Scribd Logo
Upload

Welcome to Scribd!

  • 9 views

    (Chapter - 11) Audit Report

    Uploaded by

    zangzop5

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    (Chapter - 11) Audit Report

    Uploaded by

    zangzop5
    9 views6 pages

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    9 views6 pages

    (Chapter - 11) Audit Report

    Uploaded by

    zangzop5

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 6

    AUDIT REPORT

    The audit opinion


    A company’s auditors must report their opinions to shareholders/members on two primary matters:
    (1) Whether the financial statements give a true and fair view (or present fairly in all material
    respects).
    (2) Whether the financial statements have been properly prepared in accordance with relevant
    rules, e.g.
    • International Accounting Standards,
    • a particular country’s legal requirements.

    The objectives of the auditor


    According to ISA 700 Forming an Opinion and Reporting on Financial Statements, the auditor's
    objectives are:
    • To form an opinion on the financial statements based on an evaluation of the conclusions drawn
    from the audit evidence obtained, and
    • To express clearly that opinion through a written report that also describes the basis for that
    opinion.

    Elements of Auditor’s report


    ISA 700 describes the elements that make up the audit report as:

    Title:
    The title should be ‘appropriate’. The use of ‘Independent Auditor’s Report’ distinguishes this report
    from any other report produced internally or by other nonstatutory auditors.

    Addressee:
    • The report should be addressed to the intended user of the report which is usually the
    shareholders, board of directors or other party defined in the engagement or local regulations.
    • This varies from country to country, but is usually addressed to the members of the company. This
    is to prevent other parties relying on the report when it is not intended for their use.
    Introductory paragraph:
    This paragraph contains the name of entity being audited, the sets of financial statements that have
    been audited, period covered by the audit, and brief statement of accounting policy.
    Statement of responsibilities of management:
    • Preparation of the financial statements which show a true and fair view or present fairly in all
    material respects and
    • In accordance with the applicable financial framework.
    • Designing and implementing an effective internal control system.
    • Applying appropriate accounting policies.
    • Making reasonable accounting estimates.
    Statement of responsibilities of the auditors:
    • Express opinion.
    • Assess the risk of material misstatement.
    • The fact that the audit was planned and performed to obtain reasonable assurance about whether
    the financial statements are free from material misstatement.
    • Consider internal control as a basis for preparing financial statements without responsibility for
    implementing it.
    • Obtain sufficient, appropriate audit evidence on which to base the opinion.

    Scope Paragraph:
    • The standards under which the audit was conducted i.e. ISAs.
    • A summary of audit processes and procedures in general terms e.g. examining on a test basis,
    evidence to support the financial statement amounts and disclosures.
    • Evaluate the appropriateness of accounting policies.
    • Evaluate the overall presentation of the financial statements.

    Opinion:
    • This covers the primary statements and associated notes referred to in the introductory paragraph
    (even though only the first two are referred to explicitly).
    • Truth and fairness (or presented fairly in all material respects).
    • Preparation in accordance with the financial reporting framework – applicable legislation and
    accounting standards.
    • If applicable, any other matters required under a country’s regulations. Such a statement would
    be made at the end of the opinion paragraph.

    Auditor’s signature:
    • This should include reference to the auditor's status as a Registered Auditor.
    • The report may be signed by the firm, by the auditor individually or both.
    Normally the firm’s signature is given as the firm as a whole assumes responsibility for the audit.
    • The audit report must be signed after the directors have approved the financial statements and
    preferably on the same day.
    • It is not necessary that the final typewritten copies of financial statements are available for
    signature – draft copies may be signed, provided the draft documents are sufficiently clear to
    enable a proper overall assessment of presentation to be made.

    Auditor’s address:
    The audit report should name a specific location, which is normally the city where the auditor
    maintains the office that has responsibility for the audit.
    Types of Audit Report

    Unmodified report
    This is the standard report that is the outcome for the vast majority of companies. In this situation:
    ● The auditors believe the Financial Statements are true and fair
    ● The auditors believe the Financial Statements were properly prepared
    ● There is nothing else the auditors wish to report.

    Modified reports
    There are 8 modifications to know:

    Modified with a modified opinion – the FS don't fully show a true and fair view or the auditor has
    not obtained sufficient appropriate evidence to make that conclusion. (ISA 705)

    1. A qualification due to a material misstatement in the Financial Statements.


    2. A qualification due to a lack of sufficient appropriate evidence during the audit.
    3. An adverse opinion – where the auditors disagree with the truth and fairness of the Financial
    Statements overall.
    4. A disclaimer of opinion, where a lack of evidence is so large that the auditors are unable to give
    an opinion at all.

