Aninditra Nuraufi Sardjono

EAK 1406555675

Summary : Chapter 12 - Audit Reports and Communication

1.1. Basic Elements of the Auditors Report
ISA 700, Forming an Opinion and Reporting on Financial Statements states: 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 entitys accounting
practices, including indicators of possible bias in managements judgment. The auditors
report should contain a clear written expression of opinion on the financial statements taken as
a whole. However, we now have a new format as set out by ISA 700 and this format is
different from that used in many countries. The format will stabilize to the ISA standard in the
near future, but today the audit standards organizations of the world are wrestling with
providing a format that will give the user of the auditors report more information about the
audit process. In the United States, for instance, the PCAOB has issued a concept release to
solicit public comment on the potential direction of a proposed standard-setting project on the
content and form of reports on audited financial statements.

Contents of the Auditors Report

The auditors report should be written and include the following basic elements that are
discussed in more detail in the balance of this section :
A title, e.g. Independent Auditors 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 auditors responsibility to express an opinion on the financial
statements and the scope of the audit, that includes:
o A reference to International Standards on Auditing and the law or regulation; and
o 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 auditors signature;
The date of the auditors report; and
The auditors address.

Title
The auditors report should have an appropriate title that helps the reader to identify it and
easily distinguish it from other reports, such as that of management. The most frequently used
title is Independent Auditor or Auditors Report in the title to distinguish the auditors
report from reports that might be issued by others.

Addressee
The report should be addressed as required by the circumstances of the engagement and the
local regulations. The report is usually addressed either to the shareholders or supervisory
board or the board of directors of the entity whose financial statements have been audited. In
some countries, such as The Netherlands, auditors reports are not addressed at all because the
reports are meant to be used by (the anonymous) public at large.

Opening or Introductory Paragraph

The report should identify the entity whose financial statements that have been audited. This
should include the name of the entity and the date and period covered by the financial
statements. The report should state that the financial statements have been audited, identifying
the title of each statement that comprises the financial statements. The report should also refer
to the summary of significant accounting policies and other explanatory information.

Managements Responsibility for the Financial Statements

The Managements Responsibility section of the auditors report describes the responsibilities
of those in the organization that are responsible for the preparation of the financial statements.
The auditors report need not refer specifically to management, but shall use the term
appropriate to the legal framework in that particular country. In some jurisdictions, the
appropriate reference may be to those charged with governance. The auditors report shall
include a section with the heading Managements [or other appropriate term] Responsibility
for the Financial Statements. The description shall include an explanation that management is
responsible for the preparation of the financial statements in accordance with the applicable
financial reporting framework, and for internal control to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or error. Where the
financial statements are prepared in accordance with a fair presentation framework, the
explanation of managements responsibility for the financial statements in the auditors report
shall refer to the preparation and fair presentation of these financial statements or the
preparation of financial statements that give a true and fair view, as appropriate in the
circumstances.

Auditors Responsibility
The auditors report will include a section with the heading Auditors Responsibility. The
auditors report shall state that the responsibility of the auditor is to express an opinion on the
financial statements based on the audit. The audit report explains that ISA standards require
that the auditor comply with ethical requirements and that the auditor plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free from
material misstatement.
The present auditors report format under auditors responsibility (the third, fourth and fifth
paragraph) describes the scope of an audit by stating that:
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements;
The procedures selected depend on the auditors 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 entitys
preparation 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 entitys internal control. (In circumstances when the auditor also has a
responsibility to express an opinion on the effectiveness of internal control in conjunction
with the audit of the financial statements, the auditor shall omit the phrase that the auditors
consideration of internal control is not for the purpose of expressing an opinion on the
effectiveness of internal control); and
An audit also includes evaluating the appropriateness of the accounting policies used and
the reasonableness of accounting estimates made by management, as well as the overall
presentation of the financial statements.
Where the financial statements are prepared in accordance with a fair presentation framework,
the description of the audit in the auditors report must refer to the entitys preparation and fair
presentation of the financial statements or the entitys preparation of financial statements that
give a true and fair view, as appropriate in the circumstances. The auditors report shall state
whether the auditor believes that the audit evidence the auditor has obtained is sufficient and
appropriate to provide a basis for the auditors opinion

