CHAPTER 6
AUDIT REPORTS
Audit Reports
– It is the final step in the entire audit process,
and the end product of an audit of a business
entity.
– It contains auditors’ opinion about the fairness
of the client’s financial statements;
statement of profit or loss and other
comprehensive income,
Statement of financial position,
Statement of Changes in Equity
Statement of Cash Flows &
Notes to the financial statements.
Audit Reports….
– Audit reports are means through which the rigorous
and lengthy audit process is compiled and auditors’
findings are formally communicated to users who
rely on auditors’ report for various decisions
– It is worded briefly and uniformly to save users from
looking to details which may be difficult for them to
understand
– The auditor is likely held to be responsible if an
incorrect audit report is issued.
Content of an unmodified auditor’s report
1. Title
2. Addressee
3. Auditor's Opinion
4. Basis for Opinion
5. Key Audit Matters
6. Other Information
7. Responsibilities of Management
8. Auditor's Responsibilities
9. Report on Other Legal and Regulatory
Requirements
10. Signature
11. Auditor's address
12. Date
1. The title
– The title ‘Independent Auditors’ Report.’ - This title clearly identifies the
report as ‘Independent Auditors’ Report.’ it means, that no one has any doubt
about what this document is.
2. Addressee
– The address identifies the intended user of the report and shows to whom the
auditor owes a duty of care. It is addressed to the members (i.e. shareholders)
of the company.
3. Auditor's Opinion
- Provides the auditor's conclusion as to whether the financial statements give a
true and fair view.
4. Basis for Opinion
Provides a description of the professional standards applied during the audit to
provide confidence to users that the report can be relied upon.
5. Key Audit Matters
To draw attention to any other significant matters of which the users should be
aware, to aid their understanding of the entity. (Note: This section is only
compulsory for listed entities.)
6. Other Information
To clarify that management are responsible for the other
information such as the Chair's statement. The auditor's opinion
does not cover the other information and the auditor's responsibility
is only to read the other information and report in accordance with
ISA 720
7. Responsibilities of Management and Those Charged with
Governance for the Financial Statements
This section states that the FSs are the responsibility of
management.
– This responsibility includes:
Selecting the appropriate accounting principle and
Maintaining internal control over financial reporting
sufficient for preparation of financial statements that are
free of material misstatements due to fraud or error.
8. Auditor's Responsibilities for the Audit of the
Financial Statements
To clarify that the auditor is responsible for expressing
reasonable assurance as to whether the financial
statements give a true and fair view and express that
opinion in the auditor's report.
The section also describes the auditor's responsibilities in
respect of risk assessment, internal controls, going concern
and accounting policies. Included to help minimize the
expectation gap.
9. Report on Other Legal and Regulatory Requirements
To highlight any additional reporting responsibilities, if
applicable. This may include responsibilities in some
jurisdictions to report on the adequacy of accounting
records, internal controls over financial reporting, or other
information published with the financial statements
10. Signature
Identifies the audit firm responsible for the auditor’s report and
opinion.
• 11.Auditor's address
• Identifies the specific office of the engagement partner responsible
for the report in case of any queries.
12. Date
• To identify the date up to which the audit work has been
performed. Any information that comes to light after this date will
not have been considered by the auditor when forming their
opinion.
• The report must be signed and dated after the date the directors
approved the financial statements. Often, the financial statements
are approved and the auditor's report signed on the same day.
Forming an opinion
Based on the audit evidence
accumulated, the auditor issues one of
the following audit reports
1. Unmodified opinion
2. Unmodified opinion with additional
communication
3. Modified opinion:
a. Qualified opinion or
b. Adverse opinion
4.Disclaimer of opinion
1. Unmodified opinion
– When the auditor concludes that the financial
statements are prepared, in all material
respects, in accordance with the applicable
financial reporting framework, they issue an
unmodified opinion in the auditor's report. [ISA
700, 16]
• This will mean:
– The financial statements adequately disclose
the significant accounting policies.
– The accounting policies selected are
consistently applied and appropriate.
• In formation is relevant, reliable, comparable and
understandable.
• The financial statements provide adequate disclosures to
enable the users to understand the effects of material
transactions and events.
Other Information section
Other information refers to financial or non-financial
information, other than the financial statements and
auditor's report thereon, included in the entity's annual
report. [ISA 720, 12c
– Chair's report
– Operating and financial review
– Social and environmental reports
– Corporate governance statements
Key Audit Matters section
ISA 701 Communicating Key Audit Matters in the Independent
Auditor's Report requires auditors of listed companies to
determine key audit matters and to communicate those matters in
the auditor's report. [ISA 701, 5]
Key audit matters include:
Areas of higher assessed risk of material misstatement, or
significant risks identified in accordance with ISA 315 Identifying
and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment.
• Significant auditor judgments relating to areas in the financial
statements that involved significant management judgment,
including accounting estimates that have been identified as
having high estimation uncertainty.
• The effect on the audit of significant events or transactions that
2. Unmodified opinion with additional communication
• In certain circumstances auditors are required to make
additional communications in the auditor's report even
though the financial statements show a true and fair view.
• Issues requiring communication include:
a. Material Uncertainty Related to Going Concern (ISA
570 Going Concern)
b. Emphasis of Matter paragraph (ISA 706 Emphasis of
Matter Paragraphs in an Auditor's Report)
c. Other Matter paragraph (ISA 706)
It is important to note that these do not impact the
wording of the opinion and do not constitute either a
qualified, adverse or disclaimer of opinion.
3. Modified opinion
• The auditors may decide they need to modify the opinion
when they conclude that:
– Based upon the evidence obtained the financial
statements as a whole are not free from material
misstatement.
– This is where the client has not complied with the
applicable financial reporting framework.
– They have been unable to obtain sufficient appropriate
evidence to be able to conclude that the financial
statements as a whole are free from material
misstatement.
The nature of the modification depends upon whether the
auditor considers the matter to be material but not pervasive,
or material and pervasive, to the financial statements
a. Qualified opinion
Material but not pervasive
If the misstatement or lack of sufficient appropriate
evidence is material but not pervasive, a qualified
opinion will be issued. [ISA 705, 7]
This means the matter is material to the area of
the financial statements affected but does not
affect the remainder of the financial statements.
'Except for' this matter, the financial statements
give a true and fair view.
b. Adverse opinion
Material and pervasive
A matter is considered 'pervasive' if, in the auditor's judgment:
The effects are not confined to specific elements, accounts
or items of the financial statements
If so confined, represents or could represent a substantial
proportion of the financial statements, or
• An adverse opinion is issued when a misstatement is
considered material and pervasive.
This will mean the financial statements do not give a true and
fair view.
Examples include:
Preparation of the financial statements on the wrong basis.
Non-consolidation of a material subsidiary.
Material misstatement of a balance which represents a
substantial proportion of the assets or profits e.g. would
change a profit to a loss
4. Disclaimer of opinion
A disclaimer of opinion is issued when the auditor has not
obtained sufficient appropriate evidence and the effects
of any possible misstatements could be pervasive. [ISA
705, 9]
The auditor does not express an opinion on the financial
statements in this situation.
Examples include:
Failure by the client to keep adequate accounting records.
Refusal by the directors to provide written representation.
Failure by the client to provide evidence over a single
balance which represents a substantial proportion of the
assets or profits or over multiple balances in the financial
statements.
The End
