Audit Opinion and Reporting Flashcards
Auditor Duty to Report - Statutory duty of the auditor to report (UK Companies Act)
What should a company’s auditor do?
What should their report state (2)?
What must the auditor report be/do? (3)
What should they consider?
A company’s auditors shall make a report to the company’s members on all annual accounts … laid before the company in general meeting …
The auditors’ report shall state clearly, whether in the auditors’ opinion, the annual accounts:
give a true and fair view
have been properly prepared in accordance the relevant financial reporting framework and the CA2006
The audit report must be:
- Qualified or unqualified
- Include reference to any matters the auditor wishes to draw attention
- Give a statement on any material uncertainty that may cast doubt on the company’s ability to continue operation as a going concern
The auditors shall consider whether the information given in the directors’ report … is consistent with the accounts
Auditor Duty to Report - Statutory duty of the auditor to report for listed companies, for example in the UK
Directors’ remuneration report (1)
Corporate Governance (CG) disclosures (2)
Directors’ remuneration report
- For quoted companies the Companies Act in the UK requires specified parts of the remuneration report to be audited
Corporate Governance (CG) disclosures
- Corporate governance requirements may impose additional responsibilities on auditors; these requirements may also be incorporated into the listing rules for national stock exchanges
- Auditors are required (for example, in the UK) to review directors’ CG disclosures, in particular relating to internal controls and going concern
Auditor Duty to Report - Management responsibility and ‘premise’
What is the premise?
Who count as the management?
What are “those charged with governance” responsible for?
Responsibilities: (3)
In the UK, Directors (TCWG) have a statutory (CA 2006) responsibility to: (2)
Premise – an audit is conducted on the premise that management have acknowledged certain responsibilities that are fundamental to the conduct of an audit
Management = those with executive responsibility for the conduct of an entity’s operations, including preparation of the financial statements
In the UK, ‘those charged with governance’ (TCWG) are responsible for the preparation of the financial statements
Responsibilities:
- To prepare FS according to the applicable financial reporting framework
- For internal controls necessary to ensure FS are free from material misstatement
- To provide auditors with access to all information relevant to the audit
In the UK, Directors (TCWG) have a statutory (CA 2006) responsibility to:
- preparation of financial statements that give a true and fair view;
- selection of suitable consistently applied accounting policies
Auditor Duty to Report - Objective of an Audit
2 objectives?
- To obtain reasonable assurance that the financial statements as a whole are free from material misstatement, whether due to fraud of error, thereby enabling the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework, and
- to report on the financial statements and communicate as required by the ISAs, in accordance with the auditor’s findings.
Auditor Duty to Report - Objective of an Audit and relation to AQ
What is audit quality?
What does audit quality rely on?
What is audit quality underpinned by?
What is TCWG roles (2)?
Fundamentally linked with concept of Audit Quality
- The probability that the auditor will both discover a breach in the client’s accounting system and report a breach in the client’s accounting system (DeAngelo, 1981)
- AQ relies on creating conditions where quality audits can occur consistently. (IAASB, 2014)
- AQ underpinned by auditor competence (skill and knowledge) and auditor independence (ability to remain impartial)
-
TCWG also have an important role
- Oversee financial reporting process, thereby reducing risk of material misstatement in the FS
- Maintain two way communication with auditors
Forming an audit opinion - Forming an opinion and reporting
What does ISA 700 deal with?
Related ISAs deal with? (2)
Aim of ISA 700? (5)
ISA 700 deals with the auditor’s responsibility to form an opinion on the financial statements
Related ISAs deal with
- Auditor’s responsibility to communicate Key Audit Matters (ISA 701)
- How the form and content of the audit report are affected when the auditor modifies their opinion (ISA 705) or includes an EoM of OM paragraph (ISA 706)
Aim of ISA 700
- Balance between consistency and comparability, recognising need to be flexible to accommodate particular circumstances (for example: different sectors, regulations, economies)
- Increase the value of audit reporting by making AR information relevant to users
- Promote credibility in the global marketplace
- Promote user understanding
- Identify unusual circumstances when they occur
Forming an audit opinion - In forming the opinion … (2 different things they have to use)
Exercised professional judgement
- Training, knowledge, experience in context, to make informed decisions and take appropriate action
Exercised professional scepticism
- a questioning mind, critical assessment of audit evidence, alert to situations that may indicate possible material misstatement
Forming an audit opinion - Forming an opinion
What does the auditor do?
To form an opinion, the auditor has to: (3+4)
The auditor forms an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework
To form an opinion, the auditor has to:
- Conclude on whether the auditor has obtained reasonable assurance that the financial statements are free form material misstatement
- Sufficient appropriate evidence has been obtained to reach this level of assurance?