Opinion Paragraph
The auditors report will include a section with the heading Opinion.
When expressing an unmodified (unqualified) opinion on financial statements prepared in
accordance with a fair presentation framework, the auditors opinion shall use one of the
following phrases, which are regarded as being equivalent:
The financial statements present fairly, in all material respects, in accordance with [the
applicable financial reporting framework]; or
The financial statements give a true and fair view of in accordance with [the applicable
financial reporting framework].
When expressing an unmodified opinion on financial statements prepared in accordance with a
compliance framework, the auditors opinion shall be that the financial statements are
prepared, in all material respects, in accordance with [the applicable financial reporting
framework]. If the reference to the applicable financial reporting framework in the auditors
opinion is not to International Financial Reporting Standards issued by the International
Accounting Standards Board or International Public Sector Accounting Standards issued by the
International Public Sector Accounting Standards Board, the auditors opinion shall identify the
jurisdiction of origin of the framework.
International Standard on Auditing (ISA) 200, states that the purpose of an audit is to enhance
the degree of confidence of intended users in the financial statements. This is achieved by the
expression of an opinion by the auditor on whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial reporting framework. he financial
reporting framework is determined by International Financial Reporting Standards (IFRSs),
rules issued by professional bodies, and the development of general practice within the country,
with the appropriate consideration of fairness and with due regard to local legislation.
To advise the reader of the context in which fairness is expressed, the auditors opinion would
indicate the framework upon which the financial statements are based by using words such as
...in accordance with International Accounting Standards (or [title of financial reporting
framework with reference to the country of origin])...

Report on Other Legal and Regulatory Requirements

If the auditor addresses other reporting responsibilities in the auditors report on the financial
statements that are in addition to the auditors responsibility under the ISAs to report on the
financial statements, these other reporting responsibilities shall be addressed in a separate
section in the auditors report that shall be sub-titled Report on Other Legal and Regulatory
Requirements, or otherwise as appropriate to the content of the section.

Signature of the Auditor and Date of the Report

The auditors report must be signed. 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 auditors 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 auditors
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.

Auditors Address
The report should name a specific location, which is usually the city in which the auditor
maintains an office that serves the client audited. PCAOBs Auditing Standard No.1 also
requires that an auditor include the city and state (or city and country, in the case of non-local
auditors) from which the auditors report has been issued. Note: In some countries it is not
required that the audit report give the specific address for the auditor.

Signature
The report should be signed in the name of the audit firm, or the personal name of the auditor,
or both, as appropriate. The auditors report is ordinarily signed in the name of the firm
because the firm assumes responsibility for the audit. Note: In several countries (e.g. the USA,
the UK, the Netherlands) it is currently not required that the personal name of the auditor be
signed. Inclusion of the name in a reference is sufficient.

Other Formats of the Auditors Report

An auditor may be required to conduct an audit in accordance with the auditing standards of a
specific jurisdiction (the national auditing standards), but may additionally have complied
with the ISAs in the conduct of the audit. If this is the case, the auditors report may refer to
International Standards on Auditing in addition to the national auditing standards. However,
the auditor shall make reference to ISAs and the national standards only if there is no conflict
between the requirements of the two sets of standards that would lead the auditor to form a
different opinion, or not to include an Emphasis of Matter paragraph that, in the particular
circumstances, is required by ISAs. Furthermore, the auditors report must still include each of
the elements required by the ISA format when he uses the layout or wording specified by the
national auditing standards. When the auditors report refers to both the national auditing
standards and International Standards on Auditing, the auditors report must identify the
jurisdiction of origin of the national auditing standards.
 Form of an Auditors Report
The most common type of audit report is the standard unmodified (historically called an
unqualified) audit report. It is used for more than 90 percent of all audit reports. Other audit
reports are referred to as other than unmodified reports. Other than unmodified reports
include those reports that express: an adverse opinion, disclaimer of opinion, and modified.
The form of an auditors report will generally be the form of the unmodified report which
traditionally consisted of just three paragraphs ( introduction, scope, and opinion), but now it
may consist of several paragraphs so long as the basic elements are covered (Introduction,
Managements Responsibility, Auditors Responsibility (including audit scope), and Auditors
Opinion). For unmodified financial statement opinions the PCAOB currently requires the
traditional, three paragraph report. Reports can also include a paragraph after the opinion
paragraph called an emphasis of a mater paragraph (see ISA 706) In some countries a
paragraph referring a qualification as a result of inadequate accounting procedures or
disclosure may be inserted just before the opinion paragraph.
The final paragraph in the standard unmodified report states the auditors conclusion based on
the results of the audit examination. This paragraph is so important that the entire audit report
is frequently referred to as the auditors opinion. The opinion paragraph is stated as an
opinion rather than as statement of absolute fact or a guarantee. The intent is to indicate that the
conclusions are based on professional judgment.

