Chapter 12– Audit Reports

and Communication Rick Hayes, Hans

Gortemaker and
Philip Wallage
 1. Introduction
Let’s start with the first set of slides
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 “ Many people view audit report as a legal
formality, lacking in substance. This is a paradox
because the audit report, altough comprising
only a few words, require great care and is the
consummation of a rigorous and lengthy audit
process.

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 1. Management responsibility for audit report – SOX

□ SOX Requires that the principal executive officer or officers and

the principal financial officer or officers, certify in each report
filed with the SEC the following:
 the signing officer has reviewed the report;
 the report does not contain any untrue statement of a material fact or
omit to state a material fact;
 the financial statements, and other financial information, fairly present in
all material respects the financial condition of the company;
 the signing officers:
• are responsible for establishing and maintaining internal controls;
• have evaluated the effectiveness of the company’s internal controls;
• have presented in the report their conclusions about the effectiveness of their
internal controls based on their evaluation.

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 1. Management responsibility for audit report – SOX

□ SOX Requires that the principal executive officer or officers and

the principal financial officer or officers, certify in each report
filed with the SEC the following:
 the signing officers have disclosed to the company’s auditors
and the audit committee of the board of directors:
• all significant deficiencies in the design or operation of internal
controls which could adversely affect the company’s ability to
record, process, summarise and report financial data and have
identified for the company’s auditors any material weaknesses in
internal controls;
• any fraud, whether or not material, that involves management or
other employees who have a significant role in the company’s
internal controls.

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 1. Management responsibility for audit report – SOX

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2. Basic Element of the Auditor’s
Report
Let’s start with the first set of slides
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 2. Old style audit report (3 paragraph)

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Sample Wording – Auditor’s Unqualified Report17
 2. ISA 700 auditors opinion on F/S

Audit report component:

1. Title: ‘Independent Auditor’s Report’
2. [Appropriate Addressee]
3. Introductory Paragraph (Report on Financial Statements)
4. Management’s Responsibility for the Financial Statements
5. Auditor’s Responsibility
6. Opinion
• (optional) Report on Other Legal and Regulatory Requirements
[Form and content of this section of the auditor’s report will vary depending on the
nature of the auditor’s other reporting responsibilities.]
7. [Auditor’s signature]
8. [Date of the auditor’s report]
9. [Auditor’s address]

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 2. Included in the audit report

• A title, e.g. ‘Independent Auditor’s Report’

• An addressee, as required by the circumstances of the
engagement,
e.g. ‘Shareholders of ABC company’
• An introductory paragraph that identifies
the financial statements audited.

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 2. ISA 700 sample financial statement audit report

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, 20X1, 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 policies and other
explanatory information.

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 2. The audit report management responsibility and auditor
responsibility

• A description of the responsibility of management 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, that includes:
• A reference to International Standards on Auditing and
the law or regulation
• A description of an audit in accordance with those
standards.

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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 we have obtained is sufficient and appropriate to
provide a basis for our audit opinion.
 2. Included in the audit report opinion and signatures

 An opinion paragraph containing an expression

of opinion on the financial statements and a reference to the
applicable financial reporting framework used to prepare the
financial statements (including identifying the jurisdiction of
origin of the financial reporting framework that is not
International Financial Reporting Standards or International
Public Sector Accounting Standards.
 The auditor’s signature.
 The date of the auditor’s report.
 The auditor’s address.

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Opinion
In our opinion, the financial statements present fairly, in
all material respects, (or give a true and fair view of) the financial position of
ABC Company as at December 31, 20X1, 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 auditor’s report
will vary depending on the nature of the auditor’s other reporting
responsibilities.]
[Auditor’s signature]
[Date of the auditor’s report]
[Auditor’s address]
 2. The report must be dated

The auditor shall date the report no earlier than the date on which
the auditor has obtained sufficient appropriate audit evidence on
which to base the auditor’s opinion on the financial statements
including evidence that:
(a)all the statements that comprise the financial statements,
including the related notes, have been prepared; and
(b)those with recognised authority have asserted that they have
taken responsibility for those financial statements.

