BA202 Auditing 1

Week 5
Auditor’s Report
Introduction - Reporting
 Final phase of the audit process
 Majority of audit reports are
“unqualified”, which means
• Auditor is satisfied that the financial statements present
a “true and fair view” according to Act.
• In compliance with the Companies Act 1964 in line with
 The provision of the Act
 The approved auditing standards
 The applicable approved accounting standards
Who is responsible ? A reminder
 Client – company director
◦ To ensure that approved accounting standards are
complied with in the preparation of accounts
 Auditor
◦ To perform the audit according to the approved
standards on auditing
ISA 700 The Auditor’s Report on
Financial Statements
 2.    The auditor should review and assess the
conclusions drawn from the audit evidence
obtained as the basis for the expression of an
opinion on the financial statements.
ISA 700 The Auditor’s Report on
Financial Statements
 4.    The auditor’s report should contain a
clear written expression of opinion on the
financial statements taken as a whole.
Basic Elements of the Auditor’s Report
5.    The auditor’s report includes the following basic elements, ordinarily
in the following layout:
(a)   title;
(b)   addressee;
(c)   opening or introductory paragraph
(i)   identification of the financial statements audited;
(ii)   a statement of the responsibility of the entity’s management and the
responsibility of the auditor;
(d)   scope paragraph (describing the nature of an audit)
(i)   a reference to the ISAs or relevant national standards or practices;
(ii)   a description of the work the auditor performed;
(e)   opinion paragraph containing
(i)   a reference to the financial reporting framework used to prepare the financial
statements (including identifying the country of origin[2] of the financial
reporting framework when the framework used is not International Accounting
Standards); and
(ii)   an expression of opinion on the financial statements;
(f)    date of the report;
(g)   auditor’s address; and
(h)   auditor’s signature.
A measure of uniformity in the form and content of the auditor’s report
is desirable because it helps to promote the reader’s understanding and
to identify unusual circumstances when they occur.
Basic elements of Auditor’s report
SUMMARY
1. TITLE
2. ADDRESSEE
3. INTRODUCTORY PARAGRAPH
4. SCOPE PARAGRAPH
5. OPINION PARAGRAPH
6. NAME & SIGNATURE & ADDRESS OF AUDIT
FIRM
7. AUDIT REPORT DATE
Title
 6.    The auditor’s report should have an
appropriate title. It may be appropriate to
use the term “Independent Auditor” in the
title to distinguish the auditor’s report from
reports that might be issued by others, such
as by officers of the entity, the board of
directors, or from the reports of other
auditors who may not have to abide by the
same ethical requirements as the
independent auditor.
Addressee
 7.    The auditor’s report should be
appropriately addressed as required by the
circumstances of the engagement and local
regulations. The report is ordinarily
addressed either to the shareholders or the
board of directors of the entity whose
financial statements are being audited.
Example – Title and Addressee
REPORT OF THE AUDITORS TO THE MEMBER OF
XYZ SENDIRIAN BERHAD
(Incorporated in Malaysia)
Opening or Introductory Paragraph
 8.    The auditor’s report should identify the
financial statements of the entity that have been
audited, including the date of and period covered
by the financial statements.
 9.    The report should include a statement that the
financial statements are the responsibility of the
entity’s management[3] and a statement that the
responsibility of the auditor is to express an
opinion on the financial statements based on the
audit.
Scope Paragraph
 12.    The auditor’s report should describe the
scope of the audit by stating that the audit was
conducted in accordance with ISAs or in accordance
with relevant national standards or practices as
appropriate.
 13.    The report should include a statement that
the audit was planned and performed to obtain
reasonable assurance about whether the financial
statements are free of material misstatement.
Scope Paragraph
 14.    The auditor’s report should describe the
audit as including:
(a)   examining, on a test basis, evidence to support the
financial statement amounts and disclosures;
(b)   assessing the accounting principles used in the
preparation of the financial statements;
(c)   assessing the significant estimates made by
management in the preparation of the financial statements;
and
(d)   evaluating the overall financial statement presentation.
Scope Paragraph
 15.    The report should include a statement
by the auditor that the audit provides a
reasonable basis for the opinion.
Opinion Paragraph
 17.    The opinion paragraph of the auditor’s report
should clearly indicate the financial reporting framework
used to prepare the financial statements (including
identifying the country of origin of the financial reporting
framework when the framework used is not International
Accounting Standards) and state the auditor’s opinion as
to whether the financial statements give a true and fair
view (or are presented fairly, in all material respects,) in
accordance with that financial reporting framework and,
where appropriate, whether the financial statements
comply with statutory requirements.
Companies Act requirement to
Auditors’ Report S174(2)(a) & (b)

