Audit Report under HKSA 700 & August 2008

Transcription

1 Audit Report under HKSA 700 & August 2008 Nelson Lam 林智遠 MBA MSc BBA ACA ACS CFA CPA(Aust) CPA(US) FCCA FCPA(Practising) MSCA Nelson 1 Overview HKSQCs Hong Kong Standards on Quality Control (only HKSQC 1 issued so far) Hong Kong Framework for Assurance Engagements Audits and Reviews of Historical Fin. Information Other Assurance Engagements Related Services HK Standards on Auditing (HKSAs) HK Standards on Review Engagements (HKSRE) HK Standards on Assurance Engagements (HKSAEs) HK Standards on Inv. Circular Reporting Engagements (HKSIRs) HK Standards on Related Services (HKSRSs) Nelson 2 1

2 Overview HKSQCs Hong Kong Standards on Quality Control (only HKSQC 1 issued so far) Hong Kong Framework for Assurance Engagements Audits and Reviews of Historical Fin. Information HK Standards on Auditing (HKSAs) Nelson 3 Overview HKSA General Principles and Responsibilities HKSA Risk Assessment & Response to Assessed Risks HKSA Audit Evidence HK Standards on Auditing (HKSAs) HKSA Using Work of Others HKSA Audit Conclusions and Reporting Nelson 4 2

3 Today s Agenda Subsequent Events (HKSA 560) Going Concern (HKSA 570) Simple but Comprehensive Critical and New Issues Examples and Cases Independent Auditor s Report (HKSA 700) Modification to the Independent Auditor s Report (HKSA 701) Nelson 5 Today s Agenda Subsequent Events (HKSA 560) Nelson 6 3

4 HKAS 10 Events After Balance Sheet Date HKAS 10 Events after the Balance Sheet Date defines that: Events after the balance sheet date are those events, Same as favourable and unfavourable, that occur between Subsequent Events? the balance sheet date and the date when the financial statements are authorised for issue. Two types of events can be identified: a) those that provide evidence of conditions that existed at the balance sheet date (adjusting events after the B/S date); and b) those that are indicative of conditions that arose after the balance sheet date (non-adjusting events after the B/S date). HKSA 560 Subsequent Events clarifies the term subsequent events to is used to refer to both events occurring between the date of the financial statements and the date of the auditor s report, and facts discovered after the date of the auditor s report. Not covered in HKAS Nelson 7 The Requirements of HKSA 560 Balance sheet date Date of auditor s report Date of financial statements issued Events up to Auditor s Report Date Events after Auditor s Report Date Subsequent Events HKSA 560 Subsequent Events clarifies the term subsequent events to is used to refer to both events occurring between the date of the financial statements and the date of the auditor s report, and facts discovered after the date of the auditor s report Nelson 8 4

5 The Requirements of HKSA 560 Balance sheet date Date of auditor s report Date of financial statements issued Events up to Auditor s Report Date Events after Auditor s Report Date Subsequent Events The auditor should consider the effect of subsequent events on the financial statements and on the auditor s report. (HKSA 560.2) Nelson 9 1. Events Up to Auditor s Report Date Events up to Auditor s Report Date The auditor should perform audit procedures designed to obtain sufficient appropriate audit evidence that all events up to the date of the auditor s report that may require adjustment of, or disclosure in, the financial statements have been identified. (HKSA 560.5) The audit procedures to identify events that may require adjustment of, or disclosure in, the financial statements would be performed as near as practicable to the date of the auditor s report Nelson 10 5

6 1. Events Up to Auditor s Report Date Example Audit procedures include the following: 1. Reviewing procedures management has established to ensure that subsequent events are identified. 2. Reading minutes of the meetings of shareholders, those charged with governance, including established committees such as relevant executive committees and the audit committee, held after the date of the financial statements and inquiring about matters discussed at meetings for which minutes are not yet available. 3. Reading the entity s latest available interim financial statements and, as considered necessary and appropriate, p budgets, cash flow forecasts and other related management reports. 4. Inquiring, or extending previous oral or written inquiries, of the entity s legal counsel concerning litigation and claims. 5. Inquiring of management as to whether any subsequent events have occurred which might affect the financial statements Nelson Events Up to Auditor s Report Date Example Inquiries of management on specific matters may include: 1. The current status of items that were accounted for on the basis of preliminary or inconclusive data. 2. Whether new commitments, borrowings or guarantees have been entered into. 3. Whether sales or acquisitions of assets have occurred or are planned. 4. Whether the issue of new shares or debentures or an agreement to merge or liquidate has been made or is planned. 5. Whether any assets have been appropriated by government or destroyed, for example, by fire or flood. 6. Whether there have been any developments regarding g risk areas and contingencies. 7. Whether any unusual accounting adjustments have been made or are contemplated. 8. Whether any events have occurred or are likely to occur which will bring into question the appropriateness of accounting policies used in the financial statements as would be the case, for example, if such events call into question the validity of the going concern assumption Nelson 12 6

7 1. Events Up to Auditor s Report Date When a component, such as a division, branch or subsidiary, is audited by another auditor, the auditor would consider the other auditor s procedures regarding events after the date of the financial statements and the need to inform the other auditor of the planned date of the auditor s report. When the auditor becomes aware of events which materially affect the financial statements, the auditor should consider whether such events are properly accounted for and adequately disclosed in the financial statements. (HKSA 560.8) Nelson After the Auditor s Report Date Date of auditor s report Events up to Auditor s Report Date Events after Auditor s Report Date The auditor does not have any responsibility to perform audit procedures or make any inquiry regarding the financial statements after the date of the auditor s report. During the period from the date of the auditor s report to the date the financial statements are issued, the responsibility to inform the auditor of facts which may affect the financial statements rests with management Nelson 14 7

