Audit Report and CARO, 2020 - Test 4: answer key

Question 1 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

Scenario. M/s Sharma & Associates are the statutory auditors of Alpha Chemicals Ltd., a listed chemical manufacturing company operating a large industrial facility in Gujarat. During the year, a major fire occurred in one of its production units, destroying specialised machinery and temporarily disrupting manufacturing operations. The company incurred substantial restoration expenditure and recognised an insurance receivable based on its assessment of the amount recoverable. The management properly disclosed the incident, the estimated financial effects, the insurance claim and the uncertainties surrounding its settlement in Note 32 to the financial statements. The auditors obtained sufficient appropriate evidence supporting the accounting treatment and concluded that the disclosure was adequate. They also concluded that the financial statements were not materially misstated as a result of the incident. Separately, the auditors discovered that an environmental investigation relating to an earlier financial year had resulted in an statutory restriction on the company's operations. The matter had been appropriately disclosed in the financial statements and was considered fundamental to users' understanding of the company's future operating position. It was not selected as a KAM because the matter was not among the matters of most significance in the current-period audit. The engagement partner proposed additional communication in the auditor's report. During the same audit, the company requested the auditors to explain that the previous year's financial statements had been examined under statutory audit by a different firm and that the predecessor auditor's report had not been reissued with the current financial statements. This information was not presented in the current financial statements but was relevant to understanding the audit. Management objected to the inclusion of additional paragraphs, arguing that the unmodified opinion alone should be sufficient.

Which reporting mechanism should M/s Sharma & Associates use to draw attention to the adequately disclosed effects of the factory fire?

1. A qualified opinion because any major destruction of property necessarily indicates material misstatement.
2. An Other Matter paragraph because the factory fire occurred during the year and affected business operations.
3. An Emphasis of Matter paragraph because the matter is appropriately disclosed and fundamental to users' understanding. (correct answer)
4. An adverse opinion because the insurance receivable involves uncertainty regarding the final settlement amount.

Answer: C — An Emphasis of Matter paragraph because the matter is appropriately disclosed and fundamental to users' understanding.

Explanation. SA 706 (Revised), section 6.2, permits an Emphasis of Matter paragraph where a matter is appropriately presented or disclosed in the financial statements and, in the auditor's judgement, is fundamental to users' understanding. The auditor must not otherwise be required to modify the opinion, and where SA 701 applies, the matter must not have been determined to be a KAM. A fire does not automatically require a modified opinion or an Other Matter paragraph.

Where it goes wrong. Confusing an event disclosed in the financial statements and fundamental to users' understanding with an undisclosed matter relevant to understanding the audit.

Authority. SA 701; SA 706; section 6

Question 2 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

Regarding the predecessor auditor's involvement in the previous year's financial statement audit, which reporting treatment is most appropriate on the stated facts?

1. An Emphasis of Matter paragraph because the predecessor auditor's work forms part of the current financial statements.
2. An Other Matter paragraph because the information is not presented in the current financial statements but is relevant to understanding the audit. (correct answer)
3. A qualified opinion because the current auditor did not independently perform the previous year's audit procedures.
4. A separate Basis for Opinion paragraph because every predecessor-auditor reference indicates an audit limitation.

Answer: B — An Other Matter paragraph because the information is not presented in the current financial statements but is relevant to understanding the audit.

Explanation. SA 706 (Revised), section 6.4, describes an Other Matter paragraph as referring to a matter other than those presented or disclosed in the financial statements that is relevant to users' understanding of the audit, the auditor's responsibilities or the auditor's report. The predecessor auditor's involvement is an audit-report matter rather than a disclosure about the current financial statement balances. It does not automatically require a qualification.

Where it goes wrong. Treating every significant historical matter as an Emphasis of Matter paragraph without checking whether it is presented or disclosed in the current financial statements.

Authority. SA 706; section 6

Question 3 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

Which combination of requirements should the auditor follow when including the Emphasis of Matter paragraph relating to the factory fire?

1. Include the paragraph in the Opinion section, repeat the full financial statement note and qualify the opinion on the insurance receivable.
2. Include a paragraph in the Basis for Opinion section and avoid referring to the related financial statement disclosure.
3. Place the paragraph in the Other Matter section and describe information that management has not included in the financial statements.
4. Use a separate appropriately headed section, clearly refer to the matter and related note, and state that the opinion is not modified. (correct answer)

Answer: D — Use a separate appropriately headed section, clearly refer to the matter and related note, and state that the opinion is not modified.

