19 Reports Flashcards
Q&A
Auditor’s reports are covered by the following ISAs:
These ISAs were revised in 2015. The IAASB believes that the revisions are ‘essential to the continued
relevance of the audit profession globally’ – so quite important then! The aims of the revisions are to
respond to users, who said that:
The audit opinion is valued, but could be more informative. More relevant information is needed about the entity and the audit
ISA 700 Forming an opinion and reporting on financial statements establishes what?
standards and provides
guidance on the form and content of the auditor’s report issued as a result of an audit performed by an
independent auditor on the financial statements of an entity. It states that the auditor shall form an opinion
on whether the financial statements are prepared, in all material respects, in accordance with the
applicable financial reporting framework
In order to form the opinion, the auditor needs to conclude whether reasonable assurance has been
obtained that the financial statements are free from material misstatement. The auditor’s conclusion needs
to consider the following:
Whether sufficient appropriate audit evidence has been obtained (ISA 330)
Whether uncorrected misstatements are material (ISA 450)
Qualitative aspects of the entity’s accounting practices, including indicators of possible bias in
management’s judgements – this includes considering whether the accounting policies disclosed
are relevant to the entity, and whether they have been presented in an understandable manner
Whether the financial statements adequately disclose the significant accounting policies
selected and applied
Whether the accounting policies selected and applied are consistent with the applicable financial
reporting framework and are appropriate
Whether accounting estimates made by management are reasonable
Whether the information in the financial statements is relevant, reliable, comparable and
understandable
Whether the financial statements provide adequate disclosures to allow users to understand the
effect of material transactions and events on the information presented in the financial statements
Whether the terminology used in the financial statements is appropriate
The overall presentation, structure and content of the financial statements
Whether the financial statements represent the underlying transactions and events so as to achieve
fair presentation
Whether the financial statements adequately refer to or describe the applicable financial
reporting framework
What is an unmodified opinion?
An unmodified opinion is the opinion expressed by the auditor when the auditor concludes that the
financial statements are prepared, in all material respects, in accordance with the applicable financial
reporting framework.
Whatt does ISA700 state for when to express an unmodied opinion?
ISA 700 states that the auditor shall express an unmodified opinion when the auditor concludes that the
financial statements are prepared, in all material respects, in accordance with the applicable financial
reporting framework.
If the auditor concludes that the financial statements as a whole are not free from material misstatement
or cannot obtain sufficient appropriate audit evidence to make this conclusion, the auditor must modify
the opinion in accordance with ISA 705 Modifications to the opinion in the independent auditor’s report.
We discuss modifications to the opinion later in this chapter.
Say an example of a full unmodifed opinion?
In our opinion, the financial statements present fairly, in all material respects, (or give a true and fair view
of) the financial position of ABC Company as of December 31, 20X1, and (of) its financial performance and
its cash flows for the year then ended in accordance with International Financial Reporting standards
What are the basic elements of an auditors report?
Title; Addressees; opinion paragraphs;Basis for opinion; Going concern; Key audit matters; Other information; Responsibilities for the financial statements; Auditor’s responsibilities for the audit of the financial statements; Other reporting responsibilities:
Name of the engagement partner;Auditor’s signature; Auditor’s address; Date of the report
Explain the reason for the title and adressee?
Explain the opinion paragraph?
Explain Basis of opinon, going concern and key audit matters?
Explain other information in the final report
For the audit of listed entities or any other entity where the auditor has
obtained other information, an ‘Other information’ section should be
included in the auditor’s report. This section should include:
a statement that management is responsible for the other
information
an identification of the other information obtained before the date of
the auditor’s report (for listed entities, also the other information
expected to be obtained after the date of the auditor’s report)
a statement that the auditor’s opinion does not cover the other
information
a description of the auditor’s responsibilities for reading,
considering and reporting on other information, and
where other information has been obtained, either a statement that
the auditor has nothing to report, or a description of any
uncorrected material misstatement
Expain the Responsibilities for the financial statements in final report
This part of the report describes the responsibilities of those who are
responsible for the preparation of the financial statements. This section
should describe management’s responsibility including the following:
The preparation of the financial statements in accordance with the
applicable financial reporting framework;
The implementation of such internal control as are necessary to
enable the preparation of financial statements that are free from
material misstatement, whether due to error or fraud.
