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Student id: 305764/406477

Student ID: 305764/406477
Submitted to: Julia Spencer
Total Word: 2650

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Student id: 305764/406477

Financial auditing is an accounting process which is used in business. It uses an independent
body(IAASB) to examine a business' financial transactions and statements. The main and ultimate
purpose of this form of auditing is to present an accurate accounting position of a company's financial
business transactions. The practice is used to make sure that the company is trading financially fairly,
and also that the accounts it is presenting to the public or shareholders are accurate and justified. The
results of the audit procedure will be ended with an independent written audit report. According to
company act 2001(section 205)1 this can be presented to shareholders, banks and anyone else with an
interest in the company. Durendez Gmez-Guillamn (2003)2 describe in the journal that financial
decisions like making loan depend on the audit report. Basically the audit report conveys whether the
assertions made by management are credible or not.
Audit has a very important place in society. The audit report is the most visible output from the
auditors and International Auditing and Assurance Standard Boards(IAASB) takes initiative to
improve its relevance and usefulness to shareholders and other parties who have interest. In this
report, we will discuss the IAASBs current and revised formats for the audit reports. Similarities and
differences between International Standard on Auditing 700 current and revised, reasons for the
changes, example of cases where audit report were felt to be inadequate and a critical discussion
between ISA 700 (revised) and ISA 701.

Reasons for the changes:

The auditors report is the key deliverable communicating the results of the audit process. Investors
and other financial statement users have asked for a more informative auditors reportin particular
for auditors to provide more relevant information to users.
Research, public consultations, and stakeholder outreach, including global roundtables, indicate that
enhanced auditor reporting is critical to influencing the perceived value of the financial statement

Expectations Gap:
Since 1960s, a rising number of powerful companies got bankrupted, and as a result investors are
questioning about their professional performance. Indeed, auditors weak performance could
potentially mislead the public from a true and fair view. Generally, this types of situations arises when
auditors failed to satisfy the public. Thereafter, for getting an ideal knowledge about publics
expectations Liggio(1974)3 proposed a theory named Expectations Gap. He describes expectations
gap as the difference between the levels of expected performance as envisioned by the independent
1 CA2001, section:205, Auditors Report.
2 Durendez Gmez-Guillamn, Managerial Auditing Journal, 2003
3 Hian Chye Koh, ESah Wooal, Managerial Auditing Journal, 1998
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Student id: 305764/406477

accountant and by the users of financial statements. Now we will discuss about manifestations of
expectations gap:
Generally, there principles are subjected in the study of expectations gap, the public, the auditors, and
the auditing standards. Specifically, expectations gap mainly occurs:
1. Between auditors performance and existed auditing standards:
Auditors work according to existing auditing standard and because of heavy workload or lack of
their ability sometimes auditors may deviate from the standard to a variable extent.
2. Gap between auditors and internal accountant:
The main purpose of the audit is to point an opinion with a reasonable assurance which give a true
and fair view to the financial statement. Sometimes the internal accountants deceive with auditors
and if auditors cannot find that misstatement, the report cannot give the true and fair view of the
company. The company act (2006)4 clearly states that the responsibilities of audited companies
cannot be replaced by auditors' duties. The audited companies should be responsible for the integrity
and truth of financial statements.
Porter (1993)5 defines three reasons for the gap:
1. Deficient Performance:different postulates and objectives need to be considered in the auditing
time. Unqualified auditors, complicated business activities, complication which is connected with
fraud, different technology could be the reason for expectations gap. Because of this problems
auditors could not be able to give a true and fair view.
2. Deficient Standard:
ambiguous auditing standard may cause expectation gap. For example, it
is illegal to charge for the auditing assurance, but if auditors get paid for the consultation which
can affect auditors independence.
3. Unreasonable Expectation:
asymmetry in the information can mislead the auditors. For
making the investment decision, public depends on auditing report. This may occur expectations

Example of audit failure:

Now we will depict some cases where audit reports failed to give a true and fair view of the
company. Enron and Northern Rock scandal in point.
Enron, energy company, founded by Ken Lay. After establishing in 1985. Enron is
known for the biggest scandal that led to the bankruptcy. Enrons financial statement was not very
4 CA2006, Part-16, Audit
5 Brenda Porter, Accounting Education: An International Journal, 2010.
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Student id: 305764/406477

clear about its shareholders. Furthermore, Enron used market-to-market policy which meant long
term contract were estimated at the present value of net cash flows. This method is dangerous to
judge the real financial position of the company. As a result, In the year 2000, the share price of
the company picked up approximately $90 and in November 2001, share price slumped to less
than $1. And then Enron filled bankruptcy in December 2001
Arthur Anderson was the auditor of Enron. Arthur Anderson was charged with and found guilty of
obstruction of justice for shredding thousands of documents and erasing e-mails and company
files that related to its audit of Enron. As a result, Arthur Anderson lost the right to audit. 6
Northern Rock: NORTHERN ROCK, the UK's fifth biggest mortgage lender, went into
financial meltdown when it was forced to call on emergency funding from the Bank of England in
September, sparking the first big run on a British bank in 140 years.
In January 2012 the UK government sold Northern Rock to Virgin Money for 747m. though
Pricewaterhousecoopers (PwC), auditor of Norther Rock, were not sued but did get criticized for
lack of claims of a conflict of interest and going concern warnings.

