EXECUTIVE TRAINING COMPANY (INTERNATIONAL) LTD.

Transcription

1 EXECUTIVE TRAINING COMPANY (INTERNATIONAL) LTD

2 Module C Business Assurance Module Preparation Seminar Agenda Identifying and assessing the risks of material misstatement at assertion level (HKSA 315 (Revised)) Written representations (HKSA 580 (Clarified) Types of auditor's report (HKSA 700,705,706 (Clarified))

3 HKSA 315 (Revised)

4 Audit Risk - Definition & Components It is risk that auditor expresses an inappropriate audit opinion when the financial statements are materially misstated taken as a whole Inherent Risk Control Risk Detection Risk Within the Client Auditor s Risk

5 Inherent Risk ( IR ) Refers to the susceptibility of an account balance or class of transactions to misstatement that could be material, individually or when aggregated with misstatements in other balances or classes, assuming that there were no related internal controls. Example : Industry environmental factors competitiveness Technological obsolescence or over-dependence on single product Accounts which require expert valuations

6 Control Risk ( CR ) Refers the risk that a misstatement that could occur in an account balance or class of transactions and that could be material individually or when aggregated with misstatements in other balances or classes, will not be prevented or detected and corrected on a timely basis by the accounting and control systems. If the company has good internal controls, there is a high chance that the control system will detect a material error.

7 Detection Risk ( DR ) Refers risk that the auditor will not detect a material misstatement that exists in an assertion where the audit procedures fail in its effectiveness. Auditor should amend his NET (Nature, Extent and Timeliness) of the audit procedures. Sampling risk and non-sampling risk are components of detection risk. Eg Incoming auditor ie not familiar with the audit client

8 Inverse Relationship Combined Assessment of risk Assertion Level More IR CR Audit DR Work Perform Risk Assessment only on IR and CR

9 HKSA 315 (Revised) Risk Assessment Why revised the standard? As there are changes in HKSA 610 (Revised) related to internal auditors Risk Assessment Procedures and Related Activities (a) Inquiries of Management, the Internal Audit Function and Others within the Entity auditor can obtain information through inquiries with the internal audit function, if the entity has such a function Inquiries directed to the risk management function

10 HKSA 315 (Revised) Risk Assessment Inquiries directed to information systems personnel may provide information about system changes, system or control failures (b) Inquiries of the Internal Audit Function the internal audit function is likely to have obtained insight into the entity s operations and business risks, and may have findings based on its work, such as identified control deficiencies or risks internal audit function provides information to the auditor regarding any actual, suspected or alleged fraud

11 (c) Considerations specific to public sector entities Inquiries of appropriate individuals in the internal audit function can assist the auditors in identifying the risk of material non-compliance with applicable laws and regulations and the risk of deficiencies in internal control over financial reporting. (d) Audit Evidence for Elements of the Control Environment The auditor may also consider how management has responded to the findings and recommendations of the internal audit function regarding identified deficiencies The auditor may also be able to use the work of the internal audit function to modify the nature or timing, or reduce the extent, of audit procedures

12 HKSA 315 (Revised) Risk Assessment Requirement: (Must perform) 1. Identify and Assess the risks of material misstatements at the (Overall) financial statement level and at the assertion level for classes of transactions(p/l), account balances (B/S) and disclosures. 2. Determine risks that require special audit consideration and consider whether the controls are implemented ( Significant Risks )

13 HKSA 315 (Revised) Risk Assessment 3. Evaluate the design of entity s controls and determine the implementation of the entity s controls 4. If is not possible or impracticable to reduce the risks of material misstatements at the assertion level to an acceptably low level with audit evidence obtained by substantive testing, then auditor should evaluate the design and implementation of the client s controls i.e. in a computerized system, lack of paper trail

14 Collect Audit Evidence Main purpose = to obtain sufficient and appropriate audit evidence to support audit opinion Ways to collect audit evidence Risk Assessment Tests of Controls Substantive Testing

15 Risk of material misstatement at Financial Statement Level General Applying to the financial statement as a whole Able to reduce audit risk to an acceptably low level More pervasive to the financial statement at a whole Affect many assertions

16 Risk of material misstatement at Financial Statement Level Factors to consider *** Always related to management*** Risks from a weak control environment which includes management s attitudes to good internal control practice Management s attitude towards a good internal control Management s competence, integrity and experience

