Karim & Co. Chartered accountants are engaged in the review of financial statements of Baber Textile Mills Limited for the half year ended June 30, 2008. The increase in oil energy prices and current inflationary trend prevailing in the country has resulted insubstantial losses and the company’s outlook is negative. Moreover, in view of recessional pressures being faced by the US and many of the EU economies, some of the large customers in those countries have not renewed their orders and many others are expected to follow. Consequently the company has renewed their orders and many others are expected to follow. Consequently the company has decided to layoff 40% of its work force gradually over the next few months.

The company management acknowledges the severity of the situation but is reluctant to provide specific details in the interim financial information. However it has given a note containing general indications about the future prospects of the company. Describe how the auditor should address the above issue and the implications it may have on the review report of interim financial information.

1. Inquire whether management has changed its assessment of the entity’s ability to continue as a going concern.

2. If the auditor concludes that the conditions cast significant doubt the entity’s ability to continue as a going concern, the auditor

(a) Inquire from management about the future plans, the viability of these plans and whether management believes that the outcome of such plans will improve situation.
(b) Consider the adequacy of disclosure of such matters in the financial information

3. The auditor should consider whether the note gien by the management adequately discloses the uncertainty

4. If the auditor assesses that the note is adequate the auditor should add a paragraph emphasizing uncertainty; else a qualified or adverse opinion should be expressed.

Sigma & Company, Chartered Accountants has carried out a review of the financial statements of Bilal Limited, a listed company, for the half year ended June 30, 2009. The job in charge has drafted the following review report:

Report on Review of Interim Information:


We have reviewed the accompanying condensed interim statement of financial position of Bilal Limited (“the company”) as at June 30, 2009 and 2008, and the related condensed interim statement of comprehensive come and condensed interim statement of cash flows together with the otes forming part thereof for the half year then ended in accordance ‘with International Standards on Auditing applicable to review engagement. Management is responsible for the preparation and esentation of this condensed interim financial information in ccordance with approved accounting standards as applicable in pakistan.

Scope of Review

A review of interim condensed financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with international Standards on Auditing andconsequently does not enable us obtain assurance that we would become aware of all significant matters that might be identified in an audit.


Based on our review, nothing has come to our attention that causes us t 0 “believe that the accompanying condensed interim financial. information June 30, 2009 is not presented fairly in all respects. use of the inherent limitations of our review engagement, this report ended for the information of management and should not be used yother purposes.

Emphasis of matter

Without qualifying our conclusion, We draw attention to note X to the financial statements. Management has informed us that inventory ‘has been stated at cost which is in excess of its net realizable value.

Management’s computation, which we have reviewed, shows that inventory, if valued at the lower of cost and net realizable value as required by International Financial Reporting Standards’, would have been lower by Rs. 20,000,000/-, and the reported net income and shareholders’ equity would have decreased by Rs. 18,900,000/-


Highlight the deficiencies, if any, in the draft review report.

Deficiencies in the Review Report:

(i) The Report has not been addressed properly.

(ii) Reference to the prior year’s audited financial statements in the first paragraph, is not required.

(iii) A component of the financial statements i.e. Statement of Changes in Equity have not been identified in the first paragraph.

(iv) Reference to the ISAs, in the first paragraph, is not required.

(v) The auditor review responsibilities should follow management’s responsibilities in the first paragraph.

(vi) There should be a statement on the second (scope) paragraph that the review was conducted in accordance with ISRE 2410.

(vii) There should be a statement in the second (scope) paragraph that being a review engagement no audit opinion is being expressed
on the financial statements.

(viii) The words “in accordance with approved Accounting Standar as applicable in Pakistan” are missing from the conclusio paragraph.

(ix) There should be a reference to “material” respect in Conclusion paragraph.

(x) There should be no restriction on the distribution of the audito review report as mentioned in the fourth paragraph.

(xi) Over valuation of inventory should be reported as a qualification instead of emphasis of matter paragraph.

(xii) Address of the Chartered Accountant needs to be given.

(xiii) The report should be dated.