- Consideration of impact of any material misstatements found during audit
- Evaluate:
- all aspects of accounting policies and potential management bias
- appropriate disclosure, relevance and consistency of accounting policies
- Consider reasonableness of accounting estimates
- Information presented in FS reflect qualitative characteristics of useful information
Forming an audit opinion - Form the opinion
2 different outcomes and what is said, how they are sometimes referred to etc.
- If conclusion is that FS are prepared, in all material respects, in accordance with the applicable financial reporting framework
- Express and UNMODIFIED opinion (sometimes referred to as ‘unqualified’ or ‘clean’ opinion
- In expressing opinion, the phrases used are “In our opinion, the accompanying financial statements:
- give a true and fair view of … in accordance with the (the applicable financial reporting framework)” or
- present fairly, in all material respects … … in accordance with the (the applicable financial reporting framework)”
- … which are equivalent terms.
Forming an audit opinion - Unmodified Opinion expressed: (example)
The audit report and KAMs - Elements of an Audit Report – ISA700 (post 2016) (15)
- Title
- Addressee
- Auditor’s opinion
- Basis of opinion
- Conclusion Relating to Going Concern [ISA 570]
- Irregularities including Fraud (ISA 700 (UK) from December 2019)
- Key Audit Matter [for listed or if auditor required/decides]
- Other Information [ISA 720]
- Responsibilities for Financial statements
- Auditor’s Responsibilities …
- Other Reporting Responsibilities
- Name of the Engagement Partner [listed company audits]
- Signature of the Auditor
- Auditor’s address
- Date of auditor’s report
there may also be a section concerning other legal and regulatory requirements, depending on the nature of the company’s business and associated requirements
The audit report and KAMs - Elements of an Audit Report – ISA700
(1/4/7/1/3/7/2)
- Title and Addressee, eg: Independent auditor’s report to the members of Tesco PLC
Auditor’s opinion
- The first section of the report with heading ‘Opinion’
- Also identify in this section
- Client name,
- the title of each statement including the notes and accounting policy statement,
- period covered by the audit
Basis of Opinion
- Regulatory framework followed
- State whether sufficient and appropriate audit evidence obtained
- Going Concern - Report in accordance with ISA 570
- Other information (Report in accordance with ISA 720), included in a separate section on the audit report
- The auditors opinion on the FS does not cover ‘other information’
- The auditor is required to read the other information and consider if any material inconsistencies exist between other information and the financial statements
If material inconsistency appears
Discuss with management; ask for correction; consider any impact on the audit report; consider implications for the audit engagement
Include a separate section in the audit report ‘Other Information’
- State managements responsibility - Identify other information obtained and responsibility to read - If all good “we have nothing to report”
Responsibilities for the Financial Statements (directors)
Preparing FS and related internal controls, assessing GC
Auditor responsibilities
Explaining the scope of the audit, including information about:
- Objective of an audit
- Reasonable assurance, not a guarantee
- Nature of material misstatements should they arise
- Regulatory framework followed to conduct the audit
- Behaviours adopted
- Description of the audit process
- Communications with TCWG
Other reporting responsibilities
- For example other legal/regulatory requirements
- Specific additional ‘ethical’ considerations for listed companies
The audit report and KAMs - ISA701 – Key Audit Matters
(4,0/4,3,2+1)
Scope
Purpose
- enhance the communicative value of the auditor’s report
- provide greater transparency about the audit that was performed.
- to assist users in understanding the most significance audit matter and areas of significant management judgment
- provide intended users a basis to further engage with management
Determining KAM
- Areas of higher assessed risk of material misstatement
- areas in the financial statements that involved significant management judgment, including accounting estimates that have been identified as having high estimation uncertainty.
- significant events or transactions that occurred during the period
Communicating KAM
- Separate section in audit report; Reference to related financial statement disclosures
- Explain why it was a KAM and how it was addressed
Look at the audit report of a company you are interested in to find out what the auditors considered to be KAM for that company – are they informative
Modifying the audit report and the audit opinion - Modified Audit Report
If the auditor concludes that the financial statements __ _ ________ are not free from _____________ _______________ or cannot obtain ____________, _______________ audit ___________, or attention needs to be drawn to a ______________ ______/_________, then the auditor must modify the report.
An auditor’s report is considered to be modified in the following situations: (2/3,3)
If the auditor concludes that the financial statements as a whole are not free from material misstatement or cannot obtain sufficient, appropriate audit evidence, or attention needs to be drawn to a significant risk/issue, then the auditor must modify the report.
