Question Tag: ISA 701

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  • 30 Marks

AAA – May 2017 – L3 – Q1 – Audit Reporting

Prepare briefing notes covering benefits of IAASB auditor reporting project, sections of ISA 700 report, and explanation of Key Audit Matters.

You are Aremu Ana, an Audit Partner at Danda Audit firm who has kept pace with the International Auditing and Assurance Standards Board’s (IAASB) new and revised reporting standards which lay the foundation for the future of global auditor’s reporting and improved auditor communication.

You have concluded arrangements with the Human Capital Department of the firm to train the firm’s audit team, which includes trainees, supervisors, and managers. The training programme has been fixed to hold in two months’ time. You are now preparing notes that will assist in educating the audit team and make them appreciate the new standards.

Required:

Prepare a training briefing note which:
a. Clarifies the intended benefits of the IAASB’s new auditor reporting project. (5 Marks)
b. Identifies and describes the different sections of the new auditor’s report as required by ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements. (20 Marks)
c. Explains the term ‘Key Audit Matters’ (KAM), stating any TWO matters an auditor is required to take into account in the determination of KAM in accordance with ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report. (5 Marks)

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  • 30 Marks

AAA – May 2023 – L3 – Q1 – Audit Reporting

Evaluate criteria and communication of Key Audit Matters, including actions if none exist.

Romeo and Juliet Plc is an indigenous company incorporated on March 5, 2012. The entity operates in the oil sector of the economy, which has experienced severe income decline over the past years. The global oil prices hit a record low of about $28 per barrel in 2019 and 2020, further plunging the company and the industry into a downward slide in income generation. The company is also affected by foreign exchange difficulties faced by most companies in the country resulting from increased regulation of foreign exchange. Regular cases of oil theft, pipeline vandalism, and insecurity have also affected the operations of major international oil companies, which are the entity’s major customers. As a result of the above, the company recorded the following in its books of account:

  1. Financial losses: The company has made consistent losses from the financial year ended December 31, 2017, to date.
  2. Current liability position: The company’s current liabilities exceeded its current assets.
  3. Negative net operating cash position: The company has maintained a negative net operating cash position from December 31, 2017, to date.

Furthermore, the company’s performance has worsened as a result of a decrease in sales and an increase in expenses.

The largest proportion of the current liabilities is the intercompany borrowings, which accounted for 62% (2020 – 45%) of the total current liability balance. The borrowings stood at N1.5 billion, N1.6 billion, and N2 billion for the financial years ended December 31, 2019, 2020, and 2021, respectively. The finance costs in relation to the borrowings stood at N230 million in the year ended December 31, 2021 (2020- N214 million).

The company has currently defaulted on a number of its contractual obligations with its directors, and there was no directors’ remuneration in the current year due to its continuous loss-making position.

At the pre-audit meeting with management of Romeo and Juliet Plc, your firm (the auditors) were informed that, in the year, the company was involved in a business combination with another oil company. To pay for the cost of acquisition, an additional intercompany loan was obtained because of the poor financial position of the company. In addition, the company’s major investment in an associated company was disposed of. The business acquisition proposal has all necessary regulatory approvals. It was approved at the meeting of the directors and annual general meeting of the company in the previous year and disclosed in the company’s prior year financial statements as business matters.

After the meeting with management, you have started the preparation for the year-end audit, and in compliance with regulatory requirements and auditing standards, a Key Audit Matter should be inserted on the opinion page.

Required:

(a) Evaluate the criteria that will help the engagement team determine what qualifies as a matter requiring significant auditor’s attention and can be classified as a Key Audit Matter. (8 Marks)

(b) Discuss the factors that will determine matters of most significance to be communicated to those charged with governance. (10 Marks)

(c) Discuss the criteria for what must be included in the description of a Key Audit Matter on the audit opinion. (6 Marks)

(d) Evaluate what should be done, assuming that you have determined that there are no Key Audit Matters to be reported in the above scenario. (6 Marks)

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  • 10 Marks

AA – Nov 2021 – L2 – Q1a – Audit Reports

Define Key Audit Matters (KAMs) as per ISA 701 and how they are communicated in the auditor’s report.

Independent Auditor’s Report
To The Members Of Fair Deals Limited (Extract)

Key Audit Matters
Key Audit Matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Goodwill
Goodwill under IFRSs: the company is required to annually test the amount of goodwill for impairment. This annual impairment test was significant to our audit because the balance of N3,024,115 as of December 31, 2020 is material to the financial statements. In addition, management’s assessment process is complex and highly judgmental and is based on assumptions, specifically achieving projected revenue which are affected by expected future market or economic conditions, particularly those in the North East zone.
Our audit procedures included, among others, using a valuation expert to assist us in evaluating the assumptions and methodologies used by the company in particular those relating to the forecast revenue growth and profit margins for domestic wares production. We also focused on the adequacy of the company disclosures about those assumptions to which the outcome of the impairment test is most sensitive, that is, those that have the most significant effect on the determination of the recoverable amount of goodwill.

