Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) reviewed 30 audits carried out by 17 firms during the year 2011. Audits reviewed included 17 carried out by members of international network firms.
Deficiencies were identified in 19 audits conducted by 14 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 set out below:
2.1 Items not Sufficiently Documented
Documentation in relation to 9 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 Standards.
Items which were not documented as required by Sri Lanka Auditing Standards included the following:
2.2 Failure to Obtain Sufficient Appropriate Audit Evidence
- Nature, timing and extent of audit procedures performed and results of such procedures. Deficiencies detected included absence of any evidence of work done in respect of deferred tax, trade receivables and tax losses. Absence of evidence relating to work done to verify the assumptions used in measuring defined benefit obligations and a capital gain on equity investments were also noted.
- Planning of the audit and the audit programme.
- Auditor’s understanding of the industry and the economic and legal environment in which the entity operates.
- The Auditor’s understanding of the accounting and internal control systems.
- Sampling techniques used by the Auditor.
- Analyses of transactions and balances.
- Analyses of significant ratios and trends.
- Identified and assessed risks of material misstatements at the financial statement and assertion level.
- Evidence that the work performed by assistants was supervised and reviewed.
- Conclusions reached by the Auditor concerning significant aspects of the audit, including how exceptions and unusual matters were resolved and treated.
Documentation relating to 8 audits did not provide a record of obtaining sufficient and appropriate audit evidence from substantive procedures and from tests of controls to support financial statement assertions.
- Not performing any audit procedures to test the financial statement assertions relating to receivables, payables, related party balances and contingent liabilities.
- Failure to undertake substantive procedures to ascertain the recoverability of investments in and receivables from subsidiaries.
- Relying merely on a confirmation from the Company which stated the value of the inventory without undertaking any substantive procedures to ascertain such valuation.
- Not conducting procedures to ascertain the adequacy of provisioning for interest receivables and for investments in preference shares despite such balances being identified as non-recoverable.
2.3 Understanding and Assessment of Control Risk
- Not verifying the computation of a gain resulting from change in ownership of a subsidiary.
6 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.
2.4 Failure to Establish the Audit Materiality Level
5 audits did not have any record on establishing the materiality level for the purpose of determining the nature, timing and extent of audit procedures and evaluation of the effect of misstatements.
2.5 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 4 audits.
2.6 Related Party Transactions
- Revaluing a leasehold land held under an operating lease and recognising as finance lease.
- Considering an incorrect value as the cost of investment property.
- Non-compliance with significant disclosure requirements in respect of a finance company.
- Not recognising impairment of investments and receivables.
- Not adopting the equity method for investments in associates.
- Recognising and presenting investment property as property, plant and equipment.
Failure to review available records and identify related party transactions which were not disclosed were observed in 4 audits.
2.7 Tests Performed on Expert’s Work
- Transactions with a subsidiary
- Short-term loans granted and settled during the year
3 audits did not have any evidence on how the Auditor considered source data used, assumptions and methods used and results of the expert’s work in the light of the Auditor’s overall knowledge of the business and other audit findings in evaluating the expert’s work.
- Accepting the external valuers results as the appropriate value without assessing the reasonableness of the values based on the Auditor’s understanding of the entity and its environment and whether the estimates are consistent with other audit evidence obtained during the audit when a property acquired had been revalued in the year of acquisition recognising an excessive gain.
- Failure to test significant assumptions, the valuation model and underlying data when the gain on valuation of biological assets and real estate had been significant.
- Considering the value derived by an inappropriate method adopted by the management as the appropriate value of such property.
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 most cases, the documentation did not provide evidence that the audit was planned and performed in accordance with the Standards. The working papers lacked evidence relating to overall audit strategy and planning to test assertions made in the financial statements. Inadequate identification and disclosure of related party transactions and failure to evaluate the work of experts in the light of the Auditor’s overall knowledge of the business were observed in some of the audits. Further, certain audit reports were not prepared in compliance with the relevant standard relating to the Auditor’s Report.