ACCA P7 (INT) Advanced Audit & Assurance - Study Text - 2010 (Emile Woolf Publishing)
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Chapter 14: Reporting
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The auditor’s report is addressed to the owners of the company, not to other users
of the financial statements. In the context of auditor liability, some of the larger
auditing practices now include an additional paragraph in the audit report, after the
opinion paragraph, disclaiming any liability that may arise from the use of the
report by persons other than those to whom it is addressed.
Electronic reporting
Many companies now publish their annual reports on their websites. This method
of ‘electronic reporting’ has implications for the auditor. It is considered good
practice for the auditor to check that the electronic form of the financial statements
and auditor’s report are identical to the paper copy.
1.2 The meaning of a ‘true and fair view’
In most countries, auditors performing an audit in accordance with statutory
requirements are required to produce a report that makes reference to whether the
financial statements give ‘a true and fair view’. In some countries, the audit report is
required to give an opinion whether the financial statements ‘present fairly, in all
material respects’. The terms ‘true and fair view’ and ‘fair presentation’ have an
equivalent meaning.
The meaning of the term ‘a true and fair view’ has not been rigorously defined,
either by law or by the auditing profession. Many legal authorities and writers on
auditing have developed their own definitions of the term. The main points to note
are as follows:
Assessing whether financial information is true and fair is more an art than a
science. The assessment relies heavily on the judgement of the auditor.
It is appropriate to think of ‘true and fair’ as a combined phrase. Do not try to
define ‘true’ and ‘fair’ as separate concepts.
True and fair will normally imply:
− compliance with any relevant legislation and accounting standards
− the use of accurate figures or best possible estimates
− meaningful presentation and disclosure of information
− the avoidance of bias, distortion, and manipulation of figures,
− no concealment of material information.
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The unmodified audit report: ISA 700
Definition of an unmodified audit report
Reaching the audit opinion
Basic elements of the audit report
Audit report prescribed by law or regulation
Audits conducted in accordance with both ISAs and local auditing standards
Unaudited supplementary information presented with the audited financial
statements
IAPS 1014 Reporting by auditors on compliance with International Financial
Reporting Standards
2 The unmodified audit report: ISAs 700
2.1 Definition of an unmodified audit report
An unmodified audit report is an audit report containing an audit opinion not
modified in any way by a ‘qualified’ opinion, and containing no other
modifications or additional paragraphs such as might be added by an ‘emphasis of
matter’ paragraph. These are discussed in a later section.
An unmodified opinion should be expressed when the auditor concludes that the
financial statements:
have been prepared in accordance with the identified financial reporting
framework, including the requirements of applicable law, and
give a true and fair view.
An unmodified opinion provides a high level of assurance that a professional,
independent examination of the financial statements has not revealed any actual or
possible material misstatements in those financial statements.
The general format of the report is regulated by the revised ISA 700 Forming an
opinion and reporting on financial statements However, the precise wording of an audit
report may be varied at the discretion of the auditor.
Unlike the original ISA 700, the revised ISA 700 does not deal with modifications to
audit reports. Modified reports are the subject of ISA 705 Modifications to the opinion
in the independent auditor’s report and by ISA 706 Emphasis of matter paragraphs and
other matter paragraphs in the independent auditor’s report. Both of these ISAs are
described later.
2.2 Reaching the audit opinion
In reaching his audit opinion, the auditor is required to evaluate whether:
he has obtained sufficient appropriate audit evidence as to whether the
financials statements are free from material misstatement
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uncorrected misstatements are material, individually or in aggregate
the financial statements give a true and fair view
the financial statements have been prepared in accordance with the relevant
financial reporting framework
and, in particular, whether
the financial statements adequately describe the relevant financial reporting
framework
the financial statements adequately disclose the entity’s significant accounting
policies
the significant accounting policies are appropriate and consistent with the
relevant financial reporting framework
accounting estimates are reasonable
the information in the financial statements is relevant, reliable, comparable and
understandable
the financial statements provide adequate disclosures
the terminology used in the financial statements is appropriate.
