Audit Manual Part1

HLB INTERNATIONAL AUDIT AND ASSURANCE MANUAL

Illustration 4

Circumstances include the following:
• Review of consolidated general purpose financial statements prepared by management of
the parent in accordance with International Financial Reporting Standards.
• The terms of the review engagement reflect the description of management’s responsibility
for the financial statements in paragraph 30(b) of ISRE 2400.
• The financial statements are materially misstated due to the nonconsolidation of a subsidiary.
The material misstatement is deemed to be pervasive to the financial statements. The effects
of the misstatement on the financial statements have not been determined because it was not
practicable to do so.
• The practitioner does not have other reporting responsibilities under local law in addition to
the review of the consolidated financial statements.

INDEPENDENT PRACTITIONER’S REVIEW REPORT

[Appropriate Addressee]

Report on the Consolidated Financial Statements

We have reviewed the accompanying consolidated financial statements of ABC Company,
which comprise the consolidated statement of financial position as at December 31, 20X1, and
the consolidated statement of comprehensive income, statement of changes in equity and
statement of cash flows for the year then ended, and a summary of significant accounting
policies and other explanatory information.

Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated
financial statements in accordance with International Financial Reporting Standards, and for
such internal control as management determines is necessary to enable the preparation of
consolidated financial statements that are free from material misstatement, whether due to
fraud or error.

Practitioner’s Responsibility

Our responsibility is to express a conclusion on the accompanying consolidated financial
statements. We conducted our review in accordance with International Standard on Review
Engagements (ISRE) 2400 (Revised), Engagements to Review Historical Financial
Statements. ISRE 2400 (Revised) requires us to conclude whether anything has come to our
attention that causes us to believe that the consolidated financial statements, taken as a
whole, are not prepared in all material respects in accordance with the applicable financial
reporting framework. This Standard also requires us to comply with relevant ethical
requirements.
A review of consolidated financial statements in accordance with ISRE 2400 (Revised) is a
limited assurance engagement. The practitioner performs procedures, primarily consisting of
making enquiries of management and others within the entity, as appropriate, and applying
analytical procedures, and evaluates the evidence obtained.

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The procedures performed in a review are substantially less than those performed in an audit
conducted in accordance with International Standards on Auditing. Accordingly, we do not
express an audit opinion on these consolidated financial statements.

Basis for Adverse Conclusion

As explained in Note X, the company has not consolidated the financial statements of
subsidiary XYZ Company it acquired during 20X1 because it has not yet been able to ascertain
the fair values of certain of the subsidiary’s material assets and liabilities at the acquisition
date. This investment is therefore accounted for on a cost basis. Under International Financial
Reporting Standards, the subsidiary should have been consolidated because it is controlled by
the company. Had XYZ been consolidated, many elements in the accompanying financial
statements would have been materially affected.

Adverse Conclusion

Based on our review, due to the significance of the matter discussed in the Basis for Adverse
Conclusion paragraph, the consolidated financial statements do not present fairly (or do not
give a true and fair view of) the financial position of ABC Company and its subsidiaries as at
December 31, 20X1, and (of) their financial performance and cash flows for the year then
ended in accordance with International Financial Reporting Standards.

Report on Other Legal and Regulatory Requirements

[Form and content of this section of the practitioner’s report will vary depending on the nature
of the practitioner’s other reporting responsibilities.]

[Practitioner’s signature]

[Date of the practitioner’s report]

[Practitioner’s address]

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Illustration 5

Circumstances include the following:
• Review of a complete set of general purpose financial statements prepared by management
of the entity in accordance with International Financial Reporting Standards.
• The terms of the review engagement reflect the description of management’s responsibility
for the financial statements in paragraph 30(b) of this ISRE.
• The practitioner was unable to form a conclusion on the financial statements, due to inability
to obtain sufficient appropriate evidence about multiple elements of the financial statements,
and the practitioner believes the effect is material and pervasive to the financial statements.
Specifically, the practitioner was unable to obtain evidence about the entity’s physical inventory
and accounts receivable.

INDEPENDENT PRACTITIONER’S REVIEW REPORT

[Appropriate Addressee]

We were engaged to review the accompanying financial statements of ABC Company, which
comprise the statement of financial position as at December 31, 20X1, and the statement of
comprehensive income, statement of changes in equity and statement of cash flows for the
year then ended, and a summary of significant accounting policies and other explanatory
information.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial
statements in accordance with International Financial Reporting Standards,26 and for such
internal control as management determines is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or error.