17 Risk of material misstatement at Financial Statement Level Other Factors to consider Unusual pressures on management (i.e. plan to go public, bonuses ties to sales or profits) Nature of entity s business risky Industry, market fluctuations Industry factors i.e. Special regulations and reporting changes (i.e. Listing companies, securities companies, insurance companies, banks)

18 Risk of material misstatement at Financial Statement Level Other Factors to consider Aggressive business strategies fast expansion, plenty of acquisition and mergers Significant business risk Cannot focus on a specific risk Concern about the client s going concern Concern about fraud

19 HKSA 330 (Clarified) Responses to assessed risk FS Level Reduce audit risk to an acceptability low level, auditor should determine overall responses to assessed risks of material misstatements at the financial statement level and documentation is required Consider Control Environment

20 HKSA 330 (Clarified) Responses to assessed risk FS Level **** Use general audit strategy *** For Example: Assigning more staff or more training for staff More supervision for staff Emphasizing to audit staff the need to maintain professional skepticism

21 HKSA 330 (Clarified) Responses to assessed risk FS Level Collect more persuasive evidence and more procedures Using experts Incorporating more unpredictability into the audit procedures Change nature, extent and timeliness of substantive tests

22 HKSA 330 (Clarified) Responses to assessed risk FS Level Responses when Risk at FS Level is Low: No response except to maintain professional skepticism Questioning of mind, alert to audit evidence and make effort to support management representations

23 HKSA 330 (Clarified) Responses to assessed risk FS Level Responses when Risk at FS Level is Medium: Remind the engagement to maintain professional skepticism Assign more experienced staff Budget more review and supervision

24 HKSA 330 (Clarified) Responses to assessed risk FS Level Responses when Risk at FS Level is High: Remind the engagement to maintain professional skepticism Assign more experienced staff Budget more review and supervision

25 HKSA 330 (Clarified) Responses to assessed risk FS Level Add: Assign an expert i.e. computer fraud Do not rely on client s internal control and use substantive procedures only Perform audit procedures in unexpected manner Resigning from engagement

26 Significant Risks Requires special audit attention since they are often related to significant non-routine transactions and judgement Non-routine transactions are unusual and occur infrequently Transactions that involve great deal of management intervention Transactions with great deal of manual intervention for data collection and processing

27 Significant Risks Complex calculations involved Where it is difficult to implement effective controls Accounting estimates or revenue recognition may be subject to different interpretation Subjective judgement required for complex transactions and require great deal of assumptions

28 Significant Risks Transactions involved fraud Responses: Must perform test of controls on controls that mitigate significant risks Must perform specific substantive testing

29 Risk of material misstatement at Assertion Level Not able to reduce the risks of material misstatement to an acceptably low level with audit evidence obtained only from substantive procedures Refer to specific classes of transactions, accounts balances Risks arise from the particular characteristics of a class of transaction inherent and control risk Identify controls that are likely to prevent, detect or correct material misstatements

30 Risk of material misstatement at Assertion Level General Comprises of IR and CR (Combined Assessment of the Risk of Material Misstatements) Auditor would perform tests of controls to support the risk assessment

31 Risk of material misstatement at Assertion Level Factors to consider Accounts likely to be susceptible to misstatements (i.e. required many adjustments in previous year s audit or accounts that include estimated amounts) Complexity of underlying transactions (i.e. financial instruments) Degree of judgement involved in determining account balances (i.e. provision for contingent liabilities and warranty expenses) Susceptibility of assets to loss or misappropriation

32 Risk of material misstatement at Assertion Level Responses Design and perform appropriate audit procedures to address to the assessed risks of material misstatements at the assertion level and for each material class of transactions, account balances and disclosure. Determine risks that require special audit considerations and consider whether the controls are implemented Evaluate the design of entity s controls and determine the implementation of the entity s controls Vouching etc Documentation of N (Nature) E (Extent) T (Timeliness) * of further audit procedures, linkage of those procedures with

33 N Nature of Substantive Testing Consider performing Substantive Testing only or both Tests of controls and substantive testing Type such as inspection, observation, inquiry etc Use Substantive Approach Perform only substantive testing Use Combined Approach Use both test of control and substantive testing

34 E Extent of Substantive Testing Quantity of a specific audit procedures to be performed Required judgment After consideration of materiality Higher Risk = increase extent Use sampling approach or not?

