Slide 12.

Audit Reports and

Communication
Principles of Auditing: An Introduction to
International Standards on Auditing - - Ch. 12

Waqar Ali

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.2

Management Responsibility for Audit Report -

SOX
Signing Officer / Financial Officers duty to review

Report does not contain any untrue statement of

a material fact or omit to state a material fact.

They are responsible for establishing and

maintaining internal controls:
have evaluated the effectiveness of the companys
internal controls; and
have presented their conclusions on effectiveness of
their internal controls based on their evaluation;
Disclosure to auditors / audit committee of any
material deficiencies.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.3

ISA 700 Auditors Opinion

[Illustrate to students using Burberrys Auditor Report.]
Title: Independent Auditors Report / [Addressee]
Introductory Paragraph [Report on Financial
Statements]
Managements Responsibility for
the Financial Statements
Auditors Responsibility
Opinion
Report on Other Legal and Regulatory
Requirements [Form and content of this section of the
auditors report will vary depending on the nature of the
auditors other reporting responsibilities.]
[Auditors signature]
[Date of the auditors report]
[Auditors address]
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.4

Objectives of the Auditor / Audit itself

To form an opinion on the financial

statements based on an evaluation of the
conclusions drawn from the audit evidence
obtained.
To express clearly that opinion through a
written report that also describes the basis
for that opinion.
Discuss with students the extensive work
that goes behind this. Remember the
structure of a file!
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.5

The opinion expressed in the

auditor's report may be one of four
types
Unmodified / Unqualified?
Three Modified Opinions:
Qualified Q U A D

Adverse
Disclaimer of
opinion

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.6

Unqualified Audit Opinion Also called

Unmodified Opinion
The auditor concludes
the financial statements are prepared, in all
material respects,
in accordance with the applicable financial
reporting framework.
Most common type of audit report (Burberry)
Called clean opinion
Used for more than 90 per cent of all audit
reports. Why?

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.7

Qualitative aspects forming basis of an

Unmodified Report
Disclosure of significant accounting policies (FSLIs):
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.
Fair Representation
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.8

Modified Reports: Navigation Chart

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.9

Modified opinion is necessary when

a) Evidence-based conclusion: Financial

statements as a whole are not free from
material misstatement.
b) Unable to obtain sufficient appropriate
audit evidence to conclude that the
financial statements as a whole are free
from

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.10

ISA 705 Types of Modified Opinions

[Illustrate to students each example.]

Auditors Judgement about the

Pervasiveness of the Effects on the
Nature of Matter Financial Statements
[Cause of Modification]
Material but Not Material &
Pervasive Pervasive
Material
Misstatement in Qualified Opinion Adverse Opinion
Financial Statements
Inability to obtain
Sufficient Appropriate Qualified Opinion Disclaimer of
Evidence Opinion

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.11

Auditors Qualified Opinion

[Left quadrants in previous slide]
The auditor (having obtained sufficient
appropriate audit evidence) concludes:
misstatements, individually or in the aggregate,
are material, but not pervasive, to the FS; 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.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.12

Students to review on their own:

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 (NB: Precedes Opinion Paragraph

below.)
ABC Companys 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 ABCs share of
XYZs net income of xxx is included in ABCs income for the year then ended.
We were unable to obtain sufficient appropriate audit evidence about the carrying
amount of ABCs investment in XYZ as at December 31, 20X1 and ABCs share
of XYZs 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 [Hayes,
ended in accordance with International Financial Reporting
Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.13

Auditors Adverse Opinion (ISA 705)

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.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.14

Auditors Disclaimer of Opinion (ISA

705)
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.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.15

Basis for Modification Paragraph

When the auditor modifies the opinion on the
financial statements, shall,
Include a paragraph in the auditors report
that provides a description of the matter
giving rise to the modification.
The auditor shall place this paragraph
immediately before the opinion paragraph,
Using the heading (as apt):
Basis for Qualified Opinion,
Basis for Adverse Opinion, or
Basis for Disclaimer of Opinion.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.16

An Emphasis of a Matter Paragraph

with an Unmodified Opinion
Specialty Case
Features: Fundamental to _____?,
or Other Matter beyond FS
After Opinion Paragraph
An unqualified report...
expanded upon
to explain matters that do not affect
the auditors opinion,
but should be emphasized to the
financial statement user. Examples?
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.17

Students to Review:
Report of Independent Registered Public Accounting Firm
[Standard Introductory Paragraph]
[Management Responsibility Paragraph]
[Auditor Responsibility Paragraphs]
[Opinion Paragraph]
Required Emphasis Paragraph[s] (Succeeds Opinion Paragraph)
[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]
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
[Date]
Slide 12.18

Emphasis of a Matter Examples

Uncertainty affecting FSLIs
resolution of which is dependent upon future events
Uncertainty Sponges:
Existence of related party transactions,
Important accounting matters occurring subsequent
(events) to the B/S 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 / held for sale, losses on discontinued
operations
A material matter regarding a going concern problem
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.19

Going Concern Objectives

(a) Sufficient / appropriate audit evidence:
about the appropriateness of managements use
of the going concern assumption in the
preparation and presentation of the financial
statements;
(b) To conclude, whether a material uncertainty
exists related to events or conditions that may
cast significant doubt on the entitys ability to
continue as a going concern; and
(c) To determine the implications for the auditors
report.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.20

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.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.21

Communications With Those Charged

With Governance (Financial Process)
Timely observations arising from the audit that are
significant and to their responsibility to oversee the
financial reporting process:
Qualitative aspects of accounting practices
Significant difficulties 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
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.22

Auditor Communications
(Governance) I
Material deficiencies in internal control

Non-compliance with laws and regulations / their

impact on FSLIs

Fraud involving management / Questions

regarding management integrity

The selection of, or changes in, significant

accounting policies and practices that have a
material effect on the financial statements
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.23

Auditor Communications
(Governance) II
Potential effect on FS of:
significant risks and exposures / disclosure in FS
Significant audit adjustments to the accounts
Going Concern uncertainty
Disagreements with management
about matters that could be significant to FS

Expected modifications to the auditors report

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.24

Long-Form Audit Report (Can you relate

this to Burberry?)
In many countries it is customary for the auditor
to prepare a long-form report to the Audit
Committee of an entitys 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
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.25

Management Letter / Audit Findings

Report
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
(Illustrate using a business example.)
Problem which may require immediate
action to correct.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.26

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.
Illustrate to students audit / professional efficacy
(Tax)
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 12.27

Continuous Reporting and Auditing

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. Auditability (FSLIs in
response to risk assessment)
Daily Book Close

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007