsibilities placed on the accountant.

Identifying Threats

Following are examples of facts and circumstances within each of those categories of threats
that might create threats for a CA when undertaking a professional service:
Threat Examples
Self-interest  A CA holding a financial interest in, or receiving a loan or guarantee from,
the employing organization.
 A CA participating in incentive compensation arrangements offered by
the employing organization.
 A CA having access to corporate assets for personal use.
 A CA being offered a gift or special treatment from a supplier of the
employing organization.

Self-review  A CA determining the appropriate accounting treatment for a business

combination after performing the feasibility study supporting the
purchase decision.

Advocacy  A CA having the opportunity to manipulate information in a prospectus

in order to obtain favorable financing

Familiarity  A CA being responsible for the financial reporting of the employing

organization when an immediate or close family member employed by
the organization makes decisions that affect the financial reporting of the
organization.
 A CA having a long association with individuals influencing business
decisions.

Intimidation  A CA or immediate or close family member facing the threat of dismissal

or replacement over a disagreement about:
 The application of an accounting principle.
 The way in which financial information is to be reported
Code of Ethics Page 308

Evaluating Threats

The CA’s evaluation of the level of a threat might be impacted by the work environment within
the employing organization and its operating environment. For example:
 Leadership that stresses the importance of ethical behavior and the expectation that
employees will act in an ethical manner.
 Policies and procedures to empower and encourage employees to communicate ethics
issues that concern them to senior levels of management without fear of retribution.
 Policies and procedures to implement and monitor the quality of employee performance.
 Systems of corporate oversight or other oversight structures and strong internal controls.
 Recruitment procedures emphasizing the importance of employing high caliber competent
personnel.
 Timely communication of policies and procedures, including any changes to them, to all
employees, and appropriate training and education on such policies and procedures.
 Ethics and code of conduct policies.

Addressing Threats and Communicating with TCWG

 When communicating with those charged with governance in accordance with the Code, a
CA shall determine the appropriate individual(s) within the employing organization’s
governance structure with whom to communicate.
 In determining with whom to communicate, a CA might consider the nature and importance
of the circumstances; and matter to be communicated.
 If a CA communicates with individuals who have management responsibilities as well as
governance responsibilities, the accountant shall be satisfied that communication with
those individuals adequately informs all of those in a governance role with whom the
accountant would otherwise communicate
 In extreme situations, if the circumstances that created the threats cannot be eliminated
and safeguards are not available or capable of being applied to reduce the threat to an
acceptable level, it might be appropriate for a CA to resign from the employing organization
Code of Ethics Page 309

CONFLICTS OF INTEREST (SECTION 210)

Conflict of interest creates threats to compliance with principle of objectivity and might create
threats to compliance with other fundamental principles. Such threats might be created when:
 A CA provides a professional service related to a particular matter for 2 or more clients
whose interests with respect to that matter are in conflict; or
 The interests of a CA with respect to a particular matter and the interests of the client for
whom the accountant provides a professional service related to that matter are in conflict.

Examples of circumstances that might create a conflict of interest include:

 Serving in a management or governance position for two employing organizations and
acquiring confidential information from one organization that might be used by the CA to
the advantage or disadvantage of the other organization.
 Undertaking a professional activity for each of two parties in a partnership, where both
parties are employing the accountant to assist them to dissolve their partnership
 Preparing financial information for certain members of management of the accountant’s
employing organization who are seeking to undertake a management buy-out.
 Being responsible for selecting a vendor for the employing organization when an immediate
family member of the accountant might benefit financially from the transaction.
 Serving in a governance capacity in an employing organization that is approving certain
investments for the company where one of those investments will increase the value of the
investment portfolio of the accountant or an immediate family member.

Conflict Identification

 A CA shall take reasonable steps to identify circumstances that might create a conflict of
interest.
 Such steps shall include identifying:
- Nature of the relevant interests and relationships between the parties involved; and
- The service and its implication for relevant parties.

Threats Created by Conflicts of Interest

 Level of threat will be more than acceptable level if connection between the professional
activity and the matter on which the parties’ interests conflict is more
 Examples of other safeguards to address threats include:
- Restructuring or segregating certain responsibilities and duties.
- Obtaining appropriate oversight, for example, acting under the supervision of an
executive or non-executive director.
- CA is encouraged to seek guidance from within the employing organization or from
others, such as a professional body, legal counsel or another accountant. When dong that
name of organizations must be kept anonymous
- withdrawing from the decision-making process related to the matter giving rise to the
conflict of interest
Code of Ethics Page 310

Disclosure and Consent

It is generally necessary to:

 Disclose the nature of the conflict of interest and how any threats created were addressed
to the relevant parties.
 Obtain consent from the relevant parties for the CA to undertake the professional activity
when safeguards are applied to address the threat.
 There can be implied consent when the CA has sufficient evidence to conclude that the
parties know the circumstances at the outset and have accepted the conflict of interest if
they do not raise an objection to the existence of the conflict.

If such disclosure or consent is not in writing, the CA is encouraged to document:

 The nature of the circumstances giving rise to the conflict of interest;
 The safeguards applied to address the threats when applicable; and
 The consent obtained
Code of Ethics Page 311

PREPARATION AND PRESENTATION OF INFORMATION (SECTION 220)

CAs at all levels in an employing organization are involved in the preparation or presentation
of financial and non-financial information like Operating and performance reports, Decision
support analyses, Budgets and forecasts, Risk analyses, Information provided to the internal and
external auditors, General and special purpose financial statements, Tax returns, Reports filed
with regulatory bodies for legal and compliance purposes both within and outside the
organization for Management and TCWG, Investors and lenders or other creditors and various
Regulatory Bodies in order to assist stakeholders in understanding and evaluating state of
affairs and decision making process.

Such Preparing/presenting information might create self-interest, intimidation or other threats

As safeguards when preparing or presenting information, a CA shall:

 Prepare or present the information in accordance with a relevant reporting framework,
where applicable;
 Prepare or present the information in a manner that is intended neither to mislead nor to
influence contractual or regulatory outcomes inappropriately;
 Exercise professional judgment to:
- Represent the facts accurately and completely in all material respects;
- Describe clearly the true nature of business transactions or activities; and
- Classify and record information in a timely and proper manner; and
 Not omit anything with the intention of rendering the information misleading or of
influencing contractual or regulatory outcomes inappropriately

Use of Discretion in Preparing or Presenting Information

Preparing or presenting information might require the exercise of discretion in making

professional judgments. However no such discretion shall be applied with the intention of
misleading others or influencing contractual or regulatory outcomes inappropriately.
Examples of ways in which discretion might be misused to achieve inappropriate outcomes:
 Determining estimates, for example, determining fair value estimates in order to
misrepresent profit or loss.
 Selecting or changing an accounting policy or method among two or more alternatives
permitted under the applicable financial reporting framework, for example, selecting a
policy for accounting for long- term contracts in order to misrepresent profit or loss.
 Determining the timing of transactions, for example, timing the sale of an asset near the end
of the fiscal year in order to mislead.
 Determining the structuring of transactions, for example, structuring financing transactions
in order to misrepresent assets and liabilities or classification of cash flows.
 Selecting disclosures, for example, omitting or obscuring information relating to financial
or operating risk in order to mislead
 Code of Ethics Page 312

When performing professional activities, especially those that do not require compliance with a
relevant reporting framework, like pro forma reports, budgets or forecasts the CA shall exercise
professional judgment to identify and consider:
 The purpose for which the information is to be used;
 The context within which it is given; and
 The audience to whom it is addressed

Relying on the Work of Others

A CA who intends to rely on the work of others, either internal or external to the employing
organization, shall exercise professional judgment whether to use the work or not based on
below factors
 Reputation & expertise of, and resources available to, the other individual or organization.
 Whether the other individual is subject to applicable professional and ethics standards.

Addressing Information that is or Might be Misleading

When the CA knows that he is associated is misleading, the accountant shall take appropriate
actions to seek to resolve the matter which may be:
 Discussing concerns with appropriate level(s) of management within the accountant’s
employing organization or those charged with governance, and requesting such individuals
to take appropriate action to resolve the matter. Such action might include:
- Having the information corrected.
- If the information has already been disclosed to the intended users, informing them of
the correct information.
 Consulting the policies and procedures of the employing organization (for example, an
ethics or whistle-blowing policy) regarding how to address such matters internally.
 Consulting with:
- A relevant professional body.
- The internal or external auditor of the employing organization.
- Legal counsel.
 Determining whether any requirements exist to communicate to Third parties, including
users of the information and Regulatory and oversight authorities
 In extreme circumstances he should resign from the employing organization

Documentation

The CA is encouraged to document the facts, accounting principles or other relevant professional
standards involved, the communications and parties with whom matters were discussed, courses
of action considered and how the accountant attempted to address the matter(s).
 Code of Ethics Page 313

ACTING WITH SUFFICIENT EXPERTISE (SECTION 230)

The principle of professional competence and due care requires that a CA only undertake
significant tasks for which the accountant has, or can obtain, sufficient training or
experience.

A self interest threat might be created if there is:

 Insufficient time for performing or completing the relevant duties.
 Incomplete, restricted or otherwise inadequate information for performing the duties.
 Insufficient experience, training and/or education.
 Inadequate resources for the performance of the duties

Factors that are relevant in evaluating the level of such a threat include:
 The extent to which the CA is working with others.
 The relative seniority of the accountant in the business.
 The level of supervision and review applied to the work
 If accountant determines that declining is appropriate, the accountant shall communicate
the reasons.
Code of Ethics Page 314

FINANCIAL INTERESTS, COMPENSATION AND INCENTIVES LINKED TO FINANCIAL

REPORTING AND DECISION MAKING (SECTION 240)

CAs might have financial interests of immediate or close family members that, in certain
circumstances, it might create threats to compliance with the fundamental principles.

Examples of circumstances that might create a self-interest threat include situations in which
the CA or an immediate or close family member:
 Has a motive and opportunity to manipulate price-sensitive information in order to gain
financially.
 Holds a direct or indirect financial interest in the employing organization and the value of
that financial interest might be directly affected by decisions made by the accountant.
 Is eligible for a profit-related bonus and the value of that bonus might be directly affected
by decisions made by the accountant.
 Holds, directly or indirectly, deferred bonus share rights or share options in the employing
organization, the value of which might be affected by decisions made by the accountant.
 Participates in compensation arrangements which provide incentives to achieve targets or
to support efforts to maximize the value of the employing organization’s shares. An example
of such an arrangement might be through participation in incentive plans which are linked
to certain performance conditions being met.

Factors that are relevant in evaluating the level of such a threat include:
 The significance of the financial interest. What constitutes a significant financial interest
will depend on personal circumstances and the materiality of the financial interest to the
individual.
 Policies and procedures for a committee independent of management to determine the
level or form of senior management remuneration.
 In accordance with any internal policies, disclosure to those charged with governance of:
- All relevant interests.
- Any plans to exercise entitlements or trade in relevant shares.
 Internal and external audit procedures that are specific to address issues that give rise to
the financial interest.
Code of Ethics Page 315

INDUCEMENTS, INCLUDING GIFTS AND HOSPITALITY (SECTION 250)

An inducement is an object, situation, or action that is used as a means to influence another
individual’s behavior. Inducements can range from minor acts of hospitality between business
colleagues to acts that result in non-compliance with laws and regulations. Offering or accepting
inducements might create a self-interest, familiarity or intimidation threat to compliance with
the fundamental principles, particularly the principles of integrity, objectivity and professional
behavior. An inducement can take many different forms, for example:
 Gifts.
 Hospitality.
 Entertainment.
 Political or charitable donations.
 Appeals to friendship and loyalty.
 Employment or other commercial opportunities.
 Preferential treatment, rights or privileges

Inducements with Intent to Improperly Influence Behavior

A CA shall not offer or accept, or encourage others to offer or accept, any inducement that is
made, or which the accountant considers a reasonable and informed third party would be likely
to conclude is made, with the intent to improperly influence the behavior of the recipient or of
another individual.

The determination of whether there is actual or perceived intent to improperly influence

behavior requires the exercise of professional judgment. Relevant factors to consider might
include:
 The nature, frequency, value and cumulative effect of the inducement.
 Timing of when the inducement is offered relative to any action or decision that it might
influence.
 Whether the inducement is a customary or cultural practice in the circumstances, for
example, offering a gift on the occasion of a religious holiday or wedding.
 Whether the inducement is an ancillary part of a professional activity, for example, offering
or accepting lunch in connection with a business meeting.
 Whether the offer of the inducement is limited to an individual recipient or available to a
broader group. The broader group might be internal or external to the employing
organization, such as other customers or vendors.
 The roles and positions of the individuals offering or being offered the inducement.
 Whether the CA knows, or has reason to believe, that accepting the inducement would
breach the policies and procedures of the counterparty’s employing organization.
 The degree of transparency with which the inducement is offered.
 Whether the inducement was required or requested by the recipient.
 The known previous behavior or reputation of the offeror.
Consideration of Further Actions
Code of Ethics Page 316

If the CA becomes aware of an inducement offered with actual or perceived intent to

improperly influence behavior, threats to compliance with the fundamental principles might
still be created

Examples of actions that might be safeguards to address such threats include:

 Informing senior management or those charged with governance of the employing
organization of the CA or the offeror regarding the offer.
 Amending or terminating the business relationship with the offeror.

Inducements with No Intent to Improperly Influence Behavior

Examples of circumstances where offering or accepting such an inducement might create

threats even if the CA has concluded there is no actual or perceived intent to improperly
influence behavior include:
 Self-interest threats - A CA is offered part-time employment by a vendor.
 Familiarity threats - A CA regularly takes a customer or supplier to sporting events.
 Intimidation threats - A CA accepts hospitality, the nature of which could be perceived to be
inappropriate were it to be publicly disclosed.

Examples of actions that might eliminate threats created by offering or accepting such an
inducement include:
 Declining or not offering the inducement.
 Transferring responsibility for any business-related decision involving the counterparty to
another individual who the CA has no reason to believe would be, or would be perceived to
be, improperly influenced in making the decision.
 Being transparent with senior management or those charged with governance of the
employing organization of the CA or of the counterparty about offering or accepting an
inducement.
 Registering the inducement in a log maintained by the employing organization of the
accountant or the counterparty.
 Having an appropriate reviewer, who is not otherwise involved in undertaking the
professional activity, review any work performed or decisions made by the accountant with
respect to the individual or organization from which the accountant accepted the
inducement.
 Donating the inducement to charity after receipt and appropriately disclosing the donation,
for example, to those charged with governance or the individual who offered the
inducement.
 Reimbursing the cost of the inducement, such as hospitality, received.
 As soon as possible, returning the inducement, such as a gift, after it was initially accepted.
Code of Ethics Page 317

Immediate or Close Family Members

Where the CA becomes aware of an inducement being offered to or made by an immediate or

close family member and concludes there is intent to improperly influence the behavior of the
accountant or of the counterparty, or considers a reasonable and informed third party would
be likely to conclude such intent exists, the accountant shall advise the immediate or close
family member not to offer or accept the inducement

Factor that is relevant is the nature or closeness of the relationship, between:

 The accountant and the immediate or close family member;
 The immediate or close family member and the counterparty; and
 The accountant and the counterparty.

For example, the offer of employment, outside of the normal recruitment process, to the
spouse of the accountant by a counterparty with whom the accountant is negotiating a
significant contract might indicate such intent.
Code of Ethics Page 318

RESPONDING TO NON-COMPLIANCE WITH LAWS AND REGULATIONS (260)

A self-interest or intimidation threat to compliance with the principles of integrity and

professional behavior is created when a CA becomes aware of non-compliance or suspected
non-compliance with laws and regulations.

Non-compliance with laws and regulations comprises acts of omission or commission,

intentional or unintentional, which are contrary to the prevailing laws or regulations
committed by the following parties:
 The CA’s employing organization;
 Those charged with governance of the employing organization;
 Management of the employing organization; or
 Other individuals working for or under the direction of the employing organization.

Examples of laws and regulations addressing include those that deal with:
 Fraud, corruption and bribery.
 Money laundering, terrorist financing and proceeds of crime.
 Securities markets and trading.
 Banking and other financial products and services.
 Data protection.
 Tax and pension liabilities and payments.
 Environmental protection.
 Public health and safety.

Non-compliance might result in fines, litigation or other consequences for the employing
organization, potentially materially affecting its financial statements. Importantly, such non-
compliance might have wider public interest implications in terms of potentially substantial
harm to investors, creditors, employees or the general public.

Responsibilities of Organization’s Management and Those Charged with Governance

The employing organization’s management, with the oversight of those charged with
governance, is responsible for ensuring that the employing organization’s business activities
are conducted in accordance with laws and regulations. Management and those charged with
governance are also responsible for identifying and addressing any non-compliance
 The employing organization;
 An individual charged with governance of the employing organization;
 A member of management; or
 Other individuals working for or under the direction of the employing organization
Code of Ethics Page 319

Responsibilities of All CAs including Senior Members

If protocols and procedures exist within the CA’s employing organization to address non-
compliance or suspected non- compliance, the accountant shall consider them in determining
how to respond to such non-compliance.

Many employing organizations have established protocols and procedures regarding how to
raise non-compliance or suspected non-compliance internally. These protocols and procedures
include, for example, an ethics policy or internal whistle-blowing mechanism. Such protocols
and procedures might allow matters to be reported anonymously through designated channels.

Obtaining an Understanding of the Matter

This understanding shall include:
 The nature of the non-compliance or suspected non-compliance and the circumstances in
which it has occurred or might occur;
 The application of the relevant laws and regulations to the circumstances; and
 An assessment of the potential consequences to the employing organization, investors,
creditors, employees or the wider public.
 A senior CA is expected to apply knowledge and expertise, and exercise professional
judgment.
 The accountant might also consult on a confidential basis with others within the employing
organization or a professional body, or with legal counsel.

Addressing the Matter

 Have the matter communicated to those charged with governance;
 Comply with applicable laws and regulations, including legal or regulatory provisions
governing the reporting of non-compliance or suspected non-compliance to an appropriate
authority
 Have the consequences of the non-compliance or suspected non- compliance rectified,
remediated or mitigated;
 Reduce the risk of re-occurrence; and
 Seek to deter the commission of the non-compliance if it has not yet occurred.

Determining Whether Further Action Is Needed

CA shall assess the appropriateness of the response of the accountant’s superiors, if any, and
those charged with governance.
Relevant factors to consider in assessing the appropriateness of the response of the senior CA’s
superiors, if any, and those charged with governance include whether:
 The response is timely.
 They have taken or authorized appropriate action to seek to rectify, remediate or mitigate
the consequences of non-compliance, or to avert non-compliance if it has not yet occurred.
 The matter has been disclosed to an appropriate authority where appropriate and, if so,
whether the disclosure appears adequate
Code of Ethics Page 320

The determination of whether further action is needed, and the nature and extent of it, will
depend on various factors, including:
 The legal and regulatory framework.
 The urgency of the situation.
 The pervasiveness of the matter throughout the employing organization.
 Whether the senior CA continues to have confidence in the integrity of the accountant’s
superiors and those charged with governance.
 Whether the non-compliance or suspected non-compliance is likely to recur.
 Whether there is credible evidence of actual or potential substantial harm to the interests
of the employing organization, investors, creditors, employees or the general public.

CA shall exercise professional judgment in determining the need for, and nature and extent of,
further action. In making this determination, the accountant shall take into account whether a
reasonable and informed third party would be likely to conclude that the accountant has acted
appropriately in the public interest.

Further action that the CA might take includes:

 Informing the management of the parent entity of the matter if the employing organization
is a member of a group.
 Disclosing the matter to an appropriate authority even when there is no legal or regulatory
requirement to do so.
 Resigning from the employing organization

Seeking Advice

As assessment of the matter might involve complex analysis and judgments, the senior CA might
consider:
 Consulting internally.
 Obtaining legal advice to understand the accountant’s options and the professional or legal
implications of taking any particular course of action.
 Consulting on a confidential basis with a regulatory or professional body.

Determining Whether to Disclose the Matter to an Appropriate Authority

The determination of whether to make such a disclosure depends in particular on the nature
and extent of the actual or potential harm that is or might be caused by the matter to investors,
creditors, employees or the general public. For example, the CA might determine that disclosure
of the matter to an appropriate authority is an appropriate course of action if:
 The employing organization is engaged in bribery (for example, of local or foreign
government officials for purposes of securing large contracts).
 The employing organization is regulated and the matter is of such significance as to
threaten its license to operate.
Code of Ethics Page 321

 The employing organization is listed on a securities exchange and the matter might result
in adverse consequences to the fair and orderly market in the employing organization’s
securities or pose a systemic risk to the financial markets.
 It is likely that the employing organization would sell products that are harmful to public
health or safety.
 The employing organization is promoting a scheme to its clients to assist them in evading
taxes.

The determination of whether to make such a disclosure will also depend on external factors
such as:
 Whether there is an appropriate authority that is able to receive the information, and cause
the matter to be investigated and action to be taken
 Whether there exists robust and credible protection from civil, criminal or professional
liability or retaliation afforded by legislation or regulation, such as under whistle-blowing
legislation or regulation.
 Whether there are actual or potential threats to the physical safety of the senior CA or other
individuals.

Imminent Breach
In exceptional circumstances, the senior CA might become aware of actual or intended conduct
that the accountant has reason to believe would constitute an imminent breach of a law or
regulation that would cause substantial harm to investors, creditors, employees or the general
public. Having first considered whether it would be appropriate to discuss the matter with
management or those charged with governance of the employing organization, the accountant
shall exercise professional judgment

Documentation
In relation to non-compliance or suspected non-compliance, the senior CA is encouraged to have
the following matters documented:
 The matter.
 The results of discussions with the accountant’s superiors, if any, and those charged with
governance and other parties.
 How the accountant’s superiors, if any, and those charged with governance have responded
to the matter.
 The courses of action the accountant considered, the judgments made and the decisions
that were taken.
 How the accountant is satisfied that the accountant has fulfilled the responsibility
Code of Ethics Page 322

PRESSURE TO BREACH THE FUNDAMENTAL PRINCIPLES (SECTION 270)

A CA shall not:
 Allow pressure from others to result in a breach of compliance with the fundamental
principles; or
 Place pressure on others that the accountant knows, or has reason to believe, would result
in the other individuals breaching the fundamental principles.

A CA might face pressure that creates threats to compliance with the fundamental principles.
Pressure might be explicit or implicit and might come from:
 Within the employing organization, for example, from a colleague or superior.
 An external individual or organization such as a vendor, customer or lender.
 Internal or external targets and expectations.

Examples of pressure that might result in threats include

 Pressure related to conflicts of interest:
- From a family member to act as a vendor.
 Pressure to influence preparation or presentation of information:
- Pressure to report misleading financial results to meet investor, analyst or lender
expectations.
- From elected officials on public sector accountants to misrepresent programs or
projects to voters.
- From colleagues to misstate income, expenditure or rates of return to bias decision-
making on capital projects and acquisitions.
- From superiors to approve or process expenditures that are not legitimate business
expenses.
- Pressure to suppress internal audit reports containing adverse findings.
 Pressure to act without sufficient expertise or due care:
- From superiors to inappropriately reduce the extent of work performed.
- From superiors to perform a task without sufficient skills or training or within
unrealistic deadlines.
 Pressure related to financial interests:
- From superiors, colleagues or others, e.g., those who might benefit from participation in
compensation or incentive arrangements to manipulate performance indicators.
 Pressure related to inducements:
- From others, either internal or external to the employing organization, to offer
inducements to influence inappropriately the judgment or decision making process of
an individual or organization.
- From colleagues to accept a bribe or other inducement, for example to accept
inappropriate gifts or entertainment from potential vendors in a bidding process.
 Pressure related to non-compliance with laws and regulations:
- Pressure to structure a transaction to evade tax.
Code of Ethics Page 323

Factors that are relevant in evaluating the level of threats created by pressure include:
 The intent of the individual who is exerting the pressure and the nature and extent of the
pressure.
 The application of laws, regulations, and professional standards to the circumstances.
 The culture and leadership of the employing organization including the extent to which they
reflect or emphasize the importance of ethical behavior and the expectation that employees
will act ethically.
 Policies and procedures, if any, that the employing organization has established, such as
ethics or human resources policies that address pressure.

Documentation

The CA is encouraged to document:

 The facts.
 The communications and parties with whom these matters were discussed.
 The courses of action considered.
 How the matter was addressed.
Code of Ethics Page 324

PART 3 CHARTERED ACCOUNTANTS (CAs) IN PRACTICE

APPLYING THE CONCEPTUAL FRAMEWORK (SECTION 300)

In this Part, the term “CA” refers to individual CAs in practice and their firms.

Requirements and Application Material General

 CA shall consider context of ethical issue. Where CA in practice is performing professional

activities due to relationship with the firm, whether as a contractor, employee or owner, he
shall comply with the provisions in Part 2 as well that apply to these circumstances.
 Examples of situations in which the provisions in Part 2 apply to a CA in practice include:
- Facing conflict of interest when being responsible for selecting a vendor for firm when
an immediate family member of CA might benefit financially from contract. (Sec 210)
- Preparing or presenting financial information for client or firm (Sec 220).
- Being offered an inducement such as being regularly offered complimentary tickets to
attend sporting events by a supplier of the firm. (Sec 250)
- Facing pressure from an engagement partner to report chargeable hours inaccurately
for a client engagement. (Sec 270)

Identifying Threats

Following are examples of facts and circumstances within each of those categories of threats
that might create threats for a CA when undertaking a professional service:
Threat Examples
Self-interest - Having a direct financial interest in a client.
- Quoting a low fee to obtain a new engagement and the fee is so low that it
might be difficult to perform the professional service for that price.
- Having a close business relationship with a client.
- Having access to confidential information that might be used for personal
gain
- Discovering a significant error when evaluating the results of a previous
professional service performed by a member of the accountant’s firm.
Self-review - Issuing an assurance report on the effectiveness of the operation of financial
systems after implementing the systems.
- Having prepared the original data used to generate records that are the
subject matter of the assurance engagement.
Advocacy - Promoting the interests of, or shares in, a client.
- Acting as advocate on behalf of client in litigation or disputes with 3rd
parties
- Lobbying in favor of legislation on behalf of a client.
Familiarity - Having close or immediate family member who is director or officer of
client.
Code of Ethics Page 325

- A director or officer of client, or an employee in a position to exert

significant influence over subject matter, having recently served as
engagement partner.
- An audit team member having a long association with the audit client.
Intimidation - Being threatened with dismissal from a client engagement or the firm
because of a disagreement about a professional matter.
- Feeling pressured to agree with the judgment of a client because the client
has more expertise on the matter in question.
- Being informed that a planned promotion will not occur unless accountant
agrees with an inappropriate accounting treatment.
- Having accepted a significant gift from a client and being threatened that
acceptance of this gift will be made public.

Evaluating Threats

Conditions, policies and procedures described in 120.8 might impact evaluation of threat as
acceptable level or not. Such conditions, policies and procedures might relate to:

a) The Client and its Operating Environment

 Evaluation of level of a threat might be impacted by whether the client is:
- An audit client and whether the audit client is a public interest entity;
- An assurance client that is not an audit client; or
- A non-assurance client.
 Corporate governance structure, including leadership of client might promote compliance
with the fundamental principles. For example, the client:
- Requires appropriate individuals other than management to ratify or approve the
appointment of a firm to perform an engagement.
- Has competent employees with experience & seniority to make managerial decisions.
- Has implemented internal procedures that facilitate objective choices in tendering non-
assurance engagements.
- Has a corporate governance structure that provides appropriate oversight and
communications regarding the firm’s services.

b) The Firm and its Operating Environment

 Leadership of firm that promotes compliance with fundamental principles and establishes
the expectation that assurance team members will act in the public interest.
 Policies or procedures for establishing and monitoring compliance by all personnel.
 Compensation, performance appraisal and disciplinary policies and procedures that
promote compliance with the fundamental principles.
 Management of the reliance on revenue received from a single client.
 Engagement partner having authority within the firm for decisions concerning compliance
with fundamental, including decisions about accepting or providing services to a client.
 Educational, training and experience requirements.
 Processes to facilitate and address internal and external concerns or complaints.
Code of Ethics Page 326

Evaluation of level of a threat is also impacted by the nature and scope of professional service.

Consideration of New Information or Changes in Facts and Circumstances

Examples of new information or changes that might impact the level of a threat include:
 When the scope of a professional service is expanded.
 When the client becomes a listed entity or acquires another business unit.
 When the firm merges with another firm.
 When CA is jointly engaged by two clients and a dispute emerges between the two clients.
 When there is a change in the CA’s personal or immediate family relationships.

Addressing Threats

Examples of actions that in certain circumstances might be safeguards to address threats:

 Assigning additional time and qualified personnel to required tasks when an engagement
has been accepted might address a self-interest threat.
 Using different partners and engagement teams with separate reporting lines for the
provision of non-assurance services to an assurance client might address self-review,
advocacy or familiarity threats.
 Involving another firm to perform or re-perform part of the engagement might address self-
interest, self-review, advocacy, familiarity or intimidation threats.
 Disclosing to clients any referral fees or commission arrangements received for
recommending services or products might address a self-interest threat.
 Separating teams when dealing with matters of a confidential nature might address a self-
interest threat.
 Having an appropriate reviewer who was not a member of the team review the work
performed or advise as necessary might address a self-review threat.
An appropriate reviewer is a professional with the necessary knowledge, skills, experience
and authority to review, in an objective manner, the relevant work performed or service
provided. Such an individual might be a CA.

Communicating with TCWG

 CA shall determine the appropriate individual(s) within the entity’s governance structure
with whom to communicate.
 If he communicates with a subgroup of TCWG, he shall determine whether communication
with all of TCWG is also necessary so that they are adequately informed.
 Examples of a subgroup include an audit committee or an individual member of TCWG.
 In determining with whom to communicate, a CA might consider:
- The nature and importance of the circumstances; and
- The matter to be communicated.
 If CA communicates with individuals having management as well as governance
responsibilities, he shall be satisfied that such communication adequately informs all of
those in a governance role with whom the accountant would otherwise communicate.
 In some circumstances, all TCWG are involved in managing entity (e.g. a small business
where one owner manages entity). In these cases, if matters are communicated to
individual(s) with management duties, CA has satisfied communication requirement
Code of Ethics Page 327

CONFLICTS OF INTEREST (SECTION 310)

Conflict of interest creates threats to compliance with principle of objectivity and might create
threats to compliance with other fundamental principles. Such threats might be created when:
 A CA provides a professional service related to a particular matter for 2 or more clients
whose interests with respect to that matter are in conflict; or
 The interests of a CA with respect to a particular matter and the interests of the client for
whom the accountant provides a professional service related to that matter are in conflict.

Examples of circumstances that might create a conflict of interest include:

 Providing a transaction advisory service to a client seeking to acquire an audit client, where
the firm has obtained confidential information during the course of the audit that might be
relevant to the transaction.
 Providing advice to 2 clients at the same time where the clients are competing to acquire
the same company and the advice might be relevant to the parties’ competitive positions.
 Providing services to a seller and a buyer in relation to the same transaction.
 Preparing valuations of assets for two parties who are in an adversarial position with
respect to the assets.
 Representing 2 clients in the same matter who are in a legal dispute with each other, such
as during divorce proceedings, or the dissolution of a partnership.
 In relation to a license agreement, providing an assurance report for a licensor on the
royalties due while advising the licensee on the amounts payable.
 Advising a client to invest in a business in which, for example, the spouse of the CA has a
financial interest.
 Providing strategic advice to a client on its competitive position while having a joint venture
or similar interest with a major competitor of the client.
 Advising a client on acquiring a business which the firm is also interested in acquiring.
 Advising a client on buying a product or service while having a royalty or commission
agreement with a potential seller of that product or service.

Conflict Identification

 Before accepting a new client or engagement and throughout the engagement, a CA shall
take reasonable steps to identify circumstances that might create a conflict of interest.
 Such steps shall include identifying:
- Nature of the relevant interests and relationships between the parties involved; and
- The service and its implication for relevant parties.
 It also includes considering matters identified by external parties (e.g. clients)
 An effective process to identify actual or potential conflicts of interest will take into account
factors such as:
- The nature of the professional services provided.
- The size of the firm.
- The size and nature of the client base.
- The structure of the firm, for example, the number and geographic location of offices.
Code of Ethics Page 328

 A CA shall remain alert to changes over time in the nature of services, interests and
relationships that might create a conflict of interest while performing an engagement.
 If firm is a member of a network, CA shall consider conflicts of interest that might exist or
arise due to interests and relationships of a network firm. Factors to consider include:
- The nature of the professional services provided.
- The clients served by the network.
- The geographic locations of all relevant parties.

Threats Created by Conflicts of Interest

 Factors in evaluating the level of a threat include measures that prevent unauthorized
disclosure of confidential information when performing services for 2 or more clients
 These measures include:
- Existence of separate practice areas for specialty functions within firm, which might act
as a barrier to the passing of confidential client information between practice areas.
- Policies and procedures to limit access to client files.
- Confidentiality agreements signed by personnel and partners of the firm.
- Separation of confidential information physically and electronically.
- Specific and dedicated training and communication.
 Examples of other safeguards to address threats include:
- Having separate engagement teams who are provided with clear policies and
procedures on maintaining confidentiality.
- Having an appropriate independent reviewer, not involved in conflict, review the work
performed to assess whether the key judgments and conclusions are appropriate.

