15
AUDITOR’S REPORT
Learning Outcomes
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
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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:
(a) 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
(b) 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:
(a) The responsibilities of the auditor and the
management of the entity;
(b) The scope of the audit; and
(c) 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:
(a) Conflict of Interest - might exist between the management and
shareholders.
(b) Consequence - financial reports should contain relevant and reliable
information.
(c) Complexity - since accounting is getting more complicated, there is a
greater risk of misinterpretation and unintentional error.
(d) 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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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.)
(a) 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
(b) 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.
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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:
(a) Limitation of audit scope - occur when the auditor is unable
to obtain all of the evidence considered necessary for the
purpose of the audit.
(b) 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:
(a) The auditor concludes that, based on the audit
evidence obtained, the financial statements as a
whole are not free from material misstatement; or
(b) 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.)
(a) An uncertainty relating to the future outcome of
exceptional litigation or regulatory action;
(b) 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
(c) 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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