    Modified without modifying the opinion – the FS show a true and fair view but there is something
    that needs to be brought to the attention of the user by way of an additional paragraph. (ISA 706)

    5. An Emphasis of Matter, where there is nothing wrong with the Financial Statements and no lack
    of evidence … but there is something important disclosed in the FS (other than a material
    uncertainty related to going concern) that the auditors wish to draw to the shareholders’ attention.
    6. An Other Matter, where there is nothing wrong with the Financial Statements and no lack of
    evidence ... but there is something non-FS related that the auditors want to tell the shareholders
    (e.g. to inform them that last year’s audit was done by a different firm)
    7. A Material Uncertainty Related to Going Concern (MURGC), where there is nothing wrong with
    the Financial Statements and no lack of evidence … but there is a material uncertainty re going
    concern disclosed in the FS in line with IAS 1.
    8. If there is an inconsistency in the unaudited “Other Information” (e.g. the Chairman Statement in
    the Annual Report), this will need to be described within the “Other Information” section of the
    auditor’s responsibilities section of the report.

    The Emphasis of Matter Paragraph


    Emphasis of matter is used to refer to a matter that has been adequately presented or disclosed in
    the financial statements by directors. The auditor's judgement is that these matters are of such
    fundamental importance to the users' understanding of the financial statements that the auditor
    should emphasis the disclosure.

    Examples of such fundamental matters include:


    • Uncertainties regarding the company's ability to continue as a going concern.
    • Major catastrophes that have had a significant effect on the entity's financial position.
    • Where the financial statements have been prepared on a basis other than the going concern basis.
    • An uncertainty relating to the future outcome of exceptional litigation or regulatory action.
    • Early application of a new accounting standard.
    • Where the corresponding figures have been restated.
    It is important to note that the emphasis of matter paragraph can only be used when adequate
    disclosure has been made of the matters mentioned above. The auditor can only emphasis
    something that is already included.

    Example of Emphasis of Matter


    We draw attention to Note X to the financial statements which describe the uncertainty related to
    the outcome of the lawsuit filed against the company by XYZ Company. Our opinion is not modified
    in respect of this matter.
    Qualified audit opinion

    1. Qualification due to material misstatement


    When there is a single material mistake in the Financial Statements (or a small number of individual
    mistakes), the overall Financial Statements remain true and fair.
    The auditor reports that, Except for the effect of the error(s), the Financial Statements give a true
    and fair view.
    There are many examples that would lead to this opinion, for example:
    ● Failure to provide for a material doubtful debt
    ● Material error in the calculation of depreciation
    ● The treatment of a material expense as an asset.

    2. Qualification due to a lack of sufficient evidence


    With this “limitation of scope”, the auditor was unable to fully carry out his work due to a lack of the
    usual evidence. Whilst he is happy that the overall Financial Statements show a true and fair view,
    he has concerns about possible material errors with a particular balance (or balances).
    The auditor reports that, Except for any adjustments that might have been necessary, had the
    auditor seen the evidence, the Financial Statements give a true and fair view.
    Examples include:
    ● The auditor was unable to attend the year-end stocktake (eg due to being appointed auditor after
    the year end).
    ● There are lots of cash transactions (where there is not a lot of documentary evidence).
    3. Adverse opinion
    This is a form of misstatement that is so strong, it affects the opinion of the Financial Statements as
    a whole (pervasive).
    The most common form of this in the exam is a disagreement that the company is a going concern.
    As such, the auditor is disagreeing with the entire basis of preparation of the Financial Statements,
    which is likely to result in disagreement with many of the figures in the Financial Statements.
    The auditor reports that the Financial Statements do not give a true and fair view.
    4. Disclaimer of opinion
    This is a lack of evidence that is so strong, the auditor feels unable to report on the overall truth and
    fairness of the Financial Statements.
    Imagine turning up to an audit client to be told that all of the accounting records were lost the
    previous day in a fire, and that there are no back-ups. Without any evidence, the auditor is unable
    to do an audit, so cannot give an opinion.
    The auditor reports that “we do not provide an opinion”, or similar wording.

    You might also like