Explanation. SA 706 (Revised), section 6.2.1, requires an Emphasis of Matter paragraph to appear in a separate section with a heading containing the term 'Emphasis of Matter'. It must clearly identify the matter and refer to the relevant financial statement disclosures. It must also state that the auditor's opinion is not modified in respect of the matter emphasized. It should not introduce information that is absent from the financial statements.

Where it goes wrong. Assuming that an EOM paragraph can contain independent information not disclosed in the financial statements or can weaken the unmodified opinion.

Authority. SA 706; section 6

Question 4 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

The engagement partner expects to include both Emphasis of Matter and Other Matter paragraphs. What communication is required before issuing the auditor's report?

1. Communicate the expectation and proposed wording of each paragraph to those charged with governance. (correct answer)
2. Obtain written permission from each shareholder before including either paragraph in the auditor's report.
3. Communicate the paragraphs only to management after issuing the audit report, because the opinion remains unmodified.
4. Obtain approval from the predecessor auditor before including the Other Matter paragraph in the current report.

Answer: A — Communicate the expectation and proposed wording of each paragraph to those charged with governance.

Explanation. SA 706 (Revised), section 6.5, requires the auditor to communicate with those charged with governance when the auditor expects to include an Emphasis of Matter or Other Matter paragraph. This communication covers both the expectation of including the paragraph and its proposed wording. The requirement does not give governance a right to veto the auditor's professional judgement or require prior approval from shareholders or a predecessor auditor.

Where it goes wrong. Confusing communication with governance with obtaining management's or shareholders' permission to exercise independent reporting judgement.

Authority. SA 706; section 6

Question 5 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

Scenario. M/s K. Mehta & Co. and M/s V. Raman & Associates have been appointed as joint statutory auditors of Zenith Manufacturing Ltd., a large automobile-component manufacturer with production facilities in three states. Before commencing the audit, the engagement partners jointly discussed the audit strategy. They allocated inventory, purchases and related expenses to M/s K. Mehta & Co., while revenue, receivables and cash balances were assigned to M/s V. Raman & Associates. The examination of statutory compliance, financial statement presentation and disclosure, and overall audit-report requirements was designated as common work. During the audit, both firms participated in testing the design of controls over financial reporting and reviewed the accounting policies adopted by the company. The engagement teams documented their respective procedures and obtained management representations through a common engagement arrangement. A signed work-allocation document was prepared and communicated to those charged with governance. While examining inventory, M/s K. Mehta & Co. discovered that a substantial quantity of obsolete raw material had been retained at full cost. After obtaining sufficient evidence, it concluded that the resulting overstatement was material but not pervasive. The matter was communicated to M/s V. Raman & Associates before completion of the audit. The latter reviewed the available evidence and agreed with the proposed treatment, but management refused to pass the adjustment. The engagement partners now have to decide how responsibility for the allocated inventory work, the matter agreed by both firms, and the overall financial statement presentation should be determined. The company's finance director also suggests that only the firm responsible for inventory should sign any modified audit opinion.

A material but non-pervasive inventory overstatement has been identified in the work allocated to M/s K. Mehta & Co. Which statement correctly describes responsibility for this allocated audit work?

1. Both joint auditors are automatically jointly and severally liable for every procedure performed in the inventory area.
2. M/s K. Mehta & Co. is responsible only for identifying the issue, while M/s V. Raman & Associates bears sole responsibility for the audit conclusion.
3. M/s K. Mehta & Co. is responsible for the properly executed audit work allocated to it. (correct answer)
4. Neither firm is responsible because the inventory examination was formally divided through a work-allocation document.

Answer: C — M/s K. Mehta & Co. is responsible for the properly executed audit work allocated to it.

Explanation. SA 299 (Revised), provisions on division of responsibility, state that each joint auditor is responsible only for the audit work allocated to that auditor, including proper execution of the relevant audit procedures. This does not make the other joint auditor automatically responsible for every procedure in the allocated area. However, both auditors retain joint and several responsibility for specified common matters, including statutory compliance, financial statement presentation and the audit report.

Where it goes wrong. Assuming that the appointment as joint auditor creates unrestricted joint and several liability for every specifically allocated audit procedure.

Authority. SA 299

Question 6 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

The inventory misstatement was communicated to M/s V. Raman & Associates, examined by both firms and agreed upon before completion. Which responsibility principle applies to the agreed matter?