Practitioner’s Responsibility

Our responsibility is to express a conclusion on the accompanying financial statements.
Because of the matter(s) described in the Basis for Disclaimer of Conclusion paragraph,
however, we were not able to obtain sufficient appropriate evidence as a basis for expressing
a conclusion on the financial statements.

Basis for Disclaimer of Conclusion

Management did not conduct a count of physical inventory on hand at the end of the year. We
were unable to perform the procedures we considered necessary concerning the inventory
quantities held at December 31, 20X1, which are stated at xxx in the statement of financial
position at December 31, 20X1.
In addition, the introduction of a new computerized accounts receivable system in September
20X1 resulted in numerous errors in accounts receivable and inventory. As of the date of our
report, management was still in the process of rectifying the system deficiencies and correcting
the errors. As a result of these matters, we were unable to determine whether any adjustments

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might have been found necessary in respect of recorded or unrecorded inventories and
accounts receivable, and the elements making up the statement of comprehensive income,
statement of changes in equity and statement of cash flows.

Disclaimer of Conclusion

Due to the significance of the matters described in the Basis for Disclaimer of Conclusion
paragraph, we were unable to obtain sufficient appropriate evidence to form a conclusion on
the accompanying financial statements. Accordingly, we do not express a conclusion on these
financial statements.

[Practitioner’s signature]

[Date of the practitioner’s report]

[Practitioner’s address]

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Illustration 6

Circumstances include the following:
• The financial statements have been prepared by management of the entity in accordance
with the financial reporting provisions of a contract (that is, a special purpose framework), to
comply with the provisions of the contract. Management does not have a choice of financial
reporting frameworks.
• The applicable financial reporting framework is a compliance framework.
• The terms of the review engagement reflect the description of management’s responsibility
for the financial statements in paragraph 30(b) of ISRE 2400.
• Distribution or use of the practitioner’s report is restricted.

INDEPENDENT PRACTITIONER’S REVIEW REPORT

[Appropriate Addressee]

We have reviewed the accompanying financial statements of ABC Company, which comprise
the balance sheet as at December 31, 20X1, and the income statement, statement of changes
in equity and cash flow statement for the year then ended, and a summary of significant
accounting policies and other explanatory information. The financial statements have been
prepared by management of ABC Company based on the financial reporting provisions of
Section Z of the contract dated January 1, 20X1 between ABC Company and DEF Company
(“the contract”).

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation of these financial statements in accordance
with the financial reporting provisions of Section Z of the contract, and for such internal control
as management determines is necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or error.

Practitioner’s Responsibility

Our responsibility is to express a conclusion on the accompanying financial statements. We
conducted our review in accordance with International Standard on Review Engagements
(ISRE) 2400 (Revised), Engagements to Review Historical Financial Statements. ISRE 2400
(Revised) requires us to conclude whether anything has come to our attention that causes us
to believe that the financial statements, taken as a whole, are not prepared in all material
respects in accordance with the applicable financial reporting framework. This Standard also
requires us to comply with relevant ethical requirements.
A review of financial statements in accordance with ISRE 2400 (Revised) is a limited
assurance engagement. The practitioner performs procedures, primarily consisting of making
enquiries of management and others within the entity, as appropriate, and applying analytical
procedures, and evaluates the evidence obtained.
The procedures performed in a review are substantially less than those performed in an audit
conducted in accordance with International Standards on Auditing. Accordingly, we do not
express an audit opinion on these financial statements.

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Conclusion

Based on our review, nothing has come to our attention that causes us to believe that these
financial statements are not prepared, in all material respects, in accordance with the financial
reporting provisions of Section Z of the contract.

Basis of Accounting, and Restriction on Distribution and Use

Without modifying our conclusion, we draw attention to Note X to the financial statements,
which describes the basis of accounting. The financial statements are prepared to assist ABC
Company to comply with the financial reporting provisions of the contract referred to above. As
a result, the financial statements may not be suitable for another purpose. Our report is
intended solely for ABC Company and DEF Company and should not be distributed to or used
by parties other than ABC Company or DEF Company.

[Practitioner’s signature]

[Date of the practitioner’s report]

[Practitioner’s address]

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Illustration 7

Circumstances include the following:
• Review of a statement of cash receipts and disbursements
• The financial statement has been prepared by management of the entity in accordance with
the cash receipts and disbursements basis of accounting to respond to a request for cash flow
information received from a creditor. The basis of accounting applied to prepare the financial
statement has been agreed between the entity and the creditor.
• The applicable financial reporting framework is a fair presentation framework designed to
meet the financial information needs of specific users.
• The practitioner has determined that it is appropriate to use the phrase “presents fairly, in all
material respects,” in the practitioner’s conclusion.
• The terms of the review engagement reflect the description of management’s responsibility
for the financial statement in paragraph 30(b) of ISRE 2400.
• Distribution or use of the practitioner’s report is not restricted.