Revenue Recognition
The amount of revenue and profit recognised in the year on the sale of domestic wares and after-market services is dependent on the appropriate assessment of whether or not each long-term after-market contract for services is linked to or separated from the contract for sale of domestic wares. As the commercial arrangements can be complex, significant judgment is applied in selecting the accounting basis in each case. In our view, revenue recognition is significant to our audit as the company might inappropriately account for sales of domestic wares and long-term service agreements as a single arrangement for accounting purposes and this would usually lead to revenue and profit being recognised too early because the margin in the long-term service agreement is usually higher than the margin in the domestic wares sale agreement.
Our audit procedures to address the risk of material misstatement relating to revenue recognition, which was considered to be a significant risk, included:

  • Testing of controls, assisted by our own IT specialists, including, among others, those over: input of individual advertising campaigns’ terms and pricing; comparison of those terms and pricing data against the related overarching contracts with advertising agencies; and linkage to viewer data;
  • Detailed analysis of revenue and the timing of its recognition based on expectations derived from our industry knowledge and external market data, following up variances from our expectations.

Abuja, Nigeria (signed)
Date
Chartered Accountants

ISA 701 Communicating key Audit matters in the Independent Auditors Report was introduced to make the auditor’s report more informative and useful for the intended users.

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  • 10 Marks

AA – Nov 2019 – L2 – Q5b – Completion Procedures and Reporting

Discusses authoritative sources for the auditor’s report and explains the importance of management and auditor responsibility paragraphs.

The basic objective of an audit is to form and express an opinion on the financial statements. The tangible means by which the auditor achieves this objective is the Auditors Report that is issued to members of the company after the completion of the audit.

Required:
i) Discuss TWO (2) authoritative sources which govern the form and content of the auditor’s report to members. (4 marks)
ii) Explain the essence or importance of Management Responsibility and Auditor’s Responsibility paragraphs in the auditor’s report. (6 marks)

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  • 15 Marks

AA – May 2018 – L2 – Q5 – Completion Procedures and Reporting

Explains key audit matters under ISA 701, objectives of ISA 701, and the requirements for determining and communicating KAM.

In January 2015, the IAASB issued ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report. This standard is required to be applied to the audit of all listed entities.

Required:
a) Explain the term Key Audit Matters as defined in ISA 701. (2 marks)
b) State TWO objectives of ISA 701. (2 marks)
c) What are the THREE matters that ISA 701 requires the auditor to take into account when making a determination of Key Audit Matters? (6 marks)
d) How should the auditor communicate Key Audit Matters? (5 marks)

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  • 20 Marks

AAA – Nov 2023 – L3 – Q3 – Reporting, Current Issues

Brief staff on KAMs, their determination, and their interaction with modifications to the audit report, going concern, emphasis of matter, and other matters.

ISA 701: Communicating Key Audit Matters (KAM) in the Independent Auditor’s Report is a new ISA introduced as part of the International Audit and Assurance Standards Board’s (IAASB) extensive revisions to International Standards on Auditing (ISAs) relating to audit reporting. The objective of the IAASB’s revisions was to make the auditor’s report more detailed and useful for the intended users. ISA 701 applies to audits of complete sets of general purpose financial statements of listed entities.

Subsequently, the Institute of Chartered Accountants, Ghana (ICAG) as the regulator of accountancy profession and practice in Ghana, issued a notice to practitioners and the public which directed that auditor’s report issued on financial statements for periods ending on or after 31 December, 2017 for Public Interest Entities (PIEs) to include a communication on Key Audit Matters as required by ISA 701.

You are the Partner in charge of training with Preko and Associates. An audit team member informed you that one of the clients being audited has an issue which is being contemplated as to whether to report the issue as key audit matter, emphasis of matter paragraph, other matter paragraph, or to modify the audit opinion.

Required: Prepare briefing notes for the staff of your firm regarding the following:

a) KAMs and state TWO (2) categories of entities in Ghana which ISA 701 is applicable as adopted by ICAG. (5 marks)

b) Factors to be considered in determining KAMs.

(3 marks)

c) Interaction between: i) KAMs and ISA 705 (revised): Modifications to the Opinion in the Independent Auditor’s Report
ii) KAMs and ISA 570 (revised): Going Concern
iii) KAMs and Emphasis of Matter
iv) KAMs and Other Matters (12 marks)

 

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  • 30 Marks

AAA – May 2017 – L3 – Q1 – Audit Reporting

Prepare briefing notes covering benefits of IAASB auditor reporting project, sections of ISA 700 report, and explanation of Key Audit Matters.

