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Course Code: ACC 3210

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Submission Due on :
Type of Assignment:
Title of the Assignment:
Mr. Deepal A.Guruge
Department of Accounting and Finance.
24th of April 2020.
Individual Assignment
Critical Evaluation of one of the Sri Lanka Auditing Standards
(SLAuS) with its practical implications.

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Declaration

We hereby declare that this assignment is our own work and effort and that, to the best of our
knowledge and belief, it contains no material previously published or written by another
person nor material which has been accepted for the award of any other degree or diploma of
the university or other institute of higher learning, except where due acknowledgment has
been made in the text.

No. Name of the student Student Reg. No. Student’s Signature

Date: 24/04/2020
Abstract
In this study I discuss one of the Sri Lanka Auditing Standard (SLAuS), SLAuS-700 the
Auditor’s Report on Financial Statements. The auditor’s report is considered as the most
important tool of financial communication. It is a written letter about the auditor’s opinion.
So the audit report must be readable by all the users of the financial statements. The intention
of this report is to discuss the selected standard with it practical situation and get overall idea
about the selected standard. Therefore I followed the Sri Lanka Auditing Standard,
International Standards on Auditing (ISA) and auditor’s report of well established companies.
Then collect the information and discuss that all findings properly within this report.

Before the discussing the Auditor’s report essential to understand about the term of audit,
need of the audit services and why standards are importance. Therefor I mentioned here some
background information about the selected standard (SLAuS -700).

 Key words: Audit opinion, literature Review, Stakeholders, GAAP & GAAS, ISA &
SLAuS, and Accounting policies.

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Contents
Abstract...................................................................................................................................1
Acknowledgment....................................................................................................................2
Introduction............................................................................................................................3
Literature Review...................................................................................................................4
Analysis and Discussion.........................................................................................................6
Introduction........................................................................................................................6
The Auditor’s Report.........................................................................................................6
Basic Components of the Auditor’s Report......................................................................6
1) Title..............................................................................................................................7
2) Addressee.....................................................................................................................7
3) Introductory Paragraph.............................................................................................8
4) Scope Paragraph.........................................................................................................8
5) Opinion Paragraph.....................................................................................................9
6) Date of the report......................................................................................................10
7) Auditor’s Address.....................................................................................................10
8) Auditor’s signature...................................................................................................10
Modified Report................................................................................................................11
Circumstances that may result in other than an unqualified opinion...........................11
Disagreement with management......................................................................................12
Compliance with International Standards on auditing..................................................12
Effective Date....................................................................................................................12
Conclusion.............................................................................................................................13
References.............................................................................................................................14
Appendix...............................................................................................................................15
Acknowledgment
This study would not have been undertaken without the support of a number of peoples. Most
important person of among is my lecturer Mr. Deepal A Guruge. (Senior Lecturer,
Department of Accounting & Finance), and another who support to me by providing
importation and guide Mr.Rasika wijesooriya (lecturer of CA Sri Lanka).

Finally I must Thanks my parents and my friends who all supported me to done this study
successfully.

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Introduction
The Audit is an act important role of in entities to fraud prevention. Without a proper audit
system, an organization cannot be create reliable financial reports for internal or external
purposes. There for all the organizations are continue proper audit system. So when consider
about the Auditors, when they are doing an audit of any entity they can be happen some
issues, there for to answer that issues have some Auditing Standards. The purpose of this
study to evaluate one of the Sri Lankan Auditing Standard (SLAuS) with it is practical
implication. The audit standard provide minimum guidance for the auditor, so it help to
determine the procedures and steps auditors should follow and applied to fulfill the audit
objectives. The Institute of Chartered Accountants of Sri Lanka has authority to prepare Sri
Lankan Auditing standards. The main purpose of establish these standard are provide
guidance to the auditor. In addition to because of these reasons audit standard are required,

 Enhance quality and relevance of the auditing practices.

 Increase consistency and comparability of the reporting
 Standardization of the audit practices.
 Increase public confidence about the audit.
 It help to management to avoid errors and frauds of the company.
 Helps the management to obtain loan from banks and other financial institutions.
 Helps to achieve organization objectives.

