Chapter 13: Reporting on an audit engagement (basics)

Question 1

Who are the auditors responsible to?

Answer 1

Thanks to the Bannerman case:

The company and the company’s shareholders as a body

Question 2

What are the auditors responsibilities in relation to the Corporate Governance Statement?

Answer 2

Companies Act 2006 requires listed companies to include a Corporate Governance Statement in their annual report

The auditor:

• Should report by exception if no Corporate Governance Statement included
• Report on the company’s compliance with the specific provisions of the UK Corporate Governance Code

Question 3

When should an auditor use a modified report with an unmodified opinion?

Answer 3

Where:

• the financial statements do show a true and fair view, so the opinion is unmodified
• but the auditor has something important to communicate to the users of the financial statements

In this case, the auditor will include an additional paragraph in the audit report

Question 4

What is an emphasis of matter paragraph?

Answer 4

• used to highlight a matter included in the financial statements which has been appropriately presented or disclosed, but which is fundamental to the understanding of the users of the financial statements
• ISA (UK) 706

Question 5

How do you construct an emphasis of matter paragraph?

Answer 5

An emphasis of matter paragraph:

• is headed up ‘Emphasis of matter’
• Describes the matter and includes a reference to where disclosures can be found in the financial statements
• States that the audit opinion is not modified in this respect

e.g. major catastrophe that has a significant impact on the entity’s financial position

Question 6

What is an other matter paragraph?

Answer 6

• used to highlight a matter not included in the financial statements
• headed up ‘other matter’
• describes the matter
• eg. : the prior period financial statements were audited by the predecessor auditor, or were not audited at all, as required by ISA 710

Question 7

Who should the auditor tell about emphasis of and other matter paragraphs?

Answer 7

Those charged with governance

Question 8

When does a modified report with a modified opinion arise?

Answer 8

When they cannot say the financial statements give a true and fair view:

• the financial statements are misstated (the auditor disagrees with the directors over accounting treatment or disclosure)
• the auditor is unable to obtain sufficient appropriate audit evidence (also known as a limitation on scope)

Question 9

What should an auditor do when they identify misstatements or limitations on scope?

Answer 9

• ask the client to make an adjustment to the financial statements where necessary (or provide information required)
• consider materiality
• consider the impact on the audit opinion

Question 10

What does ISA (UK) 705 identify? What are the levels of significance for materiality?

Answer 10

ISA 705 deals with matters that lead to a modified audit report with a modified opinion

Two levels of significance in relation to materiality:

• material (could be by size or nature)
• material and pervasive, defined as a matter which:
  - is not confined to particular elements of the financial statements or
  - represents a significant portion of the financial statements or
  - is fundamental to the users’ understanding

Question 11

What happens if the client does not make the required adjustment, or no alternative audit evidence can be found?

Answer 11

The report will:

• contain a modified opinion
• explain the reason for the modification after the opinion in a ‘basis for modified opinion’ paragraph

Question 12

When do you give a qualified opinion?

Answer 12

When the financial statements are materially misstated or there is an inability to obtain sufficient appropriate audit evidence and it is material BUT not pervasive

e.g. ‘ In our opinion, except for the effects of the matter described in the basis for qualified opinion paragraph, the financial statements give a true and fair view…’

Question 13

When do you give an adverse opinion?

Answer 13

When the financial statements are materially misstated in a way that is both material and pervasive

e.g. ‘The financial statements do NOT give a true and fair view’

Question 14

When do you give a disclaimer of opinion?

Answer 14

When there is an inability to obtain sufficient appropriate audit evidence that has a material and pervasive effect

e.g “we do not express an opinion”

Question 15

When companies prepare a complete set of financial statements on a different accounting basis, which ISA do you refer to?

Answer 15

ISA (800) UK Special Considerations
The auditor’s report should include an emphasis of matter paragraph highlighting the use of the special purpose framework

Question 16

When companies prepare a single financial statement, which ISA do you refer to?

Answer 16

ISA (UK) 805
Specific element of the financial statements, or a single financial statement:
- externally managed assets and income of a private pension plan
- net tangible assets
- a balance sheet

Must consider whether it is practical to carry out this work without auditing the complete financial statements. In some circumstances the work required may be disproportionate to the part of the financial statements being audited.