8 2. After the Auditor s Report Date Facts may materially affect financial statements Date of auditor s report Date of financial statements issued Events after Auditor s Report Date When, after the date of the auditor s report but before the date the financial statements are issued, the auditor becomes aware of a fact which may materially affect the financial statements, the auditor should consider whether the financial statements need amendment, should discuss the matter with management, and should take the action appropriate in the circumstances. (HKSA ) Nelson After the Auditor s Report Date Facts may materially affect financial statements Financial statements amended by management When management amends the financial statements, the auditor would carry out the audit procedures necessary in the circumstances and would provide management with a new report on the amended financial statements The new auditor s report would be dated not earlier than the date of approval of the amended financial statements Nelson 16 8

9 2. After the Auditor s Report Date Facts may materially affect financial statements Financial statements amended by management No Auditor s report released If the management does not amend the financial statements in circumstances where the auditor believes they need to be amended and the auditor s report has been released to the entity the auditor would notify those charged with governance of the entity not to issue the financial statements and the auditor s report thereon to third parties. If the financial statements are subsequently released, the auditor needs to take action to prevent reliance on the auditor s report. The action taken will depend on the auditor s legal rights and obligations and the recommendations of the auditor s lawyer Nelson After the Auditor s Report Date Facts may materially affect financial statements Financial statements amended by management No Auditor s report released No Auditor s report not released When management does not amend the financial statements in circumstances where the auditor believes they need to be amended and the auditor s report has not been released to the entity, the auditor should express a qualified opinion or an adverse opinion, as described in HKSA 701 Modifications to the Independent Auditor s Report. (HKSA ) Nelson 18 9

10 3. Financial Statements Issued Date of financial statements issued Events after Auditor s Report Date After the financial statements have been issued, the auditor has no obligation to make any inquiry regarding such hfinancial i statements. t t Nelson Financial Statements Issued When, after the financial statements have been issued, the auditor becomes aware of a fact which existed at the date of the auditor s report and which, if known at that date, may have caused the auditor to modify the auditor s report, the auditor Date of financial statements issued Events after Auditor s Report Date should consider whether the financial statements need revision, should discuss the matter with management, and should take the action appropriate in the circumstances. (HKSA ) After statements issued, facts may affect auditor s opinion Nelson 20 10

11 3. Financial Statements Issued When management revises the financial statements, the auditor would carry out the audit procedures necessary in the circumstances, would review the steps taken by management to ensure that anyone in receipt of the previously issued financial statements together with the auditor s report thereon is informed of the situation, and would issue a new report on the revised financial statements. New Report After statements issued, facts may affect auditor s opinion Management revises the financial statements Nelson Financial Statements Issued The new auditor s report should include an emphasis of a matter paragraph referring to a note to the financial statements that more extensively discusses the reason for the revision of the previously issued financial statements and to the earlier report issued by the auditor. (HKSA ) New Report After statements issued, facts may affect auditor s opinion Management revises the financial statements Nelson 22 11

12 3. Financial Statements Issued The auditor has found that the financial statements were materially misstated after the statements issued, but the management refuses to take the necessary steps to ensure that anyone in receipt of the previously issued financial statements together with the auditor s report thereon is informed of the situation and does not revise the financial statements in circumstances where PDN believes they need to be revised. The auditor should notify those charged with governance of the entity that action will be taken by the auditor to prevent future reliance on its auditor s report. The action taken will depend on the auditor s legal rights and obligations and the recommendations of the auditor s lawyers. After statements issued, facts may affect auditor s opinion Management revises the financial statements No Management refuses to revise and notify any recipients Nelson Offering of Securities to the Public In cases involving the offering of securities to the public, the auditor should consider any legal and related requirements applicable to the auditor in all jurisdictions in which the securities are being offered. (HKSA ) After statements issued, facts may affect auditor s opinion Management revises the financial statements No Management refuses to revise and notify any recipients Nelson 24 12

13 Today s Agenda Going Concern (HKSA 570) Nelson 25 Going Concern HKAS 1 Presentation of Financial Statements requires that: When preparing financial statements, management shall make an assessment of an entity s ability to continue as a going concern. Financial statements shall be prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity s ability to continue as a going concern, those uncertainties shall be disclosed. When financial statements are not prepared on a going concern basis, that fact shall be disclosed, together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern. (HKAS 1.23) Nelson 26 13

14 Going Concern HKAS 1 Presentation of Financial Statements requires that: In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, 12 months from the balance sheet date. The degree of consideration depends on the facts in each case. When an entity has a history of profitable operations and ready access to financial resources, a conclusion that the going concern basis of accounting is appropriate may be reached without t detailed d analysis. In other cases, management may need to consider a wide range of factors relating to current and expected profitability, debt repayment schedules and potential sources of replacement financing before it can satisfy itself that the going concern basis is appropriate Nelson 27 The Requirements of HKSA 570 When planning and performing audit procedures and in evaluating the results thereof, the auditor should consider the appropriateness of management s use of the going concern assumption in the preparation of the financial statements. (HKSA 570.2) Nelson 28 14

15 Auditor s Approach Planning and Risk Assessment Evaluating Management s Assessment Period Beyond Management s Assessment Further Audit Procedures Conclusions and Reporting Nelson 29 Planning and Risk Assessment Planning and Risk Assessment May be already covered in Risk Assessment Procedures In obtaining an understanding of the entity, the auditor should consider whether there are events or conditions and related business risks which may cast significant doubt on the entity s ability to continue as a going concern. (HKSA ) Nelson 30 15

