1. Rick Stephan Hayes, Philip Wallage, and Hans Gortemaker
Audit Reports and Communication Principles of Auditing: An Introduction to International Standards on Auditing - - Ch. 12
Rick Stephan Hayes,
Philip Wallage, and Hans Gortemaker
Last Update: 17 November 2011
International Federation of Accountants Handbook Of International Quality Control, Auditing, Review, Other Assurance, And Related Services Pronouncements 2010 Edition Part I
International Auditing Standards (ISAs): ISA 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”; ISA 250, “Consideration of Laws and Regulations in an Audit of Financial Statements”; ISA 260, Communication with Those Charged with Governance, ISA 570 Going Concern; ISA 620, Using the Work of an Auditor’s Expert; ISA 700 Forming an Opinion and Reporting on Financial Statements; ISA 705, Modifications to the Opinion in the Independent Auditor’s Report; ISA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report; ISA 710, Comparative Information—Corresponding Figures and Comparative Financial Statements; ISA 720, The Auditor’s Responsibilities Relating to Other Information in Documents Containing Audited Financial Statements; ISA 800, Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks
U.S. GAAS AU 341 (SAS 59) “The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern”; AU 411 (SAS 69) “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles in the Auditor’s Report”; AU 420 (SAS 1) “Consistency of Application of GAAP”; AU 431 (SAS 32) Adequacy of Disclosure in Financial Statements”; AU 504 (SAS 26) “Association with Financial Statements”; AU 508 (SAS 58, SAS 79) “Reports on Audited Statements”; AU 530 (SAS 1, SAS 29) “Dating the Auditor’s Report”; AU 532 “Restricting the Use on an Auditor’s Report”, AU 534 (SAS 51) “ Reporting on Financial Statements Prepared for Use in Other Countries”; AU 543 (SAS 1) “Part of the Examination Made by Other Independent Auditors”; AU 551 (SAS 29) “Reporting on Information Accompanying the Basic Financial Statements in Auditor-Submitted Documents”; AU 552 (SAS 42) “Reporting on Condensed Financial Statements and Selected Financial Data”; AU 558 (SAS 52) “Required Supplementary Information”; AU 511 (SAS 37) Filings Under Federal Securities
Modifications to Chapter 12: Add ISA 700” (ED Dec 2006); ISA 701, (ED Dec 2006); ISA 705, (Oct 2008).) • ISA 706, (ED Oct 2008); ISA 710 (Dec 2006), ISA 720 (Sept 2007); ISA 800 (Dec 2006, PCAOB audit reports. 50% revision 1

2. 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; and
have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation;
Page 491 Illustration 12.1 Certification of Schlumberger Financial Statements by Corporate Officers
the Sarbanes-Oxley Act of 2002 (SOx) which now requires[i] that the principal executive officer or officers and the principal financial officer or officers, certify in each annual or quarterly report filed or submitted to the U.S. Securities and Exchange Commission (SEC) the following:
(1) the signing officer has reviewed the report;
(2) the report does not contain any untrue statement of a material fact or omit to state a material fact;
(3) the financial statements, and other financial information, fairly present in all material respects the financial condition of the company;
(4) the signing officers (A) are responsible for establishing and maintaining internal controls; (B) have evaluated the effectiveness of the company’s internal controls; and (C) have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation;
(5) the signing officers have disclosed to the company’s auditors and the audit committee of the board of directors —
(A) all significant deficiencies in the design or operation of internal controls which could adversely affect the company’s ability to record, process, summarize, and report financial data and have identified for the company’s auditors any material weaknesses in internal controls; and
(B) any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal controls; and
[i] 107th U.S. Congress Sarbanes-Oxley Act of Public Law 107–204. SEC “Corporate Responsibility For Financial Reports”. Senate and House of Representatives of the United States of America in Congress assembled. Washington, D.C. July 30.

3. Corporate Responsibility for Audit Report under SOx (cont.)
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, summarize, and report financial data and have identified for the company’s auditors any material weaknesses in internal controls; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal controls;
Page 491

4. Old Style Audit Report (3 paragraph)
Page ; Illustrations 12.2 Sample Wording – Auditor’s Unqualified Report p 497 and 12.3 Sample US Unqualified Report and Management’s Report on Responsibility for Financial Reporting for Wm. Wrigley Jr. Company p 498
standard unqualified wording (FROPLEAPER)
INTRODUCTION PARAGRAPH
Financial statements (four of them)
Responsibility of management (all financial statements)
Opinion responsibility of auditor
SCOPE (nature of the audit)
PCAOB standards
Like to plan and perform to obtain reasonable assurance free of mat. miss.
Evidence supporting amounts and disclosures on a test basis
Assessing accounting principles, significant estimates, overall financial pres.
Provide a reasonable basis for our opinion
OPINION
Express and opinion
Refer to GAAP