Currently Sri Lankan have more applicable auditing standards (SLAuS - 500, SLAuS -210,
SLAuS – 540, SLAuS – 570,…etc.). Some standard are applied before the audit, some are
applied during the audit and some are at the after the audit. From those standard I selected to
discuss within this study Sri Lanka Auditing Standard 700 the Auditor’s Report on
Financial Statements. This standard normally use end of the audit procedure. It mainly
concern about how issued auditor’s report as a result of an audit performed by an independent
auditor of the financial statement of an entity.

Literature Review
According to the accounting literature, the independent auditor’s report does not seem to be
understood by many users of financial statements (Fakhfakh, 2013a).several previous studies
show that the hypothesis of harmonization of audit reports is not always accepted (Archer,

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Mcleay & Dufour, 1989; Bavishi, 1995; Fakhfakh & Fakhfakh, 2010; Gangolly, Hussein,
Seow, & Tam, 2002; Hussein, Bavishi, & Gangolly, 1986; jones & Karbhari, 1996; King,
1999; wallage, 1993).

In Tunisia, several financial and accounting reforms have focused on business management
and development of financial communication. These reforms encourage the audit report to
play an informational role for all users of financial statements. Comprehensibility of the
report is a fundamental characteristic that determines the performance and effectiveness of
financial disclosures. It is generally accepted that the illegibility of audit information
significantly reduces the satisfaction of stakeholders. The incomprehensibility of audit
opinions hampers the interpretation of financial statements and regarding of annual reports.
This paper analyses the extent of the intelligibility of Tunisian audit report and discusses the
implications of informational ambiguity. (IUP Journal of Accounting Research & Audit
Practices 12(2), 2013).

The consolidated audit report is a sources of information that strengthens corporate

governance and financial communication. The purpose of this paper is to analyze the
linguistic features and readability of auditors’ report on consolidated financial statements in
Tunisia. The literature was examined in order to obtain a rigorous approach that explores the
content and structure of audit messages. The study sample consists of 42 consolidated audit
reports that are related to several sectors. The empirical result show that these reports are not
readable by all users of the consolidated financial statements. The same result confirm the
significant impact of specific determinants on readability of audit reports such as
modification of the opinion of the independent auditor and the audit report lag. (Mondher
Fakhfakh, Cogent Business & Management 3 (1), 1234360, 2016).

The independent auditors periodically publish reports that summarize the audit results. These
reports reinforce the financial communication and reliability of accounting information.
International standards on Accounting (ISA) determine the content of audit reports and the
quality of audit results. Theoretically, the audit standardization must model intelligible and
clear reports for readers. Compliance with linguistic principles contributes to the
improvement of the structure of audit reports. In practice, the effectiveness of these reports is
criticized because users do not understand the audit information. In order to improve the
content of audit reports, International Federation of Accountants (IFAC) had revised
international Standards on Auditor’s report: ISA 700: Forming on auditor’s opinion and

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reporting on financial statements. Linguistically, standardized audit reports could be
unreadable by many users of financial statements. (Mondher Fakhfakh, Journal of
Economics, Finance band Administrative Science 20(38), 2015).

The International Federation of Accountants has revised several standards that standardize
audit reports. The objective of these revised standards is to improve financial reporting. So
the purpose of this paper is to examine the readability of reports which have been
standardized by three International standards on Auditing (ISA 700, ISA 705 and ISA 706).
The Measurement of the Understandability of reports is achieved in terms of the linguistic
characteristics of standardized report wording. (Mondher Fakhfakh, journal of commerce and
Accounting Research 2(1), 10, 2013.

The unqualified consolidated audit report is a useful document for making a decision.
Currently, the form and content of this report are defined by the International Standard for
Auditing ISA 700. The comprehensibility of the independent auditor’s report is qualitative
characteristic that can condition the satisfaction of users’ needs in the consolidated financial
statements. These users require readable reports to facilitate the interpretation of financial
statements. The public is also looking for legible audit information to enhance the quality of
financial disclosures. (Collins G. Ntim, 2016).