35 T Timeliness of Substantive Testing Perform further audit procedures at an interim or at period end Perform audit procedures before the period end to identify significant matters at early stage of audit Higher risk = perform sub tests nearer to or at period end

36 Risk of material misstatement at Assertion levels Statement of Financial Statements Account Balance Assertion Risk Existence Assets, liabilities, and equity interests do not exist at the Balance Sheet Date Examples for increase risk Multi-locations Assets held by third parties Assets that have special characteristics require an expert to identify

37 Risk of material misstatement at Assertion levels Statement of Financial Statements Account Balance Assertion Risk Completeness All assets, liabilities and equity interests that should have been recorded have not been recorded. Examples for increase risk: Multi-locations, assets held by third party Wrong posting, off balance sheet items Understate of liabilities

38 Risk of material misstatement at Assertion levels Statement of Financial Statements Account Balance Assertion Risk Valuation and Allocation Assets, liabilities, and equity interests are included in the financial statements at inappropriate amounts and any resulting valuation or allocation adjustments are not appropriately recorded Examples for increase risk: Valuation subject to heavy estimate/ heavy market fluctuations/ expert s valuation / Heavy complex calculation is involved in the valuation i.e. manufactured goods DM, DL, OH

39 Risk of material misstatement at Assertion levels Statement of Financial Statements Account Balance Assertion Risk Rights and Obligations The entity does not hold or control the rights to assets, and liabilities are not the obligations of the entity Examples to increase risk: Subsequent events title has been passed Many different contracts with many different terms Title is subject to specific HKAS

40 Risk of material misstatement at Assertion levels Income Statement Assertion Risk Occurrence Transactions and events that have been recorded have not (1) occurred nor (2) pertain to the entity. Example to increase risk: Sales occurred at year end Multiple sales sales last for several years Invoice not with the client Consignment sales

41 Risk of material misstatement at Assertion levels Income Statement Assertion Risk Completeness All transactions and events that should have been recorded have not been recorded Examples to increase projects: Consignment sales Cutoff dates different for many companies No pre-numbering invoice No authorization n sales invoice

42 Risk of material misstatement at Assertion levels Income Statement Assertion Risk Cutoff Transactions and events have been recorded in an incorrect accounting period. Examples to increase risk: Transactions taken after year end Management s cutoff procedures not adequate

43 Risk of material misstatement at Assertion levels Income Statement Assertion Risk Accuracy / Measurement Amounts and other data relating to recorded transactions and events have not been recorded appropriately. Examples to increase risk: Complex HKAS Transactions terms have different interpretations Involve overseas accounting standards Require expert to interpret

44 Scenario thinking : ABC Manufacturing Ltd (ABC) s principal activity is manufacturing medicine and the production line is in Dongguan. During the year, one of its products, ( CURE ) was investigated by the Department of Health which had received complaints from patients taking CURE, claiming that they felt heavy heart beat after taking this product. Some of the CURE products were retained by the Department of Health while ABC had to recall all CURE. Assess the risk of material misstatement of ABC in related to the incident of recall of CURE. (8 marks)

45 Scenario thinking : Which Item? PPE Intangible Asset Inventories Receivables Contingent Liabilities Sales Which assertions

46 Exam Techniques : 1. Which item in the FS affected? 2. Which assertions? 3. If figures are given, use them ie Analytical Procedures 4. Relationship between figures 5. What facts are given in the question? 6. Answer the question risk is low/normal or high 7. How many marks?

47 MC Exam Questions Exam Questions Review Dec 2012 Case Qu 5a Risk Assessment at assertion level

48 MC Exam Questions Question : Dec 2012 Qu 5(a) You are working on an audit engagement for a client who owns over 150 chain shoe stores in Hong Kong. Your client owns 5 different shoe brands and each of the brands specializes in a different style of shoe products. During the course of the audit, you look into the inventory ledger and find that the inventory balance as at year end increased three-fold to HK$200 million compared to last year, representing 20% of the total assets of the company as at year end, and the inventory aging has been deteriorating significantly compared to last year.

49 MC Exam Questions You therefore discuss with the management their assessment on the appropriateness of the inventory provision. The managing director explains to you that he is very optimistic about their future development. According to the managing director, they have just acquired 3 more shoe brands and will open another 50 shoe stores in Hong Kong in the coming year and therefore the inventory balance as at year end had tripled compared to last year. In addition, he is confident that there will be no inventory provision required against their shoe products given that their shoe products are always well-received by their customers in the market.