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The opinion expressed in the auditor’s report may be
one of four types:

Unmodified or
(unqualified),
Three Modified Opinions:
qualified,
Q U A D
adverse or
disclaimer of
opinion
 2. Unqualified audit opinion – also called unmodified opinion

□ Unmodified (unqualified) opinion – The opinion expressed by

the auditor when the auditor concludes that the financial
statements are prepared, in all material respects, in accordance
with the applicable financial reporting framework.
□ Most common type of audit report.
□ Called ‘clean opinion’.
□ Used for more than 90 per cent of all audit reports.
□ Other audit reports are referred to as ‘modified opinion
(adverse opinion, disclaimer of opinion and qualified opinion).

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 2. Unqualified audit opinion – also called unmodified opinion

□ Unmodified (unqualified) opinion – The opinion expressed by

the auditor when the auditor concludes that the financial
statements are prepared, in all material respects, in accordance
with the applicable financial reporting framework.
□ Most common type of audit report.
□ Called ‘clean opinion’.
□ Used for more than 90 per cent of all audit reports.
□ Other audit reports are referred to as ‘modified opinion
(adverse opinion, disclaimer of opinion and qualified opinion).

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 2. Evaluation of the compliance to the reporting framework
include consideration of these qualitative aspects

• Whether the financial statements adequately disclose the significant

accounting policies selected and they are consistent and appropriate.
• Accounting estimates made by management are reasonable.
• Information presented in the financial statements is relevant, reliable,
comparable and understandable.
• Disclosures to enable the intended users to understand the effect of
material transactions and events on the information conveyed in the
financial statements.
• Terminology used in the financial statements, including the title
of each financial statement, is appropriate.
• Whether the financial statements achieve fair presentation. If they are
prepared in accordance with a fair presentation framework.
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 2. Auditor’s qualified opinion

The auditor will express a qualified opinion when:

• having obtained sufficient appropriate audit evidence, he concludes that
misstatements, individually or in the aggregate, are material, but not
pervasive, to the financial statements; or
• the auditor is unable to obtain sufficient appropriate audit evidence on
which to base the opinion, but the auditor concludes that the possible
effects on the financial statements of undetected misstatements,
if any, could be material but not pervasive.

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 2. Auditor’s adverse opinion (ISA 705)

The auditor shall express an adverse opinion when the auditor,

having obtained sufficient appropriate audit evidence, concludes
that misstatements, individually or in the aggregate, are both
material and pervasive to the financial statements.

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 2. Auditor’s disclaimer of opinion (ISA 705)

The auditor shall disclaim an opinion 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.

or interaction of multiple
uncertainties on F/S

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 2. Basis for modification paragraph

When the auditor modifies the opinion on the financial statements,

the auditor shall, in addition to the specific elements required by ISA
700, include a paragraph in the auditor’s report that provides a
description of the matter giving rise to the modification. The auditor
shall place this paragraph immediately before the opinion paragraph
in the auditor’s report and use the heading ‘Basis for Qualified
Opinion’, ‘Basis for Adverse Opinion’ or ‘Basis for Disclaimer of
Opinion’, as appropriate.

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3. Emphasis of a Matter Paragraph
Let’s start with the first set of slides
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 3. Emphasis of Matter Paragraph

When the auditor includes an Emphasis of Matter paragraph in the

auditor’s report, the auditor shall:
a. include it immediately after the Opinion paragraph
in the auditor’s report;
b. use the heading ‘Emphasis of Matter’;
c. include in the paragraph a clear reference to the matter being
emphasised and to where relevant disclosures that fully describe
the matter can be found in the financial statements;
d. indicate that the auditor’s opinion is not modified
in respect of the matter emphasised.

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 3. Emphasis of Matter Paragraph

An auditor might write an emphasis of a matter paragraph:

□ If there is a significant uncertainty which may affect the financial
statements, the resolution of which is dependent upon future
events.
□ Examples of items that might be emphasised include:
• the existence of related party transactions;
• important accounting matters occurring subsequent to the balance
sheet date;
• matters affecting the comparability of financial statements with those of
previous years (e.g. change in accounting methods);
• litigation, long-term contracts, recoverability of asset values, losses on
discontinued operations.
□ To highlight a material matter regarding a going concern problem.

