CH 12

Page 493
CHAPTER 12
The auditor’s reporting obligations
LEARNING OBJECTIVES (LO)

12.1 Understand the nature and significance of the auditor’s reporting
obligations.
12.2 Understand the structure and wording of the auditor’s report and
appreciate the recent changes to the report which are designed
to enhance its communication effectiveness.
12.3 Explain the differences between the concepts of ‘true and fair’
and ‘presents fairly in accordance with’, and between a fair
presentation framework and a compliance framework.
12.4 Identify the different types of auditors’ reports—unmodified
auditors’ reports, modifications to the auditor’s opinion (resulting
in a qualified opinion, adverse opinion or disclaimer of opinion)
and auditors’ reports containing additional communications
(Emphasis of Matter or Other Matter paragraphs)—and describe
the circumstances under which an auditor would issue each type
of report.
12.5 Identify the reasons for departures from a standard unmodified
auditor’s report—material misstatement and limitations imposed
Copyright © 2018. McGraw-Hill Australia. All rights reserved.
on the scope of the audit—and understand the factors giving rise

to these reasons.
12.6 Describe the auditor’s responsibility for reporting on comparative
information, and understand the auditor’s responsibility with
respect to other information in an annual report.
12.7 Describe communications other than the auditor’s report between
the auditor and shareholders, those charged with governance,
and management.
Gay, GE, & Simnett, R 2018, Auditing and Assurance Services in Australia, McGraw-Hill Australia, Sydney. Available from: ProQuest Ebook Central. [30 October 2020].
Created from usc on 2020-10-30 19:33:22.
RELEVANT GUIDANCE
ASA 101 Preamble to Australian Auditing Standards
ASA 260/ISA 260 Communication with Those Charged with Governance
ASA 265/ISA 265 Communicating Deficiencies in Internal Control to Those

Charged with Governance and Management
ASA 450/ISA 450 Evaluation of Misstatements Identified during the Audit
ASA 570/ISA 570 Going Concern
ASA 700/ISA 700 Forming an Opinion and Reporting on a Financial Report
ASA 701/ISA 701 Communicating Key Audit Matters in the Independent

Auditor’s Report
ASA 705/ISA 705 Modifications to the Opinion in the Independent Auditor’s

Report
ASA 706/ISA 706 Emphasis of Matter Paragraphs and Other Matter

Paragraphs in the Independent Auditor’s Report
ASA 710/ISA 710 Comparative Information—Corresponding Figures and

Comparative Financial Reports
ASA 720/ISA 720 The Auditor’s Responsibilities Relating to Other

Information
GS 006 Electronic Publication of the Auditor’s Report
GS 010 Responding to Questions at an Annual General Meeting
IAASB Preface to the International Standards on Quality Control,

Auditing, Review, Other Assurance and Related Services
Page 494
CHAPTER OUTLINE
The entire audit process is geared towards the expression of an opinion on the
financial report. All of the auditor’s planning decisions and evidence-collection
procedures are aimed at placing the auditor in the position of being able to
issue their auditor’s report. As such, it is important that the auditor’s report be an
effective means of communication. This chapter explores recent initiatives to
enhance the communication effectiveness of the auditor’s report. It further
explains how the auditor decides on the type of report that is appropriate, and
the various modifications to the opinion and the additional communications that
may be appropriate under particular circumstances. This chapter also describes
the auditor’s communications with corporate clients, including communications
with shareholders, boards of directors, audit committees and senior
management. How this chapter fits into the completion and communication
stages of a financial report audit is illustrated in Figure 12.1 , which is an
expansion of part of the flowchart provided in Chapter 1 .
FIGURE 12.1 Flowchart of completion and communication stages of a financial report audit
Page 495
LO 12.1 Obligations to report