16 Planning and Risk Assessment Planning and Risk Assessment May be already covered in Risk Assessment Procedures The auditor should remain alert for audit evidence of events or conditions and related business risks which may cast significant doubt on the entity s ability to continue as a going concern in performing audit procedures throughout the audit. If such events or conditions are identified, the auditor should, in addition to performing the procedures in HKSA , consider whether they affect the auditor s assessment of the risks of material misstatement. (HKSA ) Nelson 31 Planning and Risk Assessment Example List examples of events or conditions which may give rise to business risks, that may cast significant doubt about the going concern assumption. Financial Net liability or net current liability position. Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment; or excessive reliance on short-term borrowings to finance long-term assets Indications of withdrawal of financial support by debtors and other creditors. Negative operating cash flows indicated by historical or prospective financial statements Adverse key financial ratios Substantial operating losses or significant deterioration in the value of assets used to generate cash flows Arrears or discontinuance of dividends Inability to pay creditors on due dates Nelson 32 16

17 Planning and Risk Assessment Example Financial (continued) Inability to comply with the terms of loan agreements Change from credit to cash-on-delivery transactions with suppliers Inability to obtain financing for essential new product development or other essential investments Operating Loss of key management without replacement. Loss of a major market, franchise, license, or principal supplier. Labor difficulties or shortages of important supplies. Other Non-compliance with capital or other statutory requirements. Pending legal or regulatory proceedings against the entity that may, if successful, result in claims that are unlikely to be satisfied. Changes in legislation or government policy expected to adversely affect the entity Nelson 33 Evaluating Assessment Evaluating Management s Assessment The auditor should evaluate management s assessment of the entity s ability to continue as a going concern. consider the same period as that used by management in making its assessment under the applicable financial reporting framework. (HKSA ) Nelson 34 17

18 Evaluating Assessment Evaluating Management s Assessment If management s assessment of the entity s ability to continue as a going concern covers less than 12 months from the balance sheet date, the auditor should ask management to extend its assessment period to 12 months from the balance sheet date. (HKSA ) Nelson 35 Evaluating Assessment Example How can an auditor evaluate management s assessment? Evaluating Management s Assessment In evaluating management s assessment, the auditor considers the process management followed to make its assessment, the assumptions on which the assessment is based and management s plans for future action. The auditor considers whether the assessment has taken into account all relevant information of which the auditor is aware as a result of the audit procedures Nelson 36 18

19 Period Beyond Assessment The auditor should inquire of management as to its knowledge of events or conditions and related business risks beyond the period of assessment used by management that may cast significant doubt on the entity s ability to continue as a going concern. (HKSA ) Period Beyond Management s Assessment In normal case, only required to inquire management If management has assessed for at least 12 months from the balance sheet date the auditor does not have a responsibility to design audit procedures other than inquiry of management to test for indications of events or conditions which cast significant doubt on the entity s ability to continue as a going concern beyond that period Nelson 37 Events or Conditions Identified When events or conditions have been identified which may cast significant doubt on the entity s ability to continue as a going concern, the auditor should: a) Review management s plans for future actions based on its going concern assessment; b) Gather sufficient appropriate audit evidence to confirm or dispel whether or not a material uncertainty exists through carrying out audit procedures considered necessary, including considering the effect of any plans of management and other mitigating factors; and c) Seek written representations from management regarding its plans for future action. (HKSA ) Further Audit Procedures Nelson 38 19

20 Events or Conditions Identified Example Suggest procedures to address any doubt on an entity s going concern. 1. Analyzing and discussing cash flow, profit and other relevant forecasts with management. 2. Analyzing and discussing the entity s latest available interim financial statements. 3. Reviewing the terms of debentures and loan agreements and determining whether any have been breached. 4. Reading minutes of the meetings of shareholders, those charged with governance and relevant committees for reference to financing difficulties. 5. Inquiring of the entity s lawyer regarding the existence of litigation and claims and the reasonableness of management s assessments of their outcome and the estimate of their financial implications. 6. Confirming the existence, legality and enforceability of arrangements to provide or maintain financial support with related and third parties and assessing the financial ability of such parties to provide additional funds. 7. Considering the entity s plans to deal with unfilled customer orders. 8. Reviewing events after period end to identify those that either mitigate or otherwise affect the entity s ability to continue as a going concern Nelson 39 Audit Conclusions and Reporting Based on the audit evidence obtained, the auditor should determine if, in the auditor s judgment, a material uncertainty exists related to events or conditions that alone or in aggregate, may cast significant doubt on the entity s ability to continue as a going concern. (HKSA ) A material uncertainty exists when the magnitude of its potential impact is such that, in the auditor s judgment, clear disclosure of the nature and implications of the uncertainty is necessary for the presentation of the financial statements not to be misleading. Conclusions and Reporting Nelson 40 20

21 Audit Conclusions and Reporting Going concern assumption appropriate but a material uncertainty exists Going concern assumption inappropriate Conclusions and Reporting Management unwilling to make or extend its assessment Nelson 41 Audit Conclusions and Reporting Going concern assumption appropriate but a material uncertainty exists If adequate disclosure is made in the financial statements, the auditor should express an unqualified opinion but modify the auditor s report by adding an emphasis of matter paragraph that highlights the existence of a material uncertainty relating to the event or condition that may cast significant doubt on the entity s ability to continue as a going concern and draws attention to the note in the financial statements that discloses the matters. (HKSA ) Conclusions and Reporting Nelson 42 21