The assessment of the entity’s ability to continue as a going
concern, the appropriateness of the going concern basis of
accounting and adequacy of related disclosures;
Reference shall be made to ‘the preparation and fair presentation of
these financial statements’ (or ‘the preparation of financial statements
that give a true and fair view’) where the financial statements are
prepared in accordance with a fair presentation framework.
Explain
Auditor’s responsibilities for
the audit of the financial
statements
The report must state that:
the auditor’s objectives are to obtain reasonable assurance
whether the financial statements as a whole are free from material
misstatement, and to issue an auditor’s report that includes the
auditor’s opinion; and
reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with the ISAs will
always detect a material misstatement when it exists.
The report must also:
explain that misstatements can arise from fraud or error
describe the meaning of materiality
explain that the auditor exercises professional judgement and
maintains professional scepticism throughout the audit
describe the auditor’s responsibilities in an audit.
The description of the auditor’s responsibilities must either be set out
in the body of the auditor’s report, in an appendix to the auditor’s
report or by including a specific reference in the body of the auditor’s
report to such a description on the website of an appropriate authority,
where this is permitted by law and regulation
Explain:
What arekey audit matters?
Key audit matters. Those matters that, in the auditor’s professional judgment, were of most significance
in the audit of the financial statements of the current period. Key audit matters are selected from matters
communicated with those charged with governance
What do Key audit matters (KAMS) include?
Reporting on KAMs aims to improve transparency by helping users to understand the most significant
issues the auditor faced. This should enhance the communicative value of the auditor’s report.
KAMs are part of every listed company auditor’s report, and can be included by other auditors if needed.
KAMs do not constitute a modification of the report or of the opinion. They are a part of the standard
report which must be tailored to each company’s circumstances. KAMs are not a substitute for
disclosures, for EoM/OM paragraphs, nor for modified opinions. KAMs must always relate to matters
already included within the financial statements
What matters would be included in KAMS?
Areas of higher risk of material misstatement, or ‘significant risks’ identified in line with ISA 315
(eg at the planning stage)
Significant judgements in relation to areas where management made judgements
The effect of significant events or transactions
What are the other factors to consider when determining KAMS?
The importance of the matter to intended users’understanding, including materiality
The nature of the underlying accounting policy relating to the matter or the complexity or
subjectivity involved
Any misstatements related to the matter
The nature and extent of audit effort needed to address the matter
The nature and severity of difficulties in applying audit procedures, obtaining evidence or forming
conclusions, including more subjective judgements
The severity of any control deficiencies
Whether several separate issues interacted, eg if a long-term contract had repercussions in
several areas (revenue recognition, litigation or contingencies).
The description of each key audit matter in the Key Audit Matters section of the auditor’s report shall
include a reference to the related disclosure(s), if any, in the financial statements and shall address:
a) Why the matter was considered to be one of most significance in the audit and therefore
determined to be a key audit matter; and
(b) How the matter was addressed in the audit.
If a modified opinion is expressed, the matter that gives rise to the modified opinion will be described in ____
basis for modified opinion’ paragraph, so it must not be included as a KAM.
The auditor shall not communicate a matter in the Key Audit Matters section of the auditor’s report when
the auditor would be required to modify the opinion in accordance with ISA 705 (Revised) as a result of
the matter. (ISA 701 paragraph 12)
Going concern issues should be included as a
KAM. T/F
False
What is the difference between KAMs and EoM
The difference is that KAMs do not modify the
report, and are included as standard in every listed company auditor’s report. An EoM, on the other hand,
does modify the report – although neither modifies the opinion. You could think of the issues giving rise to
an EoM as being like KAMs but just more extreme: the EoM is for a ‘matter of such importance that it is
fundamental for users’ understanding’, whereas KAMs are merely ‘most significant matters’, ie less than
fundamental.
What does
ISA 706 Emphasis of matter paragraphs and other matter paragraphs in the independent auditor’s report
provide?
ISA 706 Emphasis of matter paragraphs and other matter paragraphs in the independent auditor’s report
provides guidance to auditors on the inclusion of paragraphs in the auditor’s report that either draw users’
attention to a matter that is of such importance that it is fundamental to their understanding or that is
relevant to their understanding of the audit, the auditor’s responsibilities or the auditor’s report
What is EoM?
EoM paragraph is a paragraph included in the auditor’s report that refers to a matter
appropriately presented or disclosed in the financial statements that, in the auditor’s judgement, is of such
importance that it is fundamental to users’ understanding of the financial statements.
What is EoM used for?