You are Aremu Ana, an Audit Partner at Danda Audit firm who has kept pace with the International Auditing and Assurance Standards Board’s (IAASB) new and revised reporting standards which lay the foundation for the future of global auditor’s reporting and improved auditor communication.

You have concluded arrangements with the Human Capital Department of the firm to train the firm’s audit team, which includes trainees, supervisors, and managers. The training programme has been fixed to hold in two months’ time. You are now preparing notes that will assist in educating the audit team and make them appreciate the new standards.

Required:

Prepare a training briefing note which:
a. Clarifies the intended benefits of the IAASB’s new auditor reporting project. (5 Marks)
b. Identifies and describes the different sections of the new auditor’s report as required by ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements. (20 Marks)
c. Explains the term ‘Key Audit Matters’ (KAM), stating any TWO matters an auditor is required to take into account in the determination of KAM in accordance with ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report. (5 Marks)

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  • 30 Marks

AAA – May 2023 – L3 – Q1 – Audit Reporting

Evaluate criteria and communication of Key Audit Matters, including actions if none exist.

Romeo and Juliet Plc is an indigenous company incorporated on March 5, 2012. The entity operates in the oil sector of the economy, which has experienced severe income decline over the past years. The global oil prices hit a record low of about $28 per barrel in 2019 and 2020, further plunging the company and the industry into a downward slide in income generation. The company is also affected by foreign exchange difficulties faced by most companies in the country resulting from increased regulation of foreign exchange. Regular cases of oil theft, pipeline vandalism, and insecurity have also affected the operations of major international oil companies, which are the entity’s major customers. As a result of the above, the company recorded the following in its books of account:

  1. Financial losses: The company has made consistent losses from the financial year ended December 31, 2017, to date.
  2. Current liability position: The company’s current liabilities exceeded its current assets.
  3. Negative net operating cash position: The company has maintained a negative net operating cash position from December 31, 2017, to date.

Furthermore, the company’s performance has worsened as a result of a decrease in sales and an increase in expenses.

The largest proportion of the current liabilities is the intercompany borrowings, which accounted for 62% (2020 – 45%) of the total current liability balance. The borrowings stood at N1.5 billion, N1.6 billion, and N2 billion for the financial years ended December 31, 2019, 2020, and 2021, respectively. The finance costs in relation to the borrowings stood at N230 million in the year ended December 31, 2021 (2020- N214 million).

The company has currently defaulted on a number of its contractual obligations with its directors, and there was no directors’ remuneration in the current year due to its continuous loss-making position.

At the pre-audit meeting with management of Romeo and Juliet Plc, your firm (the auditors) were informed that, in the year, the company was involved in a business combination with another oil company. To pay for the cost of acquisition, an additional intercompany loan was obtained because of the poor financial position of the company. In addition, the company’s major investment in an associated company was disposed of. The business acquisition proposal has all necessary regulatory approvals. It was approved at the meeting of the directors and annual general meeting of the company in the previous year and disclosed in the company’s prior year financial statements as business matters.

After the meeting with management, you have started the preparation for the year-end audit, and in compliance with regulatory requirements and auditing standards, a Key Audit Matter should be inserted on the opinion page.

Required:

(a) Evaluate the criteria that will help the engagement team determine what qualifies as a matter requiring significant auditor’s attention and can be classified as a Key Audit Matter. (8 Marks)

(b) Discuss the factors that will determine matters of most significance to be communicated to those charged with governance. (10 Marks)

(c) Discuss the criteria for what must be included in the description of a Key Audit Matter on the audit opinion. (6 Marks)

(d) Evaluate what should be done, assuming that you have determined that there are no Key Audit Matters to be reported in the above scenario. (6 Marks)

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  • 10 Marks

AA – Nov 2021 – L2 – Q1a – Audit Reports

Define Key Audit Matters (KAMs) as per ISA 701 and how they are communicated in the auditor’s report.

Independent Auditor’s Report
To The Members Of Fair Deals Limited (Extract)

Key Audit Matters
Key Audit Matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Goodwill
Goodwill under IFRSs: the company is required to annually test the amount of goodwill for impairment. This annual impairment test was significant to our audit because the balance of N3,024,115 as of December 31, 2020 is material to the financial statements. In addition, management’s assessment process is complex and highly judgmental and is based on assumptions, specifically achieving projected revenue which are affected by expected future market or economic conditions, particularly those in the North East zone.
Our audit procedures included, among others, using a valuation expert to assist us in evaluating the assumptions and methodologies used by the company in particular those relating to the forecast revenue growth and profit margins for domestic wares production. We also focused on the adequacy of the company disclosures about those assumptions to which the outcome of the impairment test is most sensitive, that is, those that have the most significant effect on the determination of the recoverable amount of goodwill.