22 Audit Conclusions and Reporting Example Sample Report (Extract Only) Emphasis of Matters Without qualifying our opinion, we draw attention to Note X in the financial statements which indicates that the Company incurred a net loss of ZZZ during the year ended 31 December 2006 and, as of that date, the Company s current liabilities exceeded its total assets by ZZZ. These conditions, along with other matters as set forth in Note X, indicate the existence of a material uncertainty which may cast significant doubt about the Company s ability to continue as a going concern Nelson 43 Audit Conclusions and Reporting Case Independent d auditors report ( ) To the shareholders of C.P. Pokphand Co. Ltd. Opinion In our opinion, the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31st December, 2007 and of the Group s profit and cash flows for the year then ended in accordance with International Financial Reporting Standards and have been properly prepared in accordance with the disclosure requirements of the Hong Kong Companies Ordinance. Without qualifying our opinion, we draw attention to note 2 to the financial statements which indicates that the Group s current liabilities exceeded its current assets by US$355,829,000 as at 31st December, This condition indicates the existence of a material uncertainty which may cast significant doubt about the ability of the Group and the Company to continue as a going concern Nelson 44 22

23 Audit Conclusions and Reporting Going concern assumption appropriate but a material uncertainty exists If adequate disclosure is not made in the financial statements, the auditor should express a qualified or adverse opinion, as appropriate (HKSA 701, Modifications to the Independent Auditor s Report ). The report should include specific reference to the fact that there is a material uncertainty that may cast significant doubt about the entity s ability to continue as a going concern. (HKSA ) Conclusions and Reporting Nelson 45 Audit Conclusions and Reporting Sample Qualified Report (Extract Only) Example Basis of Qualified Opinion The Company s financing arrangements expire and amounts outstanding are payable on 19 March The Company has been unable to re-negotiate or obtain replacement financing. This situation indicates the existence of a material uncertainty which may cast significant doubt on the Company s ability to continue as a going concern and therefore it may be unable to realize its assets and discharge its liabilities in the normal course of business. The financial statements (and notes thereto) do not disclose this fact. Qualified Opinion Arising from Disagreement In our opinion, except for the omission of the information included in the preceding paragraph, the financial statements give a true and fair view of (present fairly, in all material respects) the financial position of the Company at 31 December 2006 and of its financial performance and its cash flows for the year then ended in accordance with Nelson 46 23

24 Audit Conclusions and Reporting Example Sample Adverse Report (Extract Only) Basis for Adverse Opinion The Company s financing arrangements expired and the amount outstanding was payable on 31 December The Company has been unable to renegotiate or obtain replacement financing and is considering filing for bankruptcy. These events indicate a material uncertainty which may cast significant doubt on the Company s ability to continue as a going concern and therefore it may be unable to realize its assets and discharge its liabilities in the normal course of business. The financial statements (and notes thereto) do not disclose this fact. Adverse Opinion In our opinion, because of the omission of the information mentioned in the preceding paragraph, the financial statements do not give a true and fair view of (or do not present fairly) the financial position of the Company as at 31 December 2006, and of its financial performance and its cash flows for the year then ended in accordance with (and do not comply with ) Nelson 47 Audit Conclusions and Reporting Going concern assumption inappropriate If, in the auditor s judgment, the entity will not be able to continue as a going concern, the auditor should express an adverse opinion if the financial statements have been prepared on a going concern basis. (HKSA ) Conclusions and Reporting Nelson 48 24

25 Audit Conclusions and Reporting Management unwilling to make or extend its assessment If management is unwilling to make or extend its assessment when requested to do so by the auditor, the auditor should consider the need to modify the auditor s report as a result of the limitation on the scope of the auditor s work. (HKSA ) Conclusions and Reporting Nelson 49 Audit Conclusions and Reporting Case Report of the Independent Auditors ( ) to the Shareholders of EganaGoldpfeil (Holdings) Limited BASIS OF DISCLAIMER OF OPINION 1. Scope limitation material sales transactions and receivable provision 2. Fundamental uncertainty relating to the going concern basis As explained in Note 2 to the accounts, that the Group incurred a consolidated net loss to the equity holders of the Company of $1,959,408,000 for the year ended 31st May, 2007 and had consolidated net current liabilities of $17,703,000 at 31st May, The accounts have been prepared on a going concern basis, the validity of which is dependent on the successful outcome of the proposed acquisition of a controlling interest in the Company, and related proposed funding, by a prospective investor, and the Group s current negotiations with its principal bankers regarding a rescheduling of the Group s bank borrowings. The accounts do not include any adjustments that would result from a failure to obtain such funding support. We consider that appropriate disclosures have been made. However, the uncertainty surrounding the outcome of this proposed acquisition and funding by a prospective investor and negotiations with the principal bankers raises a significant doubt regarding the Group s ability to continue as a going concern Nelson 50 25

26 Today s Agenda Independent Auditor s Report (HKSA 700) Nelson 51 HKSA 700 and 701 HKSA 700 addresses circumstances when the auditor is able to express an unqualified opinion and no modification to the auditor s report is necessary. HKSA 701 establishes standards and provides guidance on the modifications to this report for an emphasis of matter, a qualified opinion, a disclaimer i of opinion, i or an adverse opinion In the past, SAS 600 addressed both modified and unmodified report HKSA requires: The auditor s report should contain a clear expression of the auditor s opinion on the financial statements Nelson 52 26

27 HKSA 700 HKSA requires: The auditor should evaluate the conclusions drawn from the audit evidence obtained as the basis for forming an opinion on the financial statements. The elements of the auditor s report required by HKSA 700 include: a) Title; b) Addressee; c) Introductory paragraph; d) Management s responsibility for the financial statements; e) Auditor s responsibility; f) Auditor s opinion; g) Other reporting responsibilities; h) Auditor s signature; i) Date of the auditor s report; and j) Auditor s address Nelson 53 HKSA 700 Title and Addressee a) Title The auditor s report should have a title that clearly indicates that it is the report of an independent auditor (HKSA ) b) Addressee The auditor s report should be addressed as required by the circumstances of the engagement. (HKSA ) SAS 600 required an appropriate title is used to distinguish clearly the auditors report from other information relating to the reporting entity with which it may be published. SAS 600 required the auditors report on the financial statements of a company is addressed to its members (normally the shareholders) because the audit is undertaken on their behalf Nelson 54 27

