international standards on auditing reports october 10, 2009 pab/icaj joint seminar kpmg in jamaica...

International Standards on AuditingREPORTS

October 10, 2009

PAB/ICAJ JOINT SEMINAR

KPMG in Jamaica

Rochelle Minto

Senior Manager, Audit

KPMG in Jamaica

Rochelle Minto

Senior Manager, Audit

KPMG in Jamaica

© 2009 KPMG, a Jamaican partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Jamaica. KPMG and the KPMG logo are registered trademarks of KPMG

International, a Swiss cooperative.



Course Outline (1)

•Types of engagements and reports

– International Standards on Review Engagements (ISRE 2400 & 2410)

– Assurance engagements other than audits or reviews of historical financial information (ISAE 3000)

– The Auditor's Report on Special Purpose Audit Engagements (ISA 800)

– Engagements to Perform Agreed-upon Procedures Regarding Financial Information (ISRS 4400)

– Engagements to compile financial information (ISRS 4410)

– Audit engagement (ISA 700)

• Content of the Independent Auditor’s Report

• Dating of audit reports





Course Outline (2)

• ISA 701 Modification to the auditor’s report

– Matters that do not affect the audit opinion

– Matters that affect the audit opinion

• Representation letter: ISA 580 Management Representations

• Questions and answers


International, a Swiss cooperative.4

Types of Engagements and Reports





Types of Engagements & Reports

• Review engagements (ISRE 2400 & 2410)

• Assurance engagements (ISAE 3000)

• Special Purpose Audit engagements (ISA 800)

• Agreed-upon procedures regarding Financial Information (ISRS 4400)

• Compilation of financial information (ISRS 4410)

• Audit engagements (ISA 700)





International Standards on Review Engagements 2400: Engagements to review Financial Statements

• Requires a Practitioner to state whether anything has come to the Practitioner's attention that causes the Practitioner to believe that the financial statements are not prepared, in all material respects. The procedures do not provide all the evidence that would be required in an audit.

• The review report should contain a clear written expression of negative assurance. The Practitioner should review and assess the conclusions drawn from the evidence obtained as the basis for the expression of negative assurance.





ISRE 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity Conforming Amendments

• Requires 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.

• A review, in contrast to an audit, is not designed to obtain reasonable assurance that the interim financial information is free from material misstatement. A review consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. It does not provide all of the evidence that would be required in an audit.





ISAE 3000 - Assurance engagements other than audits or reviews of historical financial information

• This ISAE uses the terms ‘reasonable assurance engagement’ and ‘limited assurance engagement’ to distinguish between the two types of assurance engagement a practitioner is permitted to perform.

• The objective of a reasonable assurance engagement is a reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement as the basis for a positive form of expression of the practitioner's conclusion.

• The objective of a limited assurance engagement is a reduction in assurance 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 a negative form of expression of the practitioner's conclusion.





ISAE 3000 – Conclusion expressed in the positive versus negative form

• In a reasonable assurance engagement, the conclusion should be expressed in the positive form: for example: "In our opinion internal control is effective, in all material respects, based on XYZ criteria" or "In our opinion the responsible party's assertion that internal control is effective, in all material respects, based on XYZ criteria, is fairly stated."

• In a limited assurance engagement, the conclusion should be expressed in the negative form: for example: "Based on our work described in this report, nothing has come to our attention that causes us to believe that internal control is not effective, in all material respects, based on XYZ criteria" or "Based on our work described in this report, nothing has come to our attention that causes us to believe that the responsible party's assertion that internal control is effective, in all material respects, based on XYZ criteria, is not fairly stated."





ISRS 4400 - Engagements to Perform Agreed-upon Procedures Regarding Financial Information

• 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.

• Users of the report assess for themselves the procedures and findings reported by the auditor and draw their own conclusions from the auditor's work.





ISRS 4410 - Engagements to compile financial information

• The objective of a compilation engagement is for the accountant to use accounting expertise, as opposed to auditing expertise, to collect, classify and summarize financial information.

This ordinarily entails reducing detailed data to a manageable and understandable form without a requirement to test the assertions underlying that information. The procedures employed are not designed and do not enable the accountant to express any assurance on the financial information.

