Lecture 7

Question 1

What is the primary objective of ISA 700 (Revised)?

Answer 1

To establish requirements and provide guidance on forming an opinion on financial statements and on the form and content of the auditor’s report. It ensures the auditor’s report is clear, transparent, and consistent with international best practice.

Question 2

What are the main sections required in the auditor’s report under ISA 700 (Revised)?

Answer 2

Title (e.g., ‘Independent Auditor’s Report’).
Addressee (typically shareholders or those charged with governance).
Opinion (unmodified, qualified, adverse, or disclaimer).
Basis for Opinion (reference to ISA compliance, independence, and ethical responsibilities).
Key Audit Matters (if required under ISA 701).
Responsibilities of Management and Those Charged with Governance (for the financial statements).
Auditor’s Responsibilities for the Audit (scope, objectives, and inherent limitations).
Other Reporting Responsibilities (if applicable).
Name of the Engagement Partner (in certain jurisdictions).
Signature, Auditor’s Address, and Date of the report.

Question 3

How does ISA 700 (Revised) address transparency in the auditor’s report?

Answer 3

By requiring explicit statements about the auditor’s responsibilities, independence, and compliance with ethical standards.
By emphasizing the use of plain language to communicate critical information effectively to users.
By mandating disclosure of Key Audit Matters (per ISA 701) or related references if applicable.

Question 4

What is the purpose of ISA 701?

Answer 4

To enhance the communicative value of the auditor’s report by providing greater transparency about the most significant matters in the audit, known as Key Audit Matters (KAMs). KAMs inform users of areas that required the most auditor judgment or presented the highest risk of material misstatement.

Question 5

How does the auditor determine Key Audit Matters?

Answer 5

By identifying issues that required significant auditor attention during the audit:
Areas of higher risk of material misstatement or significant risks.
Significant auditor judgments in areas involving management estimates.
The effect on the audit of significant events or transactions.
The auditor then selects those matters that, in his/her professional judgment, were the most significant.

Question 6

What should be included in the KAM section of the report?

Answer 6

A clear description of why each matter was considered a KAM.
An explanation of how the matter was addressed in the audit.
A reference to the related disclosures in the financial statements (if relevant).
Sufficient context to help users understand the significance of the matter and the work performed.

Question 7

Under ISA 705 (Revised), when should the auditor modify the opinion?

Answer 7

If financial statements are materially misstated or if the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements are free from material misstatement. Depending on the significance and pervasiveness of the matter, the opinion can be qualified, adverse, or disclaimed.

Question 8

What are the three types of modified opinions under ISA 705 (Revised)?

Answer 8

Qualified Opinion –where the limitation of scope/disagreement affects only one particular aspect of the FS, rather than the FS as a whole.
(Misstatement is material but not pervasive, or there is a material scope limitation that is not pervasive).
Adverse Opinion – Misstatement is both material and pervasive the auditor disagrees strongly with the mgt (FS not true and fair).
Disclaimer of Opinion – Auditor is unable to obtain sufficient evidence, and the possible effects of undetected misstatements could be both material and pervasive unable to form opinion.

Question 9

How does ISA 705 (Revised) guide the structure of a modified report?

Answer 9

The Opinion section is modified to clearly state the type of modified opinion (qualified, adverse, or disclaimer).
A Basis for Qualified/Adverse/Disclaimer Opinion section is added to explain the rationale for the modification.
Other required elements (e.g., KAMs, Responsibilities) are adjusted or omitted depending on the type of modification.

Question 10

What is an Emphasis of Matter paragraph?

Answer 10

A paragraph included in the auditor’s report to draw attention to a matter that is appropriately presented or disclosed in the financial statements. The matter is of such importance that it is fundamental to users’ understanding of the financial statements. It does not modify the auditor’s opinion.

Question 11

What is an Other Matter paragraph?

Answer 11

A paragraph used to communicate a matter not presented or disclosed in the financial statements but relevant to users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report. It also does not affect the auditor’s opinion.

Question 12

When should the auditor use Emphasis of Matter vs. Other Matter paragraphs?

Answer 12

Emphasis of Matter Paragraph: If the matter is disclosed in the financial statements and is critical to understanding them.
Other Matter Paragraph: If the matter is outside the scope of the financial statements’ disclosures but still relevant to users.

Question 13

What is ‘Other Information’ under ISA 720 (Revised)?

Answer 13

Financial or non-financial information (other than the financial statements and the auditor’s report) included in an entity’s annual report or other documents containing audited financial statements. Examples: Management Discussion & Analysis, Chairman’s Statement. This information is not audited in the same way as the financial statements, but the auditor has certain responsibilities to read and consider its consistency with the audited statements.

Question 14

What are the auditor’s responsibilities regarding Other Information?

Answer 14

To read the other information and identify any material inconsistencies with the financial statements or with the auditor’s knowledge obtained in the audit.
To respond appropriately if material misstatements or inconsistencies are found in the other information. The auditor does not express an opinion on the other information but must report any material misstatements if management refuses to correct them.

Question 15

How should the auditor report on Other Information in the auditor’s report?

Answer 15

Include a specific section in the auditor’s report describing the auditor’s responsibilities under ISA 720.
State whether the auditor has identified any material inconsistencies or misstatements in the Other Information.
If such inconsistencies remain uncorrected, the auditor may describe them or, in extreme cases, consider further actions (e.g., withholding the report).