ASA 200.11 (ISA 200.11) states that the objective of an audit of a financial report is to
obtain reasonable assurance about whether the financial report taken as a whole is free of
material misstatement, thereby enabling the auditor to express an opinion on whether the
financial report is prepared, in all material respects, in accordance with an applicable
financial reporting framework. Auditors are required to conduct an audit in accordance
with approved auditing standards. In Australia the auditing standards apply to audits and
reviews that are undertaken to meet the requirements of the Corporations Act 2001 (ASA
101.1), as well as an audit of a complete financial report prepared for any other purpose.
They also apply, as appropriate, to the audit of other financial information (ASA
101.1/IAASB Preface paragraph 04). The standards numbered 700–799 cover what may be
regarded as the final stage of the financial report audit process—the audit conclusions and
reporting stages concerning general-purpose financial reports. These standards are listed in
the Relevant guidance section of this chapter.
As well as meeting the requirement to conduct an audit in accordance with Australian

auditing standards, the auditor also has an obligation to form a conclusion as to whether the
financial report has been prepared using Australian accounting standards issued by the
Australian Accounting Standards Board (AASB). It should be remembered that an
auditor’s professional obligations should be exercised for all types of entities, not just
companies. This distinguishes them from the statutory responsibilities that occur as a result
of the AASB standards, which apply only to companies, registered schemes and disclosing
entities covered by the Corporations Act 2001.
In many engagements the auditor’s reporting responsibilities are governed by the statute
under which the auditor is appointed. Often, compliance with statutory reporting
responsibilities also satisfies the reporting requirements outlined above. However, some
engagements undertaken under statute law require a different form of reporting and/or
additional information in the auditor’s report (for example, engagements to audit banks and
superannuation funds).
One of the significant areas of reporting that is governed by statute is an audit undertaken
in accordance with the requirements of the Corporations Act 2001. This section will deal
with those requirements and the specific reporting obligations of the auditor. These
obligations, as laid out in Exhibit 12.1 , are found in section 307 of the Corporations
Act 2001.
EXHIBIT 12.1 REPORTING OBLIGATIONS OF THE AUDITOR
An auditor who conducts an audit of the financial report for a financial year or
half-year must form an opinion about:
(a) whether the financial report is in accordance with this Act, including:
(i)
section 296 or 304 (compliance with accounting standards); and
(ii)
section 297 or 305 (true and fair view); and
(aa) if the financial report includes additional information under
paragraph 295(3)(c) or 303(3)(c) (information included to give true and fair
view of financial position and performance)—whether the inclusion of that
additional information was necessary to give the true and fair view required
by section 297 or 305; and
(b) whether the auditor has been given all information, explanation and
assistance necessary for the conduct of the audit; and
(c) whether the company, registered scheme or disclosing entity has kept
financial records sufficient to enable a financial report to be prepared and
audited; and
(d) whether the company, registered scheme or disclosing entity has kept other
records and registers as required by this Act.
Source: Sourced from the Federal Register of Legislation at December 2017, www.legislation.gov.au/De
tails/C2017C00328.
Page 496
The Corporations Act 2001 also clearly specifies that the auditor’s report shall
state the auditor’s opinion in relation to points (a)(i) and (ii) in Exhibit 12.1 (section
308(1)). If for any reason the auditor is not satisfied about any of these matters, the
auditor’s report must state why not. If in the auditor’s opinion the financial report is not
drawn up in accordance with a particular applicable accounting standard, the auditor’s
report must show the quantified financial effect on the financial report of failing to draw it
up in accordance with that accounting standard (section 308(2)).
While the auditor is required to form an opinion on the matters noted in points (aa) to (d) in
Exhibit 12.1 , under the exception basis of reporting the auditor need only include these
in the auditor’s report if there is a deficiency, failure or shortcoming in respect of any of
those matters (section 308(3)(b)). The exception reporting basis was introduced as a
response to concerns about the expectation gap, and in relation to these requirements has
resulted in a simplified and more concise form of auditor’s report that is believed to be
more effective in communicating its primary message.
The advantage of reporting on these items only when the requirements have not been met is
that it draws the attention of the reader of an auditor’s report more directly to inadequacies
in the financial report. This enhances the effectiveness of the reporting process by
highlighting and explaining exceptions when they occur. The auditor’s report must also
describe any defect or irregularity in the financial report (section 308(3)(a)). Further
professional considerations for the reporting of fraud are contained in ASA 240 (ISA 240),
the auditor’s responsibilities for which were discussed in Chapter 6 .
There is also a responsibility for the entity to comply with applicable accounting standards
under section 296 of the Corporations Act 2001. Applicable accounting standards are those
prepared by the AASB. It is possible that particular accounting standards may not be
appropriate, and relief may be granted by the Australian Securities and Investments
Commission (ASIC) from compliance with such standards, under section 340 of the
Corporations Act 2001. Under section 308(3A), the auditor’s report must include any
statements or disclosures required by the auditing standards. If the financial report includes
additional information necessary to give a true and fair view of financial position and
performance, the auditor’s report must also include a statement of the auditor’s opinion on
whether the inclusion of that additional information was necessary to give the true and fair
view required by section 297 (section 308(3B)). The auditor’s report must also specify the
date on which the statement was made (section 308(4)).
Who the auditor has an obligation to report to

