Test Your IQ On Audit Conclusions And Reporting

WEEKEND MCQ SELF CHALLENGE #0020

Audit Conclusions and Reporting

Dear Professional Seniors & Friends,

Welcome to this wonderful weekend MCQ self-challenge!

Being a tax consultant in Gurgaon, we know the importance of effective audits and reports. So, This weekend's challenge is based on Audit Conclusions and Reporting having 5 MCQs to be self-answered by participants to take self challenge. You will get the detailed answers of these MCQs once you have completed the self-assessment. This post shall be of immense use to all the participant.

MCQ 20.1: Wipro Ltd has branches all over India Suddenly due to floods in Kerala, all the Records of Wigro Ltd at its Kerala branch were destroyed due to Floods No documents were made available. The turnover of Wipro Ltd (all over India) was Rs 100 Crore. If turnover from the Kerala Branch alone was Rs 25 Lakhs and the Company has disclosed the same in Financial Statements as notes to accounts. There are no alternative checks that could be applied except External Party Confirmations. As an auditor of Wipro, what would be your opinion on the Financial Statements

A: Unmodified Opinion with Emphasis on the Matter that the books of the Kerala ranch have been destroyed

B. Modified Opinion-Adverse Opinion

C. Modified Opinion Disclaimer of Opinion

D. Modified Opinion-Qualified Opinion

MCQ 20.2: What if the above the above question the company doesn't disclose the fact that the Books of Accounts of the Kerala Branch have been destroyed in the Financial Statement?

A. Unmodified with Emphasis on Matter that the books of the Kerala Branch have been destroyed.

B. Modified Opinion-Adverse Opinion.

C Modified Opinion Disclaimer of Opinion.

D. Modified Opinion-Qualified Opinion.

MCQ 20.3: What if in the Above Question (1) the Turnover of the Kerala Branch alone was 51 Crore and the company disclosed the fact that the Books of Accounts of the Kerala Branch have been destroyed? Would your opinion be the same?

A. Unmodified with Emphasis on Matter that the books of the Kerata Branch have been destroyed

B. Modified Opinion-Adverse Opinion

C. Modified Opinion Disclaimer of Opinion

D. Modified Opinion-Qualified Opinion

MCQ 20:4: Key Audit Matters are to be communicated in the Auditor's Report (w.ef 1.4.18))

A. As a substitute for disclosures in the Financial Statement

B. As a substitute for the Auditor Expressing a modified opinion in the Financial Statement

C. As a separate opinion on Individual Matters

D. When the auditor is required by law or regulation to communicate key audit matters in the auditor's Report

MCQ 20.5: When the auditor is unable to obtain sufficient and appropriate audit evidence that financial statement on which to these the opinion and the auditor concludes that possible effects of the financial statement can be both Material and Pervasive. Then the Key Matters to be included in the Auditor's Report Should

A. Disclose that No Sufficient & Appropriate Evidence is obtained

B. The auditor is prohibited from communicating Key Audit Matters in the Auditor's Report Le No disclosure is Required

C. Disclose that Financial Statements don't Present a True and Fair View

D. Both A&C

Answer MCQ Self Challenge #0020

Answer MCQ 20.1:

A) Unmodified opinion with Emphasis on Matter that the books of the Kerala Branch have been destroyed

Practical Analysis for MCQ 20.1 to 20.3:

As per SA 320 "Materiality in Planning and Performing an Audit When establishing an overall audit strategy, the auditor shall determine materiality for the financial statements 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 the materiality of the financial transaction as a whole.

There are certain items on which the attention of users of the particular entity is to be focused le financial performance users may tend to focus on Profit and revenue.

When planning the audit, the auditor based on materiality considers what items would make the financial information materially misstated and Items for which sufficient and appropriate Audit Evidence is required

For particular balances and Class of Transaction Amounts for determining mis statement can be set by the Auditor at less than materiality levels Le levels for a particular Class of Transaction, account balances, and disclosures.

As per SA 705 Modification of opinion in the Independent Auditor's Report the auditor based on the Audit Evidence obtained frames an opinion that the financial statement as a whole is not free from Material Misstatement.

Nature of Matter Giving Rise to Modification - Auditor's Judgement about the pervasiveness of the Effects or Possible effects on the Financial statements

Financial statements are Materially Misstated - Material but not Pervasive (Qualified Opinion) , Material & Pervasive (Adverse Opinion)

Inability to obtain sufficient & appropriate audit Evidence - Material but not Pervasive (Qualified Opinion) , Material & Pervasive (Disclaimer of Opinion)

As per SA-706 "Emphasis on Matter Paragraph and Other Matter paragraph in the Independent Auditor's Report

The emphasis of the Matter paragraph is a para Included In the Auditor's Report that refers to a matter appropriately presented/disclosed in a Financial statement that is in the auditor's judgment fundamental to the user's understanding of Financial statements.

