Chapter 7

The Auditors Report

Standards of Reporting
The final phase of an audit is the reporting of the findings
ASA 700 The Auditors Report on a General Purpose
Financial Report establishes mandatory requirements
and provides explanatory guidance on the form and
content of the auditors report

Financial Statements
The financial statements on which an auditor reports
constitute a general-purpose financial report
The disclosure and presentation requirements for such
reports are generally determined by accounting
standards and statutory and other requirements
The Corporations Act 2001 outlines the
scope of the contents of a financial report
(s. 295)

Accounting Standards
The auditor reports on whether the financial statements
are in accordance with accounting standards issued by
the Australian Accounting Standards Board (AASB)
These standards are now mandated by law under ASA
700 and by virtue of the Corporations Act under s. 334

Relevant statutory and

other requirements
The Corporations Act prescribes the auditors reporting
duties
the financial statements are in accordance with the
law, comply with accounting standards and give a
true and fair view
all information, explanations and assistance
necessary for the conduct of the audit have been
provided
The financial records have been kept to enable the
preparation and audit of financial reports
The records and registers have been kept as
required by law
5

Relevant statutory and

other requirements
The financial statements on which the auditor is to
report, include the directors declaration (s. 295) which
states that the financial statements and notes thereto
comply with accounting standards
give a true and fair view
are in accordance with the Corporations Act
In reaching an opinion on the financial statements, the
auditor will thus need to review the contents of the
directors declaration

Forming an opinion
In forming an opinion on the financial reports auditor
considers whether:
Sufficient audit evidence has been obtained
Any uncorrected misstatements are material
Significant accounting policies are adequately
disclosed

Expression of an opinion
Auditors report on a general purpose financial report
shall state whether the financial report gives a true and
fair view or presents fairly, in all material respects in
accordance with the applicable financial reporting
framework

Unmodified auditors
report
Most common type of opinion issued
opinion section expresses an unqualified opinion
The financial report presents fairly, in all material
respects, in accordance with the applicable financial
reporting framework

Modified auditors reports

Issued where the auditor concludes that the financial
report as a whole is not free from material misstatement
Types of modified opinions
Qualified opinion
Adverse opinion
Disclaimer of opinion

Modified opinions

Circumstances to modify
Qualified opinion
Misstatements, individually, or in aggregate, are
material but not pervasive to the financial report
Unable to obtain sufficient appropriate audit evidence
and possible effects are material, but not pervasive

Circumstances to modify
Adverse
Sufficient audit evidence has been obtained
Misstatements, both individually, or in aggregate, are
material and pervasive on the financial report

Circumstances to modify
Disclaimer of opinion
Auditor unable to obtain sufficient appropriate
evidence on which to base an opinion
Possible effects on financial report of undetected
misstatements could be material and pervasive

Material misstatements
Misstatement
Difference between amount, classification,
presentation or disclosure of a reported financial
report item and what is required for the item to be in
accordance with the applicable financial reporting
framework
may arise from:
Inappropriate selection or application of an
accounting policy
Inadequate disclosure

Inability to obtain
sufficient appropriate audit
evidence
Unable to evaluate whether method of accounting has
been appropriately applied
Timing of auditor appointment is such that it is not
possible to evaluate significant appropriate evidence
Entitys accounting controls are not effective

Emphasis of Matter
paragraph
Refers to matters appropriately presented or disclosed in
the financial report that the auditor considers is
fundamental to users understanding

Emphasis of Matter
paragraph
Criteria
Fundamental to users understanding
Is not a modification of opinion
Sufficient appropriate audit evidence has been
obtained
Is presented or disclosed in financial report
May be required by other auditing standards

Emphasis of Matter
paragraph
Circumstances where an emphasis of matter paragraph
may be included:
Uncertainty relating to future outcome of an event
Early application of a new accounting standard
A major catastrophe has had, or continues to have, a
significant effect on the entitys financial position

Other Matter paragraph

A paragraph included in the auditors report referring
matters other than those presented or disclosed in the
financial report

Other reporting
considerations for
corporate entities
These considerations include:
Reporting on consolidated accounts
Comparatives
Initial engagements
Half-year statements