Disclosure and Consent

 A CA shall exercise professional judgment to determine whether the nature and significance
of a conflict of interest are such that specific disclosure and explicit consent are necessary
when addressing the threat created by the conflict of interest.
 Factors to consider in when determining such disclosure and explicit consent include:
- The circumstances creating the conflict of interest.
- The parties that might be affected.
- The nature of the issues that might arise.
- The potential for the particular matter to develop in an unexpected manner.

 Disclosure and consent might take different forms, for example:

- General disclosure to clients of circumstances where, as is common commercial practice,
the CA does not provide professional services exclusively to any one client
(e.g. CA might make general disclosure in standard terms & conditions of engagement)
- Specific disclosure to affected clients of the circumstances of the particular conflict in
sufficient detail to enable the client to make an informed decision about the matter and
to provide explicit consent accordingly.
(Such disclosure might include a detailed presentation of circumstances and a
comprehensive explanation of any planned safeguards and the risks involved)
Code of Ethics Page 329

Consent might be implied by clients’ conduct in circumstances where CA has sufficient

evidence to conclude that clients know the circumstances at the start and have accepted
the conflict of interest if they do not raise an objection to the existence of the conflict.

 It is generally necessary to:

- Disclose the nature of conflict of interest and how any threats created were addressed
to clients affected by a conflict of interest; and
- Obtain consent of affected clients to perform services after applying safeguards.
 If such disclosure or consent is not in writing, the CA is encouraged to document:
- The nature of the circumstances giving rise to the conflict of interest;
- The safeguards applied to address the threats when applicable; and
- The consent obtained.

When Explicit Consent is Refused

If a CA has determined that explicit consent is necessary and the client has refused to provide
consent, the accountant shall either:
 End or decline to perform professional services that would result in conflict of interest; or
 End relevant relationships or dispose of relevant interests to eliminate the threat or reduce
it to an acceptable level.

Confidentiality

 A CA shall remain alert to principle of confidentiality, including when making disclosures

or sharing information within the firm or network and seeking guidance from 3rd parties.
 When making specific disclosure for obtaining explicit consent would result in a breach of
confidentiality, and such consent cannot therefore be obtained, the firm shall only accept or
continue an engagement if:
- Firm does not act in an advocacy role for one client in an adversarial position against
another client in the same matter;
- Specific measures are in place to prevent disclosure of confidential information between
the engagement teams serving the two clients; and
- Firm is satisfied that a reasonable and informed third party would be likely to conclude
that it is appropriate for the firm to accept or continue the engagement because a
restriction on the firm’s ability to provide the professional service would produce a
disproportionate adverse outcome for the clients or other relevant third parties.
 A breach of confidentiality might arise, for example, when seeking consent to perform:
- A transaction-related service for a client in a hostile takeover of another client of firm.
- A forensic investigation for a client regarding a suspected fraud, where firm has
confidential information from another client who might be involved in fraud
 In the above breach of confidentiality, CA shall document:
- The nature of the circumstances, including the role that the accountant is to undertake;
- The specific measures in place to prevent disclosure of information between the
engagement teams serving the two clients; and
- Why it is appropriate to accept or continue the engagement.
Code of Ethics Page 330

PROFESSIONAL APPOINTMENTS (SECTION 320)

Client and Engagement Acceptance General

 Threats to compliance with integrity or professional behavior might be created from

questionable issues associated with the client (its owners, management or activities).
 Some of the examples are involvement in illegal activities, dishonesty, questionable
financial reporting practices or other unethical behavior.
 Factors relevant in evaluating the level of threat include:
- Knowledge and understanding of client, its owners, management and TCWG
- Client’s commitment to address the questionable issues through improving governance

 Self-interest threat professional competence and due care is created if engagement team
does not possess, or cannot acquire, the competencies to perform the services.
 Factors relevant in evaluating level of threat include:
- An appropriate understanding of the:
o Nature of the client’s business;
o Complexity of its operations;
o Requirements of the engagement; and
o Purpose, nature and scope of the work to be performed.
- Knowledge of relevant industries or subject matter.
- Experience with relevant regulatory or reporting requirements.
- Existence of quality control policies and procedures so that engagements are accepted
only when they can be performed competently.
 Examples of safeguards include:
- Assigning sufficient engagement personnel with the necessary competencies.
- Agreeing on a realistic time frame for the performance of the engagement.
- Using experts where necessary.

Changes in a Professional Appointment

 CA shall determine whether there are any reasons for not accepting when he:
- Is asked by a potential client to replace another accountant;
- Considers tendering for an engagement held by another accountant; or
- Considers undertaking work that is complementary/additional to existing accountant
(Threat to professional competence & due care may be created due to incomplete info)
 Self- interest threat to professional competence & due care is created if a CA accepts the
engagement before knowing all the relevant facts.
 Examples of safeguards include:
- Asking existing accountant to provide any known information of which, he thinks, the
proposed accountant needs to be aware before accepting the engagement.
- Obtaining information from other sources such as through inquiries of third parties or
background investigations regarding senior management or TCWG of the client.
Code of Ethics Page 331

Communicating with the Existing or Predecessor Accountant

 Proposed accountant will usually need client’s permission, preferably in writing, to initiate
discussions with the existing or predecessor accountant.
 If unable to communicate with existing or predecessor accountant, proposed accountant
shall take other reasonable steps to obtain information about any possible threats.

Communicating with the Proposed Accountant

 Existing or predecessor accountant shall:

- Comply with relevant laws and regulations governing the request; and
- Provide any information honestly and unambiguously.
 Existing or predecessor accountant is bound by confidentiality.
 Following factors should be considered:
- Nature of the engagement
- Whether he has permission from the client for the discussion; and
- Legal and ethics requirements relating to such communications and disclosure

Changes in Audit or Review Appointments

For an audit or review of F/S, CA shall request existing or predecessor accountant to provide
relevant information (Except non-compliance/suspected non-compliance R360.21 & R360.22)
 If client consents to existing or predecessor accountant disclosing any such facts or other
information, he shall provide the information honestly and unambiguously; and
 If client fails or refuses to grant him permission to discuss with the proposed accountant,
he shall disclose this fact to proposed accountant
 Proposed accountant shall carefully consider such failure or refusal when deciding.

Client and Engagement Continuance

 For recurring engagement, CA shall periodically review whether to continue with that.
 Potential threats might be created after acceptance which, had they been known earlier,
would have caused the CA to decline the engagement.

Using the Work of an Expert

 When a CA intends to use work of expert, he shall determine whether the use is justified.
 Factors to consider include reputation and expertise of expert, resources available to the
expert, and the professional and ethics standards applicable to expert.
 Information might be gained from prior association with expert or from consulting others.
Code of Ethics Page 332

SECOND OPINIONS (SECTION 321)

Providing second opinion to entity (not an existing client) might create self-interest or other
threat to compliance with fundamental principles, especially professional competence & due care

 A CA might be asked to provide a second opinion on the application of accounting, auditing,

reporting or other standards or principles to
- Specific circumstances, or
- Transactions by or on behalf of a company or an entity that is not an existing client.
 Self-interest threat might be created if second opinion is not based on same facts that the
existing or predecessor accountant had, or is based on inadequate evidence.
 Evaluation of circumstances of request and all the other available facts and assumptions
should be considered.
 Examples of safeguards include:
- With client’s permission, obtaining information from existing/predecessor accountant
- Describing the limitations surrounding any opinion in communications with the client.
- Providing the existing or predecessor accountant with a copy of the opinion.

If entity will not permit to communicate with existing/predecessor accountant, CA shall

determine whether he may provide the second opinion sought.
Code of Ethics Page 333

FEES AND OTHER TYPES OF REMUNERATION (SECTION 330)

Level and nature of fee and other remuneration arrangements might create self-interest threat

Level of Fees quoted

 Level of fees quoted might impact a CA’s ability to perform professional services in
accordance with professional standards.
 CA in practice may quote whatever fee is deemed to be appropriate matching with the
nature and service to be rendered.
 CAs in practice should not quote fee lower than that charged by CAs previously carrying out
the audit, as it could be regarded as undercutting
(unless scope and quantum of work materially differs from the previous)
 Factors relevant in evaluating level of threat include:
- Whether the client is aware of the terms of engagement and the basis on which fees are
charged and which professional services the quoted fee covers.
- Whether the level of fee is set by an independent third party such as a regulatory body.
 Examples safeguards include:
- Adjusting the level of fees or the scope of the engagement.
- Having an appropriate reviewer review the work performed.

Referral Fees or Commissions

 Self-interest threat to objectivity and professional competence & due care is created if a CA
pays or receives a referral fee or receives a commission relating to a client.
 Such referral fees or commissions include, for example:
- A fee paid to another CA for obtaining new client work when the client continues as a
client of existing accountant but requires specialist services not offered there.
- A commission received from a 3rd party (e.g. a software vendor) in connection with the
sale of goods or services to a client.
 Examples of safeguards include:
- Disclosing to clients any referral fees or commission arrangements paid to, or received
from, another CA or third party for recommending services or products
- Obtaining an advance agreement from client for commission arrangements for sale by
another party of goods or services to the client

Purchase or Sale of a Firm

A CA may purchase all or part of another firm on the basis that payments will be made to
individuals formerly owning the firm or to their heirs or estates. Such payments are not referral
fees or commissions for the purposes of this section.
Code of Ethics Page 334

INDUCEMENTS, INCLUDING GIFTS AND HOSPITALITY (SECTION 340)

Offering or accepting inducements might create a self-interest, familiarity or intimidation threat

to compliance with the fundamental principles, particularly integrity, objectivity & professional
behavior.
An inducement is an object, situation, or action that is used as a means to influence another
individual’s behavior, but not necessarily with the intent to improperly influence that
individual’s behavior. An inducement can take many different forms, for example:
 Gifts.  Appeals to friendship and loyalty.
 Hospitality.  Employment or other commercial
 Entertainment. opportunities.
 Political or charitable donations.  Preferential treatment, rights/privileges

Inducements Prohibited by Laws and Regulations

 In many jurisdictions, there are laws and regulations, such as those related to bribery and
corruption, that prohibit offering or accepting of inducements in certain circumstances.
 CA shall obtain an understanding of relevant laws and regulations and comply with them
when the accountant encounters such circumstances.

Inducements Not Prohibited by Laws and Regulations

Inducements with Intent to Improperly Influence Behavior

 CA shall not offer/accept, or encourage others to offer/accept, any inducement that is made,
or which he considers a reasonable and informed 3rd party would be likely to conclude is
made, with intent to improperly influence the behavior of recipient or another.
 Inducement is considered as improperly influencing an individual’s behavior if it causes
him to act in an unethical manner.
 Threat to integrity is created in such situation
 Determination of whether there is actual/perceived intent to improperly influence
behavior requires professional judgment. Relevant factors to consider might include:
- The nature, frequency, value and cumulative effect of the inducement.
- Timing of when inducement is offered (any action or decision that it might influence)
- Whether offer of inducement is limited to individual or available to a broader group.
- Roles & positions of individuals at firm or client offering or being offered inducement.
- Whether its against the policies & procedures of the client (as per his knowledge)
- The degree of transparency with which the inducement is offered.
- Whether the inducement was required or requested by the recipient.
- The known previous behavior or reputation of the offeror.
- Whether inducement is a cultural practice in the circumstances
(e.g. offering a gift on the occasion of a religious holiday or wedding).
- Whether inducement is an ancillary part of a professional service
(e.g. offering or accepting lunch in connection with a business meeting)
Code of Ethics Page 335

Examples of actions that might be safeguards to address such threats include:

 Informing senior management of the firm or TCWG of the client regarding the offer.
 Amending or terminating the business relationship with the client.

Inducements with No Intent to Improperly Influence Behavior

 If such an inducement is trivial, any threats created will be at an acceptable level.

 Examples of circumstances where such an inducement might create threats even if the CA
has concluded there is no intent to improperly influence behavior include:
- Self-interest threats
A CA is offered hospitality from the prospective acquirer of a client while providing
corporate finance services to the client.
- Familiarity threats
A CA regularly takes an existing or prospective client to sporting events.
- Intimidation threats
A CA accepts hospitality from a client, the nature of which could be perceived to be
inappropriate were it to be publicly disclosed.
 Examples of actions that might eliminate threats include:
- Declining or not offering the inducement.
- Transferring responsibility for the provision of any professional services to the client to
another independent individual
 Examples of actions that might be safeguards to address such threats include:
- Being transparent with senior management of the firm or of the client about offering or
accepting an inducement.
- Registering the inducement in a log monitored by senior management of the firm or
another individual responsible for firm’s ethics compliance or maintained by the client.
- Having an independent appropriate reviewer, review any work performed or decisions
made by CA with respect to the client from which he accepted the inducement.
- Donating the inducement to charity after receipt and appropriately disclosing the
donation (e.g. to member of senior management of firm or the individual who offered)
- Reimbursing the cost of the inducement, such as hospitality, received.
- As soon as possible, returning inducement, such as a gift, after it was initially accepted.

Immediate or Close Family Members

 CA shall remain alert to potential threats to compliance with fundamental principles

created by the offering of an inducement to an immediate or close family member of the
accountant by an existing or prospective client of the accountant (and vice versa).
 Where CA becomes aware of such inducement and concludes there is intent to improperly
influence the behavior of the accountant or of an existing or prospective client of the
accountant, or considers a reasonable and informed 3rd party would be likely to conclude
such intent exists, accountant shall advise that family member not to offer/accept.
Code of Ethics Page 336

 Another relevant factor is the nature or closeness of the relationship, between:

- The accountant and the immediate or close family member;
- The immediate or close family member and the existing or prospective client; and
- The accountant and the existing or prospective client.
 Where CA becomes aware of such an inducement, threats to compliance with the
fundamental principles might be created where:
- Immediate or close family member offers or accepts contrary to the advice of CA; or
- CA does not have reason to believe an actual or perceived intent to improperly influence
the behavior of the accountant or of the existing or prospective client exists.

Other Considerations

 If a firm, network firm or an audit team member is being offered gifts or hospitality from an
audit client, Section 420 shall apply.
 If a firm or an assurance team member is being offered gifts or hospitality from an
assurance client, Section 906 shall apply.

CUSTODY OF CLIENT ASSETS (SECTION 350)

Holding client assets creates a self-interest or other threat to compliance with the principles of
professional behavior and objectivity

 A CA shall not assume custody of client money or other assets unless permitted to do so by
law and in accordance with any conditions under which such custody may be taken.
 At acceptance time, CA shall:
- Make inquiries about the source of the assets; and
- Consider related legal and regulatory obligations.
 Inquiries might reveal any assets derived from illegal activities e.g. money laundering.
 In such circumstances, provisions of Section 360 would apply.

After Taking Custody

 Comply with the laws and regulations relevant to holding and accounting for the assets;
 Keep the assets separately from personal or firm assets;
 Use the assets only for the purpose for which they are intended; and
 Be ready at all times to account for the assets and any income, dividends, or gains generated,
to any individuals entitled to that accounting.
Code of Ethics Page 337

RESPONDING TO NON-COMPLIANCE WITH LAWS AND REGULATIONS (SECTION 360)

 When CA becomes aware of Non Compliance with laws and regulations, A self-interest or
intimidation threat to compliance with integrity and professional behavior is created
 This section guides the accountant in assessing the implications of matter and the possible
courses of action when responding to NOCLAR with:
- Laws and regulations generally recognized to have a direct effect on the determination
of material amounts and disclosures in the client’s financial statements; and
- Other laws and regulations that do not have a direct effect on the determination of the
amounts and disclosures in financial statements, but compliance with which might be
fundamental to operating or continuing client’s business, or to avoid material penalties
Tutor’s Note: In this complete section we would be using the abbreviation “NOCLAR” for
“NOn Compliance with Laws And Regulations” (Actual or Suspected)
When responding to NOCLAR, the objectives of the CA are:
 To comply with the principles of integrity and professional behavior;
 By alerting management or, where appropriate, TCWG, to seek to:
- Enable them to rectify, remediate or mitigate the consequences of the NOCLAR; or
- Prevent the committing of the non-compliance where it has not yet occurred; and
 To take such further action as appropriate in the public interest.

NOCLAR comprises acts of omission or commission, intentional or unintentional, which are

contrary to the prevailing laws or regulations committed by the following parties:
 A client;
 TCWG of a client;
 Management of a client; or
 Other individuals working for or under the direction of a client.
Examples of laws and regulations which this section addresses include those that deal with:
 Fraud, corruption and bribery.
 Money laundering, terrorist financing and proceeds of crime.
 Securities markets and trading.
 Banking and other financial products and services.
 Data protection.
 Tax and pension liabilities and payments.
 Environmental protection.
 Public health and safety.
Non-compliance might result in fines, litigation or other consequences for the client, potentially
materially affecting its financial statements. Importantly, such non-compliance might have wider
public interest implications in terms of potentially substantial harm to investors, creditors,
employees or the general public (resulting in serious adverse consequences to any of these parties
in financial or non-financial terms). Examples include the execution of a fraud resulting in
significant financial losses to investors, and breaches of environmental laws and regulations
Code of Ethics Page 338

In some areas, there are legal or regulatory provisions governing how CAs should address
NOCLAR. Accountant shall obtain an understanding of those and comply with them, including:
 Any requirement to report the matter to an appropriate authority; and
 Any prohibition on alerting the client (e.g. in money laundering)

This section does not address:

 Personal misconduct unrelated to the business activities of the client; and
 Non-compliance by parties other than those specified in paragraph

Responsibilities of Management and TCWG

Management, with the oversight of TCWG, is responsible for ensuring that the client’s business
activities are conducted in accordance with laws and regulations. Management and TCWG are
also responsible for identifying and addressing any NOCLAR

Responsibilities of All CAs

Where a CA becomes aware of any NOCLAR, the steps shall be taken on a timely basis, having
regard to the nature of the matter and the potential harm to the interests of the stakeholders

Audits of Financial Statements

Obtaining an Understanding of the Matter

 If a CA engaged to perform an audit of F/S becomes aware of NOCLAR, he shall obtain an
understanding of the matter (including nature of that and connected circumstances)
 CA is expected to apply knowledge and expertise, and exercise professional judgment.
 However, he is not expected to have a level of knowledge of laws and regulations greater
than required by the engagement.
 Whether an act constitutes non- compliance is ultimately a matter to be determined by a
court or other appropriate adjudicative body.
 Depending on nature and significance of matter, CA might consult on a confidential basis
with others within firm, a network firm or a professional body, or with legal counsel.
 If he identifies or suspects non-compliance, he shall discuss the matter with appropriate
level of management and, where appropriate, TCWG.
 Relevant factors to consider appropriate level of management include:
- Nature and circumstances of the matter.
- Individuals actually or potentially involved.
- Likelihood of collusion.
- Potential consequences of the matter.
- Whether that level of management is able to investigate and take appropriate action.
 Appropriate level of management is usually at least one level above the suspects
- For group, appropriate level might be management at an entity that controls the client.
 CA might also consider discussing the matter with internal auditors, where applicable.
 If CA believes that management is involved in NOCLAR, he shall discuss matter with TCWG
Code of Ethics Page 339

Addressing the Matter

 CA shall advise management and/or TCWG to take appropriate and timely actions, to:
- Rectify, remediate or mitigate the consequences of the non- compliance;
- Prevent the non-compliance where it has not yet occurred; or
- Disclose the matter to an appropriate authority
(if required by law or regulation or considered necessary in public interest)
 He shall consider whether they understand their legal or regulatory responsibilities.
 If they do not understand their responsibilities, he might suggest appropriate sources of
information or recommend that they obtain legal advice.
 The CA shall comply with applicable:
- Laws and regulations, including legal or regulatory provisions governing the reporting
of NOCLAR to an appropriate authority; and
- Requirements under auditing standards, including those relating to:
 Identifying and responding to non-compliance, including fraud.
 Communicating with TCWG.
 Considering the implications of the NOCLAR for the auditor’s report.
Communication with Respect to Groups
 If CA becomes aware of NOCLAR in a component of a group, whether he is performing
standalone audit or is a part of a group audit), he shall additionally communicate the matter
to group engagement partner unless prohibited by law or regulation:
(regardless of whether group engagement partner’s firm or network is same or different)
 Likewise if group engagement partner becomes aware of NOCLAR, he shall also consider
whether the matter might be relevant to one or more components
 If it is relevant to those, group engagement partner shall take steps to have the matter
communicated to those performing work at the components, unless prohibited by law

Determining Whether Further Action Is Needed

 CA shall assess the appropriateness of response of management and/or TCWG.
 Relevant factors to consider in such assessment include whether:
- The response is timely.
- The NOCLAR has been adequately investigated.
- Appropriate actions (as given in ‘addressing the matter’) has been, or is being, taken
- Appropriate steps have been, or are being, taken to reduce the risk of re-occurrence.
 After that CA shall determine if further action is needed in the public interest.
 This determination of further action will depend on various factors, including:
- The legal and regulatory framework.
- The urgency of the situation.
- The pervasiveness of the matter throughout the client.
- Whether CA continues to have confidence in integrity of management and/or TCWG.
- Whether the NOCLAR is likely to recur.
- Whether there is credible evidence of actual or potential substantial harm to the
interests of the entity, investors, creditors, employees or the general public.
Code of Ethics Page 340

 Examples of circumstances that might cause the CA no longer to have confidence in the
integrity of management and, where applicable, TCWG include situations where:
- He suspects or has evidence of their involvement or intended involvement.
- He is aware that they have knowledge of such non- compliance and, contrary to legal or
regulatory requirements, have not reported, or authorized the reporting of, the matter
to an appropriate authority within a reasonable period.
 Further action that the CA might take includes:
- Disclosing the matter to an appropriate authority even when there is no legal or
regulatory requirement to do so.
- Withdrawing from the engagement and relationship where permitted by law.
(Withdrawing is not a substitute for taking other actions that might be needed)
 Where CA has withdrawn from the professional relationship, he shall, on request by the
proposed accountant (Section 320), provide all relevant information concerning NOCLAR
 Predecessor accountant shall do so, even in situations where the client fails or refuses to
grant him permission to discuss the client’s affairs, unless prohibited by law or regulation.
 If proposed accountant is unable to communicate, he shall take reasonable steps to obtain
information about the circumstances of the change of appointment by other means.
including inquiries of third parties or background investigations of management or TCWG.
 As assessment of matter might involve complex analysis & judgments, CA might consider:
- Consulting internally.
- Obtaining legal advice to understand the accountant’s options and the professional or
legal implications of taking any particular course of action.
- Consulting on a confidential basis with a regulatory or professional body.

Determining Whether to Disclose the Matter to an Appropriate Authority

 Purpose of making disclosure (if not forbidden by law) is to enable appropriate authority
to cause the matter to be investigated and action to be taken in the public interest.
 Determination of whether to make such a disclosure depends in particular on the nature
and extent of actual or potential harm to investors, creditors, employees or general public.
 CA might determine the disclosure appropriate if (for example):
- Entity is engaged in bribery (e.g. of government officials for securing large contracts).
- Entity is regulated and matter is of such significance as to threaten its license.
- Entity is listed on securities exchange and matter might result in adverse consequences
to the fair and orderly market in securities or pose a systemic risk to financial markets.
- It is likely that entity would sell products that are harmful to public health or safety.
- Entity is promoting a scheme to its clients to assist them in evading taxes.
 Decision of making such disclosure will also depend on external factors such as:
- Whether there is an appropriate authority that is able to take actions
(e.g. a securities regulator in case of fraudulent financial reporting)
- Whether there exists robust and credible protection from civil, criminal or professional
liability or retaliation afforded by legislation or regulation
- Whether there are actual/potential threats to safety of CA or other individuals.
Code of Ethics Page 341

If he determines that disclosure is an appropriate course of action. He shall, when making such
disclosure, act in good faith and exercise caution when making statements and assertions. He shall
also consider whether it is appropriate to inform the client before disclosing the matter.

Imminent Breach
In exceptional circumstances, CA might become aware of actual or intended conduct that he has
reason to believe would constitute an imminent breach of a law or regulation that would cause
substantial harm to investors, creditors, employees or the general public. After considering to
discuss with management or TCWG, he shall determine whether to disclose the matter immediately
to an appropriate authority in order to prevent or mitigate the consequences.

Documentation

The CA shall document (in addition to the documentation requirements of ISAs):

 How management and, where applicable, TCWG have responded to the matter.
 Courses of action he considered, the judgments made and the decisions that were taken,
having regard to the reasonable and informed third party test.
 How he is satisfied that he has fulfilled his responsibility set out in this section

Professional Services Other than Audits of F/S

Obtaining an Understanding of Matter and addressing it with Management and TCWG

 This understanding shall include the nature of NOCLAR and connected circumstances.
 CA is expected to apply knowledge and expertise, and exercise professional judgment.
 However, he is not expected to have a level of knowledge of laws and regulations greater
than required by the engagement.
 Whether an act constitutes non- compliance is ultimately a matter to be determined by a
court or other appropriate adjudicative body.
 Depending on nature and significance of matter, CA might consult on a confidential basis
with others within firm, a network firm or a professional body, or with legal counsel.
 If he identifies or suspects non-compliance, he shall discuss the matter with appropriate
level of management and, where appropriate, TCWG.
 Relevant factors to consider appropriate level of management include:
- Nature and circumstances of the matter.
- Individuals actually or potentially involved.
- Likelihood of collusion.
- Potential consequences of the matter.
- Whether that level of management is able to investigate and take appropriate action.
Code of Ethics Page 342

Communicating the Matter to the Entity’s External Auditor

Performing a non-audit service for Shall communicate within firm, unless prohibited
audit client or a component of audit by law (as per firm’s procedures); In absence of
client of firm such procedures, directly to engagement partner
Performing a non-audit service for an He shall consider to communicate to network
audit client of a network firm; or a firm. (as per network firm’s procedures); In
component of that client of network absence of such procedures, directly to
engagement partner
Performing a non-audit service for a He shall consider whether to communicate the
client that is not audit client of firm or NOCLAR to client’s external auditor (if any)
a network firm; nor a component of
those

Relevant Factors to Consider

 Whether doing so would be contrary to law or regulation.

 Whether there are restrictions about disclosure imposed by a regulatory agency or
prosecutor in an ongoing investigation into the NOCLAR.
 Whether the purpose of the engagement is to investigate potential non-compliance within
the entity to enable it to take appropriate action.
 Whether management or TCWG have already informed the external auditor about matter.
 The likely materiality of the matter to the audit of the client’s F/S or group F/S.

Considering Whether Further Action Is Needed

 Whether further action is needed, nature and extent of it, will depend on factors such as:
- The legal and regulatory framework.
- Appropriateness and timeliness of the response of management and TCWG.
- The urgency of the situation.
- The involvement of management or TCWG in the matter.
- Chances of substantial harm to client, investors, creditors, employees or general public
 Further action by the CA might include:
- Disclosing matter to an appropriate authority even when there is no legal requirement.
- Withdrawing from the engagement and relationship where permitted by law.
 In considering whether to disclose to an appropriate authority, relevant factors include:
- Whether doing so would be contrary to law or regulation.
- Whether the purpose of engagement is to investigate potential NOCLAR within entity.
 If he determines that disclosure is an appropriate course of action. He shall, when making
such disclosure, act in good faith and exercise caution when making statements and
assertions. Shall also consider whether it is appropriate to inform client before disclosing.

Imminent Breach
Same as previous section
Code of Ethics Page 343

Seeking Advice
The CA might consider:
 Consulting internally.
 Obtaining legal advice to understand the professional or legal implications of taking any
particular course of action.
 Consulting on a confidential basis with a regulatory or professional body.
Documentation
CA is encouraged to document:
 The matter.
 Results of discussion with management and, where applicable, TCWG and other parties.
 How management and, where applicable, TCWG have responded to the matter.
 Courses of action he considered, the judgments made and the decisions that were taken.
 How he is satisfied that he has fulfilled the responsibility set out in this section

PUBLIC NOTICES, ANNOUNCEMENTS AND COMMUNICATIONS (S ECTION 370)

 In any communications, announcements and public notices, CA 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.
 A CA preparing or authorizing the issue of such matter should do so with a due sense of
responsibility to the profession and to the public as a whole.
 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

Advertising for solicitation be avoided

 All announcements, communications and public notices should:-

- be aimed at informing the recipients or the public in an objective manner;
- conform to basic principles of legality, decency, clarity, honesty and truthfulness; and
- not project an image, which is inconsistent with that of a professional person.
 Following activities are prohibited that:
- Create false, deceptive or unjustified expectations of favourable results;
- Imply the ability to influence any court, tribunal, regulatory agency or similar body etc;
- 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
Code of Ethics Page 344

Following are examples that are illustrative of circumstances in which communications,

announcements, public notices, etc., are acceptable and the related matters to be considered

Subject Matters to be considered

Appointments - It is in the interests of public and profession that any appointment or
and Awards other activity of CA in a matter of national or local importance, or award
of any distinction to a member, should receive publicity and membership
of the Institute should be mentioned.
- CA should not make use this for personal professional advantage.
CAs seeking - A CA may inform interested parties through any medium
employment or - Cas should not, however, publicize for subcontract work in a manner,
Professional which could be interpreted as seeking to procure professional business.
Business - Public announcements/notices seeking subcontract work may be
acceptable if placed only in professional press and provided that neither
CA's name, address or telephone number appears in that
- A CA may write a letter or make a direct approach to another CA when
seeking employment or professional business.
Directories & - A CA and his firm may be listed in the directories both alphabetically and
Internet in lead type and in classified list under "CAs" in the directories.
- If directories do not have specific classification for "CAs", he can, use the
classification "Accountants and Auditors".
- Entries should be limited to name, address, telephone numbers, internet
address, e-mail address, professional description & any other contact
info
- Firm may also develop and maintain a website on the internet provided
the contents comply with requirements of this section 370
Books, Articles, - CA who is author of book/article on a professional subject, may state his
Interviews, name and professional qualifications and give name of his firm
Lectures, and - Shall not give any information as to the services that the firm provides.
Electronic - Similar provisions applicable to participation by a CA in a lecture,
Media interview or a radio or television program on a professional subject.
- What practicing member write or say, should not be promotional of
themselves or firm but should be an objective professional discussion
- Practicing members are responsible for using their best actions to ensure
that what ultimately goes before public complies with these requirement.
- The CA may not provide the press with any information for publication
that he could not publish himself.
Training - May invite clients, their staff and general public to attend training
Courses, courses or seminars conducted for imparting professional education.
Seminars, etc. - Undue prominence should not be given to name of a CA in any booklets
or documents issued in connection therewith
Code of Ethics Page 345

Subject Matters to be considered

Professional - Any professional literature bearing name of CA or his firm giving
Literature and technical information for assistance of staff and clients may be issued.
Publications - Publication developed/ authored by a firm may be published in the firm's
name but it shall not give any information as to services that firm
provides
- These literatures and publications can also be placed on website of firm.
Staff - Genuine staff vacancies may be communicated to the public through any
Recruitment common medium for such
- If job specification give some necessary detail, as to one or more of the
services provided by the CA or his firm, it is acceptable but it should not
contain any promotional element.
- No comparison of services offered as superior to those offered by other
CAs as a consequence of size, associations, or for any other reason.
- In publications such as specifically directed to schools & other
educational places to inform students etc of career opportunities in
profession, services offered to public may be described in a businesslike
way.
- More latitude may also be permissible in a section of a newspaper
devoted to staff vacancies than would be allowed if the vacancy appears
in a prominent position elsewhere in a newspaper on the grounds that it
would be most unlikely that a potential client would use such media to
select his professional adviser
Recruitment on - Should ensure that emphasis is toward objectives to be achieved for
behalf of clients client
- Description of any services provided by the practice as being of specialist
nature is not permitted.
Brochures and A CA in practice may issue:
Firm - A factual and objectively worded account of the services provided, firm's
Directories resources (human & other, qualifications & experience of personnel
where appropriate), existing clients (keeping confidentiality) and of
professional assignments undertaken; and
- A directory setting out names of partners, office addresses and names
and addresses of associated firms and correspondents.
Stationery and - Should be of an acceptable professional standard
Nameplates - Should comply with the requirements of directives issued by the Council
from time to time as to names of partners, principals and others who
participate in practice, use of professional descriptions and designatory
letters, cities or countries where practice is represented, logotypes, etc.
- Description of any services provided by the practice as being of specialist
nature is not permitted.
- Similar provisions apply to nameplates.
Code of Ethics Page 346

Subject Matters to be considered

Newspaper - Appropriate newspapers or magazines may be used to inform public of
Announcements the establishment of a new practice, changes in composition of a
partnership, or of any alteration in the address and telephone number of
a practice.
- Such announcements should be limited to a bare statement of facts and
consideration given to the appropriateness of the area of distribution of
the newspaper or magazine and number of insertions.
Inclusion of the - CA in practice should take steps to ensure that the context in which the
name of a CA in report is published is not such as might result in the public being misled
practice in a as to the nature and meaning of the report.
document - CA should advise client that permission to be obtained before
issued by client publication
(e.g. publish a - Similar consideration should be given to other documents by a client
report by CA in containing name of CA acting in an independent professional capacity.
practice dealing - Inclusion of name of CA in practice in annual report of a client is allowed.
with client's - When CA in practice in their private capacity are associated with, or hold
existing affairs office in, an organization, organization may use their name and
or establishing a professional status on stationery and other documents.
new business (CA should ensure that this information is not used in such a way as
venture might lead the public to believe that there is a connection with the
organization in an independent professional capacity)
Advertising - It is of value to prospective students/participants to know the
material used to instructor's background (e.g. degree, professional body affiliations &
promote course name of his firm)
to be conducted - CA has the responsibility to ascertain that all promotional efforts are
within the bounds of this Section
Use of CA title on - Use of CA title by a CA not in practice is proper.
Employer's - It would also be proper for the CA title to appear in paid advertisements
Stationery of the employer that list the officers and directors.
Greeting and - May be sent in the name of a CA or his firm.
Invitation Cards - Professional qualifications may be indicated
- No information shall be given regarding services that CA or firm
provides
Code of Ethics Page 347

