Tutorial letter 105

Evaluating, Concluding and

Reporting
Presented by:

Mr. Collen Thabo Matsimela CA (SA)

Senior Lecturer: AUE4861/2
[email protected]
+27(0) 12 429 4368
 Agenda

• Subsequent events
• Going concern
• Misstatements
• Audit opinions and reports
• Reporting on other engagements
 Review engagements
 Agreed upon procedures
 Compilation engagements
 Subsequent Events

ISA 560
Deals with the auditors responsibility relating to
subsequent events in an audit of financial
statements
 Subsequent Events

• The financial statements may be affected by

certain events that occur after the date of the
financial statements

• These events include:

Adjusting events (Conditions existing at year-end)
Non-adjusting events (Conditions arising after year-end)
 Subsequent Events

The auditor gives an opinion on the fair presentation of the

annual financial statements (AFS),
i.e. Whether the AFS are free from material misstatement or
not

Thus where Subsequent events exist, adjustment or

disclosure is required in the AFS otherwise it will lead to the
AFS containing misstatement which could affect the audit
opinion.
 Subsequent Events

The objectives of the auditor are:

1. To obtain audit evidence about whether events
that require adjustment of or disclosure in the
AFS are appropriately reflected in those AFS
2. Respond to facts which become known to the
auditor after the date of the auditors report
(Refer to Para 4 of ISA 560)
 Subsequent Events
Year-End Date AFS Approval Auditor Report Date AFS Issue Date
Date
30 June 2016 1 July 2016 10 July 2016 1 August 2016

Refer to the Refer to the The auditor is expected to gather The auditor has no
definition in definition in audit evidence up to the date of obligation to perform
paragraph 5. paragraph 5. the audit report therefore the audit procedures
auditor has an obligation to
perform audit procedures. (Para
6-9)
Co. act However if situations arise after However if situations
Sec 27 the report date but before the arise after the AFS are
Financial year- AFS are issued, the audit may be issued, the auditor may
end of required to perform additional have to ensure that
companies procedures. reliance is not placed on
(Para 10-13) the report (Para 14-17)
 Subsequent Events
Events occurring between the date of the
financial statements and the date of the
auditors report (Para 6-9)
• Auditor has an obligation to perform audit
procedures
• If as a result of the procedures performed the
auditor identifies subsequent events, the auditor
shall determine whether such events is
appropriately reflected in those AFS
 Subsequent Events
Facts which become known to the auditor after the
date of the auditors report but before the date the
AFS are issued (Para 10-13)
• No obligation to perform any audit procedures
• If client amends AFS, perform procedures on
amendments and issue a new report
Remember to consider the circumstances in Para 12
and 13
 Subsequent Events
Definitions: (Para 5 of ISA560)
• Date of financial statements: Date of the end of the latest
period covered by the AFS
• Date of auditor report: Date the auditor dates the report
on the AFS
• Subsequent Events: Events occurring between the date of
the financial statements and the date of the auditors
report, and facts that become known to the auditor after
the date of the auditors report
 Subsequent Events
Facts which become known to the auditor after the AFS have been
issued (Para 14-17)

• No obligation to perform audit procedures

• However, if client amends AFS, perform procedures on
amendments and issue a new report
• Inform those who wish to rely on the audit report of the situation.
• Refer to SAAPS 3 page 34 for an illustration of an audit report that is
amended due to the AFS being amended after the initial issue
thereof.
 Subsequent Events
• ISA 560: Provides the guidelines for the auditors
responsibility regarding subsequent events which includes
the procedures the auditor can perform to identify such
events. If any such events are identified, the auditor will
determine if management has made the necessary changes
in accordance with IAS10

• IAS 10: Provides the accounting rules should subsequent

events be identified. Management should make the
changes to the AFS as necessary whilst the auditor should
ensure that these changes comply with the IAS and that the
AFS are fairly presented
 Subsequent Events
http://www.sasol.co.za/sites/default/files/publications/integrated_reports/downloads/Sasol%20AFS%20-%20website.pdf
[Accessed 23 March 2016, at 10h45 am]
 Subsequent Events
• The audit report was included to highlight dates
which are of importance
• Year-end date: 30 June 2015
• Audit report date: 4 September 2015

The audit report is dated for 2 months after year-

end, This implies that the auditor has considered
and gathered audit evidence for subsequent events
up to this date before issuing the audit opinion.
 Subsequent Events

Exam Technique
• State that the issue is an adjusting event (or non-
adjusting, whichever is relevant).
• State why it is an adjusting event
• Discuss all the relevant information in the scenario
in terms of what was done correctly or not.
 Going Concern

ISA 570 (Revised)

Deals with the auditors responsibility on the
audit relating to managements use of the
going concern assumption in the preparation
of the financial statements
 Going Concern

Going Concern Assumption: An entity is viewed as

continuing in business for the foreseeable future.

