Observations made by SLAASMB-2010

Reviews of financial statements - 2010

1. Undertakings obtained to make the required corrections

Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) obtained undertakings from specified business enterprises (SBEs) to make corrections in financial statements which required changes in net profit/equity amounting to Rs. 1.2 billion during the year 2010. Types of items for which undertakings were obtained are given below.

• Failure to recognize impairment of investments in equity  

• Not making allowance in respect of doubtful debts

• Failure to recognize part of the surplus arising from a revaluation

• Failure to carry out revaluations with sufficient regularity

• Recognition of a gain expected from a contingent asset in the form of a capital reserve.

• Failure to prepare and present consolidated financial statements, where control over a subsidiary was acquired during the financial period.

2. Letters of Assistance

The identified departures from Sri Lanka Accounting Standards detected, which were material, but not significant as to require the use of procedure using statutory provisions, were informed to the enterprises, by letter, without extensive inquiries, so that enterprises could, where necessary, take corrective action on their own. Such letters not being directions issued by the Board, are intended to be letters of assistance.

The main findings on which the letters of assistance were issued are set out below.

• Not computing the present value of the liability in respect of gratuity by using the projected unit credit method as required by the Standard.

• Not adopting a systematic basis of depreciating property, plant and equipment

• Not recognizing deferred tax liability for taxable temporary differences

• Revaluation of property plant and equipment not made regularly, where revaluation model has been selected

• Not revaluing the entire class of property, plant and equipment to which the revalued asset belongs

• Not using uniform accounting policies for like transactions and other similar events  when preparing consolidated financial statements

• Recording a foreign currency transaction at an exchange rate which prevailed two years before the date of the Balance Sheet.

• When computing earnings per share, not adjusting the weighted average number of ordinary shares outstanding during the period  and of all periods presented for events that change the number of shares without a corresponding change in resources

• Not recognizing property held to earn rentals or for capital appreciation as investment property

Audit Reviews-2010 

1.Background

Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) reviewed 30 audits carried out by 16 firms during the year 2010. Audits reviewed included 15 carried out by members of international network firms.

2.Main findings

Deficiencies were identified in 20 audits conducted by 15 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 10 audits had deficiencies in relation to items 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.

• Nature, timing and extent of audit procedures performed and results of such procedures. In some cases there was no evidence of any work done in respect of property, plant and equipment, deferred tax, investment property, depreciation of assets and gratuity.

• Planning of the audit and the audit program

• Auditor’s understanding of the industry and economic and legal environment in which the entity operates

• The auditor’s understanding of the accounting and internal control systems

• Inherent and control risk assessments carried out by the auditor

• Sampling techniques used by the auditor

• 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 revealed by the auditor were resolved

• Communication of material weaknesses to the management

• Auditors’ attendance at the physical inventory count. 

2.2 Failure to obtain sufficient appropriate audit evidence

Documentation relating to 9 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.

Deficiencies included;

• Relying on a letter from a key executive of the Company which stated that the unconfirmed inter-company balance is recoverable without undertaking substantive procedures

• Relying on confirmations from the Company itself, confirming the related party balance and on the fact that no legal issues were pending with the Company without undertaking substantive procedures

• Not undertaking substantive procedures on inventory, taxation, income and expenses, creditors and provision for gratuity to test the existence, occurrence, valuation and measurement

• Consideration of the mere fact of not having any movements during the year in a related party payable, as a sufficient basis to establish the extent of a significant liability, without even a confirmation from the party concerned

• Consideration of a letter from one director instructing the auditor to write-off a receivable as sufficient evidence to write-off such assets.

• Performing only a walk-through-test to place reliance on the liability in respect of deposits from customers of  a finance company.

• Not evaluating the adequacy of loan loss provisioning, despite the credit review revealing lack of information relating to the borrower.

 
2.3 Failure to establish the audit materiality level

6 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.

2.4 Overall audit plan and audit program

5 audits did not have records on overall audit planning, describing the expected scope and conduct of the audit and the audit program, setting out the nature, timing and extent of planned audit procedures required to implement the audit plan.

2.5 Analytical procedures

5 audits did not have any evidence of performing analytical procedures at the planning stage to identify the areas of potential risk and at or near the end of the audit when forming an overall conclusion as to whether the financial statements as a whole are consistent with the auditor’s knowledge of the business.

2.6 Understanding and Assessment of Control Risk

4 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.

In most of these cases there was no information on carrying out systems test on revenue, payments, salaries and property, plant and equipment and the working papers did not include any communication to the management on systems weaknesses observed. 

2.7 Tests performed on expert’s work

3 audits did not have any evidence on how the auditor considered source data used, assumptions and methods used and the 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.

2.8 Related party transactions

Failure to review available records and identify related party transactions which were not disclosed or not appropriately authorized were observed in 4 audits.

Examples are:

• Entity’s debtors assigned to its related finance company in settlement of a loan obtained by the entity.

• Write-off of a receivable from a related party

3. General

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. Poor identification and disclosure of related party transactions and not evaluating the results of the work of experts in the light of the auditor’s overall knowledge of the business were observed in some of the audits.