PART 4A INDEPENDENCE – AUDIT & REVIEW ENGAGEMENTS

MAP OF PART 4A
 Code of Ethics Page 348

Sub Situation Threats Factors for Safeguards

Para Considering
Significance

Financial Interests
(direct financial interest or a material indirect financial interest)

A financial interest might be held directly or indirectly through an intermediary such as a

collective investment vehicle, an estate or a trust. When a beneficial owner has control over the
intermediary or ability to influence its investment decisions, the Code defines that financial
interest to be direct. Conversely, when a beneficial owner has no control over the intermediary or
ability to influence its investment decisions, the Code defines that financial interest to be indirect
(510.3)
Factors relevant in evaluating level of a self-interest threat include:
 The role of the individual holding the financial interest.
 Whether the financial interest is direct or indirect.
 The materiality of the financial interest

510.4 Direct financial interest or S.I Shall not be held by:

a material indirect (a) Firm or a network firm;
financial interest in the (b) Audit team member, or any of
audit client that individual’s immediate
family;
(c) Any other partner in the office
in which an engagement
partner practices in
connection with audit
engagement, or any of that
partner’s immediate family; or
(d) Any other partner or
managerial employee who
provides non-audit services to
audit client, except for any whose
involvement is minimal, or any of
his immediate family.
510.5 As an exception, family member an immediate family member may hold a direct or material
indirect financial interest in an audit client, provided that: received the financial interest
because of employment rights, for example through pension or share option plans, and, when
necessary, the firm addresses the threat created by the financial interest; and the family
member disposes of or forfeits financial interest as soon as practicable when family member
has or obtains right to do so, or in the case of a stock option, when family member obtains the
right to exercise the option
510.6 When an entity has a S.I Neither the firm, nor a network
controlling interest in an firm, nor an audit team member,
nor any of that individual’s
 Code of Ethics Page 349

audit client and the client immediate family shall hold a

is material to the entity, direct or material indirect
financial interest in that entity.
510.10 Immediate family member S.I - Role of individual - Removing the audit team
of the team member INT on the audit team. member with the financial
having a financial interest FAM - Whether ownership interest from the audit team
in the audit client - Having an appropriate reviewer
of entity is closely
review the work of the audit
or widely held. team member.
- Whether the
interest allows
investor to control
or significantly
influence the entity.
- Materiality of the
financial interest
510.10 Close family member of S.I - Nature of - Having a CA review the work of
the team member having a relationship the team member; or
financial interest in the between member
audit client and close family
member; and
- Materiality of the
financial interest
- Whether the
financial interest is
direct or indirect
510.10 If an audit team member S.I - The firm’s - Removing the audit team
knows that a financial organizational, member with the personal
interest in audit client is operating and relationship from the audit team
held by individuals such reporting structure. - Excluding the audit team
as: - The nature of the member from any significant
- Partners and professional relationship decision- making concerning the
employees of the firm or between the audit engagement.
network firm, apart from individual and the - Having an appropriate reviewer
those who are specifically audit team member review the work of the audit
not permitted to hold team member
such financial interests or
their immediate family.
- Individuals with a close
personal relationship
with an audit team
member.
510.10 A retirement benefit plan S.I
of a firm or a network firm
holds a direct or material
indirect financial interest
in an audit client.
 Code of Ethics Page 350

510.8 Financial Interests in S.I Shall not hold a such - Dispose of the interest; or
Common with the Audit financial interest - Dispose of enough of the interest
Client unless: so that the remaining interest is
(i) Financial no longer material.
interests are
immaterial to the
firm, network
firm, audit team
member and his
immediate family
member and the
audit client; or
(ii) Audit client
cannot exercise
significant influence
over the entity.
510.9 Financial Interests - Financial interest shall be
Received disposed of immediately, or
Unintentionally enough of an indirect financial
If interest is received by interest shall be disposed of so
the firm or a network firm, that the remaining interest is no
or an audit team longer material; or
member or any of that
individual’s immediate
family
510.9 Financial Interests - Financial interest shall be
Received disposed of as soon as possible,
Unintentionally or enough of an indirect financial
If the interest is received interest shall be disposed of so
by an individual who is that the remaining interest is no
not an audit team longer material; and
member, or by any of that
individual’s immediate
family
510.7 Holding a financial S.I Can acts as trustee, unless:
interest in the audit client (a) None of the following is
as a trustee by the firm, a beneficiary of the trust: the
network firm or individual trustee, the audit team member or
any of that individual’s immediate
family, the firm or a network firm;
(b) The interest in the audit
client held by the trust is not
material to the trust;
(c) The trust is not able to
exercise significant influence over
the audit client; and
(d) None of the following
can significantly influence any
Code of Ethics Page 351

investment decision involving a

financial interest in the audit
client: the trustee, the audit team
member or any of that
individual’s immediate family, the
firm or a network firm.

Loans and Guarantees

511.5 A loan, or a guarantee of a S.I - Made under normal Such a loan or guarantee (other
loan, to a team member, or lending procedures than normal lending procedures
his immediate family and terms or not and term) shall not be accepted.
member, the firm or - Materiality of loan Work reviewed by an appropriate
network firm from an audit reviewer, who is not an audit
client that is a bank or a team member, from a network
similar institution firm that is not a beneficiary of
the loan.
511.7 If firm, network firm or a S.I High Significance
team member, or his unless loan etc is
immediate family member, immaterial to both:
accepts a loan from, or has a - Firm, network firm,
borrowing guaranteed by, an or the individual
audit client that is not a receiving the loan
bank or similar institution etc; and
- Lender (Client)
511.4 If firm, network firm or a S.I High Significance
team member, or his unless loan etc is
immediate family member, immaterial to both:
makes or guarantees a - Borrower (client)
loan to an audit client - Lender

511.6 If a firm,network firm or a No Threat is not created

team member, or his if deposit or account
immediate family member, is held under normal
has deposits or a brokerage commercial terms
account with an audit client
that is a bank, broker or
similar institution
 Code of Ethics Page 352

Business Relationships

520.3 Close business relationship S.I - -

between a firm, or team INT
member, or his immediate
family member, and client or
its management, e.g.
- Having a financial interest in
a joint venture with either
the client or a controlling
owner, director, officer or
other senior management
- Arrangements to combine
one or more services or
products
- Distribution or marketing
arrangements
520.4 Firm, Network Firm, Audit S.I A firm, a network firm or an audit
Team Member or Immediate team member shall not have a close
Family Business INT business relationship with an audit
Relationships client or its management unless
any financial interest is immaterial
and the business relationship is
insignificant to both
520.5 Common Interests in S.I This does not create
Closely-Held Entities threats if:
Business relationship - Business relationship
involving the holding of an is insignificant
interest by the firm, or a - Financial interest is
team member, or his immaterial to
immediate family member, investor
in a closely-held entity when - Financial interest
the audit client or a director does not give the
or officer of the client, or any ability to control
group thereof, also holds an closely-held entity
interest in that entity the investor, or
(Common interest) group of investors
520.6 Buying Goods or Services S.I This does not create - Eliminating or reducing the
Purchase of goods and a threat to magnitude of the transaction; or
services from an audit client independence if: - Removing the individual from
by the firm, a network - Transaction is in team.
firm,or a team member, or normal course of
his immediate family business
member - It is at arm's length.
 Code of Ethics Page 353

Family and Personal Relationships

521.3 Immediate family member S.I - The individual’s No safeguard except removing the
of a team member is: FAM responsibilities on individual from the audit team.
- Director or officer of client; INT the audit team.
or - Role of family
- An employee in a position to member or other
exert significant influence individual within
over preparation of client's client, and closeness
accounting records or F/S of the relationship.
521.4 An immediate family S.I - Position held by - Removing the individual from the
521.5 member of a team member FAM immediate family audit team; or
is an employee in a position INT member; and - Structuring responsibilities of the
to exert significant influence - Role of professional audit team so that the professional
over the client's financial on the audit team. does not deal with matters that
position, financial are within the responsibility of the
performance or cash flows. immediate family member.
- That individual shall not
participate as an audit team
member
521.6 A close family member of a S.I - Nature of - Removing the individual from the
team member is: FAM relationship between audit team; or
- A director or officer of audit INT team member and - Structuring responsibilities of the
client; or close family member audit team so that the professional
- An employee in a position to - Position held by does not deal with matters that
exert significant influence close family member; are within the responsibility of the
over the preparation of and immediate family member.
client's accounting records or - Role of professional
F/S on which the firm will on the audit team.
express an opinion.
521.7 Other Close Relationships of S.I - Nature of - Removing professional from audit
an Audit Team Member FAM relationship between team; or
INT individual and team - Structuring responsibilities of
member; audit team so that the professional
- Position the does not deal with matters that
individual holds with are within responsibility of
client; and individual with whom the
- Role of professional professional has a close
on the audit team. relationship.
521.8 Personal or family S.I - Nature of - Structuring partner's or
relationship between FAM relationship between employee's responsibilities to
- A partner or employee of INT partner or employee reduce any potential influence
firm who is not a team of firm and the over audit; or
member and director or officer or - Having a CA review relevant audit
- A director or officer of audit employee of client; work performed.
client or an employee in a - Interaction of
position to exert significant partner or employee
 Code of Ethics Page 354

influence over preparation of of firm with audit

client's accounting records or team;
F/S on which the firm will - Position of partner or
express an opinion. employee within
firm;
- Position the
individual holds with
the client.

Employment with an Audit Client

524.3 Any of following individuals FAM -

have been an audit team INT
member or partner of the
firm or a network firm:

audit client.

to exert significant influence

over the preparation of the
client’s accounting records
or the F/S on which the firm
will express an opinion
524.4 A former team member or FAM - Position individual - Modifying the audit plan.
partner joins audit client as a INT has taken at the - Assigning to the audit team
director or officer, or as an client. individuals who have sufficient
employee in a position to - Any involvement the experience relative to the
exert significant influence individual will have individual who has joined the
over preparation of client's with the audit team. client.
accounting records or F/S - The length of time - Having an appropriate reviewer
since individual was review the work of the former
an audit team audit team member
member or partner
of firm or network
firm.
- Former position of
the individual within
the audit team, firm
or network firm. An
example is whether
the individual was
responsible for
maintaining regular
contact with the
client’s management
or TCWG
 Code of Ethics Page 355

524.5 Audit Team Members S.I - Required to notify firm when

Entering Employment with a entering employment
Client negotiations
A team member participates - Removing individual from team;
in audit while knowing that or
team member will, or may, - A review of any significant
join client sometime in judgments made by that
future. individual while on the team.

Employment with Audit Clients - that are Public Interest Entities

524.6 if an individual who was a FAM Independence deemed not be compromised if:
key audit partner with INT
respect to an audit client Subsequent to the partner ceasing to be a key audit
that is a public interest partner, entity had issued audited F/S covering a period
entity joins the client as: of not less than 12 months and individual was not a team
(a) A director or officer; or member with respect to audit of those F/S.
(b) An employee in a
position to exert significant
influence over the
preparation of accounting
records or the F/S
524.7 Individual who was firm's INT Independence deemed not be compromised if:
Senior or Managing 12 months have passed since the individual was the
Partner joins an audit client Senior or Managing Partner(Chief Executive or
as: equivalent) of the firm
- An employee in a position to
exert significant influence
over preparation of entity's
accounting records or F/S; or
- A director or officer of entity
524.8 Business Combinations
Independence is not compromised if
- The position was not taken in contemplation of the business combination;
- Any benefits or payments due to the former partner from the firm or a network firm have been
settled in full, unless made in accordance with fixed pre-determined arrangements and any
amount owed to the partner is not material to the firm or network firm as applicable;
- The former partner does not continue to participate or appear to participate in the firm’s or
network firm’s business or professional activities; and
- The firm discusses the former partner’s position held with the audit client with TCWG

Temporary Personal Assignments

525.3 A firm or network firm shall S.R - Conducting an additional review of the work performed
525.4 not loan personnel to an FAM by the loaned personnel might address a self-review
audit client unless: ADV threat.
- Not including the loaned personnel as an audit team
member might address a familiarity or advocacy threat.
 Code of Ethics Page 356

(a) Such assistance is - Not giving the loaned personnel audit responsibility for
provided only for a short any function or activity that the personnel performed
period of time; during the loaned personnel assignment might address a
(b) The personnel are not self-review threat
involved in providing non-
assurance services that When familiarity and advocacy threats are created by the
would not be permitted loan of personnel by a firm or a network firm to an audit
under Section 600 and its client, such that the firm or the network firm becomes too
subsections; and closely aligned with the views and interests of
(c) The personnel do not management, safeguards are often not available
assume management
responsibilities and the audit
client is responsible for
directing and supervising the
activities of the personnel
Recent Service with an Audit Client

522.3 If, during the period covered S.I Very High Such individuals shall not be
by audit report, a team S.R assigned to the audit team.
member had served as a FAM
director or officer of client,
or was an employee in a
position to exert significant
influence over preparation
of accounting records or F/S
522.4 If, before period covered by S.I - Position individual has An example of a safeguard may
audit report, a team member S.R taken with client; be: Conducting a review of the
had served as a director or FAM - Length of time since work performed by the
officer of client, or was an the individual left the individual as a team member.
employee in a position to client; and
exert significant influence - Role of professional
over such preparation on the audit team

Serving as a Director or Officer of an Audit Client

523.3 If a partner or employee of S.R Very High No partner or employee shall

the firm serves as a director S.I serve as a director or officer of
or officer of an audit client an audit client.
523.4 A partner or employee of S.R Very High unless:
firm serves as Company S.I Management makes
Secretary for an audit client, all relevant decisions
and duties are limited
to routine and the
administrative nature
 Code of Ethics Page 357

Long Association of Senior Personnel (Including Partner Rotation) with an Audit Client
(General Provisions)

540.3 Using same senior personnel FAM For individual: - Changing the role of the
on an audit engagement over S.I - Overall length of his individual on the audit team or
a long period of time relationship with the the nature and extent of the
client, including if tasks the individual performs.
such relationship - Having an appropriate reviewer
existed while the who was not an audit team
individual was at a member review the work of the
prior firm. individual.
- How long individual - Performing regular independent
has been engagement internal or external quality
team member, and the reviews of the engagement.
nature of the roles.
- Extent to which his R540.4 If a firm decides that
work is directed, the level of the threats created
reviewed & can only be addressed by
supervised by more rotating the individual off the
senior person. audit team, the firm shall
- Extent to which he, determine an appropriate period
due to seniority, has during which the individual shall
the ability to influence not:
the outcome of audit (a) Be a member of the
- Closeness of his engagement team for the
personal relationship audit engagement;
with senior (b) Provide quality control for
management/TCWG. the audit engagement; or
- Nature, frequency and (c) Exert direct influence on the
extent of interaction outcome of the audit
between him & senior engagement.
management/TCWG
(b) For audit client:
- Nature or complexity
of the financial
reporting issues and
any changes therein
- Whether there have
been any recent
changes in senior
management/TCWG
- Structural changes in
organization which
impact nature,
frequency & extent
of dealing with
senior
management/TCWG
 Code of Ethics Page 358

Audit Clients that are Public Interest Entities

(540.5-540.9): An individual shall not act in any of the following roles, or a combination of such roles, for a
period of more than 7 cumulative years unless the law prescribes a shorter period (the “time-on” period):
 The engagement partner;
 The individual appointed as responsible for the engagement quality control review; or
 Any other key audit partner role.

After the time-on period, the individual shall serve a “cooling-off” period

In calculating the time-on period, the count of years shall not be restarted unless the individual ceases to act in
any one of the roles prescribed above for a minimum period. This minimum period is a consecutive period equal
to at least the cooling-off period as applicable to the role in which the individual served in the year immediately
before ceasing such involvement.

As an exception, key audit partners whose continuity is especially important to audit quality may, in rare cases
due to unforeseen circumstances outside the firm’s control, and with the concurrence of TCWG, be permitted to
serve an additional year as a key audit partner as long as the threat to independence can be eliminated or
reduced to an acceptable level.

If an audit client becomes a public interest entity, a firm shall take into account the length of time an individual
has served the audit client as a key audit partner before the client becomes a public interest entity in determining
the timing of the rotation. If the individual has served the audit client as a key audit partner for a period of five
cumulative years or less when the client becomes a public interest entity, the number of years the individual may
continue to serve the client in that capacity before rotating off the engagement is seven years less the number
of years already served. As an exception to paragraph R540.5, if the individual has served the audit client as a
key audit partner for a period of six or more cumulative years when the client becomes a public interest entity,
the individual may continue to serve in that capacity with the concurrence of TCWG for a maximum of two
additional years before rotating off the engagement.

When a firm has only a few people with the necessary knowledge and experience to serve as a key audit partner
on the audit of a public interest entity, rotation of key audit partners might not be possible. As an exception, if
an independent regulatory body in the relevant jurisdiction has provided an exemption from partner rotation
in such circumstances, an individual may remain a key audit partner for more than seven years, in accordance
with such exemption. This is provided that the independent regulatory body has specified other requirements
which are to be applied, such as the length of time that the key audit partner may be exempted from rotation or
a regular independent external review.

Cooling-off Period (540.11-540.20)

 If the individual acted as the engagement partner for seven cumulative years, the cooling-off period shall
be five consecutive years.
 Where the individual has been appointed as responsible for the engagement quality control review and
has acted in that capacity for seven cumulative years, the cooling-off period shall be three consecutive
years.
 If the individual has acted as a key audit partner other than mentioned above for seven cumulative years,
the cooling-off period shall be two consecutive years.
 If the individual acted in a combination of key audit partner roles and served as the engagement partner
for four or more cumulative years, the cooling- off period shall be five consecutive years.
 Code of Ethics Page 359

 If the individual acted in a combination of key audit partner roles and served as the key audit partner
responsible for the engagement quality control review for four or more cumulative years, the cooling-off
period shall be three consecutive years.
 If an individual has acted in a combination of engagement partner and engagement quality control review
roles for four or more cumulative years during the time-on period, the cooling-off period shall:
 As an exception, be five consecutive years where the individual has been the engagement partner for
three or more years; or be three consecutive years in the case of any other combination.
 If individual acted in any combination of key audit partner roles other than above, the cooling-off period
shall be two consecutive years.
 In case of Service at a Prior Firm, in determining the number of years that an individual has been a key
audit partner, the length of relationship shall, where relevant, include time while the individual was a key
audit partner on that engagement at a prior firm.
 Where a legislative or regulatory body (or organization authorized or recognized by such legislative or
regulatory body) has established a cooling- off period for an engagement partner of less than five
consecutive years, the higher of that period or three years may be substituted for the cooling-off period
of five consecutive years provided that the applicable time-on period does not exceed seven years.

For the duration of the relevant cooling-off period, the individual shall not:
 Be an engagement team member or provide quality control for the audit engagement;
 Consult with the engagement team or the client regarding technical or industry-specific issues,
transactions or events affecting the audit engagement (other than discussions with the engagement team
limited to work undertaken or conclusions reached in the last year of the individual’s time-on period
where this remains relevant to the audit);
 Be responsible for leading or coordinating the professional services provided by the firm or a network
firm to the audit client, or overseeing the relationship of the firm or a network firm with the audit client;
or
 Undertake any other role or activity not referred to above with respect to the audit client, including the
provision of non-assurance services that would result in the individual:
(i) Having significant or frequent interaction with senior management or TCWG; or
(ii) Exerting direct influence on the outcome of the audit engagement.
 Code of Ethics Page 360

Provision of Non-assurance Services to an Audit Client

600.5 A firm or a network firm S.R - Nature, scope and To avoid assuming a
600.7 shall not assume a S.I purpose of service. management responsibility, the
600.8 management FA - Degree of reliance that firm shall be satisfied that client
responsibility for an audit M management makes all
will be placed on
client AD judgments and decisions that
V outcome of service as are the proper responsibility of
Examples of activities that part of the audit. management.
are generally considered a - Legal and regulatory
management environment This includes ensuring that the
responsibility: - Whether the outcome client’s management:
- Setting policies and will affect matters (a) Designates an individual
strategic direction; who possesses suitable skill,
reflected in F/S; and, if
- Directing and taking knowledge and experience to be
so: responsible at all times for the
responsibility for the  Extent to which it client’s decisions and to oversee
actions of the entity's will have material the services. Such an individual,
employees; effect on the F/S. preferably within senior
- Authorizing transactions; management, would
 Degree of
- Deciding which understand:
subjectivity
recommendations of the (i) The objectives, nature and
involved results of the services; and
firm or other third parties
- Level of expertise of (ii) The respective client and
to implement;
client’s management firm or network firm
- Taking responsibility for responsibilities.
and employees with
preparation and fair However, the individual is not
respect to the type of
presentation of F/S in required to possess the
service provided.
accordance with AFRF; and expertise to perform or re-
- Extent of the client’s
- Taking responsibility for perform the services.
involvement in (b) Provides oversight of the
designing, implementing
determining significant services and evaluates the
and maintaining internal
matters. adequacy of the results of the
control. service performed for the
- Nature and extent of
- Hiring or dismissing client’s purpose.
the impact of the
employees (c) Accepts responsibility for
service, if any, on the
- Controlling or managing the actions, if any, to be taken
client’s systems arising from the results of the
bank accounts or
 Accounting records services.
investments.
or F/S
 Internal controls
over financial
reporting.
- Whether client is a
public interest entity.
 Code of Ethics Page 361

601.4 Accounting and No threat if the firm A firm or a network firm shall
601.5 Bookkeeping Services that does not assume a not provide to an audit client
are Routine or Mechanical management that is not a public interest
responsibility for the entity accounting and
- Audit Clients that are Not client. bookkeeping services including
Public Interest Entities preparing F/S on which the firm
will express an opinion or
financial information which
forms the basis of such F/S,
unless:
(a) Services are of a routine or
mechanical nature; and
(b) The firm addresses any
threats that are created by
providing such services that are
not at an acceptable level.

Safeguards are:
Using professionals who are not
audit team members to perform
the service.
Having an appropriate reviewer
who was not involved in
providing the service review the
audit work or service
performed.
601.6 Audit Clients that are Public S.R May provide services of - Arranging for such services to be
Interest Entities a routine or mechanical performed by an individual who
nature for divisions or is not a team member; or
A firm or a network firm related entities of an - If such services are performed by
shall not provide to an audit client that is a a team member, using a partner
audit client that is a public public interest entity if or senior staff member who is
interest entity accounting the personnel providing not a team member to review the
and bookkeeping services the services are not work performed.
including preparing F/S on audit team members
which the firm will express and:
an opinion or financial (a) Divisions or related
information which forms entities for which the
the basis of such F/S. service is provided are
collectively immaterial
to the F/S on which the
firm will express an
opinion; or
(b) Service relates to
matters that are
collectively immaterial
to F/S of the division
 Code of Ethics Page 362

ADMINISTRATIVE SERVICES (Para 602.3)

Administrative services involve assisting clients with their routine or mechanical tasks within the
normal course of operations. Such services require little to no professional judgment and are clerical in
nature
Examples of administrative services include:
- Word processing services.
- Preparing administrative or statutory forms for client approval.
- Submitting such forms as instructed by the client.
- Monitoring statutory filing dates, and advising an audit client of those dates.
“Providing administrative services to an audit client does not usually create a threat”

Valuation Services (Para 603)

Making of assumptions with regard to future developments, application of appropriate methodologies
and techniques and combination of both to compute a certain value, or range of values for an asset,
liability or for business as a whole

603.3 If a firm or network firm is S.R - Whether valuation report - Having a professional who
requested to perform a be made public was not involved in
valuation to assist an audit ADV - Extent of the client’s providing the valuation
client with its tax reporting involvement in service review the audit or
obligations or for tax determining and valuation work
planning purposes and the approving valuation performed; or
results of the valuation will methodology etc - Making arrangements so
not have a direct effect on - Degree of subjectivity that personnel providing
the F/S, inherent in the item for such services do not
valuations participate in the audit
- Whether valuation will engagement.
have a material effect on - Having an appropriate
the F/S. reviewer who was not
- Extent and clarity of involved in providing the
disclosures related to the service review the audit
valuation in F/S. work or service performed
- degree of dependence on might address a self-
future events of a nature review threat.
that might create
significant volatility
inherent in the amounts
involved.
603.4 Providing valuation services S.R - Material effect on F/S No safeguards could
to Audit client that is not a - Significant degree of reduce threat to an
public interest entity ADV subjectivity acceptable level. Shall not
provide the service
603.5 Providing valuation services S.R Material effect on F/S Firm shall not provide
to Audit client that is a (separately or in the such service.
public interest entity ADV aggregate)
Code of Ethics Page 363

Taxation Services – Tax Return and Tax Calculations (Para 604)

Factors relevant in evaluating level of threats created by providing any tax service to audit client include:
- The particular characteristics of the engagement.
- The level of tax expertise of the client’s employees.
- The system by which the tax authorities assess and administer the tax in question and the role of the firm
or network firm in that process.
- The complexity of the relevant tax regime and the degree of judgment necessary in applying it

604.4 Tax return preparation No threat if the firm

including following services does not assume a
- Assisting clients with their tax management
reporting obligations by responsibility for the
drafting and compiling returns including any
information, including the significant judgments
amount of tax due (required to
be submitted to the applicable
tax authorities)
- Advising on tax treatment of
past transactions and
responding on behalf of client
to tax authorities’ requests
604.5 Tax Calculations for Purpose of S.R - Complexity of relevant - Using professionals who are
Preparing Accounting Entries ADV tax law and regulation not members of audit team;
for Audit clients that are not - Degree of judgment - Having appropriate reviewer,
public interest entities (current - Level of tax expertise who was not involved in
and deferred tax) of client's personnel; providing the service, review
- Materiality to the F/S the audit work or service
performed.

603.4 Providing valuation services to S.R - Material effect on F/S No safeguards could reduce
Audit client that is not a Significant degree of threat to an acceptable level.
public interest entity ADV subjectivity Shall not provide the service
603.5 Providing valuation services to S.R Material effect on F/S Firm shall not provide such
Audit client that is a public (separately or in the service.
interest entity ADV aggregate)
604.6 Tax Calculations for Preparing S.R Very HIGH A firm or a network firm shall
Accounting Entries (material not prepare such tax
to the F/S) for Audit clients ADV calculations
that are public interest
entities
 Code of Ethics Page 364

604.7 Tax Planning and Other S.R - Degree of subjectivity - Using professionals who are not
Tax Advisory Services for in determining the members of audit team to
All Audit Clients ADV appropriate perform the service;
treatment for tax - Having a an appropriate
advice in F/S. reviewer, who was not involved
- Extent to which the in providing tax service, advise
outcome of tax advice the audit team on service and
will have a material review the F/S treatment;
effect on F/S; - Obtaining advice on service
- Whether effectiveness from an external tax
of tax advice depends professional; or
on accounting - Obtaining pre-clearance or
treatment or advice from tax authorities.
presentation in F/S
and there is doubt as
to its appropriateness
- Whether tax
treatment is
supported by private
ruling or otherwise
been cleared by the
tax authority before
preparation of F/S
604.8 Where effectiveness of the S.R Very HIGH No safeguards could reduce the
tax advice depends on a threat to an acceptable level. A
particular accounting firm shall not provide such
treatment or presentation in tax advice to an audit client.
F/S and:
a) Audit team has reasonable
doubt as to appropriateness
of related accounting
treatment or presentation
under FRF; and
b) Outcome or consequences
of tax advice will have a
material effect on F/S;
604.9 Tax Services Involving S.I - Extent to which the - Using professionals who are
Valuations Adv valuation method is not audit team to perform
supported by tax law service
or regulation etc - Having appropriate reviewer
- Degree of subjectivity who was not involved in
inherent in valuation. providing service review audit
- Reliability and extent work or service performed
of the underlying data - Obtaining pre-clearance from
the tax authorities
 Code of Ethics Page 365

604.1 When firm represents an ADV - Whether firm has - Using professionals who are not
0 audit client in the resolution S.R provided advice which members of audit team to
of a tax dispute may reach at is subject of tax perform the service;
apoint once the tax dispute; - Having a tax professional, who
authorities have notified the - Extent to which the was not involved in providing
client that they have rejected outcome of dispute will the tax service, advise audit
the client's arguments on a have effect on F/S; team on the services and review
particular issue and either - Extent to which matter the F/S treatment; or
the tax authority or the client is supported by tax law - Obtaining advice on service
is referring the matter for or regulation etc; from an external tax
determination in a formal - Whether proceedings professional.
proceeding, for example are conducted in
before a tribunal or court. public;
- Role management
plays in resolution of
dispute.
604.1 Acting as an advocate for ADV Significance of the No safeguards could eliminate
1 audit client before a public threat is very HIGH or reduce threat to an
tribunal or court in acceptable level. Firm shall not
resolution of a tax matter perform this type of service for
and amounts involved are an audit client
material to F/S

Internal Audit Services (Para 605.3)

Internal audit activities may include:
- Monitoring of internal control – reviewing controls, monitoring their operation and recommending
improvements to them
- Reviewing controls, monitoring operation & recommending improvements;
- Reviewing the means used to identify, measure, classify and report financial and operating information, and
specific inquiry into individual items including detailed testing of transactions, balances and procedures;
- Review of economy, efficiency and effectiveness of operating activities including non-financial activities; and
- Review of compliance with laws, regulations and other external requirements, and with management policies
and directives and other internal requirements.

Examples of internal audit services that involve assuming management responsibilities include:
- Setting internal audit policies or the strategic direction of internal audit activities.
- Directing and taking responsibility for the actions of the entity’s internal audit employees.
- Deciding which recommendations resulting from internal audit activities to implement.
- Reporting the results of the internal audit activities to TCWG on behalf of management.
- Performing procedures that form part of the internal control, such as reviewing and approving changes to
employee data access privileges.
- Taking responsibility for designing, implementing, monitoring and maintaining internal control.
- Performing outsourced internal audit services, comprising all or a substantial portion of the internal audit
function, where the firm or network firm is responsible for determining the scope of the internal audit work;
and might have responsibility for one or more of the matters noted above
 Code of Ethics Page 366

605.4 Provision of internal audit S.R Whether firm assume Other Safeguard may be:
services to an audit client if a management The use of professionals who
the firm uses the internal responsibility are not members of audit team
audit work in the course of a Other factors can be: to perform internal audit
subsequent external audit - Materiality of related service.
F/S amounts;
- Risk of misstatement;
- Degree of reliance to be
placed on internal
audit
605.5 Provision of internal audit S.R Firm shall not provide
services to Audit clients that internal audit services that
are public interest entities relate to:
- A significant part of the internal
controls over financial
reporting;
- Accounting systems that
generate information significant
to accounting records or F/S; or
- Amounts or disclosures that are
material to the F/S
INFORMATION TECHNOLOGY SYSTEMS SERVICES (Para 606)
Services related to IT systems include the design or implementation of hardware or software systems.