 In auditors’ opinion
◦ Whether the accounts are properly drawn up
 So as to give a true and fair view of matters required
by S169 (Profit and loss account, balance sheet and
directors’ report) to be dealt with in the accounts
 In accordance with the provisions of the Act so as to
give a true and fair view of the company’s state of
affairs and results of operations
 In accordance to the accounting standards
◦ Whether the accounting and other records and
registers required by the Act have been
properly kept
Date of Report
 23.    The auditor should date the report as
of the completion date of the audit.
 24.    Since the auditor’s responsibility is to
report on the financial statements as
prepared and presented by management,
the auditor should not date the report
earlier than the date on which the financial
statements are signed or approved by
management.
Auditor’s Address
 25.    The report should name a specific
location, which is ordinarily the city where the
auditor maintains the office that has
responsibility for the audit.
Auditor’s Signature
 26.    The report should be signed in the
name of the audit firm, the personal name of
the auditor or both, as appropriate.
Various types of auditor’s opinion
 Overview of auditor’s opinion
Immaterial
Unqualified
Qualified Unqualified
Matters That Do Affect the Matters That Do Not Affect (Unmodified)

Auditor’s Opinion the Auditor’s Opinion

Unqualified
Material Modified
Scope limitation Disagreement
Emphasis of matter

Except For

Material &
Pervasive
Disclaimer Adverse
Unqualified report
 Unqualified report to be expressed when
auditor is satisfied that all material
aspects of the financial statements is
presently fairly in accordance with:-
◦ Accounting standards
◦ Relevant statutory and other requirements
 Standard wordings on
◦ Introductory paragraph
◦ Scope paragraph
◦ Opinion paragraph
 Let us review the following slides…
Matters That Do Not Affect the
Auditor’s Opinion
 30.    In certain circumstances, an auditor’s report may be
modified by adding an emphasis of matter paragraph to
highlight a matter affecting the financial statements which is
included in a note to the financial statements that more
extensively discusses the matter. The addition of such an
emphasis of matter paragraph does not affect the auditor’s
opinion. The paragraph would preferably be included after
the opinion paragraph and would ordinarily refer to the fact
that the auditor’s opinion is not qualified in this respect.
Matters That Do Not Affect the
Auditor’s Opinion
 31.    The auditor should modify the auditor’s
report by adding a paragraph to highlight a
material matter regarding a going concern
problem.
Matters That Do Not Affect the
Auditor’s Opinion
 32.    The auditor should consider modifying the
auditor’s report by adding a paragraph if there is a
significant uncertainty (other than a going concern
problem), the resolution of which is dependent
upon future events and which may affect the
financial statements.
 An uncertainty is a matter whose outcome depends
on future actions or events not under the direct
control of the entity but that may affect the
financial statements. ie litigation
Emphasis of matter – Going Concern
 Without qualifying our opinion, we draw attention to Note X in the
financial statements which indicates that the Company incurred a net
loss of RM xxx during the year ended 31 December 2003 and as of
that date the company’s current liabilities exceeded its total assets
by RM xxx. These conditions, along with other matter set forth in
Note X indicate the existence of a material uncertainty which may
cast significant doubt about the Company’s ability to continue as a
going concern.
Emphasis of matter - Litigation
 Without qualifying our opinion we draw attention to Note X to the
financial statements. The Company is the defendant in a lawsuit
alleging infringement of certain patent rights and claiming royalties
damages. The Company has filed a counter action, and preliminary
hearings and discovery proceedings on both actions are in progress.
The ultimate outcome of the matter cannot presently be determined,
and no provision for any liability that may result has been made in
the financial statements."
Departure from Unqualified Auditors’
Report
 Overview of auditor’s opinion
Immaterial
Unqualified
Qualified Unqualified
Matters That Do Affect the Matters That Do Not Affect (Unmodified)