The financial information compiled by the accountant should contain a reference such as "Unaudited," "Compiled without Audit or Review" or "Refer to Compilation Report" on each page





QUIZ (1)

• The financial information should include the reference “Unaudited” when the following engagement is performed:

(a) agreed-upon procedures

(b) assurance engagements

(c) review engagements

(d) compilation engagement





QUIZ (2)

• This engagement provides a report on factual findings:

(a) review engagement

(b) compilation

(c) agreed upon procedures

(d) assurance engagement



ISA 700: The Independent Auditor’s Report





Content of Audit Reports

• Title

• Addressee

• Introductory paragraph

• Management's responsibility for the financial statements

• Auditor's responsibility

• Auditor's opinion

• Other reporting responsibilities

• Auditor's signature

• Date of the auditor's report

• Auditor's address





What should be included in the Audit Report?

• Title

Clearly indicates that it is the report of an independent auditor

• Addressee

Those for whom the report is prepared

• Introductory paragraphState the entity whose financial statements have been audited and should state that the financial statements have been audited. The introductory paragraph should also:

(a) Identify the title of each of the financial statements that comprise the complete set of financial statements;

(b) Refer to the summary of significant accounting policies and other explanatory notes; and

(c) Specify the date and period covered by the financial statements.



What should be included in the Auditor’s report?Management & Auditor responsibilities

Management responsibility

• For the preparation and the fair presentation of the financial statements in accordance with the applicable financial reporting framework and that this responsibility includes:

• (a) Designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error;

• (b) Selecting and applying appropriate accounting policies; and

• (c) Making accounting estimates that are reasonable in the circumstances.

Auditor responsibility

• To express an opinion on the financial statements based on the audit

• The auditor's report should state that the audit was conducted in accordance with International Standards on Auditing. The auditor's report should also explain that those standards require that the auditor comply with ethical requirements and that the auditor plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.





What should be included in the Auditor’s report? Auditor’s responsibilities (2)

The auditor's report should describe an audit by stating that:

• 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. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation 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.





What should be included in the Auditor’s report? Auditor’s responsibilities (3)

• In circumstances when the auditor also has a responsibility to express an opinion on the effectiveness of internal control in conjunction with the audit of the financial statements, the auditor should omit the phrase that the auditor's consideration of internal control is not for the purpose of expressing an opinion on the effectiveness of internal control; and

• An audit also includes evaluating the appropriateness of the accounting policies used, the reasonableness of accounting estimates made by management, as well as the overall presentation of the financial statements.

• The auditor's report should state that the auditor believes that the audit evidence the auditor has obtained is sufficient and appropriate to provide a basis for the auditor's opinion.





What should be included in the Auditor’s report? Audit opinion

• An unqualified opinion should be expressed when the auditor concludes that the financial statements give a true and fair view or are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

• When expressing an unqualified opinion, the opinion paragraph of the auditor's report should state the auditor's opinion that the financial statements give a true and fair view or present fairly, in all material respects, in accordance with the applicable financial reporting framework.

• When International Financial Reporting Standards or International Public Sector Accounting Standards are not used as the financial reporting framework, the reference to the financial reporting framework in the wording of the opinion should identify the jurisdiction or country of origin of the financial reporting framework





What should be included in the Auditor’s report?

• Other reporting responsibilities

When the auditor addresses other reporting responsibilities within the auditor's report on the financial statements, these other reporting responsibilities should be addressed in a separate section in the auditor's report that follows the opinion paragraph

• Auditor's signature

Either the name of the audit firm, the personal name of the auditor or both

• Auditor's address

The report should name the location in the country or jurisdiction where the auditor practices.





Quiz (1)

• Which of the following is not included in the Auditor’s report”

(a) Title

(b) Management responsibilities

(c) Addressee

(d) Management representations

(e) Introductory paragraph





Quiz (2)

• To whom may the audit report be addressed for the following:

(a) Statutory audit

(b) Non-statutory audit

(c) Partnership

(d) Proprietor

(e) Pension plan



Dating of Audit Reports





Dating of Audit Reports

• The auditor should date the report on the financial statements no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the opinion on the financial statements. Sufficient appropriate audit evidence should include evidence that the entity's complete set of financial statements has been prepared and that those with the recognized authority have asserted that they have taken responsibility for them.



ISA 701 - Modifications to the independent auditor's report: Types of Audit Report





Modification to Audit Reports

• This ISA describes how the auditor's report wording is modified in the following situations:

• Matters that Do Not Affect the Auditor's Opinion

- Emphasis of matter

• Matters that Do Affect the Auditor's Opinion

- Qualified opinion

- Disclaimer of opinion

- Adverse opinion.