5. Addressee (not required PCAOB AS 5) opening or introductory paragraph
Contents of the PCAOB Combined Financial Statement and Internal Control Auditor's Report
title,
Addressee (not required PCAOB AS 5)
opening or introductory paragraph
scope paragraph (describing the nature of an audit)
Definition paragraph
Limitations paragraph
opinion paragraph containing an expression of opinion on the financial statements,
the date of the report, the auditor's address, and auditor’s signature US Classes

6. Example PCAOB sample combined financial statement and internal control audit report from Audit Standard No. 5 NEXT SLIDES U.S. Classes

7. Report of Independent Registered Public Accounting Firm
[Introductory paragraph]
We have audited the accompanying balance sheets of W Company as of
December 31, 20X8 and 20X7, and the related statements of income,
stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 20X8. We also have audited management's assessment, included in the accompanying [title of management‘s report], that W Company maintained effective internal control over financial reporting as of December 31, 20X8, based on [Identify control criteria, for example, "criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)." ]. W Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the company's internal control over financial reporting based on our audits.
96. The following example combined report expressing an unqualified opinion on
financial statements and an unqualified opinion on internal control over financial
reporting illustrates the report elements described in this section.
Report of Independent Registered Public Accounting Firm
[Introductory paragraph]
We have audited the accompanying balance sheets of W Company as of
December 31, 20X8 and 20X7, and the related statements of income,
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 20X8. We also have audited
management's assessment, included in the accompanying [title of management's
report], that W Company maintained effective internal control over financial
reporting as of December 31, 20X8, based on [Identify control criteria, for
example, "criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO)." ]. W Company's management is responsible for these financial
statements, for maintaining effective internal control over financial reporting, and
for its assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on these financial statements and an
opinion on the company's internal control over financial reporting based on our
audits.

8. [Scope paragraph]
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
[Scope paragraph]
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whethereffective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
US Classes

9. [Definition paragraph]
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
[Definition paragraph]
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
US Classes

10. US Classes [Inherent limitations paragraph]
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
[Opinion paragraph]
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of W Company as of December 31, 20X8 and 20X7, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 20X8 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, W Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 20X8, based on [Identify control criteria, for example, "criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)." ].
[Signature]
[City and State or Country]
[Date]
US Classes

11. ISA 700 Auditors Opinion on F/S
Title: “Independent Auditor’s Report”
[Appropriate Addressee]
Introductory Paragraph (Report on Financial Statements)
Management’s Responsibility for the Financial Statements
Auditor’s Responsibility
Opinion
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]
ISA to 42
INDEPENDENT AUDITOR’S REPORT
[Appropriate Addressee]
23. The introductory paragraph in the auditor’s report shall: (Ref: Para. A17–A19) (a) Identify the entity whose financial statements have been audited; (b) State that the financial statements have been audited; (c) Identify the title of each statement that comprises the financial statements; (d) Refer to the summary of significant accounting policies and other explanatory information; and (e) Specify the date or period covered by each financial statement comprising the financial statements.
Management’s Responsibility for the Financial Statements 24. This section of the auditor’s report describes the responsibilities of those in the organization that are responsible for the preparation of the financial statements. The auditor’s report need not refer specifically to “management,” but shall use the term that is appropriate in the context of the legal framework in the particular jurisdiction. In some jurisdictions, the appropriate reference may be to those charged with governance.
Report on the Financial Statements
Management’s Responsibility for the Financial Statements
Auditor’s Responsibility
Opinion
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]

12. 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.
ISA 700 Appendix ref A 14
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.

13. 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
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;
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; and
A description of an audit in accordance with those standards;
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; and
The auditor’s address.

14. 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.
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.

15. The Audit Report Management Responsibility and Auditor Responsibility
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; and
A description of an audit in accordance with those standards.
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;
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; and
A description of an audit in accordance with those standards;
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; and
The auditor’s address.

16. 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 judgment, 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.
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 judgment, 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.5 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.

17. Report on Other Legal and Regulatory Requirements
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]
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]

18. Included in the Audit Report Opinion and Signatures
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; and
The auditor’s address.
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;
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; and
A description of an audit in accordance with those standards;
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; and
The auditor’s address.

19. The objectives of the auditor are:
To form an opinion on the financial statements based on an evaluation of the conclusions drawn from the audit evidence obtained and
To express clearly that opinion through a written report that also describes the basis for that opinion.
ISA 700
6. The objectives of the auditor are:
(a) To form an opinion on the financial statements based on an evaluation of the conclusions drawn from the audit evidence obtained; and
(b) To express clearly that opinion through a written report that also describes the basis for that opinion.