Auditor’s Opinion the Auditor’s Opinion

Unqualified
Material Modified
Scope limitation Disagreement
Emphasis of matter

Except For

Material &
Pervasive
Disclaimer Adverse
Matters That Do Affect the Auditor’s
Opinion
 40.    Whenever the auditor expresses an
opinion that is other than unqualified, a
clear description of all the substantive
reasons should be included in the report
and, unless impracticable, a quantification
of the possible effect(s) on the financial
statements.
Matters That Do Affect the Auditor’s
Opinion – QUALIFED OPINION
 37.    A qualified opinion should be expressed
when the auditor concludes that an unqualified
opinion cannot be expressed but that the effect of
any disagreement with management, or limitation
on scope is not so material and pervasive as to
require an adverse opinion or a disclaimer of
opinion. A qualified opinion should be expressed
as being ‘except for’ the effects of the matter to
which the qualification relates.
Matters That Do Affect the Auditor’s
Opinion – DISCLAIMER OF OPINION
 38.    A disclaimer of opinion should be
expressed when the possible effect of a
limitation on scope is so material and
pervasive that the auditor has not been able
to obtain sufficient appropriate audit
evidence and accordingly is unable to
express an opinion on the financial
statements.
Matters That Do Affect the Auditor’s
Opinion – ADVERSE OPINION
 39.    An adverse opinion should be
expressed when the effect of a
disagreement is so material and pervasive
to the financial statements that the auditor
concludes that a qualification of the report
is not adequate to disclose the misleading
or incomplete nature of the financial
statements.
Scope limitation
 Not able to get sufficient appropriate audit
evidence on some components of the
accounts
◦ Client limits scope of engagement
 may prevent discovery of material misstatement
◦ Circumstances of the audit
 E.g. auditor could not participate in inventory
counting
Limitation on Scope
 41.    A limitation on the scope of the auditor’s
work may sometimes be imposed by the entity (for
example, when the terms of the engagement
specify that the auditor will not carry out an audit
procedure that the auditor believes is necessary).
 42.    A scope limitation may be imposed by
circumstances (for example, when the timing of the
auditor’s appointment is such that the auditor is
unable to observe the counting of physical
inventories).
Scope limitation
 If auditor could do alternative audit
procedure
◦ Issue a standard unqualified report
◦ Else,
 a qualified except for report (material – overall
accounts still true and fair) or
 disclaimer (material and pervasive)
 ISA 700 – when scope limitation causes
the auditors to consider a disclaimer
necessary, usually auditor will not take
up the engagement
Example : Limitation on Scope—
Qualified Opinion
 We did not observe the counting of the physical inventories as of
December 31, 20X1, since that date was prior to the time we were
initially engaged as auditors for the Company. Owing to the nature
of the Company’s records, we were unable to satisfy ourselves as to
inventory quantities by other audit procedures.
 In our opinion, except for the effects of such adjustments, if any, as
might have been determined to be necessary had we been able to
satisfy ourselves as to physical inventory quantities, the financial
statements give a true and ...
Example : Limitation on Scope—
Disclaimer of Opinion

 We were engaged to audit the accompanying balance sheet of the ABC

Company as of December 31, 20X1, and the related statements of
income and cash flows for the year then ended. These financial
statements are the responsibility of the Company’s management. (Omit
the sentence stating the responsibility of the auditor).
 (The paragraph discussing the scope of the audit would either be
omitted or amended according to the circumstances.)
 (Add a paragraph discussing the scope limitation as follows:)
 We were not able to observe all physical inventories and confirm
accounts receivable due to limitations placed on the scope of our work
by the Company.
 Because of the significance of the matters discussed in the preceding
paragraph, we do not express an opinion on the financial statements.”
Disagreement

 Disagreement
◦ When the accounts are affected by non
compliance with approved accounting standards
and
◦ The views of auditors differ from the views
expressed by management
◦ Auditors may disagree with the accounting
standards selected, the method of applying the
standards & adequacy of disclosure
Disagreement with Management
 45.    The auditor may disagree with
management about matters such as the
acceptability of accounting policies
selected, the method of their application, or
the adequacy of disclosures in the financial
statements. If such disagreements are
material to the financial statements, the
auditor should express a qualified or an
adverse opinion.
Examples: Disagreement on Accounting Policies-
Inappropriate Accounting Method—Qualified Opinion

 We conducted our audit in accordance with ...

