Audits of specialised areas

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Audits of specialised areas

MODULE 5 | 5.1 | STUDENT COMPANION

When users need assurance on something narrower or more tailored than complete general purpose

financial statements, three standards apply: ASA 800 (special purpose frameworks), ASA 805 (a single

statement, or a specific element, account or item) and ASA 810 (summary financial statements). For the

first two, every relevant auditing standard applies, adapted to the narrower subject; for a summary, the

auditor reports under ASA 810's own requirements, which build on its audit of the full statements.

Three engagements, three standards

Assurance on something narrower or more tailored than a full set of general purpose statements

ASA 800 (ISA 800)

Special purpose framework

Financial statements prepared under a

framework built for particular users,

such as the reporting rules in a contract

or a regulator's requirements. Met in

Module Four.

ASA 805 (ISA 805)

One statement, or one element

A single statement, such as cash

receipts and payments; or one element,

account or item, such as a schedule of

royalties, a list of receivables, or grant

income and spending for a funding

body

ASA 810 (ISA 810)

Summary financial statements

Drawn from audited financial

statements, but with less detail, for

readers such as members or customers

ASA 800 and ASA 805: every auditing standard relevant to the audit applies, adapted to the narrower subject. ASA 810: the auditor

reports under its own standard, which builds on its audit of the full statements

Special purpose frameworks (ASA 800) are built for particular users: the reporting rules in a loan agreement

or joint venture contract, a regulator's requirements, or a cash basis. Before accepting, the auditor asks why the

statements are prepared, who will rely on them and how management judged the framework acceptable; Module

Four covered the report and its warning that the statements may not suit other purposes. An element prepared

under such a framework, such as a lease's definition of gross sales, brings ASA 805 and ASA 800 together.

Auditing a single element

Ferngrove (imagined cafe chain)

Its lease: base rent plus 6% of gross sales above $1 million a year, and an audited statement of gross sales prepared under the lease's definition

1

Materiality set for the element

Judged against gross sales and the rent they drive: $50,000

might not matter to a large group's statements, but it matters

here

2

Attention to related accounts

Refunds, discounts and cash takings all feed into the gross

sales figure

3

The framework that defines it

The lease's own definition: are gift cards counted when sold

or when used? Are delivery-app sales in or out?

4

An opinion on that element alone

Is the statement of gross sales prepared, in all material

respects, in line with the lease's definition?

The main planning risk: gross sales understated to cut the rent

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Before accepting an element audit, the auditor checks that the definition can actually be applied the same way

every time; at Ferngrove, that means knowing when gift card sales count and whether delivery-app sales are in.

Materiality is then judged against the element and the people who use it, not the whole entity. A $50,000

misstatement is probably too small to change how investors see a large group, but above Ferngrove's $1 million

threshold it changes the extra rent by $3,000 (6% of $50,000), so the landlord and the tenant both care.

If the same auditor also audits the full financial statements

Each engagement gets its own report and opinion; an element published with the full statements must be clearly

set apart from them, so readers don't confuse the two opinions.

Report on the complete set What it means for the element

Modified opinion, or an Emphasis of

Matter or Other Matter paragraph

Decide what effect it has on the element; where relevant, modify the

element's opinion or add a similar paragraph

Adverse opinion or disclaimer No unmodified opinion on an element that forms a major part of the complete

set, or on any single statement in it (a single statement always counts as a

major part), because it would contradict the overall conclusion

Adverse or disclaimer, and the

element is only a minor part

An unmodified opinion on the element is possible only if law allows it and its

report is not published with the report on the complete set

Reporting on summary financial statements

Audited financial statements

The full report, with the auditor's

report on it drawnfrom

Summary financial statements

Less detail: here, a two-page

summary posted to members reportedon

Report on the summary

An opinion on its consistency with the

audited statements

Precondition

The auditor audited the financial

statements the summary is

drawn from

Consistency

Evaluated against the audited

statements, applying the criteria

management used

Identification

The summary names the audited

statements and says where to

obtain them

Dating

No earlier than the auditor's

report on the full statements

The opinion

Whether the summary is consistent, in all material respects, with the

audited financial statements, in line with the criteria

If the full statements' report was modified

Qualified: the report on the summary says so, explains why and

describes any effect on the summary. Adverse or disclaimer: no

opinion on the summary

Before accepting, the auditor confirms that it audited, or will audit, the statements the summary comes from;

that management's criteria for the summary are acceptable; and that management will prepare the summary on

those criteria, make the audited statements easy to obtain, and put the auditor's report alongside the summary in

any document that says the auditor has reported on it. The work asks: do the figures agree with, or recalculate

from, the audited statements? Does the summary say it is a summary and where the full statements are? Does it

leave out anything that would make it misleading?

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When the report on the full statements is modified

For the imagined building society, whose members get a two-page summary with the full report online, the report

on the summary follows whatever happened to the full statements.

Report on the full statements Report on the summary

Qualified opinion The opinion on the summary can still be given if the summary is consistent. The

report adds that the full statements received a qualified opinion, describes the

basis for it and the opinion itself, and explains the effect, if any, on the summary

Adverse opinion or disclaimer No opinion on the summary: the report says so, describes the basis, and states

that it is therefore inappropriate to give an opinion on the summary

The summary itself isn't consistent,

and management won't fix it

An adverse opinion on the summary

Practice questions

MODULE 5 | 5.1 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - Which kind of specialised audit?

Is each engagement an audit of special purpose statements, of a single statement or element, or of summary

statements? Name the Australian standard that applies.

Engagement (all imagined) Special purpose, single

element or summary?