An auditor’s report is considered to be modified in the following situations:
Matters that do not affect the auditor’s opinion
- Emphasis of Matter paragraph
- Other Matters paragraph
- Going Concern paragraph (where basis of accounting is appropriate)
Matters that do affect the auditor’s opinion
- Qualified opinion
- Disclaimer of opinion
- Adverse opinion
Modifying the audit report and the audit opinion - Emphasis of Matter Paragraph
An Emphasis of Matter paragraph is a paragraph included in the audit report that refers to: (3)
Add an Emphasis of Matter paragraph where: (include what to do, where it is and what effect it has)
To determine significance, the auditor should consider: (4)
An Emphasis of Matter paragraph is a paragraph included in the audit report that refers to:
- a matter, appropriately presented or disclosed in the financial statements that,
- in the auditor’s judgement,
- is of fundamental importance to the users’ understanding of the financial statements.
Add an Emphasis of Matter paragraph where
There is significant uncertainty; Describe the matter and possible effects; Normally included after the opinion paragraph; Does not affect the audit opinion
To determine significance, the auditor should consider:
- risk, range of possible outcomes, potential consequences and if directors have adequately accounted for and disclosed
Modifying the audit report and the audit opinion - Emphasis of Matter Paragraph, examples
3 examples
Example: Emphasis of Matter – Effects of a Fire
Examples
- Uncertainty relating to outcome of exceptional litigation or regulatory action
- Early application of a new accounting standard that has a material effect on the financial statements
- A major catastrophe effecting the financial position
Example: Emphasis of Matter – Effects of a Fire
“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” (ISA 706, illustration).
Modifying the audit report and the audit opinion - Other Matter Paragraphs
What are they for?
Who is relevant to?
For example? (2)
Other Matters Paragraphs
- to communicate a matter other than those that are presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.
For example
- Drawing attention to the reason for an amendment of previously issued financial statements (relating to subsequent events)
- Previous year’s financial statements had been audited by a different auditor
Modifying the audit report and the audit opinion - The Modified Audit Opinion
ISA 705 distinguishes three types of modified opinion: (3/0,3,1)
A qualified opinion
Limitation of scope - Disclaim
- E.g. not being able to carry out an audit procedure leading to lack of sufficient evidence
- Imposed by the entity, or
- Imposed by circumstances
Disagreement with management - Adverse
- For example, acceptability of selected accounting policies, the method of their application or the adequacy of their disclosure
Modifying the audit report and the audit opinion - The type of modified opinion depends on: (2/2,3)
Material, but not pervasive
- When circumstances prompting the misstatement or possible misstatement are material but not pervasive
- Qualified opinion
Pervasive - if the effects of the matter:
- Are not confined to a specific elements, accounts or items of the financial statements, and/or
- Represent a substantial proportion of the financial statements, and/or
- Are fundamental to users’ understanding of the financial statements that relate to disclosures
Modifying the audit report and the audit opinion - Categories of qualifications in an audit opinion
Circumstances:
Limitation of scope: Situations where the auditor couldn’t obtain enough evidence to form an opinion.
Disagreement: Cases where the auditor disagrees with how financial information is presented.
Importance:
Material: Issues that are significant but not all-encompassing.
Material and pervasive: Problems so significant they affect the overall accuracy or reliability of the financial statements.
The matrix divides these into four categories:
Material limitation of scope:
- Leads to a qualified opinion, meaning the auditor found issues but believes they are not widespread.
Material disagreement:
- Also results in a qualified opinion, with the phrase “except for” clarifying the disagreement.
Material and pervasive limitation of scope:
- Results in a disclaimer of opinion, where auditors state they can’t form an opinion due to lack of evidence.
Material and pervasive disagreement:
- Results in an adverse opinion, where auditors outright state the financial statements do not present a true and fair view.
Modifying the audit report and the audit opinion - For all modified opinions, the auditor should: (3)
- Amend the ‘Opinion’ heading to Qualified opinion, Adverse Opinion or Disclaimer of Opinion, as appropriate
- Give reasons for the modification
- Quantify the effect on the accounts if possible; if not possible a statement to this effect should be included.
Modifying the audit report and the audit opinion - Modified opinion: Limitation of scope [see ISA 705 - illustrations of auditor’s reports with modifications to the audit opinion. (2)
Limitation of Scope:
- Qualified opinion: “except for” limitation
“In our opinion, except for the possible effects of the matter(s) described in the Basis for Qualified Opinion paragraph, the financial statements give a true and fair view……”
- Disclaimer of opinion
“We do not express an opinion on the accompanying financial statements of the Company. Because of the significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these financial statements.”
Modifying the audit report and the audit opinion - Modified opinion: Disagreement (2)
Disagreement:
- Qualified opinion: except for disagreement:
“In our opinion, except for the effects of the matter(s) described in the Basis for Qualified Opinion paragraph, the financial statements give a true and fair view……”
- Adverse opinion
“In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion section of our report, the accompanying consolidated financial statements do not give a true and fair view”
Very long card
Modifying the audit report and the audit opinion - Going Concern – implications for audit report
What should be done?
