AC312 Week 7 4Auditor’s Report 4Truth and Fairness

THE REPORT “The signing of the audit report is generally regarded as the culmination and completion of the audit process as it is through the report that the auditor gives his or her opinion on the financial statements. The report is effectively the means by which auditors communicate satisfaction or dissatisfaction with the accounts to shareholders” Gray & Manson p.457

UK REGULATIONS Auditing Standard SAS 600 “Auditors’ Reports on Financial Statements” issued in May 1993 governs the form and content of such reports

LOCATION SAS recommends that the audit report be placed before the financial statements

CONTENTS Addressee Scope Responsibilities Basis Opinion Signature Date

UNQUALIFIED REPORT 1a. THE ADDRESSEE A report of an audit of a company is addressed to the ‘members’ of the company (the shareholders) The Report may be of interest to other financial statement users, but the auditor does not owe them a statutory duty When entities such as charities or trade unions are being audited, the report will be addressed to people other than shareholders

1b. SCOPE PARAGRAPH Annual (and other) reports usually contain much information/statements which are not audited. The auditors’ report should therefore identify the information which has been audited (and by implication that which is not) Auditors must check that the information in the Directors’ report is consistent with the financial statements

2. RESPONSIBILITIES SECTION Specifies the directors’ and the auditors’ responsibilities Directors’: To keep proper accounting records, safeguard the assets of the entity, take appropriate action to detect fraud, chose suitable accounting policies and to prepare true and fair financial statements Auditors’: To form an opinion on the financial statements

STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RELATION TO FINANCIAL STATEMENTS Almost always the complete directors’ responsibility statement will be located outside the report - but mention will be made in it. SAS recommends that a statement of directors’ responsibilities be placed immediately before the audit report. In part the idea of specifying auditors’ and directors’ responsibilities has been an attempt to reduce the so-called “expectations gap”

3. BASIS OF OPINION How the opinion was formed, including: The standards relied on (next slide) That evidence was derived on a test basis That the significant estimates and judgments made by the directors were assessed Whether the accounting policies were appropriate and consistently applied

In the UK the standards for companies are the APB’s Auditing Standards, but for certain entities other standards must be used (e.g. Code of Audit Practice for Local Authorities and the National Health Service in England & Wales) Many other countries will have their own standards - or will have adopted or will accept those of IASC

UNCERTAINTY An additional paragraph at the end of the ‘Basis of Opinion’ section should be included if: There is a fundamental uncertainty and/or There are other important matters relevant to a proper understanding of the basis of their opinion (e.g. an unusual accounting policy or significant post balance sheet event)

DEFINITION An uncertainty is fundamental “when the magnitude of its potential impact is so great that, without clear disclosure of the nature and implications of the uncertainty, the view given in the financial statements would be seriously misleading” (SAS 600(13)) Example: uncertainty about ‘going concern’s; outcome of major litigation

4. OPINION Note it is not an assertion, a guarantee, but an opinion. The UK criteria (for company audits) are (a) whether the financial statements have been “properly prepared” in accordance with company law, and (ii) whether they give a “true and fair”

TYPES OF OPINION nUNQUALIFIED YES + Explanatory paragraph nQUALIFIED YES - Except for... CAN’T SAY - unable to form an opinion NO - Adverse Opinion

5. Auditors’ Signature

6. Date Î The name and qualifications of the auditors eg PricewaterhouseCoopers Chartered Accountants and Registered Auditors Ï Date of the auditors’ report The date is the date on which the auditors signed their report - this must be after the directors have approved the accounts

CLASS TASKS Consider under what circumstances an auditor might give/be obliged to give a qualified audit report and what form do such qualifications take? (See pp incl. Gray & Manson). Gray and Manson Self Assessment Questions 14.1 and 14.2