11. Audit Report Flashcards
Objectives of the auditor as per SA 700 (Revised) “Forming an Opinion and Reporting on Financial Statements”.
The objectives of the auditor as per SA 700 (Revised) are:
i) To form an opinion on the financial statements based on an evaluation of the conclusions drawn from the audit evidence obtained; and
ii) To express clearly that opinion through a written report.
Basic elements of an audit report.
• Title -
The auditor’s report shall have a title that clearly indicates that it is the report of an independent auditor.
• Addressee -
The auditor’s report shall be addressed, as appropriate, based on the circumstances of the engagement.
Law, regulation or the terms of the engagement may specify to whom the auditor’s report is to be addressed.
• Auditor’s Opinion
• Basis for Opinion
• Going Concern -
Where applicable, the auditor shall report in accordance with SA 570 (Revised).
• Key Audit Matters - For audits of complete sets of general purpose financial statements of listed entities, the auditor shall communicate key audit matters in the auditor’s report in accordance with SA 701.
When the auditor is otherwise required by law or regulation or decides to communicate key audit matters in the auditor’s report, the auditor shall do so in accordance with SA 701.
• Other Information -
Where applicable, the auditor shall report in accordance with SA 720 (Revised).
• Responsibilities for the Financial Statements
• Auditor’s Responsibilities for the Audit of the Financial Statements
• Location of the description of the auditor’s responsibilities
• Other Reporting Responsibilities
• Signature of the Auditor
• Place of Signature -
The auditor’s report shall name specific location, which is ordinarily the city where the audit report is signed.
• Date of the Auditor’s Report
Basic elements of an audit report - Auditor’s opinion.
The first section of the auditor’s report shall include the auditor’s opinion, and shall have the heading “Opinion.”
The Opinion section of the auditor’s report shall also:
a) Identify the entity whose financial statements have been audited;
b) State that the financial statements have been audited;
c) Identify the title of each statement comprising the financial statements;
d) Refer to the notes, including the summary of significant accounting policies; and
e) Specify the date of, or period covered by, each financial statement comprising the financial statements.
Unmodified Opinion:
When expressing an unmodified opinion on financial statements, the auditor’s opinion shall, unless otherwise required by law or regulation, use one of the following phrases, which are regarded as being equivalent:
a) In our opinion, the accompanying financial statements present fairly, in all material respects, […] in accordance with [the applicable financial reporting framework]; or
b) In our opinion, the accompanying financial statements give a true and fair view of […] in accordance with [the applicable financial reporting framework].
The phrases “present fairly, in all material respects,” and “give a true and fair view” are regarded as being equivalent
Basic elements of an audit report - Basis for Opinion.
The auditor’s report shall include a section, directly following the Opinion section, with the heading “Basis for Opinion”, that:
- States that the audit was conducted in accordance with Standards on Auditing:
- Refers to the section of the auditor’s report that describes the auditor’s responsibilities under the SAs;
- Includes a statement that the auditor is independent of the entity in accordance with the relevant ethical requirements relating to the audit and has fulfilled the auditor’s other ethical responsibilities in accordance with these requirements.
- States whether the auditor believes that the audit evidence the auditor has obtained is sufficient and appropriate to provide a basis for the auditor’s opinion.
Basic elements of an audit report - Responsibilities for the Financial Statements.
The auditor’s report shall include a section with a heading “Responsibilities of Management for the Financial Statements.”
This section of the auditor’s report shall describe management’s responsibility for:
a) Preparing the financial statements in accordance with the applicable financial reporting framework, and
b) 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.
c) Assessing the entity’s ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate as well as disclosing, if applicable, matters relating to going concern.
Basic elements of an audit report - Auditor’s Responsibilities for the Audit of the Financial Statements.
The auditor’s report shall include a section with the heading “Auditor’s Responsibilities for the Audit of the Financial Statements.”
This section of the auditor’s report shall state:
a) That the objectives of the auditor are to:
i) Obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error; and
ii) Issue an auditor’s report that includes the auditor’s opinion.
b) That reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with SAs will always detect a material misstatement when it exists; and
c) That misstatements can arise from fraud or error, and either:
i) Describe that they are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements; or
ii) Provide a definition or description of materiality in accordance with the applicable financial reporting framework.