1. Only M/s K. Mehta & Co. is responsible because the matter originated in its allocated area, even after both firms agreed on it.
2. Both joint auditors are jointly and severally responsible because the matter was brought to their attention and there was agreement. (correct answer)
3. Only M/s V. Raman & Associates is responsible because it reviewed the issue after receiving the written communication.
4. The management alone becomes responsible because the matter was communicated before the audit report was finalised.

Answer: B — Both joint auditors are jointly and severally responsible because the matter was brought to their attention and there was agreement.

Explanation. SA 299 (Revised), provisions relating to joint and several responsibility, include matters brought to the notice of joint auditors by any one of them where there is agreement among the joint auditors on such matters. Therefore, after both firms examined and agreed on the inventory issue, responsibility extends to both. The original work allocation does not protect an auditor from responsibility for matters that fall within this expressly shared category.

Where it goes wrong. Assuming that the original allocation of an audit area permanently prevents joint responsibility even after both auditors agree on a matter.

Authority. SA 299

Question 7 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

The finance director argues that the financial statement presentation and disclosure requirements should be the responsibility of the firm that prepared the final audit report. Which conclusion is correct?

1. Only the firm preparing the report is responsible because financial statement presentation is not part of the allocated audit work.
2. Only the firm assigned the largest audit area is responsible for compliance with the applicable financial reporting framework.
3. The firms may transfer presentation responsibility entirely to management through a joint management representation letter.
4. Both joint auditors are jointly and severally responsible for examining statutory compliance and financial statement presentation and disclosure. (correct answer)

Answer: D — Both joint auditors are jointly and severally responsible for examining statutory compliance and financial statement presentation and disclosure.

Explanation. SA 299 (Revised) expressly includes examining whether financial statements comply with relevant statutes and ensuring appropriate presentation and disclosure under the applicable financial reporting framework among matters for which all joint auditors are jointly and severally responsible. These are not merely individual allocated-area duties. A common management representation letter does not transfer the auditors' independent responsibilities to management.

Where it goes wrong. Treating statutory compliance and financial statement presentation as individual work-allocation matters rather than common responsibilities.

Authority. SA 299

Question 8 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

Assuming both firms maintain their disagreement with management's refusal to adjust inventory, which reporting approach is required under SA 299?

1. Only M/s K. Mehta & Co. should issue a separate report because the misstatement arose in its allocated inventory area.
2. Both joint auditors must issue one common unmodified report because separate reporting is not permitted in joint audits.
3. The firms should issue separate reports expressing their respective opinions, with each report referring to the other's report. (correct answer)
4. The auditors should issue a common qualified report even if one auditor does not agree with the qualification.

Answer: C — The firms should issue separate reports expressing their respective opinions, with each report referring to the other's report.

Explanation. SA 299 (Revised), provisions dealing with disagreements among joint auditors, require separate audit reports where joint auditors disagree regarding the opinion or any matter to be covered in the audit report. Each separate report must make reference to the other joint auditor's report. A common report is the normal requirement where agreement exists, but it cannot be forced upon auditors who hold differing professional opinions.

Where it goes wrong. Assuming that a joint audit always requires one common report even when the joint auditors fundamentally disagree.

Authority. SA 299

Question 9 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

Scenario. M/s Patel & Shah and M/s D. Nair & Co. are joint statutory auditors of Suryodaya Infrastructure Ltd., which undertakes large highway and renewable-energy projects. At the beginning of the engagement, the firms divided the audit work. M/s Patel & Shah was assigned project revenue, contract assets and related estimates, while M/s D. Nair & Co. was assigned borrowings, finance costs and treasury operations. Both firms jointly handled overall planning, statutory compliance, financial statement presentation and the preparation of the audit report. During its assigned work, M/s Patel & Shah identified substantial unrecorded revenue adjustments relating to contract variations. It communicated the relevant evidence and potential financial statement impact to M/s D. Nair & Co. in writing before completion of the audit. Both firms examined the issue and initially agreed that the accounting treatment required correction. However, after further discussions with management, M/s D. Nair & Co. changed its position and concluded that the adjustment was not necessary. M/s Patel & Shah maintained that the available evidence supported a material qualification of the financial statements. Separately, M/s D. Nair & Co. identified an undisclosed covenant breach relating to borrowings that required discussion and judgement by both auditors. It communicated the issue to M/s Patel & Shah, but the latter did not examine the matter because it fell outside its allocated area. The engagement partners disagree about the final opinion and whether a common report can be issued. Management insists that the senior firm should determine the final opinion and the other firm should merely endorse it.

What was M/s D. Nair & Co.'s obligation after receiving written communication about the project-revenue misstatement identified by M/s Patel & Shah?