50 MC Exam Questions Question : Dec 2012 Qu 5(a) (Cont d) Required: Assess and explain the risk of material misstatement relating to the accounting estimate over the inventory valuation as at year end. (5 marks) After talking to the managing director, you are not satisfied with the explanation from the managing director on the inventory. What audit procedures would you further perform in response to the risk of material misstatement discussed in Question 5(a)? (10 marks) (15 marks)

51 MC Exam Questions Answer : Dec 2012 Qu 5(a) (Cont d) The risk of material misstatement over the inventory valuation is high. The increase in risk of material misstatement over the inventory valuation is mainly due to: the inventory balance as at year end is significant to the company s total assets (i.e. 20%). Any material misstatement in the inventory balance could result in pervasive misstatement in the financial statement as a whole. the financial trend does not look reasonable. The increase in inventory is far more than the company s plan of expansion which indicates that there may be slow-moving inventory piling up. the deterioration of inventory aging is supportive that there may be slowmoving inventory and management should factor it in the inventory provision assessment. management s assessment of inventory provision purely relies on past trend without taking into account a totality of facts which may indicate management bias.

52 MC Exam Questions Exam Questions Review Dec 2012 Case Qu 6 Risk Assessment at assertion level

53 MC Exam Questions Question : Dec 2012 Qu 6(a) & (b) In a recent dialogue with the Internal Audit, you understand that the Internal Audit has issued an unsatisfactory report on the bank reconciliation process of your client. The Internal Audit report indicated that there was significant control deficiency over the cash management process, and that the management processes and controls were not properly exercised by the operation team. Required: a. Assess and explain the risk of material misstatement relating to the existence and accuracy assertions of the cash and bank balance as at year end. (3 marks) b. Suggest and explain the audit procedures you would perform in response to the risk of material misstatement identified in (7 marks)

54 MC Exam Questions Answer : Dec 2012 Qu 6(a) The risk of material misstatement on cash and bank balances is high because of the following: the bank reconciliation process does not operate effectively which may increase the risk of unidentified accounting errors and adjustments; and there is an increased opportunity for misappropriation of cash given that the management s processes and controls were not properly exercised by the operation team.

55 MC Exam Questions Answer : Dec 2012 Qu 6(b) (Cont d) The audit team should consider the following audit procedures in response to the risk of material misstatement over cash and bank balances identified in (a): review the Internal Audit Report in detail and discuss with Internal Audit findings with management and reassess the risk of material misstatements of cash and bank balance; understand from management the remedial action plan and implementation timeline; identify whether there are compensating controls and consider performing the testing of the compensating controls by understanding, evaluating and validating the key management compensating controls; instead of relying on management s control over cash management, consider a substantive testing approach by performing test of details;

56 MC Exam Questions Answer : Dec 2012 Qu 6(b) (Cont d) circulate bank confirmations directly to every bank with which the company conducted business; verify the bank balances with the replies to the standard bank letter; check the bank balances against the respective bank statements; reperform the bank reconciliation by comparing the cash ledger balance and the balance stated on bank statements/ bank confirmations, obtain an explanation from management for any large or unusual items not cleared at the time of audit; obtain satisfactory explanations for all items in the cash book for which there are no corresponding entries in the bank statement and vice versa through discussion with finance staff; and check subsequent bank statements to confirm the validity of the bank reconciliation items (e.g. un-presented cheques).

57 HKSA 580 (Clarified) Written representations

58 MC HKSA 580 Written Representations Written representations are written statements by management provided to the auditor to confirm certain matters or to support other audit evidence. The objectives of the auditor: To obtain written representations that management believes that it has fulfilled the fundamental responsibilities that constitute the premise on which an audit is conducted To support other audit evidence relevant to the financial statements if determined by the auditor or required by other HKSAs To respond appropriately to written representations or if management does not provide written representations requested by the auditor

59 MC HKSA 580 Written Representations Written representations as audit evidence: Written representation letter is written evidence that is better than oral representations. However, the letter is evidence from within the entity and is less reliable than information from independent sources. If a representation by management is contradicted by other audit evidence, the auditors should investigate the circumstances and, when necessary, reconsider the reliability of other representations made by management.

60 MC HKSA 580 Written Representations Written representation cannot substitute some other evidence A representation by management as to the quantity and condition of inventories is not a substitute for the same evidence obtained through physical observation. A representation by management as to the existence of trade debtor is not a substitute for the same evidence obtained by trade receivable confirmation. If management refuses to provide representations that auditor requires, this constitutes a limitation on scope and auditor should express a qualified opinion or a disclaimer of opinion. The auditor should reconsider the appropriateness to rely on other management representations during the audit and should discuss the matter with management. Auditors should re-evaluate the integrity of management.