606.3 IT systems services such as: S.R - Whether firm assume When providing services, firm
- Design or implementation of a management or network firm shall be
606.4 IT systems unrelated to responsibility satisfied that the client:
internal control over - Nature of the service. - Acknowledges its
financial reporting; - The nature of IT responsibility for establishing
- Design or implementation of systems and the and monitoring a system of
IT systems that do not extent to which they internal controls;
generate information impact or interact - Assigns the responsibility to
forming significant part of with the client’s make all management
accounting records etc; accounting records or decisions to a competent
- Implementation of "off-the- F/S. employee, preferably within
shelf' reporting software that - The degree of reliance senior management;
was not developed by firm if that will be placed on - Make all management
the customization is not the particular IT decisions
significant; systems as part of the - Evaluates the adequacy and
- Evaluating and making audit results of the design and
recommendations for a implementation of system; and
system designed, - Is responsible for operating
implemented or operated by the system (hardware or
another service provider or software) and for the data it
the client. uses or generates
606.5 Audit Clients that are A firm or a network firm shall not provide IT systems
Public Interest Entities services to such audit client if the services involve
designing or implementing IT systems that:
 Code of Ethics Page 367

- Form a significant part of the internal control over

financial reporting; or
- Generate information that is significant to the client’s
accounting records or F/S

Litigation Support Services

Acting as an expert witness, calculating estimated damages or other amounts that might become receivable
or payable as the result of litigation or other legal dispute, and assistance with document management etc

607.3 Litigation support services S.R - Legal and regulatory Using a professional who was not
including ADV environment in an audit team member to perform
- Assisting with document which service is the service
management and retrieval. provided
- Acting as a witness, - Nature of the service.
including an expert witness. - Extent to which the
- Calculating estimated outcome of service
damages or other amounts will have a material
that might become effect on the F/S
receivable or payable as the
result of litigation or other
legal dispute
Legal Services
Legal services are defined as any services for which the individual providing the services must either:
(a) Have the required legal training to practice law; or
(b) Be admitted to practice law before the courts of the jurisdiction in which such services are to be
provided

608.3 Acting in an Advisory Role S.R - Materiality of - Using professionals who are not
608.4 such as specific matter in members of audit team to
- Contract support. relation to the perform the service; or
- Supporting an audit client client’s F/S. - Having a professional not being
in executing a transaction. - Complexity of legal involved in providing services
- Mergers and acquisitions. matter and degree of provide advice to audit team and
- Assisting client’s internal judgment necessary review any F/S treatment
legal department. to provide the
- Legal due diligence and service
restructuring

608.6 Acting in an advocacy role S.R - Using professionals who are not
for an audit client in ADV members of audit team to
resolving a dispute or perform service; or
litigation (amounts involved - Having a professional who was
are not material to the F/S) not involved in providing
services advise audit team on the
service and review any F/S
treatment
 Code of Ethics Page 368

608.5 Appointment of partner or S.R Very HIGH No member of firm shall accept
an employee of firm or the ADV such appointment for audit
network firm as General client
Counsel (senior management
position) for legal affairs

Recruiting Services
Recruiting services might include activities such as:
- Developing a job description.
- Developing a process for identifying and selecting potential candidates.
- Searching for or seeking out candidates.
- Screening potential candidates for the role by reviewing qualifications, reference checks & interviewing
- Determining employment terms and negotiating details, such as salary, hours and other compensation

609.3 Providing recruiting services S.I - Nature of requested Shall not assume management
609.4 to an audit client. FAM assistance; and responsibilities, including acting
609.5 INT - Role of person to be as a negotiator, and hiring
recruited. decision shall be left to client.
- Any conflicts of Following are then allowed:
interest or - Reviewing qualifications of a
relationships that number of applicants and
might exist between providing advice on suitability
the candidates and the - Interviewing candidates and
firm providing the advising on competence for
advice or service accounting, administrative or
control positions
Firm shall be satisfied that
(a)Client assigns the
responsibility to make all
management decisions with
respect to hiring to competent
employee, preferably within
senior management; and
(b)Client makes all management
decisions including:
- Determining the suitability of
prospective candidates and
selecting suitable candidates.
Determining employment terms
and negotiating details, such as
salary, hours and other
compensation

Recruiting Services that are Prohibited (Para 609.6 and 609.7)

- Searching for or seeking out candidates; or
- Undertaking reference checks of prospective candidates, with respect to the following positions:
(i) A director or officer of the entity; or
(ii) A member of senior management in a position to exert significant influence over preparation of F/S
 Code of Ethics Page 369

Corporate Finance Services

610.3 Providing services such as: ADV - Degree of subjectivity - Using professionals who are not
610.4 - Assisting client in developing S.R involved members of audit team to
610.5 corporate strategies; - Extent to which the provide services; or
- Identifying possible targets outcome of advice will - Having a professional who was
for audit client to acquire; directly affect not involved in providing service
- Advising on disposal amounts recorded in advise audit team and review the
transactions; F/S accounting and F/S treatment
- Assisting finance raising - Extent to which the
transactions; and amounts are material Special Case
- Providing structuring advice to F/S; Corporate finance advice shall
Or - Whether effectiveness not be provided where the
Providing a corporate of advice depends on a effectiveness of advice depends
finance service, that will particular accounting on particular accounting
directly affect amounts treatment in F/S and treatment in F/S and:
reported in F/S there is doubt as to - Audit team has reasonable doubt
(e.g. advice on structuring of a the appropriateness of as to appropriateness of related
corporate finance transaction the related accounting accounting treatment under FRF;
or on financing arrangements) treatment under FRF - Outcome or consequences of
advice will have a material effect
on F/S;
610.4 Providing corporate finance ADV Significance of threat No safeguards could reduce the
services involving S.R is very HIGH threat to an acceptable level.
promoting, dealing in, or Firm shall not provide such
underwriting an audit services to an audit client.
client's shares
 Code of Ethics Page 370

Fee

Fees - Relative Size

410.3 When total fees from an S.I - Operating structure of - Increasing the client base in the
audit client represent a large INT the firm; firm to reduce dependence on
proportion of total fees of - Whether firm is well the audit client.
firm established or new; - Having an appropriate reviewer
- Significance of client who did not take part in the
qualitatively and/or audit engagement review the
quantitatively to firm work.
- Extent to which the
remuneration of the
partner/office is
dependent.
410.4 Where an audit client is a - Disclose to TCWG the fact; and
public interest entity and, for - Discuss whether either of the
two consecutive years, the following actions as safeguards:
total fees from the client and (i) Prior to opinion being issued
its related entities represent on the second year’s F/S, a CA,
more than 15% of the total who is not a member of the firm,
fees received by the firm performs an engagement QCR; or
a professional body performs a
review of that engagement that is
equivalent to an engagement
QCR (“a pre-issuance review”);
or
(ii) After audit opinion on the
second year’s F/S has been
issued, and before the audit
opinion being issued on third
year’s F/S, a CA, who is not a
member of the firm, or a
professional body performs a
review of the second year’s audit
that is equivalent to an
engagement QCR
(“a post-issuance review”)
410.6 When total fees significantly Based on Judgment - Only Pre-issuance review might
exceed 15% be more suited
- Disclose and discuss with TCWG
Fees-Overdue
410.7 When a significant part of S.I Firm shall determine - Obtaining partial payment of
fees due from an audit client Whether overdue fees overdue fees.
remains unpaid for a long might be equivalent - Having an appropriate
410.8 time to a loan to client; and reviewer who did not take part
 Code of Ethics Page 371

is it appropriate to be in the audit engagement review

re-appointed or the work performed
continue audit.

Contingent Fees
410.1 A contingent fee S.I A firm shall not charge directly or
0 charged by a firm in indirectly a contingent fee for an audit
respect of audit engagement
410.1 Contingent fee for a S.I Significance of the threat Such arrangements shall not be
1 non-assurance is very HIGH accepted if
service provided to - Fee is material or expected to be
an audit client material to that firm;
- - Fee is charged by a network firm that
participates in a significant part of audit
and fee is material or expected to be to
that firm; or
- Outcome of the service, and amount of
the fee, is dependent on a future or
contemporary judgment related to audit
of a material amount in the FS
Compensation and Evaluation Policies
411.3 A team member is S.I - Proportion of the Either revise the compensation plan or
411.4 evaluated on or individual's evaluation process for that individual
compensated for compensation or or apply following safeguards such as:
selling non- performance - Removing such members from the
assurance services evaluation that is based audit team; or
to audit client on sale of such services; - Having a CA review the work of the
- Role of individual on team member.
audit team; and Note: A key audit partner shall not be
- Whether promotion evaluated on or compensated based on
decisions are that partner's success in selling non-
influenced by sale of assurance services to the partner's audit
such services. client.
Gifts and Hospitality
420.3 Accepting gifts or S.I Very High No safeguards
hospitality from an FAM (unless value is trivial Firm or a team member shall not accept
audit client INT and inconsequential) such gifts or hospitality.
Actual or Threatened Litigation
430.3 Litigation takes S.I - Materiality of the - Removing individual, involved in
place, or appears litigation; and litigation, from audit team; or
likely, between the INT - Whether litigation - Having a professional review the work
firm or a team relates to a prior audit. performed.
member and audit - Withdraw from or decline audit
client (If no safeguards works)
Code of Ethics Page 372

After completing Part 4A, you can just skim the requirements of the Part 4B
from the Code of Ethics
(being a mere reproduction of this part in context of other than audit and
Tutor’s Note review clients)
373

APPOINTMENT OF
AUDITOR

LEGAL
CONSIDERATIONS
Appointment of Auditor (Legal Considerations) Page 374

C OMPANIES ACT 2017 (SECTIONS 246 TO 250)

Appointment and remuneration of auditors (Sec 246)

Auditor Time of Appointment Appointed by Term of Office

First 90 days of Directors Till 1st AGM
incorporation
Subsequent At AGM Members on Till next AGM
recommendation of the BOD
Casual 30 days of such vacancy Directors Till next AGM
Vacancy

 Auditor, appointed by directors or the members, may be removed before conclusion of next AGM by
Special Resolution
 If auditor is removed by Special resolution, next auditor will be appointed by board with prior
approval of SECP.

SECP shall appoint auditor, on its own motion or on application by company or members, if:
 1st auditors not appointed by directors within 90 days of the incorporation
 Auditor not appointed in an AGM
 Casual vacancy not filled by directors within 30 days
 Auditors appointed are unwilling to act

Appointing Authority Remuneration Fixed by

Directors Directors
SECP SECP
All other cases Members

Retirement of existing and Appointment of new auditor in an AGM

 Member(s) having at least 10% shareholding shall also be entitled to propose any auditor
whose consent has been obtained.
 A notice shall be given to company at least 7 days before the date of the AGM..
 On receipt of such notice, company shall:
o Sent a copy of notice to the retiring auditor, forthwith.
o Post it on its website.
 Retiring auditor can make representation to company at least 2 days before AGM. It shall
be read in AGM and it shall be mandatory for auditor/representative to attend the meeting.
 Company shall intimate the registrar within 14 days of appointment / removal / casual
vacancy together with the consent of appointed auditor.
Appointment of Auditor (Legal Considerations) Page 375

Qualification and disqualification of auditors (Sec 247)

 Auditor shall be a CA having valid certificate of practice form ICAP or a Firm of CAs for:
o Public Company
o Private Company which is subsidiary of Public Company
o Private Company having paid up share capital of at least Rs. 3 million.
 For companies other than above, auditor shall be CA or CMA having certificate of practice
from respective institute or Firm of CAs/CMAs having such criteria as may be prescribed
 Firm where majority of partners practicing are qualified for appointment can be appointed
in firms name.
 Only partners meeting above criteria shall be authorized to act and sign on behalf of firm.

DISQUALIFICATIONS OF AUDITOR

1. Person who during preceding 3 years was director, other officer or employee of Company
2. Person who is a director, other officer or employee of Company
3. Person who is a partner or employee of a director, officer or employee of Company
4. Spouse of the director of Company
5. Person indebted to Company, other than in ordinary course of business of such entities
- Not be considered indebted, if owes less than 1,000,000 to a credit card issuer
- Not be considered indebted, if unpaid utility dues for ≤ 90 days to utility Company
6. Body Corporate
7. Person or his spouse and his minor children, or in case of a firm, all partners of a firm who
holds any shares in Company or its associated company.
(If he holds shares before appointment, the fact shall be disclosed at time of appointment
and shall disinvest such shares within 90 days of appointment)
8. Person who has given a guarantee/security in connection with the indebtedness of any
third person to the company other than in the ordinary course of business of such entities;
9. Person or a firm who, directly or indirectly, has business relationship with the company
other than in the ordinary course of business of such entities;
10. Person who has been convicted by a court of an offence involving fraud and a period of 10
years has not elapsed from the date of such conviction;
11. Person who is not eligible to act as auditor under the code of ethics as adopted by the ICAP
and the ICMAP;

 Person disqualified as auditor of a Company shall also be disqualified for its Holding
company, its Subsidiary Company or Subsidiary Company of its Holding Company.
 If after appointment auditor becomes disqualified, he shall deem to vacate office with effect
from date he becomes disqualified
 If an unqualified/disqualified person is appointed as auditor; It shall be void and SECP may
appoint a qualified person in place of the auditor appointed by Company.
 A person, who not being qualified to be an auditor, acts as auditor of a company shall be
liable to a penalty of level 2
Appointment of Auditor (Legal Considerations) Page 376

Rights and duties of auditors

RIGHTS (Sec 248)

 To access freely to all books & papers of Company and all supporting documents
 Access to copies/extracts of branch records as transferred to Principal office of company
 To require any of the following, to provide him necessary information or explanations:
- Any director, officer or employee of the company;
- Any person holding or accountable for any of company’s books, accounts or vouchers;
- Any subsidiary of the company;
- Any officer, employee or auditor of any subsidiary
- Any person holding or accountable for books, accounts or vouchers of any subsidiary
 The auditor is entitled to attend, receive all notices of any general meeting
 The auditor is entitled to be heard at any general meeting which he attends on any part of
the business which concerns him as auditor

DUTIES (Sec 249)

 Conduct audit, prepare report and express opinion in compliance with the requirements of
ISA adopted by the ICAP.
 Carry out such examination to form an opinion as to
- Whether adequate accounting records have been kept and adequate returns have been
received from branches not visited by him; and
- Whether the company’s F/S are in agreement with accounting records and returns.
 Auditor shall make a report on books of accounts and F/S; shall be laid before AGM.
 The report shall state; whether or not:
- They have obtained sufficient audit evidence for audit
- In their opinion, proper books of accounts have been kept
- Statement of Financial position and profit and loss account and Other Comprehensive
Income or the income and expenditure account and the cash flows has been prepared in
accordance with Act and are in agreement with their books and returns.
- The true and fair view has been given by F/S
- In their opinion all the investments made, expenditure incurred and guaranteed
extended was for the purpose of the business.
- Zakat deductable under Zakat and Ushr Ordinance 1980 been deducted & deposited.
 If auditor's report makes reference to some other report or statement:
- Such report be annexed to auditor's report and be considered a part of report.
 SECP may direct any Company or class of Company that the auditor’s report shall also
include a statement of such additional matters as may be so specified.
 Where any qualification is put in auditor's report, there shall be added the reasons for it and
the true position of Company to the best of auditor's knowledge.
 For listed company, auditor or a person authorized by him in writing shall be present in the
general meeting in which financial statements and auditor’s report are to be considered.
Appointment of Auditor (Legal Considerations) Page 377

 SECP may by general or special order, direct, that the statement of compliance to be attached
with Directors Report, shall be reviewed by the auditor who shall issue a review report to
the members on the format as specified.

Audit of Cost Accounts (Sec 250)

Where any company or class of companies are required to keep cost accounts, SECP may direct
audit of cost accounts be conducted in specified manner & stipulations by a CA or CMA having
same powers, duties etc as auditor, and other prescribed powers, duties & liabilities

Such audit shall be directed by SECP subject to the recommendation of the regulatory authority
supervising the business of relevant sector.

Any contravention or default in complying with requirements of sections 246, 247, 248 and 250
shall be an offence liable to a penalty of level 3 on the standard scale (Sec 252)

Following definitions are important to understand and to be memorised in the context

of answering the scenarios of Companies Act area in the ICAP exams

Associated Company (Section 2(4) – Companies Act 2017)

Two or more companies/undertakings, interconnected with each other in the following

Tutor manner
Note  If one is the subsidiary of another; or
 If companies or undertakings are under common management or control; or
 If undertaking is a modaraba managed by the company; or
 If owner, partner, director or person having ≥ 20% voting power in one
company/undertaking, is also owner, partner, director or person having ≥
20% voting power in other company/undertaking; or

Note: Investment of spouse or minor children deemed to be investment of that person:

Following person / investments do not create relationship of associates

 Nominee director of Federal/Provincial Government or a financial institution
owned/controlled by those or NIT.
 Directorship of a person appointed as an “independent director”; or
 Shares owned by the NIT or a financial institution directly or indirectly owned
or controlled by the Federal Government or a Provincial Government or CDC

Subsidiary company (Section 2(68) – Companies Act 2017)

It means a company or body corporate whose more than fifty percent (50%) voting
securities are held or controlled (directly or indirectly), by some other company or such
other company controls the composition of the board of such company.
Appointment of Auditor (Legal Considerations) Page 378

Listing Regulations (Audit Related)

Quality of Audits

 All listed companies shall facilitate QCR of the audit working papers of practicing CAs, carried
out by ICAP and shall authorize their auditors to make available the details to the QCR
Committee of ICAP.

 Listed company shall not appoint or retain any auditor, who has been found guilty of
professional misconduct, by SECP or by a Court of Law, for a period of 3 years unless lesser
period is determined by SECP
 If any partner(s) of a firm has been held guilty of professional misconduct, firm shall only be
appointed if a written confirmation is given to all the stock exchanges, SECP and ICAP that
such partner shall not be engaged in audit of any listed company for the specified period.

 No Listed company shall, appoint or retain any person as auditor who is engaged by the
company to provide prohibited services.
 Listed company shall also not appoint or retain any auditor, if a person associated with the
auditor (partner, colleague director in a company etc) has been, at any time during preceding
1 year engaged as a consultant or advisor or to provide any prohibited services

An auditor shall be guilty of “professional misconduct” if he:-

 Fails to report a material misstatement or fact known to him and non-disclosure of which
may render the F/S misleading or disclosure of which is necessary in his professional capacity;
 Fails to obtain sufficient information to warrant the expression of an opinion or his exceptions
are sufficiently material to negate expression of an opinion;
 Makes a statement which is misleading, or deceptive;
 incites any one to commit a criminal offence, or helps or encourages anyone in planning or
execution of a criminal offence which is committed;
 agrees with anyone to prevent or obstruct the course of justice by concealing, destroying or
fabricating evidence by a misleading statement which he knows to be untrue;
 deceives any person, either by making a statement, which he knows to be false, or by
suppressing matters relevant to a proper appreciation of its significance;
 expresses his opinion on F/S of any business or enterprise in which he, his firm or a partner in
his firm has substantial interest.
 is penalized under any of the provisions of the Companies Ordinance, 1984 in relation to his
function as an auditor of a listed company; and
 is guilty of any other act which is determined as professional misconduct by the Commission
in relation to his function as an auditor of a listed company.
Appointment of Auditor (Legal Considerations) Page 379

Prohibited Services
1. Preparing F/S, accounting records and accounting services;
2. Financial information technology system design and implementation, significant to overall
F/S;
3. Appraisal or valuation services for material items of F/S;
4. Acting as an Appointed Actuary within the meaning of the term defined by the Insurance
Ordinance, 2000;
5. Actuarial advice and reviews in respect of provisioning and loss assessments for an insurance
entity;
6. Internal audit services related to internal accounting controls, financial systems or F/S;
7. Human resource services relating to:-
 Executive recruitment;
 Work performed (including secondments) where management decision will be made
on behalf of a listed audit client;
8. Legal Services;
9. Management functions or decisions;
10. Corporate finance services, advice or assistance which may involve independence threats
such as promoting, dealing in or underwriting of shares of audit clients.
11. Any exercise or assignment for estimation of financial effect of a transaction or event where
an auditor provides litigation support services.
12. Share Registration Services (Transfer Agents) and;
13. Any other service(s) which the Council with the prior approval of the SECP, may determine
to be a “prohibited service”.

The Commission may, in its sole discretion and to the extent deemed fit and proper exempt one
or more services from the restriction aforesaid. ICAP also may, with the prior written approval
of the Commission, and to the extent deemed fit and proper, exempt one or more services from
this restriction.
Appointment of Auditor (Legal Considerations) Page 380

Banking Companies Ordinance 1962 – Accounts & Audit

Accounts and balance-sheet (Sec 34)

 At the expiration of each calendar year every banking company shall prepare a balance-sheet
and profit and loss account as on the last working day of the year
(as per forms set out in the Second Schedule to the extent it is practicable)
 Requirements applicable to Banking companies incorporated in Pakistan (regarding all
business transacted by it) and every banking company incorporated outside Pakistan
(regarding all business transacted through its branches in Pakistan)

SBP may, after giving not less than 15 days notice, from time to time by a notification in the official
Gazette, amend the forms set out in the Second Schedule.

Authentication of Accounts

Balance sheet and profit and loss account shall be signed by the
 Banking company incorporated in Pakistan
Manager or the principal officer of the company and all the directors
(where there are more than 3 directors of the company, by at least 3 of those directors)
 Banking company incorporated outside Pakistan
Manager or agent of the principal office of the company in Pakistan and by another officer
next in seniority to the manager or agent.

Filing of the accounts (Sec 36, 37)

 Accounts and balance-sheet together with auditor’s report (approved) shall be published in
the prescribed manner
 3 copies of the above documents shall be furnished as returns to SBP within 3 months of the
year end (SBP may extend this time by a further period not exceeding 3 months)
 Banking company may or a private company shall send to registrar simultaneously 3 copies
of above documents
 On such filing, the requirements to file these document under Companies Ordinance 1984
(Sec 134) shall cease. (chargeable with same fees as applicable under that Ordinance)

Half-yearly returns (Sec 32)

Every banking company shall, before the close of the month succeeding the half-year submit to
SBP a half-yearly return in the prescribed form and manner showing its assets and liabilities in
Pakistan as they stood at the close of business on 30th June in the first half and the 31st
December, in the second half of the year.
Appointment of Auditor (Legal Considerations) Page 381

Display of accounts by banking companies incorporated outside Pakistan (Sec 38)

Every banking company incorporated outside Pakistan shall:
 Not later than first Monday in August of any year in which it carries on business
 Display in a conspicuous place in its principal office and in every branch office in Pakistan, a
copy of its last audited balance sheet and profit and loss account prepared u/s 34
 Keep it so displayed until replaced by a copy of the subsequent accounts
 Also display in like manner, the copies of its complete audited balance sheet and profit and
loss account relating to its banking business as soon as they are available
 Keep the copies so displayed until copies of such subsequent accounts are available.

Audit (Sec 35)

Balance sheet and profit and loss account shall be audited by a person who is
 A CA (as per Chartered Accountants Ordinance, 1961) qualified to be auditor of companies
 Borne on the panel of auditors maintained by SBP for this purpose
SBP shall classify the panel of auditors, so maintained, in different categories for different
banking companies keeping in view the scope and size of such banking companies.
An auditor shall hold office for a period of 3 years
(shall not be removed from office before that period except with the prior approval of the SBP)

SBP may, from time to time, lay down guidelines for the audit of banking companies and the
auditors shall be bound to follow those guidelines.
If SBP is not satisfied with the performance of auditor or the auditor has not fulfilled any of the
requirements of this section, SBP after giving the auditor an opportunity of being heard may:
 Revoke the appointment of external auditors of the banking company;
 Downgrade the category of the auditor in the panel of the auditors; and
 Remove the auditor from the panel of the auditors for a maximum period of 5 years.

In addition to the other required matters, he shall also state in his report:
 Whether or not the information and explanations required by him have been found to be
satisfactory;
 Whether or not the transactions of the banking company which have come to his notice have
been within the powers of the banking company;
 Whether or not the returns received from branch offices of the banking company have been
found adequate for the purposes of his audit;
 Whether the profit and loss account shows a true balance of profit and loss for the period
covered by such account; and
 Any other matter which he considers should be brought to the notice of the shareholders
Auditors shall report all the matters of material significance to SBP and reporting of such
information and material shall not constitute breach of confidentiality under any law
Auditor shall have same powers and duties as are under Companies Ordinance
[
Appointment of Auditor (Legal Considerations) Page 382

Insurance Ordinance 2000 – Accounts & Audit

Books and records (Sec 45)

Every insurer
 Incorporated in Pakistan, for all businesses
 incorporated outside Pakistan for Pakistan Business only
shall maintain proper books and records in English/Urdu Language in bound/loose leaf form in
electronic or any other form capable of being retrieved at any time and approved by SECP.
Insurer shall secure the books and make it error free.
Proper Books and record means and includes
 A register or record of policies, issued by the insurer, the name and address of the policy
holder, the date when the policy was effected and a record of any transfer, assignment or
nomination of which the insurer has notice;
 A register or record of claims, made with the date of the claim, the name and address of the
claimant and the date on which the claim was discharged, or, in the case of a claim which is
rejected, the date of rejection and the grounds therefor; and
 Such other books and records as may from time to time be prescribed.

“Books” includes -
 A register;
 Accounts or accounting records, however compiled, recorded or stored;
 A document; and
 Any other record of information.

Annual Reporting requirements (Sec 46)

Every insurer shall file following statements duly audited by approved auditor to SECP annually.
In such form manner and time as may be prescribed.
Life Insurer
 A statement of assets and liabilities for each statutory fund operated by the life insurer and
the shareholders’ fund;
 A statement of profits and losses for the shareholders’ fund;
 A statement of cash flows for each statutory fund operated by life insurer and shareholders’
fund;
 A revenue account for each statutory fund operated by the life insurer;
 A statement of premiums for each statutory fund operated by the life insurer;
 A statement of claims for each statutory fund operated by the life insurer;
 A statement of expenses for each statutory fund operated by the life insurer;
 A statement of investment income for each statutory fund operated by the life insurer;
 Such other statements as may be prescribed by the Federal Government;
Appointment of Auditor (Legal Considerations) Page 383

Non Life insurer

 A statement of assets and liabilities;
 A statement of profits and losses;
 A statement of cash flows;
 A statement of premiums;
 A statement of claims;
 A statement of expenses;
 A statement of investment income;
 A statement of claims analysis;
 A statement of exposures; and
 Such other statements as may be prescribed by the federal government;

SECP may prescribe a form of balance sheet, profit and loss account, revenue account and any
other statement required under the Companies Ordinance, 1984 (XLVII of 1984), and filing made
in such form shall satisfy the requirements of that Ordinance.

Statements shall be
 Signed by
- (chairman + two directors + the principal officer)for insurer incorporated in Pakistan
- (principal officer + two directors (or equivalent officer) for insurer incorporated outside
Pakistan,
 accompanied by
- a statement containing the names and descriptions of in charge of the management of the
business during the period of statements;
- a report on the affairs of the business; and
- a statement that in their opinion;
o the annual statutory accounts have been drawn up in accordance with the Ordinance and
any rules made there under;
o the insurer has throughout in year complied with the provisions relating to paid-up capital,
solvency and reinsurance arrangements; and
o as at the date of the statement, the insurer continues to be in compliance with the
provisions relating to paid-up capital, solvency and reinsurance arrangements.

Filing

 At least one printed copy, To SECP in manner as may be prescribed

 Within four months from the end of the period to which they related(Extension Max 1
Month by SECP)
 Signed by (chairman + two directors + principal officer of the company + CE (if any)
Appointment of Auditor (Legal Considerations) Page 384

Quarterly Returns

Every insurer, Incorporated in Pakistan, for all businesses and incorporated outside Pakistan for
Business in Pakistan only, shall furnish, to SECP, after December, March, June and September
every year
 A statement of assets and liabilities certified by a principal officer and prepared in the form
and manner as may be prescribed
 In case of life insurer having investment linked business, signed (2 directors + principal
officer) a statement containing:
- The assets underlying the units linked to policies in force;
- The values assigned to each such asset;
- The valuation placed on the units; and
- The amount of any provisions made in determining the valuation.

Explanations
 Life insurer shall furnish such returns separately for each statutory fund and Shareholders’
Fund.
 An actuarial valuation of policyholder liabilities at the date to which such statement is made
up is not required but valued as may be prescribed.

Filing
 At least one printed copy, To SECP in manner as may be prescribed
 Within 6 weeks from the end of period to which they related (Extension Max 15 days by
SECP)
 Signed by (chairman + two directors + principal officer of the company + CE, if any)

Audit.(Sec 48)

Every insurer shall appoint an auditor who shall be:

 Approved by the Commission as qualified to perform audits of insurance companies;
 Authorised under the Companies Ordinance to perform audits of public companies.

The auditor shall have power of exercise duties and liabilities of Companies Ordinance 1984.

The auditor expresses an opinion (in writing in a report attached to the statements) as to whether:
 Statements accurately reflect the books and records of the company;
 Company has maintained proper books and records;
 Statements present fairly the state of affairs of the company as at the balance date and the
result of the company for the financial year ended on that date;
 In the case of a life insurer, apportionment required to be performed has been performed
in accordance with the advice of the appointed actuary; and
 The statements have been prepared in accordance with this Ordinance.
Appointment of Auditor (Legal Considerations) Page 385

Special audit (Sec 49)

 SECP may at its discretion appoint an auditor, qualified to perform audits of insurance
companies but not being the auditor, or a partner of the auditor to perform an investigation
of such accounts and statements, books and records of an insurer as the Commission may
direct.
 Auditor shall have access to all books and accounts and can inquire from director other
officer of the insurance company.
 Report shall be submitted to SECP.
 Against a fee as maybe prescribed paid with in time as may be prescribed.

Report of Actuarial valuation of Life insurance Businesses (Sec 50)

Life insurer shall, in respect of the life insurance business, as at the end of each year cause an
 investigation into the financial condition
 valuation of policyholder liabilities
To be reported in a report prepared by the appointed actuary in accordance with such
conditions as may be prescribed

Report shall
 Be made up to the date to which the accounts of insurer are made up for the purpose of
such report.
 Be accompanied by a certificate signed by the principal officer of the insurer that full and
accurate particulars of every policy under which there is a liability have been furnished to
the appointed actuary for the purpose of the investigation.
 Include a statement of the minimum actuarial reserve for policyholder liabilities calculated
in the manner and on the basis prescribed by the commission in this behalf.
 Include a statement of amount of deficit (if any) of minimum actuarial reserve of a fund as
compared to policyholder liabilities for that statutory fund.

SECP may require insurers generally or in particular any actuarial valuation investigation in the
manner as may be prescribed.

Filing

 At least one printed copy, To SECP in manner as may be prescribed

 Within 4 months from end of period to which they related
(Extension Max 1 Month by SECP)
 Signed by (chairman + two directors + principal officer of the company + CE (if nay)
 Actuarial valuation report shall also be signed by actuary who carried out investigation.
Appointment of Auditor (Legal Considerations) Page 386

Power of Commission to order actuarial report (Sec 57)

If SECP believes, that actuarial report does not properly indicate the condition of the affairs of
the insurer, the SECP may after
 Giving notice to the insurer and
 Giving him an opportunity to be heard,
Cause an investigation as at such date as the SECP may specify,
 At the expense of the insurer,
 By an actuary
- Appointed by the insurer for this purpose and
- Approved by the SECP

The insurer shall place at the disposal of the actuary all the material required for investigation
within such period, not being less than three months, as the Commission may specify.

Such investigation will be conducted in the same manner except the filing time may be different
as SECP may specify.

Information to be delivered to SECP (Sec 47, 53 & 54)

 Every insurer deliver to the SECP such additional copies as may be prescribed of all
accounts, documents, reports and returns filed under the Companies Ordinance, 1984 at
the same time as they are required to be filed there under.
 An insurer incorporated outside Pakistan shall deliver to SECP within 30 days on which
such insurer is required to provide such information a copy of the annual accounts
prepared under the laws of the place of its incorporation and a copy of any public document
which shows or purports to show the annual profit or state of affairs of the insurer in
respect of its business in Pakistan.
Accounts documents reports should be in English/Urdu/translation in English language along
with certified copy of English translation
 Every insurer shall furnish to the Commission a certified copy of every report on the affairs
of the insurer which is submitted to the members or policy holders of the insurer
immediately after its submission to the members or policy holders, as the case may be.
 Every insurer, shall furnish to SECP a certified copy of the minutes of the proceedings of
every general meeting as entered in the in minutes Book of the insurer within thirty days
from the holding of the meeting to which it relates.

Custody and inspection of documents (Sec 55)

Every return furnished to the Commission, or a certified copy thereof shall be kept by the
Commission and shall be open to inspection; and any person may procure a copy of any such
return, or of any part thereof, on payment of such fee as may be prescribed.
Appointment of Auditor (Legal Considerations) Page 387

Power of Commission regarding returns (Sec 56)

If in opinion of SECP any return furnished is inaccurate or defective in any material particular,
it may:
 Require from the insurer such further information, certified by an auditor or actuary, as the
Commission may consider necessary to correct or supplement such return;
 Call upon the insurer to submit for its examination at the principal place of business of the
insurer in Pakistan any book of account, register or other document or to supply any
statement which the Commission may specify in a notice served on the insurer for the
purpose;
 Examine any officer of the insurer on oath in relation to the return; or
 Decline to accept any such return unless the inaccuracy has been corrected or the deficiency
has been supplied before the expiry of one month from the date on which the requisition
asking for correction of the inaccuracy or supply of the deficiency was delivered to the
insurer and if the Commission declines to accept any such return, the insurer shall be
deemed to have failed to comply with the provisions relating to the furnishing of returns.

Supply of copies by the insurer (Sec 55)

 A printed or certified copy of the accounts, statements and report furnished shall, on the
application of any shareholder or policy holder made at any time within two years from the
date on which the document was so furnished be supplied, to him by the insurer within
fourteen days when the insurer is a company or body corporate incorporated in Pakistan
and in any other case within one month of such application.
 A copy of the memorandum and articles of association of the insurer, if a company, shall on
the application of any policy holder, be supplied to him by the insurer on payment of such
fee as may be prescribed.
Code of Corporate Governance 2019 Page 388

Listed Companies (Code of Corporate Governance) Regulations, 2019.

Tutor’s Note
This topic is not exactly part of syllabus but there is a routine of examiner to expect that students
have a good understanding of the Code so the same is given hereunder for developing / revising
good understanding for the purpose of the exam.