1. Ignore it because the matter falls within the other firm's allocated responsibility and no further communication is necessary.
2. Accept the accounting treatment proposed by M/s Patel & Shah without evaluating the evidence independently.
3. Report the matter directly to shareholders and discontinue the joint audit without communicating with the other auditor.
4. Consider the communicated matter, discuss and apply professional judgement where required, and reach an appropriately supported joint reporting conclusion. (correct answer)

Answer: D — Consider the communicated matter, discuss and apply professional judgement where required, and reach an appropriately supported joint reporting conclusion.

Explanation. SA 299 (Revised) requires a joint auditor who becomes aware of a matter relevant to the responsibilities of another joint auditor, requiring attention, disclosure or discussion, to communicate it in writing before completion of the audit. The recipient cannot simply disregard a relevant matter because the original audit area was allocated elsewhere. The auditors should examine its implications for the financial statements and reporting responsibilities.

Where it goes wrong. Confusing individual responsibility for allocated procedures with permission to ignore matters communicated by another joint auditor.

Authority. SA 299

Question 10 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

M/s D. Nair & Co. discovers the undisclosed borrowing covenant breach and sends it to M/s Patel & Shah. The matter requires judgement regarding overall financial statement presentation. Which responsibility principle applies?

1. The matter is exclusively the responsibility of M/s D. Nair & Co. because borrowings were allocated to that firm.
2. Both joint auditors are jointly and severally responsible for the matter if it is brought to their attention and agreement exists. (correct answer)
3. The matter falls outside the joint audit because it involves a disclosure rather than a recorded transaction.
4. M/s Patel & Shah has no responsibility because it did not perform the original borrowing confirmation procedures.

Answer: B — Both joint auditors are jointly and severally responsible for the matter if it is brought to their attention and agreement exists.

Explanation. SA 299 (Revised) includes matters brought to the notice of joint auditors by any one of them where the auditors agree, together with financial statement presentation and disclosure, within joint and several responsibility. The fact that borrowings were allocated to one firm does not eliminate the shared reporting responsibility arising from an agreed matter affecting the financial statements as a whole.

Where it goes wrong. Applying the work-allocation principle to a matter that has become an agreed matter involving common reporting responsibilities.

Authority. SA 299

Question 11 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

M/s Patel & Shah and M/s D. Nair & Co. continue to disagree about the qualification relating to project revenue. What is the correct reporting procedure?

1. The senior firm should decide the opinion and the other firm should sign a common report to avoid confusing shareholders.
2. Both firms should issue identical reports, while privately recording their disagreement in the working papers.
3. The disagreement should be resolved through the management representation letter, after which only one auditor signs the report.
4. Each firm should express its own opinion in a separate report, with cross-references to the other's report. (correct answer)

Answer: D — Each firm should express its own opinion in a separate report, with cross-references to the other's report.

Explanation. SA 299 (Revised) states that joint auditors normally issue a common audit report. However, where they disagree regarding the opinion or any matter to be covered by the report, they shall express their opinion in separate audit reports. The reports must refer to each other. Neither the seniority of a firm nor management's preference determines the audit opinion.

Where it goes wrong. Assuming that the size or seniority of a joint audit firm gives it authority to impose the final audit opinion on the other firm.

Authority. SA 299

Question 12 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

Which statement correctly describes the responsibility of M/s Patel & Shah for borrowings and covenant disclosures after the issue was brought to its attention by the other firm?

1. It automatically becomes solely responsible for performing every borrowing audit procedure originally allocated to M/s D. Nair & Co.
2. It has no responsibility regarding the covenant breach because its allocated area is restricted to project revenue.
3. It must consider the communicated matter and discharge applicable shared reporting responsibilities, although its original allocated procedures remain with the other firm. (correct answer)
4. It may rely entirely on M/s D. Nair & Co.'s conclusion because joint auditors never share responsibility for matters outside their allocated areas.

Answer: C — It must consider the communicated matter and discharge applicable shared reporting responsibilities, although its original allocated procedures remain with the other firm.

Explanation. SA 299 (Revised) distinguishes responsibility for allocated audit procedures from jointly and severally responsible matters. M/s Patel & Shah does not automatically inherit every originally allocated borrowing procedure. However, when a matter requiring attention or disclosure is communicated, it must consider its implications and participate in applicable common reporting judgements. Statutory compliance, financial statement presentation and the audit report are shared responsibilities.

