Chapter 7 : Audit Report

➢ An audit report is a document in which an auditor

shares their opinion on an organization’s financial
performance and whether they’re compliant with
financial reporting regulations like the IFRS.
➢ Audit reports will generally include a description of the
auditor’s role, management’s role, the scope of the audit
and the audit opinion.
➢ Purpose of an audit report is to make a statement about a
company’s financial status related to its financial reporting.
➢ Investors analyze audit reports and base much of their
investment decisions on information contained in the
audit reports. Regulators will also review audit reports
to decide whether to assess penalties for noncompliance.
 Audit Opinion
✓ The audit opinion is very important for stakeholders
because it let them know whether or not the information
in the financial statements that they are using is correct
and they can use that information for their decision
making.
✓ The audit opinion also indirectly informs the users of
financial statements how is the integrity of senior
management as well as the directors of the entity.
✓ The auditor is required to produce an auditor's report at
the end of the audit which sets out their opinion on the
truth and fairness of the financial statements.
✓ The auditor needs to consider the following when
undertaking the audit work:
 Introduction Cont…
1. Whether sufficient appropriate audit evidence has been
obtained
2. Whether uncorrected misstatements are material.
3. Qualitative aspects of the entity's accounting practices,
including indicators of possible bias in management's
judgments
4. Whether the financial statements adequately disclose the
significant accounting policies selected & applied.
5. Whether the accounting policies selected and applied
are consistent with the applicable financial reporting
framework and are appropriate.
6. Whether accounting estimates made by management are
reasonable.
 Introduction Cont…
7. Whether the information in the financial statements is
relevant, reliable, comparable and understandable.
8. Whether the financial statements provide adequate
disclosures to allow users to understand the effect of
material transactions.
9. Whether the terminology used in the financial statements
is appropriate.
10. The overall presentation, structure and content of the
financial statements.
11. Whether the financial statements adequately refer to or
describe the applicable financial reporting framework.

Types of audit opinion

Types of audit Opinion Cont…
❖ In general, there are two main types of audit opinions:
Unmodified and Modified Opinion.
❖ Let see the Audit Opinion Flow Chart below to gain a
better understanding:

Audit Opinion

Unmodified Opinion Modified Opinion

Qualified Opinion Adverse Opinion Disclaimer of Opinion

Opinion
Types of audit Opinion Cont…
1. Unmodified/clean/ audit opinion:
✓ 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.
✓ To check if the audit report is clean or not is given in
opinion paragraph section.
✓ Clean Audit reports are not only represented as a true and
fair presentation of financial statements but as free from
all material misstatements. Further, they also imply that
the team has high integrity.
Types of audit Opinion Cont…
2. Modified audit opinion:
✓ 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.
A. Qualified Audit Opinion:
✓ A qualified opinion must be expressed in the auditor's
report when the auditor concludes that misstatements
are material to the financial statements. However…
Types of audit Opinion Cont…
…. these material misstatements are collective / not affect
other items and accounts in the whole financial statement/.
E.g. The opening balance of the client contains a large
number of inventories that cannot be verified.
✓ But if the auditor thinks that the misstatement is not
collective /pervasive/, then the auditor will issue an
adverse opinion in the report.
✓ In the said report, only inventories mentioned are
significant. Any other information in the financial
statements is true and fair.
✓ Material misstatements could arise in respect of:
- The appropriateness of selected accounting policies
Types of audit Opinion Cont…
-The application of selected accounting policies
- The appropriateness or adequacy of disclosures in
the financial statements
B. Adverse Audit Opinion:
✓ An adverse opinion is expressed when the auditor,
having obtained sufficient appropriate audit evidence,
concludes that misstatements are both material and
pervasive to the financial statements.
✓ Not only are they material misstated, but they also affect
other items & accounts in the whole financial
statement. These are called pervasive.
C. Disclaimer Audit Opinion:
Types of audit Opinion Cont…
✓ An opinion must be disclaimed when the auditor cannot
obtain sufficient appropriate audit evidence on which to
base the opinion/.
✓ when auditors are prevented from accessing information
related to accounts or items in financial statements/ and
concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be
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
uncertainties
Types of audit Opinion Cont…
✓ For example where the auditor is unable to attend the
inventory count and unable to request receivable
confirmations, and there is no other realistic means of
gathering evidence on these two areas. If these two areas
form a significant element of the total assets value, a
disclaimer may be appropriate.

Contents of audit reports

✓ A measure of consistency in the form and content of the
auditor's report is desirable because it promotes
credibility.
✓ The auditor's report must be in writing and includes the
following basic elements:
Content of audit report Cont…
1. Title: The auditor's report must have a title that clearly
indicates that it is the report of the independent auditor.
This signifies that the auditor has met all the ethical
requirements concerning independence .
2. Addressee: The addressee will be determined by law
or regulation, but is likely to be the shareholders or
those charged with governance.
3. Opinion Paragraph: It must identify the entity being
audited, state that the F/S have been audited, refer to the
summary of significant accounting policies and other
explanatory notes, and specify the date or period covered
by each statement comprising the financial statements.
Content of audit report Cont…
4. Basis of Opinion: The basis for opinion paragraph
must state that the audit was conducted in accordance with
the ISA, and refer to the ‘Auditor’s responsibilities for the
audit of the financial statements’ section which describes the
auditor’s responsibilities under ISA.
✓ The auditor must also state that they are independent of
the audited entity, in accordance with the relevant ethical
requirements relating to the audit.
✓ Finally, the auditor must state that they believe the audit
evidence obtained is sufficient and appropriate to provide
a basis for the audit opinion.
5. Going Concern: Where z auditor considers a material
uncertainty related to going concern exists, this should be…
Content of audit report Cont…
… described in a separate paragraph headed ‘Material
uncertainty related to going concern’.
6. Key audit matters: For the audit of an entities, or
where required by law or regulation, the auditor should
include a ‘Key audit matters’ section. This section
describes the matters that, in the auditor’s professional
judgment, are most significant to the audit.
7. Other Information: For the audit of an 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.
Content of audit report Cont…
- An identification of the other information obtained
before 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
8. Responsibilities for z Preparation of F/S: This
part of the report describes the responsibilities of those who
are responsible for the preparation of the F/S. This section
should describe management responsibility which include:
Content of audit report Cont…
- 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;
9. Auditor’s Responsibilities for the audit of z F/S:
The report must state that:
-
Content of audit report Cont…
- The auditor’s objectives are to obtain reasonable assurance
whether the F/S 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 ISA will always detect a material misstatement.
✓ The report must also:
- Explain that misstatements can arise from fraud or error
- Describe the meaning of materiality
- Explain that the auditor exercises professional judgment
and maintains professional skepticism throughout the audit
- Describe the auditor’s responsibilities in an audit.
Content of audit report Cont…
10. Other Reporting Responsibilities: If the auditor
is required by law to report on any other matters, this must
be done in an additional paragraph titled 'Report on other
legal & regulatory requirements' or otherwise as appropriate.
11. Name of the Engagement Partner: The name of
the engagement partner should be identified, unless such a
disclosure is reasonably expected to lead to a significant
personal security threat.
12. Auditor's signature: The report must contain the
auditor's signature, whether this is the auditor's own name or
the audit firm's name or both.
13. Auditor’s address: The location where the auditor
practices must be included.
Content of audit report Cont…
14. Date of the report: The report must be dated no
earlier than the date on which the auditor has obtained
sufficient appropriate audit evidence on which to base the
auditor's opinion on the financial statements.
Thank You!