Question

2. Explain how a provision should be recognised when according to MFRS 137. [8 marks]

3. Describe the responsibility resting on the shoulders of the group auditor. [8 marks]

4. Explain the four (4) main types of risks in the audit risk model for audit planning. [8 marks]

5. Provide the gist of "International Standard on Auditing (ISA) 701: Communicating Key Audit Matters in the Independent Auditor's Report". [8 marks]

Answer 1

2. Recognition of provision according to MFRS 137:

• A provision shall be recognized when: (a) an enterprise has a present obligation (legal or constructive) as a result of a past event;
  (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and
  (c) a reliable estimate can be made of the amount of the obligation.

If these conditions are not met, no provision shall be recognized.

3. The responsibility resting on the shoulders of the Group Auditor:

• The group auditor takes full responsibility for the audit of the consolidated annual financial statements. The auditor’s duties are prescribed by the International Standard on Auditing 600, “Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors)”, which requires the auditor to obtain sufficient appropriate audit evidence regarding the financial information of the components and the consolidation process to express an opinion.
• The group auditor is also required to obtain an understanding of the component auditor, their work, independence, etc. In fact, there is meaningful communication between the group auditor and component auditors throughout the entire process, including sharing of risks, results of procedures, weaknesses found, discussions with management, etc.
• For components in the group that are not considered significant components, the group auditor only performs analytical procedures at the group level. If sufficient information can’t be obtained from these procedures or from work done on other components of the group, further procedures may be performed, including a full audit, specific procedures, review, etc.

4. Four (4) main types of risks in the audit risk model for audit planning:

• Audit risk is the risk that an auditor will not detect errors or fraud while examining the financial statements of a client.

• The types of audit risk are as follows:

• Control risk. This is the risk that potential material misstatements would not be detected or prevented by a client's control systems.

• Detection risk. This is the risk that the audit procedures used are not capable of detecting a material misstatement.

• Inherent risk. This is the risk that a client's financial statements are susceptible to material misstatements.

• Audit Risk = Inherent Risk x Control Risk x Detection Risk

5. Gist of "International Standard on Auditing (ISA) 701: Communicating Key Audit Matters in the Independent Auditor's Report":

• According to ISA 701, the purpose of communicating key audit matters (KAM) is ‘to enhance the communicative value of the auditor’s report by providing greater transparency about the audit that was performed.
• ISA 701 requires the auditor to include in the KAM paragraph those matters that required the most significant auditor attention in performing the audit. Thus, when preparing an auditor’s report, the auditor will need to carefully select the matters that should be communicated in the KAM paragraph.
• There are three types of matter, according to ISA 701, which should be considered when determining key audit matters: (a) Areas of higher assessed risk of material misstatement, or significant risks identified. (b)Significant auditor judgments relating to areas in the financial statements that involved significant management judgment, including accounting estimates that have been identified as having high estimation uncertainty. (c) The effect on the audit of significant events or transactions that occurred during the period.
• ISA 701 requires that the description of each key audit matter in the auditor’s report shall include a reference to the related disclosure(s), if any, in the financial statements and shall address: (a) why the matter was considered to be one of most significance in the audit and therefore determined to be a key audit matter, and (b) how the matter was addressed in the audit.