Comply or explain approach - Reg 2(1)(b)

Means discretion of a company with respect to non-mandatory provisions of these
Regulations either to comply or provide appropriate explanation as to any impediment in its
compliance in the compliance report along with the financial statements;
Mandatory - Reg 2(1)(c)
Means such provisions that are construed to be strictly complied with by company and non-
compliance of such Regulations leads to penal proceedings under regulation 37
Tutor’s Note:
For all mandatory requirements you can see << Mandatory >> written with relevant heading

Composition of BOD (Reg # 4 to 9)

BOD shall comprises of members having core competencies, diversity, requisite skills,
knowledge, experience & fulfils any other criteria relevant in context of company’s operations
Female Director << Mandatory >>
BOD shall have at least 1 female director when it is reconstituted after the expiry of its current
term

Executive Director << Mandatory >>

Executive director means a director who devotes the whole or substantially the whole of his
time (whether paid or not) to the operations of the company.
 Executive directors, including CEO, shall not be more than 1/3rd of its BOD.
(explain the reasons, in compliance report, if any fraction is rounded up as 1)

What is difference between an executive and a non-executive director? (Q#8 of

FAQ)
Section 181 (2) of the Act defines non-executive director. Generally, executive directors
are the working, whole-time directors of a company. Non-executive directors, on the other
Tutor Note hand are those who are not from among the executive management team and may or may
not be independent. An executive director cannot be categorically defined as a "paid
director" and a non-executive director as one who is "not a paid director". The guiding
factor in distinguishing between executive and non-executive directors of a company is
Code of Corporate Governance 2019 Page 389

the extent of their involvement in managing the affairs of the company rather than their
pecuniary interests

Independent Director << Mandatory >>

 Independent directors of each listed company shall not be less than the higher of
- 2 members; or
- 1/3rd of the total members of BOD
(explain the reasons, in compliance report, if any fraction is not rounded up as 1)
 Independent director shall submit his consent and a declaration to chairman of BOD that he
qualifies the criteria of independence notified under the Companies Act 2017 (the ‘Act’).
- At first meeting which is held after election of directors; and
- On an event of any change affecting his independence.

In a BOD of 7, what should be the ideal composition as per these regulations

- 3 Independent directors
- 2 Executive directors (including the CEO)
Tutor Note - 2 Non-executive directors (other than independent)

There should be at least 1 female out of these 7 directors (in any category)

Representation of Minority shareholders

The minority members as a class shall be facilitated to contest election of directors by proxy
solicitation, for which purpose, the listed companies shall:
 Annex to the notice of election, a statement by a candidate from among the minority
shareholders who seeks to contest election to the BOD
 Such statement shall include a profile of the candidate(s);
 Provide information regarding members and shareholding structure to candidate(s); and
 On a request by the candidate(s) and at the cost of the company, annex to the notice an
additional copy of proxy form duly filled in by such candidate(s);

Chairman of BOD

 Chairman and CEO shall not be the same person.

 Chairman shall be elected as per the requirements of the Act.

Number of Directorship (Reg # 3) << Mandatory >>

A person shall not be elected or nominated or hold office as a director of a listed company,
including as an alternate director, of more than 7 listed companies simultaneously

Limit shall be effective when BOD shall be reconstituted not later than expiry of current term
Code of Corporate Governance 2019 Page 390

Responsibilities of BOD and its members (Reg # 10)

 BOD shall carry out its fiduciary duties with a sense of objective judgment and in good faith
in the best interests of the company and its stakeholders.
 BOD is responsible for the governance of risk and for determining the company’s level of risk
tolerance by establishing risk management policies.
 BOD shall undertake at least annually, an overall review of business risks to ensure that the
management maintains a sound system of risk identification, risk management and related
systemic and internal controls to safeguard assets, resources, reputation and interest of the
Company and shareholders.
 Chairman shall, at the beginning of term of each directors, issue letter to directors setting
out their role, obligations, powers and responsibilities in accordance with Act and AOA, their
remuneration & entitlement.
 All directors shall attend its general meeting(s), (ordinary and extra- ordinary) unless
precluded from doing so due to any reasonable cause.

Can foreign directors attend general meeting through video conference ? (Q#22-
FAQ)

Tutor Foreign directors can attend general meeting through video conferencing facility. However
Note other directors are required to attend the general meetings of the shareholders in person
except precluded for any reasonable cause.

The BOD shall ensure that:

 A vision and/or mission statement and overall corporate strategy for the company is
prepared, adopted and reviewed as and when deemed appropriate by BOD.
 A formal code of conduct is in place that promotes ethical culture in the company and
prevents conflict of interest in their capacity as member of BOD, senior management and
other employees.
 Take appropriate steps to disseminate code throughout Co with supporting policies etc
 These shall be put on the company’s website;
 Adequate systems and controls are in place for identification and redressal of the grievances
arising from unethical practices;
 A system of sound internal control is established, which is effectively implemented and
maintained at all levels within the company;
 A formal and effective mechanism is put in place for an annual evaluation of BOD’s own
performance, members of BOD and of its committees;

BOD shall define the level of materiality, keeping in view specific circumstances of company and
the recommendations of any technical or executive sub-committee of BOD that may be set up for
this;
Code of Corporate Governance 2019 Page 391

BOD shall maintain a complete record of particulars of the significant policies along with their
date of approval or updating.

The significant policies may include but are not limited to the following:
 Governance of risks and internal control measures;
 Human resource management including preparation of a succession plan;
 Permissible fee for non-executive directors including independent directors
 Procurement of goods and services
 Communication policy and investors’/shareholders’ relations
 Marketing
 Determination of terms of credit and discount to customers
 Write-off of bad/doubtful debts, advances and receivables
 Sale and lease of assets, undertaking, capital expenditure, planning and control
 Investments and disinvestment of funds
 Debt coverage
 Determination and delegation of financial powers
 Transactions or contracts with associated companies and related parties
 Environmental, social and governance (ESG) including health and safety aspects in business
strategies that promote sustainability. (E.g. Corporate Social Responsibility (CSR) initiatives
and other philanthropic activities, donations / contributions to charities and other social
causes); and
 Whistle blowing policy, by establishing a mechanism to receive, handle complaints in a fair
and transparent manner while providing protection to complainant against victimization.

Meeting of BOD (Reg # 11, 12, 14, 15)

 Chairman shall set the agenda of the meeting and ensure that reasonable time is available
for discussion
 All written notices and material shall be circulated at least 7 days prior to meetings
(except in emergency meetings, where notice period may be reduced or waived)
 Chairman shall ensure that minutes are kept in accordance with requirements of Act.
 If a director is of the view that his dissenting note has not been satisfactorily recorded in the
minutes
- The matter may be referred to company secretary for appending it to the minutes.
- If he fails to do so, director may file an objection with SECP within 30 days of
confirmation of minutes.

Related party transactions

 Details of all related party transactions shall be placed periodically before Audit Committee
 On recommendations of audit committee it shall be placed before BOD for approval.
(if majority of directors are interested in such, it shall be placed before general meeting)
Code of Corporate Governance 2019 Page 392

Meeting of BOD - Issues to be placed for decision of BOD

CEO shall place significant issues for the information, consideration and decision, as the case
may be, of the BOD or its committees that include but are not limited to the following:
 As soon as CEO foresees risk of default concerning obligations on any loans (including
penalties) to a creditor, bank or financial institution or default in payment of public deposit),
Term Finance Certificates (TFCs), Sukuk or any other debt instrument
 Annual business plan, cash flow projections, forecasts and strategic plan;
 Budgets including capital, manpower and overhead budgets, along with variance analysis;
 Matters recommended and/or reported by audit committee and other committees of BOD;
 Quarterly operating results of company (as a whole as well as its operating divisions or
business segments);
 Internal audit reports, including cases of fraud, bribery, corruption, or irregularities of
material nature;
 Management letter issued by the external auditors;
 Details of joint venture or collaboration agreements or agreements with distributors, agents
etc.;
 Promulgation of or amendment to a law, rule or regulation, applicability of financial
reporting standard and such other matters as may affect company and status of compliance
 Status and implications of any law suit or proceedings (show cause notice, demand or
prosecution notice) of material nature, filed by or against the company;
 Failure to recover material loans, advances, and deposits made by company, including trade
debts and inter corporate finance;
 Any significant accidents, fatalities, dangerous occurrences and instances of pollution and
environment involving company;
 Significant public or product liability claims made or likely to be made against Co, including
any adverse judgment or order made on conduct of company or of another company that
may bear negatively on it;
 Report on governance, risk management and compliance issues.
(Considering reputational risk, risk analysis, risk management and risk communication);
 Disputes with labor and their proposed solutions, any agreement with the labor union or
collective bargaining agent and any charter of demands on the company;
 Reports on /synopsis of issues and information pursued under the whistle blowing policy,
clearly disclosing how such matters were dealt with and finally resolved or concluded;
 Implementation of environmental, social and governmental and health and safety business
practices including report on corporate social responsibility activities and status of
adoption/compliance of corporate social responsibility (Voluntary) Guidelines 2013 or any
other regulatory framework as applicable;
 Payment for goodwill, brand equity or intellectual property;
 Sale of assets, investments and interest in subsidiaries and undertakings, of material amount
or significant nature, which is not in the ordinary course of business; and
 Quarterly details of foreign exchange exposures and safeguards taken by management
against adverse exchange rate movement.
Code of Corporate Governance 2019 Page 393

Remuneration of Directors (Reg # 16, 17)

 BOD shall have in place a formal policy and transparent procedure for fixing remuneration
packages of individual directors for attending meetings of BOD and its committees.
 No director shall determine his own remuneration.
 Levels of remuneration shall be appropriate and commensurate with level of responsibility
and expertise, to attract and retain directors needed to govern the company successfully and
to encourage value addition.
 However, it shall not be at a level that could be perceived to compromise their independence.
 Company shall comply with the provisions of the Act and the AOA

Directors’ Training Program (Reg # 18, 19)

 All companies shall make appropriate arrangements to carry out orientation courses for
their directors to acquaint them with these Regulations, applicable laws and their duties.
 It is encouraged that by following dates, the given number of the directors on their BOD have
acquired the prescribed certification under any director training program offered by
institutions, local or foreign, that meet the criteria specified by SECP and approved by it:
- June 30, 2020 At least half of the directors;
- June 30, 2021 At least 75% of the directors; and
- June 30, 2022 All the directors.
 A newly appointed director shall acquire directors training program certification within 1
year from the date of appointment (unless exempted or already certified)
 Director having a minimum of 14 years of education and 15 years of experience on BOD of a
listed company, local and/or foreign, shall be exempt from directors training program.
(SECP shall grant exemption keeping in view the relevancy of qualification & experience)
 Companies are also encouraged to arrange training, every year, also for:
- Atleast 1 female executive under Training program from year starting July, 2020
- Atleast 1 head of department under Training program from year starting July, 2022.

CFO, Company Secretary and Head of Internal Audit (Reg # 13, 20 to 24)

 The company secretary shall be secretary to BOD.

 BOD shall determine appointment, remuneration, terms and conditions of employment of
CFO, company secretary and head of internal audit of companies.
 CFO and company secretary (or in their absence, the nominee appointed by Board), shall
attend all meetings of the Board:
 CFO and company secretary shall not attend such part of Board meeting where
- Agenda item relates to consideration of their performance or terms of their service; or
- In opinion of Board, their presence in the meeting on any agenda item is likely or may
tend to impair the organizational discipline and harmony of the company.
Code of Corporate Governance 2019 Page 394

Can positions of company secretary and internal auditor be given to one person?
(Q#14 of FAQ)
No. The two positions carry minimal synergy and, therefore should be performed by
separate persons.
Tutor Note
Can a full time employee (including CFO and company secretary) of a listed company
hold a similar position in an unlisted group company? Question (Q#15 of FAQ)
The Regulations do not restrict any full time employee in a listed company from working
in a similar position in an unlisted group company. However, appropriate steps should be
taken by BOD of companies concerned to ensure that additional workload would not affect
the quality of work performed by such employee and no conflict of interest would arises
as a result of holding similar positions in two group companies.

 Removal of CFO, company secretary and head of internal audit shall be made with approval
of BOD
 Head of internal audit may be removed upon recommendation of the audit committee.

Qualification of CFO
Should have following number of years managerial experience in fields of audit or accounting
or in managing financial or corporate affairs functions of a Co having prescribed qualification
Qualification Experience
A member of the ICAP or ICMAP At least 3 years
Either a member of professional body of accountants whose qualification At least 5 years
is recognized as equivalent to post graduate degree by HEC or has a
postgraduate degree in finance from a university in Pakistan or equivalent
recognized and approved by the HEC
A suitable degree from a university in Pakistan or abroad equivalent to At least 7 years
graduate degree, recognized and approved by HEC. (SECP, on application
from company, shall determine the suitability of such candidate)

Qualification of Internal Auditor

Qualification Experience
A member of the ICAP or ICMAP At least 3 years
Any of the following qualifications At least 5 years
 Certified Internal Auditor; or
 Certified Fraud Examiner; or
 Certified Internal Control Auditor; or
 Post graduate degree in business, finance from a university or
equivalent recognized and approved by HEC and is a member of a
professional body relevant to such qualification, if applicable.
A suitable degree from a university in Pakistan or abroad equivalent to At least 7 years
graduate degree, recognized and approved by HEC. (SECP, on application
from company, shall determine the suitability of such candidate)
Code of Corporate Governance 2019 Page 395

“Body of professional accountants” means

 Established in Pakistan, governed under special enactment of FG as a self-regulatory
organization managed by a representative National Council, and has prescribed criteria of
examination & entitlement of membership
 Established outside Pakistan under a special enactment of that country and which is a member
of the IFAC.

Qualification of Company Secretary

The qualification as specified under the relevant Regulations by SECP.
(Person shall not simultaneously hold office of CFO & company secretary of a listed company)

Committees of BOD

Audit Committee (Reg # 27) << Mandatory >>

The audit committee shall be constituted by BOD keeping in view the following requirements:
 It should be of at least 3 members comprising of non-executive directors and at least 1
independent director.
 Chairman of committee shall be an independent director
(who shall not be the chairman of BOD)
 A secretary of committee shall be appointed who shall either be company secretary or head
of internal audit.
 At least 1 member of the audit committee qualifies as “financially literate”.
A person who is member of recognized body of professional accountants or has post graduate
degree in finance from university or equivalent institution, either in Pakistan or abroad
recognized by HEC has atleast 10 years of experience as audit committee member; or atleast
20 years of senior management experience in overseeing financial, audit related matters

Meeting

 Audit committee shall meet at least once every quarter of the financial year.
(shall be held prior to approval of interim results by its BOD and after completion of audit)
 A meeting of audit committee shall also be held, if requested by external auditors or head of
internal audit.
 Head of internal audit and external auditors represented by engagement partner (or in his
absence any other partner designated by audit firm) shall attend meetings of audit
committee at which issues relating to accounts and audit are discussed.
 CEO and CFO shall not be the members of audit committee but must attend the meeting of
audit committee at the invitation of Chairman.
 At least once a year, audit committee shall meet the
- External auditors without the CFO and the head of internal audit being present.
- Head of internal audit and other members of that function without presence of CFO and
external auditors
Code of Corporate Governance 2019 Page 396

Terms of Reference

 Determination of appropriate measures to safeguard the company’s assets;

 Review of annual and interim financial statements , prior to their approval by the BOD,
focusing on:
- Major judgmental areas;
- Significant adjustments resulting from the audit;
- Going concern assumption;
- Any changes in accounting policies and practices;
- Compliance with applicable accounting standards, these regulations and other
statutory requirements;
- All related party transactions.
 Review of preliminary announcements of results prior to external communication and
publication;
 Facilitating external audit and discussion with them of major observations arising from
interim and final audits and any matter that auditors may wish to highlight in the absence of
management, if necessary;
 Review of management letter issued by external auditors and management’s response
thereto;
 Ensuring coordination between the internal and external auditors ;
 Review of scope and extent of internal audit, audit plan, reporting framework and
procedures and ensuring that the internal audit function has adequate resources and is
appropriately placed within the company;
 Consideration of major findings of internal investigations of activities characterized by fraud,
corruption and abuse of power and management's response thereto;
 Ascertaining that internal control systems including financial and operational controls,
accounting systems for timely and appropriate recording of purchases and sales, receipts
and payments, assets and liabilities;
 Review of statement on internal control systems prior to endorsement by BOD and internal
audit reports;
 Instituting special projects, value for money studies or other investigations on matter
specified by BOD, in consultation with CEO & to consider transfer of any matter to external
auditors/any other external body;
 Determination of compliance with relevant statutory requirements;
 Monitoring compliance with the these regulations and identification of significant violations
thereof;
 Review of arrangement for staff and management to report to audit committee in confidence,
concerns about actual/potential improprieties in financial and other matters and
recommend instituting remedial measures;
 Recommend to BOD, appointment of external auditors, their removal, audit fees, provision
of any service permissible to be rendered by the external auditors in addition to audit.
 Consideration of any other issue or matter as may be assigned by BOD.
Code of Corporate Governance 2019 Page 397

Secretary of audit committee shall circulate minutes of meetings of audit committee to all
members, directors, head of internal audit and where required to CFO prior to next meeting of
BOD. If it is not practicable, chairman of Audit Committee shall communicate a synopsis of the
proceedings to BOD and minutes shall be circulated immediately after the meeting of BOD.

Human Resource and Remuneration Committee: (Reg # 28)

 Shall consist of at least 3 members comprising a majority of non-executive directors

 At least 1 of the non-executive director shall be an independent director.
 Chairman shall also be an independent director.
 CEO may be included as a member of the committee.

Meeting

 Committee shall meet at least once in a financial year

(may meet more often if requested by a member of BOD, or committee itself or CEO)
 Head of HR or any other person appointed by BOD may act as the secretary of committee.
 CEO (if not a member of the committee), head of human resource (if not the secretary to
committee) or any other advisor or person may attend the meeting only by invitation.
 A member of committee shall not participate in the proceedings of committee when an
agenda item relating to his performance or review or renewal of terms and conditions of his
service comes up for consideration.

Terms of Reference

 Recommend to BOD for consideration and approval a policy framework for determining
remuneration of directors (executive & non-executive) and members of senior management
(definition of senior management will be determined by BOD, it normally include the layer
below the CEO);
 Undertaking annually a formal process of evaluation of performance of BOD as a whole and
its committees (either directly or by engaging external independent consultant)
 Recommending human resource management policies to BOD;
 Recommending to BOD the selection, evaluation, development, compensation (including
retirement benefits) of chief operating officer, CFO, company secretary and head of internal
audit;
 Consideration and approval on recommendations of CEO on such matters for key
management positions who report directly to CEO or chief operating officer; and
 Where human resource & remuneration consultants are appointed, their credentials shall be
known by the committee and statement shall be made by them as to whether they have any
other connection with company
Code of Corporate Governance 2019 Page 398

Nomination Committee: (Reg # 29)

 BOD may constitute this committee, of such number and class of directors, as may deem fit
 The terms of reference shall be determined by BOD ensuring there is no duplication or
conflict with matters stipulated under terms of reference of HR&R committee.

 It shall be responsible for

- Considering and making recommendations to BOD in respect of BOD committees and
their chairmanship
- Keeping structure, size and composition of BOD under regular review and for making
recommendations to BOD with regard to any changes necessary.

Risk Management Committee: (Reg # 30)

 BOD may constitute this committee, of such number and class of directors, as it may deem
fit, to carry out a review of effectiveness of risk management and present a report to BOD.

 The terms of reference of the committee may include the following:

- Monitoring and review of all material controls (financial, operational, compliance);
- Risk mitigation measures are robust and integrity of financial information is ensured;
- Appropriate extent of disclosure of risk framework and internal control system in
Directors report.

Internal Audit (Reg # 31)

There shall be an internal audit function in every company

 Head of internal audit shall functionally report to the audit committee and administratively
to the CEO
(His performance appraisal shall be done jointly by Chairman of audit committee and CEO)
 A director cannot be appointed, in any capacity, in internal audit to ensure independence
 BOD shall ensure that the internal audit team comprises of experts of relevant disciplines in
order to cover all major heads of accounts maintained by the company.
 Company shall ensure that head of internal audit is suitably qualified, experienced and
conversant with the company's policies and procedures.
 Company shall ensure that internal audit reports are provided for review of external
auditors
 Auditors shall discuss any major findings in relation to the reports with the audit committee,
which shall report matters of significance to the BOD.
Code of Corporate Governance 2019 Page 399

Outsourcing

 The internal audit function, wholly or partially, may be outsourced by the company to a
professional services firm or be performed by the internal audit staff of holding company.
 In lieu of outsourcing, the company shall appoint or designate a fulltime employee other than
CFO, as head of internal audit holding equivalent qualification, to act as coordinator between
that firm and BOD.
 While outsourcing the function, company shall not appoint its existing external auditors as
internal auditors.

External Audit

Terms of Appointment (Reg # 32) << Mandatory >>

 No company shall appoint as external auditors, a firm of auditors, which

- Has not been given a satisfactory rating under QCR program of ICAP and registered
with Audit Oversight Board of Pakistan.
- Is or a partner of which is non- compliant with the IFAC Guidelines on Code of Ethics,
as adopted by ICAP
 BOD shall recommend appointment of auditors for a year, as suggested by audit committee.
 The recommendations of audit committee shall be included in Directors’ Report.
(for recommending auditor other than retiring auditor, reasons shall be also be included)
 No company shall appoint its auditors to provide services in addition to audit except in
accordance with these regulations and shall require the auditors to observe applicable IFAC
guidelines in this regard.
 Co shall ensure that auditors do not perform management functions or make management
decisions, responsibility for which remains with the BOD and management of the company.
 No company shall appoint a person as an external auditor or a person involved in the audit
of a company who is a close relative (spouse, parents, dependents and non- dependent
children) of CEO, CFO, head of internal audit, company secretary or a director of company.
 Every company shall require external auditors to furnish a management letter to its BOD
within 45 days of the date of audit report.
 Provided that any matter deemed significant by external auditor shall be communicated in
writing to the BOD prior to the approval of the audited accounts by the BOD.

Rotation of auditors (Reg # 33) << Mandatory >>

 All listed companies in financial sector shall change their external auditors every 5 years.
 All inter related companies/ institutions, engaged in business of providing financial services
shall appoint the same firm of auditors to conduct the audit of their accounts.
(Financial sector, means banks, NBFC, modarabas and insurance/ takaful companies).
 All listed companies other than those in the financial sector shall, at the minimum, rotate
engagement partner after every 5 years.
Code of Corporate Governance 2019 Page 400

Initials of External Auditors (Reg # 26)

CEO and CFO shall have the annual and interim financial statement (both separate &
consolidated where applicable) initialed by the external auditors before presenting it to audit
committee and BOD for approval.

Is the requirement for external auditors to initial financial statements before these
are considered/ approved by the Audit Committee and BOD, inconsistent with the
provisions of Act, which states that responsibility for preparation of financial
statements lies with directors ? (Q#18 of FAQ)
Tutor Note
The requirement for auditors to initial the financial statements is for identification only.
The responsibility of preparation of financial statements rests with BOD in accordance
with provisions of the Act.

Endorsement of the financial statement by CFO and CEO (Reg # 25)

CEO and CFO shall duly endorse quarterly, half-yearly and annual financial statements under
their signatures prior to placing and circulating it for consideration and approval of BOD

Reporting & Disclosure

Directors’ Report (Reg # 34)

The quarterly unaudited financial statements of companies shall be published and circulated
along with directors’ review on the affairs of the company.

 The BOD shall state in the Directors’ Report the following:

Total number of Directors: Composition:

Male: (i) Independent Directors
Female: (ii) Other Non executive Directors
(iii)Executive Directors
(iv) Female Directors

 Names of Members of BOD committees shall be disclosed in each Directors’ Report.

 Directors’ report shall state remuneration policy of non-executive directors including
independent directors, as approved by BOD. This includes disclosing the significant features
and elements thereof.

Company's Annual Report shall contain details of aggregate amount of remuneration separately
of executive and non-executive directors, including salary/fee, perquisites, benefits and
performance-linked incentives etc.
Code of Corporate Governance 2019 Page 401

Disclosure of significant policies on website (Reg # 35)

The company may post the following on its website:

 Key elements of its significant policies including but not limited to the following:
- Communication and disclosure policy;
- Code of conduct for board of directors, senior management and other employees;
- Risk management policy;
- Internal control policy;
- Whistle blowing policy;
- Corporate social responsibility/sustainability/ environmental, social and governance
related policy.
 Brief synopsis of terms of reference of the Board’s committees including:
- Audit Committee
- HR and Remuneration Committee
- Nomination Committee
- Risk Management Committee
 Key elements of the directors’ remuneration policy.

Compliance Statement and Auditor Review (Reg # 36) << Mandatory >>

 All companies shall publish and circulate a statement, along with their annual reports to set
out the status of their compliance with the requirements of Regulations.
 Statement shall be specific and deemed to be supported by necessary evidence.
 All companies shall ensure that the statement of compliance is reviewed and certified by
statutory auditors as per relevant Regulations specified by SECP.
 Auditors shall ensure that any non-compliance with these Regulations is highlighted in their
review report.

Compliance with Regulations (Reg # 37, 38)

 Whoever fails or refused to comply with, or contravenes regulation 3, 6, 7, 8, 27, 32, 33 and
36 of these Regulations, shall be punishable with penalty as provided under Sec 512(2) of
Companies Act 2017. (i.e. Rs 5 Million + 100,000/- per day)
 Where SECP is satisfied that it is not practicable to comply with any of the mandatory
requirements of the regulation 3, 6, 7, 8, 27, 32, 33 and 36 of these Regulations, it may, for
reasons to be recorded in writing, on the application by the company, extend the time for
compliance of the same subject to such conditions as it may deem fit.

Does the Regulations conflict with the Companies Act, 2017 ? (Q#2 of FAQ)
The Regulations are framed to ensure not to reproduce or be in conflict with the
requirements of the Act.
Tutor Note However, in case of any conflict, the requirements of Act shall prevail.
Code of Corporate Governance 2019 Page 402

Annexure A
Statement of Compliance with Listed Companies (Code of Corporate Governance) Regulations,
2019

Name of company …………………………………………………………………………

Year ending………………………………………………………………………………….

The company has complied with the requirements of the Regulations in the following manner:
1. The total number of directors are ____ as per the following:
a. Male:
b. Female:
2. The composition of BOD is as follows:
a) Independent Directors
b) Other Non-executive Director
c) Executive Directors
d) Female Directors
3. The directors have confirmed that none of them is serving as a director on more than seven listed
companies, including this company.
4. The company has prepared a Code of Conduct and has ensured that appropriate steps have been
taken to disseminate it throughout the company along with its supporting policies and procedures.
5. BOD has developed a vision/mission statement, overall corporate strategy and significant policies of
the company. A complete record of particulars of significant policies along with the dates on which they
were approved or amended has been maintained.
6. All the powers of BOD have been duly exercised and decisions on relevant matters have been taken
by BOD/ shareholders as empowered by the relevant provisions of the Act and these Regulations.
7. The meetings of BOD were presided over by the Chairman and, in his absence, by a director elected
by BOD for this purpose. BOD has complied with the requirements of Act and the Regulations with
respect to frequency, recording and circulating minutes of meeting of BOD.
8. The BOD have a formal policy and transparent procedures for remuneration of directors in
accordance with the Act and these Regulations.
9. BOD has arranged Directors’ Training program for the following:
(Name of Director)
(Name of Executive & Designation (if applicable))
10. BOD has approved appointment of CFO, Company Secretary and Head of Internal Audit, including
their remuneration and terms and conditions of employment and complied with relevant requirements
of the Regulations.
11. CFO and CEO duly endorsed the financial statements before approval of BOD.
12. BOD has formed committees comprising of members given below:
a) Audit Committee (Name of members and Chairman)
b) HR and Remuneration Committee (Name of members and Chairman)
c) Nomination Committee (if applicable) (Name of members and Chairman)
d) Risk Management Committee (if applicable) (Name of members and Chairman)
Code of Corporate Governance 2019 Page 403

13. Terms of reference of aforesaid committees have been formed, documented and advised to the
committee for compliance.
14. The frequency of meetings (quarterly/half yearly/ yearly) of the committee were as per following:
a) Audit Committee
b) HR and Remuneration Committee
c) Nomination Committee (if applicable)
d) Risk Management Committee (if applicable)
15. BOD has set up an effective internal audit function/ or has outsourced the internal audit function
to ……….. who are considered suitably qualified and experienced for the purpose and are conversant
with policies and procedures of company.
16. The statutory auditors of the company have confirmed that they have been given a satisfactory
rating under the quality control review program of the ICAP and registered with Audit Oversight BOD
of Pakistan, that they or any of the partners of the firm, their spouses and minor children do not hold
shares of the company and that the firm and all its partners are in compliance with International
Federation of Accountants (IFAC) guidelines on code of ethics as adopted by the ICAP
17. The statutory auditors or the persons associated with them have not been appointed to provide
other services except in accordance with the Act, these regulations or any other regulatory requirement
and the auditors have confirmed that they have observed IFAC guidelines in this regard.
18. We confirm that all other requirements of regulations 3, 6, 7, 8, 27,32, 33 and 36 of the Regulations
have been complied with; and

19. Explanation for non-compliance with requirements, other than regulations 3, 6, 7, 8, 27, 32, 33 and
36 are below (if applicable):

__________________
Signature (s)
(Name in block letters)
Chairman
404

MISCELLANEOUS ARES
(FOR UNDERSTANDING)
- PROFESSIONAL MISCONDUCT
- MONEY LAUNDERING
- IAASB QUALITY FRAMEWORK
- QCR FRAMEWORK BY ICAP
- AUDITOR’S LIABILITY
- DUE DILIGENCE
- IAS/IFRS CHECKLIST FOR AUDITORS
- GROUP AUDITS
Misc Areas – Money Laundering Page 405

Professional Misconduct

Facts, etc., to be laid before the Investigation Committee.-

The Secretary of the Institute, any member or any aggrieved person may lay before the
Investigation Committee with relevant and necessary facts indicating that-
 A member of the Institute has prima facie been guilty of any professional misconduct
specified in Schedule I or Schedule II; or
 A student has prima facie been guilty of any professional misconduct specified in Schedule
III.

Inquiry by the Investigation Committee.-

The Investigation Committee is of opinion that such facts or complaint require investigation, it
shall after giving a notice to the member of the Institute or student whose conduct is in question,
hold an inquiry by counsel or by member of institute, provided that opportunity of being heard
will be given.

The Investigation Committee shall report the result of the inquiry to the Council after inquiry.

Member or student not found guilty

If, the member of the Institute or student, is not guilty of any professional misconduct, it shall
record its finding accordingly

Orders by the Council if member found guilty in Schedule I

If the Council is of the opinion that the member of the Institute has been guilty of any
professional misconduct specified in Schedule I, it may, after giving such member an
opportunity of being heard, either personally or through counsel or another member of the
Institute, make any of the following orders, namely:-
 reprimand or warn such member;
 impose such penalty as it may deem necessary not exceeding one thousand rupees; and
 remove the name of such member from the Register for a period not exceeding five years:

Provided that, where Council is of the opinion that the name of such member is to be removed
from the Register for a period exceeding five years or permanently, it shall not make any order
but shall refer the case to the High Court with its recommendations thereon.
Misc Areas – Money Laundering Page 406

SCHEDULE 1

Professional misconduct in relation to chartered accountants in practice (Part 1)

A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if

he-
 allows any person to practice in his name as a chartered accountant, unless such person is
also a chartered accountant in practice and is in partnership with, or employed by, him;
 pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or
brokerage or the fees or profits of his professional business to any person other than a
member of the Institute or a partner or a retired partner or the legal representative of a
deceased partner. Explanation:- In this clause, "partner" includes a person residing outside
Pakistan with whom a Chartered Accountant in practice has entered into partnership which
is not in contravention of clause (4) of this part;
 accepts or agrees to accept any part of the profits of the professional work of a lawyer,
auctioneer, broker, or other agent who is not a member of the Institute.
 Places his professional service at the disposal of, or enters into partnership with, an
unqualified person in a position to obtain business of the nature in which chartered
accountants engage by means which are not open to a member of the Institute: Provided that
this paragraph shall not be construed as prohibiting a member from practicing in a country
outside Pakistan in association with a person who is entitled under the laws in force in that
country to perform functions similar to those of a member of the. Institute is entitled to
perform in Pakistan:
 Solicits clients for professional work either directly or indirectly by circular, advertisement,
personal communication or interview or by any other means;
 Advertises his professional attainments or services, or uses any designation or expression
other than chartered accountant on professional documents. Visiting cards, letter head or
sign boards, unless it be a degree of a University established by law in Pakistan or recognized
by the Federal Government or the Council;
 Accepts a position as auditor previously held by another member of the Institute without
first communicating with him in writing;
 accepts appointments as auditor of a company without first ascertaining from it whether the
requirements of sub-section (6) of section 144 of the Companies Act, 1913 (VII of 1913), in
respect of such appointment have been duly complied with;
 charges or offers to charge, accepts or offers to accept in respect of any professional
employment fees which are based on a percentage of profits or which are contingent upon
the findings or results of such employment except in cases which are permitted under any
law for the time being in force or by an order of the Government;
 Engages in any business or occupation other than the profession of Chartered Accountants
unless permitted by the Council so to engage; Provided that nothing contained herein shall
disentitle a Chartered Accountant from being a director of a company unless he or any of his
partners is interested in such company as an auditor;
Misc Areas – Money Laundering Page 407

 accepts a position as auditor previously held by some other Chartered Accountant in such
conditions as to constitute undercutting;
 allows a person not being a member of the Institute or a member not being his partner to
sign on his behalf or on behalf of his firm; any balance sheet, profit and loss account, report
or financial statement; or
 gives estimates of future profits for publication in a prospectus or otherwise or certifies for
publication the statements of average profits over a period of two years or more without, at
the same time, stating the profits or losses for each year separately.