You are the audit engagement partner of a listed company, Steel Limited (SL). The firm is currently in the process of completing limited scope review of SL’s interim financial statements for the half year ended December 31, 2007. The audit team has recently concluded their work with following findings for your decision:

(i) Inventory is a significant item of the balance sheet but the auditor was not asked to attend the stock count at the end of the period. Consequently, the audit team relied on the count
communicated by the management. 

(ii) SL has executed many contracts with its customers for long term future deliveries at different prices, amounting to Rs. 1,200 million. To avoid loss on account of price fluctuation, short term futures had been bought in international market against future deliveries valuing Rs. 300 million only. Such futures are carriedover on maturity. Remaining deliveries have been left open. 

(iii) A set up of the company in Lahore having carrying value of
Rs. 235 million has been sold to an associated undertaking for Rs. 240 million. The minutes of the Board of Directors show that the transaction was carried out at an arm’s length price. No explanatory note has been given in the financial statements in this regard.

(iv) As a percentage of totaldebts the provision for bad debts are in accordance with the previous history of the company. However, due to time constraints the practice of using age-analysis of debtors has not been used this time.

Review of Interim Financial Information

(xi) Over valuation of inventory should be reported as a qualification instead of emphasis of matter paragraph.

(xii) Address of the Chartered Accountant needs to be given.

(xiii) The report should be dated.

(v) . Due to time constraints the review of subsequent event was not carried out by the audit team.


Discuss the above issues and their implications on your report.

(i) A review does not involve observing inventory count. So the review report will not be modified.

(ii) If open position is so serious that it may cast doubt about the future viability of the entity, the auditor should request management to disclose the fact in the notes to the accounts. If the management adequately discloses the fact in the notes the report but will add an emphasis of a matter paragraph giving reference to the particular note. If the disclosure is inadequate the report may be qualified.

(iii) The auditor should request management to disclose the fact in financial statements. If adequate disclosures are not made the review report will be modified.

iv) If the results of inquiry, analytical procedures another review procedures are satisfactory, the report need not be modified only because age analysis has not been prepared by the management.

(v) The auditor inquire whether management has identified all events up to the date of the review report that may require adjustment to or disclosure in the interim financial information. It is not necessary for the auditor to perform other procedures to identify events occurring after the date of review report

The auditor should have an understanding of the entity and its environment to enable him to plan the engagement and select the inquiries, analytical and other review procedures.


State the procedures which an auditor may perform, to update his understanding of the entity and its environment, while carrying out an engagement to review interim fmancial information

Procedures which an auditor may perform to update the understanding of the entity and its environment for an engagement to review interim financial information includes the following:

(a) Reading the documentation, to the extent necessary, of the preceding year’s audit and reviews of prior interim period(s) of the current year and corresponding interim period(s) of the prior year, to enable the auditor to identify matters that may affect the current-period interim financial information.
(b) Considering any significant risks, including the risk of management override of controls that were identified in the audit of the prior year’s financial statements.
(c) Reading the most recent armual and comparable prior period interim financial information.
(d) Considering materiality with reference to the applicable financial reporting framework as it relates to interim financial information to assist in determining the nature and extent of the procedures to be performed and evaluating the effect of misstatements.
(e) Considering the nature of any corrected material misstatements and any identified uncorrected immaterial misstatements in the prior year’s financial statements.
(f) Considering significant financial accounting and reporting matters that may be of continuing significance such as material weaknesses in internal control.
(g) Considering the results of any audit procedures performed with respect to the current years’ financial statements.
(h) Considering the results of any internal audit performed and the subsequent actions taken by management.
(i) Inquiring of management about the results of management’s assessment of the risk that the interim financial information may be materially misstated as a result of fraud.
U) Inquiring of management about the effect of changes I the entity’s business activities.
(k) Inquiring of management about any significant changes in internal control and the potential effect of any such changes on the preparation of interim financial information.

(1) Inquiring of management of the process by which the interim financial information has been prepared and the reliability of the underlying accounting records to which the interim financial information is agreed or reconciled.

Posted on November 3, 2015 in Special Considerations - Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks

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