Session 2

[Acid]

Master Ltd is a newly established company. Your firm has been appointed to carry out a statutory audit of the Master Ltd under the Companies Act. Jiten , a consultant of Master Ltd , told the management of Master Ltd that all the company needed to be audited under the Income tax act.

One of the director asks why , If Master has already appointed a statutory auditor to carry out the company audit ( as required by Comapnies ACt) , it is necessary to appoint another auditor.

The director also suggests that , if the audit under the Income Tax Act is a requirement , Master should appoint the same firm to perform this audit as well as the statutory audit.

You are required to discuss :

a) Objectives of the statutory audit
b) Implications of appointing the same auditor to perform an audit under Companies ACt as well as under the INcome tax Act.

Also discuss the different type of opinion provided by statutory audit.


[ 10 ]


Note : You should keep in mind the auditors independence priniciples and the differences between statutory audit and the other audit.

[Lightwarrior]

Vivie whats the difference between substantive procedures and analytical procedures?


Thanks

Lightwarrior

[tracy]

In the UK the compaines Act requires all large companies registered under the Act to have their finanacial statements audited by an independent auditor. In many countries the laws and regulations also require audit of the Income Tax.

The objectives of the statutory audit require by the comaines act is to provide a opinon on the truth and fairness of the financial statements.
Whereas the objective of the audit for Income tax is to check the expenditure claimed for authenticity and income for completness.

an auditor is a statutory audit will provide either a unmodififed report this is where the financial statemetns give a true and fair view in all material aspects. or provide a modified report.
In a modified report there are matters that do not affect the opinon and matters that do affect the opinon of the auditor, there can give either:
A adverse opinon - this is if the auditor disagree with management regarding accounting policies
A Disclaimer of opinon - the auditor cannot get enough evidence to express an opion
A qualified opinon - the disagreement is not material.

The regulations prohibit the same auditor from doing the statutory audit and the income tax audit as it may affect the independance of the auditor. There is also the risk the auditor can be pressured into giving an incorrect report by the company if they received the majority of their income from one client.

Any feedback would be great.
Tracy

[Acid]

Tracy,

We are all waiting for our tutors feedback , you answer is great but I PERSONALLY think t hat this should be a bit more emphasised... i mean dont u think its a bit short for the marks ? but anyhow your quality is great.

Lets see !

Cheeeeeeeeeers!

Acid

[Vivienne]

A statutory audit is an audit that is governed and conducted according to the requirements of the companies act 1985.most puplicly listed companies are compelled by law to have their financial statements audited whilst small companies are generally totally exempt from the audit requirement.

statutory audits are conducted by independent auditors and not the internal auditors of the company.

the main objectives of such an audit is to subject financial statements to an audit which is carried out in accordance with ISAs.whilst with an internal audit,the emphasis is to check whether the prescibed controls are operating effectively.statutory audits lead to forming an opinion whether the financial statements show a true and fair view.these auditors are not responsible for detecting fraud though they are expected to detect material mistatements in the financial statements.

auditors under a statutory audit report to the shareholders of a company whilst internal auditors report to management of the company.


b) auditors are commonly appointed by share holders.they are generally appointed for a one year term.audotor independence is very important as it borders on the objectivity of the auditors.ther are certain conditions that threaten the independence of auditors like using the same auditors for a statutory audit and an income tax audit.when this happens it leads to an auditor compromising his position since it is like he is reviewing his own work.this will in turn lead to issuing an incorrect opinion on the financial statements.

opinions provided by auditors

1)when there is a disagreement that is the auditors do no agree with certain accounting treatment an 'except for' opinion will be issued.an example of this could be that no depreciation has been provided in the financial statements and hence the carrying value of non current assets have not been reduced with the accumulated depreciation.

2) adverse opinion is where the auditors stae that the financial staements do not give a true and fair view.here if ther eare any matters that the auditors have highlighted like in the case above then an adverse opinion is issued. an adverse opinion could also be due to a limitation of scope.this could mena that the auditors wee unable to collect sufficient evidence eg when they miss the counting of physical inventory.

the end

[Vivienne]

yes lightworrior,

you asked me the diifferences between substantive procedures and analytical procedures.well this is what i came up with

substantive procedures are the tests of transactions and balances that an auditor carries out in order to obtain sufficient evidence to enable him form an opinion.there are a number of procedures that are carried out in order to arrive at sufficient evidence.analytical procedures happens to be one of the procedures carried out to arrive at this evidence.the substantive procedures can be easily remembered with the pneumonic AEIOU

Analytical procedures -comparison of financial and non financial
information eg ratios
Enquiry -seeking information from knowledgeable
persons
Inspection -of records and documents/tangible assets

Observation -looking at processes and procedures being
performed
compUtation -checking mathematical accuracy of
documents and records.


this is all i can say if there is anything to be added or removed please help.