61 MC Exam Questions Exam Questions Review Jun 2014 Short Qu 7 Written representations

62 MC Exam Questions Question : Jun 2014 Qu 7 According to HKSA 580 (Clarified) "Written Representations", the auditor shall request written representations from management with appropriate responsibilities for the financial statements and knowledge of the matters concerned. Required: a) What is the importance of written representation and obtaining it from the client? (3 marks)

63 MC Exam Questions Question : Jun 2014 Qu 7(Cont d) b) What factors should be considered: (i) in respect of the form and the approval of the written representation; and (ii) in deciding the contents of the representation letter or its subject matters. Provide brief explanations of the rationale behind. (7 marks) (10marks)

64 MC Exam Questions Answer : Jun 2014 Qu 7 Answer (a) Information and explanations from the client's management and directors are an important part of audit evidence. It is required that any representation that we are given, and on which we will place significant reliance in forming our audit opinion, should be confirmed in writing by the directors. The representations we obtain are normally made and dated on the same date as our report on the financial statements. The management's refusal to provide such representations which we consider necessary will constitute a limitation on the scope of our audit and we will need to consider the effect of such a refusal on our audit report.

65 MC Exam Questions Answer : Jun 2014 Qu 7(Cont d) Answer (b) The normal form that representations by the management take is a formal letter detailing the appropriate representations and signed by a director and the senior financial officer of the company being persons who are fully aware of the matters contained therein. We should expect that such matters have been duly considered and approved by the board of the company and minuted. This approval will normally be at the board meeting held to approve the financial statements. The representations that we ask to be formally recorded in the representation letter should be specific matters and restricted to those which deal with those significant matters on which we have relied when forming our audit opinion. In deciding which of the representations we receive should be the subject of formal documentation, the following guidance should be followed:

66 MC Exam Questions Answer : Jun 2014 Qu 7(Cont d) (i) (ii) the matter should be so significant that if we had not received (or did not believe) the representation, we would consider qualifying our report; and such other evidence on the matter as is available should provide insufficient corroboration of the assertion that has been made. It is stressed that representations do not mean we can restrict the scope of our audit, they are definitely not alternatives to obtaining independent evidence which may be reasonably available. Further, it is important to distinguish between the absence of sufficient corroborative evidence for an assertion and the presence of conflicting evidence. Where there is conflicting evidence, this apparent contradiction will need to be resolved before we can accept the representations made.

67 MC Exam Questions Answer : Jun 2014 Qu 7(Cont d) It is also important to ensure that we do not ask directors to make representations on matters for which they cannot reasonably be expected to be knowledgeable. This is of particular importance in a group situation. While in some groups the pattern of delegation and management control will result in main board directors having a detailed knowledge of matters relating to subsidiaries, in other groups they will not and will rely on the subsidiary boards in these matters. The representation letters should reflect this and where subsidiaries have appropriate autonomy the auditor should rely on the audit of the subsidiary including representations received as part of that audit.

68 HKSA 700,705,706 (Clarified) - Types of auditor s reports

69 Types of auditor s reports Overall Audit Report Unqualified report HKSA 700 Clarified Draw readers attention Unqualified report + Emphasis of a matter + Other matters paragraph HKSA 706 [Modify] Qualified report HKSA 705

70 Types of auditor s reports HKSA Inherent Uncertainty + 2. Fundamental Auditor / mang cannot resolve uncertainty by additional procedures Affect FS as a whole Fundamental uncertainty ie Going concern problem Client Proper A/C + Proper Disclosure Unqualified report + Emphasis of a matter Reader s attention on going concern If No proper A/C or disclosure HKSA 705

71 Types of auditor s reports HKSA 706 (Clarified) An emphasis of matter paragraph is used by the auditor to highlight an issue affecting the financial statements which the readers should know about but which does not give rise to a modified opinion. An emphasis of matter paragraph An auditor's report may be modified by adding an emphasis of matter to highlight a matter affecting the financial statements which is included in a note to the financial statements that more extensively discusses the matter. The addition of such an emphasis of matter paragraph does not affect the auditor's opinion. Other matter paragraph A paragraph included in the auditor's report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor's judgment, is relevant to users' understanding of the audit, the auditor's responsibilities or the auditor's report.