General purpose financial statements are prepared on a

going concern basis.

Assets and liabilities are recorded on the basis that the

entity will be able to realize its assets and discharge its
liabilities in the normal course of business.
(Para 2)
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 Going Concern

Managements responsibility:
IAS 1 requires management to make an
assessment of an entity’s ability to continue as a
going concern (Para 3)

The assessment involves making a judgement, at

a particular point in time about inherently uncertain
future outcomes of events or conditions (Para 5)

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 Going Concern

The objectives of the auditor are (para .9):

1. To obtain audit evidence regarding the
appropriateness of managements use of the
going concern assumption in preparing the AFS
2. To conclude whether a material uncertainty
exists that may cast doubt on the entity’s ability
to continue as a going concern.
3. To determine the implications for the audit report,
i.e. to report in accordance with ISA 570 (R).
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 Going Concern
Planning Phase:
• Perform risk assessment procedures and consider
whether there are events or conditions that may cast
doubt on the entity’s ability to continue as a going concern
• Determine if management already performed a
preliminary assessment of the entity's ability to continue
as a going concern
• Remain alert throughout the audit for evidence of events
or conditions that may cast doubt on the entity’s ability
to continue as a going concern

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 Going Concern Indicators

Events or conditions that may cast doubt on the

entity’s ability to continue as a going concern
(Para A3)
• Financial events or conditions
• Operating events or conditions
• Other events or conditions

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 Going Concern

Audit procedures when events or conditions

are identified:
• The auditor must obtain evidence to determine
whether or nor a material uncertainty exists
• Including considering mitigating factors

Para 16 and A16

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 Going Concern

Audit Conclusions and reporting:

The auditor will use his judgement and evidence

obtained to conclude whether a material
uncertainty exists relating to events or
conditions that individually or collectively
may cast doubt on the entity’s ability to continue
as a going concern. (Para 17)

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 Going Concern

Going concern assumption appropriate but a material

uncertainty exists
The auditor shall determine whether the AFS:
• Adequately describe the event that may cast doubt on
the entity’s ability to continue as a going concern and
managements plans to deal with these events

• Disclose clearly that a material uncertainty exists and

therefore the entity may be unable to realize its assets or
discharge its liabilities in the normal course of business

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 Going Concern
Going concern assumption appropriate but a material
uncertainty exists:
• If adequate disclosure is made the auditor shall express an
unmodified opinion including an emphasis of matter paragraph
(Para 19)
• Include a separate section with the heading “Material Uncertainty
Related to Going Concern”.
• Key Audit Matters section: include reference to the “Basis for
Opinion” para where the matter is stated.
• If adequate disclosure is not made, the auditor shall express a
qualified or adverse opinion. (ISA 570 (revised) par 23 and par A.32: illustrative
example 2)

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 Going Concern

Use of going concern assumption

inappropriate:

If the AFS are prepared on the going concern

basis, but in the auditors judgement this basis is
inappropriate, the auditor shall express an
adverse opinion (ISA 570 (revised) Par 21)

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 Going Concern

Management unwilling to make or extend its

assessment
The auditor shall consider the implications for
the audit report

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 Going Concern

Communication with TCWG

The auditor shall communicate with TCWG events or
conditions that may cast doubt on the entity’s ability to
continue as a going concern.

The communication shall include:

• If events or conditions constitute a material uncertainty
• If the use of the going concern assumption is appropriate
in preparation of the AFS
• The adequacy of related disclosures in the AFS
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 Going Concern

Factual Insolvency Commercial Insolvency

• Liabilities > Assets fairly valued (S4 • Cannot pay debts even if
Co.act)
assets > liabilities (S4 Co.act)
• An indicator but does not necessarily
mean a going concern problems exists • Stronger indicator for likely
going concern problems
• If trading under these conditions:
 Possible reckless trading (S22 of Co.
Act) and S76;77 directors) • The company’s working
 Possible RI (S45 of the APA) capital cycle is impaired thus
affecting its ability to trade
• Can be mitigated by a subordination
agreement

30
 Going Concern

SAAPS 3
• Provides illustrative examples of audit reports
modified by going concern issues (Page 34-
38)

• Provides a decision tree for linking going

concern considerations with types of audit
opinions (Page34-36): See TL105

31
 Going Concern
Exam Technique:
• You may be required to evaluate whether the
use of the going concern assumption is
appropriate. (You discuss both the applicable
indicators as per ISA 570 (revised) and
mitigating factors, and conclude)

• Concerns regarding the going concern principle.

