AAA – Reporting

Audit Reporting – Part 1

AUDIT REPORTING:

Audit reporting is the most important area included in the completion phase of an audit. Students must first be able
to list and describe the basic contents of an audit report, this has recently been expanded to include more
information in an attempt to close the expectation gap. The headings are as follows:

 Title/addressee
All audit reports are addressed to the user of the report, which is always the shareholders. Report titles
normally emphasise the fact that auditors are external to the audit client by actually stating that the report is
independent.

 Introduction
This just states the areas and documents that are covered by the report so that the user can be clear about
where they are able to place their confidence.

 Opinion
This is the main part of any report. Most opinions just basically say that everything is ok. This means that a
true and fair view is given by the financial statements, that they have been prepared in accordance with
legislation and that there is nothing else that the auditor has to say. This would be an unmodified opinion and
report.

 Basis of opinion
This is a relatively new inclusion. It is a couple of paragraphs that briefly explains the overall audit process.

 Going Concern
There is now a requirement to report specifically on the going concern status of the audit client. Auditors will
state whether or not they believe the client to be a going concern. If there is significant doubt, then a paragraph
should be included to explain the issue, entitled Material Uncertainty relating to Going Concern.
 Key Audit Matters
There is also now a requirement to describe key audit matters. This is supposed to be done for larger audit
clients who are complying with corporate governance requirements but any size of client can disclose this
information. Key audit matters are areas of significant judgement that have formed a major part of the audit
work, such as the treatment of goodwill and accounting for impairment of assets. The method for auditing
these areas should be explained in this paragraph. Key Audit Matters are not problems that have been found
during the audit -they are merely important areas that have formed an important chunk of our work, so the
users of the report have an idea as to how we have spent our time.

 Other Information
Sometimes other information that is not part of the financial statements but is included in the Annual Report is
inconsistent with the financial statements themselves. If this is the case, then this should be explained in this
section along with any reporting by exception statements as required by the Companies Act.

 Responsibilities
The responsibilities of the auditor and the directors of the audit client are listed out in this section. It is
permissible to remove this section from the actual audit report and show it as a separate document.

 Name of Engagement Partner

 Signature/date
This is just a way of authorising the document.

Students should already be familiar with this basic format. At this level of study, the most important thing is to know
what the variations are, the different ways in which an audit report may be modified. Apart from a so-called clean
unmodified report, there are six possible modifications, four to the opinion and two to the basis of opinion.

MODIFICATIONS TO THE OPINION:

Let us deal with the possible modifications to the opinion first.

1. Qualification due to a material misstatement:

 A qualification due to a material misstatement is when there is a material error that can be isolated to just
one part of the financial statements.
 It would require an extra paragraph in the opinion section that says ‘except for’ this everything else is ok.
The essential thing is that it is an isolated issue.
 Also, in order to say something is wrong, there must be enough evidence to do so, all normal sources of
 evidence must be available.

2. Qualification due to a lack of evidence:

 A qualification due to a lack of evidence is when some audit evidence is missing so no opinion can be
formed on a particular figure.
 Again this is an isolated issue and is normally described in the opinion by using the phrase ‘except for’.

NOTE: The above two modifications may well look the same in a report but they are given for two very different
reasons. The first one highlights an error whereas the second one says that we don’t know if something is right or
not because missing evidence means we cannot decide.

3. A disclaimer of opinion:

 A disclaimer of opinion is used when there is a lack of evidence that cannot be isolated to one area of the
financial statements.
 It is, therefore, said to be a pervasive issue, it affects everything!
 This is a very serious type of modification because the auditor actually states that they are ‘unable to form
an opinion’.

4. An adverse opinion:
 An adverse opinion is when a misstatement exists but cannot be isolated, it affects the financial statements
as a whole.
 Here, the opinion would say the financial statements ‘do not give a true and fair view’.
NOTE: To summarise the last two modifications, a disclaimer is a pervasive lack of evidence and an adverse
opinion is a pervasive misstatement.

MODIFICATIONS TO REPORT WITHOUT AFFECTING THE OPINION:

There are also two ways in which the report can be modified without actually affecting the opinion itself.

1. An emphasis of matter:
An emphasis of matter is used when a fundamental uncertainty exists and has been adequately disclosed in
the financial statements. For example, an audit client relies upon a bank overdraft in order to continue to trade
and that overdraft is due to be reviewed by the bank sometime AFTER the date the audit report is due to be
signed. The matter is explained fully in the financial statements. At the point the report is signed, the outcome
of the event is unresolvable-no one knows if the bank will renew the overdraft.

If the matter is disclosed in the financial statements, which it is here, then there is no misstatement and there
is no missing evidence so the opinion will not be modified. Instead, the basis of opinion will be modified by
including an extra paragraph that explains the uncertainty. The paragraph must refer to the adequate
 disclosure in the financial statements and will also state that the opinion has not been modified.

2. An other matter:
An other matter also requires an extra paragraph to be included in the basis of opinion. It is used when the
other information (directors’ report and other narrative) is not consistent with the financial statements and it is
the other information that is wrong.

NOTE: Questions often provide students with one or more mini scenarios and then ask for the most appropriate
type of modification.