The Auditor’s Responsibilities for the Audit of the Financial Statements section of the auditor’s report shall further:
a) State that, as part of an audit in accordance with SAs, the auditor exercises professional judgement and maintains professional skepticism throughout the audit; and
b) Describe an audit by stating that the auditor’s responsibilities are:
i) To identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error; to design and perform audit procedures responsive to those risks; and to obtain audit evidence that is sufficient and appropriate to provide a basis for the auditor’s opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
ii) To obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances.
iii) To evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
iv) To conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern.
The Auditor’s Responsibilities for the Audit of the Financial Statements section of the auditor’s report also shall:
a) State that the auditor communicates with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that the auditor identifies during the audit;
b) For audits of financial statements of listed entities, state that the auditor provides those charged with governance with a statement that the auditor has complied with relevant ethical requirements regarding independence and communicate with them all relationships and other matters that may reasonably be thought to bear on the auditor’s independence, and where applicable, related safeguards; and
c) For audits of financial statements of listed entities and any other entities for which key audit matters are communicated in accordance with SA 701, state that, from the matters communicated with those charged with governance, the auditor determines those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. The auditor describes these matters in the auditor’s report unless law or regulation precludes public disclosure.
Basic elements of an audit report - Other Reporting Responsibilities.
If the auditor addresses other reporting responsibilities in the auditor’s report on the financial statements that are in addition to the auditor’s responsibilities under the SAs, these other reporting responsibilities shall be addressed in a separate section in the auditor’s report with a heading titled
“Report on Other Legal and Regulatory Requirements” or otherwise as appropriate to the content of the section, unless these other reporting responsibilities address the same topics as those presented under the reporting responsibilities required by the SAs in which case the other reporting responsibilities may be presented in the same section as the related report elements required by the SAs.
If other reporting responsibilities are presented in the same section as the related report elements required by the SAs, the auditor’s report shall clearly differentiate the other reporting responsibilities from the reporting that is required by the SAs.
Basic elements of an audit report - Signature of the Auditor.
The auditor’s report shall be signed. The report is signed by the auditor (i.e. the engagement partner) in his personal name.
Where the firm is appointed as the auditor, the report is signed in the personal name of the auditor and in the name of the audit firm.
The partner/proprietor signing the audit report also needs to mention the membership number assigned by the Institute of Chartered Accountants of India.
They also include the registration number of the firm (FRN), wherever applicable, as allotted by ICAI, in the audit reports signed by them.
An auditor is required to mention the UDIN with respect to each audit report being signed by him, along with his membership number while signing an audit report.
Basic elements of an audit report - Date of the Auditor’s Report.
The auditor’s report shall be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial statements, including evidence that:
i) All the statements that comprise the financial statements, including the related notes, have been prepared; and
ii) Those with the recognized authority have asserted that they have taken responsibility for those financial statements.
The date of the auditor’s report informs the user of the auditor’s report that the auditor has considered the effect of events and transactions of which the auditor became aware and that occurred up to that date.
The auditor’s responsibility for events and transactions after the date of the auditor’s report is addressed in SA 560.
- Circumstances When a Modification to the Auditor’s Opinion Is Required; &
- Objectives of the Auditor as per SA 705 “Modifications to the opinion in the independent auditor’s report”.
- The auditor shall modify the opinion in the auditor’s report in the following circumstances:
i) The auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement; or
ii) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.
- As per Standard on Auditing (SA) 705 “Modifications To The Opinion In The Independent Auditor’s Report”, the objective of the auditor is to express clearly an appropriately modified opinion on the financial statements that is necessary when:
[Same as point (i) and (ii) above]
Types of Modified Opinions
There are three types of modified opinions, namely-
1. A qualified opinion
2. An adverse opinion
3. A disclaimer of opinion
- Qualified Opinion:
The auditor shall express a qualified opinion when:
a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or
b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.
- Adverse Opinion:
The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements. - Disclaimer of Opinion:
The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.