Matters that do not affect the Auditor’s Opinion

Emphasis of matter

• Paragraph added to highlight a matter affecting the financial statements which is included in a note to the financial statements that more extensively discusses the matter

• Modify the auditor's report by adding a paragraph to highlight a material matter regarding a going concern problem.

• Modify the auditor's report by adding a paragraph if there is a significant uncertainty (other than a going concern problem), the resolution of which is dependent upon future events and which may affect the financial statements.





Matters that affect the Auditor’s Opinion (1)

A significant number of material disagreement might result in true and

fair view not being shown at all

A significant number of material disagreement might result in true and

fair view not being shown at all

Material item(s) in the accounts does not show a

true and fair view

Material item(s) in the accounts does not show a

true and fair view

Adverse opinionAdverse opinion

Qualified audit opinion.Accounts show a true and

fair view ‘except for …’

Qualified audit opinion.Accounts show a true and


Accounts show a true and fair view

Accounts show a true and fair view

A true and fair view is not shown because

disagreements are pervasive to the accounts

A true and fair view is not shown because

disagreements are pervasive to the accounts

Unable to tell whether a true and fair view is given

in respect of material item(s) due to limitation in

scope

Unable to tell whether a true and fair view is given

in respect of material item(s) due to limitation in

scope

Unable to tell whether a true and fair view is given at all due to a limitation in

scope

Unable to tell whether a true and fair view is given at all due to a limitation in

scopeDisclaimer of opinionDisclaimer of opinion

Modified audit opinionAccounts show a true and


Modified audit opinionAccounts show a true and


Unqualified audit opinionUnqualified audit opinion






• An auditor may not be able to express an unqualified opinion when either of the following circumstances exist and, in the auditor's judgment, the effect of the matter is or may be material to the financial statements:

(a) There is a limitation on the scope of the auditor's work (qualified or disclaimer)

(b) There is a disagreement with management regarding the acceptability of the accounting policies selected, the method of their application or the adequacy of financial statement disclosures (qualified or adverse)






• A qualified opinion should be expressed when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with management, or limitation on scope is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion. A qualified opinion should be expressed as being 'except for' the effects of the matter to which the qualification relates.

• A disclaimer of opinion should be expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and accordingly is unable to express an opinion on the financial statements.

• An adverse opinion should be expressed when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements.





Matters that affect the Auditor’s Opinion: Limitation on scope

• A scope limitation may be imposed by circumstances

- the timing of the auditor's appointment is such that the auditor is unable to observe the counting of physical inventories,

- the entity's accounting records are inadequate;

- the auditor is unable to carry out an audit procedure believed to be desirable.





Matters that affect the Auditor’s Opinion: Disagreement with management

• The auditor may disagree with management about matters such as:

- acceptability of accounting policies selected,

- the method of their application, or

- the adequacy of disclosures in the financial statements.





Quiz (1)

• The company is the defendant in a lawsuit alleging infringement of certain patent rights. There is significant uncertainly related to an outstanding lawsuit. What is the impact on the audit report:

(a) emphasis of matter

(b) qualified opinion

(c) disclaimer of opinion

(d) adverse

• ABC Limited has incurred a loss and had a net working capital deficit. What is the impact on the audit report:

(a) emphasis of matter

(b) qualified opinion

(c) disclaimer of opinion

(d) adverse





Quiz (2) – What is the impact on the Auditor’s Report

• Why Limited declined to present a cash flow statement for the year ended December 31, 2008 and December 31, 2007.

• Heat Incorporated had a fire in a branch office on January 5, 2009 that destroyed its accounts receivable records. There are no alternative means to confirm or verify the carrying amount of accounts receivable included in the financial statements as at March 31, 2009 [balance sheet date].

• The financing arrangements for Money Worries Limited have expired and the amount outstanding was payable on May 31, 2009. The Company has been unable to re-negotiate the arrangements or obtain replacement financing and is considering filing for bankruptcy. They company may be unable to realize its assets and discharge its liabilities in the normal course of business.



The IAASB’s Clarity project (1)

ISAs (Reporting) Key revisionsISA 700 (redrafted) Forming an opinion and reporting on financial statements

Illustrative auditors reports in appendices have been updated

ISA 705 (revised and redrafted) Modifications to the opinion in the independent auditor’s report

Limitation in scope becomes an ‘inability to obtain sufficient appropriate audit evidence’.

Disagreement is now ‘financial statements are materially misstated’.