Question 16

What is the core requirement of ISA 570 (Revised) regarding going concern?

Answer 16

The auditor must evaluate management’s assessment of the entity’s ability to continue as a going concern. The auditor must obtain sufficient appropriate evidence to conclude whether a material uncertainty exists that may cast significant doubt on the entity’s going concern status.

Question 17

How should an auditor address going concern issues in the auditor’s report?

Answer 17

Material Uncertainty Related to Going Concern: If there is significant doubt about the entity’s ability to continue as a going concern but adequate disclosure is made, the auditor must include a separate section in the report with a heading ‘Material Uncertainty Related to Going Concern.’
Modified Opinion: If disclosures are inadequate, the auditor may issue a qualified or adverse opinion, depending on the severity and pervasiveness of the omission.
Emphasis of Matter: If going concern issues are adequately disclosed and not considered a material uncertainty, the auditor may, but is not required to, include an Emphasis of Matter.

Question 18

What are some indicators of a potential going concern problem?

Answer 18

Financial indicators: negative net worth, recurring losses, negative cash flows, loan defaults.
Operational indicators: loss of key management, labor difficulties, dependence on a single product or customer.
Other external factors: adverse legal judgments, changes in legislation, or economic downturns.

Question 19

How does the Companies Act 2006 govern auditor reporting in the UK?

Answer 19

It sets out the legal requirements for the appointment of auditors, their rights and duties, and their reporting obligations for UK companies. It requires auditors to form an opinion as to whether the financial statements have been properly prepared in accordance with applicable law and accounting standards, and whether they give a true and fair view.

Question 20

What are key responsibilities of auditors under the Companies Act 2006?

Answer 20

Statutory Duty to Report: Auditors must report to the company’s members on the financial statements and certain other matters.
Consistency Check: Auditors must confirm that information provided in the Directors’ Report is consistent with the financial statements.
Additional Reporting: They may need to report on specific matters such as the adequacy of accounting records or returns, and whether directors’ remuneration has been properly disclosed.

Question 21

Attempt to define meaning of true fair

Answer 21

Sandilands Committee(1975) - referred to accounts being ‘drawn up in accordance with generally accepted accounting principles’.

Question 22

Should we change the term ‘true and fair (reference)

Answer 22

Interestingly, Brydon (2019), in the recommendations from the review into auditing, takes issue with the term “true and fair” and suggests replacing it with “presents fairly in all material respects” (Section 2.3)

Question 23

Revisions to ISAs

Answer 23

The ISAs relating to the audit report (700, 701, 705, 706) were revised in 2015 as it was thought that (per the IAASB)
- The audit opinion could be more informative
- More relevant information was needed about the entity itself and the audit of it.
And there have been more revisions since….

Question 24

Modifications to the standard audit report

Answer 24

If the audit is ‘fine’, the audit report and opinion that is issued is described as “clean”, or “unmodified” or “unqualified”.

If problems arise that the auditor needs to report, then changes (modifications) may be made to the audit report and/or the audit opinion.

Question 26

Possibilitiesof audit outcomes (picture)

Answer 26

Question 27

What is pervasive? – this is a crucial concept as it determines the opinion

Answer 27

This is defined in ISA 705 as “A term used, in the context of misstatements, to describe the effects on the financial statements of misstatements or the possible effects on the financial statements of misstatements, if any, that are undetected due to an inability to obtain sufficient appropriate audit evidence. Pervasive effects on the financial statements are those that, in the auditor’s judgment:

(i)Are not confined to specific elements, accounts or items of the financial statements;

(ii) If so confined, represent or could represent a substantial proportion of the financial statements; or

(iii) In relation to disclosures, are fundamental to users’ understanding of the financial statements.

Question 28

Some examples of pervasive misstatements

Answer 28

Non consolidation of a subsidiary
Inability to obtain sufficient appropriate evidence re a joint venture investment representing over 90% of the company’s net assets
Inability to obtain sufficient appropriate audit evidence about multiple elements of the financial statements e.g. inventories and accounts receivable.

Question 29

Modifications to the standard audit opinion - summary

Answer 29

Question 30

Emphasis of matter (EOM), ISA 706

Answer 30

This is usually an extra paragraph, inserted to draw attention to a significant matter affecting the financial statements. Usually follows the opinion paragraph and refers to fact that opinion is not qualified/or modified.

USED IF: the financial statements are affected by matters of FUNDAMENTAL IMPORTANCE to the user’s understanding. If there is sufficient disclosure about the issue within the F.S., the opinion need not be modified, but the auditor may wish to draw attention to this matter in the audit report via EOM

Question 31

Emphasis of matter Examples

Answer 31

Uncertainty re outcome of exceptional litigation; major catastrophe that had/has a significant effect on the entity’s financial position; significant subsequent event (e.g. fire or major flood affecting production

Question 32

Going concern issue?

Answer 32

If the going concern basis is appropriate, but there is material uncertainty, as long as this is disclosed properly in the F.S. the auditor will draw this to the user’s attention in a ‘material uncertainty related to going concern’ paragraph
Does not affect the opinion, as long as adequate disclosure is made – i.e. no modified audit opinion
If the material uncertainty is not adequately disclosed, the auditor should modify the audit opinion (an except for (qualified) or adverse opinion).
Material uncertainties may include potential funding issues/loan being renewed