Emphasis of matter paragraphs are used to draw readers’ attention to a matter already presented or
disclosed in the financial statements that the auditor feels is fundamental to their understanding, provided
that the auditor has obtained sufficient appropriate audit evidence that the matter is not materially
misstated.
Emphasis of matter paragraphs are not used in relation to going concern. T/F
True
Examples of EoM in an auditors report?
An uncertainty relating to the future outcome of exceptional litigation or regulatory action
Early application of a new accounting standard that has a pervasive effect on the FS
A major catastrophe that has had, or continues to have, a significant effect on the entity’s
financial position
Give an example of EoD?
We draw attention to Note X of the financial statements, which describes the effects of a fire in the
Company’s production facilities. Our opinion is not modified in respect of this matter
The other matter paragraph can be used whenever the auditor judges the matter to be relevant to users’
understanding of the audit. Examples include:
The auditor is unable to withdraw from the engagement and yet is unable to obtain sufficient
appropriate audit evidence;
The auditor has been requested to report on other matters or to provide more clarifications in line
with the legal jurisdiction of the country.
An other matter paragraph must not refer to something that has been included as a key audit matter.
On Other matter paragraph ISA 706 (Revised) states ?
When an Other Matter paragraph is included to draw users’ attention to a matter relating to Other
Reporting Responsibilities addressed in the auditor’s report, the paragraph may be included in the
Report on Other Legal and Regulatory Requirements section.
When relevant to all the auditor’s responsibilities or users’ understanding of the auditor’s report,
the Other Matter paragraph may be included as a separate section following the Report on the
Audit of the Financial Statements and the Report on Other Legal and Regulatory Requirements
What must ISA 706 say about what the auditor is expected to do?
ISA 706 states that when the auditor expects to include an emphasis of matter paragraph or an other
matter paragraph, the auditor must communicate with those charged with governance the circumstances
and the proposed wording of the paragraph in the auditor’s report
ISA 705 Modifications to the opinion in the independent auditor’s report sets out the different types of
modified opinions that can result. It identifies three possible types of modification:
A qualified opinion
An adverse opinion
A disclaimer of opinion
What is pervasiveness?
Pervasiveness is a term used to describe the effects or possible effects on the financial statements of
misstatements or undetected misstatements (due to an inability to obtain sufficient appropriate audit
evidence). There are three types of pervasive effect:
– Those that are not confined to specific elements, accounts or items in the financial statements
– Those that are confined to specific elements, accounts or items in the financial statements and
represent or could represent a substantial portion of the financial statements
– Those that relate to disclosures which are fundamental to users’ understanding of the financial
statements
What does the type of modifcation issued depnds on the ff?
The nature of the matter giving rise to the modifications (ie whether the financial statements are
materially misstated or whether they may be misstated when the auditor cannot obtain sufficient
appropriate audit evidence)
The auditor’s judgement about the pervasiveness of the effects/possible effects of the matter on
the financial statements
A modified opinion is required in either of the following situations.
The auditor concludes that the financial statements as a whole are not free from material
misstatements.
(b) The auditor cannot obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement.
A qualified opinion must be expressed in the auditor’s report in the following two situations:
The auditor concludes that misstatements are material, but not pervasive, to the financial
statements.
Material misstatements could arise in respect of:
The appropriateness of selected accounting policies
The application of selected accounting policies
The appropriateness or adequacy of disclosures in the financial statements
The auditor cannot obtain sufficient appropriate audit evidence on which to base the opinion but
concludes that the possible effects of undetected misstatements, if any, could be material but
not pervasive.
The auditor’s inability to obtain sufficient appropriate audit evidence is also referred to as a
limitation on the scope of the audit and could arise from:
Circumstances beyond the entity’s control (eg accounting records destroyed)
Circumstances relating to the nature or timing of the auditor’s work (eg the timing of the
auditor’s appointment prevents the observation of the physical inventory count)
Limitations imposed by management (eg management prevents the auditor from requesting
external confirmation of specific account balances)
An adverse opinion is expressed when the auditor, having obtained sufficient appropriate audit evidence,
concludes that misstatements are both __ and ___
material and pervasive to the financial statements
What are the reasons and explanations of pervasive reports and examples?
When must an opinion must be disclaimed?
when the auditor cannot obtain sufficient appropriate audit evidence on
which to base the opinion and concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive.
The opinion must also be disclaimed in situations involving multiple uncertainties when the auditor
concludes that, despite having obtained sufficient appropriate audit evidence for the individual
What is the impact of the auditors report
When the auditor has had to modify the auditor’s opinion, the auditor’s report must include a paragraph
before the opinion paragraph, which provides a description of the matter giving rise to the modification.
