Chapter 10 - Reporting

Question 1

Contents and purposes of an unmodified audit report

Answer 1

1. Title
   Should clearly indicate it is the report of an independent auditor.
2. Addressee
   Should be addressed to the intended user of the report which is usually the shareholders or other parties as required by the circumstances of the engagement.
3. Introductory paragraph
   - Identifies the entity whose financial statements have been audited.
   - States the financial statements have been audited.
   - Identifies the title of each of the financial statements.
   - Refers to the accounting policies applied to the financial statements.
   - Specifies the date or period covered by the financial statements.
4. Responsibilities of management
   A description of management responsibility for:
   - The preparation and fair presentation of the financial statements.
   - Designing and implementing an effective internal control system necessary for the preparation and fair presentation of the financial statements.
5. Responsibilities of the auditor
   - Express an opinion on the financial statements.
   - The audit was conducted in accordance with ISA’s.
   - Requirement to comply with ethical standards.
   - The audit was planned and performed to obtain reasonable assurance about where the financial statements are free from material misstatement.
   - Audit involves procedures to obtain evidence about amounts and disclosures in the financial statements.
   - The procedures are based upon auditor judgement including risk assessment and consideration of internal controls.
   - Obtain sufficient, appropriate evidence on which to base the opinion.
6. Auditors opinion
   When expressing an unmodified opinion the auditor (unless otherwise required by relevant laws or regulations) uses one of:
   - “The financial statements present fairly, in all material respects…”.

• “The financial statements show a true and fair view of…”.

6. Other reporting responsibilities
   The auditor may have other reporting responsibilities under local legislation or regulations.
7. Auditor’s signature
   - The report may be signed in the name of the firm, or the personal name of the auditor
   - There may be a requirement to state the auditor’s professional accountancy designation or that the firm is recognised by appropriate licensing authority e.g. ACCA.
8. Date of report
   - Should be dated no earlier than the date on which the auditor has obtained sufficient appropriate evidence upon which to base their opinion.
   - This requires that all the statements and notes/ disclosure that comprise the financial statements are finalised and those with responsibility for preparation of the financial statements have acknowledged their role.
   - This means the auditor should sign their report after the directors have approved the financial statements.
9. Auditor’s address
   The audit report should name a specific location, normally where the auditor maintains the office that has responsibility for the audit.

Question 2

Forming an opinion

Answer 2

1. Unmodified.
   The FS show a true and fair view. (ISA700).
2. 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.
3. 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.

Question 3

Modified report with unmodified opinion

Answer 3

Auditor’s are required to make additional communications in the audit report even though the financial statements show a true and fair view. Issues requiring communication include:

1. Matters already communicated in the financial statements that are of fundamental importance to users understanding of the financial statements through the use of an Emphasis of Matter paragraph.
2. Any other matters relevant to the users understanding of the audit, the auditor’s responsibility and the auditor’s report through the use of an Other matters paragraph.

Question 4

The emphasis of matter paragraph

Answer 4

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 emphasise the disclosure.

When adequate disclosure has not been the opinion will need to be modified and an emphasis of matter paragraph should not be used.

Question 5

Other matter paragraphs

Answer 5

If the auditor’s consider it necessary to communicate to the users regarding matters that are not presented or disclosed in the financial statements, that in the auditor’s judgment are relevant to understanding the audit, the auditor’s responsibilities or the audit report, the auditor includes an Other Matter paragraph in the audit report.

Question 6

Modified report with modified opinion

Answer 6

The auditor may decide to modify the opinion when they conclude that:

1. Based on the evidence financial statements as a whole are not free from material misstatement.
2. They have been unable to gather sufficient appropriate evidence to be able to conclude that the financial statements as a whole are free from material misstatement.

There are 3 categories of modified opinions:

1. Qualified opinions
2. Adverse opinion
3. Disclaimer of opinion

The modification depends on whether the auditor considers the matter to be material and if so whether it is persuasive to the financial statements.

The term persuasive is defined as those effects that in the auditor’s judgement:

• Are not confined to specific elements, accounts or items of the financial statements.
• If confined, represent or could represent a substantial proportion of the financial statements
• In relation to disclosures, are fundamental to users understanding of the financial statements.

Question 7

Basis for modified opinion

Answer 7

When the auditor decides to modify the opinion, a basis for modified opinion must be included in the report.

1. The paragraph will be included above the opinion paragraph.
2. The paragraph will explain the reason why the opinion is modified.
3. If possible, a quantification of the financial effect of the modification will be included.

The following illustrates the impact on the audit opinion and audit report:

Financial statements are materially misstated:-

1. Material but not persuasive
   - Qualified opinion
   - Except for…
   - Basis for qualified opinion paragraph
2. Material and persuasive
   - Adverse opinion
   - FS do not give a true and fair view
   - Basis for adverse opinion

Inability to obtain sufficient appropriate evidence

1. Material but not persuasive
   - Qualified opinion
   - Except for…
   - Basis for qualified opinion paragraph
2. Material and persuasive
   - Disclaimer of opinion
   - Do not express an opinion
   - Basis for disclaimer of opinion

Question 8

Reprinting to those charged with governance

Answer 8

The main forms of communication are the engagement letter and the management letter.

The objectives are:

1. To communicate the responsibilities of the auditor and an overview of the scope and timing of the audit.
2. To obtain from those charged with governance information relevant to the audit.
3. To provide timely observations arising from the audit, significant of those charged its governance.
4. To promote effective communication between the auditor and those charged with governance.

Audit matters of governance interest include:

• Auditor independence
• Effects of significant accounting policies and changes to them
• Potential financial effect of risks/ uncertainties
• Material audit adjustments
• Disagreements with management concerning the financial statements.
• Significant difficulties encountered during the audit
• Expected modifications to the audit report
• Significant internal control deficiencies including fraud.

Question 9

Timing of communications

Answer 9

1. Planning
   - Practical matters concerning forthcoming audit.
   - Independence of auditor.
   - Expected fees
   - Nature and scope of audit work
   - Ensure letter of engagement is up to date.
2. During the audit
   If any situation occurs and it would not be appropriate to delay communication until the audit is concluded.
3. Conclusion of audit
   - Major findings from audit work
   - Uncorrected misstatements
   - Qualitative aspects of accounting policies
   - Final draft of the written representation
   - Expected modifications to audit report
   - Significant internal control deficiencies