Audit opinion verifies the financial statement of companies published fairly. Stakeholders
pay close attention to audit opinion. Different stakeholders have different expectations from
audit opinion (Litt et al., 2014)

Analysis and Discussion

Introduction
The Sri Lanka Auditing Standard 700 the Auditor’s Report on Financial Statements is
establish to provide the guidance to the auditor about the how form and what should include
in the auditor’s report issued as a result of an audit of financial statement of any entity. It deal
with the auditor’s responsibility to form an opinion on the financial statement. So this
standard are require to keep consistency and comparability in auditor’s report and need to

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increase the value of the auditor reporting. So should be used information in auditor’s report
more relevant to the users.

The Auditor’s Report

The auditor’s report is a written document. It containing the opinion of independent auditors
about the financial statements of the company. The report is describe whether the financial
statement are comply with GAAP (General Acceptance Accounting Principles). The auditor’s
report are very important to users of financial statement, because the report inform to the
users about the auditor’s opinion and also the report is necessary to the entity, because
creditors and banks are regulators requirement an audit of a financial statements before
lending to company. There for auditor’s report is important to many parties. The report are
normally publish with the company’s annual report.

Basic Components of the Auditor’s Report

When prepare the auditor’s report, auditor should follow a standard format. That format
include some basic elements necessary to include in auditor’s report. So auditors should
follow that structure.

1. Tittle
2. Addressee
3. Introductory Paragraph
4. Scope Paragraph
5. Opinion paragraph
6. Date of the Report
7. Auditor’s address; and
8. Auditor’s Signature

1) Title – Auditor’s report should have a title. It should cleary show that, it is the report of
and independent auditor. So most suitable to use “Independent Auditor’s Report”. It
help to identify Independent Auditor’s Report from issued by others. As a practical
example,

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2) Addressee – The auditor’s report should mention as to whom the report is being to
present. The report normally addressed either to the shareholders or the board of
directors of the entity.

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3) Introductory Paragraph – In this introductory paragraph should include statement of
responsibility of the entity’s management/directors and the statement of responsibilities
of the auditors. As an example for this paragraph,

4) Scope Paragraph – The scope paragraph describe the scope of the audit process and it
should mention the audit is conducted according to the SLAuS. In this paragraph
auditor should describe how they did the audit, as an example,

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 5) Opinion Paragraph – This is the most important paragraph of the auditor’s report,
because the auditor mention their opinion in this section. So in this paragraph mention
the auditor’s opinion after the auditing financial statements.

Mainly there are four types of auditor’s opinion

1. Unqualified opinion
2. Qualified opinion
3. Adverse opinion
4. Disclaimer of opinion

Unqualified Opinion

Unqualified opinion or clean opinion means the financial records/Statement of the companies
are correct and those are prepared according to the guidelines set of by GAAP (General
Accepted Accounting Principle). So this opinion can write like these,

“In our opinion the accompanying financial statements present fairly in al material respects
[…] in accordance with [the applicable financial reporting framework];”

As a practical example,

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Qualified opinion

A qualified opinion means the financial statement are fairly presented but exception of a
specified area. The qualified opinion are normally acceptable to lenders, creditors and
investors.

Adverse opinion

The Adverse opinion complete opposite of an unqualified opinion. It mean the financial
statements of the company not present results fairly or are not in conformity with the General
Accepted Accounting Principles.

Disclaimer of opinion

Disclaimer of opinion mean the auditors unable to determine a opinion about the financial
position of the firm because, the company have not completed an examination of its accounts,
or examination is not cover broad range of areas (covered area is not enough).

6) Date of the report – The auditors should mention completion date of the audit as date
of the auditor’s report. Simply can say the date on which the audit report is signed.
7) Auditor’s Address – Auditors should mention the specific location, normally the city
when the audit firm is located, or the name of the city which the report is singed.
8) Auditor’s signature – Finally the auditor’s report should singed by the auditor. It can
be signed in the name of the audit firm or the personal name of the auditor or both. As a
practical example,

These are the main elements of the auditor’s report. So auditor should follow these structure.
In addition to these the Sri Lankan Auditing Standard – 700 also discuss about these things.