Discussion on Current ISA 700 and ISA 700(revised):

The International Auditing and Assurance Standard Board (IAASB) proposed a revision of
International Standard of Auditing(ISA) 700. Which will be effective for period ending on or after
December 15, 2016. Now we will discuss about the key changes in ISA:

References to the Accounting Standard Board have now been replaced by Financial
Reporting Council.

Terminology in relation to modified reports has changed, for example;

A disagreement is currently detailed as a qualified opinion.
Depending on the pervasiveness of the disagreement and the
materiality it may now be detailed as an adverse opinion.

Limitation on scope currently leads to a qualified opinion in certain

circumstances and depending on the pervasiveness of the effect if
material is now a disclaimer of opinion

An example of an other matter paragraph could include the following;

The main change from the old ISA 700 is the format of the audit report.
The current format includes title, respective responsibilities of directors
and auditors, basis of audit opinion, opinion and if required an EOM

Respective responsibilities of directors and auditors has now

been condensed and just includes references to responsibilities

The Basis of audit opinion has been replaced with Scope of the
audit of financial statements.

6 The Economist, 2002

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Student id: 305764/406477

How the changes aim to improve public view :

The communication between auditors and investors are enhanced, as well as corporate

Improved users confidence in financial statements and audit reports

Renewed auditors focus on matters to be reported that could result in an increase in

professional scepticism

Improved audit quality and enhanced information value and its transparency

Increased attention by management and financial statement prepares to disclosures

referencing the auditors report.7

A discussion on ISA 701 and 700:

The revised and new auditor reporting standard from the IAASB are intended to improve the
communication value of the auditors report and to increase publics confident by providing
greater transparency about the audit that was performed. All in all, the changes in revised and new
ISA will required to provide greater insights into the audit by enhancing the form and disclosure
content of the auditors report. Among the key changes, the requirement to report key audit
matters(KAMs) and Opinion Paragraph and Going concern have significant changes.
Key Changes of auditors report:
Relocation of the auditors opinion:now the auditors report will be presented first, followed by the
basis for opinion section including unmodified opinions.
The proposed revised ISA 700 brings new guidance on the matter that auditor considers when forming
the auditors opinion on the statement of the financial position as a whole at the conclusion of the
audit. At present, the direction in the ISAs concentrates on circumstances when an alteration to the
evaluator's report might be required and is found in different ISAs. Another segment in the proposed
modified ISA 700 manages matters the inspector needs to consider when reflecting, toward the end of
the review process, on the reasonable presentation of the financial articulations in general. The
direction perceives the uncommon circumstances when particular prerequisites in the monetary
reporting system might bring about deluding data or extra divulgences are required. While the
examiner's reaction to such circumstances will rely on upon how administration has tended to the
matter in the financial articulations and how the money related reporting structure manages these
uncommon circumstances, eventually, the evaluator is guided by the examiner's moral obligations and
needs to be fulfilled that the data passed on in the money related explanations together with the
inspector's report is not deluding.

7 IAASB, where are the intended benefits.

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In dependent and other relevant ethical requirements:
the auditors report should be included with
a statement of the auditors independent of the entity and has fulfilled all other relevant ethical
requirements, with disclosure of the jurisdiction of the origin of those requirements is needed to
reference with International Ethics Standard Board for Accountants.
Key Audit Matters(KAMs):
KAMs are the subject of ISA 701, Communicating Key Audit
Matters in The Independent Auditors Report. The requirement of key audit matter is unnecessary
where the auditor is satisfied with such matter have been disclosed appropriately in the annual report
where the auditor feel satisfied. The FRC are keen to avoid duplication of a description of key audit
matter in both auditors report and the report prepared by government charged. The IAASB s
proposal does not highlight the auditors judgement, fundamental to users understanding of the
financial statement.
The accentuation of matter and other matter section in ISA 706 cannot be utilized a substitute for
KAMs. by The consideration of KAMs in the upgraded evaluator's report does not change the
fundamental obligations of the reviewers. The beginning stage for depicting KAMs in a review is to
see at the rundown of critical review matters that were conveyed to the review advisory group and the
board. From this, the evaluator needs to figure out which matters will require their noteworthy review
consideration. This second rundown is then limited around distinguishing the matters that were the
hugest in the review of the money related explanations of the present period.
Material Uncertainty related to going concern: This is one of the more imperative areas of potential
change, stemming from criticism that the current inspector's report says too little in regards to going
concern matters, leaving shareholders and different clients with inadequate data to achieve an
educated conclusion on going concern matters. The illustrative examiner's report contains a different
section quickly underneath the premise for feeling passage, highlighting the significance of going
concern matters. The IAASB sees this as a noteworthy matter, expressing in the Invitation to
Comment: 'The late worldwide money related emergency has highlighted the significance to monetary
markets of clear and auspicious financial reporting. It has likewise brought about a more prominent
spotlight on the evaluation of going concern and related revelations a few respondents to the
IAASB's May 2011 interview requested elucidation of the separate parts and obligations of
administration and the inspector with respect to going concern, and for reviewers to report the result
of their review work in regards to going concern. These advancements give a huge stimulus to the
IAASB to try to upgrade examiner reporting around there.'

