Question

b. inquire of management regarding key revenue recognition policies. C. calculate key ratios relevant to the client. d. issue a report at the conclusion of the engagement REVIEW QUESTIONS R15-1 Why does the standard unmodified report on the financial statements of a private company contain paragraphs outlining (1) management's responsibility for the financial statements and (2) the auditor's responsibility for the financial statements? What is contained in these paragraphs? LO1 R15-2 What is the significance of the date on the auditor's report on the financial statements? LO1 R15-3 in what circumstances is an auditor required or allowed to include an emphasis of matter paragraph in the audit report on the financial statements? LO2

Answer 1

R15-1

In an unmodified report, managements responsibility and auditors responsibility for the financial statements is clearly segregated and mentioned under different headings as the responsibilities of both has to be clearly put forward to the stakeholders in order to have a clarity on the role and responsibilities of the auditor and the management. This also helps to identify and fix the responsibility in case of lapses or defaults in carrying out their respective responsibilities.

The contents of the following paragraphs are given below:

Managements responsibility for the financial statements:

The auditor’s report shall describe management’s responsibility for the preparation of the financial statements. The description shall include an explanation that management is responsible for the preparation of the financial statements in accordance with the applicable financial reporting framework, and for such internal control as it determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Where the financial statements are prepared in accordance with a fair presentation framework, the explanation of management’s responsibility for the financial statements in the auditor’s report shall refer to “the preparation and fair presentation of these financial statements” or “the preparation of financial statements that give a true and fair view,” as appropriate in the circumstances.

Auditors responsibility for the financial statements:

The auditor’s report shall state that the responsibility of the auditor is to express an opinion on the financial statements based on the audit.The auditor’s report shall state that the audit was conducted in accordance with International Standards on Auditing. The auditor’s report shall 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 about whether the financial statements are free from material misstatement. The auditor’s report shall describe an audit by stating that: (a) An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements; (b) 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 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. 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 shall 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 (c) An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made by management, as well as the overall presentation of the financial statements. Where the financial statements are prepared in accordance with a fair presentation framework, the description of the audit in the auditor’s report shall refer to “the entity’s preparation and fair presentation of the financial statements” or “the entity’s preparation of financial statements that give a true and fair view,” as appropriate in the circumstances. The auditor’s report shall state 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.

R15-2

The auditor’s report shall be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial statements, including evidence that:(a) All the statements that comprise the financial statements, including the related notes, have been prepared; and (b) Those with the recognized authority have asserted that they have taken responsibility for those financial statements.

The significance of date on auditors report is that it is the date on which the opinion is given on the financial statements and this is on the basis of all the examination conducted and after obtaining all the sufficient and appropriate audit evidence to form a basis of opinion. And it is also the date on which the authority takes the responsibility on the financial statements.

R15-3

Examples of circumstances where the auditor may consider it necessary to include an Emphasis of Matter paragraph are: • An uncertainty relating to the future outcome of exceptional litigation or regulatory action. • Early application (where permitted) of a new accounting standard (for example, a new International Financial Reporting Standard) that has a pervasive effect on the financial statements in advance of its effective date. • A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position.