Professional misconduct in relation to members engaged in management consultancy

(Part 2)

A member of Institute engaged in management consultancy shall be deemed to be guilty of

professional misconduct, if he-
 advertises or solicits for work or issues any circular, calendar or publicity material;
 issues brochures, except to existing clients or in response to an unsolicited request;
 uses designatory letters indicating qualifications of the directors and members of the
company on letter head, note-papers, or professional cards excepts as provided in clause (6)
of Part 1 of this Schedule;
 refers to associate firms of Chartered Accountants on his letter head or professional cards or
announcements;
 adopts a name or associates himself as a partner or director of a firm or a company whose
name is indicative of its activities;
 uses the term chartered accountants for his management consultancy firm or company;
 shares profits of remuneration in a manner contrary to clauses (2) and (3) of Part 1 of this
Schedule, except when he associates with non- members as stated in clause (10) of this part;
 or his partner in any firm accepts auditing, taxation, or other conventional accounting work
from any client introduced to him for management consultancy services by the client's own
professional accountant;
 uses the term "Management Consultant(s)" except in respect of a company engaged in
management consultancy field;
 associates with non-members for the rendering of various management services except as
long as such non-member observes the bye-laws and code of professional ethics of the
Institute;
 does not communicate with the existing professional accountant or consultant, if a member
of the Institute, informing him of the special work he has been asked to undertake in the
event of an introduction for management consultancy work other than through the existing
professional accountant; or
 Under the guise or through the medium of a company or firm does anything which he is not
allowed to do as an individual.
Misc Areas – Money Laundering Page 408

Professional misconduct in relation to members of the Institute in service (Part 3)

A member of the Institute (other than a member in practice) shall be deemed to be guilty of
professional misconduct, if he, being an employee of any company, firm or person:
 pays or allows or agrees to pay directly or indirectly to any person any share in the
emoluments of the employment undertaken by the member;
 accepts or agrees to accept any part of fees, profits or gains from a lawyer, chartered
accountant or broker engaged by such company, firm or person or agent or customer of such
company, firm or person by way of commission or gratification; or
 discloses confidential information acquired in the course of his employment except as and
when required by law or except as permitted by the employer

Professional misconduct in relation to members of the Institute generally (Part 4)

A member of the institute, whether in practice or not, shall be deemed to be guilty of

professional misconduct, if he-
 includes in any statement, return or form to be submitted to the Institute any particulars
knowing them to be false;
 not being a fellow styles himself as a fellow;
 does not supply the information called for by the Institute or does not comply with the
requirements asked to be complied with or does not comply with any of the directives issued
or pronouncements made by the Council or any of its Standing Committees;
 generally, willfully maligns the Institute, the Council or its Committee to lower their prestige,
or to interfere with performance of their duties in relation to himself or others;
 has been guilty of any act or default discreditable to a member of the Institute; or
 contravenes any of the provisions of the Ordinance or the bye-laws made there under.

Orders by the Council if member found guilty in Schedule II

If the Council is of opinion that the member of the Institute is guilty of professional misconduct
specified in Schedule II, it shall refer the case to the High Court with its recommendations
thereon.

High court can take following actions:

 direct that the proceedings be filed, or dismiss the complaint, as the case may be;
 reprimand such member;
 remove him from membership of the Institute either permanently or for such period as it
may deem fit; or
 refer the case to the Council for further inquiry and report.
Misc Areas – Money Laundering Page 409

Return of certificate.-

If name of a member of the Institute is removed from the Register, whether for a specified period
or permanently, every certificate of membership or practice held by such member shall deemed
to be stand cancelled from the date of the order for the said period or, as the case may be,
permanently.

SCHEDULE II

Professional misconduct in relation to chartered accountants in practice requiring action

by a High Court (Part 1)

A chartered Accountant in practice shall be deemed to be guilty of Professional misconduct, if

he-
 discloses information acquired in the course of his professional engagement to any person
other than his client, without the consent of his client or otherwise than as required by any
law for the time being in force;
 certifies or submits in his name or in the name of his firm a report of a examination of
financial statement unless the examination of such statements and the related records has
been made by him or by a partner or an employee in his firm or by another chartered
accountant in practice;
 permits his name or the name of his firm to be used in connection with any estimates of
earnings contingent upon future transactions in a manner which may lead to the belief that
he vouches for the accuracy of the forecast;
 expresses his opinion on financial statements of any business or any enterprise in which he,
his firm or a partner in his firm has a substantial interest, unless he discloses his interest in
his report;
 fails to disclose a material fact known to him which is not disclosed in a financial statement,
but disclosure of which is necessary to ensure that the financial statement is not misleading;
 fails to report a material mis-statement known to him to appear in a financial statement with
which he is concerned in a professional capacity;
 is grossly negligent in the conduct of his professional duties;
 fails to obtain sufficient information to warrant the expression of an opinion or his
exceptions are sufficiently material to negate the expression of an opinion; or
 fails to keep moneys of his client in a separate banking account or fails to use such moneys
for purposes for which they are intended.

Professional misconduct in relation to members engaged in management consultancy

requiring action by a High Court (PART 2)

A member engaged in management consultancy shall be deemed to be guilty of professional

misconduct, if he-
Misc Areas – Money Laundering Page 410

 discloses information acquired in the course of his professional engagements to any person
other than his client, without the consent of his client or otherwise than as required by any
law for the time being in force;
 is grossly negligent in the conduct of his professional duties; or
 fails to keep moneys of his client in a separate banking account or fails to use such moneys
for purposes to which they are intended.

Orders by the Council If student found guilty-

If Council is of opinion that the student is guilty of any professional misconduct specified in
Schedule III, it shall, after giving such student an opportunity of being heard, either personally
or through a counsel or a member of the Institute, make any of the following orders, namely:-
 Reprimand or warn the student; or
 Suspend the student from training, or extend the period of training of the student, for such
period as it may deem fit; or
 Debar the student from training

SCHEDULE III

Professional misconduct in relation to the students of the Institute

A student of the Institute shall be deemed to be guilty of professional misconduct if he-
 contravenes any of the provisions of the Ordinance or the bye-laws made there under;
 does not supply the information called for by the Institute;
 does not comply with any requirements which he is asked by the Institute to comply with;
 does not comply with any of the directives issued by the Council or any of its committees;
 discloses confidential information acquired in the course of his training except as and when
required by law or except as permitted by his principal;
 includes in any statement or form to be submitted to the Institute, any particulars knowing
them to be false; or
 has been guilty of any act or omission discreditable to a student of the Institute.

Publication of findings and decisions

Where a member of the Institute or a student is found guilty, the Council shall publish the
findings and decisions in the official Gazette or journals as the Council may deem fit:

However it may omit the name of such member or student from publication, if required
Misc Areas – Money Laundering Page 411

Appeal and revision.-

Any aggrieved member of the Institute may file an appeal within sixty days of the date of
communication of such order to him, to the High Court.
The High Court may-
 confirm, modify or set aside the order;
 impose any penalty or set aside, reduce, confirm or enhance the penalty imposed by the
order;
 remit the case to the Council for such further inquiry as the High Court may consider proper
in the circumstances of the case; or
 pass such other order as it may deem fit:

Powers of a civil court

The Council and the Investigation Committee shall deemed to be a civil court and shall have the
same powers as of a civil court like
 summoning and enforcing the attendance of any person and examining him on oath;
 the discovery and production of any document; and
 receiving evidence on affidavits.
Misc Areas – Money Laundering Page 412

MONEY LAUNDERING

Definition of money laundering

Money laundering can be defined as the process by which criminals attempt to conceal the true
origin and ownership of the proceeds of their criminal activities.

Criminal activities include drug trafficking, terrorism, theft, fraud and tax evasion.

Money laundering is a process by which money earned from criminal activities (‘dirty money’)
is transferred and transformed so that it appears to have come from a legitimate source (‘clean
money’). This typically occurs in three stages:
 Placement – the introduction (placement) of illegal funds into the financial system. E.g. using
a cash-intensive business such as a betting shop to disguise illegal (dirty) money as
legitimate revenue, or using numerous bank accounts to make lots of low-value cash
deposits.
 Layering – disguising the original source of the funds by passing the money through a large
number of transactions (layers).
 Integration – repatriation (integration) of the laundered funds back into the legitimate
economy so they can then be used for purchases or investment.

If it is undertaken successfully, money laundering allows criminals to maintain control over the
proceeds of their criminal activity and to provide a legitimate cover for their sources of income.

There are various criminal offences connected with money laundering. Examples include:
 possessing, in any way dealing with, or concealing, the proceeds of any crime. Examples of
the proceeds of crime might include the following:
- Tax evasion.
- Offences that involve saved costs (as these could result from environmental offences or
failure to follow health and safety regulations).
- Retaining overpayments from customers.
- Payments made overseas that are deemed to be bribes and would be illegal in Pakistan.

 attempting, conspiracy or incitement to commit the above offence

 aiding, abetting, counselling or procuring the commission of such an offence
 an act which would constitute any of these offences if done in Pakistan
 failure by a person in the regulated sector to inform the appropriate party of a knowledge or
suspicion that another person is engaged in money laundering
 making a disclosure to a third party which is likely to prejudice a money laundering
investigation being undertaken (tipping off).
Misc Areas – Money Laundering Page 413

The last two offences are the ones that accountants may find themselves affected by even
inadvertently, as accountants operate in the regulated sector and are therefore required to
report suspicions of money laundering.

It is made more complicated by the fact that ‘suspicion’ is not defined in the law. However, it
appears to be somewhere between mere speculation and actual proof.

There are various defences to charges of money laundering:

 a report had been made to the appropriate party
 there was an intention to make a report and a reasonable excuse (likely to include fear of
physical violence or other menaces) for not having done so
 acquiring or using property for adequate consideration in good faith

Regulation

Due to the work of inter-governmental bodies such as the Financial Action Task Force on Money
Laundering (FATF), many countries now have legal provisions in place designed to detect,
report and ultimately prevent money-laundering activities. These provisions vary from country
to country and include the US Patriot Act 2001 in the USA, the Money Laundering Regulations
2007 in the UK and various laws in Singapore including the ‘Corruption, Drug Trafficking and
Other Serious Crimes Act 1992’ and the ‘Terrorism (Suppression of Financing) Act 2002. The
following notes are based mainly on regulations in the UK, but similar regulations are applied
by many other countries.

In Pakistan the Financial Monitoring Unit (FMU), State Bank of Pakistan (SBP) and Securities
and Exchanges Commission of Pakistan (SECP) oversee the application of the Anti-Money
Laundering Regulations 2008 and Anti-Money Laundering Act, 2010. This oversight mechanism
is consistent with the recommendations of FATF in relation to customer due diligence (‘know
your client’), record-keeping, due diligence of corresponding banks, reporting of suspicious
transactions and compliance.

Those found guilty of offences of money laundering face imprisonment of between 1 to 10 years
plus fines up to one million rupees.

Obligations placed on professional firms

Money laundering may be of particular relevance to accountants and in particular auditors, in

cases where criminals establish companies and use transactions between their companies to
‘launder’ their dirty money.

Specific obligations for detecting and reporting suspicions of money laundering are placed on
professional firms (for example, lawyers and accountants) and financial institutions. These
requirements might include the following:
Misc Areas – Money Laundering Page 414

 Putting into place systems, controls and procedures to ensure that the firm is not used for
money laundering purposes.
 Appointing a Money Laundering Reporting Officer (MLRO), whose responsibility is to
receive reports on suspected money laundering activities from other employees and report
them to the appropriate authorities.
 Establishing and enhancing the record-keeping systems (1) for all transactions (which must
be kept for a minimum period, typically at least five years, with controls to ensure that they
are not inadvertently destroyed) and (2) for verifying the identity of clients (by obtaining
official documents, such as – for an individual – passport or driving license, supported by
recent utilities bills, and – for a company – certificate of incorporation).
 Establishing procedures within the firm for reporting any suspicion of money laundering by
client companies.
 Training and educating staff in procedures for detecting and reporting suspicions of money
laundering activities.
 These obligations are wide-ranging and auditors and other professionals need to be fully
aware of the extent of their responsibilities in taking care of them.

Example: Money laundering

An international case involved a solicitor who was imprisoned for six months for failing to
report their suspicion in relation to money paid to their firm by a client who was later convicted
of drug trafficking. The solicitor misunderstood their obligation to report the suspicion, thus
unintentionally committing an offence.

Guidance from professional bodies

In addition to any disciplinary action that may be taken by ICAP for breaches of the regulations,
penalties for non-compliance with money laundering obligations can:
 make a firm liable (under criminal law) to fines, and
 make its principals (usually its partners) liable to possible imprisonment.

In response to the increased expectations of legislators and regulators in many countries with
respect to the accounting profession’s role in detecting money laundering, IFAC has published
a second paper on this topic.

This paper highlights:

 the causes and possible means of preventing money laundering
 the signs of money laundering activity
 the vulnerability of banks, non-bank financial institutions and other entities to money
laundering
 governance-related issues (the relative responsibilities of directors and auditors for
monitoring and reporting suspicions of money laundering).
Misc Areas – Money Laundering Page 415

Customer due diligence

Effective ‘customer due diligence’ (CDD) measures are an essential part of any system designed
to prevent money laundering. For example, CDD measures should be carried out:
 when establishing a client relationship
 when carrying out an occasional transaction
 where there is a suspicion of money laundering or terrorist financing
 where there are doubts concerning the veracity of previous identification information.

Firms are required to ensure CDD procedures are applied to all clients, both new and existing.
Prior to entering a client relationship, firms in Pakistan must:
 identify and verify the client’s identity using documents or information from reliable and
independent sources
 identify the beneficial owner of the client (where there is one), including understanding the
ownership and control structure of the client and verifying, according to risk, the identity of
the beneficial owner(s)
 obtain information on the purpose and intended nature of the client relationship

Verification of identity may in certain circumstances be conducted during the establishment of

a client relationship if minimum interruptions are to be made to normal course of business and
there is little risk of money laundering or terrorist financing occurring, provided the verification
is completed as soon as practicable after contact is first established.

During a client relationship, firms must monitor activity on an ongoing basis. This includes
scrutiny of transactions, source of funds and other elements of knowledge collected in the
customer due diligence process, to ensure the new information is consistent with other
knowledge of the client and keeping the documentation concerning the client and the
relationship updated.

Firms can use a variety of tools and methods to conduct customer due diligence; the onus is on
them to satisfy themselves and to be able to demonstrate to their anti-money laundering
supervisory authority the appropriateness of their approach.

Since the entire process of money laundering involves the use of deception and at times,
collusion between the perpetrators of the crime, it can be difficult to identify actual cases or all
risks associated with money laundering. This is an area of increasing concern worldwide and
audit firms must remain vigilant to any indicators of money laundering.

Anti-money laundering systems and controls

Indications of potentially suspicious transactions might include:

 transactions being routed through several jurisdictions without apparent business sense
 an excessive use of wire transfers
Misc Areas – Money Laundering Page 416

 transactions with large currency or bearer instruments

 high value deposits or withdrawals not normally associated with the type of account they
flow through
 transactions of a secret nature
 a pattern of deposits followed by similar (and in some instances, the same) amounts being
wired to another account or financial institution
 a number of deposits and/or withdrawals just below the monitoring threshold in short
succession (often on the same day)

Businesses should establish appropriate risk-sensitive policies and procedures in order to

prevent activities related to money laundering and terrorist financing. These could include
policies and procedures which provide for:
 identification and scrutiny of complex or unusually large transactions, unusual patterns of
transactions with no apparent economic or lawful purpose and other activities regarded by
the regulated person as likely to be of the nature of money laundering or terrorist financing
 prevention of use of products favouring anonymity
 determination of whether a client is a politically exposed person (i.e. someone who has been
entrusted with a prominent public function, or a relative or known associate of that person)
 customer due diligence
 internal reporting including appointment of an officer (i.e. MLRO) to receive any money
laundering reports and a system for making those reports
 record keeping, including details of customer due diligence and supporting evidence for
client relationships
 internal control, risk assessment and management, compliance monitoring, management
and communication

In addition, businesses should take measures to make relevant employees aware of the law
relating to money laundering and terrorist finance, and to train those employees in how to
recognise and deal with transactions which may be related to money laundering or terrorist
financing.

In order to ensure compliance is appropriately managed, businesses will need to ensure

sufficient senior management oversight, appropriate analysis and assessment of the risks of
clients and work/product types, systems for monitoring compliance with procedures and
methods of communicating procedures and other information to personnel.

Duty of confidentiality and money laundering

The accountant’s normal professional duty of confidentiality to clients is not an adequate

defense where money laundering is concerned.

In the case of reporting suspicions of money laundering, practitioners in most countries are
afforded statutory protection against claims for breach of confidence where reports are made
Misc Areas – Money Laundering Page 417

in good faith and to the appropriate authority. This will be so even in cases where the suspicions
later prove to be unfounded and wrong.

An accountant may in fact find it hard not to commit the offence of ‘tipping off’ bearing in mind
all the reporting requirements that an auditor has to fulfil. For example, if an auditor had a
strong suspicion or knowledge of money laundering, they might want to resign their position.
However, doing so would mean that they were required to report to the shareholders on their
reasons (in a statement of circumstances) and also report any professional matters arising to
their successor in a professional clearance letter. In such a circumstance, the auditor might be
better placed not to resign at that time and should certainly take legal advice before doing so
(remember that taking advice from a solicitor would not constitute tipping off because it is
protected by legal privilege).

Accountants may find themselves in a position where they are prevented from making a report
of a suspicion of money laundering because they have received information under a legal
privilege. This will be rare.

Global dimension

Several countries have similar legislation to the FATF recommendations described above. For
example, the US Patriot Act 2001 requires all financial institutions to establish anti-money
laundering programs to include development of internal policies, the appointment of a
compliance officer, an ongoing employee training program and an independent audit function.
Misc Areas – IAASB Framework for Audit Quality Page 418

IAASB Framework for Audit Quality

Introduction and Objectives

Global financial stability is supported through high quality reporting. Audits can help foster
trust in the quality of reporting. This highlights the importance of audit quality, a topic of
continuous debate and of relevance to all stakeholders in the financial reporting supply chain.

With this in mind, the IAASB developed the Framework for Audit Quality which it launched in
February 2014. The Framework describes in a holistic manner the different elements that
create the environment for audit quality at the engagement, firm, and national levels, as well as
relevant interactions and contextual factors.

The objectives of the Framework for Audit Quality include:

 Raising awareness of the key elements of audit quality;
 Encouraging key stakeholders to explore ways to improve audit quality; and
 Facilitating greater dialogue between key stakeholders on the topic.

The IAASB expects that the Framework for Audit Quality will generate discussion in the
financial reporting supply chain and positive actions to achieve a continuous improvement in
audit quality.

ELEMENTS

The elements of the Framework for Audit Quality include:

 Inputs
 Processes
 Outputs
 Interactions
 Contextual factors

While the primary responsibility for performing quality audits rests with auditors, audit quality
is best achieved in an environment where there is support from other participants in the
financial reporting supply chain.
Misc Areas – IAASB Framework for Audit Quality Page 419

INPUTS

Quality audits involve auditors:

 exhibiting appropriate values, ethics and attitudes; and
 being sufficiently knowledgeable, skilled, experienced, and having sufficient time allocated
to them to perform the audit work.

Within each of these categories quality attributes are further organised between those that
apply at the engagement, firm and national levels.

PROCESSES

Quality audits involve auditors applying a rigorous audit process and quality control procedures
that comply with laws, regulations and applicable standards. In this regard various quality
attributes are further organised between those that apply at the engagement, firm, and national
levels.
Misc Areas – IAASB Framework for Audit Quality Page 420

OUTPUTS

Quality audits result in outputs that are useful and timely. Outputs are described in relation to
the full reporting supply chain and they include outputs from:
 the auditor
 the audit firm
 the entity
 audit regulators

Outputs include reports and information that are formally prepared and presented by one party
to another, as well as outputs that arise from the auditing process that are generally not visible
to those outside the audited organization.

INTERACTIONS

Quality audits involve auditors interacting properly with the stakeholders in the financial
reporting supply chain. The interactions between the following key stakeholders are described
within the Framework:
 Auditors
 Management
 Those charged with governance
 Users
 Regulators

These interactions, including both formal and informal communications, will be influenced by
the context in which the audit is performed and allow a dynamic relationship to exist between
inputs and outputs.

While each separate stakeholder in the financial reporting supply chain plays an important role
in supporting high-quality financial reporting, the way in which the stakeholders interact can
have a particular impact on audit quality.
Misc Areas – IAASB Framework for Audit Quality Page 421

CONTEXTUAL FACTORS

Quality audits involve auditors who respond properly to contextual factors. Contextual factors
are described as having the potential to impact the nature and quality of financial reporting and,
either directly or indirectly, audit quality.

These include:
 Business practices and commercial law
 Laws and regulations relating to financial reporting
 The applicable financial reporting framework
 Information systems
 Corporate governance
 Financial reporting timetable
 Broader cultural factors
 Audit regulation
 Litigation environment
 Attracting talent
 Financial reporting timetable.
Misc Areas – IAASB Framework for Audit Quality Page 422

Quality Control Review (QCR) Framework by ICAP

Introduction

The Council of the Institute (ICAP) formed the Quality Control Review (QCR) Committee in 1987
with the primary objective of establishing an independent quality control review framework in
respect of audits of financial statements conducted by the Firms.

With effect from October 2005, the QCR Committee was converted into a Quality Assurance
Board and was entrusted with this responsibility, as more fully described in this framework.

The framework of the QCR Program was issued first in 2003 which was revised in 2006, 2009,
2015 and 2019.

Scope

This framework describes the objectives and scope of the Institute’s Quality Control Review
(QCR) and the composition, responsibilities and functions of the Quality Assurance Board and
Appellate Board and their policies, procedures and process in relation to QCR program.

This framework applies to all Firms carrying out audit of financial statements prepared under
any applicable legal and financial reporting framework, which intend to get or renew a QCR
rating or obtain registration with AOB.

Audit Oversight Board (AOB)

Pursuant to Part IXC of the Securities and Exchange Commission of Pakistan Act, 1997, Firms
that carry out or intend to carry out audit of public interest companies are required to register
with Audit Oversight Board, which requires a recommendation of QAB in accordance with the
Quality Control Review Framework.

Under the Listed Companies (Code of Corporate Governance) Regulations, 2019, no company
shall appoint as external auditors, a firm of auditors, which has not been given a satisfactory
rating under the Quality Control Review program of the Institute of Chartered Accountants of
Pakistan and registered with Audit Oversight Board of Pakistan.

Definition: Audit Oversight Board (AOB)

Audit Oversight Board means the independent audit oversight board established under Part IXC
of the Securities and Exchange Commission of Pakistan Act, 1997.

AOB is the independent audit oversight board established by the parliament to function in the
public interest and enhance the quality of audit of financial statements of public interest entities.
Misc Areas – IAASB Framework for Audit Quality Page 423

This development is in line with the efforts in other jurisdictions to enhance the audit quality
and reliability of financial statements that are a key source of information to investors and other
stakeholders.

Functions of AOB

 Register audit firms, that conduct or intend to conduct the audit of public interest companies
in the manner laid down in sub-section (1) of section 36T;
 Deregister audit firms in the manner laid down in sub-section (2) of section 36T;
 Undertake comprehensive review and examination of the QAB work and independently
assess the appropriateness of the quality control review framework and take such actions as
deemed necessary;
 Oversee and review policies, procedures, programs of QAB for ensuring an effective
oversight of quality of audit of public interest companies and to specify any improvement
required in QAB’s policies, procedures and systems;
 Direct the Institute of Chartered Accountants of Pakistan (ICAP) for making such changes in
the quality control review framework as it considers necessary or expedient for the purposes
of this Part;
 Ensure that the auditing standards adopted by the Institute conform to the international
standards as issued by the International Auditing and Assurance Board;
 Conduct inspections and inquiries in respect of matters related to this Part and regulations
made hereunder; and
 Coordinate with relevant authorities including SECP, State Bank of Pakistan and ICAP in
formulating and implementing strategies for enhancing the reliability of quality and
effectiveness of audits of public interest companies.

QCR Program

Under S.R.O. 1044 (I)/2015 dated October 22, 2015 issued by the Securities and Exchange
Commission of Pakistan, following are required to appoint Satisfactory QCR rated Firms as their
statutory external auditors:
 Public Interest Companies;
 Large Sized Companies; and
 Public Interest and Large Sized Companies which are either associations not for profit or
limited by guarantee.

The objectives of the QCR Program are to enhance the quality of audit report and credibility of
accountancy profession in public interest by evaluating that the:
 Audit engagements are conducted in accordance with the applicable ISAs, relevant ethical
requirements and legal and regulatory requirements as applicable in Pakistan;
 System of quality control has been appropriately designed and effectively implemented in
accordance with the requirements of ISQM; and
Misc Areas – IAASB Framework for Audit Quality Page 424

 Firm’s quality control policies and procedures have been appropriately applied so that
reports issued are appropriate in the circumstances.

This framework applies to all office locations of the Firms located and operating in the
territories of Islamic Republic of Pakistan and Azad Jammu & Kashmir and registered with the
Institute.

Quality Assurance Board (QAB) and its Functions

Composition

The Quality Assurance Board shall comprise of nine members nominated as follows:
 Three members shall be nominated by the Securities and Exchange Commission of Pakistan
(SECP);
 Two members shall be nominated by the State Bank of Pakistan (SBP);
 One member shall be nominated by the Pakistan Stock Exchange;
 Three members shall be nominated by the Council; and
 The Chairman of QAB shall be a member of the Institute having at least ten years post
qualification experience and shall be elected by the members of QAB. Provided that a
member in practice and/or a member with an economic interest in an audit firm shall not be
eligible to become the Chairman of QAB.

The above nominations shall be subject to following conditions:

 No more than two members shall be audit partners or employees in an audit firm and such
members, if any, shall only be nominated by the Institute;
 No member from the Council shall be a member of QAB; and
 No current employee, member, or official of the Audit Oversight Board or any other statutory
regulatory body or a securities exchange shall be a member of QAB.

Term of QAB and its Members

 QAB shall be a perpetual board without any tenure.

 No member of QAB shall serve more than two consecutive periods of three years each.
 A person who was appointed as a member of QAB, under a previous QCR Framework may
remain a member of QAB until the expiration of his term except an employee of SECP, SBP
and PSX. The relevant nominating body shall nominate a new member in accordance with
this QCR Framework within sixty (60) days of effective date of this Framework.
 In case of any casual vacancy the new member shall be nominated by the original appointing
body within sixty (60) days for remaining period of the member vacating his position.
Misc Areas – IAASB Framework for Audit Quality Page 425

Cessation of Membership

A member of QAB shall cease to be a member if he

 is replaced by his nominating body;
 has given his resignation in writing addressed to the Secretary of the Institute and the
Council has accepted the same;
 becomes of unsound mind;
 has applied to be adjudicated as an insolvent and his application is pending;
 is an undischarged insolvent;
 has been convicted by a court of law for an offence involving moral turpitude;
 has displayed lack of fiduciary behavior and a declaration to this effect has been made by a
court; and/or
 is removed from the membership of the Institute.

Meetings of QAB
 QAB shall hold at least six (6) meetings in a financial year.
 Procedure to call meetings of QAB shall be as follows:
- Notice of the meeting shall be issued at least fifteen (15) days, or any shorter period if
decided by the Chairman, before the date of the meeting.
- Agenda and working papers shall be sent by the Secretary to QAB, to all members of QAB
at least ten (10) days or any shorter period as may be decided by the Chairman, before
the date of the meeting.
- In the absence of the Chairman, the members present shall elect amongst themselves a
Chairman, who shall preside over the meeting of QAB.
 Except as otherwise specified in this framework, all the meetings of QAB, the vote of majority
shall prevail and in the event of equality of vote, the Chairman shall have a casting vote in
addition to his own vote.
 The Secretary to QAB shall prepare minutes of the QAB meeting not later than 14 days after
the meeting and shall circulate the minutes to all members of QAB.
 Minutes of meetings shall be signed by the Chairman of the meeting. Secretary to QAB shall
maintain the record of the signed minutes of the meetings of QAB.
 Subject to the approval by the competent authority under the provisions of Chartered
Accountants Ordinance, 1961, members of QAB shall be paid a meeting fee, as may be
specified by the Council.
 Minimum five members of QAB shall form the ‘Quorum’ for a meeting of QAB.
Duties and Powers of the Chairman of QAB
The Chairman shall be responsible for the following:
 Chair the meetings of QAB;
 Ensure timely preparation and approval of agenda, working papers, minutes etc. of the
meeting;
 Ensure that a meeting of QAB is planned effectively, conducted according to the framework
and that matters are dealt with in an orderly and efficient manner;
Misc Areas – IAASB Framework for Audit Quality Page 426

 Recommend removal of member(s) to the nominating body in case a member of QAB is

absent for three consecutive meetings of QAB;
 Refer the matter to the nominating body for filling up of any casual vacancy; and
 Any other function as required/prescribed in the framework.

Responsibilities and Functions of QAB

 To decide a QCR Rating on a timely basis in case of a new Firm or before the expiry of a Firm’s
last QCR rating;
 To set policies for the implementation of this framework and to decide on all matters relating
thereto and monitor its adequate and effective implementation;
 To prepare annual report within four (4) months after June 30 of the year summarizing the
performance of QAB and the results of the QCR Program;
 To evaluate the performance of Head of QAD and Secretary to QAB for the HR Committee of
the Institute;
 To determine required capacity of QAD in view of the work hours required to perform
reviews and recommend the same to ICAP;
 To ensure that remedial actions or recommendations made by AOB are properly
implemented within specified time period;
 To recommend a Firm to AOB for registration under section 36T of Part IXC of Securities and
Exchange Commission of Pakistan Act 1997, within such time and manner as may be
specified by AOB;
 To recommend a Firm to AOB for de-registration under section 36T of Part IXC of Securities
and Exchange Commission of Pakistan Act 1997, within such time and manner as may be
specified by AOB. A recommendation for de-registration shall be made upon the removal of
a Firm from the List of Firms having Satisfactory QCR Rating, request by Firm for voluntary
de- registration or any other grounds as may be deemed appropriate by QAB or AOB;
 To appoint Secretary to QAB from amongst the candidates recommended by the Institute
and approve the terms and conditions of his appointment; and
 To appoint Head of QAD from amongst the candidates recommended by the Institute and
approve the terms and conditions of his appointment;

Definition: Quality Assurance Department (QAD)

A department established, resourced and funded by the Institute in consultation with the
Quality Assurance Board to carry out such functions and responsibilities as assigned to it by the
Quality Assurance Board in line with this framework.

Secretary to the QAB and the Head of QAD shall be two different offices held by two different
persons and a Head of QAD already appointed by the Institute shall be deemed to have been
appointed by QAB.

In carrying out the above functions, QAB shall be assisted by its Secretary and the QAD.
Misc Areas – IAASB Framework for Audit Quality Page 427

Auditors’ Liability and Expectations Gap

1.1 Introduction

This chapter deals with a number of aspects of law and regulation under which auditors:
 may have penalties imposed on them for a criminal offence, or
 may have legal claims made against them (for ‘damages’) for negligence.

The potential liability of auditors has become an important topic in recent years, due to the
growing complexity of the business and legal environment and an increase in legal actions
against auditors.

One explanation put forward to explain the high number of legal actions against auditors is the
‘expectations gap’.

The expectations gap

The expectations gap is the difference (or ‘gap’) between:

 what the users of financial statements and other members of the public think that the
auditors should do, and
 what the auditors are actually required by the law and the profession to do.

There are three main elements in the expectations gap:

 A standards gap. This occurs because of a perception that auditing standards are more
prescriptive than they actually are, and that auditors have wide-ranging rules that they must
follow:
 A performance gap. This occurs because of a perception that audit work has fallen below the
required standards.
 A liability gap. This arises from a lack of understanding about the auditor’s liability and who
the auditor may be liable to.

In addition, there is a perception that auditors have a responsibility for detecting all frauds,
whenever they occur.

High levels of expectation about what auditors should do may lead to legal action against
auditors if this level of expectation is not met. To reduce the frequency and cost of legal action,
and to maintain the image of the audit profession in the mind of the public, it is in the interests
of the profession to take steps to close the expectations gap.
Misc Areas – IAASB Framework for Audit Quality Page 428

Closing the expectations gap

A number of strategies exist that could assist in closing the expectation gap and are discussed
below.
 The profession should attempt to improve the general level of knowledge and understanding
about the audit process. One such attempt has been made with the issuance of revised ISA
700, the auditing standard on auditor’s reports. This requires the audit report to include an
explanation of the nature of an audit.
 The revised ISA 700 (see later chapter on current affairs) extends the description of the
nature of an audit and provides more useful and relevant information about the audit to
users.
 Controls over the auditing profession are important in enhancing public confidence. For
example:
- The European Union requires the audit of companies whose shares are quoted on a stock
market in the EU to be conducted in accordance with international auditing standards
(ISAs);
- National oversight bodies such as PCAOB (Public Company Accounting Oversight Board)
in USA and FRC (Financial Reporting Councils) in the UK monitor the compliance of audit
firms in their conduct of audits by performing audit inspections;

 Significant guidance for auditors and management aimed at increasing quality and
addressing issues such as going concern has been issued by standard setters, professional
bodies and regulators. There has been an increased focus on corporate governance and the
role that audit committees play in companies, reducing inconsistencies and enhancing the
quality of audits.
 Open and candid communication between internal and external auditors, financial
management and the audit committee is increasingly being seen as critical in helping reduce
the expectation gap. Such communication helps the audit committee to perform their
governance role with the necessary transparency and realistic expectations that will help
achieve effective risk management.
 Enhanced communication between the parties and confirmation of their respective roles and
responsibilities should be presented in the audit committee and directors’ reports to the
shareholders. This will ensure that users become much more aware of the various parties’
roles and responsibilities beyond the understanding they gain just from the audit report.
 The expectation gap will hopefully narrow further as financial reporting participants work
together even more effectively to improve the deterrence and detection of financial
reporting fraud.