The governing body and members
The engagement letter (discussed in Chapter 5 ) should clearly specify who the auditor
has an obligation to report to. As outlined in ASA 700.22 and A16 (ISA 700.22 and A16),
the auditor’s report should be addressed as required by the terms of the engagement,
normally to either the governing body or the members of the entity.
In Australia, under the Corporations Act 2001, the auditor’s primary reporting
responsibility is to report to the company’s members (see section 308(1)). This has been
supported by common law. For example, in the Pacific Acceptance Corporation case,
Moffitt J stated that one of the primary duties of the auditor was to report to the members
(see Chapter 2 ).
Management and the board of directors
Justice Moffitt also said that the auditor’s reporting responsibilities extended beyond the
auditor’s report. The auditor also has a responsibility to report to management anything
that is prejudicial to the interests of shareholders (for further discussion, see
Chapter 2 ). What constitutes adequate reporting to management was discussed in the
AWA case. In that case it was stated that the auditor had a responsibility to bring a material
weakness in internal control to the attention of the full board of directors, and that
reporting the weakness only to the managing director was insufficient. This will be
considered in more detail later in this chapter, under‘Communications between the audit
or and other parties ’.
Australian Securities and Investments Commission Page 497
Section 311 of the Corporations Act 2001 states that if the auditor of a company has
reasonable grounds to suspect that there has been a significant contravention of, or failure
to comply with, any of the provisions of the Corporations Act 2001, they must immediately
inform ASIC in writing. For all other contraventions, if the auditor believes that the matter
will not be adequately dealt with by comment in the auditor’s report or notifying the
directors, then they must immediately inform ASIC in writing. Failure to report such a
breach is a criminal offence, subject to strict liability (meaning that intention is not
relevant).
As a result of initial concerns about the breadth of auditors’ obligations, ASIC issued
Regulatory Guide (RG) 34 Auditors’ Obligations (reissued 2013). Under the guidance
contained in RG 34, an auditor is obliged to report a ‘significant’ contravention of the Act

directly to ASIC. Types of suspected contraventions that could be considered to be
significant by an auditor include:
insolvent trading by a company