This paragraph will be entitled ‘Basis for qualified opinion’ or ‘Basis for adverse opinion’ or ‘Basis for
disclaimer of opinion’ depending on the type of modification.
The section of the auditor’s report containing the opinion will be headed either ‘Qualified opinion’,
‘Adverse opinion’ or ‘Disclaimer of opinion’, again depending on the type of modification.
When the auditor expresses a qualified or adverse opinion, the section of the report on the auditor’s
responsibilities must be amended to state that the auditor believes that the audit evidence obtained is
sufficient and appropriate to provide a basis for the auditor’s modified audit opinion.
When the auditor disclaims an opinion due to being unable to obtain sufficient appropriate audit evidence,
the section on the auditor’s responsibilities must be amended to include the following: ‘Because of the
matter(s) described in the Basis for Disclaimer of Opinion paragraph, however, we were not able to obtain
sufficient appropriate audit evidence to provide a basis for an audit opinion.
Summarise when financial statements are material and pervasive and material and not pervasive
Explain material but not pervasive and material and pervasive
Material but not pervasive, where the circumstances prompting the misstatement or
possible misstatement are material. These circumstances will result in a qualified opinion.
(ii) Material and pervasive to the overall view shown by the financial statements, ie the
financial statements are or could be misleading. These will result in an adverse opinion
Explain the fff secitons in the auditors report:Other information; annual report; misstatement of the other information
Other information is financial and non-financial information (other than the financial statements and the
auditor’s report thereon) included in an entity’s annual report
An annual report is a document, or combination of documents, prepared typically on an annual basis by
management or those charged with governance in accordance with law, regulation or custom.
Its purposes is to provide owners (or similar stakeholders) with information on the entity’s operations and
the entity’s financial results and financial position as set out in the financial statements.
A misstatement of the other information exists when the other information is incorrectly stated or
otherwise misleading (including because it omits or obscures information necessary for a proper
understanding of a matter disclosed in the other information).
Examples of other information include the following:
A report by management or those charged with governance on operations
Financial summaries or highlights
Employment data
Planned capital expenditures
Financial ratios
Names of officers and directors
Selected quarterly data
If the financial statements is materially misstated but management refuses to correct the misstatement,
the auditor shall modify the audit opinion.
If the other information is materially misstated and needs to be revised but management refuses, the
auditor shall communicate this matter to those charged with governance and (2 points):
Include an Other information section in the auditor’s report that describes the material
inconsistency, or
Withdraw from the engagement (where this is legally permitted).
that the auditors report by exception, so a standard report tells the user that, for example:
Adequate accounting records have been kept.
The accounts agree with the records.
The auditors have received all necessary information.
All directors’ transactions have been disclosed.
The directors’ report is consistent with the accounts.
Define expectations gap?
the difference between the apparent public perceptions of the responsibilities of auditors
on the one hand (and therefore the assurance that their involvement provides) and the legal and
professional reality on the other.
The above definition of the expectations gap is not definitive but we can highlight some specific issues.
(a) Misunderstandings of the nature of audited financial statements, for example that:
The statement of financial position provides a fair valuation of the reporting entity.
The amounts in the financial statements are stated precisely.
The audited financial statements will guarantee that the entity concerned will continue to
exist.
(b) Misunderstanding as to the type and extent of work undertaken by auditors
(c) Misunderstanding about the level of assurance provided by auditors, for example that:
An unmodified auditor’s opinion means that no frauds have occurred in the period.
The auditors provide absolute assurance that the figures in the financial statements are
correct (ignoring the concept of materiality and the problems of estimation).
When auditors prepare a written communication on internal control matters, the following points should
be considered:
should not include language that conflicts with the opinion expressed in the auditor’s report.
(b) It should state that the accounting and internal control system were considered only to the extent
necessary to determine the auditing procedures to report on the financial statements and not to
determine the adequacy of internal control for management purposes or to provide assurances on
the accounting and internal control systems.
(c) It will state that it discusses only deficiencies in internal control which have come to the auditors’
attention as a result of the audit and that other deficiencies in internal control may exist.
(d) It should also include a statement that the communication is provided for use only by
management (or another specific named party).
The statement of management’s responsibilities is always included in the auditors’ report. T?F
The inclusion of an emphasis of matter paragraph in the auditor’s report does not affect the auditor’s
opinion on the financial statements.T/F
False; True