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Modified Report
In some situation auditor can be modified the auditor’s reports. So, mainly there are two
situation can be considered the auditor’s report is modified.

1. Maters that do not affect the auditor’s opinion.

In some situation auditor want to be discuss or explain further some points or auditor
want to emphasis and highlight that points. Therefore, to do that changes the auditors
can added extra paragraph to the report. That kind of things do not affect to the
auditor’s opinion. Those are can use for increase to users convenience and more
transparency of the report.
Eg: To emphasis some points about the going concern concept.
2. Matter that affect the auditor’s opinion.
Because of some reasons auditors can’t express an unqualified opinion. Some
limitation on the scope of the auditor’s work or no any agreement with the
management about the selected accounting principles, acceptability of the selected
policies, and methods of auditors are use, because of these kind of situation auditors
cannot give an unqualified opinion. So these things are affect to the auditor’s opinion.

Circumstances that may result in other than an unqualified opinion

Sometimes the entity can be imposed some limitations to the auditor. However if that
limitations are affect to disclaimer of the auditor opinion normally auditor can’t
accept that kind of audit. Unless required by statute.

This scope limitation also can happen because of the situation. Sometimes auditor
unable to carry out an audit procedure properly or because of inadequate of the
entity’s accounting records, auditor can’t express unqualified opinion. So that kind of
situation auditor should follow a reasonable alternatives procedure to obtain sufficient
appropriate audit evidences.

Disagreement with management

Some situation the auditor may disagree with management
- The acceptability of the selected accounting policies.
- The method of their using or the adequacy of discourses in the financial statutes.

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 Because of these reasons auditor can be disagree with the management. If these
reason are materials to the entity’s financial reports the auditors may be express a
qualified or an adverse opinion.

Compliance with International Standards on auditing

If auditor conducting the audit according to the Sri Lanka Auditing Standard
(SLAuS), it ensures that the auditor are compliance with International Standard on
auditing 700 (IAS).

Effective Date
The effective date express this SLAuS is effective for all the auditors of financial
statements for periods ending on or after the relevant period.

Note:-International Standard on Auditing (ISA) 701,”Modification of the Independent

Auditor’s Report. After the 31, 2016 the International Standard on Auditing modified the
Standard of Independent Auditor’s report – 700. It provide some significant change in
auditor’s reporting. It required to report key audit matters in their audit report which require
significant auditor attention.

Conclusion
The audit report is a useful document for making a decision. It is a written document
expressing with auditor’s opinion about financial statement of the entities. Sri Lankan
Auditing Standard – 700 provide guidelines to the auditors about how prepare the auditor’s
report and have an accepted structure for should follow by the auditors. From that structure

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most important step is opinion paragraph. Auditor mention unqualified opinion, qualified
opinion, adverse opinion and disclaimer of opinion in opinion paragraph of the report. If the
financial statement are present true and fair view auditors give unqualified opinion.
Sometimes auditors can modified the report and some situation auditor will disagree with the
manager. Anyway the auditor’s report should compline with Sri Lankan Auditing Standard –
700.

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References
 Mondher Fakhfakh, (2013), IUP Journal of Accounting Research & Audit Practices
12(2), Journal of Commerce and Accounting Research 2 (1).
 Mondher Fakhfakh, (2016), IUP Journal of Accounting Research & Audit Practices
15 (4).
 Colins G. Ntim, Fakhfakh, (2016), Understandability of unmodified audit report on
consolidated financial statements; a normative and advanced study of the
international normalization.
 Jinyu Tian, Meijin Xin North China Electric Power University, Baoding, China
(2017), Journal of Modern Accounting and Auditing.
 http://www.investopedia.com/terms/a/auditors-opinion
 http://en.m.wikipedia.org/wiki/Auditor
 http://www.scribd.com/document/SLAuS-700
 http://www.casrilanka.com/casl/index
 http://www.courehero.com/file/slaus-700/
 http://www.slaasc.lk/auditing/press-rooms

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Appendix

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