Standard(s)

(a) Pinkwater Salt, a joint venture between two companies, prepares

a full set of financial statements using the reporting rules in its joint

venture agreement, for the two venturers

(b) Parkhaven Pty Ltd runs a council's multi-storey car park and pays

the council 40% of the fees it collects. The contract requires an

audited schedule of fees collected, using the contract's definitions

(c) Mulga Infrastructure Fund, a listed fund, posts its unit holders a

four-page summary drawn from its audited annual financial

statements, saying where the full report can be found

(d) The buyer of Trevally Seafoods Pty Ltd wants an audited

statement of financial position, on its own, at the date the sale is

completed

(e) Lantern Bridge Foundation, a charity, prepares financial

statements for an overseas donor using the donor's own reporting

guidelines

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Question 2 - Plan the audit of a franchisee's gross sales

Juniper Bay Washes Pty Ltd (imagined) runs three car-wash sites in the Sparkway Car Wash franchise network

(also imagined). The franchise agreement charges a royalty of 7% of gross sales and requires an audited

statement of gross sales each year, using the agreement's definition: all amounts received or receivable for

washes and wash products, excluding GST and refunds. Customers pay by card at the automatic bays, with

coins and notes at the self-serve bays, through monthly memberships billed in an app, or on monthly invoices for

fleet customers. Juniper Bay also sells prepaid wash cards through a nearby fuel station. Gross sales are about

$2.6 million a year. Plan the audit of the statement of gross sales, including materiality and the key risks.

Question 3 - A summary after a qualified opinion

Milkwood Valley Co-operative (imagined), owned by its dairy-farmer members, sends each member a two-page

summary drawn from its audited financial statements. This year the auditor's report on the full statements

contains a qualified opinion: the board refused to recognise a $2.4 million impairment of a cheese factory that

has stood idle since March, which the auditor judges material but not pervasive. The summary is drawn

accurately from the full statements. Explain how the auditor's report on the summary should differ from last

year's report, which accompanied an unmodified opinion.

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Worked answers

MODULE 5 | 5.1 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Kinds of specialised audit

Engagement Kind Standard(s) and why

(a) Pinkwater Salt Special purpose

statements

ASA 800: a full set, but prepared under the agreement's

reporting rules for two specific users

(b) Parkhaven Specific element ASA 805 with ASA 800: one item (fees collected), measured

under the contract's definitions; materiality set for the schedule

(c) Mulga Infrastructure

Fund

Summary ASA 810: drawn from audited statements. The auditor can

report on it only if it audited the full statements

(d) Trevally Seafoods Single statement ASA 805: one statement on its own. If it follows the accounting

standards' rules for that statement, ASA 805 alone; if the sale

contract sets the rules, ASA 800 as well

(e) Lantern Bridge

Foundation

Special purpose

statements

ASA 800: the donor's guidelines are a framework built for one

user's needs

Question 2 - Juniper Bay Washes (sample plan)

Area Plan

Acceptance and the

framework

Read the agreement's definition and check it can be applied consistently: are prepaid wash

cards counted when sold or when used, and at the price paid? Are memberships counted

when billed? Are free washes for staff or complaints excluded? Settle unclear points in writing

with both parties, and confirm that management accepts responsibility for the statement

Materiality Set for the statement and its users, not for Juniper Bay as a whole. The franchisor uses every

dollar to calculate the royalty, so materiality is low: for example, about 0.5% of expected gross

sales (around $13,000, which would move the royalty by about $900), with lower performance

materiality. Nature matters too: a deliberate understatement of any size would matter

Key risks Understatement to cut the royalty: cash from the self-serve bays not banked or not recorded;

fleet invoices or memberships left out; sales recorded net of discounts the agreement doesn't

allow. Misapplying the definition: wash cards, memberships, refunds and GST. Cut-off at

year end. Completeness: every site and every payment channel included

Related items Refunds, discounts and promotional free washes; the liability for wash cards sold but not yet

used; cash takings and bank deposits

Procedures Reconcile card sales to the payment provider's settlement reports and bank statements;

compare cash banked with each machine's coin and note counters; agree membership

income to the app provider's reports and fleet sales to contracts and receipts; recalculate

wash-card income on the agreed basis; compare each bay's wash counter, multiplied by

average prices, with recorded sales by site and month, and check water and power use

against wash numbers; test refunds, discounts and cut-off; obtain written representations

Reporting An opinion on whether, in all material respects, the statement follows the agreement's

definition, describing that framework and alerting readers that the statement may not suit other

purposes

ADVANCED AUDIT AND ASSURANCE | M5 | 5.1 | WORKED ANSWERS

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Question 3 - Milkwood Valley Co-operative (sample answer)

The opinion on the summary can still be given. It states whether the summary is consistent, in all material

respects, with the audited financial statements, in line with the criteria. Because the summary is drawn

accurately from the full statements, it is consistent with them.

A new section on the full statements' report. The report must state that the auditor's report on the full

statements contains a qualified opinion, and describe both the basis for the qualification (the $2.4 million

impairment of the idle cheese factory that the board refused to recognise) and the qualified opinion itself.

The effect on the summary. Because the summary comes from those statements, the same misstatement

is in it: property, plant and equipment, profit and equity are each overstated by about $2.4 million (before any

tax effect). Members reading only the summary must be told this.

Dating. The report on the summary can't be dated earlier than the report on the full statements.

Compare: if the full statements had received an adverse opinion or a disclaimer, the report would say so,

describe the basis, and state that it is therefore inappropriate to give an opinion on the summary.

ADVANCED AUDIT AND ASSURANCE | M5 | 5.1 | WORKED ANSWERS

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