AC2104

Seminar Group 1
Presentation 1
6 September 2018
Team 1:
Alvin Tan Jun Rong
Elysia Chua Hui Yi
Jonathan Low Wen Xun
Ng Jing Hui Rachel
William Elmer Winarto
A (i)
What are the challenges likely to be encountered by
auditors in reporting key audit matters (KAM)?
 What is KAM?
Matters that, in the auditor’s professional judgement were of most
significance in the audit of the financial statements of the current
period. They are selected from matters communicated with those
charged with governance:

Areas of auditor Significant events or

Areas with increased
judgement relating transactions that
risk requiring extra
to management have impacted the
attention in the audit
judgements audit
Benefits of KAM

More Increase in
interaction professional skepticism

More attention Enhanced users’

Enhanced
by management perception
value
 Challenges likely to be encountered by
auditors in reporting KAM?
KAM are selected from matters that have been communicated
Identifying the items
to the Audit Committee, but not everything communicated to
to be included
the Audit Committee is necessarily a KAM.
Difficulty in summarizing the procedures performed in a
succinct way that adequately communicates the nature and
Concise Presentation
extent of the auditor’s response to the assessed due to the
challenges in complex, judgement areas of the audit.

Perceive the auditor’s reporting of KAMs to be too candid and

Reluctant to take on
responsibility
reflects on the audit committee’s performance if control
weaknesses are identified.
A (ii)
SSA 701 (A46) states that the ‘amount of detail to be
provided in the auditor’s report to describe how a key
audit matter was addressed in the audit report is a matter
of professional judgment’. One of the aspects that the
auditor may describe is an indication of the
outcome/findings of the auditor’s procedures. Based on
FRC (2016) and PWC (2017) review of the auditor’s
report, how prevalent is the disclosure of audit
outcome/findings and what are the arguments for and
against describing the outcome/findings of the auditor’s
procedures?
How prevalent is the disclosure of audit
outcome/findings?

Singapore 42%

Hong Kong 27%

UK 20%
 Arguments for describing the outcome
/findings of the auditor’s procedures

1 2 3 4
Reduce uncertainty Users of financial Provides a real value Provides insight into
about how the statements would be add, giving colour as the auditor’s
auditor resolved the interested in not to whether judgements at the
matter when only what auditors management’s more granular level
forming the opinion did but also what judgements were of identified risks
on the financial they found balanced, mildly rather than at the
statements as a optimistic or mildly overall financial
whole pessimistic in the statement level.
view of the auditor.
 Arguments against describing the outcome
/findings of the auditor’s procedures

1. Careful consideration of the wording used

● Provide indication of the outcome of auditor’s response
● To avoid leading readers into believing that a “mini opinion”/
separate opinion is provided on individual KAM

2. Enhancing the quality of one aspect of the auditor’s report

● Leads to higher expectations
● Need to be balanced against the demands of clarity and conciseness
Arguments against describing the outcome
/findings of the auditor’s procedures

3. Reservations about this approach

● Ultimate goal: Convey an opinion for the entire financial statement

B (i)
You are auditing Diverse Carbon, a manufacturer of nerve
gas for the military, for the year ended 30 September. On 1
September, one of its manufacturing plants caught fire,
releasing nerve gas into the surrounding area. Thirteen
people were killed and numerous others paralysed. The
company’s legal counsel indicates that the company is
liable and that the amount of the liability can be reasonably
estimated, but the company refuses to disclose this
information in the financial statements. Indicate the type of
financial statement audit report that you would issue, and
briefly explain your reasoning. Assume that the item is
material.
 Is the matter material?

Yes

Qualified opinion

Is the matter No
Qualified opinion
pervasive?

Yes - departure Yes - client imposed

Adverse Disclaimer
 Is the matter pervasive?
Event is confined to specific elements, accounts or items of the financial statements.

Yes No

“Thirteen people were killed and Only affects;

numerous ● Provision for legal suit expense
others paralysed” (balance sheet)
● Substantial monetary compensation
● Legal suit expense acc (P/L)
● Especially if Diverse Carbon is a
small company

Sum from this event is not a substantial

proportion of the financial statement.
 Departure from financial
reporting framework
● Company is liable and;

Is the matter ● Liability can be reasonably

pervasive? estimated
● Company refuses to disclose
when;

Yes - departure ● FRS states that a provision

has to be recognised if
○ Probable
Adverse
○ Reliable estimate
 To conclude

Adverse Qualified

Small company Large company

Sum from this event is a substantial Sum from this event is not a substantial
proportion of the financial statement. proportion of the financial statement.
B (ii)
You are undertaking the audit for the year ended 30 June 2018 of Durable Drums Ltd, a
manufacturer and retailer of steel drums. As in previous years, Durable Drums has
accounted for inventory on a last in first out (LIFO) basis. Durable Drums also uses a
‘just-in-time’ inventory management system and therefore the effect of this departure
from Australian accounting standards was previously not material. In the current year,
however, the company has a large stockpile of inventory at year end, due to an unexpected
cancellation of a major order en route to its destination. In order to cut freight costs,
Durable Drums stored the goods temporarily in Thailand, hoping for an order from another
South-east Asian customer.

Unfortunately, you were not told of this problem until after balance date and did not
conduct a stocktake of the inventory. You have also been told that some of the inventory
has since been shipped to a number of different customers to fill outstanding orders. The
available audit procedures have been unable to validate the existence of this inventory at
balance date. The relevant inventory is currently recorded at $2,500,000. Audit
procedures have indicated that, had inventory been accounted for on a first in, first out
(FIFO) basis, it would have been recorded at $3,500,000. Materiality for the audit has been
set at $1,000,000.
 What is the most appropriate auditor’s
opinion for Durable Drums for the year
ended 30 June 2018? Explain your answer.
1. “You were not told of this problem”

2. “Materiality for the audit has been

set at $1,000,000”

3. Inventory and COGS affected

Material + Not Pervasive = Qualified Opinion

B (i)
You have detected that the information about this year’s
sales in the Chairman’s report contained in your
client’s annual report is materially inconsistent with
the sales reported in the audited financial statements.
You have determined that the information in the
Chairman’s report needs revision, but the information
has not been revised.
 Indicate the type of financial statement
audit report that you would issue, and
briefly explain your reasoning.

● Unmodified
○ Sales Information are reported correctly
○ OM to explain to reader that sales in annual
report is not misstated while Chairman
report is wrong.