Where it goes wrong. Confusing an obligation to consider a communicated matter with automatic transfer of the entire originally allocated audit area.

Authority. SA 299

Question 13 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

Scenario. During the audit of a company, the auditor concludes that a matter is appropriately disclosed in the financial statements and is fundamental to users' understanding, but it does not require modification of the opinion. When should the auditor consider an EOM paragraph?

During the audit of a company, the auditor concludes that a matter is appropriately disclosed in the financial statements and is fundamental to users' understanding, but it does not require modification of the opinion. When should the auditor consider an EOM paragraph?

1. Whenever the matter is significant, regardless of whether it is already adequately disclosed in the financial statements.
2. Only when the matter is not disclosed and users need additional information about the auditor's responsibilities.
3. Whenever management requests that the auditor highlight a particular accounting estimate in the report.
4. When the auditor judges that it is fundamental to understanding, an EOM is appropriate, no modification is required and it is not a KAM where SA 701 applies. (correct answer)

Answer: D — When the auditor judges that it is fundamental to understanding, an EOM is appropriate, no modification is required and it is not a KAM where SA 701 applies.

Explanation. SA 706 (Revised), section 6.2, requires the auditor to consider an Emphasis of Matter paragraph where a matter is presented or disclosed in the financial statements and is fundamental to users' understanding. The auditor must not be required to modify the opinion because of the matter, and when SA 701 applies, the matter must not have been determined to be a KAM. Mere management preference is not sufficient.

Where it goes wrong. Ignoring the conditions that the matter must already be presented or disclosed and must not require a modified opinion.

Authority. SA 701; SA 706; section 6

Question 14 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

Scenario. An auditor wishes to communicate that the financial statements include information that was not examined under statutory audit by the auditor but was included in an accompanying publication. The information is not presented in the financial statements but is relevant to understanding the auditor's report. Which paragraph may be appropriate?

An auditor wishes to communicate that the financial statements include information that was not examined under statutory audit by the auditor but was included in an accompanying publication. The information is not presented in the financial statements but is relevant to understanding the auditor's report. Which paragraph may be appropriate?

1. An Emphasis of Matter paragraph, because any information accompanying the annual report is treated as part of the financial statements.
2. An Other Matter paragraph, provided communication is not prohibited by law or regulation and the matter is not a KAM where SA 701 applies. (correct answer)
3. A Basis for Qualified Opinion paragraph, because information not examined under statutory audit automatically makes the financial statements materially misstated.
4. An adverse opinion paragraph, because the auditor cannot refer to any matter outside the financial statements in an unmodified report.

Answer: B — An Other Matter paragraph, provided communication is not prohibited by law or regulation and the matter is not a KAM where SA 701 applies.

Explanation. SA 706 (Revised), section 6.4, permits an Other Matter paragraph for a matter not presented or disclosed in the financial statements but relevant to users' understanding of the audit, auditor responsibilities or auditor's report. The communication must not be prohibited by law or regulation and, where SA 701 applies, must not be a matter determined to be a KAM. The matter does not automatically create a financial statement misstatement.

Where it goes wrong. Confusing information accompanying the financial statements with information actually presented or disclosed within the financial statements.

Authority. SA 701; SA 706; section 6

Question 15 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

Scenario. An auditor includes an EOM paragraph explaining uncertainty about the outcome of exceptional litigation. The disclosure in the financial statements is inadequate and the auditor concludes that the omission is materially misleading. What is the correct treatment?

An auditor includes an EOM paragraph explaining uncertainty about the outcome of exceptional litigation. The disclosure in the financial statements is inadequate and the auditor concludes that the omission is materially misleading. What is the correct treatment?

1. Retain the unmodified opinion because an EOM paragraph adequately communicates any disclosure deficiency.
2. Use an Other Matter paragraph because litigation is not a matter requiring financial statement disclosure.
3. Consider a modified opinion under SA 705 because an EOM paragraph cannot replace correction of material misstatement or inadequate disclosure. (correct answer)
4. Retain the EOM paragraph and obtain management's written undertaking that full disclosure will be made next year.

Answer: C — Consider a modified opinion under SA 705 because an EOM paragraph cannot replace correction of material misstatement or inadequate disclosure.

Explanation. SA 706 (Revised), section 6.3, expressly provides that an Emphasis of Matter paragraph is not a substitute for a modified opinion under SA 705, required financial statement disclosures or going-concern reporting under SA 570. If litigation uncertainty has not been adequately disclosed and the omission is materially misleading, the auditor must evaluate the need for a modified opinion. A future management undertaking cannot cure the current-period disclosure deficiency.