a breach of accounting standards or the true and fair view requirement
suspected dishonest or misleading and deceptive conduct.
An auditor is required to notify ASIC if the auditor has ‘reasonable grounds to suspect’ that
there has been a significant contravention of the Act. This test is satisfied by circumstances
that would create in the mind of a reasonable auditor an actual apprehension or fear that a
contravention has occurred. The suspicion must be honest and reasonable, and must be
based on facts that would create suspicion in the mind of a reasonable auditor (see George
v Rockett (1990) 93 ALR 483).
QUICK REVIEW
1. The auditor is required to express an opinion as to whether the financial
report is prepared, in all material respects, in accordance with an
applicable financial reporting framework.
2. Legislative reporting obligations are contained in the statutes that govern
the audit. Audits undertaken in accordance with the requirements of the
Corporations Act 2001 should form a conclusion that accounting standards
prepared by the AASB were followed.
3. The auditor’s primary reporting responsibility is normally to the governing
body or members of the entity as outlined in the engagement letter. For
audits of companies under the Corporations Act 2001, the primary
reporting responsibility is to the company’s shareholders.
4. The auditor has a duty to report to management and the board of directors
certain issues which may be judged as being prejudicial to the interests of
shareholders.
5. The auditor has a duty to report to ASIC when they have reasonable
grounds to suspect a significant contravention of the Corporations Act
2001, or any other contravention that could not be adequately dealt with in
the auditor’s report or by notifying the board of directors.
LO 12.2 The auditor’s report and its communication
effectiveness
There have been a number of improvements to the auditor’s report over the past years,
including clarification of the scope of the audit and the respective responsibilities of
management and the auditor. These improvements were primarily intended to address the
expectations gap, discussed in Chapter 1 , and to promote international consistency in
auditor reporting. It has been recognised recently that a more fundamental change to
auditor reporting was required. The recognition arose because of perceptions that auditor
reporting was not meeting the information needs of financial report users in a global
business environment with increasingly complex financial reporting requirements. Page 498
Such suggestions have been acted on by the International Auditing and Assurance
Standards Board (IAASB), which had the revision of the auditor report as its number one
priority from 2009 until approval in 2014.
Background information gathered by the IAASB suggested the following:
The financial report audit and the independent auditor’s opinion on an entity’s financial
report are valued. However, other than communicating the auditor’s overall conclusion,
the content of the auditor’s report is not viewed as being particularly useful or
informative.
Some users believe that the communicative value of the auditor’s report could be
improved if changes were made to the structure and wording of the auditor’s report.
Users recognise that there is richer information about the entity and about the audit itself
than is currently being provided through the audited financial report and other corporate
disclosure mechanisms and through the auditor’s report. Users wish to obtain this richer
information directly from the entity or want to hear the auditor’s insight into such matters.
They believe that such information would assist them in assessing the financial condition
and performance of the entity, as well as the quality of its corporate reporting and the
quality of the audit. This is referred to as the ‘information gap’, introduced in
Chapter 1 and discussed further below.
Research showed that user perceptions of audit quality are influenced by the
communicative value of the auditor’s report. The standard auditor’s report at the time was
seen to provide little information to evaluate the quality of the audit, in part because it did
not disclose information about the procedures performed and the extensive judgments
made by the auditor in forming the audit opinion. Increased transparency about the audit
process was therefore expected to have a beneficial effect on perceptions of audit quality. In
this context, the views provided by some capital market participants—investors and
financial analysts, among others—suggested that auditor reporting needs to further evolve
to meet users’ needs.
Users of corporate financial information pointed to the existence of the information gap
mentioned above as the difference between what they believe is needed to make informed
investment and fiduciary decisions and what is available to them through the entity’s
audited financial report or other publicly available information. This gap is seen as
increasing the challenges of understanding how corporate financial information, including
the audited financial report and related disclosures, reflects the overall picture of the
entity’s financial condition and performance and the sustainability of its business. It has
implications for the efficient functioning of capital markets.
Users argued that the information available to them, including an entity’s audited financial
report and the auditor’s report thereon, was only a part of the wider set of information
available to management of the entity or to the entity’s independent auditor. By design,
through the established financial reporting frameworks and relevant laws and regulations,
this smaller subset of the available information was intended to provide users with a
relatively concise summary of the information relevant to their decision making. This is
illustrated in Figure 12.2 , and in Figure 1.6 in the introductory chapter of this book,
where it was also discussed.
FIGURE 12.2 Information gap