In particular, the proposals are that every one of evaluators' reports ought to incorporate, having
respect to the pertinent financial reporting system:

A conclusion with respect to the propriety of administration's utilization of the going concern
presumption, and

A articulation with respect to whether, taking into account the review work performed,
material instabilities identified with occasions or conditions that might provide reason to feel
ambiguous about huge the element's capacity to proceed as a going concern have been distinguished.
To minimize potential misjudging, the illustrative report clarifies that, as not every single future
occasion or conditions can be anticipated, the announcement about the nonappearance of material
vulnerabilities is not an assurance as to the element's capacity to proceed as a going concern.
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Student id: 305764/406477

Moreover, a different passage in the segment of the auditors report managing administration's
obligations will depict administration's obligations in connection to going concern. This clarifies
administration make an evaluation about the substance's capacity to proceed as a going concern,
considering all accessible data about the future, which is in any event, however is not constrained to,
twelve months from the end of the reporting period.
The Applicable Financial Reporting Framework

Paragraph 3 in extant ISA 700 alludes to the requirement for the auditor to consider whether the
financial explanations have been readied as per a "satisfactory" financial reporting structure, but it
does not give any direction on how the examiner surveys the "acceptability" of the framework. ISA
315, "Getting an Understanding of the Entity and Its Environment and Surveying the Risks of
Material Misstatement" as of late affirmed by the IAASB additionally presented the idea of the
"appropriate" money related reporting structure. This presentation draft proposes alterations to ISA
200 and ISA 210 that clear up the inspector's obligations as for administration's distinguishing proof
of a material financial reporting structure and fills the crevice in the ISAs on how the inspector
evaluates whether those systems are "worthy." This direction perceives that appropriate financial
reporting systems vary contingent upon the way of the element (for instance, benefit situated, notrevenue driven, governments) and the goal of the money related articulations (broadly useful or
intended for an uncommon reason). The modifications propose to present the rule that the inspector
ought not acknowledge an engagement for a review of financial articulations when the examiner
infers that the monetary reporting system distinguished by administration is not worthy.

Wording of the Auditors Report:

In addition to new and revised guidance on the matters
above, the exposure draft brings some changes to the wording of the auditors report. While
the IAASBs consideration of the auditors report did not entail a fundamental
reconsideration of the role and approach to reporting, the IAASB did review existing
auditors report wording in other jurisdictions, as well as the new Audit Risk Standards
recently approved by the IAASB, with a view to expanding and updating the wording of the
auditors report to enhance understanding of the auditors role and the auditors report. The
proposed new wording for the auditors report includes:
Better explanations of the respective responsibilities of management and the auditor.
An updated description of the audit process to reflect the new Audit Risk Standards.
Clarification of the scope of the auditors responsibilities with respect to internal control.

The IAASB has proposed some critical changes to the structure and substance of the
auditor's report. It can be seen that there are numerous preferences to these
recommendations for the clients of financial explanations, particularly given the
expanding many-sided quality of financial proclamations, and the requirement for
both preparers and auditors to practice significant judgments while performing their
roles. The additional disclosures should enhance users understanding of the audit
process and the nature of risk-based auditing, however there are a few drawbacks to
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the proposition, for example, the expanded length of the auditor's report which, for a
few elements, implies that the expense might well exceed the advantage.

1. Government Gazette of Mauritius. (2001). THE COMPANIES ACT 2001.Available: Last accessed 10th
Dec 2015.
2. GmezGuillamn, A. (2003). The usefulness of the audit report in investment
and financing decisions. Managerial Auditing Journal. 18 (6/7), p549-555.
3. Hian Chye Koh, ESah Wooal. (1998). The expectation gap in auditing.Managerial
Auditing Journal. 13 (3), p147-153.
4. The National Archives. (2006). Companies Act 2006. Available:
ties-and-rights-of-auditors. Last accessed 10th dec 2015.

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Student id: 305764/406477

5. Porter,B. Bui, B. (2010). The Expectation-Performance Gap in Accounting
Education: An Exploratory Study. Accounting Education: an international journal.
19 (1-2), p23-50.
6. The Economist. (2002). The lessons from Enron. Available: Last accessed 13th dec 2015.
7. international federation of accountants. (2003). Proposed Revised to ISA 700,
The Independent Auditors report on Financial Statements.Proposed
Pronouncements on the Auditors Report . 1 (1), p7-21.

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