28 HKSA 700 Introductory Paragraph c) Introductory paragraph The introductory paragraph in the auditor s report should identify the entity whose financial statements have been audited and should state that the financial statements have been audited. The introductory paragraph should also: a) Identify the title of each of the financial statements that comprise the complete set of financial statements; b) Refer to the summary of significant accounting policies and other explanatory notes; and c) Specify the date and period covered by the financial statements. (HKSA ) Include the title of: Balance sheet Income statement Cash flow statement Statement of changes in equity SAS 600 only required the followings: identifying the financial statements that have been audited Suggested the wordings We have audited the financial statements on pages... to.... refers to accounting principles, comprising the accounting standards and accounting policies Nelson 55 HKSA 700 Introductory Paragraph Example Sample Report (Extract Only) Independent Auditor s Report To The Shareholders of ABC Limited (incorporated in Hong Kong with limited liability) We have audited the financial statements of ABC Limited set out on pages... to..., which comprise the balance sheet as at 31 December 200X, and the income statement, [statement of changes in equity or statement of recognised income and expense] and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes Nelson 56 28

29 HKSA 700 Responsibility d) Management s Responsibility for the Financial Statements The auditor s report should state that management is responsible for the preparation and the fair presentation of the financial statements in accordance with the applicable financial reporting framework and that this responsibility includes: a) Designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; b) Selecting and applying appropriate accounting policies; and c) Making accounting estimates that are reasonable in the circumstances. (HKSA ) New New Nelson 57 HKSA 700 Responsibility Example Sample Report (Extract Only) Directors responsibility for the financial statements The directors are responsible for the preparation and the true and fair presentation of these financial statements in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants and the Hong Kong Companies Ordinance. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and the true and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances Nelson 58 29

30 HKSA 700 Responsibility e) Auditor s Responsibility The auditor s report should state that the responsibility of the auditor is to express an opinion on the financial statements based on the audit. (HKSA ) The auditor s report should state that the audit was conducted in accordance HKSAs. The auditor s report should also explain that those standards require that the auditor comply with ethical requirements and that the auditor plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. (HKSA ) Renamed and restructured previously, part of the requirements were included in Basis of opinion Nelson 59 HKSA 700 Responsibility e) Auditor s Responsibility The auditor s report should describe an audit by stating that: a) )An audit ditinvolves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements; b) The procedures selected depend on the auditor s judgment, New including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control New relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s New internal control. In circumstances when the auditor also has a responsibility to express an opinion on the effectiveness of internal control in conjunction with the audit of the financial statements, the auditor should omit the phrase that the auditor s consideration of internal control is not for the purpose of expressing an opinion on the effectiveness of internal control; and Nelson 60 30

31 HKSA 700 Responsibility e) Auditor s Responsibility The auditor s report should describe an audit by stating that: c) An audit also includes evaluating the appropriateness of the accounting policies used, the reasonableness of accounting estimates made by management, as well as the overall presentation of the financial statements. (HKSA ) The auditor s report should state that the auditor believes that the audit evidence the auditor has obtained is sufficient i and appropriate to provide a basis for the auditor s opinion. (HKSA ) The category of basis of opinion was deleted and some requirements are included in auditor s responsibility now Nelson 61 HKSA 700 Responsibility Example Sample Report (Extract Only) Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with HKSAs issued by the HKICPA. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement. t t Nelson 62 31

32 HKSA 700 Responsibility Example Sample Report (Extract Only) Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with HKSAs issued by the HKICPA. Those standards require that we comply and to with report ethical our requirements opinion solely and to you, as a body, in accordance with plan section and perform 141 of the Companies audit to obtain Ordinance, reasonable and assurance for no other as purpose. to We whether do not assume the financial responsibility statements towards are free or from accept material liability to any other person misstatement. for t the contents t of the report. Professional Risk Management Bulletin, Auditors Duty of Care to Third Parties and the Audit Report issued by the HKICPA in May Nelson 63 HKSA 700 Responsibility Case Independent d auditor s report to the shareholders of Hang Seng Bank Limited Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. This report is made solely to you, as a body, in accordance with section 141 of the Hong Kong Companies Ordinance, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement Nelson 64 32

33 HKSA 700 Responsibility Example Sample Report (Extract Only) Auditor s responsibility An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and true and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose p of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion Nelson 65 HKSA 700 Auditor s Opinion f) Auditor s Opinion An unqualified opinion should be expressed when the auditor concludes c that the financial a statements e ts give a true and fair view or are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. When expressing an unqualified opinion, the opinion paragraph of the auditor s report should state the auditor s opinion that the financial statements give a true and fair view or present fairly, in all material respects, in accordance with the applicable financial reporting framework (unless the auditor is required by law or regulation to use different wording for the opinion, in which case the prescribed wording should be used). When HKFRSs are not used as the financial reporting framework, the reference to the financial reporting framework in the wording of the opinion should identify the jurisdiction or New country of origin of the financial reporting framework. (HKSA ) e.g. in accordance with accounting principles generally accepted in Country X Nelson 66 33

34 HKSA 700 Other Issues g) Other Reporting Responsibilities When the auditor addresses other reporting responsibilities New within the auditor s report on the financial statements, these other reporting responsibilities should be addressed in a separate section in the auditor s report that follows the opinion paragraph. (HKSA ) h) Auditor s Signature The auditor s report should be signed. (HKSA ) i) Date of the Auditor s Report The auditor should date the report on the financial SAS 600 required statements no earlier than the date on which the auditor the date as of the has obtained sufficient appropriate audit evidence on completion date which to base the opinion on the financial statements. of the audit. Sufficient appropriate audit evidence should include evidence that the entity s complete set of financial statements has been prepared and that those with the recognized authority have asserted that they have taken responsibility for them. (HKSA ) Nelson 67 HKSA 700 Other Issues i) Auditor s Address The report should name the location in the country or jurisdiction where the auditor practices. (HKSA ) Auditor s Report The auditor s report should be in writing. (HKSA ) A written report encompasses both reports issued in hard copy format and those using an electronic medium Nelson 68 34