[Acid]

The objectives of statutory Audit :

- To ensure that financial statements present a true and fair view and are free from any material misstatements.

-To audit in compliance with with local and International ( eg IAS ) standards


-To audit under the companys Act


Implication of using the same auditor for audit under Companies as well as Income tax act :


Independance & objectivity of the auditor may be impaired eg. Auditor may get substantial amount of fee from its client so he may think that he should give a good opinion so that next year also he is appointed for audit and other services.
The Auditor may not have sufficient expertise to audit under income tax .
ACCA Professional ethics may prevent the same auditor giving the services to one client which is likely to impair objectivity.

Types of auditors opinion


Unmodified opinion i.e. The financial statements are perfect!
Modified opinion may have 2 elements
Disclaimer opinion :the auditor cannot get enough evidence to express an opion
Qualified opinion : Matters are not so material that auditor should give an adverse opinion.

Waiting for feedback! :eek:

Acid

[Vivienne]

Yes Acid,

i was not very clear on the session 2 question.i was not particularly clear on the inclusion of Precious ltd.i understood that jiten was a consultant of master ltd but what was precious ltd in this question.please enlighten me .

the second question was that i did not understand very well an audit under income tax act. did you mean an auditor also providing tax consultancy services or there is specifically an income tax audit. i had answered the questions in the way i had understood them .i could have misunderstood the whole question.

anyway i just have to wait for the feedback.

[Acid]

Yes Acid,

i was not very clear on the session 2 question.i was not particularly clear on the inclusion of Precious ltd.i understood that jiten was a consultant of master ltd but what was precious ltd in this question.please enlighten me .

the second question was that i did not understand very well an audit under income tax act. did you mean an auditor also providing tax consultancy services or there is specifically an income tax audit. i had answered the questions in the way i had understood them .i could have misunderstood the whole question.

anyway i just have to wait for the feedback.

Actually check the question now and you will not find any precious ltd! that was a mistake by me . Apologies for that.

Audit under Companies act and Income tax are to different things where the scope of the audit differs.

Audit under companies act looks for compliance with legislations etc

While Audit under income tax means that auditor would ensure correct tax liabilities and deffered taxes etc.

Does that make you clear?

[Vivienne]

i am clear now on the two different audits. i surely was not. Thanks. meanwhile so far so good let us move on.

[Acid]

Wonderful! So are we clear up till here ? IS everything clear regarding the topics and concepts we have discussed so far ?

[Vivienne]

things are moving on fine for me. i had attempted this paper during the dec 06 and i couldnt manage. in june 07 i didnt write it but instead i wrote f7.so you can see the lapse in between. so far so good because previously i was so inclined to p2 and was not so much concentrating on f8. since we started this program am now being kept busy doing the questions and i am slowly getting the grip! i am clear with what we have gone through so far. it now just remains to wait for the feedback.

[tracy]

things are going well, doing these questions is really forcing me to focus my attention on learning the subjects, just what I needed,
Thanks acid for setting this up.

cheers
Tracy

[Pixiefeet]

I was confused at first with the Master Co questioned but undderstood what was being asked from the second answer

[Pixiefeet]

[/LIST]
Types of auditors opinion


Unmodified opinion i.e. The financial statements are perfect!
Modified opinion may have 2 elements
Disclaimer opinion :the auditor cannot get enough evidence to express an opion
Qualified opinion : Matters are not so material that auditor should give an adverse opinion.

Waiting for feedback! :eek:

Acid

I am familiar with the terms Unqualifed and Qualified Opinions...can someone please tell me if they are the same thing for which one is more current??

[Acid]

You are right , they are interchangable terms

[rajni]

Hi Tracy,

Your answer has been marked, please find the attachment.

[rajni]

Hi Acid,

your answer has been marked. please find the attachment.

[rajni]

Hi Vivienne,

your answer has been marked. please find the attachment.