72 Types of auditor s reports HKSA 706 (Clarified) Under HKSA 706 (Clarified) the paragraph is normally included after the opinion paragraph and would ordinarily refer to the fact that the auditor's opinion is not qualified in this respect. The heading of Emphasis of Matter, or other appropriate heading should be presented. Inherent uncertainty In certain circumstances, an auditor s report may be modified by adding a paragraph to highlight a material matter regarding a going concern problem or if there is a significant uncertainty, the resolution of which is dependent upon future events and which may affect the financial statements and not under the direct control of the entity. Other matter paragraph When an other matter paragraph is included to draw users attention to a matter relevant to their understanding of the audit of the financial statements, the paragraph is included immediately after the opinion paragraph and any emphasis of matter paragraph.

73 Types of auditor s reports HKSA 705 (Clarified) The decision regarding which type of modified opinion is appropriate depends upon: a) the materiality of the nature of the matter giving rise to the modification b) the auditor's judgment about the pervasiveness of the effects or possible effects of the matter on the financial statements When the auditor expects to modify the opinion in the auditor's report, he shall communicate with those charged with governance the circumstances that led to the expected modification and the proposed wording of the modification. Pervasive is used to describe the effects on the financial statements of misstatements or the possible effects on the financial statements of misstatements, if any that are undetected due to an inability to obtain sufficient appropriate audit evidence.

74 Types of auditor s reports Disagreement with management The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements. Material and pervasive 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. (Auditors state that the financial statements do not give a true and fair view)

75 Types of auditor s reports Limitation of scope the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive Qualified Material and Persuasive 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.

76 Questions Review Types of auditor s reports

77 ETC Practice Question You are the audit manager of Lemon & Co and you have been provided with financial statements extracts and the following information about your client, Ocean Kitchen Designs Ltd ( Ocean ), who is a kitchen manufacturer. The company's year end is 30 April Ocean has recently been experiencing trading difficulties, as its major customer who owes $0.6m to Ocean has ceased trading, and it is unlikely any of this will be received. However the balance is included within the financial statements extracts below. The sales director has recently left Ocean and has yet to be replaced. The monthly cash flow has shown a net cash outflow for the last two months of the financial year and is forecast as negative for the forthcoming financial year. As a result of this, the company has been slow in paying its suppliers and some are threatening legal action to recover the sums owing.

78 ETC Practice Question Due to its financial difficulties, Ocean missed a loan repayment and, as a result of this breach in the loan covenants, the bank has asked that the loan of $4.8m be repaid in full within six months. The directors have decided that in order to conserve cash, no final dividend will be paid in Financial statements extracts for year ended 30 April: Draft Actual HK$m HK$m Current Assets Inventory Receivables Cash Current Liabilities Trade payables Overdraft Loans

79 ETC Practice Question Having performed the going concern audit procedures, you have serious concerns in relation to the going concern status of Ocean. The finance director has informed you that as the cash flow issues are short term he does not propose to make any amendments to the financial statements. a) State Lemon & Co's responsibility for reporting on going concern to the directors of Ocean; and (3 marks) b) If the directors refuse to amend the financial statements, describe the impact on the audit report. (4 marks)

80 ETC Practice Question - Answer (a) Lemon & Co's responsibility to report on going concern to the directors Lemon & Co must report to the directors any information which casts doubt on the ability of the company to continue as a going concern. In accordance with HKSA 570 (Clarified) Going concern Lemon & Co will report the following: Whether the events or conditions constitute a material uncertainty. Whether the use of the going concern assumption is appropriate in the preparation of the financial statements. The adequacy of related disclosures in the financial statements.

81 ETC Practice Question - Answer (b) Impact on the audit report If the directors refuse to amend the financial statements and we believe that the company is not a going concern, the audit opinion will be modified. An adverse opinion will be issued as the matter is both material and pervasive. The basis for adverse opinion paragraph will provide an explanation of the inappropriate use of the going concern assumption by the directors. The adverse opinion paragraph will state that the financial statements do not present fairly or do not give a true and fair view. (HKSA 705 (Clarified))

82 Exam Techniques for MC

83 Common Techniques to pass MC A. Prepare your critical files B. Only need 1 set of notes C. Time yourself D. Start practice writing E. Don t just copy use key words for application F. Demonstrate logical thinking sometimes no right or wrong G. No need to highlight everything in the question booklet H. Writing legible to read

84 Final Advice The time to look-up the textbook is limited during an open-book exam Students should: have a good understanding of the topics before going into the exam read the case and questions carefully answer what is being asked, not what they wanted to be asked identify the core issues of the question and allocate their time accordingly analyse the facts of the case and apply the tax rules or principles to arrive at the conclusion not copy large passages from the textbook use logical thinking to understand and respond to the questions