Where it goes wrong. Using EOM reporting to avoid a qualification or adverse opinion when the financial statements themselves contain a material disclosure misstatement.

Authority. SA 570; SA 705; SA 706; section 6

Question 16 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

Scenario. A joint audit engagement involves two firms with different expertise. Which arrangement is required to establish an effective audit plan before commencement?

A joint audit engagement involves two firms with different expertise. Which arrangement is required to establish an effective audit plan before commencement?

1. Each firm independently prepares its own audit strategy, and management combines them after the audit is completed.
2. The engagement partner of the larger firm alone determines the audit scope, timing and direction for both firms.
3. The firms discuss only the division of work and avoid discussing common audit areas to preserve independence.
4. Key engagement members participate, and the joint auditors establish an overall strategy and discuss a plan identifying divided and common areas. (correct answer)

Answer: D — Key engagement members participate, and the joint auditors establish an overall strategy and discuss a plan identifying divided and common areas.

Explanation. SA 299 (Revised) requires engagement partners and other key team members from each joint auditor to participate in planning. The joint auditors should establish an overall audit strategy setting scope, timing and direction, and develop a joint audit plan before commencement. This plan identifies divided and common areas, reporting objectives, significant engagement factors, preliminary engagement results and necessary resources.

Where it goes wrong. Assuming that allocating individual audit areas alone is sufficient without joint strategy, planning and coordination.

Authority. SA 299

Question 17 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

Scenario. The engagement team has proposed including an EOM paragraph immediately after the signature block because it wishes to give the matter special prominence. Which approach is most consistent with SA 706?

The engagement team has proposed including an EOM paragraph immediately after the signature block because it wishes to give the matter special prominence. Which approach is most consistent with SA 706?

1. Determine placement based on the nature of the matter and relative significance to users, while maintaining a separate appropriately headed section. (correct answer)
2. Place every EOM paragraph after the signature block because this position is mandatory under the Standard on Auditing.
3. Always place the EOM paragraph within the Opinion section so that users interpret it as a separate audit conclusion.
4. Place the EOM paragraph before the title because matters disclosed in financial statements take precedence over auditor identification.

Answer: A — Determine placement based on the nature of the matter and relative significance to users, while maintaining a separate appropriately headed section.

Explanation. SA 706 (Revised) requires an EOM paragraph to be presented in a separate section with an appropriate heading containing the term Emphasis of Matter. Its placement should be determined by the nature of the information and the auditor's judgement about its relative significance to users compared with other report elements. The Standard does not prescribe placing every EOM paragraph after the signature block or within the Opinion section.

Where it goes wrong. Assuming that the auditor has unlimited freedom to place an EOM paragraph anywhere or that a single fixed position applies in every engagement.

Authority. SA 706

Question 18 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

Scenario. A joint auditor discovers that a major sales-return arrangement affects the revenue area assigned to another joint auditor. The matter requires discussion and judgement by the other auditor. What is the proper course?

A joint auditor discovers that a major sales-return arrangement affects the revenue area assigned to another joint auditor. The matter requires discussion and judgement by the other auditor. What is the proper course?

1. Adjust the other auditor's audit working papers directly without communicating because both firms are appointed to the same engagement.
2. Communicate the matter to all other joint auditors in writing before completion of the audit. (correct answer)
3. Ignore the arrangement unless the auditor originally assigned the revenue area requests assistance.
4. Report the matter only to management because the joint auditors are responsible exclusively for their individual allocated areas.

Answer: B — Communicate the matter to all other joint auditors in writing before completion of the audit.

Explanation. SA 299 (Revised) requires a joint auditor who comes across matters relevant to another joint auditor's area and which deserve attention, require disclosure, or require discussion or application of judgement to communicate the matter to all other joint auditors in writing before completion of the audit. The division of responsibilities does not remove the duty to share relevant findings that may affect the financial statements or audit report.

Where it goes wrong. Assuming that work allocation removes the obligation to communicate matters affecting another joint auditor's area.

Authority. SA 299

Question 19 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

Scenario. A company's financial statements adequately disclose the effects of an exceptional subsequent event occurring between the balance-sheet date and the date of the auditor's report. The event is fundamental to users' understanding and does not require modification. Which reporting mechanism may be used?

A company's financial statements adequately disclose the effects of an exceptional subsequent event occurring between the balance-sheet date and the date of the auditor's report. The event is fundamental to users' understanding and does not require modification. Which reporting mechanism may be used?