21

Reporting on consolidated
accounts

22

In situations where a reporting entity has one or more

controlled entities, it may be necessary for more than
one auditing firm to participate in the examination
The auditor of a reporting entity
has the right of access to the accounting records
and registers of controlled entities
also has the right to require from their officers and
auditors such information and explanation as is
needed
The opinion expressed on the consolidated financial
statements is the sole responsibility of the principal
auditor

Comparatives
Comparatives refer to amounts or disclosures of one or
more previous periods presented on a comparative
basis with those of the current period
The auditor needs to consider the following:
Any qualified previous period report
Subsequent events
Additional reporting requirements must be met
when there has been a change of auditors
Unaudited previous period financial statements
require the auditor to seek evidence to ensure there
are no material misstatements
23

Initial engagements
In an initial audit engagement, ASA 510 requires the
auditor to obtain sufficient appropriate audit evidence to
ensure that:
the opening balances do not contain misstatements
that materially affect the current periods financial
statements
the previous periods closing balances have been
correctly brought forward to the current period or,
when appropriate, have been restated
appropriate accounting policies are consistently
applied or changes in accounting policies have been
properly accounted for and adequately disclosed
24

Half-year statements
Section 302 of the Corporations Act prescribes that
disclosing entities must:
prepare half-year financial statements and
a directors report
have the financial statements audited or reviewed,
and obtain an auditors report
lodge the financial statements, the directors report
and the auditors report with the Australian Securities
and Investments Commission (ASIC)

25

Half-year statements
According to s. 302 of the Corporations Act, the half-year
accounts may be either audited or reviewed, although
the majority of Australian companies opt for a review
If the half-year statements are audited, then the reporting
requirements are covered by ASA 700 (ISA 700)

26

Half-year statements
If a review engagement is needed, then it should be
performed in accordance with ASRE 2410 Review of an
Interim Financial Report Performed by the Independent
Auditor of an Entity
There are no requirements for the auditors report on
half-year statements to be circulated to the entitys
members
However, the auditor should encourage distribution of the
report to members in the interests of effective
communication
27

Chapter 18
Completing the audit

Review of subsequent
events
The auditor shall consider the effect of subsequent
events on the financial report and on the auditors report
(ASA 560.5)
Subsequent events consist of:
events occurring between the end of the period and
the date of the auditors report
facts discovered after the date of the auditors report

29

Review of subsequent
events
The auditor needs to assess whether it is an event on
which he or she has a responsibility to act
If the auditor has the responsibility, there is a need to
consider the appropriate accounting treatment
The following slide shows the timeline in respect of
subsequent events

30

Review of subsequent
events

Auditing procedures
Review of procedures that management has

32

established to ensure that subsequent events are

identified
Review of the minutes of the meetings of shareholders,
those charged with governance, audit and executive
committees held after the reporting date etc.
Review of the entitys latest available interim financial
statements
Also, as considered necessary and appropriate,
budgets, cash flow forecasts and other related
management reports
Enquiry of entitys lawyers

Auditing procedures
Inquiring of management as to whether any
subsequent events have occurred that may affect the
financial statements, including:
the current status of items that were accounted for
on the basis of preliminary or inconclusive data
whether new commitments, borrowings or
guarantees have been entered into

33

Auditing procedures
whether sales of assets have occurred or are planned
whether the issue of new shares or debentures, or an
agreement to merge or liquidate has been made or is
planned
whether any major assets have been destroyed, for
example, by fire or flood
whether there have been any material developments
regarding risk areas and contingencies

34

Auditing procedures
In situations where management does not amend the
financial statements when the auditor believes it is
necessary, then the auditor should consider issuing a
modified audit report
This is required by ASA 705 Modifications to the
Opinion in the Independent Auditors Report

35

Accounting considerations
AASB 110 Events after the Balance Sheet Date,
classifies after reporting date events into two
categories:
Adjusting events
Non-adjusting events

36

Adjusting events
Adjusting events are those that:
provide additional evidence about conditions that
were uncertain at reporting date
provide evidence about a condition that existed at
reporting date, that the entity was unaware of
The related assets and liabilities should be adjusted to
reflect the additional evidence