20. 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 recognized authority have asserted that they have taken responsibility for those financial statements.
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 recognized authority have asserted that they have taken responsibility for those financial statements. This informs the reader that the auditor has considered the effect on the financial statements and on the report of events or transactions about which the auditor became aware and that occurred up to that date. Since the auditor’s responsibility is to report on the financial statements as prepared and presented by management, the auditor should not date the report earlier than the date on which the financial statements are signed or approved by management

21. Unmodified (unqualified), qualified, adverse, or disclaimer of opinion
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
Page 499
ISA 705
2. This ISA establishes three types of modified opinions, namely, a qualified opinion, an adverse opinion, and a disclaimer of opinion. The decision regarding which type of modified opinion is appropriate depends upon:
(a) The nature of the matter giving rise to the modification, that is, whether the financial statements are materially misstated or, in the case of an inability to obtain sufficient appropriate audit evidence, may be materially misstated; and
(b) The auditor’s judgment about the pervasiveness of the effects or possible effects of the matter on the financial statements. (Ref: Para. A1)

22. 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).
Page 499 – 500
Glossary: *Unmodified 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.22
The standard unqualified audit report is used for more than 90 per cent of all audit reports.Arens, A. A. R.J. Elder and M.S. Beasley Essentials of Auditing and Assurance Services An Integrated Approach, Pearson Education / Prentice Hall. Upper Saddle River. New Jersey.

23. An Unmodified (Unqualified) Audit Opinion should be expressed when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.
Page 500. Illustrations 12.2 Sample Wording – Auditor’s Unqualified Report p 497 and OLD Sample US Unqualified Report and Management’s Report on Responsibility for Financial Reporting for Wm. Wrigley Jr. Company p 498
Sample
ISA (c) Unmodified 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.
ISA 700

24. accounting estimates made by management are reasonable;
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; and
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,
Evaluation of the compliance to the reporting framework include consideration of the qualitative aspects of the entity’s accounting practices, including indicators of possible bias in management’s judgments. In particular, the auditor must evaluate:
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; and
terminology used in the financial statements, including the title of each financial statement, is appropriate.
When the financial statements are prepared in accordance with a fair presentation framework, the evaluation above will also include whether the financial statements achieve fair presentation.

25. at least two circumstances where the auditor may not be able to express an unmodified opinion:
A limitation in scope;
The auditor’s judgment 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.
Based on ISA 700, there are at least two circumstances where the auditor may not be able to express an unmodified opinion:
a limitation in scope;
The auditor’s judgment 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.
International Auditing and Assurance Standards Board (IAASB) International Standard on Auditing 700 (ISA 700), “Forming an Opinion and Reporting on Financial Statements.” Paragraph 17. Handbook of International Quality Control, Auditing Review, Other Assurance, and Related Services Pronouncements,
2012 Edition, Volume 1. International Federation of Accountants. New York

26. The objective of the auditor is to express clearly an appropriately modified opinion on the financial statements that is necessary when
The auditor concludes, based on the audit evidence obtained, that the financial statements as a whole are not free from material misstatement; or
The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.
ISA 705 Appendix Sample Wording
ISA 705
4. The objective of the auditor is to express clearly an appropriately modified opinion on the financial statements that is necessary when:
(a) The auditor concludes, based on the audit evidence obtained, that the financial statements as a whole are not free from material misstatement; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.

27. Auditor’s Qualified Opinion
Express a qualified opinion when:
The auditor, having obtained sufficient appropriate audit evidence, 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.
Page 502 Illustration 12.4 Sample Wording – Limitation on Scope Qualified Opinion, p 503; ISA 705 Appendix
ISA 705 para 7. The auditor shall express a qualified opinion when:
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or
(b) 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.
ISA (a) Pervasive – A term used, in the context of misstatements, to describe the effects on the financial statements of misstatements or the possible effects on the financial statements of misstatements, if any, that are undetected due to an inability to obtain sufficient appropriate audit evidence. Pervasive effects on the financial statements are those that, in the auditor’s judgment:
(i) Are not confined to specific elements, accounts or items of the financial statements;
(ii) If so confined, represent or could represent a substantial proportion of the financial statements; or
(iii) In relation to disclosures, are fundamental to users’ understanding of the financial statements.