Source: This diagram is from Enhancing the Value of Auditorfrom Enhancing the Value of Auditor Reporting:
Exploring Options for Change of the International Auditing and Assurance Standards Board, published by the
International Federation of Accountants (IFAC) in May 2011 and is used with permission of IFAC. Such use of
IFAC’s copyrighted material in no way represents an endorsement or promotion by IFAC. Any views or opinions
that may be included in Auditing & Assurance Services in Australia 7e are solely those of McGraw-Hill Education
and do not express the views and opinions of IFAC or any independent standard setting board associated with
IFAC. www.ifac.org/sites/default/files/publications/exposure-drafts/CP_Auditor_Reporting-Final.pdf.
A perception existed that there should be more transparency about:
the entity and its financial report, particularly key financial reporting risks and how they
are being addressed, which relate to the information gap discussed earlier in this chapter
the audit performed, including key areas of audit risk, which helps address concerns
around a performance gap (Simnett and Huggins 2014).
This led to a consideration of what the available, and most appropriate, channels are for
narrowing the information gap by providing this type of additional information to users.
Conceptually, the perceived information gap could also be narrowed by the disclosure of
additional information that is currently not made available to users. In principle, such
information could be provided to users through some combination of additional reporting
by management or those charged with governance, and by the auditor.
The new international auditor reporting standards were approved in 2014 and are effective
for audits of financial reports for periods ending on or after 15 December 2016, with early
adoption permitted. In Australia and New Zealand about 25 public reporting entities early
adopted for their 2015 and 2016 reporting periods. The IAASB’s stated reasons Page 499
for enhancing the auditor’s report, and its continuing commitment to
implementation support and post-implementation review for 2015–2019, are outlined in
Auditing in the global news 12.1 .
12.1 Auditing in the global news . . .
Auditor reporting—implementation support and post-

implementation review
Because the auditor’s report is the key deliverable addressing the output of
the audit process for users of the financial statements, the IAASB’s top
priority in the last two years has been its work on auditor reporting, with the
new and revised standards approved in September 2014. In light of their
importance and the expected significant effect on practice, the IAASB
intends to focus initially on implementation support and subsequently on
post-implementation review efforts in 2015–2019 on the new and revised
auditor reporting standards.
Source: IAASB, Strategy for 2015–2019: Fulfilling Our Public Interest Mandate in an Evolving World, w
ww.ifac.org/system/files/publications/files/IAASB-Strategy-2015-2019_0.pdf.
Structure and wording of the auditor’s report

Although the structure and wording contained in the auditing standards and other guidance
material are only illustrative, the ASA 700 (ISA 700) series standards include examples of
auditors’ reports showing the suggested structure and wording.
Exhibit 12.2 reveals the standard elements of the auditor’s report.
Page 500
EXHIBIT 12.2 THE STANDARD AUDITOR’S REPORT
Independent auditor’s report
To the shareholders of ABC Company Ltd [or other appropriate addressee]
Report on the Audit of the Financial Report
Opinion
We have audited the financial report of ABC Company Ltd (the Company), which
comprises the statement of financial position as at 30 June 20X1, the statement of
comprehensive income, statement of changes in equity and statement of cash flows
for the year then ended, and notes to the financial statements, including a summary of
significant accounting policies, and the directors’ declaration.
In our opinion the financial report of ABC Company Ltd is in accordance with the
Corporations Act 2001, including:
(a) giving a true and fair view of the Company’s financial position as at 30 June
20X1 and of its performance for the year then ended; and
(b) complying with Australian Accounting Standards and the Corporations
Regulations 2001.
Basis for Opinion
We conducted our audit in accordance with Australian Auditing Standards. Our

responsibilities under those standards are further described in the Auditor’s
Responsibilities for the Audit of the Financial Report section of our report. We are
independent of the Company in accordance with the auditor independence
requirements of the Corporations Act 2001 and APES 110 Code of Ethics for
Professional Accountants (the Code) that are relevant to our audit of the financial
report in Australia. We have also fulfilled our other ethical requirements in
accordance with the Code.
We confirm that the independence declaration required by the Corporations Act

