1. Topic 9: Reporting obligations
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2. Topic learning outcomes
Understand the nature and significance of the auditor’s reporting obligations
Demonstrate an understanding of the circumstances that result in the issuance of a qualified opinion or emphasis of matter and the types of qualified opinions available for use
Explain the key concepts, structures and qualitative characteristics of the audit report
Understand the auditor’s responsibility for comparative information and other information contained in the annual report
9.1
9.2
9.3
9.4
9.5
Communicating with other parties 1
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3. 9.1
Obligations to report
The Corporations Act 2001, s 307, requires the auditor to form an opinion as to:
Whether the financial report is in accordance with the Act, including:
(i) s296 (or 304) that it complies with accounting standards; and
(ii) s297 (or 305) that it presents a true and fair view. 2
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4. Who must an auditor report to?
9.1
Who must an auditor report to?
Usually either the governing body and members (shareholders)
In addition to the audit report, auditors have reporting responsibilities to:
Management and the board of directors on anything prejudicial to the interests of shareholders (e.g. fraudulent activity, negligent conduct etc).
ASIC where there are reasonable grounds to suspect a contravention of the provision of the Corporations Act, that will not be adequately dealt with by comment in the audit report or by notifying directors. 3
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5. Changes to the audit report
9.2
Changes to the audit report
IAASB wanted to enhance the auditor’s report because:
there was (is) an ‘information gap’ between what users believe is needed to make informed investment and fiduciary decisions, and what is available to them through the entity’s audited financial report or other publicly available information.
other than communicating the auditor’s overall conclusion, the content of the auditor’s report was (is) not viewed as useful or informative.
Identified issues.
The communication value of the auditor’s report could be improved if changes were made to the structure and wording of the auditor’s report.
There is richer information available about the entity and its financial report that is available to the auditor but is not being communicated to the user. 4
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6. 9.2
The information gap 5
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7. The enhanced auditor’s report
9.2
The enhanced auditor’s report
The changes that were implemented are:
changing the location of the auditor’s opinion in the financial report to the beginning of the report, to give it greater emphasis
the auditor providing additional information about the entity and the financial report (key audit matters)
expanding the auditor’s responsibilities when considering other information.
Compare Exhibit 12.1 and 12.2
A number of options for enhancing auditor reporting and narrowing the information gap were considered. 6
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8. The enhanced auditor’s report
9.2
The enhanced auditor’s report
Other changes:
improved description of the responsibilities of management and those charged with governance for the financial report and of the auditor’s responsibilities for the audit of the financial report
increased reporting on both management’s and the auditor’s responsibility with regard to going concern
clarifying the relationship between:
Emphasis of Matter paragraphs and Other Matter paragraphs; and
the Key Audit Matters section of the auditor’s report
allowing for standardised materials such as components of the description of the responsibilities of the auditor and key aspects of the audit to be relocated to a website or appendix. 7
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9. Key Matters ASA 701 (new standard)
This section of the auditor’s report covers:
some of the key areas/matters that auditor thought were most significant to the audit; and
how they were addressed those matters to arrive at their opinion 8

10. 9.2 9 NEW Title (Independent Auditor’s Report)
OLD
Title (Independent Auditor’s Report)
Same
Addressee (Governance and the shareholders/members)
Header: Report on the Financial Report
Introduction
No longer applicable
Auditor’s opinion clearly stating if it is Qualified, Adverse or a Disclaimer in the title
Director’s responsibility
Same but relocated
Basis for the opinion even if unqualified opinion - now also includes independence statement
Auditor’s responsibility
Basis for an unqualified opinion is now provided.
Emphasis of Matter
Independence statement
Key Audit Matters (ASA 701)
Reason for a modification of opinion (if necessary)
New
Other information (ASA720) (often in disclaimer form)
Auditor’s opinion - clearly states the modification
Other Matter
Emphasis of Matter and/or Other Matter paragraph (if necessary)
Responsibility of the Directors (or management)
Other reporting responsibilities (using a clear header)* – report on Remuneration Report & opinion
Auditor's responsibility
Signature of the Auditor
Other reporting responsibilities (using a clear header)* – e.g. report on Remuneration Report followed by the opinion
Date of the auditor’s report
Auditor’s address 9
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11. Westpac 2016 Annual Statement
9.2
Westpac 2016 Annual Statement 10

12. ‘True and fair’ v ‘presents fairly’
9.2
‘True and fair’ v ‘presents fairly’
Differences in terminology between:
ASA
whether financial report gives a true and fair view or presents fairly in accordance with applicable accounting standards and other mandatory professional reporting requirements
Corporations Act 2001 audits (s297)
whether the accounts are drawn up so as to give a true and fair view. Therefore true and fair terminology must be used for audits undertaken in accordance with the Corporations Act 2001.
might mean additional disclosures in notes to the accounts 11
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13. Types of audit opinions
9.3
Types of audit opinions
ASA/ISA 700 covers the auditor’s responsibility to form an opinion on the financial report, and the form and content of unmodified auditor’s reports.