28. Basis for Qualified Opinion
Auditors Responsibility …We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.
Basis for Qualified Opinion
ABC Company’s investment in XYZ Company, a foreign associate acquired during the year and accounted for by the equity method, is carried at xxx on the statement of financial position as at December 31, 20X1, and ABC’s share of XYZ’s net income of xxx is included in ABC’s income for the year then ended. We were unable to obtain sufficient appropriate audit evidence about the carrying amount of ABC’s investment in XYZ as at December 31, 20X1 and ABC’s share of XYZ’s net income for the year because we were denied access to the financial information, management, and the auditors of XYZ. Consequently, we were unable to determine whether any adjustments to these amounts were necessary.
Qualified Opinion
In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph, 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.
New Chapter 12, 3rd Edition, p 27

29. 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.
Page 502 Illustration 12.5 Sample Wording – Inadequate Disclosure Adverse Opinion p 504; ISA 705 Appendix Sample Wording
ISA 705 para 8. 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. (See Example Reports 2 and 3 in the Appendix.)

30. 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.
Pages 503 – 504; Illustration 12.6 Sample Wording – Limitation of Scope Disclaimer of Opinion; ISA 705 Appendix Sample Wording
ISA 705 Disclaimer of Opinion
9. 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.
10. The auditor shall disclaim an opinion when, in extremely rare circumstances involving multiple uncertainties, the auditor concludes that, notwithstanding having obtained sufficient appropriate audit evidence regarding each of the individual uncertainties, it is not possible to form an opinion on the financial statements due to the potential interaction of the uncertainties and their possible cumulative effect on the financial statements.
or interaction of multiple uncertainties on F/S

31. ISA 705 Appendix Types of Modified Opinions
Auditor’s Judgment about the Pervasiveness of the Effects or Possible Effects on the Financial
Statements
Nature of Matter Giving
Rise to the Modification
Material but Not
Pervasive
Material and Pervasive
Financial statements are
materially misstated
Qualified opinion
Adverse opinion
Inability to obtain
sufficient appropriate audit
evidence
Disclaimer of opinion
See p 690 of 2010 Handbook
Nature of Matter Giving
Rise to the Modification
Auditor’s Judgment about the Pervasiveness of the
Effects or Possible Effects on the Financial
Statements
Material but Not
Pervasive
Material and Pervasive
Financial statements are
materially misstated Qualified opinion Adverse opinion
Inability to obtain
sufficient appropriate audit
evidence
Qualified opinion Disclaimer of opinion
Nature of Material Misstatements (Ref: Para. 6(a))

32. 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.
ISA 705 Basis for Modification Paragraph
Para 16. When the auditor modifies the opinion on the financial statements, the auditor shall, in addition to the specific elements required by ISA 700 (Redrafted), 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. (Ref: Para. A17)

33. An Emphasis of a Matter Paragraph with an Unmodified (Unqualified) Opinion
An auditor’s unqualified report is sometimes expanded upon to explain matters that do not affect the auditor’s opinion, but should be emphasized to the financial statement user.
Pages 505 – 511 Illustration 12.7 Sample Wording – Auditor’s Unqualified Report with Legal Uncertainty Emphasis
of Matter Paragraph, p 506; Illustration 12.8 Sample Wording – Auditor’s Unqualified Report with Going Concern Emphasis of Matter Paragraph, p 507; Illustration 12.9 Intel’s 2002 Unqualified Audit Report with Change in Accounting Methods Emphasis of Matter Paragraph, p 509; Illustration Dell’s 2002 Unqualified Audit Report with Change in Revenue Recognition Emphasis of Matter Paragraph, p 509
ISA 706 Emphasis Of Matter Paragraphs And Other Matters Paragraphs In The Independent Auditor’s Report
4. The objective of the auditor, having formed an opinion on the financial statements, is to draw users’ attention, when in the auditor’s judgment it is necessary to do so, by way of clear additional communication in the auditor’s report, to:
(a) A matter, although appropriately presented or disclosed in the financial statements, that is of such importance that it is fundamental to users’ understanding of the financial statements; or
(b) As appropriate, any other matter that is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.

