Auditing – Study Notes Chapter 19 International Standards on Review Engagements CHAPTER NINTEEN INTERNATIONAL STANDARDS ON REVIEW ENGAGEMENTS LO # LEARNING OBJCTIVE PART A – INTRODUCTION TO AUDIT AND RELATED SERV ICES REFERENCE LO AUDIT AND AUDIT RELATED SERV ICES 16.1.1 16.1.4 LO TYPES OF REV IEW ENGAGEMENT 16.1.2 LO DUE DILIGENCE ENGAGEMENTS 16.1.3 PART B – ENGAGEMENT TO REV IEW FINANCIAL INFORMATION LO PRINCIPLES TO APPLY TO REV IEW ENGAGEMENTS LO PROCEDURES FOR A REV IEW ENGAGEMENT LO REPORT OF A REV IEW ENGAGEMENT 16.1.4 16.1.6 16.1.4 16.1.7 16.1.5 16.1.8 Auditing – Study Notes Chapter 19 International Standards on Review Engagements PART A – INTRODUCTION TO AUDIT AND RELATED SERVICES LO 1: AUDIT AND AUDIT RELATED SERV ICES: Audit: Audit is a form of assurance engagement Objective of an audit is to obtain reasonable assurance whether financial statements have been prepared, in all material respects, in accordance with applicable financial reporting framework Review: Review is also a form of assurance engagement Objective of a review is to obtain moderate assurance whether anything has come to auditor’s attention that causes him to believe that interim financial information is not prepared, in all material respects, in accordance with applicable financial reporting framework Agreed-upon Procedures: The objective is to carry out procedures of audit nature to which the auditor and the entity have agreed and to report on factual findings Compilations: The objective is to carry out procedures of accounting nature to collect, classify and summarize financial information e.g preparing a tax computation for client LO 2: TYPES OF REV IEW ENGAGEMENT : There are two types of review engagements: Attestation Engagement: In this type of engagement, a practitioner is engaged to attest to something e.g to attest that certain procedures within the entity have been performed in prescribed way Practitioner will not comment on quality of procedures.) Direct reporting engagement: In this type of engagement, a practitioner is engaged to provide a special report on some aspect of client’s affairs Practitioner performs examination of financial information and expresses negative form of conclusion (moderate assurance) A common example is “Due Diligence Engagement” LO 3: DUE DILIGENCE ENGAGEMENTS: Due Diligence Engagement: This is a type of direct reporting review engagement and is usually performed in the context of Mergers and Takeovers Objective is to obtain information about the Target company prior to take over to find out everything that may be relevant about target company’s financial performance, financial position and future prospects Main objective of a Due Diligence is:  To decide whether a takeover or merger is actually desirable  If so, what should be proposed cost of acquisition Auditing – Study Notes Chapter 19 International Standards on Review Engagements Items to investigate in a Due Diligence Exercise: Financial Performance and Financial Position (e.g looking at financial statements of company, budgets etc., performing ratio analysis and evaluating trends) Operational Issues (e.g major contracts with customers, high rate of labor turnover, high cost of warranties to customers) Management Representations (evaluating management’s representation regarding takeover e.g if management says that there is no tax investigation or significant litigations) Identification of assets (specially intangible assets are identified for inclusion in financial statements of acquirer e.g internally generated goodwill, patent rights, customer lists, brand names) Future Benefits and costs of takeover (it includes analysis of future benefits e.g synergy effect from economies of scale) Benefits of using an audit firm for due diligence:  An audit firm has expertise  Saves time for management  Re-assures that acquisition has been properly and professionally evaluated PART B – ENGAGEMENT TO REVIEW FINANCIAL INFORMATION LO 4: PRINCIPLES TO APPLY TO REV IEW ENGAGEMENTS : A professional engaged in a review engagement shall:  Comply with ethical requirements  Agree terms of engagement  Plan and perform the work with professional skepticism  Obtain sufficient and appropriate evidence by performing “Review Procedures”  Express his conclusion in negative form in a written report LO 5: PROCEDURES FOR A REV IEW ENGAGEMENT : The auditor should make inquiries, primarily of persons responsible for financial and accounting matters, and perform analytical and other review procedures to enable the auditor to conclude on financial statements A review ordinarily does not require tests of the accounting records through inspection, observation or confirmation Practitioner shall: Obtain understanding of entity and its industry Make inquiries of management about significant matters e.g about identification of subsequent events affecting financial information, about events or conditions affecting ability of entity to continue as a Going concern Applying analytical procedures i.e a Comparing financial information with Prior Period, Budgets competitors and industry b Study of Relationships between elements in financial statements that should be expected to confirm a predictable pattern Reading the minutes of the meetings of shareholders, and TCWG Other review procedures including: a evaluating uncorrected misstatements (as in audit) Auditing – Study Notes Chapter 19 International Standards on Review Engagements b obtain written representation letter from management c consider matters giving rise to modification in audit/review report in previous periods d read other information to identify a material inconsistency LO 6: REPORT OF A REV IEW ENGAGEMENT : Examples of Review Reports on Interim Financial Information (Unqualified Conclusion) AUDITORS’ REPORT TO THE MEMBERS ON REVIEW OF CONDENSED INTERIM FINANCIAL INFORM ATION Introduction We have reviewed the accompanying condensed interim statement of financial position of Pakistan Telecommunication Company Limited as at June 30, 2014, and the related condensed interim statement of comprehensive income, condensed interim statement of cash flows, condensed interim statement of changes in equity and notes to the financial information for the six months period then ended (here-in-after referred to as the “interim financial information”) Management is responsible for the preparation and presentation of this interim financial information in accordance with approved accounting standards as applicable in Pakistan for interim financial reporting Our responsibility is to express a conclusion on this interim financial information based on our review Scope of Review We conducted our review in accordance with International Standard on Review Engagements 2410, “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit Accordingly, we not express an audit opinion Conclusion Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim financial information as of and for the six months period ended June 30, 2014, is not prepared, in all material respects in accordance with approved accounting standards as applicable in Pakistan for interim financial reporting Auditor Auditor Date Address ... ENGAGEMENT : Examples of Review Reports on Interim Financial Information (Unqualified Conclusion) AUDITORS’ REPORT TO THE MEMBERS ON REVIEW OF CONDENSED INTERIM FINANCIAL INFORM ATION Introduction... International Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity” A review of interim financial information consists of making...Auditing – Study Notes Chapter 19 International Standards on Review Engagements PART A – INTRODUCTION TO AUDIT AND RELATED SERVICES LO 1: AUDIT AND AUDIT RELATED SERV ICES: Audit: Audit