35 HKSA 700 Other Issues Auditor s Report for Audits Conducted in Accordance with Both HKSAs and Auditing Standards of a Specific Jurisdiction or Country The auditor s report should refer to the audit having been conducted in accordance with the HKSAs only when the auditor has complied fully with all of the HKSAs relevant to the audit. (HKSA ) When the auditor s report refers to both HKSAs and auditing standards of a specific jurisdiction or country, the auditor s report should identify the jurisdiction or country of origin of the auditing standards. (HKSA ) Nelson 69 HKSA 700 Other Issues Auditor s Report for Audits Conducted in Accordance with Both HKSAs and Auditing Standards of a Specific Jurisdiction or Country When the auditor prepares the auditor s report using the layout or wording specified by the law, regulation or auditing standards of the specific jurisdiction or country, the auditor s report should refer to the audit being conducted in accordance with both HKSAs and the auditing standards of the specific jurisdiction or country only if the auditor s report includes, at a minimum, each of the following elements: a. A title; b. An addressee; c. An introductory paragraph; d. A description of management s responsibility; e. A description of the auditor s responsibility; f. An opinion paragraph; g. The auditor s signature; h. The date of the auditor s report; and i. The auditor s address. (HKSA ) Nelson 70 35

36 HKSA 700 Other Issues Unaudited Supplementary Information Presented with Audited Financial Statements The auditor should be satisfied that t any supplementary information presented together with the financial statements that is not covered by the auditor s opinion is clearly differentiated from the audited financial statements. (HKSA ) If the auditor concludes that the entity s presentation of any unaudited supplementary information does not differentiate it sufficiently from the audited financial statements, the auditor should explain in the auditor s report that that information has not been audited. (HKSA ) Nelson 71 Today s Agenda Modification to the Independent Auditor s Report (HKSA 701) Nelson 72 36

37 HKSA 701 HKSA 701 Is to establish standards and provide guidance on the circumstances when the independent d auditor s report should be modified and the form and the content of the modifications to the auditor s report in those circumstances. Describes how the auditor s report wording is modified in the following situations: Matters that do not affect the auditor s opinion Emphasis of matter a) Emphasis of matter Matters that do affect the auditor s opinion Modified Opinion a) Qualified opinion, b) Disclaimer of opinion, or c) Adverse opinion Nelson 73 HKSA 701 Emphasis of Matter The auditor should modify the auditor s report by adding a paragraph to highlight a material matter regarding a going concern problem. (HKSA 700.6) The auditor should consider modifying the auditor s report by adding a paragraph if there is a significant uncertainty (other than a going concern problem), the resolution of which is dependent upon future events and which may affect the financial statements. (HKSA 701.7) Emphasis of matter Going Concern Problem Significant Uncertainty (Other than a going concern problem) Refer to HKSA Nelson 74 37

38 HKSA 701 Emphasis of Matter Sample Report (Extract Only) Emphasis of matter paragraph for a significant uncertainty Example Without qualifying our opinion we draw attention to Note X to the financial statements. The Company is the defendant in a lawsuit alleging infringement of certain patent rights and claiming royalties and punitive damages. The Company has filed a counter action, and preliminary hearings and discovery proceedings on both actions are in progress. The ultimate outcome of the matter cannot presently be determined, and no provision for any liability that may result has been made in the financial statements Nelson 75 HKSA 701 Emphasis of Matter The addition of a paragraph emphasizing a going concern problem or significant uncertainty is ordinarily adequate to meet the auditor s reporting responsibilities regarding such matters. However, in extreme cases, such as situations involving multiple uncertainties that are significant to the financial statements, the auditor may consider it appropriate to express a disclaimer of opinion instead of adding an emphasis of matter paragraph. Going Concern Problem Emphasis of matter Significant Uncertainty (Other than a going concern problem) Nelson 76 38

39 HKSA 701 Emphasis of Matter Emphasis of matter paragraph, can also be used to report on matters other than those affecting the financial statements. Matters other than Such paragraph may preferably be added those affecting the after the paragraph containing the auditor s financial opinion statements but before the section on any other reporting responsibilities. Going Concern Problem Emphasis of matter Significant Uncertainty (Other than a going concern problem) Nelson 77 HKSA 701 Emphasis of Matter Case Independent auditor s report ( ) to the Members of Lifestyle International Holdings Limited Emphasis of Matters Without qualifying our opinion, we draw attention to note 23(b) to the consolidated financial statements which indicates that the Group has extended a bridging loan of HK$300 million ( Bridging Loan ) to EganaGoldpfeil (Holdings) Limited (together with its subsidiaries the Egana Group ) during the year and which remains outstanding as at the date of this report. The Company has been participating in negotiations with the bank creditors of the Egana Group on the proposed financial i restructuring t of the indebtedness of the Egana Group (the Proposed Restructuring ) which may result in the Group becoming the controlling shareholder of the Egana Group Nelson 78 39