(You discuss just the indicators.)

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 Going Concern
Exam Technique:

• Further audit procedures when there is a material uncertainty

relating to events or conditions that may cast significant doubt
on the entity’s ability to continue as a going concern. (You
base your procedures on the information in the scenario and
make the procedures per ISA 570 (revised) applicable.)

• Explain the impact on the auditor’s report, when a company is

not a going concern. (To answer this you would use the
decision tree in SAAPs 3 page 34-36.)

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 Misstatements

ISA 450

Deals with the auditor responsibility to evaluate

the effect of identified misstatements on the
audit and of uncorrected misstatements if any
on the financial statements

34
 Misstatements

The objective of the auditor is to evaluate:

• The effect of identified misstatements on the

audit; and
• The effect of uncorrected misstatements, if
any, on the financial statements
(Para 3)

35
 Misstatements

Definitions: (Para 4)
• Misstatement: A difference between a reported
financial statement item and an item to be in
accordance with the applicable financial reporting
framework. A misstatement arises from error or
fraud

• Uncorrected Misstatement: Misstatements that the

auditor accumulates during an audit that is not
corrected
36
 Misstatements

Accumulation of Identified misstatements:

The auditor shall accumulate misstatements
identified during the audit, other than those that
are clearly trivial.(Para 5)
The auditor may determine an amount below
which misstatements would be clearly trivial and
if accumulated would still not have a material
effect on the financial statements (Para A2)

37
 Misstatements

Consideration of identified misstatements as the

audit progresses: (Para 6-7)
• Determine if the audit strategy and plan needs to be revised
 The nature and circumstance of misstatements indicate that
other misstatements may exist
 The aggregate of misstatements approaches materiality

• If management examines an account and corrects

misstatements on the auditors request, the auditor must still
perform additional procedures to determine whether
misstatements remain.

38
 Misstatements

Communication and correction of misstatements

(Para 8-9)
• The auditor shall communicate all misstatements
accumulated and request management to correct
those misstatements

• If management refuse to correct the auditor shall:

 Understand managements reason for not correcting
 Evaluate if the AFS are free from material mistatement

39
 Misstatements

Evaluating the effect of uncorrected Misstatements:

• First reassess materiality to confirm if it remains
appropriate
• Then auditor determines if uncorrected misstatements
are material, individually or in aggregate. The auditor
shall consider:
 The size and nature of the misstatement
 Effect of uncorrected misstatements relating to prior
periods

40
 Misstatements

Communication with TCWG: (Para 12-13)

• Auditor shall communicate with TCWG uncorrected
misstatements and the effect that they, individually
or in aggregate have on the opinion in the auditors
report. (Including those of prior periods)
• The auditor shall communicate each material
uncorrected misstatement individually
• The auditor shall request that uncorrected
misstatements be corrected

41
 Misstatements

Documentation: (Para 15)

The auditor shall include in the audit documentation:
• Amounts below which misstatements are regarded
as clearly trivial
• All misstatements accumulated on the audit and if
corrected
• If uncorrected misstatements are material,
individually or in aggregate and the basis for that
conclusion
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 Misstatements

Types of questions that may be asked

• Discuss the effect of the misstatements
identified on the financial statements.
• Discuss the effect of the misstatements
identified on the audit opinion / report

43
 Misstatements

Exam Technique:
• When answering a question on misstatements,
always determine if a materiality figure is given, if
not calculate this figure.
• A misstatement can be either quantitative
(Amounts) or qualitative (nature) and should be
considered individually or in aggregate
• Remember that we are concerned with the net
effect of differences on the AFS.
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 Framework for answering a misstatement question

Evaluation of misstatements identified during the audit (ISA 450)

Consider

Materiality Impact on the Impact on audit

Impact on AFS
audit report

Further audit procedures Refer to slide on

Nature
Nature Amount
Amount Adjust AFS AR

Note: Misstatements should be evaluated in isolation and

Factual, Judgemental and in aggregate
Projected misstatement (ISA
450, A3)

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 Audit Reports and Opinions

In terms of ISA 200, the overall objectives of

the auditor are to:
• Obtain reasonable assurance about whether
the AFS are free from material
misstatement, thereby enabling the auditor to
express an opinion; and
• To report on the AFS in accordance with the
auditors findings

46
 New and Revised Audit Report
• IRBA Board has approved for adoption, issue and prescription by Registered
Auditors in South Africa the following IAASB pronouncements:

• ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements;

• ISA 701, Communicating Key Audit Matters in the Independent Auditor's Report;
• ISA 705 (Revised), 
Modifications to the Opinion in the Independent Auditor's Report;
• ISA 706 (Revised), 
Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent
Auditor's Report
;
• ISA 570 (Revised), Going Concern;
• ISA 260 (Revised), Communication with Those Charged with Governance; and
• Related Conforming Amendments to other ISAs.
 New and Revised Audit Report

• Significant changes between the old Audit

Report and the New and Revised Audit
Report:
– New requirement for listed entities to include
the name of the engagement partner in the
auditor's report 
– Ability to include the auditor's responsibility
paragraph on the website of an appropriate
authority 
 Key Audit Matters
ISA 701 (new)
• Those matters that, in the auditor’s professional judgement, were of most
significance in the audit of financial statements of the current period.
• The auditor shall take the following into account when determining
which matters are key audit matters:
– Matters which required significant auditor attention in performing the audit.
– Areas of higher assessed risk of material misstatement or significant risks identified.
– Matters which required significant auditor judgement that also involved significant management
judgement, including accounting estimates.
– 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.
– Based on the auditor’s judgement about which matters were of most significance in the audit.
– Matters that pose challenge to the auditor in obtaining sufficient appropriate audit evidence.
– Areas of complexity and significant management judgement (accounting estimates) may need to
involve experts.

NOTE: Significant risks are often areas that require significant auditor attention.
 Audit Opinions and Reports

ISA 700 (revised)

• Deals with the auditors responsibility to form an
opinion on the AFS including the form and content of
the auditors report

• This ISA promotes consistency in the auditors report

• Deals with an unmodified (Unqualified) opinion (i.e.

The AFS are fairly presented in all material respects)

50
 Audit Opinions and Reports

ISA 700 (revised)

• Refer to the appendix within the ISA for
examples of an auditor report

• NB: Only Give the opinion paragraph, not

expected to write out the entire audit report.

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 Audit Opinions and Reports

ISA705 (revised)
• Deals with the auditors responsibility to issue
an appropriate report where the auditor
concludes that a modification to the opinion is
necessary
• This ISA establishes 3 types of modified
opinions, namely “Qualified” “Adverse” and
“Disclaimer” of opinion.

52
 Audit Opinions and Reports

ISA 705 (revised)

Qualified Audit Opinion
• Auditor concludes that misstatements, individually or in
aggregate are material but not pervasive
• NB: Obtained – material; not pervasive
• NB: Unable to obtain – material; not pervasive

• Except for the matters described in the basis for

qualified opinion paragraph, the financial statements are
fairly presented
53
 Audit Opinions and Reports

ISA 705 (revised)

Qualified Audit Opinion
• Refer to the appendix, specifically illustration 1
and 3 for an example of a qualified audit opinion
• Take note that an additional paragraph has been
included “ Basis for qualified opinion” before the
opinion paragraph which results in the
modification to the standard audit report as seen
in ISA 700
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 Audit Opinions and Reports

ISA 705 (revised)

Adverse Audit Opinion
• The auditor concludes that misstatements,
individually or in aggregate are both material
and pervasive.
• NB: Obtained – material; pervasive
• Thus the auditor concludes that the AFS as a
whole are not fairly presented (Remember
that the misstatements are pervasive)
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 Audit Opinions and Reports

ISA 705 (revised)

Adverse Audit Opinion
• Refer to the appendix, specifically illustration 2
for an example of an adverse audit opinion
• Again take note that an additional paragraph
has been included “ Basis for Adverse opinion”
before the opinion paragraph which results in
the modification to the standard audit report

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 Audit Opinions and Reports

ISA 705 (revised)

Disclaimer Audit Opinion
• The auditor shall disclaim an opinion when the auditor is
unable to obtain audit evidence or where multiple
uncertainties exist it is not possible to form an opinion.
• NB: Misstatements are both material and pervasive.