Which type of opinion is appropriate?
The decision regarding which type of modified opinion is appropriate depends upon:
a) The nature of the matter giving rise to the modification, that is, whether the financial statements are materially misstated or, in the case of an inability to obtain sufficient appropriate audit evidence, may be materially misstated; and
b) The auditor’s judgement about the pervasiveness of the effects or possible effects of the matter on the financial statements.
Consequence of an Inability to Obtain Sufficient Appropriate Audit Evidence Due to a Management Imposed Limitation after the Auditor Has Accepted the Engagement
1) If, after accepting the engagement, the auditor becomes aware that management has imposed a limitation on the scope of the audit that the auditor considers is likely to result in the need to express a qualified opinion or to disclaim an opinion on the financial statements, the auditor shall request that management remove the limitation.
2) If management refuses to remove the limitation referred above, the auditor shall communicate the matter to those charged with governance, unless all of those charged with governance are involved in managing the entity and determine whether it is possible to perform alternative procedures to obtain sufficient appropriate audit evidence.
3) If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor shall determine the implications as follows:
a) If the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive, the auditor shall qualify the opinion; or
b) If the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive so that a qualification of the opinion would be inadequate to communicate the gravity of the situation, the auditor shall:
i) Withdraw from the audit, where practicable and possible under applicable law or regulation; or
ii) If withdrawal from the audit before issuing the auditor’s report is not practicable or possible, disclaim an opinion on the financial statements.
4) If the auditor withdraws as contemplated by point (b)(i) above, before withdrawing, the auditor shall communicate to those charged with governance any matters regarding misstatements identified during the audit that would have given rise to a modification of the opinion.
Form and Content of the Auditor’s Report When the Opinion is Modified.
When the auditor modifies the audit opinion, the auditor shall use the heading “Qualified Opinion,” “Adverse Opinion,” or “Disclaimer of Opinion,” as appropriate, for the Opinion section.
Qualified Opinion:
When the auditor expresses a qualified opinion due to a material misstatement in the financial statements, the auditor shall state that, in the auditor’s opinion, except for the effects of the matter(s) described in the Basis for Qualified Opinion section,
a) When reporting in accordance with a fair presentation framework, the accompanying financial statements present fairly, in all material respects (or give a true and fair view of) […] in accordance with [the applicable financial reporting framework]; or
b) When reporting in accordance with a compliance framework, the accompanying financial statements have been prepared, in all material respects, in accordance with [the applicable financial reporting framework].
When the modification arises from an inability to obtain sufficient appropriate audit evidence, the auditor shall use the corresponding phrase “except for the possible effects of the matter(s)..” for the modified opinion.
Adverse Opinion:
When the auditor expresses an adverse opinion, the auditor shall state that, in the auditor’s opinion, because of the significance of the matter(s) described in the Basis for Adverse Opinion section,
a) When reporting in accordance with a fair presentation framework, the accompanying financial statements do not present fairly (or give a true and fair view of) […] in accordance with [the applicable financial reporting framework];
b) When reporting in accordance with a compliance framework, the accompanying financial statements have not been prepared, in all material respects, in accordance with [the applicable financial reporting framework].
Disclaimer of Opinion:
When the auditor disclaims an opinion due to an inability to obtain sufficient appropriate audit evidence, the auditor shall:
a) State that the auditor does not express an opinion on the accompanying financial statements;
b) State that, because of the significance of the matter(s) described in the Basis for Disclaimer of Opinion section, the auditor has not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the financial statements; and
c) Amend the statement required by SA 700 (Revised), which indicates that the financial statements have been audited, to state that the auditor was engaged to audit the financial statements.
What special consideration is needed for the “Basis for Opinion” section in case of modification of opinion.
When the auditor modifies the opinion on the financial statements, the auditor shall, in addition to the specific elements required by SA 700 (Revised):
i) Amend the heading “Basis for Opinion” required by SA 700 (Revised) to “Basis for Qualified Opinion,” “Basis for Adverse Opinion,” or”Basis for Disclaimer of Opinion,” as appropriate; and
ii) Within this section, include a description of the matter giving rise to the modification.