Auditors are required to communicate to those charged with governance when they expect to modify the opinion in the audit report regarding the circumstances that led to the expected modification and the proposed wording of the modification.

ISA 706 (revised and redrafted) Emphasis of matter paragraphs and other matter paragraphs in the independent auditor’s report

EM or OM paragraphs do not affect the audit opinion

Exact wording of the EM or OM paragraphs must be communicated with those charged with governance



The IAASB’s Clarity project (2)

ISAs (Reporting) Key revisionsISA 710 (redrafted) Comparative information – corresponding figures and comparative financial statements

Audit procedures similar but audit report differs for each.

ISA 800 (revised and redrafted) Special consideration audits of financial statements prepared in accordance with special purpose frameworks

Audit reports on special purpose financial statements must include an EOM paragraph alerting users that the financial statements have been prepared in accordance with a special purpose framework and as a result may not be suitable for another purpose.

ISA 805 (revised and redrafted) Special considerations – audits of single financial statements and specific elements, accounts or items of a financial statement

The standard deals with the audit of specific elements, accounts or items of a financial statement.

ISA 810 (revised and redrafted) Engagements to report on summary financial statements

The auditor will express an opinion that the summary financial statements are consistent with the audited financial statements or a dair summary of them.





QUIZ (1)

• The Clarified ISAs are effective for audits of financial statements:

(a) for periods beginning on or after December 15, 2009

(b) for periods beginning on or after December 15, 2010

(c) for period beginning before December 15, 2009

(d) for periods beginning on or after January 15, 2010

• What ISA currently provides guidance on modification of audit reports?:

(a) ISA 700

(b) ISA 701

(c) ISA 710



Representation letters:ISA 580 Management Representations





Management representations

• The auditor should obtain audit evidence that management acknowledges its responsibility for the fair presentation of the financial statements in accordance with the applicable financial reporting framework, and has approved the financial statements.

• The auditor should obtain written representations from management on matters material to the financial statements when other sufficient appropriate audit evidence cannot reasonably be expected to exist.

• Modification to the audit reports should also be included – We understand that your audit report will contain….



Management Representations:Matters which might be included

• Completion of information re identification of related parties

• Financial statements free of material misstatements

• Properly recorded or disclosed the capital stock repurchase options and agreements etc

• No inventory stated at an amount in excess of net realizable value

• All books of account and supporting documentation and all minutes of meetings of shareholders/ the board of directors made available

• Company has satisfactory titles to all assets

• All liabilities, actual or contingent have been recorded, disclosed

• No formal or informal compensating balance arrangements

• No events subsequent to period end, except as disclosed

• Complied with all aspects of contractual agreements

• No irregularities involving management or employees who have a significant role in internal control





Management Representations (1)

• The auditor should obtain written representation from management that:

- It acknowledges its responsibility for the design and implementation of internal control to prevent and detect error; and

• - It believes the effects of those uncorrected financial statement misstatements aggregated by the auditor during the audit are immaterial, both individually

and in the aggregate, to the financial statements taken as a whole.

• If a representation by management is contradicted by other audit evidence, the auditor should investigate the circumstances





Management Representations (2)

• The auditor should obtain written representation from management that

• It has disclosed to the auditor the results of its assessment of the risk that the financial statements may be materially misstated as a result of fraud;

• It has disclosed to the auditor its knowledge of fraud or suspected fraud affecting the entity involving:

- Management;

- Employees who have significant roles in internal control; or

- Others where the fraud could have a material effect on the financial statements; and

- It has disclosed to the auditor its knowledge of any allegations of fraud, or suspected fraud, affecting the entity's financial statements communicated by employees, former employees, analysts, regulators or others





Basic Elements of a Management Representation Letter

• ADDRESS:

To be addressed to the auditor

• DATE:

Same date as the auditor's report.

• SIGNATURE:

Should be signed by members of management who have primary responsibility for the entity and its financial aspects





Action if management refuses to provide representations

• The auditor should express a qualified opinion or a disclaimer of opinion

Evaluate any reliance placed on other representations made by management during the course of the audit and consider if the other implications of the refusal may have any additional effect on the auditor's report



ReportingQuestions and Answers



Presenter’s contact details

Rochelle Minto

KPMG in Jamaica

+876 922 6640

[email protected]

www.kpmg.com

international standards on auditing reports october 10, 2009 pab/icaj joint seminar kpmg in jamaica...

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