ASA/ISA 705 covers the types of modified opinions that can be issued, these are:
Qualified opinion (e.g. lack of evidence, disagreement with management);
Disclaimer of opinion (where there is serious lack of evidence); or
Adverse opinion (disagreement with management that makes the financial report inherently useless/false) 12
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14. Additional paragraphs
9.3
Additional paragraphs
In addition to the opinion itself there may be situations where it is necessary to draw users’ attention to an issue through the use of an:
Emphasis of Matter paragraph, or
Other Matter paragraph
ASA/ISA 706 covers those situations. 13
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15. Unmodified auditor’s report
9.3
Unmodified auditor’s report
This type of report is expressed when the auditor is satisfied in all material respects that the financial report:
Has been prepared in accordance with the Corporations Act 2001, including giving a true and fair view and complying with Australian accounting standards and with the Corporations Regulations 2001; and
Complies with IFRSs.
This form of opinion gives rise to the unmodified or unqualified opinion paragraph.
The unmodified report was previously known as unqualified opinion 14
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16. Example an unqualified opinion
9.3
Example an unqualified opinion 15
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17. Example an unqualified opinion
9.3
Example an unqualified opinion
Source: Appendix to ASA 700 16
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18. Modified reports: Qualified opinion
9.3
Modified reports: Qualified opinion
A qualified opinion is expressed when the auditor concludes:
That misstatements are material but not pervasive to the financial report; or
When the auditor is unable to obtain sufficient appropriate evidence on which to base the opinion but concludes that the possible effects on the financial report could be material but not pervasive (ASA/ISA 705.7)
The most common types of qualified opinions issued relate to material departures from a specific accounting standard or material disagreements over the carrying value of a specific asset or liability and its potential effect on profit.
The auditor should take all reasonable steps to overcome the issues giving rise to the material misstatement (disagreements with management) or the issues causing the auditor to be unable to obtain sufficient appropriate evidence (limitations on scope). 17
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19. Example of a qualification
9.3
Example of a qualification
Qualified Opinion
We have audited the financial report of ABC Company Ltd. (the Company), which comprises the statement of financial position as at 30 June 20X1, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, and the directors’ declaration.
In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion section of our report, the accompanying financial report of ABC Company Ltd., is in accordance with the Corporations Act 2001, including:
(a) giving a true and fair view of the company’s financial position as at 30 June 20X1 and of its financial performance for the year then ended; and
(b) complying with Australian Accounting Standards and the Corporations Regulations 2001. 18
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20. Example of a qualification
9.3
Example of a qualification
Basis for Qualified Opinion
The Company’s inventories are carried in the statement of financial position at $xxx. The directors have not stated the inventories at the lower of cost and net realisable value but have stated them solely at cost, which constitutes a departure from Australian Accounting Standards. The Company’s records indicate that, had the directors stated the inventories at the lower of cost and net realisable value, an amount of $xxx would have been required to write the inventories down to their net realisable value. Accordingly, cost of sales would have been increased by $xxx, and income tax, net income and shareholders’ equity would have been reduced by $xxx, $xxx and $xxx, respectively.
We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Company in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code.
We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of ABC Company Ltd., would be in the same terms if given to the directors as at the time of this auditor’s report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion.
Source: Appendix to ASA 705 19
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21. 9.3
Adverse opinion
Should be expressed when the effect of the misstatements, individually or in the aggregate, are so material and pervasive that the financial report taken as a whole is, in the auditor’s opinion, misleading or of little use to the addressee of the auditor’s report (ASA/ISA 705.8)
Most common situation in which they are issued is where the accounts are prepared on a going concern basis and the auditor concludes that it is highly improbable that the entity will continue as a going concern (ASA/ISA 570 Appendix 1). 20
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22. Example of adverse opinion
9.3
Example of adverse opinion 21
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23. Example of adverse opinion
9.3
Example of adverse opinion 22
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24. 9.3
Disclaimer of opinion
Also referred to as an inability to form an opinion
Expressed when the auditor is unable to obtain sufficient appropriate evidence to form an opinion, and concludes that the possible effect of undetected misstatements on the financial report could be both material and pervasive (ASA/ISA 705.9–10).
In issuing a disclaimer of opinion the auditor is communicating that there has been such a limitation on the evidence gathering procedures that they are unsure whether the financial report is reliable. 23
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25. Example of disclaimer of opinion
9.3
Example of disclaimer of opinion
Note there is no reference to ‘true and fair view’, the standards or the Corporations Act 24
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26. Example of disclaimer of opinion
9.3
Example of disclaimer of opinion 25
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27. Summary of modifications to the audit report
9.3
Summary of modifications to the audit report 26
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28. Effect of materiality on the audit qualification
9.3
Effect of materiality on the audit qualification
The primary factor when considering whether to qualify an audit opinion, or attempting to determine what sort of qualification to apply, is the materiality of the subject matter giving rise to the qualification.
One critical aspect is the dollar magnitude of the effects of the matter on the financial report.