Modified Opinion
An auditors report is considered to be modified in the two different situations:
1. Matters that do not affect the Auditors Opinion (which would mean adding an emphasis of
matter paragraph);
2. Matters that do affect the Auditors Opinion (instances that call for either a (a) qualified
opinion, (b) disclaimer of opinion, or (c) adverse opinion).
As the users understanding will be better if the form and content of each type is uniform, ISA
705, Modifications to the Opinion in the Independent Auditors Report, includes suggested
wording to express a qualified, adverse or disclaimer of opinion.
1.2. Types of Report Expressing Audit Opinion
The opinion expressed in the auditors report may be one of four types: unmodified, qualified,
adverse or disclaimer of opinion.

Standard Unmodified Opinion Auditors Report

The auditors unmodified report should be expressed when the auditor concludes that the
financial statements are prepared, in all material respects, in accordance with the identified
financial reporting framework. An auditors report containing an unmodified opinion also
indicates implicitly that any changes in accounting principles or in the method of their
application, and their effects, have been properly determined and disclosed in the financial
statements. Illustration12.2 earlier shows sample wording for an auditors unmodified report.

Requirements to Give Unmodified Opinion

In order to form that opinion, the auditor shall conclude as to whether he 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 whether
sufficient appropriate audit evidence has been obtained, if uncorrected misstatements are
material, individually or in aggregate; and certain evaluations as to correspondence of financial
statements to the requirements of the applicable financial reporting framework.
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. If the auditor concludes based on the audit evidence that the financial statements
as a whole are not free from material misstatement; or is unable to obtain sufficient appropriate
audit evidence he must modify the opinion in the auditors report by expressing a qualified,
adverse or disclaimer of opinion.
Auditors Report Containing a Modified Opinion
The auditor will express a qualified opinion when:
Having obtained sufficient appropriate audit evidence, the auditor 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.
The key concepts to consider are materiality and pervasiveness. Information is material if its
omission or misstatement could influence the economic decisions of users taken on the basis of
the financial statements. Materiality depends on the size of the item or error judged in the
particular circumstances of its omission or misstatement. Thus, materiality provides a threshold
or cutoff point rather than being a primary qualitative characteristic which information must
have if it is to be useful. Pervasive is a term used to describe the effects on the financial
statements of misstatements or the possible effects on the financial statements of misstatements
that are undetected due to an inability to obtain sufficient appropriate audit evidence. Pervasive
effects on the financial statements are those that, in the auditors judgment:
Are not confined to specific elements, accounts or items of the financial statements;
If so confined, represent or could represent a substantial proportion of the financial
statements; or
In relation to disclosures, are fundamental to users understanding of the financial
statements.

Auditors Report Containing an Adverse Opinion

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.
An adverse opinion is issued when the effect of a disagreement is so material and pervasive to
the financial statements that the auditor concludes that a qualification of his report is not
adequate to disclose the misleading or incomplete nature of the financial statements.