2001, which has been given to the directors of the Company, would be in the same
terms if given to the directors as at the time of this auditor’s report.
We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the financial report of the current period. These matters
were addressed in the context of our audit of the financial report as a whole, and in
forming our opinion thereon, and we do not provide a separate opinion on these
matters.
[Descriptions of each key audit matter in accordance with ASA 701/ISA 701.]
Other Information
[Reporting requirements of other information should be in accordance with the

reporting requirements in ASA 720/ISA 720.]
The directors are responsible for the other information. The other information
comprises the information included in the Company’s annual report for the year
ended 30 June 20X1, but does not include the financial report and our auditor’s
report thereon.
Our opinion on the financial report does not cover the other information and
accordingly we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial report, our responsibility is to read the
other information and, in doing so, consider whether the other information is
materially inconsistent with the financial report or our knowledge obtained in the
audit or otherwise appears to be materially misstated.
If, based on the work we have performed, we conclude that there is a material
misstatement of this other information, we are required to report that fact. We have
nothing to report in this regard.
Responsibilities of the Directors for the Financial Report
The directors of the Company are responsible for the preparation of the financial
report that gives a true and fair view in accordance with Australian Accounting
Standards and the Corporations Act 2001 and for such internal control as the Page 501
directors determine is necessary to enable the preparation of the financial

report that gives a true and fair view and is free from material misstatement, whether
due to fraud or error.
In preparing the financial report, the directors are responsible for assessing the
Company’s ability to continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of accounting unless the
directors either intend to liquidate the Company or to cease operations, or have no
realistic alternative but to do so.
Auditor’s Responsibilities for the Audit of the Financial Report

Our objectives are to obtain reasonable assurance about whether the financial report
as a whole is free from material misstatement, whether due to fraud or error, and to
issue an auditor’s report that includes our opinion. Reasonable assurance is a high
level of assurance, but is not a guarantee that an audit conducted in accordance with
ASAs will always detect a material misstatement when it exists. Misstatements can
arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of
users taken on the basis of this financial report.
[A further description of the auditor's responsibilities for the audit of the financial
report (being the italicised material immediately below) can be included in the
auditor’s report, located in an Appendix to the auditor’s report, or by
a specific reference within the auditor’s report to the location of such a description on
a website of an appropriate authority, such as the Auditing and Assurance Standards
Board website at http://www.auasb.gov.au/Home.aspx. This description forms part
of the auditor’s report.]
As part of an audit in accordance with the ASAs, we exercise professional judgment

and maintain professional scepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the financial report,
whether due to fraud or error, design and perform audit procedures responsive to
those risks, and obtain audit evidence that is sufficient and appropriate to provide a
basis for our opinion. The risk of not detecting a material misstatement resulting
from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations, or the override of
internal control.
Obtain an understanding of internal control relevant to the audit 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.
Evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by the directors.
Conclude on the appropriateness of the directors’ use of the going concern basis of
accounting and, based on the audit evidence obtained, whether a material
uncertainty exists related to events or conditions that may cast significant doubt on
the Company’s ability to continue as a going concern. If we conclude that a
material uncertainty exists, we are required to draw attention in our auditor’s
report to the related disclosures in the financial report or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit
evidence obtained up to the date of our auditor’s report. However, future events or
conditions may cause the Company to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the financial report,
including the disclosures, and whether the financial report represents the
underlying transactions and events in a manner that achieves fair presentation.
We communicate with the directors regarding, among other matters, the planned
scope and timing of the audit and significant audit findings, including any significant
deficiencies in internal control that we identify during our audit.
We also provide the directors with a statement that we have complied with relevant
ethical requirements regarding independence, and to communicate with them all
relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
From the matters communicated with the directors, we determine those matters that
were of most significance in the audit of the financial report of the current period
and are therefore the key audit matters. We describe these matters in our Page 502
auditor’s report unless law or regulation precludes public disclosure about
the matter or when, in extremely rare circumstances, we determine that a matter
should not be communicated in our report because the adverse consequences of
doing so would reasonably be expected to outweigh the public interest benefits of
such communication.
Report on the Remuneration Report
Opinion on the Remuneration Report
We have audited the Remuneration Report included in [paragraphs a to b or pages x