1. An Other Matter paragraph because every event occurring after the reporting date is outside the financial statements.
2. A qualified opinion because events occurring after the reporting date cannot be included in an unmodified report.
3. An Emphasis of Matter paragraph, provided its disclosure is appropriate and the relevant conditions of SA 706 are met. (correct answer)
4. A disclaimer of opinion because the event occurred after the financial statements were initially prepared.

Answer: C — An Emphasis of Matter paragraph, provided its disclosure is appropriate and the relevant conditions of SA 706 are met.

Explanation. SA 706 (Revised), section 6.2 and the examples in section 6.2.1 of the ICAI study material, identify a significant subsequent event occurring between the financial statement date and the auditor's report date as a possible circumstance for an EOM paragraph. The matter must be appropriately presented or disclosed, fundamental to users' understanding and not one requiring a modified opinion. Its timing alone does not require qualification.

Where it goes wrong. Treating every subsequent event as an Other Matter merely because it occurred after the balance-sheet date.

Authority. SA 706; section 6

Question 20 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

Scenario. The auditor considers including an Other Matter paragraph about the restricted distribution of an audit report prepared for specified intended users. Which reporting consideration is most appropriate?

The auditor considers including an Other Matter paragraph about the restricted distribution of an audit report prepared for specified intended users. Which reporting consideration is most appropriate?

1. The auditor should use an EOM paragraph because restrictions on report distribution are disclosures within the financial statements.
2. The auditor should automatically express a qualified opinion because a restricted report cannot provide reasonable assurance.
3. The auditor should include the restriction in the management-responsibilities section without using any separate heading.
4. The auditor may use a separate Other Matter section when the matter is not presented or disclosed in the financial statements but is relevant to understanding the report. (correct answer)

Answer: D — The auditor may use a separate Other Matter section when the matter is not presented or disclosed in the financial statements but is relevant to understanding the report.

Explanation. SA 706 (Revised), section 6.4, addresses matters not presented or disclosed in the financial statements that are relevant to users' understanding of the audit, auditor responsibilities or auditor's report. A restriction on report distribution may be communicated through an Other Matter paragraph where appropriate, subject to legal restrictions and the KAM exclusion when SA 701 applies. It does not automatically require a modified opinion.

Where it goes wrong. Confusing restrictions concerning the use of the auditor's report with financial statement disclosure deficiencies.

Authority. SA 701; SA 706; section 6

Question 21 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

Scenario. Which of the following situations may appropriately justify an EOM paragraph without requiring a modified audit opinion?

Which of the following situations may appropriately justify an EOM paragraph without requiring a modified audit opinion?

1. A material inventory overstatement established by audit evidence, which management refuses to correct.
2. A significant accounting policy departure that is not permitted under the applicable financial reporting framework.
3. A material uncertainty relating to going concern with inadequate financial statement disclosure.
4. A major catastrophe affecting the entity's financial position that has been adequately disclosed in the financial statements. (correct answer)

Answer: D — A major catastrophe affecting the entity's financial position that has been adequately disclosed in the financial statements.

Explanation. SA 706 (Revised), section 6.2.1, identifies a major catastrophe having a significant effect on the entity's financial position as an example where an EOM paragraph may be appropriate. This requires adequate presentation or disclosure, fundamental importance to users' understanding and no need for a modified opinion. The other alternatives involve matters that may require modification under SA 705 or specific going-concern reporting under SA 570.

Where it goes wrong. Selecting a material misstatement or inadequately disclosed going-concern uncertainty as an EOM matter instead of applying the relevant modification or going-concern standard.

Authority. SA 570; SA 705; SA 706; section 6

Question 22 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

Scenario. Which of the following matters falls within the joint and several responsibility of all joint auditors under SA 299?

Which of the following matters falls within the joint and several responsibility of all joint auditors under SA 299?

1. Every testing procedure individually performed in a specific audit area allocated to one firm.
2. The audit work not divided among the joint auditors and carried out collectively by each joint auditor. (correct answer)
3. Every routine voucher examination performed by an individual team member in a separately assigned area.
4. Only the audit procedures performed by the engagement partner of the larger joint audit firm.

Answer: B — The audit work not divided among the joint auditors and carried out collectively by each joint auditor.

Explanation. SA 299 (Revised) expressly includes audit work that is not divided among the joint auditors and is carried out by all of them within their joint and several responsibility. The distinction is important: properly allocated audit work is the responsibility of the respective joint auditor, while common undivided work is shared. The other alternatives incorrectly extend shared liability to every individually allocated procedure or restrict it to senior partners.