Auditors Report Containing a Disclaimer of Opinion

The auditor will disclaim an opinion when he is unable to obtain sufficient appropriate audit
evidence on which to base the opinion, and he concludes that the possible effects on the
financial statements of undetected misstatements, could be both material and pervasive. The
auditor would also 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.
An auditors report containing a disclaimer of opinion should be expressed when the possible
effect of a limitation on scope is so material and pervasive that the auditor has not been able to
obtain sufficient appropriate audit evidence and therefore is unable to express an opinion on the
financial statements.
When an auditor issues a disclaimer of opinion, more often than not there is a finding regarding
the internal controls (controls or either ineffective or are missing/not in place, or a
combination). Whenever the auditor issues a report that is other than unmodified, he should
include a clear description of all the substantive reasons that should be included in the report
and a qualification of the possible effect(s) on the financial statements. This information should
be set out in a separate paragraph, preceding the opinion or disclaimer of opinion and may
include a reference to a more extensive discussion, if any, in a note to the financial statements.

Consequence of an Inability to Obtain Sufficient Appropriate Audit Evidence Due to a

Management-Imposed Limitation after the Auditor Has Accepted the Engagement
If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor shall
determine if the possible effects on the financial statements of undetected misstatements. If the
effects could be material but not pervasive, the auditor shall qualify the opinion. If the auditor
concludes that the possible effects on the financial statements of undetected misstatements
could be both material and pervasive he must withdraw from the audit. If withdrawal from the
audit before issuing the auditors report is not practicable or possible, the auditor should
disclaim an opinion on the financial statements. Before withdrawing, the auditor will
communicate to those charged with governance any matters regarding misstatements
identified.
When the auditor considers it necessary to express an adverse opinion or disclaim an opinion
on the financial statements as a whole, the auditors report shall not also include an unmodified
opinion with respect to the same financial reporting framework on a single financial statement
or one or more specific elements, accounts or items of a financial statement. To include such an
unmodified opinion in the same report in these circumstances would contradict the auditors
adverse opinion or disclaimer of opinion on the financial statements as a whole.

Form and Content of the Auditors Report When the Opinion Is Modified
When the auditor modifies the opinion on the financial statements, the auditor will include a
paragraph in the auditors report that provides a description of the basis for the modification.
This paragraph is placed immediately before the opinion paragraph in the auditors report
under the heading Basis for Qualified Opinion, Basis for Adverse Opinion, or Basis for
Disclaimer of Opinion, as appropriate. The auditor includes in the basis for modification
paragraph a description and quantification of the financial effects of the misstatement. If it is
not practial to quantify the financial effects, the auditor shall state that in the basis for
modification paragraph. If the modification results from an inability to obtain sufficient
appropriate audit evidence, the auditor shall include in the basis for modification paragraph the
reasons for that inability.
If there is a material misstatement of the financial statements that relates to narrative
disclosures, an explanation of how the disclosures are misstated should be included in the basis
for modification paragraph. If a material misstatement relates to the non-disclosure of
information required to be disclosed, the auditor shall discuss the non-disclosure with those
charged with governance; describe in the basis for modification paragraph the nature of the
omitted information; and include the omitted disclosures.

Opinion Paragraph When the Opinion is A Modified One

When the auditor modifies the audit opinion, the auditor uses the heading Qualified Opinion,
Adverse Opinion, or Disclaimer of Opinion, as appropriate, for the opinion paragraph.
When the auditor expresses a qualified opinion, the auditor states in the opinion paragraph that,
in the auditors opinion, EXCEPT FOR the effects of the matter(s) described in the Basis for
Qualified Opinion paragraph, the financial statements present fairly, in all material respects (or
give a true and fair view) in accordance with the applicable financial reporting framework
when reporting in accordance with a fair presentation framework OR in accordance with the
applicable financial reporting framework when reporting in accordance with a compliance
framework. When the modification arises from an inability to obtain sufficient appropriate
audit evidence, the auditor shall use the corresponding phrase except for the possible effects
of the matter(s) ... for the modified opinion.
When the auditor expresses an ADVERSE OPINION, the auditor will state in the opinion
paragraph that, in the auditors opinion, because of the significance of the matter(s) described
in the Basis for Adverse Opinion paragraph the financial statements do not present fairly (or
give a true and fair view) in accordance with the applicable financial reporting framework
when reporting in accordance with a fair presentation framework; or in accordance with the
applicable financial reporting framework when reporting in accordance with a compliance
framework.
When the auditor DISCLAIMS an opinion due to an inability to obtain sufficient appropriate
audit evidence, the auditor states in the opinion paragraph that because of the significance of
the matter(s) described in the Basis for Disclaimer of Opinion paragraph, the auditor has not
been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion;
and, accordingly, the auditor does not express an opinion on the financial statements.