2.3 Basic elements of the audit report
The basic elements of an unmodified auditor’s report, as given in ISA 700, are as
follows:
1 Title
2 Addressee
3 Introductory paragraph
4 Statement of management’s responsibility for the financial statements
5 Auditor’s responsibility
6 Auditor’s opinion
7 Other reporting responsibilities (possibly)
8 Auditor’s signature
9 Date of the audit report
10 Auditor’s address.
These elements are designed to achieve the objectives of ISA 700, which are for the
auditor to:
form an opinion on the financial statements, based on the conclusions drawn
from his audit evidence, and
express that opinion clearly through a written report that also describes the basis
for that opinion.
In addition, an unmodified report may include an ‘emphasis of matter’ paragraph
or an ‘other matters’ paragraph’. These are covered by ISA 706 and are explained
later.
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Title
The auditor’s report should have a title that clearly indicates that it is the report of
an independent auditor. This is to distinguish this type of auditor’s report from
other reports that might be issued by other auditors (who may not have to abide by
the same ethical requirements and requirement for independence as the
independent auditor - for example, internal auditors).
Addressee
The report should be appropriately addressed, as required by national law and the
circumstances of the engagement. The report is usually addressed to either:
the shareholders of the entity whose financial statements are being audited, or
the board of directors of the entity.
Introductory paragraph
The introductory paragraph in the report should:
identify the entity whose financial statements have been audited
state that the financial statements have been audited
identify the title of each statement that makes up the complete set of financial
statements (income statement/statement of comprehensive income, statement of
financial position, and so on)
refer to the summary of significant accounting polices and other explanatory
information
specify the date or period covered by each statement.
Management’s responsibility for the financial statements
This section of the report should describe the responsibilities of those responsible
for the preparation and presentation of the financial statements. It should include an
explanation that management is responsible for:
the preparation of the financial statements in accordance with the applicable
financial reporting framework, and
for such internal controls as deemed necessary to enable the preparation of
financial statements which are free from material misstatement.
Auditor’s responsibility
This section of the report states that:
the responsibility of the auditor is to express an opinion on the financial
statements based on his audit
the audit was conducted in accordance with ISAs, explaining that those
standards require the auditor to:
- comply with ethical requirements, and
- plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free from material misstatement.
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The latter gives the reader of the report assurance that the audit has been carried out
in accordance with established standards and practices.
This section also describes the ‘scope of the audit’ It refers to the auditor’s ability to
perform the audit procedures which he deemed necessary in the circumstances.
Any restriction on the scope of the audit can lead to a ‘modified’ audit report (which
is explained later).
This section also therefore describes an audit by stating that:
an audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the financial statements
the procedures selected depend on the auditor’s judgment, including his
assessment of the risks of material misstatement of the financial statements. As
part of this assessment, the auditor considers relevant internal controls. He does
not consider internal controls for the purpose of expressing an opinion on their
effectiveness
an audit also includes evaluating the appropriateness of the accounting policies
used, the reasonableness of accounting estimates made by management, and the
presentation of the overall financial statements
This part of the (unmodified) report should end with a statement that the auditor
believes that the audit evidence he has obtained is sufficient and appropriate to
provide a basis for his opinion.
Auditor’s opinion
When the financial statements have been prepared in accordance with a “fair
presentation” framework an unmodified opinion should be expressed when the
auditor concludes that the financial statements give a true and fair view or are
presented fairly, in all material respects, in accordance with the applicable financial
reporting framework.
When the financial statements have been prepared in accordance with a
“compliance” framework an unmodified opinion should be expressed when the
auditor concludes that the financial statements have been prepared, in all material
respects, in accordance with the applicable financial reporting framework.