The auditor also needs to consider the nature of the matter when making judgments regarding materiality, e.g. does it affect the companies ability to make money in the long term. 27
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29. 9.3
Emphasis of matter
Included straight after the Basis of Opinion section of the report to draw attention to certain matters that are considered relevant to the reader, but do not affect type of audit opinion issued.
It does result in a modification to the auditor’s report, but not to the auditor’s opinion (it is not a form of qualification).
It is 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.
It can accompany either an unmodified or modified audit opinion. 28
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30. Circumstances giving rise to emphasis of matter
9.3
Circumstances giving rise to emphasis of matter
ASA/ISA 706.A1 outlines circumstances in which Emphasis of Matter (EoM) can be issued:
Uncertainty relating to the future outcome of exceptional litigation or regulatory action
Early application of a new accounting standard that has a pervasive effect on the financial report in advance of its effective date, and
A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position.
Material inconsistency with other content of the annual report
Currently 90%-95% of auditor’s reports in Australia containing EoM paragraphs relate to uncertainty regarding going concern status
the revised auditor reporting standards included a separate paragraph in the auditor’s report where there is a material uncertainty related to going concern. 29
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31. ‘Other matter’ paragraph
9.3
‘Other matter’ paragraph
The ability to include an Other Matter (OM) paragraph in the auditor’s report allows the auditor to draw user’s attention to any other matters, not presented or disclosed in the financial report, that the auditor believes are sufficiently important and need to be highlighted.
Circumstances giving rise to an OM paragraph are those relevant to enhancing the user’s understanding of the audit, the auditor’s responsibilities or the auditor’s report.
It can accompany an unqualified or modified opinion.
Note: There is no problem with the financial information or the notes to the financial information.. 30
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32. An example of the emphasis and other matter paragraphs
9.3
An example of the emphasis and other matter paragraphs
This comes directly after the basis of opinion paragraph
This comes just before the ‘Responsibilities of the Directors for the Financial Report’ section 31
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33. Types of auditor’s report issued in Australia 2005-13
9.3
Types of auditor’s report issued in Australia
Unqualified with EOM used extensively for going concern related matters 570 out of 594 EOM reports (96%)
Only 16 adverse opinions due to going concern over 9 years
Only 42 qualified opinions for going concern
Other matter paragraph introduced in 2010 – from 2011 to 2013 only used 13 times
Over the 9 years 612 reports issued with reference to GC (33.3%)
Carson, E., Zhang, Y. & Fragher, N. (2014) Audit Reports in Australia Preliminary Findings. Melbourne: CPA 32
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34. Audit of comparative amounts
9.4
Audit of comparative amounts
Most entities disclose information from previous periods for comparison purposes.
Such comparative information is an integral part of the current period’s financial report, but is intended to be read only in relation to the information relating to the current period
The assessment of risk of material misstatement includes the following considerations:
The accounting policies used for the comparative information should be in accordance with the financial reporting framework and consistent with those of the current period
The comparative information and other disclosures required should agree with those in the previous financial report – though there are circumstances where they differ.
The comparative information should be free of material misstatement.
This means that if policies have changed between periods, the comparative information must be restated using those policies – therefore the amounts may not agree with the previous financial report. 33
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35. Auditor’s responsibilities for other information in annual report
9.4
Auditor’s responsibilities for other information in annual report
Examples of other information include summaries of 5–10 years of operating results, chairperson’s and directors’ reports.
Auditor does not usually have any specific responsibility to substantiate such other information.
Auditor should review such information to ensure it does not contain material inconsistencies or misstatements of fact.
If inconsistency identified, and the client does not change it, an unmodified opinion with an ‘other matter’ paragraph usually results (this is because there is nothing wrong with the financial statements)
We talked about this stuff last week a little bit... 34
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36. Communication with shareholders
9.5
Communication 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 discussions at annual general meetings, which the auditor or a suitably qualified representative must attend.
Shareholders have opportunity at AGM to ask auditor questions related to conduct of audit, preparation and content of audit report, accounting policies adopted by the company and independence of the auditor.
These requirements result in a much more proactive approach toward fraud under the current auditing standards 35
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37. Communicating with management and those charged with governance
9.5
Communicating with management and those charged with governance
ASA/ISA 260, supported by ASA/ISA 450, provides guidance for the auditor in communicating with all groups of directors and management.
If the matter concerns a significant deficiency in internal control, the auditor should, also on a timely basis, communicate in writing such deficiencies to those charged with governance (ASA/ISA 265.9).
ASA/ISA requires that the auditor communicate with those charged with governance any uncorrected misstatements and the effects that they may have on the auditor’s report. 36
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38. Communicating with the audit committee or board
9.5
Communicating with the audit committee or board
Auditor will usually meet with audit committee at or near completion of audit to discuss results of audit.
Effective committees should ask auditor about aggressiveness of accounting policy choices and any disagreements with management.
Auditor should ensure that the audit committee or board of directors are aware of contents of the management letter.
Matters that cannot be satisfactorily resolved with executive management must be discussed with the audit committee or the full board. 37
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39. Communicating through electronic presentation of financial reports
9.5
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 on this other unaudited information. 38
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