Description of Auditors Responsibility for Qualified, Adverse or Disclaimer

 When the auditor disclaims an opinion due to an inability to obtain sufficient appropriate audit
evidence, the auditor must amend the INTRODUCTORY paragraph of the auditors report to
state that the auditor was engaged to audit the financial statements. The auditor shall also
amend the description of the auditors responsibility and the description of the scope of the
audit to state only the following: Our responsibility is to express an opinion on the financial
statements based on conducting the audit in accordance with International Standards on
Auditing. Because of the matter(s) described in the Basis for Disclaimer of Opinion paragraph,
however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for
an audit opinion.

1.3. Emphasis of a Matter Paragraph

The auditor, having formed an opinion on the financial statements, sometimes must draw the
financial statement users attention to 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 any other matter that is relevant to users
understanding of the audit, the auditors responsibilities, or the auditors report. This part of the
opinion is called an emphasis of a matter paragraph or other matter paragraph. An Emphasis of
Matter paragraph is a paragraph included in the auditors report that refers to a matter
appropriately presented or disclosed in the financial statements that, in the auditors judgment,
is of such importance that it is fundamental to users understanding of the financial statements.
The Other Matter paragraph is a paragraph included in the auditors report that refers to a
matter other than those presented or disclosed in the financial statements that, in the auditors
judgment, is relevant to users understanding of the audit, the auditors responsibilities or the
auditors report.
When the auditor includes an Emphasis of Matter paragraph in the auditors report, the auditor
shall include it immediately after the Opinion paragraph in the auditors report and use the
heading Emphasis of Matter. Furthermore, the auditor will 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 indicate that the auditors opinion is not
modified in respect of the matter emphasized.
If the auditor considers it necessary to communicate a matter other than those that are
presented or disclosed in the financial statements that is relevant to users understanding of the
audit, the auditor shall do so in a paragraph in the auditors report, with the heading Other
Matter. This paragraph is placed immediately after the Opinion paragraph and any Emphasis
of Matter paragraph.
Ordinarily, 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;
to highlight a material matter regarding a going concern problem.
other matters.
An illustration of an emphasis of matter paragraph for a significant uncertainty in an auditors
report follows:
Emphasis of Matter
We draw attention to Note X to the financial statements which describes the
uncertainty related to the outcome of the lawsuit filed against the company by XYZ
Company. Our opinion is not qualified in respect of this matter.
OR
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.

Uncertainties in the Emphasis of a Matter Paragraph

Examples of uncertainties that might be emphasized include the existence of related-
party transactions, important accounting matters occurring subsequent to the balance
sheet and matters affecting the comparability of financial statements with those of
previous years (e.g. change in accounting methods).
Going Concern Emphasis of Matter
The going concern assumption is one of the fundamental assumptions underlying
preparation of financial statements. An enterprise is normally viewed as a going
concern, that is, as continuing in operation for the foreseeable future. ISA 570
establishes standards and provides guidance on the auditors responsibilities regarding
the appropriateness of the going concern assumption as a basis for preparing financial
statements. When a question arises regarding the appropriateness of the going concern
assumption, the auditor should gather sufficient appropriate audit evidence to attempt to
resolve, to the auditors satisfaction, the question regarding the entitys ability to
continue in operation for the foreseeable future.

Going Concern Disclosure

After the auditor has carried out the additional procedures deemed necessary, obtained
all required information and considered the effect of managements plans, he should
determine whether the questions raised regarding going concern have been
satisfactorily resolved. If the going concern questions are not resolved, the auditor must
adequately disclose in his report the principal conditions that raise doubt about the
entitys ability to continue in operation in the foreseeable future. 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.