40 HKSA 701 Emphasis of Matter Case Independent auditor s report ( ) to the Members of Lifestyle International Holdings Limited Emphasis of Matters The Proposed Restructuring is subject to the approvals of the relevant regulatory bodies and shareholders of both the Group and the Egana Group. The Bridging Loan will be fully repaid upon the Proposed Restructuring becoming effective at which time it is proposed to be replaced with additional funding from the Group of approximately HK$1.2 billion. The ultimate recovery of the Bridging Loan and subsequent proposed investment depends on the long-term success of the Proposed Restructuring. No provision for impairment losses has been made in the consolidated financial statements Nelson 79 HKSA 701 Emphasis of Matter Example If an amendment to other information in a document containing audited financial statements is necessary and the entity refuses to make the amendment, the auditor would consider including in the auditor s report an emphasis of matter paragraph describing the material inconsistency Matters other than those affecting the financial statements Emphasis of matter Nelson 80 40

41 HKSA 701 Modified Opinion An auditor may not be able to express an unqualified opinion when either of the following circumstances exist and, in the auditor s judgment, the effect of the matter is or may be material to the financial statements: a) There is a limitation on the scope of the auditor s work; or b) There is a disagreement with management regarding the acceptability of the accounting policies selected, the method of their application, or the adequacy of financial statement disclosures. Modified Opinion Limitation of Scope Disagreement Nelson 81 HKSA 701 Modified Opinion A qualified opinion expressed when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with management, or limitation on scope is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion. (HKSA ) Modified Opinion An adverse opinion 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. (HKSA ) A disclaimer of opinion 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. (HKSA ) Nelson 82 41

42 HKSA 701 Modified Opinion When the auditor concludes that an unqualified opinion cannot be expressed : Effect Circumstances Limitation of scope Disagreement with management Not So Material and Pervasive Qualified (except for limitation) Opinion Qualified (except for disagreement) Opinion So Material and Pervasive Disclaimer Opinion Adverse Opinion Modified Opinion Nelson 83 HKSA 701 Modified Opinion Whenever the auditor expresses an opinion that is other than unqualified, a clear description of all the substantive reasons should be included in the report and, unless impracticable, a quantification of the possible effect(s) on the financial statements. (HKSA ) Reasons Quantification Modified Opinion Nelson 84 42

43 HKSA 701 Modified Opinion 1. Limitation imposed by the entity a. When the limitation in the terms of a proposed engagement is such that the auditor believes the need to express a disclaimer of opinion exists, the auditor would ordinarily not accept Limitation of Scope such a limited engagement as an audit engagement, unless required by statute. b. When the limitation infringes on the auditor s statutory duties a statutory auditor would not accept such an audit engagement Modified Opinion 2. Limitation imposed by circumstances Timing of appointment Inadequate accounting records Unable to carry out desired audit procedures Nelson 85 HKSA 701 Modified Opinion When there is a limitation on the scope of the auditor s work that requires expression of a qualified opinion or a disclaimer of opinion, the auditor s report should describe the limitation and indicate the possible adjustments to the financial statements that might have been determined to be necessary had the limitation not existed. (HKSA ) Limitation of Scope Modified Opinion Nelson 86 43

44 HKSA 701 Modified Opinion Case Report of the Independent Auditors ( ) to the Shareholders of Shanghai Jiaoda Withub Information Industrial Company Limited BASIS FOR QUALIFIED OPINION (a) Included in the consolidated balance sheet as at 31st December 2007, the deposits, prepayments and other receivables of approximately RMB13,150,000 which were due from two independent third parties. However, we were unable to obtain direct audit confirmations from these two payees. Also, due to the lack of adequate financial information, we were unable to satisfy ourselves the existence, accuracy, recoverability of the balance and whether there are any commitments at the balance sheet date should be disclosed. Any adjustment to the balances may have a consequential significant effect on the loss for the year and net assets as at 31st December (b) Included in the other payables and accrued expenses in the consolidated balance sheet as at 31st December 2007 was a receipt of RMB12,000,000. In the absence of sufficient information, we were unable to obtain direct audit confirmation and there were no alternative audit procedures that we could carry out to satisfy ourselves the existence and accuracy of the receipt and we cannot ascertain whether there are any unrecorded liabilities as at the balance sheet date Nelson 87 HKSA 701 Modified Opinion Sample Disclaimer Report (Extract Only) Introductory para. (modified as below) We were engaged to audit the accompanying financial statements.. Example Management responsibility para. (no modification) Auditor s responsibility para. (modified as below) Our responsibility is to express an opinion on these financial statements based on our audit. Except for the limitation in the scope of our work as explained below, we conducted our audit are free from material misstatement. However, because of the matter described in the basis for disclaimer of opinion paragraph, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Para. to discuss the scope of an audit would be either omitted or amended Basis for disclaimer opinion para. (new para. for all the substantive reasons and a quantification of the possible effect) Opinion para. (modified with a disclaimer opinion) Nelson 88 44

45 HKSA 701 Modified Opinion Case Report of the Independent Auditors ( ) to the Shareholders of EganaGoldpfeil (Holdings) Limited We have audited d the consolidated d accounts of feganagoldpfeil (Holdings) Limited set out on pages 47 to 130 which comprise the consolidated and company balance sheets as at 31st May, 2007, and the consolidated profit and loss account, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, and a summary of principal accounting policies and other explanatory notes RESPONSIBILITIES OF THE DIRECTORS FOR THE ACCOUNTS RESPONSIBILITIES OF THE AUDITORS BASIS OF DISCLAIMER OF OPINION DISCLAIMER OF OPINION: DISCLAIMER ON VIEW GIVEN BY THE ACCOUNTS Nelson 89 HKSA 701 Modified Opinion Case Report of the Auditors ( ) to the Shareholders of Smart Rich Energy Finance (Holdings) Limited We were engaged to audit the consolidated d financial i statements t t of Smart Rich Energy Finance (Holdings) Limited (the Company ) and its subsidiaries (collectively referred to as the Group ) set out on pages 27 to 85, which comprise the consolidated balance sheet as at 30 June 2007, and the consolidated income statement, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Directors responsibility for the consolidated financial statements Auditor s responsibility Basis for disclaimer of opinion Disclaimer of opinion: disclaimer on view given by consolidated financial statements Nelson 90 45

