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AUDITOR’S REPORT

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After studying this chapter, you should be able to:

Explain the process of preparing an audit report
Prepare an audit report appropriate for various audit opinions
Communicate with the client’s management on key findings

Learning Outcomes

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Introduction

An audit report is a written opinion of an auditor regarding an organization’s financial statements.
The report is written in a standard format, as mandated by the Companies Act 2016 and International Standards on Auditing (ISA).

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Introduction (cont.)

ISA 700 (Revised) – Forming an Opinion and Reporting on Financial Statements deals with the auditor’s responsibility to form an opinion on the financial statements, as well as the form and content of the auditor’s report issued as a result of the audit.
Audit opinion can be categorized into:

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Introduction (cont.)

(a) An unqualified opinion, if the financial statements are a fair representation of an entity’s financial position;

(b) A qualified opinion, if there are any scope limitations that were imposed upon the auditor’s work;

(c) An adverse opinion, if the financial statements were materially misstated; and

(d) A disclaimer of opinion, which can be triggered by several situations. For example, the auditor may not be independent, or if there is a going concern issue with the auditee.

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Objectives and Format of an Audit Report

The objectives of an audit report is to communicate auditors’ findings to the users of the financial statements, and to express an opinion on the truth and fairness of the financial statements.
In order to form that opinion, auditors must conclude as to whether they have obtained reasonable assurance that the financial statements are free from material misstatement, either due to fraud or error.

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Objectives and Format of an Audit Report (cont.)

Preparation of true and fair financial statements has been expressly recognized as one of the responsibilities of management (ISA 250 – Considerations of Laws and Regulations in an Audit of Financial Statements).
Auditors must also expressly state in their audit report whether the financial statements presents a true and fair view of the financial performance and position of the entity

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Objectives and Format of an Audit Report (cont.)

Figure 15.1

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Objectives and Format of an Audit Report (cont.)

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Objectives and Format of an Audit Report (cont.)

The term fair presentation framework as stated in ISA 700 refers to a financial reporting framework that requires compliance with the requirements of the framework, and:
Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may be necessary for management to provide disclosures beyond those specifically required by the framework; or
Acknowledges explicitly that it may be necessary for management to depart from a requirement of the framework to achieve fair presentation of the financial statements. Such departures are expected to be necessary only in extremely rare circumstances.

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Objectives and Format of an Audit Report (cont.)

The typical audit report contains three paragraphs, which cover the following topics:
The responsibilities of the auditor and the management of the entity;
The scope of the audit; and
The auditor’s opinion of the entity’s financial statements.

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�The Need for an Audit Report

Relevance and reliability are the primary qualities that make audited financial statements useful for decision-making purposes.
The need for independent audits of financial reports can be divided into:
Conflict of Interest - might exist between the management and shareholders.
Consequence - financial reports should contain relevant and reliable information.
Complexity - since accounting is getting more complicated, there is a greater risk of misinterpretation and unintentional error.
Remoteness - prevents users from directly assessing the quality of the report.

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�Unqualified Report

According to ISA 700, an unqualified or 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 identified financial reporting framework.

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�Unqualified Report (cont.)

Figure 15.2

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Unqualified Report (cont.)

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�Content in an audit report

According to ISA 700, audit report should include:

A title
An addressee
An introductory paragraph that identifies the FS audited
A description of the responsibility of management
A description of the auditor’s responsibility
An opinion paragraph
Auditor’s signature
Date of the auditor’s report
Auditor’s address

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Types of Qualified Report

According to ISA 705 – Modifications to the Opinion in the Independent Auditor’s Report, there are three types of modified opinions, namely, a qualified opinion, an adverse opinion, and a disclaimer of opinion.
The decision regarding which type of modified opinion is appropriate depends upon:

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Types of Qualified Report (cont.)

The nature of the matter giving rise to the modification; that is, whether the financial statements are materially misstated or, in the case of an inability to obtain sufficient appropriate audit evidence, may be materially misstated; and
The auditor’s judgment about the pervasiveness of the effects or possible effects of the matter on the financial statements.

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Types of Qualified Report (cont.)

If the auditor concludes that the issue of an unqualified report is not appropriate, there are three other types of audit reports:

(a) Qualified audit report

An auditor expresses a qualified audit report when there is a limitation on the scope of the auditor’s examination, or a disagreement with material consequences, but not pervasive to the financial statement. Auditor believes that the overall FS are fairly presented. Modified by the words ‘except for’.

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Types of Qualified Report (cont.)

(b) Disclaimer audit report

A disclaimer audit report is issued when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.

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Types of Qualified Report (cont.)

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Types of Qualified Report (cont.)

(c) Adverse audit report

An adverse opinion is expressed when the effect of disagreement is material and pervasive to the financial statement. The auditor believes the overall financial statements are so materially misstated or misleading that they do not present fairly in accordance with the approved accounting standards.

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Circumstances That Lead to the Issuance of a Qualified Report

Under certain circumstances, it is not appropriate for auditors to issue an unqualified audit report. In such cases, they are allowed to modify their opinion. There are two basic circumstances that give rise to audit qualifications:
Limitation of audit scope - occur when the auditor is unable to obtain all of the evidence considered necessary for the purpose of the audit.
Disagreement - Disagreement arises when the auditor disagrees with the accounting treatment in the financial statements.

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�Circumstances That Lead to the Issuance of a Qualified Report (cont.)

In addition, ISA 700 highlights that auditors shall modify the opinion in the auditor’s report when:
The auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement; or
The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.

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�Disclaimer of Responsibility

In financial accounting, an auditor’s opinion is the published outcome of an auditor’s review of a company’s or organization’s financial statements.
The auditor may issue a disclaimer of opinion when the auditor cannot express an opinion on the financial statements.

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Disclaimer of Responsibility (cont.)

This is due to the inability of the auditor to obtain sufficient evidence in order to form an opinion on the financial statements, also referred to as limitation of scope.
The inability to form an opinion should be expressed only after the auditor has exhausted all reasonable means of obtaining sufficient evidence.

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Communicating Key Audit Matters in the Independent Auditor’s Report

Communicating key audit matters helps provide additional information to users of the financial statements to assist them in understanding those matters that, in the auditor’s professional judgement, were of most significance in the audit of the financial statements of the current period.
The communication of key audit matters in the auditor’s report may also provide users of the financial statements with a basis to further engage with management and those charged with governance about certain matters relating to the entity and the audited financial statements.

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Communicating Key Audit Matters in the Independent Auditor’s Report (cont.)

ISA 706 – Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report defines the following paragraphs:

(a) Emphasis of matter: A paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgement, is of such importance that it is fundamental to users’ understanding of the financial statements.

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Communicating Key Audit Matters in the Independent Auditor’s Report (cont.)

(b) Other matter: A paragraph included in the auditor’s report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s judgement, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.

Circumstances in which the auditor would issue a modified unqualified report that includes an emphasis of matter paragraph are:

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Communicating Key Audit Matters in the Independent Auditor’s Report (cont.)

An uncertainty relating to the future outcome of exceptional litigation or regulatory action;
Early application (where permitted) of a new accounting standard (for example, a new International Financial Reporting Standard) that has a pervasive effect on the financial statements in advance of its effective date; and
A major catastrophe, or continues to have, a significant effect on the entity’s financial position.

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Communicating Key Audit Matters in the Independent Auditor’s Report (cont.)

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�Conclusion

An auditor’s report provides an opinion on the true and fair view of a company’s financial statements.
This report provides an overview of the evaluation on the validity and reliability of the financial statements.
The goal of an auditor’s report is to document reasonable assurance that the financial statements are free from error or any misstatement.

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