 As discussed in Note X to the financial statements, no depreciation has been
provided in the financial statements which practice, in our opinion, is not in
accordance with International Accounting Standards. The provision for the
year ended December 31, 20X1, should be xxx based on the straight-line
method of depreciation using annual rates of 5% for the building and 20% for
the equipment. Accordingly, the fixed assets should be reduced by
accumulated depreciation of xxx and the loss for the year and accumulated
deficit should be increased by xxx and xxx, respectively.
 In our opinion, except for the effect on the financial statements of the matter
referred to in the preceding paragraph, the financial statements give a true
and ...
Example: Disagreement on Accounting Policies
—Inadequate Disclosure—Adverse Opinion
 We conducted our audit in accordance with ...
 (Paragraph(s) discussing the disagreement).
 In our opinion, because of the effects of the matters discussed in the
preceding paragraph(s), the financial statements do not give a true
and fair view of (or do not ‘present fairly’) the financial position of
the Company as of December 20, 19X1, and of the results of its
operations and its cash flows for the year then ended in accordance
with International Accounting Standards
The effects of materiality Example
 Auditor is not able to do certain audit
procedures necessary to determine the fairness
of client’s inventory balance
◦ Inventory represents 10% of total assets
 May be material but not to the extent that the overall
accounts do not represent a true and fair view
 Therefore a QUALIFIED opinion
◦ But inventory represents 50% of total assets
 Effect is highly material
 Therefore a DISCLAIMER is necessary because the
auditors could not do further audit procedure, i.e. a
scope limitation
Materiality Significance in Terms of Type of
Level Reasonable Users’ Decisions Opinion
Users’ decisions are unlikely
Immaterial to be affected. Unqualified

Users’ decisions are likely

Material to be affected. Qualified

Highly Users’ decisions are likely Disclaimer

Material to be significantly affected. or Adverse

Source:- Prentice Hall Business Publishing, Auditing and Assurance Services 9/e,
Arens/Elder/Beasley
Auditor’s Report of a

Holding Company
Standard Unqualified Auditors’ Report
All subsidiaries audited by the holding companies
In our opinion,
a) The financial statements are properly drawn-up in accordance with the
provisions of the Companies Act 1965, and applicable approved
accounting standards in Malaysia so as to give a true and fair view of
(i) the financial position of the Company and of the Group as at
xx/xxx/20xx and the results of its operations and cash flow for
the year ended on that date, and
(ii) the matters required under Section 169 of the Companies Act
1965, to be dealt with in the financial statements; and
b) The accounting and other records and the registers required by the Act
to be kept by the Company have been properly kept in accordance with
the provisions of the Act
 We are satisfied that the financial statements of the subsidiaries that have
been consolidated with the Company’s financial statements are, in form
and content, appropriate and proper for the purposes of the preparation of
the consolidated financial statements and we have received satisfactory
information and explanation required by us for these purposes.
 The auditors’ report on the financial statements of the subsidiaries were
not subject to any qualification and did not include any adverse comment
made under subsection 174(3) of the Companies Act, 1965.
Standard Unqualified Auditors’ Report
Not all subsidiaries are audited by the holding companies
auditors
In our opinion,
a) The financial statements are properly drawn-up in accordance with the
provisions of the Companies Act 1965, and applicable approved
accounting standards in Malaysia so as to give a true and fair view of
(i) the financial position of the Company and of the Group as at
xx/xxx/20xx and the results of its operations and cash flow for the
year ended on that date, and
(ii) the matters required under Section 169 of the Companies Act 1965,
to be dealt with in the financial statements; and
b) The accounting and other records and the registers required by the Act
to be kept by the Company have been properly kept in accordance with
the provisions of the Act
 The names of the subsidiaries audited by other firms are indicated in Note X
to the financial statements.
 We have considered the financial statements and the auditors’ reports of all
these subsidiaries, being financial statements that have been included in the
consolidated financial statements.
 We are satisfied that the financial statements of the subsidiaries that have
been consolidated with the Company’s financial statements are, in form and
content, appropriate and proper for the purposes of the preparation of the
consolidated financial statements and we have received satisfactory
information and explanation required by us for these purposes.
 The auditors’ report on the financial statements of the subsidiaries were not
subject to any qualification and did not include any adverse comment made
under subsection 174(3) of the Companies Act, 1965.
Summary
 Most reports are unqualified
 Qualified reports are issued when there

is a disagreement with management or a

significant uncertainty exists
 The nature of the disagreement

determines the type of qualification.