Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) reviewed 50 audits carried out by 39 firms during the year 2013 compared with the 50 audits carried out by 28 firms during the previous year. Audits reviewed included 12 audits carried out by 6 firms which are members of international networks and 32 audits carried out by 29 firms which carried out audits of less than 10 Specified Business Enterprises (SBEs). Based on the risk associated with the SBE which was audited, 8 audits were subject to a comprehensive review.
Deficiencies were identified in 43 audits conducted by 37 firms. The 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 Failure to Obtain Sufficient Appropriate Audit Evidence
Documentation relating to 35 audits did not provide a record of obtaining sufficient 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 sales, purchases, interest income, interest expenses, depreciation, property, plant and equipment, investments, inventories, related party outstanding balances, receivables on loans, leases and hire purchases, payables and deferred tax
- Not performing any audit procedures to test certain financial statement assertions.
2.2 Items Not Sufficiently Documented
- Not planning and performing audit procedures to ensure completeness of customer deposit liabilities and receivables on loans, leases and hire purchases.
- Not performing audit procedures to ensure inventories are valued at appropriate amounts.
- Not performing audit procedures to verify ownership of a land on which office building was
- Failure to verify the existence of obligations relating to a long-term loan recorded in the financial statements for the
- Absence of evidence of carrying out audit procedures to ascertain existence and completeness of related party
- Failure to verify existence of bank balances, deposit liabilities, other financial liabilities and receivables on loans, leases and hire
- Not performing any audit procedures to cover the period subsequent to the interim period for which audit procedures were performed, in relation to inventories, customer deposit liabilities, other financial liabilities and receivables on loans, leases and hire purchases.
Documentation in relation to 31 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 included failure to document the following as required by Sri Lanka Auditing Standards.
2.3 Non-Availability of Evidence of Understanding and Assessment of Control Risk
- Nature, timing and extent of audit procedures performed and results of such procedures.
- Planning of the audit and the audit
- The auditor’s understanding of the industry and the economic and legal environment in which the entity
- The auditor’s understanding of the accounting and internal control systems.
- Analyses of transactions and balances.
- Analyses of significant ratios and
- Identified and assessed risks of material misstatements at the financial statement to and assertion
- 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
- Representations received from the
26 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
23 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 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 23 audits.
2.6 Absence of Evidence on the Basis of Selecting the Samples
- Recognising and presenting receipt of compensation on land as revaluation
- Recognising and presenting investment property as property, plant &
- Failing to perform an impairment test when impairment indicators exist.
- Failing to present consolidated financial statements when subsidiaries exist.
- Failing to use an actuarial valuation in measuring the retirement benefit obligation.
- Not making provision for retirement benefit obligations.
- Not making provision for deferred
- Not depreciating freehold buildings.
- Non-compliance with significant disclosure requirements in respect of a finance
- Not making allowances for impairment of financial assets of a finance company in accordance with Sri Lanka Accounting Standards.
- Failing to revalue the entire class of land and building.
- Failure to identify an inappropriate revenue recognition
21 audits did not have any documentation of the means of selecting the samples for testing so as to gather sufficient appropriate audit evidence to meet the objectives of the audit procedures.
2.7 Not Ascertaining Information Regarding Related Party Transactions
18 audits did not have evidence of the auditor reviewing information provided by the management on related party transactions and being alert of other material related party transactions to ascertain the completeness of the information.
Examples of deficiencies in this respect are:
2.8. Absence of Evidence on the Application of Analytical Procedures
- Absence of documentation of the auditor reviewing management information to identify related party relationships and
- Non-availability of documentation of the auditor performing any audit procedures relating to identifying and disclosing related party transactions.
- Non-availability of documentation of the auditor performing any audit procedures relating to identifying and disclosing a related party transaction except for obtaining a confirmation from the related party.
17 audits did not have any evidence of performing analytical procedures at the planning stage, to identify the areas of potential risk and to corroborate conclusions formed during the audit of individual components of the financial statements.
2.9. Non-Availability of Audit Plans
16 audit files did not have any documentation of the overall audit strategy and of the audit plan.
Audit documentation of majority of the files reviewed did not provide evidence relating to the implementation of quality control policies and procedures by audit firms designed to ensure that the individual audits are conducted in accordance with Sri Lanka Auditing Standards.
Most of the audits revealed absence of documentation on evaluating expert’s work even though an expert’s assistance was obtained in making significant accounting estimates.
Improper wording in the opinion paragraphs, not evaluating qualifications included in the subsidiary audit report prior to incorporation in the audit opinion on the consolidated financial statements and not evaluating the appropriateness of the going concern assumption were some of the salient findings in the conduct of the audit reviews.