34. ISA 706 “Emphasis of Matter Paragraphs and Other Matters Paragraphs in the Independent Auditor’s Report”
The auditor’s report should emphasize a matter when it is necessary to:
(a) EofM: Draw users’ attention to matters presented or disclosed in the financial statements that are of such importance that they are fundamental to users’ understanding of the financial statements; or
(b) Other Matter: Draw users’ attention to any matters other than those presented or disclosed in the financial statements that are relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.
CLASS QUESTION: What matters do you think would be reported in an emphasis of matter parargraph?
ISA 706 establishes standards and provides guidance on circumstances when the auditor considers including an emphasis of matter paragraph or an other matters paragraph in the auditor’s report on the financial statements, and on the form and placement of such paragraphs. It describes the need for the auditor’s report to emphasize a matter presented or disclosed in the financial statements or the notes thereto when, in the auditor’s judgment, the matter is both unusual and of fundamental importance to the users’ understanding of the financial statements.
1. This International Standard on Auditing (ISA) deals with additional communication in the auditor’s report when the auditor considers it necessary to:
(a) Draw users’ attention to a matter or matters presented or disclosed in the financial statements that are of such importance that they are fundamental to users’ understanding of the financial statements; or
(b) Draw users’ attention to any matter or matters other than those presented or disclosed in the financial statements that are relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.
4. The objective of the auditor, having formed an opinion on the financial statements, is to draw users’ attention, when in the auditor’s judgment it is necessary to do so, by way of clear additional communication in the auditor’s report, to:
(a) A matter, although appropriately presented or disclosed in the financial statements, that is of such importance that it is fundamental to users’ understanding of the financial statements; or
(b) As appropriate, any other matter that is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.

35. Report of Independent Registered Public Accounting Firm
[Standard Introductory Paragraph]
[Management Responsibility Paragraph]
[Auditor Responsibility Paragraphs]
[Opinion Paragraph]
Required Emphasis Paragraph[s]
[Emphasize those matters that are important in understanding the financial statement presentation, including significant management judgments and estimates and areas with significant measurement uncertainty. Discuss the audit procedures performed on these significant matters. This discussion should not include matters that the company has not disclosed in the financial statements and should make reference to the notes in the financial statements that disclose each matter.]
“Without qualifying our opinion we draw attention to Note X to the financial statements. The Company is the defendant in a lawsuit alleging infringement of certain patent rights and claiming royalties and punitive damages. The Company has filed a counter action, and preliminary hearings and discovery proceedings on both actions are in progress. The ultimate outcome of the matter cannot presently be determined, and no provision for any liability that may result has been made in the financial statements.”
[Signature]
[City and State or Country]
[Date]
Report of Independent Registered Public Accounting Firm
[Standard Introductory Paragraph]
[Standard Scope Paragraph]
[Standard Opinion Paragraph]
Required Emphasis Paragraph[s]
[Emphasize those matters that are important in understanding the financial statement presentation, including significant management judgments and estimates and areas with significant measurement uncertainty. Discuss the audit procedures performed on these significant matters. This discussion should not include matters that the company has not disclosed in the financial statements and should make reference to the notes in the financial statements that disclose each matter.]
[Signature]
[City and State or Country]
[Date]

36. 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 emphasized and to where relevant disclosures that fully describe the matter can be found in the financial statements; and (d) Indicate that the auditor’s opinion is not modified in respect of the matter emphasized
ISA 706 para 7. 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,” or other appropriate heading;
(c) Include in the paragraph a clear reference to the matter being emphasized and to where relevant disclosures that fully describe the matter can be found in the financial statements; and
(d) Indicate that the auditor’s opinion is not modified in respect of the matter emphasized. (Ref: Para. A3-A4)

37. 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 uncertainties that might be emphasized 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.
Page 505 – 507
Significant uncertainties such as an uncertainty related to the future outcome of major litigation or regulatory action (for example, a regulatory agency requires a company to recall a major product for safety reasons) (see Example Report 1 in the Appendix);
• Significant and unusual related party transactions (see Example Report 2 in the Appendix);
• Early application of a new accounting principle (or International Financial Reporting Standard) (that is, before its application is required);
• A subsequent event disclosed in the financial statements;
• A matter such as a major catastrophe, which is disclosed in a note to the financial
statements, that has had, or continues to have, a significant effect on the entity’s
business or operations (see Example Report 3 in the Appendix).

38. Going Concern
Pages Illustration 12.8 Sample Wording – Auditor’s Unqualified Report with Going Concern Emphasis of Matter Paragraph, p 507; Illustration Sample Wording – Auditor’s Qualified Report for Non-Disclosure of Going Concern Problem p 510.
ISA 570 Going Concern Going Concern Assumption
2. Under the going concern assumption, an entity is viewed as continuing in business for the foreseeable future. General purpose financial statements are prepared on a going concern basis, unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so. Special purpose financial statements may or may not be prepared in accordance with a financial reporting framework for which the going concern basis is relevant (e.g., the going concern basis is not relevant for some financial statements prepared on a tax basis in particular jurisdictions). When the use of the going concern assumption is appropriate, assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business. (Ref: Para. A1)
5. Management’s assessment of the entity’s ability to continue as a going concern involves making a judgment, at a particular point in time, about inherently uncertain future outcomes of events or conditions. The following factors are relevant to that judgment:
The degree of uncertainty associated with the outcome of an event or condition increases significantly the further into the future an event or condition or the outcome occurs. For that reason, most financial reporting frameworks that require an explicit management assessment specify the period for which management is required to take into account all available information.
• The size and complexity of the entity, the nature and condition of its business and the degree to which it is affected by external factors affect the judgment regarding the outcome of events or conditions.
• Any judgment about the future is based on information available at the time at which the judgment is made. Subsequent events may result in outcomes that are inconsistent with judgments that were reasonable at the time they were made.