MCQ 20.1:

• In the above Question, no documents were available for the Kerala Branch with a turnover of Rs 25 Lakh and the Company has disclosed the same in Financial Statements. As an auditor we consider Turnover as a basis for Materiality and the turnover of the Kerala branch is 0:25% of the total turnover of the Company, the missing effects of Financial Statements don't pervasively affect the financial statement of the company as a whole. Even though audit checks need to be performed on specific balances of the Financial Statements, the non-availability of records due to flood has been disclosed by the Management in Financial Statements as Notes to Accounts
• On the basis of this Auditor needs to give an unmodified Opinion (Financial Statement presenting True and Fair Information with Emphasis on the Matter that the books of the Kerala Branch have been destroyed The emphasis of the matter paragraph shall disclose the fact that the Matter regarding the books of Kerata branch has been destroyed has been appropriately disclosed in the financial statement

Based on the above analysis Correct answer to MCQ 20.1: A) Unmodified Opinion with Emphasis on the Matter that the books of the Kerala Branch have been destroyed

Answer MCQ 20.2:

D) Modified Opinion -Qualified Opinion

MCQ 20.2:

• If the Management doesn't disclose the same in notes to Accounts the Auditor needs to quality his opinion. The reason for forming a qualified opinion is that Financial Statements are materially misstated because the Management has not disclosed the fact that the books have been destroyed due to food at Kerala Branch
• Non-disclosure of same would not give a clear picture to the users regarding certain balances in books to Accounts Thus the Auditor Report should be qualified with respect to the said matter and the basis of opinion paragraph should report that the Fact that Books of The Kerala Branch has been destroyed and the same has not been disclosed by the management in its financial statements

Based on the above analysis. The correct answer to MCQ 20.2:D) Modified Opinion-Qualified Opinion

Answer MCQ 203:

C) Modified Opinion Disclaimer of Opinion

MCQ 20,3:

• In the above Question, no documents were available for the Kerala Branch with a turnover of Rs 50 Crore and the Company has disclosed the same in Financial Statements. As an auditor if we consider Turnover as a basis for Materiality and the turnover of the Kerala branch is 50% of the total turnover of the Company, the effects of non-disclosure/non-presentation of Financial Statements will pervasively affect the financial statement of the company as a whole
• Even though the non-availability of records due to flood has been disclosed by the Management in Financial Statements as Notes to Accounts, the inability to obtain sufficient and appropriate opinion will cause a material and pervasive effect on the financial statements
• Thus a disclaimer of opinion will be given in the financial statements stating the fact in opinion paragraph that not able to obtain sufficient and appropriate audit evidence with respect to the matter that substantially affects the financial statements

Based on the above analysis. Correct answer to MCQ 20.3: C) Modified Opinion Disclaimer of Opinion

Answer MCQ 20.4:

Dj When the auditor is required by law or regulation to communicate key audit matters in the auditor's Report

Practical Analysis for MCQ 20.4:

New Standards on Auditing have been Issued by ICAI which is effective from 1.04.2018.

Meaning of Key Audit Matters: matters in the auditor's professional judgment were most significant in the audit of financial statements for the current period.

As per SA-701 "Communicating Key Matters Paragraph in the Auditor's Report is not

1. A substitute for disclosures in financial statements that the applicable financial Reporting Framework requires management to make or that are otherwise necessary to achieve fair presentation

2. A substitute for Autor Expressing a modified opinion when required by circumstances of a specific audit Engagement in accordance with SA-705

3. A substitute for reporting under SA-570 when a material uncertainty Exists relating to Events and conditions that may cast significant doubt on the entity's ability to continue as a going concern

4. A separate opinion on individual matters

But, as per SA 701. Key Audit Matters is to be communicated in the Auditor's Report when The Auditor is required to comply with law and Regulation to communicate in the auditor's report

Based on the above analysis, the Correct answer to MCQ 20.4: D) When the auditor is required by law or regulation to communicate key audit matters In the auditor's Report.

Answer MCQ 20.5:

5) The Auditor is prohibited from communicating Key Audit Matters in the Auditor's Report L. No disclosure is required.

Practical Analysis for MCQ 20.5:

SA-705 prohibits the auditor from communicating key matters in the audit report when an auditor disclaims an opinion on the financial statement, unless such reporting is required by law and regulation Based on the above analysis, the correct answer to MCQ 20.5: B) Auditor is prohibited in communicating Key Audit Matters in the Auditor's Report i.e. no disclosure is required.

(Disclaimer: The objective of the MCQ post is just to discuss the concept, it may happen, by change of facts, the answer may be different. Please do not treat this as a professional opinion: you can definitely have your own opinion.)

Sincere Regards!

CA Sanjay Kumar Agrawal