Revenue Recognition
The amount of revenue and profit recognised in the year on the sale of domestic wares and after-market services is dependent on the appropriate assessment of whether or not each long-term after-market contract for services is linked to or separated from the contract for sale of domestic wares. As the commercial arrangements can be complex, significant judgment is applied in selecting the accounting basis in each case. In our view, revenue recognition is significant to our audit as the company might inappropriately account for sales of domestic wares and long-term service agreements as a single arrangement for accounting purposes and this would usually lead to revenue and profit being recognised too early because the margin in the long-term service agreement is usually higher than the margin in the domestic wares sale agreement.
Our audit procedures to address the risk of material misstatement relating to revenue recognition, which was considered to be a significant risk, included:

  • Testing of controls, assisted by our own IT specialists, including, among others, those over: input of individual advertising campaigns’ terms and pricing; comparison of those terms and pricing data against the related overarching contracts with advertising agencies; and linkage to viewer data;
  • Detailed analysis of revenue and the timing of its recognition based on expectations derived from our industry knowledge and external market data, following up variances from our expectations.

Abuja, Nigeria (signed)
Date
Chartered Accountants

ISA 701 Communicating key Audit matters in the Independent Auditors Report was introduced to make the auditor’s report more informative and useful for the intended users.

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  • 10 Marks

AA – Nov 2019 – L2 – Q5b – Completion Procedures and Reporting

Discusses authoritative sources for the auditor’s report and explains the importance of management and auditor responsibility paragraphs.

The basic objective of an audit is to form and express an opinion on the financial statements. The tangible means by which the auditor achieves this objective is the Auditors Report that is issued to members of the company after the completion of the audit.

Required:
i) Discuss TWO (2) authoritative sources which govern the form and content of the auditor’s report to members. (4 marks)
ii) Explain the essence or importance of Management Responsibility and Auditor’s Responsibility paragraphs in the auditor’s report. (6 marks)

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  • 15 Marks

AA – May 2018 – L2 – Q5 – Completion Procedures and Reporting

Explains key audit matters under ISA 701, objectives of ISA 701, and the requirements for determining and communicating KAM.

In January 2015, the IAASB issued ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report. This standard is required to be applied to the audit of all listed entities.

Required:
a) Explain the term Key Audit Matters as defined in ISA 701. (2 marks)
b) State TWO objectives of ISA 701. (2 marks)
c) What are the THREE matters that ISA 701 requires the auditor to take into account when making a determination of Key Audit Matters? (6 marks)
d) How should the auditor communicate Key Audit Matters? (5 marks)

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  • 20 Marks

AAA – Nov 2023 – L3 – Q3 – Reporting, Current Issues

Brief staff on KAMs, their determination, and their interaction with modifications to the audit report, going concern, emphasis of matter, and other matters.

ISA 701: Communicating Key Audit Matters (KAM) in the Independent Auditor’s Report is a new ISA introduced as part of the International Audit and Assurance Standards Board’s (IAASB) extensive revisions to International Standards on Auditing (ISAs) relating to audit reporting. The objective of the IAASB’s revisions was to make the auditor’s report more detailed and useful for the intended users. ISA 701 applies to audits of complete sets of general purpose financial statements of listed entities.

Subsequently, the Institute of Chartered Accountants, Ghana (ICAG) as the regulator of accountancy profession and practice in Ghana, issued a notice to practitioners and the public which directed that auditor’s report issued on financial statements for periods ending on or after 31 December, 2017 for Public Interest Entities (PIEs) to include a communication on Key Audit Matters as required by ISA 701.

You are the Partner in charge of training with Preko and Associates. An audit team member informed you that one of the clients being audited has an issue which is being contemplated as to whether to report the issue as key audit matter, emphasis of matter paragraph, other matter paragraph, or to modify the audit opinion.

Required: Prepare briefing notes for the staff of your firm regarding the following:

a) KAMs and state TWO (2) categories of entities in Ghana which ISA 701 is applicable as adopted by ICAG. (5 marks)

b) Factors to be considered in determining KAMs.

(3 marks)

c) Interaction between: i) KAMs and ISA 705 (revised): Modifications to the Opinion in the Independent Auditor’s Report
ii) KAMs and ISA 570 (revised): Going Concern
iii) KAMs and Emphasis of Matter
iv) KAMs and Other Matters (12 marks)

 

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