financial information to be presented to potential investors and financial
institutions to secure funding for the expansion.
XYZ Ltd. engages a firm of auditors to conduct an assurance engagement on
this prospective financial information. During the engagement, the auditors
reviewed the assumptions made by XYZ Ltd.'s management and issued a
report.
Explain the key differences between prospective financial information and
historical financial information. How does this distinction impact the level of
assurance provided in an assurance engagement on prospective financial
information?
(5 Marks)
(b) CA H is managing partner of HK & Co., a Chartered Accountant firm, having
registered office at Delhi. With the annual task of reviewing whether any
threat to independence is observed in the firm, CA H noted down the
following observations received from the staff and partners of the firm for the
F.Y. 2023-24 :
(i) CA J, partner of the firm, performed statutory audit as well as non audit
engagement for M/s. Take Away Private Limited.
(ii) CA M, partner of the firm, who has done income tax audit for
M/s. Happy Associates where in CA M has material significant indirect
financial interest.
(iii) The costs of air travel and stay accommodation of family members of
audit team for audit of Chennai was borne by the client stationed at
Chennai.
(iv) One of the clients, M/s. Chalk Limited, threatened to replace them as
auditors because the audit team insisted to make provision for expected
credit loss which the company was not willing to provide.
(v) CA N, partner of the firm, who audited M/s. NM Private Limited became
arbitrator for dispute between M/s. NM Private Limited and one of its
vendors.
(vi) CA N accepted the assignment of Tax audit (on behalf of firm) of TRF
Industries. Management agreed to pay him contingent fee for tax audit.
AUDITING AND ETHICS
You are requested to help CA H in classifying the type of threats to
independence in each of the above observation received from the staff
and partners of the firm.
(3 Marks)
In case such threats exist, what should the auditor do?
(2 Marks)
(c) FRP & Associates are the statutory auditors of Paint Private Limited.
Company is into the business of trading and has operations across India.
CA M, partner in charge of the audit, is carrying out the audit procedures
with his audit team. He entrusted CA Ravi, one of the team members, the
task of obtaining various audit evidences connected with the audit and
submit the same to the engagement partner for finalizing the audit report.
How can CA M ensure that the evidences collected by CA Ravi during the
audit will be sufficient for the purpose of audit or not?
(4 Marks)
Answer
(a) Difference between “Historical financial information” and “Prospective
financial information”: The “Historical financial information” relates to
information expressed in financial terms of an entity about economic
events, conditions or circumstances occurring in past periods. The
“Prospective financial information” relates to financial information based
on assumptions about occurrence of future events and possible actions by
an entity.
Therefore, historical financial information is rooted in past events which
have already occurred whereas prospective financial information is related
to future events.
In assurance reports involving prospective financial information, the
practitioner obtains sufficient appropriate evidence to the effect that
management’s assumptions on which the prospective financial information
is based are not unreasonable, the prospective financial information is
properly prepared on the basis of the assumptions and it is properly
presented and all material assumptions are adequately disclosed.
Prospective financial information relates to future events. While evidence
may be available to support the assumptions on which the prospective
financial information is based, such evidence is itself generally future-
oriented. The auditor is, therefore, not in a position to express an opinion
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SUGGESTED ANSWER
as to whether the results shown in the prospective financial information will
be achieved.
Therefore, in such assurance engagements, practitioner provides a report
assuring that nothing has come to practitioner’s attention to suggest that
these assumptions do not provide a reasonable basis for the projection.
Hence, such type of assurance engagement provides only a “moderate”
level of assurance.
(b) Type of Threats to Independence
S.
No.
Situation
Threat to Independence
(i)
CA J, partner of the firm, performed
statutory audit as well as non- audit
engagement for Take Away Private
Limited.
Self-review threats
(ii)
CA M, partner of the firm, who has
done income tax audit for M/s.
Happy Associates where in CA M
has material significant indirect
financial interest.
Self-interest threats
(iii)
The costs of air travel and stay
accommodation
of
family
members. of audit team for audit
Chennai was borne by the client
stationed at Chennai.
Familiarity threats
(iv)
One of the clients, Chalk Limited,
threatened to replace them as
auditors because the audit team
insisted to make provision for
expected credit loss which the
company was not willing to provide.
Intimidation threats
(v)
CA N, partner of the firm, who
audited NM Private Limited became
arbitrator for dispute between.
Advocacy threats
AUDITING AND ETHICS
NM Private Limited and one of its
vendors.
(vi)
CA N accepted the assignment of
Tax audit (on behalf of firm) of TRF
Industries. Management agreed to
pay him contingent fee for tax
audit.
Self-interest threats
When such threats exist, the auditor should –
(1) Either desist from the task or eliminate the threat or at the very least,
put in place safeguards which reduce the threats to an acceptable level.
All such safeguards’ measures need to be recorded in a form that can
serve as evidence of compliance with due process.
(2) If the auditor is unable to fully implement credible and adequate
safeguards, then he must not accept the work.
(c) The auditor has to obtain sufficient appropriate audit evidence to draw
reasonable conclusions on financial statements. Sufficiency is the measure
of the quantity of audit evidence.
CA M will ensure that the evidence collected by CA Ravi will be sufficient
for the purpose of audit by considering following factors:
(i) Materiality: It may be defined as the significance of classes of
transactions, account balances and presentation and disclosures to the
users of the financial statements. Less evidence would be required in
case assertions are less material to users of the financial statements.
But on the other hand, if assertions are more material to the users of
the financial statements, more evidence would be required.
(ii) Risk of material misstatement: It may be defined as the risk that the
financial statements are materially misstated prior to audit. This
consists of two components, namely, inherent risk and control risk at
the assertion level. Less evidence would be required in case assertions
that have a lower risk of material misstatement. But on the other hand,
if assertions have a higher risk of material misstatement, more evidence
would be required.
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SUGGESTED ANSWER
(iii) Size of a population: It refers to the number of items included in the
population. Less evidence would be required in the case of smaller,
more homogeneous populations but on the other hand in case of
larger, more heterogeneous populations, more evidence would be
required.