The level of success in narrowing the expectation gap is likely to vary considerably between
territories depending on factors such as culture, ethics, the level of incidence of governance
mechanisms beyond the minimum required by law and regulation and the quality, availability
and transparency of corporate reporting.
Misc Areas – IAASB Framework for Audit Quality Page 429

One thing that is certain is that audit committees are well positioned to play a vital role in
reducing the expectation gap given their open and direct relationship with all the key parties
including shareholders, board of directors, internal audit and external audit. This is also because
audit committees include an appropriate mix of independent and/or non-executive directors
to add the necessary transparency and impartiality which is required for stakeholders’
confidence in the overall financial reporting process and the audit itself.

IAASB Q&A: Professional scepticism in an audit of financial statements

The IAASB issued a Q&A-style briefing paper on professional scepticism in 2012 which
articulates the meaning and application of professional scepticism in the audit of financial
statements.

The Q&A focuses on considerations in the ISAs and the IAASB’s quality control standard that are
of particular relevance to the proper understanding and application of professional scepticism
during an audit of financial statements.

Q&A

Question Answer
1. What is professional The ISAs define professional scepticism as “an attitude that
scepticism? includes a questioning mind, being alert to conditions
which may indicate possible misstatement due to error or
fraud, and a critical assessment of audit evidence.” They
explicitly require the auditor to plan and perform an audit
with professional scepticism recognizing that
circumstances may exist that cause the financial statements
to be materially misstated.
I.e. An inquisitive mind.

2. Why is professional Professional scepticism plays a fundamentally important

scepticism important in role in the audit and forms an integral part of the auditor’s
audits of financial skill set. Professional scepticism is closely interrelated with
statements? professional judgment. Both are essential to the proper
conduct of the audit and are key inputs to audit quality.
Professional scepticism facilitates the appropriate exercise
of professional judgment by the auditor, particularly
regarding decisions about, for example:
 The nature, timing and extent of audit procedures to be
performed.
 Whether or not sufficient appropriate audit evidence
has been obtained and whether or not more needs to be
done to achieve the objectives of the ISAs.
Misc Areas – IAASB Framework for Audit Quality Page 430

Question Answer
 The evaluation of management’s judgments in applying
the entity’s applicable financial reporting framework.
 The drawing of conclusions based on the audit evidence
obtained, for example, assessing the reasonableness of
the estimates made by management in preparing the
financial statements.

3. What can be done by Professional scepticism within the engagement team is also
audit firms and auditors to influenced both by the actions of the firm’s leadership and
enhance the awareness of the engagement partner, and by the culture and business
the importance of environment of the firm. The ISAs and ISQM include
professional scepticism and requirements and guidance designed to help create an
its application? environment at both the firm and engagement levels in
which the auditor can cultivate appropriate professional
scepticism. For example:
 Auditors must consider the integrity of the principal
owners and management during engagement
acceptance (ISQM)
 The auditor must consider the reasonableness of
significant assumptions used by management for
accounting estimates giving rise to significant risks (ISA
540)
 ISA 240 (relating to fraud) notes that the auditor must
maintain an ongoing questioning mind and be alert to
the possibility of fraud
 When considering going concern (ISA 570) the auditor
must consider the reasonableness of assumptions and
whether management’s plans are feasible in the
circumstances
 Another area where professional scepticism is
particularly important is in relation to auditing
significant unusual or highly complex transactions (ISA
330)
 The auditor is required to document how they have
applied professional scepticism (ISA 230).

4. At what stage in the audit Professional scepticism is relevant and necessary

process is professional throughout the audit, even though reference to it is not
scepticism necessary? repeated within each ISA, including:
 Engagement acceptance – integrity of owners and
management
Misc Areas – IAASB Framework for Audit Quality Page 431

Question Answer
 Identifying and assessing risks of material
misstatements
 Designing nature, timing and extent of further audit
procedures that are responsive to assessed risks of
material misstatement, and evaluating audit evidence
 Forming the audit opinion.

5. How does professional Due to the characteristics of fraud, including the fact that
scepticism relate to the fraud may include sophisticated and carefully organised
auditor’s responsibilities schemes designed to conceal it or may involve collusion, the
with respect to fraud? auditor’s professional scepticism is particularly important
when considering the risks of material misstatement due to
fraud.
ISA 240 places special emphasis on professional scepticism.

6. In addition to fraud, are Professional scepticism is important and necessary

there other aspects of an throughout the entire audit process. The auditor’s
audit where professional professional scepticism becomes particularly important
scepticism may be when addressing areas of the audit that are more complex,
particularly important? significant or highly judgmental such as:
 Accounting estimates e.g. fair value
 Going concern – e.g. management’s plans for future
actions
 Related party relationships and transactions – e.g.
business rationale
 Consideration of laws and regulations
 When auditing significant unusual or highly complex
transactions.
7. How can the application Professional scepticism is often demonstrated in the
of professional scepticism various discussions held by the auditor during the course of
be evidenced? an audit. For example, the auditor’s communication with
those charged with governance includes, where applicable,
why the auditor considers a significant accounting practice
that is acceptable under the applicable financial reporting
framework not to be most appropriate to the particular
circumstances of the entity.

Documentation remains critical. The ISAs require auditors

to document discussions of significant matters with
management, those charged with governance, and others,
including the nature of the significant matters discussed
and when and with whom the discussions took place. Such
Misc Areas – IAASB Framework for Audit Quality Page 432

Question Answer
documentation helps the auditor demonstrate how
significant judgments and key audit issues were addressed
and how the auditor has evaluated whether sufficient and
appropriate audit evidence has been obtained.

Examples of circumstances where it is particularly

important to prepare documentation:
 Significant decisions from engagement team discussions
regarding fraud
 Identified or suspected non-compliance with laws and
regulations
 Basis of auditor’s conclusions about estimates
 Identifying information that is inconsistent with the
auditor’s final conclusions on a significant matter
 Reasonableness of areas of subjective judgments

8. Do regulators and The ISAs do not set forth requirements for regulators and
oversight bodies of audit oversight bodies of the audit firms, or for those charged
firms and those charged with governance. However because of the critical role that
with governance have a role those stakeholders serve in achieving audit quality, they are
to play in supporting in a position to further challenge auditors.
sceptical behaviour among
auditors?
Misc Areas – IAASB Framework for Audit Quality Page 433

The Auditor’s Liability

Introduction

Legal claims made against auditors fall within one of two legal strands:
 The auditor may be prosecuted by the authorities for a criminal act, and be criminally liable
if found guilty. (The penalty may be a fine, or possibly imprisonment for a guilty individual.)
 The auditor may be liable under civil law. A ‘civil’ legal action may be brought against an
auditor by another person who has suffered loss or damage because of the auditor’s actions.
The person bringing the legal action usually seeks a money payment (‘damages’) from the
auditor, to recover their losses they have suffered.

The precise details about an auditor’s criminal and civil liabilities vary from one country to
another, depending on national legislation. Whilst ICAP students study Pakistani law relevant
to accountants in full in module CAF4 Business Law and CFAP2 Corporate Laws, this section
addresses the areas of Pakistani law most directly relevant to Pakistani auditors, in particular
liability arising through auditor negligence.

Note that the legal system relating to Pakistani auditors is based on the English legal system
with its two main strands:
 Criminal law (e.g. fraudulent trading or insider dealing); and
 Civil law (e.g. contract law and the law of tort)

and laws being established by:

 Statute (e.g. Companies Act, 2017)

 Common law (i.e. precedents set by rulings in previous legal cases).

Whilst the common law cases described below are not necessarily Pakistani cases, they still
remain the reference point in today’s Pakistani legal system relevant to auditors.

Criminal liability

Examples of when the auditor may be criminally liable include:

 Where they accept appointment as auditor under a statutory provision without being
qualified to act.
 Where they are involved in fraud, such as falsifying accounting documents or records.
 Where they are guilty of ‘insider dealing’. The criminal law of many countries makes it an
offence for a person with inside knowledge of price-sensitive information to use or pass on
that information. Insider dealing is also prohibited under the IFAC and ICAP rules of
professional conduct.
Misc Areas – IAASB Framework for Audit Quality Page 434

Auditing practices should take suitable steps to reduce the risk of insider dealing. For example,
it is normal practice for audit firms to impose restrictions on the amount of shares that their
staff may hold in client companies and to require staff to declare all their shareholdings.

Criminal liability may also arise for certain offences relating to:
 the winding up of a company
 tax law
 financial services legislation, in areas such as dealing in investments or giving investment
advice
 money laundering.

Civil liability

A major threat faced by the auditing profession is the possibility of legal claims against auditors
as a result of negligent (or ‘careless’) auditing.

Contract law and the law of tort

An auditor may face legal claims for losses suffered as a result of negligent auditing under two
separate branches of law: contract law and the law of tort. A summary of the position is as
follows:
Misc Areas – IAASB Framework for Audit Quality Page 435

Contract law

A company has a contract with its external auditor for the provision of audit services. It can
therefore sue the auditor for breach of contract if the auditor is negligent in carrying out the
terms of the contract.

Note that only the company can sue the auditor for a breach of contract. Other persons (third
parties) who might want to sue an auditor, such as banks, creditors and shareholders, do not
have a contract with the auditor; therefore they cannot bring a legal action under the law of
contract.

When a legal action is brought against an auditor by a company for breach of contract
(negligence), the action is usually initiated by the board of directors of the company.

Standards of skill and care

When carrying out their duties for a client, the auditors must exercise reasonable care and skill.
IFAC and ICAP’s codes of ethics require that members should carry out their professional work
with professional competence and due care and with proper regard for the technical and
professional standards expected of them as members.

The degree of skill and care expected of an auditor in a particular situation depends on the
circumstances. There is no general standard of skill and care; the auditor is expected to react to
the situation and the particular circumstances that they are facing.

In general, if the auditor has followed auditing standards and can demonstrate this in their
working papers, they will not usually be found guilty of negligence. This is why it is so important
for the auditor to ensure that they maintain adequate working papers and obtain sufficient,
relevant and reliable evidence to support their audit opinion.

Liability in tort

Only the client company can sue the auditor in the law of contract, because only the company
has a contract with the auditor. Third parties who feel they may have suffered as a result of
negligent auditing have to rely on a different branch of law – the law of tort. An important
question is: ‘To what extent can others rely on the civil law, and bring an action for negligence
against the auditors of a company?’

A tort can be defined as a ‘civil wrong’ other than that arising under contract law, giving rise
to a claim for damages. (A civil wrong is wrongdoing that is not a criminal offence, but which
allows the injured person to bring an action in civil law against the wrongdoer.) Negligence is
just one of many branches of tort.
Misc Areas – IAASB Framework for Audit Quality Page 436

Examples of other persons who may suffer loss because of an auditor’s negligence and relying
on financial statements that do not give a true and fair view are:
 A bank that lends money to a company, and the company subsequently defaults and fails to
make payments of interest or repayments of the loan principal
 A supplier who has given credit to the company, whose debts have to be written off as ‘bad’
 Another company who relies on the financial statements when deciding to make a takeover
bid for the audited company
 An investor who relies on the financial statements to buy shares in the company, and the
share price falls when the true state of the company later becomes apparent

Making a successful claim for auditor negligence (law of tort)

If a person is to make a successful claim against the auditor in the tort of negligence, three
conditions must be satisfied.

Negligence
requires

(1) (2) (3)

A duty of care That duty is Loss or damage
exists breached results

 Condition (1) – The auditor must owe a duty of care to the person who has suffered a loss
due to the auditor’s negligence. The existence of a duty of care has proved the most
troublesome of the three conditions to establish, in cases brought before the courts. This is
considered in more detail below.
 Condition (2) – The duty of care must have been breached. The party bringing the claim
against the auditor has to show that the auditor did not exercise a reasonable degree of care
in the circumstances, so that the duty of care was breached. A typical method used in court
cases to prove that a duty has been breached is to call another firm of auditors as expert
witnesses. The expert witnesses are asked to give their view on whether the audit was
performed correctly.
 Condition (3) – A loss or damage must result from breach of the duty of care. Proving that
this condition has been met is usually a question of demonstrating that the person making
the claim suffered a financial loss as a result of the negligent auditing. For example, if a bank
lent money to a company on the basis of audited accounts that were subsequently found to
contain material errors or omissions, and the company subsequently defaulted on its loan,
the bank can demonstrate a measurable financial loss.
Misc Areas – IAASB Framework for Audit Quality Page 437

Establishing the existence of a duty of care (law of tort)

Most of the major court cases on auditor negligence have been concerned with the question of
whether the auditor owes a duty of care to the ‘plaintiff’. (The plaintiff is the person making the
claim for damages.) The cases summarised below, taken from UK law, show how the view of the
courts on this question has developed over time, since the 1950s. As mentioned earlier, these
cases also form the common law precedent in Pakistan today.

You should concentrate on the principles involved, rather than the details of the cases. Whilst
some of the cases do not deal specifically with auditors, the principle established by the court is
however applied by the courts to auditors in similar situations.

Illustration: Candler v Crane Christmas (1951)

In this case, Candler sued the accountants Crane Christmas when they lost money they had
invested in a company. Crane Christmas had prepared the accounts, and it was alleged that they
had been negligent in doing so. But were the accountants liable to Candler?
The court ruling was that although the accounts were negligently prepared, Candler could not
recover their losses from the accountants because they did not have a contract with them.
Therefore, in the 1950s, the legal view was that an auditor did not owe a duty of care to third
parties who were not in a contractual relationship with the auditor.

Illustration: Hedley Byrne v Heller & Partners (1964)

This is a case dealing with banks, but it was seen as relevant to all professionals, including
auditors and accountants. The plaintiff, Hedley Byrne, lost money when a bank reference from
the defendant (Heller & Partners, a bank) turned out to have been negligently produced. The
bank indicated in its reference that a mutual client was a good credit risk when this was not the
case.
The court ruled that although Hedley Byrne did not have a contract with the bank, Heller &
Partners, they could recover their losses due to the negligence and loss involved, because the
bank knew the plaintiff by name. However, the bank did not have to pay any damages due to a
general disclaimer in its letter (that gave the reference) absolving it from any liability.
This legal decision affected auditors, because the court has decided that if a third party (with
whom the auditor did not have a contract) could show that it relied on the work of an auditor
which later turned out to be wrong, the auditor might be liable for damages for negligence.
However, this principle was only extended to plaintiffs that the auditor actually knew by name.
Unidentified third parties were not able to claim against the auditor for negligence.

Illustration: JEB Fasteners v Marks Bloom (1980)

In this case, the plaintiff acquired the share capital of a company. The audited accounts, due to
the negligence of the auditors, did not show a true and fair view of the state of affairs of the
company. It was accepted that, at the time of the audit, the defendant auditors did know of the
plaintiffs, but did not know that they were contemplating a take-over bid.
Misc Areas – IAASB Framework for Audit Quality Page 438

Whilst recognising that the auditors owed a duty of care in this situation, the court decided that
the auditors were not liable because the plaintiff had not actually suffered any loss. It was
proved that the plaintiffs would have bought the share capital of the company at the agreed
price, no matter what the accounts of the company had shown.

Illustration: Caparo Industries v Dickman and Touche Ross & Co (1989)

This is seen as a leading case in English law in the area of ‘to whom does the auditor owe a duty
of care’.

Fidelity plc was taken over by Caparo Industries. Fidelity’s accounts had been audited by
Touche Ross. Caparo alleged that the accounts overstated the profits of Fidelity plc and that they
had relied on the audited accounts of Fidelity when deciding to purchase shares in the company
and make a takeover bid.

The court held that a duty of care was not owed to potential investors in a company, or persons
making a takeover bid, because of:
 a lack of proximity (a lack of ‘closeness of relationship’) between the auditor and a potential
investor, and
 the fact that it would not be just and reasonable to impose a duty on the auditor to such
investors.

In the above case, the court identified the auditor’s functions as being:
 to protect the company itself from errors and wrongdoing - not to protect the shareholders
of the company from error; and
 to provide shareholders with information such that they can scrutinise the conduct of a
company’s affairs and remove or reward those responsible (the directors).

The auditor does not exist to aid investment decisions.

Out-of-court settlements

Large claims against auditors in high-profile cases (such as Enron) receive a high level of
publicity. Many other cases are not widely publicised, often because they are settled ‘out of
court’. This involves the parties who are in dispute reaching a negotiated settlement, rather than
taking their case to court.

The advantages of out-of-court settlements are that:

 it avoids the cost and time involved in a court case
 it may avoid adverse publicity for the auditor
 the final settlement may be lower (because both sides save legal costs, and the plaintiff might
agree to a lower settlement to avoid the cost and the risk of losing the case)
Misc Areas – IAASB Framework for Audit Quality Page 439

The disadvantages of out-of-court settlements are that:

 the final responsibility may be left undecided, so the legal position remains unclear
 it may encourage others to take action against auditors
 insurance premiums may rise.

Use of disclaimers in audit reports

A disclaimer is not a requirement of an audit report, but some audit reports include one. A
disclaimer states that:
 the auditor’s report is intended for use of the company and the company’s shareholders as a
body, and
 no responsibility is accepted by the auditor to anyone except the company or the
shareholders as a body for the content of the report.

The purpose of a disclaimer is to reduce the risk of legal claims by ‘third parties’ against the
auditor for negligence.

The main problem with a disclaimer however is that a disclaimer cannot guarantee protection
for an auditor against third party claims, because the circumstances of each individual claim
may be different.
Misc Areas – IAASB Framework for Audit Quality Page 440

Managing the Auditor’s Liability

Avoiding liability

Clearly, it is preferable to avoid claims arising for negligent auditing. Firms can minimise the
risks of being sued by ensuring that their staff perform high-quality audit work. Auditors should
therefore:
 follow appropriate auditing standards
 use effective quality control procedures
 train staff to an appropriate level of knowledge and skill
 adopt robust client acceptance procedures
 issue appropriate disclaimers
 ensure that the firm is up-to-date with modern auditing methods.

Meeting claims: professional indemnity insurance

If successful legal claims are made (or if out-of-court settlements are reached, where the audit
firm agrees to make a payment to settle the dispute) the auditor will have to pay damages. If the
damages are so large that they are more than the firm can afford, the law in some countries may
also allow claims to be made against the personal assets of partners of the audit firm.

The threat of very high claims for damages, beyond the financial means of the audit firm, applies
to the major audit firms as well as smaller firms.

The professional accountancy bodies take the view that the image of the profession would be
seriously damaged if claims awarded against auditors and accountants are not met because of
a lack of financial resources. As a result, professional bodies often require members in practice
to carry professional indemnity insurance (PII).

PII is an insurance policy that provides cover against all civil liabilities that are incurred as a
result of the conduct of the firm’s business. Money is paid out by the insurance firm on these
policies if the firm itself is unable to pay.

However, the requirement for compulsory PII has the following disadvantages:
 It may increase the frequency and size of claims made against firms, which are seen to have
large amounts of funds at their disposal to meet claims.
 It may encourage more careless auditing.
 It imposes a high cost on audit firms. These costs of insurance are likely to increase as the
general level of legal claims rises.
Misc Areas – IAASB Framework for Audit Quality Page 441

Fidelity Guarantee Insurance

Fidelity Guarantee Insurance is another tool that can be used to limit an auditor’s professional
liability. Fidelity Guarantee Insurance provides protection for an employer (in this case the
audit firm) against direct financial losses suffered due to an employee’s dishonesty, theft and/or
fraud in the course of their employment.

Limiting liability

Because of the high costs of legal claims and professional indemnity insurance, a number of
suggestions have been made for finding other ways of limiting claims against auditors.
 One suggestion is that there should be a statutory limit on claims, either a maximum
percentage of the audit fee or a maximum fixed amount.
 Another suggestion is that auditors should be permitted to agree a ‘cap’ (limit) on their
liability with their clients, so that a company cannot make a claim against its auditors for
more than the agreed amount (cap).

For example, a company and its auditors in the UK can now agree to a specified monetary sum
as a cap on the auditors’ liability.
 The use of ‘limited liability partnerships’ whereby an audit firm that is structured as a limited
liability partnership cannot lose more than its total fixed capital. This is similar to limited
liability for companies.
 The use of the equivalent of PII for directors of client companies. This may expose the
directors of companies to legal actions by other parties, rather than the audit firm, because
the plaintiffs will know that the directors can afford to pay any successful claims for
negligence.
 Including disclaimers of liability to parties other than the company and its shareholders in
the auditors’ report.
Misc Areas – Due Diligence Engagements Page 442

Due Diligence Engagements

3.1 Due diligence engagements

One of the most common forms of audit-related review services is ‘due diligence’ work. This
term refers to any engagement where the practitioner is engaged to make inquiries into the
accounts, organisation or activities of an entity.

Due diligence is not governed by a specific standard and therefore can be interpreted in a
number of ways. In practice a due diligence engagement would be conducted in accordance with
whichever standard best fits the particular engagement being conducted e.g.
 As a review engagements in accordance with ISRE 2400
 As an assurance engagement in accordance with ISAE 3000
 As a related services engagement (e.g. agreed-upon procedures) in accordance with ISRS
4400.

Due diligence work is most commonly referred to in the context of mergers and takeovers. The
work involves obtaining information about the target company, prior to the takeover (or
merger). The objective should be to find out everything that may be relevant about the target
company’s operations, financial performance, financial position and future prospects. In
addition, information should also be gathered about the business environment in which the
target company operates.

The practitioner will also interview the senior management of the target company as well as
other key employees and possibly external third parties. Due diligence work does not involve
tests of controls (unless the client specifically asks for this), nor does it involve substantive
testing. Due diligence work is not a form of audit work.

The main objective of due diligence is therefore often to provide information that will allow the
client to:
 decide whether a takeover or merger is actually desirable, and
 if so, whether the proposed cost of the acquisition is reasonable.

An adverse or critical due diligence report may therefore result in:

 abandoning a proposed takeover or merger, or
 reducing the offer price for the acquisition.

Benefits of using an audit firm for due diligence

There is no reason why an accountancy firm should not be engaged to carry out due diligence.
Management could do some or all the work themselves. However using an accountancy firm to
do the work has two potental benefits:
Misc Areas – Due Diligence Engagements Page 443

 Hiring an accountancy firm to do the work saves management time for the potential buyer.
In additon, the practitioners assigned to the due diligence work should have suitable
experience in this type of work. For large takeover, the amount of time and resources
required to carry out proper due diligence can be substantial.
 Using a professional firm to do due diligence may help to reassure shareholders in the
potential buyer (or investors who will be asked to provide loan finance for the takeover) that
the acquisition has been properly evaluated

Examples of due diligence engagements

Practical examples include:

 Financial due diligence
 Personnel due diligence
 Environmental due diligence
 Regulatory due diligence
 Operational and IT due diligence.

Items to investigate in a due diligence exercise

Financial performance and financial position. The practitioner will look at the available
historical financial information about the target company, such as its financial statements for
the past few years. Ratio analysis will often be used to make an assessment. The practitioner
will also look at the target company’s management accounts, budgets and profit/cash flow
forecasts, and at any current business plan.

Operational issues. The practitioner should also look for any operational issues in the target
company that may raise questions about its value. For example, the target company might have
important contracts with major customers, and the practitioner should try to find out when
these contracts reach their termination date and what the probability that the contracts will be
renewed is. Other operational problems may be discovered, such as a high rate of labour
turnover, or high costs incurred in meeting warranties or guarantees to customers.

Management representations. Management of the takeover target may have provided

representations to the potential buyer. For example, they might have given a written assurance
that the target company is not subject to any tax investigation or potential litigation. Due
diligence work should seek to establish that these representations appear to be correct.

Identification of assets. A takeover usually results in purchased goodwill in the consolidated

accounts. However the takeover target may have several intangible assets that do not appear in
its statement of financial position (because they were internally-generated assets) but which
should be recognised for the purpose of consolidation. Examples are internally-generated
patent rights, customer lists and databases and brand names. These should be identified and
valued, for inclusion in the consolidated statement of financial position after the acquisition. It
Misc Areas – Due Diligence Engagements Page 444

is also useful for the management of the potential buyer to be aware of the nature and estimated
value of the intangible assets that they would be acquiring.

Benefits and costs of a takeover. Due diligence may also include an attempt to estimate the
future benefits of the takeover, such as cost savings from synergies such as economies of scale.
Any ‘one off’ expenses such as redundancy costs and reorganisation costs will have to be
estimated.
Misc Areas - IAS/IFRS Checklist for Auditors Page 445

IAS / IFRS Checklist for Auditors

IAS 1: Presentation of financial statements

 Has the going concern basis been adopted? Is the going concern basis appropriate?
 If the directors of the client company have decided that the going concern basis is not
appropriate, have the relevant disclosures been made?
 If there is uncertainty about the going concern status of the company, have the relevant
disclosures been made?
 Has the accruals concept been complied with?
 Is there consistency in the presentation and classification of items in the financial
statements, between the current and previous financial periods?
 Has each material class of items been separately presented in the financial statements?
 Has offsetting (of assets and liabilities, or income and expense) been applied only as
permitted by an accounting standard?
 Has an appropriate format been adopted for the statement of financial position, income
 statement/statement of comprehensive income and statement of changes in equity?
 Are appropriate disclosure notes included?

IAS 2: Inventories
 Has inventory been consistently valued at the lower of cost and net realisable value, on an
item-by-item basis?
 Has an acceptable costing method been used for inventory? (Remember that LIFO is not
permitted by IAS 2.)
 Has inventory been counted accurately? (What is the evidence for this?)
 Has an appropriate method been used for the treatment of overheads?

IAS 7: Statement of cash flows

 Is the presentation of the statement of cash flows in accordance with the requirements of
IAS7?

IAS 8: Accounting policies, changes in accounting estimates and errors

 Have appropriate accounting policies been selected and consistently applied?
 Have any changes in accounting policy permitted under IAS 8 been correctly accounted for
as prior period adjustments?
 Have fundamental errors in prior period financial statements been accounted for as prior
period adjustments?
 Have changes in accounting estimates been reflected on a prospective basis?
Misc Areas - IAS/IFRS Checklist for Auditors Page 446

IAS 10: Events after the reporting period

 Has the definition of events after the reporting period (as defined by IAS 10) been properly
applied?
 Have all subsequent events having an impact on amounts and/or disclosures in the financial
statements been identified?
 Is there a correct distinction between adjusting and non-adjusting events after the
reporting period?
 Have adjustments been made correctly for adjusting events, in accordance with the
appropriate IAS /IFRS?
 Have non-adjusting events been adequately disclosed?

IAS 12: Income taxes

 Has the income tax liability been correctly calculated and disclosed?
 Has deferred tax been recognised in respect of all material temporary differences in
accordance with IAS 12 guidance??
 Has an appropriate rate of tax been used in measuring the amount of the deferred tax
liability (asset)?
 Are deferred tax assets recoverable?

IAS 16: Property, plant and equipment

 Has cost of property, plant and equipment been determined in accordance with IAS 16?
 Has cost been correctly allocated to components of an asset in accordance with IAS 16?
 Has post-acquisition expenditure on property, plant and equipment been properly analysed
between capital expenditure and revenue expenditure?
 Has depreciation been properly calculated and accounted for?
 Have asset revaluations been performed in accordance with IAS 16 and accounted for
correctly?
 Have disposals and the resulting gain or loss on disposal been properly calculated and
recorded?

IFRS 16: Leases

 Have leases been properly classified between finance leases and operating leases, and has
the appropriate accounting treatment been applied to each type of lease?
 Have leasing obligations (finance leases) been properly analysed into current and
noncurrent liabilities?
 For finance leases, have the depreciation and finance charges been allocated to accounting
periods in accordance with standard.
 Have the appropriate disclosures been made?
Misc Areas - IAS/IFRS Checklist for Auditors Page 447

IFRS 15: Revenue from contracts with customers

 Have the appropriate principles of revenue recognition been applied to the recognition of
revenue from the sale of goods, the provision of services and other items?

IAS 19: Employee benefits

 Have appropriate liabilities been recognised correctly when employees have provided
service in exchange for employee benefits to be paid in the future?
 Has the expense of the entity consuming the economic benefit arising from service provided
by employees in exchange for employee benefits been recognised correctly?

IAS 20: Accounting for government grants and disclosure of government assistance
 Have revenue-based grants been credited to the income statement/statement of
comprehensive income at the same time as the related expense?
 Have capital-based grants been accounted for in accordance with IAS 20? The grant should
either (1) be credited to the asset account, with depreciation then on the net cost of the
asset, or (2) carried as a deferred credit which is then amortised to the income
statement/statement of comprehensive income over the life of the asset.

IAS 21: The effects of changes in foreign exchange rates

 Have appropriate exchange rates been used in generating exchange differences and
translating from functional to presentation currencies?
 Have exchange differences on settlement of monetary items been correctly calculated and
classified within the income statement?
 Have exchange differences on foreign currency monetary items in the statement of financial
position at year-end been correctly calculated and allocated within the income statement
(or other comprehensive income if the asset/liability is a designated hedge)?
 Have exchange differences on non-monetary foreign currency assets/liabilities carried at
fair value at year-end been correctly calculated and allocated within other comprehensive
income?
 Have appropriate exchange rates been used?

IAS 23: Borrowing costs

 Have borrowing costs been recognised as an expense in the period in which they are
incurred?
 If borrowing costs have been capitalised, are they directly attributable to the acquisition,
construction or production of a qualifying asset?
 Have appropriate disclosures been made of the accounting policy, the amount of capitalised
borrowing costs in the period and the capitalisation rate used to determine the amount of
borrowing costs eligible for capitalisation?
Misc Areas - IAS/IFRS Checklist for Auditors Page 448

IAS 24: Related party disclosures

 Have necessary disclosures been made to draw attention to possibility that the company’s
financial position or profit/loss has been affected by related parties and transactions?

IAS 29: Financial reporting in hyperinflationary economies

 Does the entities functional currency satisfy IAS 29’s definition of hyperinflationary?
 Have the financial statements been correctly restated into ‘measuring units’ at the reporting
date including non-monetary assets/liabilities and income/expense items?
 Has the gain or loss on monetary items been calculated accurately and classified
appropriately within the income statement?
 For group audits does parent company retain a sufficient level of control (for a subsidiary)
or significant influence (for an associate) to satisfy the accounting treatment applied?
 Does the hyperinflationary entity remain a going concern?

IAS 32: Financial instruments: Presentation and IFRS 7: Disclosures

 Have financial instruments (liabilities) been properly classified as debt or equity based on
their substance?
 Have compound instruments been properly analysed into their debt and equity elements?
 Have payments to the providers of capital been correctly classified as borrowing cost or
dividend in accordance with the classification of the instrument to which they relate?
 Have appropriate disclosures been made of risk exposures, risk management and hedging
policies?

IAS 33: Earnings per share

 Has the basic earnings per share been correctly calculated and disclosed for the current and
prior reporting period?
 Has diluted earnings per share been properly calculated and disclosed where relevant?

IAS 34: Interim financial reporting

 Have the interim financial reports been prepared in accordance with local requirements as
well as IAS 34?
 Do the contents comply with the minimum requirements of IAS 34?
 Are appropriate disclosures included in notes to the interim statements?

IAS 36: Impairment of assets

 Have directors identified events that may indicate that impairment review is necessary?
 Have recoverable amounts been calculated in accordance with IAS 36?
 Where appropriate, have cash-generating units been identified?
 If an impairment loss has been recognised, has the loss been allocated to assets and
recorded correctly?
Misc Areas - IAS/IFRS Checklist for Auditors Page 449

IAS 37: Provisions, contingent liabilities and contingent assets

 Have all necessary provisions been recorded?
 Have contingent liabilities/ contingent assets been disclosed as required by IAS 37?

IAS 38: Intangible assets

 Have purchased intangible assets been recognised and measured in accordance with IAS
38?
 Have the useful lives of intangible assets been estimated in a reasonable way?
 Is there evidence to support the non-depreciation of intangibles with an indefinite useful
life?
 Have intangible assets been subject to annual impairment reviews?

IAS 39: Financial instruments: recognition and measurement

 Have financial instruments been recognised and measured in accordance with IAS 39?

IAS 40: Investment property

 Has the company adopted the cost model or the fair value model?
 If the cost model has been adopted, have the principles of IAS 16 been complied with?
 If the fair value model has been adopted, have annual valuations been performed and the
gain or loss correctly accounted for?

IAS 41: Agriculture

 Have changes in fair value less point-of-sale costs in respect of biological assets been -
included in the income statement in the period in which they arose?
 Have government grants relating to biological assets been recognised only when they
become receivable and measured as fair value less estimated point-of-sale costs?