INDEPENDENT PRACTITIONER’S REVIEW REPORT

[Appropriate Addressee]

We have reviewed the accompanying statement of cash receipts and disbursements of ABC
Company for the year ended December 31, 20X1, and a summary of significant accounting
policies and other explanatory information (together “the financial statement”). The financial
statement has been prepared by management of ABC Company using the cash receipts and
disbursements basis of accounting described in Note X.

Management’s Responsibility for the Financial Statement

Management is responsible for the preparation and fair presentation of this financial statement
in accordance with the cash receipts and disbursements basis of accounting described in Note
X, and for such internal control as management determines is necessary to enable the
preparation of the financial statement that is free from material misstatement, whether due to
fraud or error.

Practitioner’s Responsibility

Our responsibility is to express a conclusion on the accompanying financial statement. We
conducted our review in accordance with International Standard on Review Engagements
(ISRE) 2400 (Revised), Engagements to Review Historical Financial Statements. ISRE 2400
(Revised) requires us to conclude whether anything has come to our attention that causes us
to believe that the financial statement is not prepared in all material respects in accordance
with the applicable financial reporting framework. This Standard also requires us to comply
with relevant ethical requirements.
A review of financial statements in accordance with ISRE 2400 (Revised) is a limited
assurance engagement. The practitioner performs procedures, primarily consisting of making
enquiries of management and others within the entity, as appropriate, and applying analytical
procedures, and evaluates the evidence obtained.

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The procedures performed in a review are substantially less than those performed in an audit
conducted in accordance with International Standards on Auditing. Accordingly, we do not
express an audit opinion on this financial statement.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the
financial statement does not present fairly, in all material respects, (or does not give a true and
fair view of) the cash receipts and disbursements of ABC Company for the year ended
December 31, 20X1 in accordance with the cash receipts and disbursements basis of
accounting described in Note X.

Basis of Accounting

Without modifying our conclusion, we draw attention to Note X to the financial statement,
which describes the basis of accounting. The financial statement is prepared to provide
information to XYZ Creditor. As a result, the financial statement may not be suitable for
another purpose.

[Practitioner’s signature]

[Date of the practitioner’s report]

[Practitioner’s address]

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32. ENGAGEMENTS TO PERFORM AGREED-UPON PROCEDURES REGARDING
FINANCIAL INFORMATION (INCORPORATING ISRS 4400)

32.1 Introduction

32.1.1 The purpose of this chapter is to establish standards and provide guidance on
the auditor’s professional responsibilities when an engagement to perform agreed-upon
procedures regarding financial information is undertaken and on the form and content of
the report that the auditor issues in connection with such an engagement.

32.1.2 Using the term “auditor” does not imply that a person performing agreed-upon
procedures needs to be the auditor of the entity´s financial statements

32.2 Objective

32.2.1 The objective of an agreed-upon procedures engagement is for the auditor to
carry out procedures of an audit nature to which the auditor and the entity and any
appropriate third parties have agreed and to report on factual findings.

32.2.2 As the auditor simply provides a report of the factual findings of agreed-upon
procedures, no assurance is expressed. Instead, users of the report assess for
themselves the procedures and findings reported by the auditor and draw their own
conclusions from the auditor’s work.

32.2.3 The report is restricted to those parties that have agreed to the procedures to
be performed since others, unaware of the reasons for the procedures, may misinterpret
the results.

32.3 General Principles

32.3.1 The auditor should comply with the IFAC Code of Ethics for Professional
Accountants issued by the International Ethics Standards Board for Accountants.
Ethical principles governing the auditor’s professional responsibilities for this type of
engagement are:
• Integrity;
• Objectivity;
• Professional competence and due care;
• Confidentiality;
• Professional behavior; and
• Technical standards.

32.3.2 Independence is not a requirement for agreed-upon procedures engagements;
however, the terms or objectives of an engagement or national standards may require
the auditor to comply with the independence requirements of the IFAC Code of Ethics.
Where the auditor is not independent, a statement to that effect would be made in the
report of factual findings.

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32.3.3 If agreed-upon procedures are performed as group or component auditor in a
Group Audit, independence is required.

