Substance over form

[hrinkaa]

hi, I have three questions.

1) Is strict form compliance always the necessity? When form needs to be changed for better reporting, is it alright to change the format of the financial statments, or mention it in Notes to Accounts.

2) (a) On Compliance and Substantive tests, where does Internal audit occupy prominence?

(b) Compliance tests indicate adherence to policy in principle. Substantive tests indicate adherence to policy in application.
Is this statement correct or false. In either case, give 3 examples.

3) When can an auditor be an officer in a company in which his firm acts as the statutory auditor. (Assume that he is not the reporting Partner in the firm).

hrinkaa

[Vanessa]

1. Re: Is strict form compliance always the necessity? When form needs to be changed for better reporting, is it alright to change the format of the financial statments, or mention it in Notes to Accounts

The question pertains to F7. I have sent your question to the author of F7. You will get the reply soon.

2. Re: a) On Compliance and Substantive tests, where does Internal audit occupy prominence?

(b) Compliance tests indicate adherence to policy in principle. Substantive tests indicate adherence to policy in application.
Is this statement correct or false. In either case, give 3 examples

Compliance Test
Compliance test is not referred to as a form of audit evidence in the handbook of international
auditing, assurance, and ethics pronouncements by International federation of accountants (IFAC)

However compliance test is sometimes colloquially used to mean audit evidence which tests the application of the internal control procedures. This stands for tests of controls (referred to in GTG books)
e.g of a compliance test would be to test the internal controls in the various operations of business like purchase, revenue, payroll, etc.

Substantive tests

Substantive tests are procedures that provide evidence supporting the fairness of management’s financial statement assertions. They are aimed at detecting material misstatements at the assertion level

e.g. of a substantive test could be calculating interest expense on corporate debt and verifying the amount in the financial records

Considering the above, internal auditors concentrate on test of controls.

3. Re: When can an auditor be an officer in a company in which his firm acts as the statutory auditor. (Assume that he is not the reporting Partner in the firm).

According to IFAC code of ethics, an employee of a firm is not allowed to serve as an officer / director on the board of the assurance client. This is because the auditor would face a self interest and self review threat, which is so significant that it cannot be safeguarded.
Therefore an auditor is not allowed to be an officer / director in a company in which his firm acts as the statutory auditor.

[Vanessa]

hi, I have three questions.

1) Is strict form compliance always the necessity? When form needs to be changed for better reporting, is it alright to change the format of the financial statments, or mention it in Notes to Accounts.


hrinkaa

Hi Snehal,
This question pertains to F7. Can you please reply to it.
Vanessa

[hrinkaa]

Vanessa, thanks very much. I seem to be meeting people here who are really Subject Matter Experts in GTG group.

I asked the first question from my audit experience, where a client was making a loss, hence the way of presentation had to be changed.

The client did not agree, but we won over when we showed Sch 6 Part 1 format in Indian Companies Act. My reporting partner also agreed with me.

I agree that the preparation and presentation of the financial statements is the responsibility of the Company Management, but does the Auditor have a say in that?

Especially if form brings out a different picture than what is presented by the management. Will not (change in) form bring out better substance, should situation demand?

hrinkaa

[Vanessa]

Thanks for “appreciating” the fact that we at GTG are “subject experts”.
I think you would appreciate that in today’s globalisation specialisation is the order of the day.

IAS 1 envisages that in extremely rare circumstances, management may conclude that compliance with the requirements of a Standard or Interpretation would be so misleading that it would conflict with the objectives of financial statements as set out in the Framework. Therefore, management may override the requirements. In other words, it may depart from the Standards and potentially the Framework.

Information conflict with the objectives of the financial statements occurs when the item of information does not faithfully represent the transactions, events or conditions that it is supposed to represent. As a result, users may not be able to take correct economic decisions based on the financial statements.

Coming to your question, the audit perspective comes into the picture only if it differs from the management perspective. The responsibility for preparation of financial statements rests with the organisation, so if the organisation prepares the financial statements taking care of IAS 1, the auditor cannot have a different perspective from the accountant.
However if the auditor disagrees with either:
i. Accounting treatment; or
ii. Disclosure as per IFRS

If it deals with an area which is “material”- the auditor can give a qualified opinion
On the other hand if the matter is “pervasive”- the auditor can give an adverse opinion.

Refer page G1.13 of GTG F8 textbook for examples