Audit Report Components and Types

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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
Principles of Auditing: An Introduction to
International Standards on Auditing
Chapter 12 – Audit Reports and
Communication
Rick Hayes, Hans Gortemaker
and Philip Wallage

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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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Management responsibility for audit
report under SOX (Continued)
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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Old style audit report (3 paragraph)
Sample Wording – Auditor’s Unqualified Report17

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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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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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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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• 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.
The audit report management responsibility
and auditor responsibility

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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.

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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.

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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]

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 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.
Included in the audit report opinion
and signatures

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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
(unqualified),
Three Modified Opinions:
qualified,
adverse or
disclaimer of
opinion
Q U A D

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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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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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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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Audit Qualified Opinion – due to non GAAP

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Audit Qualified Opinion – due to scope
restriction

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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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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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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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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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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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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.
ISA 570

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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.
Circumstances that may result in other
than an unmodified opinion

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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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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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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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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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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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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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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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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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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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Long-form audit report
• In many countries it is customary for the auditor
to prepare a ‘long-form’ report to the Audit
Committee of an entity’s board of directors in
addition to the publicly published ‘short-form’
report discussed in this chapter.
• A long-form report ordinarily includes:
• Overview of the Audit Engagement
• Analysis of Financial Statements
• Risk Management and Internal Control
• Optional Topics
• Auditor independence and quality control
• Fees.

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Management letter
The management letter identifies issues not
required to be disclosed in the Annual Financial
Report but represent the auditors concerns
and suggestions noted during the audit.
An evaluation is made of the present system,
pointing out problem areas. Recommendations
for improvement are cited. Also included is a
discussion of any problem which may require
immediate action to correct.

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Thank you for your attention
Any Questions?

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