Audit I - Chapter 6, Audit Report T.pptx

Audit Reports
 It is the final step in the entire audit process, and the
end product of an audit of a business entity.
– It contains auditors’ opinion about the fairness of the
client’s financial statements;
 statement of profit or loss and other comprehensive
income,
 Statement of financial position,
 Statement of Changes in Equity
 Statement of Cash Flows &
 Notes to the financial statements.

Audit Reports….
– Audit reports are means through which the
rigorous and lengthy audit process is compiled and
auditors’ findings are formally communicated to
users who rely on auditors’ report for various
decisions
– It is worded briefly and uniformly to save users
from looking to details which may be difficult for
them to understand
– The auditor is likely held to be responsible if an
incorrect audit report is issued.

Content of an auditor’s report
Content of unmodified audit report
1. Title
2. Addressee
3. Auditor's Opinion
4. Basis for Opinion
5. Key Audit Matters
6.Other Information

Content of unmodified audit report
7. Responsibilities of Management and Those Charged
with Governance for the Financial Statements
8. Auditor's Responsibilities for the Audit of the
Financial Statements
9. Report on Other Legal and Regulatory Requirements
10.Signature
11. Auditor's address
12. Date

Content of unmodified audit report….
1. The title
– The title ‘Independent Auditors’ Report.’ - This title clearly
identifies the report as ‘Independent Auditors’ Report.’ it means,
that no one has any doubt about what this document is.
2. Addressee
– The address identifies the intended user of the report and
shows to whom the auditor owes a duty of care.
 It is addressed to the members (i.e. shareholders) of the
company.
3. Auditor's Opinion
- Provides the auditor's conclusion as to whether the financial
statements give a true and fair view.

Content of unmodified audit report…
4. Basis for Opinion
Provides a description of the professional standards applied
during the audit to provide confidence to users that the
report can be relied upon.
5. Key Audit Matters
To draw attention to any other significant matters of which
the users should be aware, to aid their understanding of the
entity. (Note: This section is only compulsory for listed
entities.)

5. Other Information
To clarify that management are responsible for the other
information such as the Chair's statement. The auditor's
opinion does not cover the other information and the
auditor's responsibility is only to read the other information
and report in accordance with ISA 720

6. Responsibilities of Management and Those Charged
with Governance for the Financial Statements
This section states that the FSs are the responsibility of
management.
– This responsibility includes:
 Selecting the appropriate accounting principle and
 Maintaining internal control over financial reporting
sufficient for preparation of financial statements that
are free of material misstatements due to fraud or
error.

7.Auditor's Responsibilities for the Audit of the Financial
Statements
 To clarify that the auditor is responsible for expressing
reasonable assurance as to whether the financial
statements give a true and fair view and express that
opinion in the auditor's report.
 This section also describes the auditor's responsibilities
in respect of risk assessment, internal controls, going
concern and accounting policies. Included to help minimize
the expectation gap. .

8. Report on Other Legal and Regulatory Requirements

To highlight any additional reporting responsibilities, if
applicable.

This may include responsibilities in some jurisdictions to
report on the adequacy of accounting records, internal
controls over financial reporting, or other information
published with the financial statements
9. Signature
1. Identifies the audit firm responsible for the auditor’s
report and opinion.

•
10.Auditor's address

Identifies the specific office of the engagement partner
responsible for the report in case of any queries.
11. Date

- To identify the date up to which the audit work has been
performed.

Any information that comes to light after this date will not
have been considered by the auditor when forming their
opinion.
•
-The report must be signed and dated after the date the
directors approved the financial statements.
•
- Often, the financial statements are approved and the

Forming an opinion
 Based on the audit evidence accumulated,
the auditor issues the follow audit opinion in
his / her report:
1. Unmodified opinion/Unqualified
2. Unmodified opinion with additional
communication
3. Modified opinion:
a. Qualified opinion or
b. Adverse opinion
4.Disclaimer of opinion

1. Unmodified opinion
 When the auditor concludes that the financial
statements are prepared, in all material respects,
in accordance with the applicable financial
reporting framework, they issue an unmodified
opinion in the auditor's report. [ISA 700, 16]
This will mean:
-The financial statements adequately disclose
the significant accounting policies.
-The accounting policies selected are
consistently applied and appropriate.

Cont..….
- The formation is relevant, reliable, comparable and
understandable.
- The financial statements provide adequate disclosures
to enable the users to understand the effects of material
transactions and events.
Other Information section
Other information refers to financial or non-financial
information, other than the financial statements and
auditor's report thereon, included in the entity's annual
report. [ISA 720, 12c

Examples of other information include:
 Chair's report /Audit committee report
 Operating and financial review
 Social and environmental reports
 Corporate governance statements

1. Unmodified opinion….
 Identifies the other information obtained by the auditor prior to
the date of the auditor's report.
 States that the auditor has not audited the other information and
accordingly does not express an opinion or conclusion on that
information.
 Includes a description of the auditor’s responsibilities with respect to
the other information.
• States either that the auditor has nothing to report or provides a
description of the material misstatement if applicable