This can lead to a two-fold opinion. For example, in the UK, an opinion will be
expressed on whether the financial statements:
give a true and fair view (UK accounting standards) or present fairly (IFRSs),
and
have been properly prepared in accordance with the Companies Act 2006.
Where IFRSs are not used as the financial reporting framework, the reference to the
financial reporting framework in the wording of the opinion should identify the
jurisdiction of the financial reporting framework.
Further guidance on this point is given by IAPS 1014. This point is dealt with in
more detail later.
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Other reporting responsibilities
In some countries, the auditor may have additional reporting responsibilities. For
example, he may be required by local legislation to report certain matters if they
come to his attention during the course of the audit, or he may be required to report
on specific matters such as the adequacy of accounting records.
Such other reporting responsibilities should be addressed in a separate section of
the report, following the opinion paragraph, sub-titled “Report on Other Legal and
Regulatory Requirements”.
Auditor’s signature
The report should be signed:
in the name of the audit firm, or
in the personal name of the auditor, or
both.
The report is usually signed in the name of the firm because the firm assumes
responsibility for the audit. However, in the UK, the report has to be signed by the
‘senior statutory auditor’ (the engagement partner) for and on behalf of the firm.
Date of the auditor’s report
The report should be dated no earlier than the date on which the auditor has
obtained sufficient appropriate evidence on which to base his opinion on the
financial statements.
This will not be earlier than the date on which the financial statements are signed or
approved by the directors/management of the client company.
The date of the report informs the reader that the auditor has considered the effect
on the financial statements (and on his audit report) of subsequent events which
occurred after the reporting period and up to that date.
Auditor’s address
The report should give a specific location for the auditor. This will usually be the
city where the office responsible for the audit is located.
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Example
An example of an unmodified audit report is set out below.
INDEPENDENT AUDITOR’S REPORT
(Appropriate addressee)
Report on the financial statements
We have audited the accompanying financial statements of ABC Company, which
comprise the statement of financial position as at December 31
st
, 20X7, and the
statement of comprehensive income, statement of changes in equity, and statement of
cash flows for the year then ended, and a summary of significant accounting polices
and other explanatory information.
Management’s responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these financial
statements in accordance with International Financial Reporting Standards, and for
such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether
due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these financial statements based on our
audit. We conducted our audit in accordance with International Standards on
Auditing. Those standards require that we comply with ethical requirements and
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts
and disclosures in the financial statements. The procedures selected depend on the
auditor’s judgement, including the assessment of the risks of material misstatement of
the financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s preparation
and fair presentation of the financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of
accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements.
We believe that the audit evidence that we have obtained is sufficient and appropriate
to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements give a true and fair view (or present fairly, in
all material respects,) of the financial position of ABC Company as of December 31,
Year 7, and of its financial performance and its cash flows for the year then ended in
accordance with International Financial Reporting Standards.
Report on other legal and regulatory requirements
(Form and content of this section of the report will vary depending on the nature of
the auditor’s other reporting responsibilities.)
(Auditor’s signature)
(Date of the report)
(Auditor’s address)
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2.4 Audit report prescibed by law or regulation
If the auditor is required by law or regulation (eg a national auditing standard) to
use a specific layout or wording of the audit report, rather than the wording in ISA
700, then the audit report may only refer to ISAs if it includes, as a minimum, the
following elements:
Title
Addressee
An introductory paragraph identifying the financial statements audited
A description of management’s responsibility for the preparation of the financial
statements
A description of the auditor’s responsibility to express an opinion on the
financial statements and the scope of the audit: this should include a reference to
ISAs and local auditing standards and a description of an audit in accordance
with those standards
An opinion paragraph containing an expression of opinion on the financial
statements, and a reference to the applicable financial reporting framework used
Auditor’s signature
Date of the report
Auditor’s address.
These headings correspond with those specified by ISA 700 as headings to be
included in an unmodified audit report.