32.4 Defining the Terms of the Engagement

32.4.1 The auditor should ensure with representatives of the entity and, ordinarily, other
specified parties who will receive copies of the report of factual findings, that there is a
clear understanding regarding the agreed procedures and the conditions of the
engagement. Matters to be agreed include the following:
• Nature of the engagement including the fact that the procedures performed will not

constitute an audit or a review and that accordingly no assurance will be expressed.
• Stated purpose for the engagement.
• Identification of the financial information to which the agreed-upon procedures will be

applied.
• Nature, timing and extent of the specific procedures to be applied.
• Anticipated form of the report of factual findings.
• Limitations on distribution of the report of factual findings. When such limitation

would be in conflict with the legal requirements, if any, the auditor would not accept
the engagement.

32.4.2 In certain circumstances the auditor may not be able to discuss the procedures
with all the parties who will receive the report. In such cases, the auditor may consider,
for example, discussing the procedures to be applied with appropriate representatives
of the parties involved, reviewing relevant correspondence from such parties or sending
them a draft of the type of report that will be issued.

32.4.3 It is in the interests of both the client and the auditor that the auditor sends an
engagement letter (see example in Appendix 1) documenting the key terms of the
appointment. An engagement letter confirms the auditor’s acceptance of the
appointment and helps avoid misunderstanding regarding such matters as the
objectives and scope of the engagement, the extent of the auditor’s responsibilities and
the form of reports to be issued.

3.2.4.4 Matters that would be included in the engagement letter include the following:
• A listing of the procedures to be performed as agreed upon between the parties.
• A statement that the distribution of the report of factual findings would be restricted

to the specified parties who have agreed to the procedures to be performed.

32.4.5 In addition, the auditor may consider attaching to the engagement letter a draft of
the type of report of factual findings that will be issued.

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32.5 Planning and Documentation

32.5.1 The auditor should conduct an agreed-upon procedures engagement in
accordance with this ISRS and the terms of the engagement.

32.5.2 The auditor should plan the work so that an effective engagement will be
performed.

32.5.3 The auditor should document matters which are important in providing evidence
to support the report of factual findings, and evidence that the engagement was carried
out in accordance with ISRS 4400 and the terms of the engagement.

32.6 Procedures and Evidence

32.6.1 The auditor should carry out the procedures agreed upon and use the evidence
obtained as the basis for the report of factual findings.

32.6.2 The procedures applied in an engagement to perform agreed-upon procedures
may include the following:
• Inquiry and analysis.
• Recomputation, comparison and other clerical accuracy checks.
• Observation.
• Inspection.
• Obtaining confirmations.

32.6.3 Appendix 2 to this chapter is an example report which contains an illustrative list
of procedures which may be used as one part of a typical agreed-upon procedures
engagement.

32.6.4 Defining agreed-upon procedures should be very precise and no general terms
should be used to avoid the impression that audit or review work is performed.

32.7 Reporting

32.7.1 The report on an agreed-upon procedures engagement needs to describe the
purpose and the agreed-upon procedures of the engagement in sufficient detail to
enable the reader to understand the nature and the extent of the work performed.

32.7.2 The report of factual findings should contain:
• Title;
• Addressee (ordinarily the client who engaged the auditor);
• Identification of specific financial or non-financial information to which the agreed-

upon procedures have been applied;
• Statement that the procedures performed were those agreed upon with the recipient;

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• Statement that the engagement was performed in accordance with the ISRS
applicable to agreed-upon procedures engagements, or with relevant national
standards or practices;

• When relevant a statement that the auditor is not independent of the entity;
• Identification of the purpose for which the agreed-upon procedures were performed;
• A listing of the specific procedures performed;
• A description of the auditor’s factual findings including sufficient details of errors and

exceptions found;
• Statement that the procedures performed do not constitute either an audit or a

review and, as such, no assurance is expressed;
• Statement that had the auditor performed additional procedures, an audit or a

review, other matters might have come to light that would have been reported;
• Statement that the report is restricted to those parties that have agreed to the

procedures to be performed;
• Statement (when applicable) that the report relates only to the elements, accounts,

items or financial and non-financial information specified and that it does not extend
to the entity’s financial statements taken as a whole;
• Date of the report;
• Auditor’s address; and
• Auditor’s signature.

32.7.3 Appendix 2 to this chapter contains an example of a report of factual findings
issued in connection with an engagement to perform agreed-upon procedures regarding
financial information.

32.8 Public Sector Perspective

32.8.1 The report in a public sector engagement may not be restricted only to those
parties that have agreed to the procedures to be performed, but made available also to
a wider range of entities or people (for example, a parliamentary investigation about a
specific public entity or governmental department).