37

Non-adjusting events
Non-adjusting events are those new conditions that
arose after reporting date, in which no adjustment should
be made
Disclosure by way of a note to the financial statements
(nature and financial effect of the event) may be required
if material

38

Considering the
appropriateness of
the going concern assumption
When planning and performing audit procedures and
in evaluating the results thereof, the auditor shall
consider the appropriateness of managements use of
the going concern assumption in the preparation of
the financial report (ASA 570)

39

Considering the
appropriateness of
the going concern assumption
Indications of a going concern problem may be
financial, such as material operating losses, operating,
such as the loss of key management personnel, or
other, such as a change in legislation
The period to be considered by such assessment
extends to the expected date of the auditors report for
the succeeding financial reporting period

40

Review for contingent

liabilities
Contingency is an existing condition, or set of
circumstances that involves uncertainty as to a
possible gain (contingent asset) or loss (contingent
liability), that will be resolved when one, or more,
future event(s) occurs or fails to occur

41

Audit procedures to ascertain

the existence of contingent
liabilities
Review of minutes of meetings of the board, subcommittees of the board and any shareholders
meetings
Review of contracts, loan agreements, leases and
correspondence with government agencies
Review of income tax liability, tax returns and
associated correspondence

42

Audit procedures to ascertain

the existence of contingent
liabilities
Inspecting other relevant documents for possible
guarantees
Obtaining a legal representation letter
Obtaining a management representation letter

43

Communication with the

entitys legal representative
ASA 502 Audit Evidence Special Consideration for
Litigation and Claims states in paragraph A5 A7:
The auditor should obtain sufficient appropriate audit
evidence regarding:
whether all material legal matters have been
identified
the probability of any material revenue or expense
arising from such matters and the estimated
amount thereof

44

Management representation
letter
ASA 580 Written Representations requires the auditor to
obtain appropriate representations from management

45

Management representation
letter
The objectives of such a letter are to:
confirm managements responsibility for the
presentation of the financial statements
Support other audit evidence relevant to the financial
report or specific assertions in the report

46

Performing analytical
procedures
ASA 520 Analytical Procedures states,
The auditor shall apply analytical procedures as risk
assessment procedures
to obtain an understanding of the entity and its
environment and in the overall review at the end of
the audit
Involves the use of ratios and other comparative
techniques

47

Performing analytical
procedures
Reasons for using analytical review in the overall
review is to:
corroborate conclusions formed during the audit
on individual elements of financial information
assist in arriving at the overall conclusion that the
financial information as a whole, is consistent with
the knowledge of the entitys business
gain assurance that the company will remain a
going concern for the relevant period

48

Performing analytical
procedures
The procedures should be:
applied to critical audit areas identified during the
audit
based on financial statement data after all audit
adjustments and reclassifications have been
recognised

49

Evaluating the findings

At this stage, the auditors objectives are:
to ensure that the audit process has complied with
auditing standards
to determine the type of audit opinion to
be expressed

50

Evaluating the findings

To

51

meet these objectives the auditor:

makes the final assessment of materiality and audit
risk
undertakes the technical review of the financial
statements
undertakes the final review of the working papers
formulates an opinion and drafts the auditors report

Communicating with the

entity
ASA 260.9 states that the auditor shall communicate
audit matters of governance interest arising from the
audit of the financial report with those charged with
governance of an entity

52

Communication of audit
matters
Matters which would normally be communicated are:
the general approach and overall scope of the audit
the selection of, or changes in, significant accounting
policies and practices that have, or could have, a
material effect on the entitys financial report
the potential effect of any significant risks and
exposures

53

Communication of audit
matters
audit adjustments
material uncertainties that may cast doubt on the
entitys ability to continue as a going concern
disagreements with management
expected modifications to the auditors report
any other matters agreed on in the terms of the audit
engagement

54

Communicating with the

entity
ASA260 para 9: objectives:
- To communicate clearly responsibilities of the
auditor in relation to the financial report audit and
an overview of the planned scope and timing of
the audit
- Obtain information relevant to the audit from those
charged with governance
- Provide timely observations arising from the audit
- Promote effective two-way communication

55