39. In a going concern judgment, the objectives of the auditor are:
To obtain sufficient appropriate audit evidence about the appropriateness of management’s use of the going concern assumption in the preparation and presentation of the financial statements;
To conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern; and
(c) To determine the implications for the auditor’s report.
ISA 570
Objectives
9. The objectives of the auditor are: (a) To obtain sufficient appropriate audit evidence about the appropriateness of management’s use of the going concern assumption in the preparation and presentation of the financial statements; (b) To conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern; and (c) To determine the implications for the auditor’s report.

40. 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 realize 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.
The disclosure should:
describe the principal conditions that raise doubt;
state that there are doubts about going concern, therefore the entity may be unable to realize 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.

41. Lack of Consistency
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.

42. 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 references the work of an expert in the auditor’s report because it is relevant to a modification to the auditor’s opinion, the auditor shall indicate this does not reduce the auditor’s responsibility for that opinion.
Page 517
ISA 620, Using the Work of an Auditor’s Expert
14. The auditor shall not refer to the work of an auditor’s expert in an auditor’s report containing an unmodified opinion unless required by law or regulation to do so. If such reference is required by law or regulation, the auditor shall indicate in the auditor’s report that the reference does not reduce the auditor’s responsibility for the auditor’s opinion. (Ref: Para. A41)
15. If the auditor makes reference to the work of an auditor’s expert in the auditor’s report because such reference is relevant to an understanding of a modification to the auditor’s opinion, the auditor shall indicate in the auditor’s report that such reference does not reduce the auditor’s responsibility for that opinion. (Ref: Para. A42)

43. Communications With Those Charged With Governance
The objective of the auditor is to provide those charged with governance with timely observations arising from the audit that are significant and relevant to their responsibility to oversee the financial reporting process including:
Qualitative aspects of the entity’s accounting practices
Significant difficulties encountered during the audit
Significant matters arising from the audit that were discussed with management
Other matters arising from the audit that are significant to the oversight of the financial reporting process
Pages 520 – 523; ISA 260, Communication with Those Charged with Governance
9. The objectives of the auditor are:
(a) To communicate clearly with those charged with governance the responsibilities of the auditor in relation to the financial statement audit, and an overview of the planned scope and timing of the audit;
(b) To obtain from those charged with governance information relevant to the audit;
(c) To provide those charged with governance with timely observations arising from the audit that are significant and relevant to their responsibility to oversee the financial reporting process; and
(d) To promote effective two-way communication between the auditor and those charged with governance.
10. For purposes of the ISAs, the following terms have the meanings attributed below:
(a) Those charged with governance – The person(s) or organization(s) (for example, a corporate trustee) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial reporting process. For some entities in some jurisdictions, those charged with governance may include management personnel, for example, executive members of a governance board of a private or public sector entity, or an owner-manager. For discussion of the diversity of governance structures, see paragraphs A1-A8.
16. The auditor shall communicate with those charged with governance: (Ref: Para.
A16)
(a) The auditor’s views about significant qualitative aspects of the entity’s accounting practices, including accounting policies, accounting estimates and financial statement disclosures. When applicable, the auditor shall explain to those charged with governance why the auditor considers a significant accounting practice, that is acceptable under the applicable financial reporting framework, not to be most appropriate to the particular circumstances of the entity; (Ref: Para. A17)
(b) Significant difficulties, if any, encountered during the audit; (Ref: Para. A18)
(c) Unless all of those charged with governance are involved in managing the entity:
(i) Significant matters, if any, arising from the audit that were discussed, or subject to correspondence with management; and (Ref: Para. A19)
(ii) Written representations the auditor is requesting; and
(d) Other matters, if any, arising from the audit that, in the auditor’s professional judgment, are significant to the oversight of the financial reporting process. (Ref: Para. A20)

44. 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, like the U.S., both functions are the legal responsibility of a single, unitary board.
Page 520

