1. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 1 CHAPTER 13 THE AUDITOR’S REPORTING OBLIGATIONS

2. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 2 THE OBLIGATION TO REPORT Reporting requirements for the auditor arise as a result of: Professional obligations Legislative obligations

3. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 3 PROFESSIONAL REPORTING OBLIGATIONS Arise from membership of professional accounting bodies Require auditor to meet requirements of AUSs and form a conclusion that financial reports have been prepared in accordance with an identified financial reporting framework

4. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 4 LEGISLATIVE REPORTING OBLIGATIONS Are contained in statutes that govern the audit Reporting requirements for Corporations Act 2001 audits are contained in ss 307-313 of the Corporations Act 2001.

5. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 5 WHO THE AUDITOR IS OBLIGED TO REPORT TO The governing body and members Management and the board of directors Australian Securities and Investments Commission (ASIC)

6. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 6 TRUE AND FAIR VIEW AND PRESENTS FAIRLY Differences in terminology for: AUS 702 (ISA 700) — whether financial report presents fairly in accordance with applicable accounting standards and other mandatory professional reporting requirements Corporations Act 2001 audits — whether the accounts are drawn up so as to give a true and fair view

7. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 7 INTERPRETATIONS OF TRUE AND FAIR Technical interpretation Literal interpretation

8. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 8 TECHNICAL INTERPRETATION Financial report will constitute a true and fair view when prepared in accordance with generally accepted accounting principles (GAAP) Thus, where an accounting standard has not been complied with, financial reports will not present a true and fair view

9. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 9 LITERAL INTERPRETATION View presented by financial information is consistent with auditor’s knowledge of the entity Allows for non-compliance with GAAP where compliance would result in view presented by financial report inconsistent with auditor’s knowledge of the entity

10. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 10 STRUCTURE OF AUDIT REPORT Title Addressee Scope paragraph Qualification paragraph, where required Opinion paragraph Emphasis of matter section, where required Auditor’s signature Address Date of audit report

11. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 11 AUDIT OPINION

12. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 12 QUALITATIVE CHARACTERISTICS OF AUDIT REPORT Relevance Reliability Explanatory information is material Timeliness Comparability (standard form reports encouraged) Understandability

13. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 13 TYPES OF AUDIT OPINIONS Unqualified  An unqualified opinion  An unqualified opinion with an emphasis of matter Unmodifie d Modified Qualified  An ‘except for’ opinion  An adverse opinion  An inability to form an opinion Modified

14. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 14 UNQUALIFIED AUDIT OPINION Expressed when auditor is satisfied in all material respects that financial report is presented fairly in accordance with: Applicable accounting standards and UIG Consensus Views; and Relevant statutory and other requirements. Most audit opinions given are unqualified (97% of listed companies in 2001).

15. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 15 ‘EXCEPT FOR’ OPINION Issued when auditor has reservation about a specific matter or matters, but apart from these specific matters the remainder of financial report can be relied upon Communicates that users can rely on majority of financial report but need to adjust financial information for matter(s) highlighted by auditor Major type of qualification in practice

16. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 16 EXAMPLE OF QUALIFIED OPINION PARAGRAPH FOR AN ‘EXCEPT FOR’ OPINION

17. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 17 ADVERSE OPINION Expressed when auditor’s reservations are of such magnitude or are so pervasive that they believe financial report, taken as a whole, is misleading and of little use to users Communicates that no reliance should be placed on financial report Extremely rare in practice

18. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 18 EXAMPLE OF QUALIFICATION AND QUALIFIED OPINION PARAGRAPH FOR ADVERSE OPINION

19. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 19 INABILITY TO FORM AN OPINION Expressed when auditor is unable to obtain adequate evidence to form an opinion on issues, the possible effects of which are material or pervasive to financial report taken as a whole Communicates that the auditor is unsure whether financial report as a whole is reliable Very rare in practice

20. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 20 EXAMPLE OF QUALIFIED AUDIT OPINION PARAGRAPH FOR A STATEMENT OF INABILITY TO FORM AN OPINION

21. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 21 EMPHASIS OF MATTER Included at end of audit report to draw attention to certain matters that are considered relevant but do not affect type of audit opinion issued Is not a qualification, but used to draw reader’s attention to matters (usually contained in a note to the accounts) that are relevant to the reader’s decision- making process

22. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 22 CIRCUMSTANCES GIVING RISE TO EMPHASIS OF MATTER SECTION Additional disclosures with which auditor concurs Inherent uncertainty (including going concern) that is adequately disclosed Material inconsistency between information contained in documents attached to financial report and the financial report Inappropriateness of going concern as a result of new conditions occurring after balance date Notice that financial report is a revised financial report

23. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 23 EMPHASIS OF MATTER PARAGRAPH RELATING TO INHERENT UNCERTAINTIES

24. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 24 CIRCUMSTANCES GIVING RISE TO A QUALIFICATION Disagreement with management regarding financial report (e.g. over applicability of accounting standards or over asset valuations) Conflict between applicable financial reporting frameworks (e.g. very rare in practice, but difference between specific legislative requirements and accounting standards) Limitation on scope of audit (e.g. evidence auditor believes should exist but cannot get access to)

25. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 25 CIRCUMSTANCES THAT RESULT IN A MODIFIED AUDIT REPORT

26. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 26 THE AUDIT OF COMPARATIVE AMOUNTS Auditor should obtain sufficient, appropriate audit evidence that comparative financial information is not materially misstated. For continuing audits, audit procedures are minimal. For new engagements, auditor may consider work of previous auditor or perform extensive procedures.

27. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 27 AUDITOR’S RESPONSIBILITIES FOR OTHER INFORMATION IN AN ANNUAL REPORT Examples of other information include summaries of 5- 10 years operating results, highlights of key figures, financial information in the chairperson’s or directors’ reports. Auditor does not usually have any specific responsibility to substantiate other information included in documents containing audited financial report. Auditor should review such information to ensure it does not contain material inconsistencies or misstatements of fact. If identified, and client doesn’t change, will usually result in an unqualified opinion with an emphasis of matter.

28. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 28 COMMUNICATIONS WITH SHAREHOLDERS Principal means of communication with shareholders is auditor’s opinion on financial report included in the annual report. Secondary means of communication is through attendance at annual general meetings. Shareholders have opportunity at AGM to ask auditor questions relevant to the conduct of the audit.

29. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 29 COMMUNICATIONS WITH EXECUTIVE MANAGEMENT Auditor has a responsibility to report significant matters identified as a result of audit procedures to management on a timely basis. Principal written form of communication between management and auditor is the management letter in which auditor lists the strategy and internal control weaknesses identified and recommendations for improvement.

30. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 30 COMMUNICATING WITH THE AUDIT COMMITTEE OR BOARD OF DIRECTORS Auditor will usually meet with audit committee at or near completion of audit to discuss results of audit. Auditor should ensure that the audit committee or board of directors are aware of contents of management letter. Matters that cannot be satisfactorily resolved with executive management must be discussed with the audit committee or the full board.

31. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 31 COMMUNICATING THROUGH ELECTRONIC PRESENTATION OF FINANCIAL REPORTS Many companies publish their audited financial report on their websites. Auditor must consider whether audit report might be construed as providing assurance of other information on the website that was unaudited. Auditor should review website to ensure audit report cannot be construed as providing assurance of unaudited information.

32. Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia by Gay & Simnett Slides prepared by Roger Simnett 32 POTENTIAL CHANGES TO THE AUDIT REPORT Some audit firms are considering changes to the standard form audit report to improve its communicative effectiveness. Some innovations include:  The audit opinion paragraph at start of report  More detail on procedures undertaken  An independence paragraph Example: PWC 2002 audit report (Exhibit 13.8, pp. 612-613).