to y] of the directors’ report for the [period] ended 30 June 20X1.
In our opinion, the Remuneration Report of ABC Company Ltd, for the year [period]
ended 30 June 20X1, complies with section 300A of the Corporations Act 2001.
Responsibilities
The directors of the Company are responsible for the preparation and presentation of
the Remuneration Report in accordance with section 300A of the Corporations Act
2001. Our responsibility is to express an opinion on the Remuneration Report, based
on our audit conducted in accordance with Australian Auditing Standards.
[Auditor’s signature]
[Date of the auditor’s report]
[Auditor’s address]
Source: Australian Auditing and Assurance Standards Board (2015), Australian Standard on Auditing (ISA) 700:
Forming an Opinion and Reporting on a Financial Report. Appendix [Aus] Illustration 1A. (c) 2018 Auditing and
Assurance Standards Board (AUASB). The text, graphics and layout of this publication are protected by
Australian copyright law and the comparable law of other countries. No part of the publication may be
reproduced, stored or transmitted in any form or by any means without the prior written permission of the
AUASB except as permitted by law. For reproduction or publication permission should be sought in writing from
the Auditing and Assurance Standards Board. Requests in the first instance should be addressed to the
Technical Director, Auditing and Assurance Standards Board, PO Box 204, Collins Street West, Melbourne,
Victoria, 8007.
The structure and wording of the auditor’s report are discussed in ASA 700 (ISA 700)
paragraphs 20–52. The major components are:
The title: This clearly indicates that the auditor’s report is the report of an independent
auditor. For example, ‘Independent auditor’s report’ distinguishes this report from reports
issued by others.
The addressee: The auditor’s report is normally addressed to those for whom the report is
prepared, often either to the shareholders (as required in Australia under the Corporations
Act 2001), or to those charged with governance.
The opinion: This should include the auditor’s opinion, and be headed ‘Opinion’. It should
have:
an introductory paragraph that contains the words ‘We have audited the financial report
of . . . which comprises . . . ’. The auditor clearly identifies the components that comprise
the financial report and will be covered by the audit. These are: the statement of financial
position, the statement of comprehensive income, the statement of changes in equity, the
statement of cash flows and the accompanying notes to the financial statements. This is
important in an annual report, which contains other information that has not been subject
to audit (although it is considered by the auditor, as outlined in Chapter 11 , with
auditor’s reporting implications that will be discussed under ‘Comparative information
and other information in the annual report ’).
‘In our opinion . . . ’ An auditor’s opinion is an expression of informed judgment.
Auditors are experts in the fields of accounting and auditing and therefore their opinions
carry substantial weight. Nevertheless, they cannot ensure or warrant the accuracy of the
financial report.
‘(a) the financial report . . . is in accordance with the Corporations Act 2001, including
(i) giving a true and fair view . . . and (ii) complying with Australian Accounting
Standards and the Corporations Regulations 2001 . . . ’ Also in Australia, where Page 503
an entity has included in its notes to the financial report an explicit and
unreserved statement of compliance with International Financial Reporting Standards
(IFRS), and the auditor agrees with this statement, there is a part (b) in the opinion
section which states that, in the auditor’s opinion, the financial report complies with
IFRSs.
The basis for opinion: This provides important context about the auditor’s opinion and
should directly follow the opinion section, with the heading ‘Basis for opinion’. This
section should:
state that the audit was conducted in accordance with International (Australian) Standards
on Auditing, which conveys to the users that the audit has been conducted in accordance
with established standards
include a statement that the auditor is independent of the entity in accordance with the
relevant ethical requirements relating to the audit, including being independent of the
company, and has fulfilled their other responsibilities in accordance with these
requirements
state whether the auditor believes that the audit evidence they have obtained is sufficient
and appropriate to provide a basis for their opinion.
The independence comment allows the auditor to be assessed not only on their expertise
but also on their independence. It conveys that the auditor has met the independence
requirements of the Corporations Act 2001 (discussed in Chapter 3 ).
Key audit matters: These are matters that, in the auditor’s professional judgment, are of
most significance in their audit of the financial report. They are in response to the desire to
have more information about the auditor’s process, in order to reduce the information gap.
These matters are addressed in the context of the audit of the financial report as a whole,
but the auditor does not provide a separate opinion on these matters (discussed in more
detail immediately below).
Other information: Where applicable, the auditor should report their responsibility for
other information in accordance with ASA 720 (ISA 720). This section covers the
information included in the annual report other than the financial report and the auditor’s
report and outlines that the auditor has ‘not audited the other information and do[es] not
express an opinion or any form of assurance conclusion thereon’. The auditor’s
responsibilities for providing assurance with regard to other information are discussed later
in this chapter.
Responsibilities of management for the financial report: A section outlining the

