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19 Reports Flashcards

Q&A

1
Q

Auditor’s reports are covered by the following ISAs:

A
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2
Q

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:

A

The audit opinion is valued, but could be more informative. More relevant information is needed about the entity and the audit

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3
Q

ISA 700 Forming an opinion and reporting on financial statements establishes what?

A

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

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4
Q

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:

A

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

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5
Q

What is an unmodified opinion?

A

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.

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6
Q

Whatt does ISA700 state for when to express an unmodied opinion?

A

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.

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7
Q

Say an example of a full unmodifed opinion?

A

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

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8
Q

What are the basic elements of an auditors report?

A

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

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9
Q

Explain the reason for the title and adressee?

A
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10
Q

Explain the opinion paragraph?

A
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11
Q

Explain Basis of opinon, going concern and key audit matters?

A
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12
Q

Explain other information in the final report

A

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

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13
Q

Expain the Responsibilities for the financial statements in final report

A

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.

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14
Q

Explain

Auditor’s responsibilities for

the audit of the financial

statements

A

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

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15
Q

Explain:

A
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16
Q

What arekey audit matters?

A

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

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17
Q

What do Key audit matters (KAMS) include?

A

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

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18
Q

What matters would be included in KAMS?

A

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

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19
Q

What are the other factors to consider when determining KAMS?

A

 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).

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20
Q

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

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.

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21
Q

If a modified opinion is expressed, the matter that gives rise to the modified opinion will be described in ____

A

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)

22
Q

Going concern issues should be included as a

KAM. T/F

A

False

23
Q

What is the difference between KAMs and EoM

A

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.

24
Q

What does

ISA 706 Emphasis of matter paragraphs and other matter paragraphs in the independent auditor’s report

provide?

A

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

25
Q

What is EoM?

A

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.

26
Q

What is EoM used for?

A

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.

27
Q

Emphasis of matter paragraphs are not used in relation to going concern. T/F

A

True

28
Q

Examples of EoM in an auditors report?

A

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

29
Q

Give an example of EoD?

A

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

30
Q

The other matter paragraph can be used whenever the auditor judges the matter to be relevant to users’

understanding of the audit. Examples include:

A

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.

31
Q

On Other matter paragraph ISA 706 (Revised) states ?

A

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

32
Q

What must ISA 706 say about what the auditor is expected to do?

A

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

33
Q

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

A qualified opinion

 An adverse opinion

 A disclaimer of opinion

34
Q

What is pervasiveness?

A

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

35
Q

What does the type of modifcation issued depnds on the ff?

A

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

36
Q

A modified opinion is required in either of the following situations.

A

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.

37
Q

A qualified opinion must be expressed in the auditor’s report in the following two situations:

A

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.

38
Q

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:

A

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)

39
Q

An adverse opinion is expressed when the auditor, having obtained sufficient appropriate audit evidence,

concludes that misstatements are both __ and ___

A

material and pervasive to the financial statements

40
Q

What are the reasons and explanations of pervasive reports and examples?

A
41
Q

When must an opinion must be disclaimed?

A

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

42
Q

What is the impact of the auditors report

A

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.

43
Q

Summarise when financial statements are material and pervasive and material and not pervasive

A
44
Q

Explain material but not pervasive and material and pervasive

A

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

45
Q

Explain the fff secitons in the auditors report:Other information; annual report; misstatement of the other information

A

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).

46
Q

Examples of other information include the following:

A

 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

47
Q

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):

A

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).

48
Q

that the auditors report by exception, so a standard report tells the user that, for example:

A

 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.

49
Q

Define expectations gap?

A

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.

50
Q

The above definition of the expectations gap is not definitive but we can highlight some specific issues.

A

(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).

51
Q

When auditors prepare a written communication on internal control matters, the following points should

be considered:

A

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).

52
Q

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

A

False; True

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