1. Introduction

Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) reviewed 100 audits carried out by 41 firms during the year 2014 compared with the 50 audits carried out by 39 firms during the previous year. Audits reviewed included 44 audits carried out by 4 firms which are members of international networks and 56 audits carried out by 37 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.



2. Main findings

Deficiencies were identified in 68 audits conducted by 41 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 41 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.
Deficiencies included:


• Failure to document any audit procedures on any of the financial statements balances
• Absence of evidence on performing any audit procedures to test the financial statement assertions relating to revenue, cost of sales, depreciation, property, plant and equipment, goodwill, investments, inventories, related party balances, receivables on loans, payables, capital reserves, contribution against equity capital, deferred tax liabilities, interest income, interest expenses and impairment of loans and receivables in a finance company
• Absence of evidence on performing any audit procedures to test certain financial statement assertions

Examples:
• Planning and performing audit procedures to ensure existence and ownership of investment property
• Planning and performing audit procedures to ensure valuation assertion by ascertaining the existence of any impairment indicators
• Planning and performing alternate audit procedures to ensure valuation assertion where initially planned audit procedures were not satisfactory
• Performing audit procedures to ensure inventories are valued at appropriate amounts
• Performing audit procedures to verify existence and ownership of lands
• Verifying the accuracy, valuation and completeness of cash and bank balances and financial assets of a finance company when returned cheques were significant
• Carrying out audit procedures to ascertain existence of related party balances
• Carrying out audit procedures to ascertain existence and ownership of investment property
• Verifying existence of other financial liabilities and receivables
• Ascertaining the percentage holdings of investments to establish parent subsidiary relationship
• Ascertaining accuracy of income tax expenses and deferred tax computation
• Absence of evidence of performing any audit procedures to cover the period subsequent to the interim period for which audit procedures were performed, in relation to inventories, revenue and cost of sales


2.2. Items not sufficiently documented

Documentation in relation to 27 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. Deficiencies observed included failure to document the following as required by Sri Lanka Auditing Standards.


• Nature, timing and extent of audit procedures performed and results of such procedures
• Planning of the audit and the audit program
• The 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
• 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
• Representations received from the management

2.3. 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 22 audits.


• Failure to recognize and present amounts attributable to unit holder’s funds as equity
• Failure to recognize the fair value movement of investments in the statement of comprehensive income
• Recognizing investment property as property, plant and equipment
• Recognizing and presenting loans granted by directors as equity
• Failure to recognize jointly controlled entities using proportionate consolidation method or equity method of accounting
• Failure to amortize the prepaid lease rentals relating to operating leases
• Failure to perform an impairment test when impairment indicators exist
• Failure to account investment in associates using equity method of accounting
• Failure to present consolidated financial statements when subsidiaries exist
• Failure to disclose significant events occurred after the balance sheet date
• Failure to recognize retirement benefit obligations
• Failure to recognize deferred taxation
• Recognizing depreciation on freehold land which has an indefinite useful life
• Failure to regularly revalue property, plant and equipment when the accounting policy is to adopt a revaluation model
• Failure to present cumulative redeemable preference shares as liability

2.4. Absence of evidence on the basis of selecting the samples

20 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 while 13 audits failed to evaluate the sample results to determine whether the assessment of the characteristics of the population is confirmed or needs to be revised.

2.5. Non availability of evidence of understanding and assessment of control risk

20 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. Failure to establish the audit materiality level

19 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 evaluating of the effect of misstatements.

2.7. Not ascertaining information regarding related party transactions

12 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:

• Absence of documentation of the auditor reviewing management information to identify related party relationships and transactions
• 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.



3. General

Audit documentation of some of the files reviewed did not provide adequate evidence on 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 and lacked any documentation of the overall audit strategy and of the audit plan.

Further, some of the deficiencies observed in the audit opinions included not modifying issues which were above the materiality level, qualifying the opinion when there was no basis for qualification, improper wording in the opinion paragraphs, not documenting basis for the qualifications of audit report and qualifying the audit opinion referring to SLFRSs when the company had adopted SLFRS for SMEs, referring to SLFRS for SMEs in the scope paragraph to the audit report instead of SLAAS.