Therefore…?
Another thing to consider?
2 things about it
Another thing the auditor has?
2 things about it
Different opinions and their effects (2/5,5)
- Financial statements are prepared – by management - on the assumption that the entity will continue operating for the foreseeable future
- Therefore, assets are realisable and liabilities can be discharged in the normal course of business - Uncertainties in the Going Concern Assumption:
- Management’s assessment involves uncertainty, as it depends on predicting future outcomes.
- Events occurring after the assessment (subsequent events) could impact the validity of the initial assumption.
- Auditor responsibility
- Obtain sufficient and appropriate audit evidence relating to management’s use f the GC assumption and appropriate disclosures have been made
- Report accordingly - Management’s use of GC assumption is inappropriate – adverse opinion
- Management’s use of GC assumption is appropriate – include a section in audit report ‘Conclusions relation to Going Concern, stating:
- Statement that auditor has not identified a material uncertainty that would cast doubt on the entity’s ability to continue as a going concern – for at least 12 months
- A conclusion that management’s use of GC assumption is appropriate
- For entities applying the UK Corporate Governance code
- Nothing material to add or draw attention to
- Explanation of how auditor evaluated managements assessment
- Management’s use of GC assumption is appropriate, but a material uncertainty exists relating to GC
- Appropriately disclosed by management -
- Unmodified audit opinion
- Include a separate section headed ‘Material Uncertainty Related to Going Concern’ – give detail
- Inappropriately disclosed by management
- Qualified or adverse opinion
- Appropriately disclosed by management -
Modifying the audit report and the audit opinion -Communication with those charged with governance (ISA 260)
Matters to be communicated (7)
What are all of the above referred to as?
Another important form of reporting, but to TCWG (not the shareholders)
Matters to be communicated
- the overall approach and scope of the audit, including any limitations on the scope of the audit
- the accounting policies, and any changes to them, that could materially affect the financial statements
- adjustments arising as a result of audit procedures which could materially impact the financial statements
- material events or uncertainties which could jeopardise the going concern status, and which require disclosure within the financial statements
- disagreements with management over accounting treatments or disclosures
- any expected modifications to the audit report
- material weaknesses discovered in the internal systems and controls.
All of the above are referred to as ‘findings from the audit’ (also often called ‘management letter points’).
Consideration of other types of assurance engagements - ISAE 3000 - Assurance Engagements Other Than Audits of Reviews of Historical Financial Statements
What does it do?
For example (3)
In contrast to… which aims to…?
What is the resulting opinion
What is assurance engagement?
What are the two types of it?
Example
- Sets a framework covering the wide range of assurance engagements encountered by the audit profession
For example:
- assessing and reporting on a company’s non-financial reporting information
- Reporting on compliance with laws/regulatory/contractual requirements
- Independent assurance on sustainability engagements
In contrast to a FS audit, which aims to give reasonable assurance, other assurance engagements will usually offer limited assurance because their scope is limited.
- The resulting opinion is expressed as ‘negative assurance’
Assurance engagement
- where a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users about the outcome of an evaluation or measurement of a subject matter against criteria
Two types of assurance engagement
Reasonable assurance engagement – e.g. statutory audit
Limited assurance engagement – do not give same level of assurance as a statutory audit and express ‘negative assurance’, for example:
“Based on our review, nothing has come to out attention to indicate that the accompanying [reports/statements] contain material misstatements”
Consideration of other types of assurance engagements - Limited Assurance Examples (4)
A review of internal controls;
‘Nothing has come to our attention that indicates material internal control weaknesses’ = negative assurance Instead of: In our opinion management has operated an effective system of internal controls
A review of financial statements:
‘ Nothing has come to our attention that causes us to believe that the accompanying financial statements do not give a true and fair view’ = negative assurance
Instead of: in our opinion the financial statements give a true and fair view
See also negative assurances given within the Tesco PLC Audit Report
- Going Concern: “We confirm that we have nothing material to report, add or draw attention to in respect of these matters”
- Other information: “We have nothing to report in relation to these matters”
Example:
- Title
- Addressee
- Respective responsibilities
- Approach to engagement
- Inherent limitations
- “Our examination
- excludes audit procedures such as verification of all assets, liabilities and transactions and
- is substantially less in scope than an audit performed in accordance with ISAs and
- therefore provides a lower level of assurance than an audit.
- Accordingly we do not express an audit opinion on the information.”
- Conclusion
- “Based on the procedures performed and evidence obtained, nothing has come to our attention that causes us to believe that the accompanying consolidated report has not been appropriately prepared in all material respects, in conformity with the requirements of the Regulations.”
