Auditing & Investigations II Reporting and Audit Reports

The auditors report on financial statements Key issues The auditors report on financial statements Issues to be considered in forming opinion Types of opinions Elements of an auditors opinion

1. Introduction At the end of the audit process, the auditors is required to issue an audit report. Requirement is through legal and professional requirements The report is expected to be presented to members at an AGM.

Continued Key statutory requirements focus on: Whether, in the auditor’s opinion, the financial statements give a true and fair view of the financial position and state of affairs of the company. Whether the financial statements have been prepared in accordance with the accounting and disclosure requirements of the relevant regulatory framework adopted in the country.

Key points The auditor is required to produce an auditor's report at the end of the audit which sets out their opinion on the truth and fairness of the financial statements. The report should indicate that the audit was carried out according to recognised standards (ISA).

2. Key Audit Standards ISA700 – Forming an opinion and reporting on financial statements ISA720 - Other information in documents containing audited financial statements ISA800 – Special Considerations – Audit of Financial Statements Prepared in accordance with Special Purpose Frameworks

3. ISA700 ISA 700 Forming an opinion and reporting on financial statements provides guidance on the form and content of the auditor's report. It states that the auditor shall form an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

Key issues to be considered in forming an opinion Sufficient appropriate audit evidence has been obtained (ISA 330) Uncorrected misstatements are material (ISA 450) Adequate disclosure on significant accounting policies selected and applied Accounting policies selected and applied are consistently accounting estimates made by management are reasonable

Continued.. Information in the financial statements is relevant, reliable, comparable and understandable The financial statements provide adequate disclosures Terminology used in the financial statements is appropriate The overall presentation, structure and content of the financial statements The financial statements adequately refer to or describe the applicable financial reporting framework

Type of Opinions Unmodified Opinion Report - is 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. Modified Opinion report- is the opinion that the financial statements as a whole are not free from material misstatement or cannot obtain sufficient appropriate audit evidence to contradict this conclusion.

Continued… ISA 700 states that the auditor shall express an unmodified opinion when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. ISA 705 Modifications to the opinion in the independent auditor's report requires that the auditor to modify an opinion where there is evidence that the financial statements have not prepared in all material aspects meeting requirements on an applicable reporting framework.

Basic Elements of an Auditors Report Explanation Title The auditor's report must have a title that clearly indicates that it is the report of the independent auditor. Addressee The addressee determined by law or regulation, e.g. to be the shareholders or those charged with governance. Introductory paragraph This shall identify the entity being audited, state that the financial statements have been audited, identify the title of each statement that comprises the financial statements being audited,

Management's responsibility Element Explanation Management's responsibility This part of the report describes the responsibilities of those who are responsible for the preparation of the financial statements and internal controls Auditor's responsibility The report shall include a section entitled 'Auditor's responsibility'. The report must state that the auditor is responsible for expressing an opinion on the financial statements based on the audit.

Continued Opinion paragraph If the auditor expresses an unmodified opinion on financial statements prepared in accordance with a fair presentation framework, the opinion shall use one of the following equivalent phrases:  The financial statements present fairly, in all material respects, …in accordance with [the applicable financial reporting framework]; or  The financial statements give a true and fair view of … in accordance with [the applicable financial reporting framework]. Continued

Continued… Other reporting responsibilities Elements Explanation Other reporting responsibilities If the auditor is required by law to report on any other matters, this must be done in an additional paragraph below the opinion paragraph which is titled 'Report on other legal and regulatory requirements' or otherwise as appropriate. Auditor's signature The report must contain the auditor's signature, whether this is the auditor's own name or the audit firm's name or both. Date of the report Date report signed. Auditor's address The location where the auditor practises must be included.

Modified Opinion Types of modified opinion: A qualified opinion An adverse opinion A disclaimer of opinion

Qualified Opinion Situation for a qualified opinion: The auditor concludes that the financial statements as a whole are not free from material misstatements. The auditor cannot obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.

Qualified Reports Decision Second Decision Merely Material So Material First Decision Disagreement “Except for” …financial statement are seriously misleading. Adverse Limitation of Scope … We are unable to make form an opinion. Disclaimer

Adverse Opinion An adverse opinion is expressed when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements are both material and pervasive to the financial statements, or, seriously misleading. “... in our opinion the financial statements do not give a true and fair view”. For Example Misstatement in one area – no depreciation being provided for a plant

Disclaimers of Opinion An opinion must be disclaimed when the auditor cannot obtain sufficient appropriate audit evidence on which to base the opinion and concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive. The opinion must also be disclaimed in situations involving multiple uncertainties. “Because of the possible effect of the limitation in evidence available to us, we are unable to form an opinion ...”. For Example Going concern - management is unwilling to make or extend its assessment.

Term Pervasiveness is a term used to describe the effects or possible effects of misstatements or undetected misstatements on financial statements A pervasive issue is one that affects the view given on the financial statements as a whole. In the case of disagreements, it is one that renders the financial statements seriously misleading.

Going Concern Auditors are required to report on going concern in their report. Where there is a significant level of concern, but the auditors do not disagree with preparation of financial statements on the going concern basis, they should include an explanatory paragraph (in basis of opinion) headed “Going concern”.

Auditors Responsibility on Going Concern To make enquiries of directors and examine information. To plan and perform audit procedures to identify matters. To determine and document their concerns. To consider disclosure required to give a true and fair view.

Reporting on Going Concern Reporting Text ‘Without qualifying our opinion, we draw attention to note 1 of the financial statements concerning the uncertainty as to the continuation and renewal of the company’s bank overdraft facility. The ultimate outcome of the matter cannot presently be determined’ Unqualified Opinion

ISA 720 - Other information in documents containing audited financial statements Auditors must ensure that if they associate themselves with published information, it is credible or else the credibility of the audit report may be undermined. They also often have a statutory duty that relates to the need to be satisfied that the directors’ report is consistent with the financial statements.

ISA800 – Special Considerations This standards is used in the Audit of Financial Statements Prepared in accordance with Special Purpose Frameworks. Typical cases where this standards is used is in the NGO sector, Churches and specialized or unique sectors. It is for the purpose of reporting to special user groups of the financial statements. The standards tend to be used in agreed upon procedures.

Other additional Reporting standards ISA805 - SPECIAL CONSIDERATIONS— AUDITS OF SINGLE FINANCIAL STATEMENTS AND SPECIFIC ELEMENTS, ACCOUNTS OR ITEMS OF A FINANCIAL STATEMENT (This ISA deals with special considerations in the application of those ISAs to an audit of a single financial statement or of a specific element, account or item of a financial statement). ISA810 - Engagements to Report on Summary Financial Statements. (covers guidance on audit of summary financial information)

Communicating with those charged with Governance on key matters of audit. ISA 705 states that when the auditor expects to express a modified opinion, the auditor must communicate with those charged with governance the circumstances leading to the expected modification and the proposed wording of the modification in the auditor's report.

Opinions Examples Long Audit report

Thank you for your attention End Thank you for your attention

End End of course outline and lectures. Moving into Tutorials