1. Unmodified opinion….
Key Audit Matters section
 ISA 701 Communicating Key Audit Matters in the Independent
Auditor's Report requires auditors of listed companies to determine
key audit matters and to communicate those matters in the auditor's
report. [ISA 701, 5]
• Key audit matters- are those that in the auditor's professional judgment
were of most significance in the audit and are selected from matters
communicated to those charged with governance. [ISA 701, 8]
• i.e those matters that required significant auditor attention in
performing the audit. Ex.
• (=Areas of higher assessed risk of material misstatement, or significant risks identified
• (=Significant auditor judgments relating to areas in the financial statements that involved
significant management judgment, including accounting estimates that have been
identified as having high estimation uncertainty)
• (=The effect on the audit of significant events or transactions that occurred during the
period)

1. Unmodified opinion…
Key audit matters include:
 Areas of higher assessed risk of material misstatement, or
significant risks identified in accordance with ISA 315.
Identifying and Assessing the Risks of Material Misstatement
through Understanding the Entity and Its Environment.
• Significant auditor judgments relating to areas in the financial
statements that involved significant management judgment,
including accounting estimates that have been identified as
having high estimation uncertainty.
• The effect on the audit of significant events or transactions that
occurred during the period

2. Unmodified opinion with additional communication
Additional communications-
• In certain circumstances auditors are required to make additional
communications in the auditor's report even though the financial
statements show a true and fair view.
 Issues requiring communication include:
a. Material Uncertainty Related to Going Concern (ISA 570 Going
Concern)
b. Emphasis of Matter paragraph (ISA 706 Emphasis of Matter
Paragraphs and Other Matter Paragraphs in an Auditor's Report)
c. Other Matter paragraph (ISA 706)
 It is important to note that these do not impact the wording of the
opinion and do not constitute either a qualified, adverse or
disclaimer of opinion.

• Critical Audit Matters
• Determination of Critical Audit Matters
• .11 The auditor must determine whether there are any critical audit
matters in the audit of the current period's financial statements. A
critical audit matter is any matter arising from the audit of the financial
statements that was communicated or required to be communicated to
the audit committee and that: (1) relates to accounts or disclosures
that are material to the financial statements and (2) involved especially
challenging, subjective, or complex auditor judgment. Critical audit
matters are not a substitute for the auditor's departure from an
unqualified opinion (i.e., a qualified opinion, adverse opinion, or
disclaimer of opinion on the financial statements as described in AS
3105).

3. Modified opinion
 The auditors may decide they need to modify the opinion when they
conclude that:
i. Based upon the evidence obtained the financial statements as a
whole are not free from material misstatement.
ii. This is where the client has not complied with the applicable
financial reporting framework.
iii. They have been unable to obtain sufficient appropriate evidence to
be able to conclude that the financial statements as a whole are free
from material misstatement.
 The nature of the modification depends upon whether the auditor
considers the matter to be material but not pervasive, or material
and pervasive, to the financial statements

a. Qualified opinion/things not right but small in scale
Material but not pervasive
If the misstatement or lack of sufficient appropriate evidence
is material but not pervasive, a qualified opinion will be
issued. [ISA 705, 7]
 This means the matter is material to the area of the financial
statements affected but does not affect the remainder of the
financial statements.
'Except for' this matter, the financial statements give a true and
fair view.

b. Adverse opinion/Mgt disagreement –large in scale
Material and pervasive
A matter is considered 'pervasive‘- if, in the auditor's
judgment:
 The effects are not confined to specific elements,
accounts or items of the financial statements
 If so confined, represent or could represent a substantial
proportion of the financial statements,

b. Adverse opinion …..
• An adverse opinion is issued when a misstatement is
considered material and pervasive.
 This will mean the financial statements do not give a true and
fair view.
Examples include:
 Preparation of the financial statements on the wrong basis.
Non-consolidation of a material subsidiary.
 Material misstatement of a balance which represents a
substantial proportion of the assets or profits
(e.g. that would change a profit to a loss)

4. Disclaimer of opinion/scope limitation
 A disclaimer of opinion is issued when the auditor has not obtained
sufficient appropriate evidence/scope - and the effects of any
possible misstatements could be pervasive. [ISA 705, 9]
 The auditor does not express an opinion on the financial
statements in this situation.
Examples include:
 Failure by the client to keep adequate accounting records.
 Refusal by the directors to provide written representation.
 Failure to observe existence of inventory
 Failure by the client to provide evidence over a single balance which
represents a substantial proportion of the assets or profits or over
multiple balances in the financial statements.

• So, after the performance of audit procedures, if
the auditors conclude that they could not get
sufficient and appropriate audit evidence, they
issue a disclaimer of opinion.
• On the other hand, if the auditors conclude a
material misstatement in the financial statement,
an adverse opinion is issued.

End of chapter six
and
The semester too

End of Chapter 6
Questions
Audit I YA AAUSC 2022

• Opinion is categorized in to two;
Unqualified Modified
• big tick-telling the true, fair -Opposite of unqualified
• =not true, no enough information
• =Qualified –things not right, but small in problem or small
in saceleor issu
- if disagreement with mgt
-relatively self-contained/not pervasive
=Adverse- If things not quite right at largest scale severely
-If disagreement with mgt- big or alots of it
=Disclaimer
-if scope limitation and quite large
=Adverse and Disclaimer are same thing for different options
• Two reasons why Auditors give Modified opinion:

Audit I - Chapter 6, Audit Report T.pptx

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