IFRS 1: First-time adoption of International Financial Reporting Standards

 Has the company followed the specific guidance in Pakistan issued in respect of the IFRS 1
guidance on exemptions and exceptions from full retrospective restatement on first time
adoption?
 Has the company adopted a set of accounting policies that are appropriate and in
compliance with IFRSs?
 Have all assets and liabilities recognised under IFRS been properly recognised and
classified?
 Have all assets and liabilities not recognised under IFRS been removed from the financial
statements?
Misc Areas - IAS/IFRS Checklist for Auditors Page 450

IFRS 2: Share-based payments

 Is the calculation of share-based payments correct? (Check the number of employees
granted share options and the number of options per employee; the official date for the
grant of the options; the length of the vesting period; the required performance conditions
attached to the options.)
 Has the cost of the share-based payments been spread fairly over the vesting period?
 Are the assumptions used to predict the level of staff turnover reasonable, based on
available evidence? (If not, what assumptions would be reasonable?) The assumption about
staff turnover affects the estimated cost of the share-based payments.
 Is the estimate of the fair value of the equity instrument reasonable, and is it consistent with
any valuation provided by an external expert (such as a chartered financial analyst)?

IFRS 3: Business combinations

 Does the “event” meet the definition of a “business combination” such that IFRS 3 applies,
or is the “event” an acquisition of an asset/group of assets that does not constitute a
business?
 The date from which the acquisition took place – when did the acquirer effectively obtain
control?
 Fair value of any pre-held equity interest in the event of a “step acquisition”, when the
 acquiree is not an entity that is traded in a public market.
 Whether all contingent consideration has been identified and fair-valued at acquisition
date?
 Whether contingent arrangements that “crystallize” during a reporting period are
“measurement period adjustments” and therefore back-dated against goodwill?

IFRS 4: Insurance contracts

 Do the financial statements present fairly the substance of the insurance contract?
 Is the insurer exposed to both financial and insurance risk and hence satisfy the definition
of an insurance contract?
 Has the liability adequacy test been appropriately performed?
 Has the required impairment test been applied for any reinsurance?
 Do the financial statements show insurance liabilities and reinsurance assets separately
(gross) or have they been netted-off (and hence require restatement)?
 Have bundled contracts been unbundled correctly into the insurance and deposit
components?

IFRS 5: Non-current assets held for sale and discontinued operations

 Has the definition of discontinued operations in IFRS 5 been properly applied?
 Have the results of discontinued operations been properly quantified and disclosed?
 Has the definition of assets held for sale contained in IFRS 5 been properly applied?
 Have assets held for sale been properly valued and disclosed?
Misc Areas - IAS/IFRS Checklist for Auditors Page 451

IFRS 6: Exploration for evaluation of mineral resources

 Where a company has recognised assets as a result of exploration and evaluation
expenditures, and facts and circumstances suggest that the carrying value may exceed the
recoverable amount, has an impairment test of those assets been carried out?
 Has any impairment loss been measured, presented and disclosed in accordance with IAS
36?
 Has the entity disclosed information that identifies and explains the amounts recognised in
its financial statements arising from the exploration for and evaluation of mineral
resources?

IFRS 7: Financial instruments: disclosures

 Has the entity appropriately identified “classes” of financial instrument by reference to the
type of instruments and type of information that is relevant, and then reconciled the totals
to the category line items required by IAS 39?
 Whether any “risk disclosures” if made in a separate document, have been included in the
scope of the audit, and suitably cross-referred to the financial statements?
 Whether the sensitivity disclosures of changes in the variables that are part of market-price
risk have been correctly calculated and disclosed?

IFRS 8: Operating segments

 Have the criteria for reportable segments been properly applied?
 Has all the required information been disclosed?

IFRS 9: Financial instruments

 Have financial instruments been recognised and measured in accordance with IFRS 9?

IFRS 10: Consolidated financial statements

 Whether or not control exists?
 Whether there is adequate disclosure of the judgements entered into in determining the
type of relationship with another entity.
 Whether the criteria for treating the parent as an investment entity have been met?
 Whether transactions involving an increase or decrease in a controlling shareholding that
do not change the relationship have been correctly recorded in equity, and not through
goodwill or as a profit on disposal?

IFRS 11: Joint arrangements

 Whether or not joint control as defined in IFRS 11 exists?
 The type of the joint arrangement (joint operations or joint venture) has been correctly
identified, especially when structured through a separate vehicle?
Misc Areas - IAS/IFRS Checklist for Auditors Page 452

IFRS 12: Disclosure of interests in other entities

 Whether the additional requirements concerning “structured entities” have been correctly
interpreted, especially in the context of financial institutions?

IFRS 13: Fair value measurement

 The correct identification of a principal market, or in its absence, the most advantageous
market.
 Identifying whether or not an observed transaction is “orderly”, and therefore provides
relevant evidence.
 Identifying the “highest and best use” for non-financial assets.

IFRS 14: Regulatory deferral accounts

 Whether or not an entity has activities that put it in scope of IFRS 14, and therefore which
enable it to carry “regulatory deferral balances” that otherwise do not meet the definitions
of assets and liabilities under the IASB Conceptual Framework?

IFRS 15: Revenue from contracts with customers

 Whether or not a contract with a customer exists?
 Whether modifications to an existing contract require to be treated as an entirely new
contract, or as an amendment to an existing contract and possible “catch-up” adjustments?
 What are the performance obligations in the contract, and are there “distinct” goods or
services?
 Whether a contract includes a significant financing effect, requiring the use of discounting?
 Whether or not a contract is performed “at an instant” or “over a period of time”?
Misc Areas – Joint Audits Page 453

Introduction to Group Audits

Introduction

A group audit is the audit of a group’s consolidated financial statements. For this topic, you need
to be aware of the requirements of the following accounting standards:
 IFRS 3 Business combinations
 IFRS 10 Consolidated financial statements
 IFRS 11 Joint arrangements
 IFRS 12 Disclosure of interests in other entities
 IAS 27 (revised) Separate financial statements
 IAS 28 Investments in associates

In addition, IAS 24 Related party disclosures is also of particular relevance because companies
within a group are related parties.

Group audits and the audit of individual group companies

Much of the basic audit work for groups of companies consists of auditing the financial
statements of the individual companies in the group. The parent company and subsidiaries are
referred to (for audit purposes) as the ‘components’ of the group.

The audit work on the financial statements of the components of a group will follow normal
auditing principles and practice.

This chapter is concerned with the additional audit considerations that arise in connection with
the preparation of the group financial statements.

Possible problems with group audits

The organisation and planning of a group audit is usually more complex than the planning of
the audit of a single company, for the following reasons:
 Groups may include a large number of companies. Some group companies may be foreign
subsidiaries that report in their own currency and perhaps use their national accounting
practices to prepare their financial statements, rather than international financial reporting
standards.
 Some companies in the group may have a different year-end accounting date from other
companies.
 It will be necessary to make or audit the adjustments that are made to the financial
statements of individual group companies, for consolidation purposes.
 Some group companies may be audited by an audit firm that is not the auditor of the parent
company.
Misc Areas – Joint Audits Page 454

 Direction, supervision, review and communication protocols need to be set bearing in mind
the local laws and regulation applicable to each component separately (this implies that data
protection laws for example, may prohibit sharing of certain information with group
auditors).

Terminology in group audits

Some special terms from ISA 600 (see below) are used for group audits.

Group engagement team

The group engagement team is the audit team responsible for the audit of the group financial
statements (and will usually also be the audit team responsible for the audit of the parent
company). ISA 600 in fact refers to the ‘group audit’, the ‘group engagement partner’ and the
‘group engagement team’ whilst a number of other ISAs use the term ‘group auditor’ as a
synonym for group engagement team.

The group engagement team will:

 establish the overall group audit strategy
 communicate with component auditors (see below)
 perform work on the consolidation process, and
 evaluate the conclusions drawn from the audit evidence obtained in order to form an opinion
on the group financial statements.
Each of the above stages is considered in more detail in this chapter.

Component auditor
A component auditor is an auditor who, at the request of the group auditor, performs work on
the financial information of a component. For example, the audit of an individual subsidiary,
associate or joint venture may be performed by Audit firm A, when the group auditor is Audit
firm B. Audit firm A is a ‘component auditor’

Component
A component is an entity or business activity for which group or component management
prepares financial information that should be included in the group financial statements.

Group
All the components whose financial information is included in the group financial statements. A
group always has more than one component.

Group audit
The audit of group financial statements.

Component materiality
The materiality for a component determined by the group engagement team.
Misc Areas – Joint Audits Page 455

Group-wide controls
Controls designed, implemented and maintained by group management over group financial
reporting.

Key accounting terms relevant to group audit (Reminder from IAS/IFRS)

Business combination
A transaction or other event in which an acquirer obtains control of one or more businesses.

Parent
An entity that has one or more entities (IFRS 10).

Subsidiary
An entity that is controlled by another entity (IFRS 10).

Control
An investor controls an investee when the investor is exposed, or has rights, to variable returns
from its involvement with the investee and has the ability to affect those returns through its
power over the investee (IFRS 10).

Power
Existing rights that give the current ability to direct the relevant activities of the investee.

Associate
An entity over which the investor has significant influence.

Significant influence
The power to participate in financial and operating policy decisions of the investee, but is not
control or joint control over those policies.

Joint arrangement
An arrangement of which two or more parties have joint control.

Joint control
The contractually agreed sharing of control over an arrangement, which exists only when the
decisions about the relevant activities require the unanimous consent of the parties sharing
control.

Joint venture
A joint arrangement whereby the parties that have joint control of the arrangement have rights
to the net assets of the arrangement.
Misc Areas – Joint Audits Page 456

Group Audits: Preliminaries

The relationship between the group auditor and component auditors

ISA 600 regulates situations where group financial statements include financial information of
components that are audited by other audit firms. The group auditor is required to determine
how the work of the component auditors will affect the audit of the group financial statements.

The group engagement partner is responsible for:

 the direction, supervision and performance of the group audit, and
 issuing an appropriate group audit report.

The group auditor is solely responsible for the audit report on the group financial statements
(although ISA 600 does not in fact use this term). The group audit report does not therefore
refer to any component auditors, unless such a reference is required by local law. If it is
required, the group audit report must indicate that such a reference does not reduce the group
auditor’s responsibility for the opinion on the group financial statements.

Because of this sole responsibility, ISA 600 contains very specific guidance on:
 the direction that the group auditor should give to the group audit.
 the group auditor’s involvement in the work of component auditors, and
 the extent of review which the group auditor can carry out of the component auditor’s work.

Accepting an appointment as group auditor

It is normal practice for the auditor of the parent company to act as the group auditor. However,
this is ‘technically’ a separate appointment. As in the case of all appointments, the audit firm
should consider whether it is in a position to accept the appointment as group auditor.

Before accepting appointment as group auditor, the audit firm should ensure that all the
procedures relating to acceptance of an engagement per ISA 220 are met and that they have a
‘reasonable expectation’ of obtaining sufficient appropriate audit evidence about the
consolidation process and the financial information of components to reduce audit risk to an
acceptable level.

The firm does this by obtaining an understanding of the group and its components and their
environment sufficient to determine:
 which components are significant to the group
 which significant components are audited by others, and
 whether as group auditor, the firm will be able to be sufficiently involved in the audit of
significant components to obtain sufficient appropriate evidence about them.
Misc Areas – Joint Audits Page 457

If the group auditor is not able to be involved in the audit of a significant component, then it is
unlikely that the group auditor can obtain sufficient appropriate evidence in respect of that
component and it should not accept (or should resign from) the engagement. If the auditor is
prevented from resigning from the engagement by the law, they should issue a disclaimer of
opinion on the group financial statements.

Definition: Significant components

Significant components are those that:
 are of individual significance to the group (i.e. individually material in a group context), or
 have been identified as likely to include significant risks of material misstatement of the
group financial statements.

Understanding the group, its components and the component auditors

In accordance with ISA 315, the group auditor must identify and assess the risks of material
misstatement through obtaining an understanding of the entity and its environment. This will
mean:
 enhancing the understanding of the group, its components and their environments, obtained
at the acceptance or continuation stage, and
 obtaining an understanding of the consolidation process, including the instructions issued
by management to its components.

This will enable the group auditor to confirm or revise its initial assessment of components
which are likely to be significant.

When the group auditor plans to request a component auditor to perform work on the financial
information of a component, they must assess the following issues:
 Whether the component auditor understands and will comply with the ethical requirements
that are relevant to the group audit (in particular that they are independent).
 The component auditor’s professional competence.
 Whether the group engagement team will be able to be involved in the work of the
component auditor to the extent necessary to obtain sufficient appropriate audit evidence.
 Whether the component auditor operates in a regulatory environment that actively oversees
auditors.

The group auditor cannot simply rely on the work performed by the component auditor without
assessing the likely quality of that work.

If the component auditor is not independent or there are serious concerns about any of the
other matters above, the group auditor will need to obtain evidence relating to the financial
information of the component without requesting the component auditor to perform any work.
Misc Areas – Joint Audits Page 458

Materiality

The group auditor will need to set:

 group materiality for the group financial statements as a whole, and
 component materiality for those components where component auditors will perform an
audit or a review for the purposes of the group audit.

Component materiality will usually be lower than group materiality. If a component has been
audited in its own right (e.g. because of local laws or regulations) and the group auditor decides
to use that audit to provide audit evidence for the group audit, the materiality threshold used
on that audit will need to be assessed. If the threshold was too high then additional work may
be needed where component materiality is lower than the overall materiality level used in the
local statutory audit for the individual component.

Different risk profiles for different components would mean separate materiality levels would
be set for each component; these could be higher or lower than the materiality set for the
components’ individual audit. Thus, the aggregate of components’ materiality would not likely
equal the materiality for the consolidated financial statements. The group auditor is particularly
concerned with items that affect the consolidated financial statements, hence there could be
items of significance to a component that may not affect the consolidated financial statements
at all, or in an immaterial manner.

Planning and controlling a group audit

The principles and guidelines for planning and controlling a group audit are similar to those for
the audit of an individual company. However, additional considerations arise, in regard to the
complexities of a group audit.

These additional considerations will require the group auditor to do the following:
 Familiarise themselves with the client’s procedures for preparing group financial statements
(for example, the client may use standard consolidation schedules).
 Ascertain the client’s timetable for the preparation of the group financial statements.
 Establish an audit strategy and audit plan for the entire group audit, including the audit of
components. This should include:
- staffing requirements for the group audit
- a timetable for the audit of the company financial statements and the group financial
statements
- an action plan for possible problem areas (for example, foreign subsidiaries)
- arrangements for communication and co-operation with component auditors.
Misc Areas – Joint Audits Page 459

Working with Component Auditors

Determining the type of work to be performed on components

Where a component is of individual financial significance to the group, the group auditor or
a component auditor must perform an audit using component materiality.

Where a component is significant because of likely significant risk of material

misstatement, the group auditor or a component auditor must perform one or more of the
following.
 An audit using component materiality.
 An audit of one or more account balances, classes of transactions or disclosures (depending
on where the risk of material misstatement lies).
 Specified audit procedures to address the risk of material misstatement.

For non-significant components the group auditor should perform analytical procedures at a
group level. However, the performance of such procedure may indicate a previously-
unidentified significant risk. In this case, the component classification may have to change to
significant component and the procedures stated above would have to be performed.

If the group auditor does not consider that sufficient appropriate audit evidence will be
obtained from the sum of the above work then additional work should be performed on non-
significant components (similar to that for significant components). The selection of such
components should be varied from year to year.

Communication with component auditors

If there is not effective communication between the group auditor and the component auditor,
there is a risk that the group auditor may not obtain sufficient appropriate audit evidence on
which to base the group audit opinion.

It is therefore vital that there is clear and timely two-way communication between the group
auditor and the component auditor. The group auditor’s requirements are usually
communicated in a letter of instruction. The component auditor’s communication with the
group auditor will usually be in the form of a memorandum or report of work performed.

However, such communication may not necessarily be in writing. For example, the group
engagement team may visit the component auditor to discuss identified significant risks or
review relevant parts of the component auditor’s audit documentation. In such cases, matters
must be properly documented in accordance with ISA 230.
Misc Areas – Joint Audits Page 460

In co-operating with the group auditor, the component auditor will provide the group
engagement team with access to relevant audit documentation provided this is not prohibited
by law or regulation.

Letter of instruction

The group auditor’s letter of instruction to the component auditor should set out:
 the work required
 the use to be made of that work, and
 the form and content of the component auditor’s communication with the group engagement
team.

It should also include:

 a request for co-operation
 ethical requirements, including independence
 component materiality
 identified significant risks
 a list of known related parties
 protocols and approval process for providing non-audit services to the component that could
have an effect on the independence at group level.

Evaluating the work of the component auditor

The group auditor is required to evaluate the work performed by component auditors. This is
typically achieved by reviewing a report or questionnaire completed by the component auditors
and engaging in appropriate discussion with the component auditors.

The group auditor must:

 Discuss significant matters arising from their evaluation with the component auditor,
component management or group management, as appropriate; and
 Determine whether it is necessary to review other relevant parts of the component auditor’s
audit documentation.

If the group engagement team concludes that the work of the component auditor is insufficient,
the group engagement team shall determine what additional procedures are to be performed,
and whether they are to be performed by the component auditor or by the group engagement
team.

The component auditor’s report of work performed should include:

 a statement of compliance with ethical and group auditor requirements
 identification of the financial information on which the component auditor is reporting
 any instances of non-compliance with laws and/or regulations which could lead to a material
misstatement of the group financial statements
Misc Areas – Joint Audits Page 461

 a list of uncorrected misstatements of the financial information of the component

 indicators of possible management bias
 any identified material weaknesses in internal control
 any other significant matters the component auditor expects to communicate to those
charged with governance of the component
 any other matters that may be relevant to the group audit
 the component auditor’s overall findings, conclusions or opinion.

Involvement of the group auditor in the work performed by component auditors

It is the group auditor’s responsibility to decide what work is to be performed on the financial
information of the component by the component auditor.

The group auditor then has to decide the extent of their involvement in that work. For significant
components they must, as a minimum:
 discuss with component management or the component auditor the business activities of
the component that are significant to the group
 discuss with the component auditor the risk of material misstatement of the financial
information of the component, and
 review the component auditor’s documentation of identified significant risks of material
misstatement of the group financial statements.

Where significant risks of material misstatement of the group financial statements have been
identified at a component the group auditor should:
 evaluate the further audit procedures to be performed to address such risks, and
 consider whether it is necessary to be involved in those procedures.
 Such involvement might include:
 meeting with component management/auditors to obtain an understanding of the
component
 reviewing the component auditor’s overall audit strategy and plan
 performing risk assessment procedures at the component
 designing and/or performing further audit procedures
 participating in closing/other key meetings between component auditors/management
 reviewing other relevant parts of the component auditor’s documentation.

For other components, the extent of the group auditor’s involvement will depend on their
understanding of that component auditor. If they have concerns about that particular
component auditor’s competence, or a lack of local regulation, they may decide that they need
to be involved in that component auditor’s risk assessment.

In all cases the group auditor is required to evaluate the report of the work performed by the
other auditor. If, after such evaluation and after discussion with the component
auditor/management, the group auditor concludes that the work is insufficient they should:
Misc Areas – Joint Audits Page 462

 determine what additional procedures are needed;

 establish whether such procedures should be performed by the component auditor or
themself, and
 understand the possible impact on the audit report on the group financial statements (if
any).

Joint auditors

A joint audit involves two (or more) audit firms being appointed to audit the financial
statements of an entity.

Joint audits may occur in other situations, but they are most commonly found in group audits.
In particular when a group acquires a new subsidiary, it is not unusual to appoint the group’s
auditors jointly with the subsidiary’s existing auditors, at least for a period of time after the
acquisition.

The joint audit provides a joint opinion on the financial statements of the subsidiary.

Advantages of joint audits

The reasons why joint auditors might be appointed include the following issues:
 The client company may be so large that it requires the services of more than one firm of
auditors.
 After the acquisition of a large subsidiary, using joint auditors may help the transition
process while the group auditors become familiar with the new subsidiary. The ‘old’ auditors
should be familiar with the business of the subsidiary and should pass their knowledge over
to the parent company auditors. For the parent company auditors, this should accelerate the
process of getting to know the business of the new subsidiary.
 Joint auditors may provide a higher level of technical expertise than either audit firm could
provide individually.
 Improved geographical coverage may be obtained for the audit, where each of the joint
auditors on its own does not have offices that cover all the geographical locations of the
component companies in the group.
 It has been suggested that two medium-sized accountancy firms might ‘join forces’ and
tender for the audit of a company for which the auditors would normally be one of the ‘Big
4’ accountancy firms. This is possibly a way in which medium-sized firms might try to ‘break
the monopoly’ of the Big 4 on large company audits.

Disadvantages of joint audits

Possible disadvantages of joint audits include the following:

 The extra cost to the client. It is likely to cost more to use two accountancy firms than to use
one.
Misc Areas – Joint Audits Page 463

 Possible inconsistencies between the two joint auditors in the audit methods that they use.
If so, there may be problems in reaching agreement on whose audit method to use.
 The possible difficulty the two firms may have in agreeing the division of work.
 Additional problems that will arise in monitoring and controlling the audit work of two
different firms.
 The two firms may find it difficult to work well together, and each firm may try to become
the leading firm in the joint audit.
 If there is a claim against the auditors for negligence in the conduct of the audit, there may
be some difficulty in identifying which of the joint auditors is potentially liable.

The key to a successful joint audit is good communication between the firms, including joint
planning meetings and regular discussions between the firms at all key stages of the audit
process. The meetings and discussions should be fully documented.

Auditing the Consolidation Process

Role of the group auditor with regard to consolidation

As discussed above, ISA 600 requires the group auditor to obtain an understanding of the
consolidation process, including the instructions issued by management to its components. This
will allow an assessment of the risks involved in the consolidation process.

The group auditor will want to confirm that the following actions have been taken correctly by
the client group:
 There has been a full and accurate transfer of information from the individual financial
statements of the components of the group to the final consolidated financial statements.
 Appropriate consolidation adjustments have been made.

However, the amount and type of detailed audit procedures to be carried out will depend on the
group auditor’s assessment of risk in this area.

The main audit procedures relating to consolidation

The table below sets out the main audit procedures that could be performed in relation to the
consolidation process i.e. preparing the consolidated financial statements from the financial
statements of the individual components in the group.
Misc Areas – Joint Audits Page 464

Topic Audit procedures

Clerical accuracy  Confirm that figures have been transferred accurately from the
financial statements of the components (individual conmpanies in
the group) to the consolidation schedules.
 Check the arithmetical accuracy of all consolidation calculations,
such as the consolidation total balances and total transaction
values.
Status of  Confirm that the parent company has correctly classified
investments investments as a subsidiary, associate, joint venture or simple
investment, in accordance with standard accounting practice.
 Confirm that the appropriate accounting treatment has been
adopted for each of these classifications of investment in the group
accounts.
Changes in the  For acquisitions: confirm fair values, the calculation of purchased
group goodwill and accounting treatment in accordance with IFRS 3 and
any other relevant standards.
 Where there has been an acquisition during the year involving
deferred consideration as part-payment, check that the amount of
the deferred consideration has been included in the cost of the
acquisition at discounted present value, using a current pre-tax
cost of capital as the discount rate. (Note: The cost of the
acquisition affects the amount of the purchased goodwill.)
 Where there has been an acquisition during the year involving a
possible contingent consideration as part-payment, check the
reasonableness of the assumption that the recent value of the
contingent consideration should be included in the cost of the
acquisition.
 For disposals: confirm the sale proceeds, and the calculation of the
gain or loss on sale.
 Check that the correct accounting treatments of items are applied
in the consolidated income statement/statement of
comprehensive income and the consolidated. For example, when
a subsidiary has been acquired during the year, check that the
calculation of pre-acquisition and post-acquisition profit is
correct.
Consolidation  Reconcile the inter-company transactions and balances (or review
adjustments* the reconciliation of the inter-company transactions and balances
that has been made by the client’s staff).
 Confirm the inter-company balances.
 Check calculations of the adjustments for unrealised profit.
 Check the calculations and disclosure of non-controlling interests.
 Check the accounting treatment of inter-company dividends and
other dividends.
Misc Areas – Joint Audits Page 465

Topic Audit procedures

Loss-making  Consider whether any goodwill on acquisition has suffered an
investments impairment.
 Consider whether a write down of the investment in the books of
the parent company is needed.
 If a subsidiary makes losses consistently, its going concern status
may be in question.
 However, the group may take a formal decision to provide
financial support to the subsidiary. This decision, in effect, would
protect the going concern status of the subsidiary, even if it is
making losses. In such a situation, the group auditor will normally
request a ‘comfort letter’ (or ‘support letter’) to this effect from
the directors of the parent company.
Related parties  Ensure the provisions of IAS 24 are complied with.
 (Most components of the group will be ‘related’ to most other
components.)
 Sometimes, one component or the parent may have provided
financial support to, or letters of guarantee on behalf of, other
components to bank or financial instituions. These need to be
considered for disclosure.
Reporting  Reach a conclusion about whether the group financial statements
present a true and fair view. (The principles relating to group
audit reports are dealt with in a later chapter.)

*(Note: Consolidation adjustments are adjustments that are made after the financial statements
of the individual group companies have been prepared. The adjustments are needed to
consolidate the financial statements of the individual companies into a single set of group
financial statements. Consolidation adjustments may therefore include adjustments to the
financial statements of individual group companies, to achieve consistency of accounting
policies. There are also adjustments for inter-group balances and closing inventory from intra-
group sales, for goodwill impairment, and so on.)

Subsequent events

The subsequent events review will need to include procedures to identify events at components
that occur between the dates of the components’ financial information and the date of the group
audit report. These procedures could be carried out by the group auditor or by component
auditors.
Misc Areas – Joint Audits Page 466

DOCUMENTATION AND COMMUNICATION WITH MANAGEMENT AND

THOSE CHARGED WITH GOVERNANCE

Documentation

In addition to meeting the requirements of ISA 230 Audit documentation the group auditor
must also document the following matters.
 An analysis of components, identifying significant components.
 The type of work performed on the financial information of components.
 The extent of the group auditor’s involvement in the work performed by component auditors
on significant components.
 Written communications between the group auditor and component auditors concerning
the group auditor’s requirements.

Communication with group management

The group auditor should make group management aware, on a timely basis, of the following
matters.
 Material weaknesses in the design or operating efficiency of group-wide controls.
 Material weaknesses which are significant to the group that the group auditor has identified
at components.
 Material weaknesses which are significant to the group that component auditors have
identified at components and have brought to the attention of the group auditor.
 Any fraud or suspected fraud identified by the group or component auditors.
 The distinction between management and “those charged with governance” (see below),
who could in fact be the same, is covered in a later chapter.

Communication with those charged with governance of the group

In addition to the matters required to be communicated within ISA 260 Communication with
those charged with governance, ISA 600 requires the group auditor to communicate the
following matters to those charged with the governance of the group:
 The type of work to be performed on the financial information of components.
 The group auditor’s planned involvement in the work to be performed by component
auditors.
 Any concerns over the quality of any component auditor’s work.
 Any limitations on the group audit (e.g. a lack of access to information).
 Any fraud or suspected fraud involving group management, component management, or
employees with significant roles in group-wide controls where the fraud resulted in a
material misstatement of the group financial statements.
467

ANNEXURES
How to Attempt the Papers (The Final Day) Page 468

HOW TO ATTEMPT THE PAPER (A SUGGESTION – NOT A RECOMMENDATION ))

Before the Paper

 Take proper sleep in the last night

 Have a good breakfast
 Reach ICAP Exam Centre at least 20 to 25 minutes before exam
 Get seated well before time
 Have a glass of water before start of reading time

During Reading Time

 Skim the paper quickly to get an idea of total questions and relevant topics
 Then see the questions in detail and underline the requirements
 Plan your paper sequence and timelines
 Select your first, second, third and so on choices
 Mark the relevant number at left of Question with lead pencil
 Mention estimated starting and ending time with lead pencil (including hard upper cap)
 Don’t multiply every question with 1.8
 Well known and good marks giving questions can be given 2 to 2.5 min per mark
 Average questions can be given 1.8 min per mark
 Below average questions can be given 1 min per mark

Time Management During the Paper

1st Hour (App 25% to 30%)

 Search for Code of Ethics Question for your very first question
 Then go for any other OPEN BOOK supported question(s)

2nd Hour (App 30% to 35%)

 ISA 705/706 Pattern Question

 Other Standards Question (ISRE, ISRS, ISAE)
 Question requiring research

3rd Hour (App 35% to 40%)

 Risk Assessment Question (App 30 to 35 minutes)

 Any difficult question
 Any remaining / unidentified question
Important Paras Page 469

IMPORTANT PARAS OF ISAS, ISRES, ISQM & ISRS

SOME IMPORTANT PARAGRAPHS

INTERNATIONAL STANDARDS ON AUDITING (ISA)

ISA- 14-24, A2, A18, A23, A43, A45, A49, A51
200
ISA- 6, 10,17,18-21,A4, A8, A23, A24, A25, A28, A33,
210
ISA- 11,15-20, 24, A2, A11, A13, A15, A17, A28
220
ISA- 8, 9, 13, 16, A2, A3, A7, A8, A12, A22
230
ISA- 15, 17, 20, 24, 29, 32, 38, 39 ,41, A3, A4, A5, A10, A11, A36, A37, A43, A48,
240 A54, A64
ISA- 13, 15, 19, 23, 29, A2, A6, A11, A15, A18, A19, A24, A26, A28
250
ISA- 14, 16, 17, A1, A5, A7, A9, A13, A14, A21, A22, A24, A38, A43, A47, A53
260
ISA- 10, 11, A2, A6, A7, A15, A29
265
ISA- 6, 8, 9, 12, A9, A8, A12, A14, A20
300
ISA- 6, 11, 14, 15, 18, 28, 32, A7, A9, A18, A19, A21, A24, A26, A30, A31, A35, A39,
315 A45, A61, A62, A63, A64, A77, A89, A104, A133
ISA- 10, 14, A3, A10, A12
320
ISA- 7, 8, 10,13, 14, 17, 20, 22, 28, A1, A22, A28, A33, A38, A48, A51, A56, A57,
330 A60, A62
ISA- 8b, 8c, 8d,8h, 8i, 9, 12, 14, 16, 17, A4, A8, A15, A22, A23, A26, A41, A42
402
ISA- 6,11,15, A1, A3, A16
450
ISA- 8, 11, A14-A25, A31, A36, A38, A40, A45, A46, A48, A53, A54
500
ISA- 4, 8 , 9 ,11 ,13, A3, A4, A11, A12, A16, A23, A24, A27
501
ISA- 7, 8, 13, 15, A4, A8, A11, A13, A18, A20
505
Important Paras Page 470

ISA- 6, 7, 8, 12, 13, A3, A6, A8

510
ISA- 5,7, A1, A12, A15
520
ISA- 5C, 5I, 5J, A3, A12, A23, APPENDIX 1, APPENDIX 4
530
ISA- 13, 16, 18, 23-27, 29, 33, 36, A1, A5, A25, A26, A29, A33, A39-A40, A43, A48,
540 A49,A52,A55,A61,A72,A86,A94,A97,A105,A110,A118,A121,A128,A134,A145
ISA- 13,14, 15, 22, 23, 25, 26, A5, A9, A17, A18, A22, A23, A36, A38, A50
550
ISA- 7, 10 -15, A8, A9, A12, A18
560
ISA- 5, 10, 13, 16, 18, 22, 23, 25, 26, A3, A14, A16, A35
570
ISA- 10, 11, 16, 19, 20, A8, A10, A12, A27
580
ISA- 12, 13, 17, 19, 21, 26-29, 40,41, 46,49,50, A11, A12, A20, A26, A27, A29, A33,
600 A35, A51, A55
ISA- 15,16, 18, 23,24,28-30,33, 34, 36, 37, A1, A7, A8, A11, A16, A24, A25, A32
610
ISA- 8, 11, 12, 14, 15, A4, A7-A10, A13, A15, A20, A24, A33, A34
620
ISA- 13, 24, 28, 34, 38, 39, 41, A4, A6, A44, A73, A74, A79, A83
700
ISA- 11-18, A7, A12, A29, A41, A45, A46, A54, A58
701
ISA- 6-28, A1, A3, A4, A6, A7, A11, A16, A27
705
ISA- 8-12, A5, A7, A16
706
ISA- 7, 11, 13, 14, 17, A1, A3, A8, A11
710
ISA- 13, 14, 16, 17-19, 21, 24 , A5, A13, A30, A31, A35, A38, A43, A51
720
ISA- 8, 13, A1, A6, A8, A14, A15
800
ISA- 8, 12-17, A8, A9, A15, A17
805
ISA- 6, 8, 9, 10, 14, 17, 19, 23, 26, A4, A6, A8
810
Important Paras Page 471

INTERNATIONAL STANDARDS ON REVIEW ENGAGEMENTS (ISRE)

ISRE- 48
2400
ISRE- 3,4,15,17,21, ALL APPENDICES
2410

INTERNATIONAL STANDARDS ON RELATED SERVICES (ISRS)

ISRS- 1, 18
4400
ISRS- 1, 5, 6, 17, 24, 29-40
4410

For the purpose of clarity, it is important to note that all the paragraphs given
in any standard are important for developing the complete understanding of
the entire text.
Examiner may ask any question relating to any paragraph
Tutor’s (whether considered important or not by the student)
Note