Where it goes wrong. Confusing work that has been jointly performed with audit procedures specifically allocated to individual joint auditors.

Authority. SA 299

Question 23 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

Scenario. A joint auditor discovers a matter during its allocated work and communicates it to the other auditor. Both firms discuss the issue but expressly disagree on the accounting treatment. Which responsibility conclusion is most appropriate?

A joint auditor discovers a matter during its allocated work and communicates it to the other auditor. Both firms discuss the issue but expressly disagree on the accounting treatment. Which responsibility conclusion is most appropriate?

1. The matter automatically becomes jointly and severally accepted because one auditor has communicated it to the other.
2. The second auditor becomes responsible for the original audit procedures merely because it received the written communication.
3. The communication obligation remains, but the specific category of shared responsibility for matters agreed upon is not established merely by disagreement. (correct answer)
4. The original auditor is relieved of all responsibility because the matter was communicated before completion of the audit.

Answer: C — The communication obligation remains, but the specific category of shared responsibility for matters agreed upon is not established merely by disagreement.

Explanation. SA 299 (Revised) distinguishes matters communicated by one joint auditor and agreed upon by the joint auditors from matters that have merely been brought to their attention. Joint and several responsibility under this category applies where there is agreement. However, the auditor who performed the allocated work remains responsible for that work, and disagreement on the report must be dealt with through the separate-report mechanism.

Where it goes wrong. Assuming that mere communication automatically creates joint and several responsibility without considering the requirement of agreement.

Authority. SA 299

Question 24 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · hard

Scenario. Two firms are joint auditors of a company. The work-allocation arrangement was agreed orally, but no signed allocation document was prepared or communicated to those charged with governance. Which requirement has been overlooked?

Two firms are joint auditors of a company. The work-allocation arrangement was agreed orally, but no signed allocation document was prepared or communicated to those charged with governance. Which requirement has been overlooked?

1. The requirement that each joint auditor must personally inspect every branch of the company before signing the report.
2. The requirement that the management representation letter must be obtained separately from each individual department.
3. The requirement that each auditor must issue an independent audit opinion even where both firms agree.
4. The requirement that the work-allocation document be signed by all joint auditors and communicated to those charged with governance. (correct answer)

Answer: D — The requirement that the work-allocation document be signed by all joint auditors and communicated to those charged with governance.

Explanation. SA 299 (Revised), planning requirements, state that the work-allocation document should be signed by all joint auditors and communicated to those charged with governance. The document provides clarity about divided and common responsibilities and helps avoid gaps or duplication. An informal oral arrangement does not satisfy the stated documentation and communication requirement. Joint auditors also obtain a common engagement letter and common management representation letter.

Where it goes wrong. Assuming that an informal agreement among engagement partners is sufficient to satisfy the formal work-allocation documentation requirement.

Authority. SA 299

Question 25 · 2 marks · Chapter 8: Audit Report and CARO, 2020 · medium

Scenario. A joint auditor independently discovers that an allocated audit area contains a material misstatement but fails to perform the prescribed procedures. The other joint auditor performed its own allocated procedures properly and was unaware of the issue. Which statement most accurately reflects SA 299?

A joint auditor independently discovers that an allocated audit area contains a material misstatement but fails to perform the prescribed procedures. The other joint auditor performed its own allocated procedures properly and was unaware of the issue. Which statement most accurately reflects SA 299?

1. The auditor responsible for the allocated area is responsible for proper execution of that work; the other auditor is not automatically liable for every such allocated procedure. (correct answer)
2. Both firms are automatically jointly and severally liable because appointment as joint auditors removes all distinctions between allocated areas.
3. Neither firm is responsible because the work was divided and the misstatement was discovered only during one firm's procedures.
4. The auditor who performed the unaffected allocated area is solely responsible because the joint audit report covers all financial statements.

Answer: A — The auditor responsible for the allocated area is responsible for proper execution of that work; the other auditor is not automatically liable for every such allocated procedure.

Explanation. SA 299 (Revised) provides that each joint auditor is responsible for the audit work specifically allocated to that auditor, including proper execution of audit procedures. Joint and several responsibility applies to common work, specified common planning decisions, agreed matters, statutory compliance, financial statement presentation and audit-report compliance. It does not automatically transfer the execution responsibility for every allocated procedure to the other auditor.

Where it goes wrong. Assuming that joint appointment automatically makes each auditor liable for every individual procedure performed by the other firm.

Authority. SA 299