45. 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 deficiencies 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;
Page 521.
‘Audit matters of governance interest’ are those that arise from the audit of financial statements and are important for people in charge of governance. Audit matters of governance interest to be communicated by the auditor to the board or audit committee ordinarily include:[i]
• 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;
• The potential effect on the financial statements of any significant risks and exposures, such as pending litigation, that requires disclosure in the financial statements;
• Significant audit adjustments to the accounting records;
• Material uncertainties related to the entity’s ability to continue as a going concern;
• Disagreements with management about matters that could be significant to the entity’s financial statements or the auditor’s report. These communications include consideration of whether the matter has, or has not, been resolved and the significance of the matter; and
• Expected modifications to the auditor’s report;
[i] IFAC Handbook Of International Auditing, Assurance and Ethics Pronouncements 2003 International Standard On Auditing (ISA) “Communication Of Audit Matters With Those Charged With Governance”. Para. 11. International Federation of Accountants. New York. June

46. Auditor Communications to Governance Entity (cont)
Audit matters of governance interest to be communicated by the auditor to the board or audit committee ordinarily include:
The potential effect on the financial statements of any significant risks and exposures, such as pending litigation, that requires disclosure in the financial statements;
Significant audit adjustments to the accounting records;
Material uncertainties related to the entity’s ability to continue as a going concern;
Disagreements with management about matters that could be significant to the entity’s financial statement.
Expected modifications to the auditor’s report

47. Reporting Fraud and Error
If the auditor has identified a fraud or has obtained information that indicates that a fraud may exist, the auditor shall communicate these matters on a timely basis to the appropriate level of management
The auditor shall determine whether there is a responsibility to report the occurrence or suspicion to a party outside the entity. The auditor’s legal responsibilities may override the duty of confidentiality in some circumstances.
Page 522; ISA 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”
40. If the auditor has identified a fraud or has obtained information that indicates that a fraud may exist, the auditor shall communicate these matters on a timely basis to the appropriate level of management in order to inform those with primary responsibility for the prevention and detection of fraud of matters relevant to their responsibilities. (Ref: Para. A60)
41. Unless all of those charged with governance are involved in managing the entity, if the auditor has identified or suspects fraud involving: (a) management;
(b) employees who have significant roles in internal control; or (c) others where the fraud results in a material misstatement in the financial
statements,
43. If the auditor has identified or suspects a fraud, the auditor shall determine whether there is a responsibility to report the occurrence or suspicion to a party outside the entity. Although the auditor’s professional duty to maintain the confidentiality of client information may preclude such reporting, the auditor’s legal responsibilities may override the duty of confidentiality in some circumstances. (Ref: Para. A65–A67)

48. Reporting of Non-compliance with Laws
If non compliance is suspected, the auditor should communicate to those charged with governance.
If the auditor concludes that the noncompliance has a material effect on the financial statements, and has not been properly reflected in the financial statements, the auditor should express a qualified or an adverse opinion.
The auditor shall determine whether the auditor has responsibility to report the identified or suspected non-compliance to parties outside the entity.
ISA 250, “Consideration of Laws and Regulations in an Audit of Financial Statement
19. If the auditor suspects there may be non-compliance, the auditor shall discuss the matter with management and, where appropriate, those charged with governance. If management or, as appropriate, those charged with governance do not provide sufficient information that supports that the entity is in compliance with laws and regulations and, in the auditor’s judgment, the effect of the suspected non-compliance may be material to the financial statements, the auditor shall consider the need to obtain legal advice. (Ref: Para. A15–A16)
23. If, in the auditor’s judgment, the non-compliance referred to in paragraph 22 is believed to be intentional and material, the auditor shall communicate the matter to those charged with governance as soon as practicable.
24. If the auditor suspects that management or those charged with governance are involved in non-compliance, the auditor shall communicate the matter to the next higher level of authority at the entity, if it exists, such as an audit committee
25. If the auditor concludes that the non-compliance has a material effect on the financial statements, and has not been adequately reflected in the financial statements, the auditor shall, in accordance with ISA 705, express a qualified opinion or an adverse opinion on the financial statements.
28. If the auditor has identified or suspects non-compliance with laws and regulations, the auditor shall determine whether the auditor has responsibility to report the identified or suspected non-compliance to parties outside the entity. (Ref: Para. A19–A20)

49. 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
Page 523 – 525

50. 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.
12.10 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. The management letter is the auditor's letter addressed to the client. It contains the public accountant's conclusions regarding the company's accounting policies and procedures, internal controls, and operating policies. 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.

