Reporting Flashcards
What is the audit report?
Objectives of an auditor, in accordance with ISA 700 Forming an Opinion and Reporting on Financial Statements:
To form an opinion on the financial statements based upon an evaluation of their conclusions drawn from audit evidence; and
To express clearly that opinion through a written report
How would the auditor form an opinion?
Auditor forms an opinion on whether financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.
Must conclude whether they have obtained reasonable assurance about whether the financial statements are free from material misstatement (whether due to fraud or error).
In particular:
- Adequate disclosure of significant accounting policies
- Accounting policies are consistent and appropriate
- Accounting estimates are reasonable
- Information relevant, reliable, comparable and understandable
- Adequate disclosure to understand effects of material transactions and events.
- Terminology used is appropriate.
What is an unmodified opinion?
Unmodified if auditor concludes that financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.
What is a modified opinion?
Modified if:
Financial statements as a whole are not free from material misstatement; or
Auditor has been unable to obtain sufficient appropriate evidence
What are the contents of an audit report?
ISA 700 provides guidance
Report must be in writing
Broken into distinct sections that explain purpose, nature and scope of audit.
Aim to reduce the ‘expectations gap’
- Title
- Addressee
- Introductory paragraph
- Statement of responsibilities of auditors
- Auditor’s opinion
- Statement of responsibilities of management
- Auditor’s signature
- Date of report
- Auditor’s address
What are modifications of an audit report?
2 ways:
By modifying the audit opinion; or
Through inclusion of additional paragraphs
Modifying audit opinion
2 reasons:
Auditor concludes that financial statements as a whole are not free from material misstatements; or
Auditor has been unable to obtain sufficient evidence to conclude that the financial statements as a whole are free from material misstatement.
If immaterial no effect on wording of opinion.
If material then modification required
‘Pervasive’ means that the matter is:
Not confined to specific elements of the financial statements;
If confined represents a substantial proportion of the financial statements; or
Is fundamental to users understanding of the financial statements
What is modification?
When auditor modifies opinion, they must include a ‘Basis for Modification Paragraph’ in audit report that describes the matter giving rise to the modification.
This should be placed before opinion paragraph
Qualified opinion – auditor stating that whilst there are, or maybe, material misstatements, they are confined to a specific element of the financial statements but the remainder may be relied upon.
“except for the matters described in the basis for modification paragraph, the financial statements present fairly (or give a true and fair view of)….”
If the auditor concludes that the matter is pervasive they are claiming that the financial statements may not be relied upon in any part.
Adverse opinion states that the financial statements “do not present fairly (or give a true and fair view of)…..”
If disclaimer, states that they “do not express an opinion on the financial statements.”
What are additional paragraphs?
Having formed opinion there are circumstances where auditor must also draw users attention to additional matters that are significant to their understanding of the financial statements.
Matters already disclosed that are fundamental to understanding the financial statements. These are presented in “Emphasis of matter” paragraphs; and
Other matters relevant to either understanding the audit, the auditor’s responsibilities or the audit report. These are presented in “Other Matter” paragraphs.
What is the emphasis of matter paragraphs?
Immediately after opinion paragraph
Do not affect audit opinion
Draw readers attention to a note already disclosed in the financial statements.
Have to be fundamental to readers’ understanding.
Examples:
- Uncertainty re litigation
- Early application of new accounting standards
- Major catastrophe
What are other matter paragraphs?
Applicable circumstances:
Pervasive inability to obtain sufficient appropriate evidence is imposed by management.
When national laws/regulations require elaboration of auditor responsibility.
Client issues another set of financial statements
Material inconsistency between audited financial statements and ‘other information’ contained in the annual report.
What are the types f communications?
Main forms of formal communication:
Engagement letter
Management letter
Objectives:
To communicate responsibilities of the auditor and an overview of scope and timing of audit.
To obtain, from those charged with governance, information relevant to the audit.
To provide timely observations arising from audit that are significant to responsibilities of those charged with governance; and
to promote 2-way communication between auditor and those charged with governance.
What are audit matters of governance?
Auditor independence
Effects of significant accounting policies and changes to them
Potential financial effect of risks/uncertainties
Material audit adjustments
Disagreements with management concerning financial statements
Significant difficulties encountered during audit
Expected modifications to the audit report
Significant internal control deficiencies, including fraud.
What are the three timing points of communications?
Planning
During the audit
Conclusion of audit
What are ISA 720 (b) Auditor’s Statutory Reporting Responsibility re Directors’ Reports?
Objectives:
Auditor objective to form an opinion on whether information given in directors’ report is consistent with financial statements and to respond appropriately if it not consistent
Requirements:
Read and assess
Not required to verify completeness, but if becomes aware of omission then must communicate to those charged with governance
If any inconsistencies with financial statements, auditor seeks to resolve
Material inconsistency unresolved, auditor states opinion and describes inconsistency in auditor’s report
If FS amendment necessary but management refuse, auditor expresses qualified or adverse opinion.