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 3. The going concern disclosure
ISA 570

The going concern disclosure should:

□ describe the principal conditions that raise doubt;
□ state that there are doubts about going concern; therefore the
entity may be unable to realise its assets and discharge its
liabilities in the normal course of business;
□ state that the financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or to amounts and classification of liabilities that may
be necessary should the entity be unable to continue as a going
concern.

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4. Circumstances that may result
in other than an unmodified
opinion
Let’s start with the first set of slides
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 4. Circumstances that may result in other than an unmodified
opinion

1. A limitation in scope
2. The auditor’s judgement about the pervasiveness
of the effects or possible effects of the matter
on the financial statements.
The circumstances described in 1 – scope limitation – could lead to a
modified opinion
or a disclaimer of opinion. The circumstances
described in 2 – disagreement with
management – could lead to a modified opinion
or an adverse opinion.

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 4. Limitation on scope

□ Scope limitations arise when the auditors are unable for

any reason to obtain the information and explanations
considered necessary for the audit
■ limited by the inability to carry out a procedure the
auditors consider necessary
■ the absence of proper accounting records
□ The audit report should describe the limitation.

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 4. Disagreement with Management

Modification of opinion results from disagreement with

management on:
□ the acceptability of the accounting policies selected;
□ the method of policy application, including the adequacy
of valuations and disclosures in the financial statements;
or
□ the compliance of the financial statements with relevant
regulations and statutory requirements.

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5. Uncertainties leading to
qualification of opinions
Let’s start with the first set of slides
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 5. Uncertainties leading to qualification of opinions

Certain uncertainties may lead to an auditor’s report

containing a qualification of opinion in many countries.
These uncertainties include:
• material uncertainties;
• lack of consistency;
• independence of auditor;
• reports in reference to an expert;
• fraud.

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 5. Materiality, lack of consistency, independence

□ If the amounts of a misstatement in the financial statements are

so significant that the financial statements are materially affected
as a whole, it is necessary to issue either a qualified or an adverse
opinion.
□ Lack of consistency in the application of accounting principles in
the current period in relation to the preceding period may require
a modification to an unmodified opinion based on standards in
many countries.
□ ISA auditing standards do not require a modified opinion or a
disclaimer of opinion if the auditor is not independent, although
this is the case in several countries (including US).

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 5. Reports involving other auditors and experts

ISA 620 suggests that when expressing an unmodified

(unqualified) opinion the auditor should not refer to the
work of an expert in her report as such a reference might be
misunderstood to be a qualification of the auditor’s opinion
or a division of responsibility. If the auditor, as a result of the
other auditor’s or expert’s work, issues an opinion other than
unmodified, he may in some circumstances describe the work
of the expert.

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 5. Auditor communications to governance entity

Audit matters of governance interest to be communicated by the

auditor to the board or audit committee ordinarily include:

• Material weaknesses in internal control

• Non-compliance with laws and regulations
• Fraud involving management
• Questions regarding management integrity
• The general approach and overall scope of the audit
• The selection of, or changes in, significant accounting policies and
practices that have a material effect on the financial statements.

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 5. Communications of deficiencies in internal control

The auditor must communicate to management in writing

significant deficiencies in internal control that are of sufficient
importance to merit management’s attention. The communication
should include:
 A description of the deficiencies and an explanation of their
potential effects
 Sufficient information to enable those charged with
governance and management to understand the context of the
communication.

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 5. Governance structures

□ The structures of governance vary from country to country

reflecting cultural and legal backgrounds.
□ In some countries, the supervision function, and the
management function are legally separated into different
bodies, such as a supervisory (wholly or mainly non-executive)
board and a management (executive) board.
□ In other countries, such as the US, both functions are the legal
responsibility of a single, unitary board.

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 5. Reporting fraud and error

□ When the auditor encounters circumstances

that may indicate that there is a material misstatement in the
financial statements resulting from fraud or error, the auditor
should perform procedures to determine whether the financial
statements are materially misstated.
□ The auditor’s duty of confidentiality would ordinarily preclude
reporting fraud or error to a third party. However, in certain
circumstances, statute or law overrides this duty.

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🍔 Any questions?

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