Weekend MCQ Self Challenge #0020 – Audit Conclusions and Reporting

Audit Conclusions and Reporting

Dear Professional Seniors & Friends,
Welcome to this wonderful weekend MCQ self challenge!

This weekend challenge is on Audit Conclusions and Reporting having 5 MCQs to be self answered by participants to take self challenge. The detailed answer of these MCQs shall be posted on Monday for the self assessment of the participants. This post shall be of immense use of the participant.

MCQ 20.1: Wipro Ltd has branches all over the India. Suddenly due to floods in Kerala, all the Records of Wipro 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 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 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 20.2: What if the above the above Question the company doesn’t disclose the fact that the Books of Accounts of Kerala Branch have been destroyed in 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 Kerala Branch alone was 51 Crore and the company disclose the fact that the Books of Accounts of Kerala Branch have been destroyed. Would your opinion be the same?

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 20.4: Key Audit Matters are to be communicated in Auditor’s Report (w.e.f 1.4.18)
A. As a substitute for disclosure’s in the Financial Statement
B. As substitute for Auditor Expressing a modified opinion in the Financial Statement
C. As a separate opinion on Individual Matters
D. When auditor is required by law or regulation to communicate key audit matters in the auditor’s Report.

MCQ 20.5: When auditor is unable to obtain sufficient and appropriate audit evidence that financial statement on which to base 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. Auditor is prohibited in communicating Key Audit Matters in the Auditor’s Report i.e No disclosure is Required
C. Disclose that Financial Statement don’t Present a True and Fair View
D. Both A & C

Sincere Regards!

CA Sanjay Kumar Agrawal
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Answer MCQ Self Challenge #0020

Dear Professional Seniors & Friends,

Warm Greetings!

Answer MCQ 20.1: A) Unmodified Opinion with Emphasis on Matter that the books of the Kerala Branch have been destroyed

Answer MCQ 20.2: D) Modified Opinion –Qualified Opinion

Answer MCQ 20.3: C) Modified Opinion- Disclaimer of Opinion

Answer MCQ 20.4: D) When auditor is required by law or regulation to communicate key audit matters in the auditor’s Report.

Answer MCQ 20.5: B) Auditor is prohibited in communicating Key Audit Matters in the Auditor’s Report i.e. No disclosure is required.

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 materiality for the financial transaction as a whole.

There are certain items on which the attention of users of the particular entity is to be focused i.e financial performance users may tend to focus on Profit & 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 & 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 i.e 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.

As per SA-706 “Emphasis on Matter Paragraph and Other Matter paragraph in the Independent Auditor’s Report”

Emphasis of Matter paragraph is a para Included in Auditor’s Report that refers to a matter appropriately presented/disclosed in Financial statement that is in 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 turnover 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 Kerala branch is 0.25% of the total turnover of the Company, the missing effects of Financial Statements doesn’t pervasively effect the financial statement of the company as a whole. Even though audit checks needs to be performed of specific balances of the financial Statements, 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 Need to give unmodified Opinion (Financial Statement present True and Fair Information with Emphasis on Matter that the books of the Kerala Branch have been destroyed. The emphasis of matter paragraph shall disclose the fact that the Matter regarding the books of Kerala 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 Matter that the books of the Kerala Branch have been destroyed

MCQ 20.2:

• If the Management doesn’t disclose the same in notes to Accounts the Auditor needs to qualify 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 floods at Kerala Branch.
• Non-disclosure of same would not give 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 Kerala Branch have been destroyed and the same has not been disclosed by the management in its financial statements.

Based on the above analysis, Correct answer to MCQ 20.2 : D) Modified Opinion-–Qualified Opinion

MCQ 20.3:

• In the above Question, no documents were available for the Kerala Branch with turnover 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 Kerala branch is 50% of the total turnover of the Company, the effects non-discloure/non-presentation of Financial Statements will pervasively effect the financial statement of the company as a whole.
• Even though 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 effect the financial statements .

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

Practical Analysis for MCQ 20.4:

New Standard 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 audit of financial statement 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 Audtor 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 uncertainity Exists relating to Events and conditions that may cast significant doubt on he 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 by law and Regulation to communicate in the auditor’s report.

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

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, 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 professional opinion; you can definitely have your own opinion.)

Sincere Regards!

CA Sanjay Kumar Agrawal

Mobile: 9810116321

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