Observations – Audit Reviews Found in 2012


  1. Introduction

    2. Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) reviewed 50 audits carried out by 28 firms during the year 2012. Audits reviewed included 24 audits carried out by 6 firms which are members of international networks.

  2. Main Findings

    3. Deficiencies were identified in 33 audits conducted by 26 firms. The identified departures from Sri Lanka Auditing Standards detected were communicated to the respective firms in the form of letters of assistance.
    The main findings are as follows:

    2.1 Items Not Sufficiently Documented

    Documentation in relation to 17 audits had deficiencies relating to matters which are of importance to support the audit opinion and to provide evidence that the audits were conducted in accordance with Sri Lanka Auditing Deficiencies observed in failure to document as required by Sri Lanka Auditing Standards included the following:
    • Nature, timing and extent of audit procedures performed and results of such procedures.
    • Deficiencies detected included absence of any evidence of examining negative goodwill on consolidation, the gratuity trust deed, and the loss incurred on disposal of a property.
    • Planning of the audit and the audit
    • Auditor’s understanding of the industry and the economic and legal environment in which the entity

    Examples:
    • Failing to document information relating to the cessation of the business activities of a core segment of the entity.
    • Failing to obtain information of the industry and the economic and legal environment in which the entity operates, attributing to the fact that the entity was facing severe liquidity crisis.
    • The auditor’s understanding of the accounting and internal control systems.
    • Sampling techniques used by the
    • Analyses of transactions and balances.
    • Analyses of significant ratios and
    • Identified and assessed risks of material misstatements at the financial statement and assertion
    • Evidence that the work performed by assistants was supervised and
    • Conclusions reached by the Auditor concerning significant aspects of the audit, including how exceptions and unusual matters were resolved and treated.
    • Audit procedures performed to evaluate the adequacy of work performed by other auditors, experts and other third parties.

    2.2  Failure to Obtain Sufficient Appropriate Audit Evidence

    Documentation relating to 15 audits did not provide a record of obtaining sufficient and appropriate audit evidence from tests of controls and from substantive procedures to support financial statement assertions.
    Deficiencies included:
    • Not performing any audit procedures to test the financial statement assertions relating to sales, purchases, interest income, interest expenses, depreciation, property, plant & equipment, investments, inventories, leasing and hire purchase receivables, related party receivables, payables and stated capital.
    • Absence of evidence of carrying out audit procedures to ascertain reasons for non-provision of deferred tax except for the audit programme referring to the fact that deferred tax was not provided.
    • Absence of evidence of carrying out audit procedures to ascertain existence, completeness and valuation of a receivable from a related party except for requesting for a
    • Failure to ascertain audit evidence about the accuracy and completeness of information produced by the

    Example:
    Company had failed to consider the carrying value of a building amounting to Rs. 225 Million when computing the deferred tax.
    • Failure to ascertain the accuracy of a significant journal entry passed by the company as an error correction.
    • Not verifying the actual liability calculation of a retirement benefit obligation when the financial statements reflected a higher
    • Failure to ascertain reasons for not presenting consolidated financial statements when the percentage holdings of certain investments in the working papers revealed parent-subsidiary relationships.


    2.3  Non-Availability of Audit Plans and Audit Programmes

    14 audit files did not have any documentation of the overall audit strategy and of the audit plan including any significant changes made during the audit engagement.

    2.4 Failure to Establish the Audit Materiality Level

    14 audits did not have any records on establishing the materiality level for the purpose of determining the nature, timing and extent of audit procedures and evaluation of the effect of

    2.5  Non-Availability of Evidence of Understanding and Assessment of Control Risk

    14 audits did not have any documentation regarding the auditor’s understanding of the entity’s accounting and internal control system and of the assessment of control risk.

    2.6  Absence of Evidence to Support the Basis for the Audit Opinion

    In 6 audits, the audit working papers did not document findings and conclusions arrived at from the audit as the basis for the opinion formed.

    2.7  Failure to Identify Material Misstatements in Financial Statements due to Inadequate Use of Assertions to Form a Basis for Audit Procedures

    Failure to identify the following material misstatements in financial statements due to inadequate use of assertions for classes of transactions, account balances and presentation and disclosures
    in sufficient detail to form a basis for the assessment of risks of material misstatements and the design and performance of further audit procedures were observed in 6 audits.
    • Recognising and presenting investment property as property, plant &
    • Incorrectly making allowances for the decline in market value of dealing securities which took place after the reporting
    • Recognition of costs to be incurred in the future in respect of business promotion, foreign travel etc., as expenses of the current
    • Adjusting a gain on loss of control of a subsidiary in the Statement of Changes in
    • Not making provision for retirement benefit obligations (gratuity).
    • Not making provision for deferred
    • Failure to adopt a depreciation method which reflects the pattern in which the asset’s future economic benefits are expected to be consumed by the
    • Non-compliance with significant disclosure requirements in respect of a finance

  3. General


    4. Audit documentation of majority of the firms reviewed did not provide a sufficient and appropriate record of the basis of the Auditor’s Report.

    In some cases, the documentation did not provide evidence relating to the audit firm implementing quality control policies and procedures designed to ensure that the audits are conducted in accordance with Sri Lanka Auditing Standards.

    In certain audits, the working papers lacked evidence on alternate audit procedures carried out to gather evidence regarding the inventory, when the auditor had not attended the physical inventory count.

    Inadequate identification and disclosure of related party transactions, improper wordings in the opinion paragraphs, failure to address the other reporting responsibilities vested by the Companies Act No. 07 of 2007 and Finance Act No. 78 of 1988 in a finance company are some of the other salient findings from the conduct of the audit reviews.

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