46 HKSA 701 Modified Opinion The auditor may disagree with management about matters, such as the acceptability of accounting policies selected, the method of their application, or the adequacy of disclosures in the financial statements. If such disagreements are material to the financial statements, the auditor should express Disagreement a qualified opinion or an adverse opinion. So material and pervasive (HKSA ) Modified Opinion Nelson 91 HKSA 701 Modified Opinion Example Sample Adverse Report (Extract Only) Introductory para. (no modification) Management responsibility para. (no modification) Auditor s responsibility para. (no modification) Basis for adverse opinion para. (new para. for all the substantive reasons and a quantification of the effect) Opinion para. (modified with an adverse opinion as below) Adverse opinion In our opinion, i because of fthe effects of fthe matters discussed din the preceding paragraph(s), the financial statements do not give a true and fair view of the financial position of ABC Company as of 31 December 200X, and of its financial performance and its cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards Nelson 92 46

47 Today s Agenda Subsequent Events (HKSA 560) Going Concern (HKSA 570) Independent Auditor s Report (HKSA 700) Modification to the Independent Auditor s Report (HKSA 701) Reports by Auditors under the HK Companies Ordinance (PN 600.1) Nelson 93 PN Practice Note Reports by Auditors under the Hong Kong Companies Ordinance Still referring to SAS 600, not HKSA 700 and 701! Describes the application of the principles of the auditor s report standard on reports by auditors issued under the HK Companies Ordinance. Several issues are discussed Nelson 94 47

48 PN Information required by the Companies Ordinance In relation to the requirements of the Companies Ordinance, the auditors are concerned with the following matters in addition to the overriding requirement as to the true and fair view of the financial statements mentioned above: a. whether the financial statements comply with the sections of the Companies Ordinance dealing with the form and content of financial statements (sections 123, 125 and 126, together with the disclosure requirements set out in the Tenth Schedule); b. whether the financial statements disclose certain information as follows: i. directors emoluments, pensions and compensation for loss of office (section 161); and ii. loans to directors and officers (section 161B). The auditors are required under the Companies Ordinance to provide in their report the information listed in b. above if it is not disclosed in the financial statements Nelson 95 PN Exception reporting The auditors are also required under the Companies Ordinance to report by exception if they are unable to satisfy themselves that: a. proper books of account have been kept (section 141(4)(a)); b. proper returns adequate for the purposes of their audit have been received from branches not visited (section 141(4)(a)); c. the financial statements are in agreement with the books and the returns received from branches (section 141(4)(b)); and d. they have obtained all the information and explanations which they considered necessary (section 141(6)). The absence of any comment in the auditors' report in respect of these matters is equivalent to a positive affirmation by the auditors that they are satisfied with each of them. If they are not so satisfied, they must qualify their report Nelson 96 48

49 PN Exception reporting In considering whether proper books of account have been kept, the auditors should assess whether the provisions of section 121 have been complied with. If the company has not kept such records, the auditors must qualify their report accordingly. In this situation they will normally need to state in their report that: a. the scope of their audit work was limited; b. they have not obtained all the information and explanations which they considered necessary; and c. they were unable to determine whether proper books of account had been kept Nelson 97 PN From HKSA 701 Example Sample Limitation Report (Extract Only) Report on matters under sections 141(4) and 141(6) of the Hong Kong Companies Ordinance In respect alone of the limitation on our work relating to inventories and work in progress: we have not obtained all the information and explanations that we considered necessary for the purpose of our audit; and we were unable to determine whether proper books of account had been kept Nelson 98 49

50 PN The Companies Ordinance requires the auditors to give other report arising from the normal auditor s report: Distribution (section 79G(4)) The Companies Ordinance prohibits all companies from making a distribution otherwise than out of profits available for the purpose. Where a qualified auditors report has been given on the last annual financial statements the company's ability to make a distribution, by reference to those financial statements, could be in doubt, and the company may not proceed to do so unless the auditors have made a statement under section 79G(4) concerning the company's ability to make the distribution. ib ti On a change of auditors, the report under section 79G(4) can only be made by the auditors who reported on the last annual financial statements Nelson 99 PN From Example 4 Example AUDITORS STATEMENT TO THE MEMBERS OF XYZ LIMITED PURSUANT TO SECTION 79G(4) OF THE COMPANIES ORDINANCE We have audited the financial statements of XYZ Limited for the year ended 31 December 19.. in accordance with Statements of Auditing Standards (?) issued by the Hong Kong Institute of Certified Public Accountants and have expressed a qualified opinion thereon in our report dated... Basis of opinion We have carried out such procedures as we considered necessary to evaluate the effect of the qualified opinion for the determination of profits available for distribution. Opinion In our opinion the subject matter of that qualification is not material for determining, by reference to those financial statements, whether the distribution [interim dividend for the year ended 31 December 19...] of HK$... proposed by the company is permitted under section 79F of the Companies Ordinance Nelson

51 Today s Agenda Subsequent Events (HKSA 560) Going Concern (HKSA 570) Independent Auditor s Report (HKSA 700) Future Modification to the Independent Auditor s Report (HKSA 701) Reports by Auditors under the HK Companies Ordinance (PN 600.1) Nelson 101 Forthcoming Change in New Set of Clarified International Standards on Auditing Since 2004 the International Auditing and Assurance Standards Board (IAASB) has begun a comprehensive program to enhance the clarity of its International Standards on Auditing (ISAs) This project would revise or redraft all ISAs and involve 21 revised/updated and redrafted standards, and 11 redrafted standards The IAASB remains committed to publish the entire suite of clarified ISAs in late 2008 Current final effective date for these new clarified ISAs 15 December Nelson