2.5 Audits conducted in accordance with both ISAs and local auditing
standards
An auditor may be required to conduct an audit in accordance with particular
national auditing standards (e.g. in the UK, with ISAs (UK and Ireland)) but in
doing so may have also complied with “pure” ISAs. This will be the case in the UK,
where, ISAs (UK and Ireland) are based on the “pure” ISAs.
In this case the audit report may refer to ISAs in addition to the national auditing
standards but only where:
there is no conflict between the national auditing standards and ISAs which
would have led the auditor to form a different opinion or not to include an
emphasis of matter paragraph (see later) that would have been required by ISAs,
and
if the report follows the wording of national auditing standards, it includes, as a
minimum, the elements as specified above.
When the report refers to both national auditing standards and ISAs it should
clearly identify the jurisdiction of origin of the national standards.
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2.6 Unaudited supplementary information presented with the audited
financial statements
The report and accounts issued by a company often contain supplementary
information that is not covered by the auditor’s opinion, such as a chairman’s
statement, employment report or business review.
The auditor should be satisfied that any unaudited supplementary information that
is presented together with the audited financial statements is clearly differentiated
from the audited financial statements. This is because unaudited items are not
covered by the auditor’s opinion.
If the auditor concludes that the unaudited information is not clearly differentiated,
then he should ask management to change how that information is presented. If
management refuse to do so then the auditor should explain in his report that the
supplementary information has not been audited.
The auditor’s responsibilities in respect of unaudited supplementary information
are covered by ISA 720 (which is described later).
2.7 IAPS 1014: Reporting by auditors on compliance with International
Financial Reporting Standards
ISA 700 requires that the audit report should clearly indicate the financial reporting
framework that has been used to prepare the financial statements (for example,
International Financial Reporting Standards). IAPS 1014 was issued to provide
guidance on this area.
Financial statements might comply:
exclusively with International Financial Reporting Standards, or
with International Financial Reporting Standards and a national financial
reporting framework, or
exclusively with a national financial reporting framework, but with disclosure of
the extent of compliance with International Financial Reporting Standards.
An unmodified opinion can only be given where the relevant framework(s) have
been complied with. A company that complies with IFRSs should disclose the extent
of the compliance with International Financial Reporting Standards, in a note to the
financial statements.
The auditor will therefore need to consider the accuracy of this note in the same way
as he would consider the accuracy of any other notes to the financial statements. If
he disagrees with the note he will need to modify his audit report.
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The modified audit report: ISAs 705 and 706
The nature of a modified audit report
Emphasis of matter paragraphs and other matter paragraphs: ISA 706
Emphasis of matter paragraphs
Other matter paragraphs
The modified opinion: ISA 705
Form and content of a modified opinion
Examples of modified opinions
Deciding to give a modified opinion
Audit reports and the exam
3 The modified audit report: ISAs 705 and 706
3.1 The nature of a modified audit report
Before issuing a modified report, the auditor should discuss with management the
reason for the modification. The reason should be explained and the auditor should
ask the client entity’s management to amend the financial statements.
If management make the necessary adjustments, the auditor will not need to
issue a modified report.
If management refuse to make the amendments, a modified report may be the
only course of action available to the auditor.
An audit report is said to be modified where either:
a matter arises which does not affect the opinion given by the auditor, but
which gives rise to an ‘emphasis of matter paragraph’ or an ‘other matter
paragraph’ in the audit report (covered by ISA 706)
a matter arises which does affect the opinion issued on the financial statements.
This will give rise to a qualified opinion, a disclaimer of opinion or an adverse
opinion (covered by ISA 705).
A modified audit report can therefore either have an unmodified audit opinion or a
modified audit opinion.
3.2 Emphasis of matter paragraphs and other matter paragraphs: ISA 706
As discussed above, an audit report may be modified to include an ‘emphasis of
matter’ paragraph and/or an ‘other matter’ paragraph. These types of paragraph
are the subject of ISA 706 Emphasis of matter paragraphs and other matter paragraphs in
the independent auditor’s report.