• NB: Unable to obtain – material; pervasive

• A disclaimer ultimately means that the auditor expresses no

opinion on the financial statements

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 Audit Opinions and Reports

ISA 705 (revised)

Disclaimer Audit Opinion
• Refer to the appendix, specifically illustration 4
and 5 for an example of a disclaimer audit opinion
• Again take note that an additional paragraph has
been included “ Basis for Disclaimer opinion”
before the opinion paragraph which results in the
modification to the standard audit report

58
 Audit Opinions and Reports

ISA 706 (revised)

• Deals with additional communication in the
auditors report when the auditor considers it
necessary such as:
 Emphasis of matter paragraph
 Other matters paragraph
• This ISA deals with a modification to the
auditors report but not a modification to the
auditors opinion as in ISA 705
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 Audit Opinions and Reports

ISA 706 (revised)

Emphasis of matter paragraph:
• Is included below the opinion paragraph
• Used to draw users attention to a matter
disclosed or presented in the AFS that in
the auditors judgement is fundamental to a
users understanding.
• Only emphasises information disclosed in the
AFS.
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 Audit Opinions and Reports

ISA 706 (revised)

Emphasis of matter paragraph
• Must indicate that the audit opinion is not
modified in respect of the matter emphasized
• Refer to appendix 3 for an example of an audit
report with an emphasis of matter paragraph
included

61
 Audit Opinions and Reports

ISA 706 (revised)

Other matter paragraph:
• Is included below the opinion and emphasis of
matter paragraph if included

• It emphasizes information not required to be

disclosed in the AFS, but in the auditors
judgement is relevant to a users understanding
of the audit
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 Audit Opinions and Reports

ISA 706 (revised)

Other matter paragraph:
• Normally disclose a reportable irregularity if
reported to IRBA under this paragraph.

63
 Financial statements fairly presented
in all material respect
Yes
No

Unmodified
Modified audit opinion Audit
Opinion
Misstatement material but NOT Misstatement material
pervasive AND pervasive

Disagreement with Limitation of Disagreement with Limitation of

Management Scope Management Scope
(Obtained) (Unable to obtain) (Obtained) (Unable to obtain)

Qualified audit opinion Adverse opinion Disclaimer of opinion

64
 Reporting on other engagements

• An auditor is often requested to report on

other types of engagements, however this
discussion will be limited to the following
engagements:
• Review Engagements (ISRE2400 and ISRE
2410)
• Agreed upon procedure engagements
• Compilation

65
 Reporting on other engagements

Review Engagements:
• Deals with the practitioners responsibilities
when engaged to perform a review of historical
financial statements when the practitioner is
not the auditor.
• The practitioners objective in a review is to
obtain limited assurance about whether the
AFS as a whole is free from material
misstatement.
66
 Reporting on other engagements

Review Engagements:
• The auditor primarily performs inquiry and
analytical procedures to obtain audit
evidence
• Limited assurance is expressed as follows:
“ Nothing has come to our attention that
causes us to believe that the financial
statements are not fairly presented”

67
 Reporting on other engagements
Review Engagements:
• The auditor provides limited assurance as opposed to
reasonable assurance.

• We provide limited assurance because we perform limited

procedures

• Remember that the companies act requires some companies to be

independently reviewed which will be done in accordance with this
ISA

• Refer to ISRE 2400, Appendix 2 for examples of a review report

68
 Reporting on other engagements

Limited assurance Reasonable assurance (ISA 700)

• Procedures are limited • Procedures are not Limited
• Assurance expressed as a • Assurance expressed as a
negative “ Nothing came positive” In our opinion”
to our attention” • Engaged to audit the AFS
• Engaged to review the AFS

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 Reporting on other engagements

Agreed upon procedures ISRS 4400

The objective of an agreed-upon procedures
engagement is for the auditor to carry out
procedures of an audit nature to which the
auditor and the entity and any appropriate
third parties have agreed and to report on
factual findings

70
 Reporting on other engagements

Agreed upon procedures:

• The auditor provides a factual findings
report

• No assurance is expressed

• Thus users must assess the report

themselves and draw their own conclusions
from the auditors work
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 Reporting on other engagements

Agreed upon procedures:

• The report is restricted only to those parties
that have agreed to the procedures.
• The agreed upon procedures that the auditor
performs may include any of the procedures as
discussed in ISA 500
• The auditors right of access to information is
limited in order to fulfill the engagement
requirements.
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 Reporting on other engagements

Agreed upon procedures

• Where additional procedures are required, this
must first be agreed upon by all parties.
• Refer to ISRS 4400 Appendix 2 for an
example of a factual findings report

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 Compilation Engagement

ISRS 4410
Deals with the practitioners responsibilities when
engaged to assist management with the preparation
and presentation of historical financial information
without obtaining any assurance on that information

Management retains responsibility for the financial

information and the basis on which it is prepared
and presented

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 Compilation Engagement

• No testing is conducted and no assurance is

given in the report
• Ordinarily includes the preparation of financial
statements
• May also include the collection, classification
and summarization of other financial information
• Refer to ISRS 4410 appendix 2 for an example
of a compilation report.

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