51. Thank You for Your Attention
Any Questions?

52. The auditor’s conclusion shall take into account:
In order to form an opinion, the auditor shall conclude as to whether the auditor has obtained reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error.
The auditor’s conclusion shall take into account:
Whether sufficient appropriate audit evidence has been obtained;
Whether uncorrected misstatements are material, individually or in aggregate; and – next slide
ISA 700
11. In order to form that opinion, the auditor shall conclude as to whether the auditor has obtained reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. That conclusion shall take into account: (a) The auditor’s conclusion, in accordance with ISA 330, whether sufficient appropriate audit evidence has been obtained; (b) The auditor’s conclusion, in accordance with ISA 450, whether uncorrected misstatements are material, individually or in aggregate; and (c) The evaluations required by paragraphs 12–15. – see next slide

53. Disclose significant accounting policies
The auditor’s conclusion shall also take into account whether the financial statements :
Are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework
Disclose significant accounting policies
Use estimates made by management that are reasonable
Use information that is relevant, reliable, comparable, and understandable
Provide adequate disclosures and uses appropriate terminology
ISA 700
(c) The evaluations required by paragraphs 12–15.
12. The auditor shall evaluate whether the financial statements are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework. This evaluation shall include consideration of the qualitative aspects of the entity’s accounting practices, including indicators of possible bias in management’s judgments. (Ref: Para. A1–A3)
13. In particular, the auditor shall evaluate whether, in view of the requirements of the applicable financial reporting framework: (a) The financial statements adequately disclose the significant accounting policies selected and applied; (b) The accounting policies selected and applied are consistent with the applicable financial reporting framework and are appropriate; (c) The accounting estimates made by management are reasonable; (d) The information presented in the financial statements is relevant, reliable, comparable, and understandable; (e) The financial statements provide adequate disclosures to enable the intended users to understand the effect of material transactions and events on the information conveyed in the financial statements; and (Ref: Para. A4) (f) The terminology used in the financial statements, including the title of each financial statement, is appropriate.
14. When the financial statements are prepared in accordance with a fair presentation framework, the evaluation required by paragraphs 12–13 shall also include whether the financial statements achieve fair presentation. The auditor’s evaluation as to whether the financial statements achieve fair presentation shall include consideration of: (a) The overall presentation, structure and content of the financial statements; and (b) Whether the financial statements, including the related notes, represent the underlying transactions and events in a manner that achieves fair presentation.
15. The auditor shall evaluate whether the financial statements adequately refer to or describe the applicable financial reporting framework. (Ref: Para. A5–A10)

54. XBRL is a freely licensed, open technology standard that makes it possible to store and/or transfer data along with the complex hierarchies, data-processing rules and descriptions.
Permits the automatic exchange and reliable extraction of financial information across all software formats and technologies, including the Internet
Reduces the need to enter financial information more than one time, reducing the risk of data entry error and eliminating the need to manually key information for various formats
Pages Illustration Example of XBRL-Coded Data, page 526.
XBRL (Extensible Business Reporting Language) is an emerging technology standard that facilitates the business reporting process. An offshoot of XML (Extensible Markup Language), XBRL is a freely licensed, open technology standard that makes it possible to store and/or transfer data along with the complex hierarchies, data-processing rules and descriptions.
XBRL: (1) Permits the automatic exchange and reliable extraction of financial information across all software formats and technologies, including the Internet and (2) reduces the need to enter financial information more than one time, reducing the risk of data entry error and eliminating the need to manually key information for various formats (e.g., a printed financial statement, an HTML[i] document for a company's Web site, an EDGAR filing document, a raw XML file or other specialized reporting formats such as credit reports and loan documents).
[i] HTML (Hypertext Markup Language) the language used to format web pages. Web browsers like Internet Explorer transmit information using the Hypertext Transport Protocol (HTTP).

55. Continuous Reporting and Auditing
Continuous reporting is the real-time disclosure of transaction data.
Embedded audit modules (EAM) are database software routines that are placed at predetermined points to gather information about transactions or events within the system that auditors deem to be material. EAMs allow auditors to proactively monitor auditable conditions.
Page 527
Continuous reporting is the real-time disclosure of transaction data. Organizations keep real-time records for accounts such as cash, receivables, payables and inventories. The company treasurer may manage cash, investments and securities on a continuous basis. At present there is no obstacle to disclose financial data on a real-time or short period basis, but corporations that have this ability, do not make it public. For example, U.S. company Cisco has often publicly mentioned its “daily book close”, but this information is not made public or posed on its web site.[i] [i] Greenstein, M. and M. Vasarhelyi Electronic Commerce Security, risk Management, and Control. 2nd Edition. McGraw-Hill Irwin. Boston
One much discussed method for using technology (ERP systems) to continuously audit is the embedded audit module (EAM).[i] Embedded audit modules (EAM) are database software routines that are placed at predetermined points to gather information about transactions or events within the system that auditors deem to be material. EAMs allow auditors to proactively monitor auditable conditions. [i] Nagel, K., and G. L. Gray Electronic Commerce Assurance Services. 2nd ed. San Diego: Harcourt Professional Publishing. .