32.8.2 It also has to be noted that public sector mandates vary significantly and caution
has to be taken to distinguish engagements that are truly “agreed-upon procedures”
from engagements that are expected to be audits of financial information, such as
performance reports.

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Appendix 1

Illustration of an Engagement Letter for an Agreed-Upon Procedures Engagement

The following letter is for use as a guide and is not intended to be a standard letter. The
letter will need to be varied according to individual requirements and circumstances.

To the Board of Directors or other appropriate representatives of the client who
engaged the auditor:

This letter is to confirm our understanding of the terms and objectives of our
engagement and the nature and limitations of the services that we will provide. Our
engagement will be conducted in accordance with the International Standard on Related
Services (or refer to relevant national standards or practices) applicable to agreed-upon
procedures engagements and we will indicate so in our report.

We have agreed to perform the following procedures and report to you the factual
findings resulting from our work: (Describe the nature, timing and extent of the
procedures to be performed, including specific reference, where applicable, to the
identity of documents and records to be read, individuals to be contacted and parties
from whom confirmations will be obtained.). The procedures that we will perform are
solely to assist you in (state purpose). Our report is not to be used for any other purpose
and is solely for your information.

The procedures that we will perform will not constitute an audit or a review made in
accordance with International Standards on Auditing or International Standards on
Review Engagements (or refer to relevant national standards or practices) and,
consequently, no assurance will be expressed.

We look forward to full cooperation with your staff and we trust that they will make
available to us whatever records, documentation and other information requested in
connection with our engagement.

Our fees, which will be billed as work progresses, are based on the time required by the
individuals assigned to the engagement plus out-of-pocket expenses. Individual hourly
rates vary according to the degree of responsibility involved and the experience and skill
required.

Please sign and return the attached copy of this letter to indicate that it is in accordance
with your understanding of the terms of the engagement including the specific
procedures which we have agreed will be performed.
RELATED SERVICES
XYZ & Co
Acknowledged on behalf of ABC Company by
(signed)
Name and Title
Date

HLB INTERNATIONAL AUDIT MANUAL

Appendix 2

Illustration of a Report of Factual Findings in Connection with Accounts Payable

REPORT OF FACTUAL FINDINGS

To (those who engaged the auditor)

We have performed the procedures agreed with you and enumerated below with
respect to the accounts payable of ABC Company as at (date), set forth in the
accompanying schedules (not shown in this example). Our engagement was
undertaken in accordance with the International Standard on Related Services (or refer
to relevant national standards or practices) applicable to agreed-upon procedures
engagements. The procedures were performed solely to assist you in evaluating the
validity of the accounts payable and are summarized as follows:

1. We obtained and checked the addition of the trial balance of accounts payable as at
(date) prepared by ABC Company, and we compared the total to the balance in the
related general ledger account.

2. We compared the attached list (not shown in this example) of major suppliers and
the amounts owing at (date) to the related names and amounts in the trial balance.

3. We obtained suppliers’ statements or requested suppliers to confirm balances owing
at (date).

4. We compared such statements or confirmations to the amounts referred to in 2. For
amounts which did not agree, we obtained reconciliations from ABC Company. For
reconciliations obtained, we identified and listed outstanding invoices, credit notes
and outstanding checks, each of which was greater than xxx. We located and
examined such invoices and credit notes subsequently received and checks
subsequently paid and we ascertained that they should in fact have been listed as
outstanding on the reconciliations.

We report our findings below:

(a) With respect to item 1 we found the addition to be correct and the total amount to be
in agreement.

(b) With respect to item 2 we found the amounts compared to be in agreement.
(c) With respect to item 3 we found there were suppliers’ statements for all such

suppliers.
(d) With respect to item 4 we found the amounts agreed, or with respect to amounts

which did not agree, we found ABC Company had prepared reconciliations and that
the credit notes, invoices and outstanding checks over xxx were appropriately listed
as reconciling items with the following exceptions:

(Detail the exceptions)

Because the above procedures do not constitute either an audit or a review made in
accordance with International Standards on Auditing or International Standards on

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Review Engagements (or relevant national standards or practices), we do not express
any assurance on the accounts payable as of (date).

Had we performed additional procedures or had we performed an audit or review of the
financial statements in accordance with International Standards on Auditing or
International Standards on Review Engagements (or relevant national standards or
practices), other matters might have come to our attention that would have been
reported to you.

Our report is solely for the purpose set forth in the first paragraph of this report and for
your information and is not to be used for any other purpose or to be distributed to any
other parties. This report relates only to the accounts and items specified above and
does not extend to any financial statements of ABC Company, taken as a whole.

AUDITOR
Date
Address