responsibility of those charged with governance or management for the financial report is
required. Words such as ‘The directors of . . . are responsible for the preparation of the
financial report that gives a true and fair view in accordance with Australian Accounting
Standards and the Corporations Act 2001 . . . ’ direct attention to the fact that the financial
report is the representation of the governing body of the entity being audited, not of the
auditor. Management and the governing body are responsible for the adequacy and
accuracy of the financial report.
Auditor’s responsibilities for the audit of the financial report: A section outlining the
responsibility of the auditor is required. Words such as ‘Our responsibility is to express an
opinion on the financial report based on our audit’ explain the role of the auditor and, in
conjunction with the preceding reference, distinguish between the responsibilities of the
governing body and the auditor. The auditor is conducting the audit to add credibility to the
representations in the financial report prepared by the governing body, by expressing the
auditor’s independent opinion on the financial report to the report addressee. Under this
section the following information is also included:
‘. . . to obtain reasonable assurance about whether the financial report as a whole is free
from material misstatement . . .’ This clause attempts to correct any misperception that
the auditor’s opinion is a guarantee of the accuracy of the financial report. It points out
that the auditor’s opinion provides only reasonable—not absolute—assurance that the
financial report does not contain material misstatements. It also emphasises the objective
of the audit, as was discussed under ‘Obligations to report ’.
‘As part of an audit in accordance with the ASAs, we exercise professional judgment and
maintain professional scepticism throughout the audit . . . ’ This emphasises the
important concepts of professional judgment and professional scepticism, as discussed in
Chapter 4 . The fact that the auditor assesses the appropriateness of the Page 504
accounting policies and disclosures used and significant accounting estimates
made by management indicates that the financial report includes a number of estimates
and approximations, such as provisions for depreciation and doubtful debts. Overall, it
attempts to convey that the precision of an audit, and the financial report being audited,
cannot be absolute.
‘We also:
– identify and assess the risks of material misstatement of the financial report,
whether due to fraud or error, design and perform audit procedures responsive to
those risks, and obtain audit evidence that is sufficient and appropriate to provide a
basis for our opinion . . .
– obtain an understanding of internal control relevant to the audit . . .
– evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates . . .
– evaluate the appropriateness of the directors’ use of the going concern basis of
accounting . . .
(discussed in more detail immediately below)
– evaluate the overall presentation, structure and content of the financial report . . . ’
This enhanced description of the audit process attempts to reduce the communications gap
about the audit. The above discussion also establishes why it would be illogical for the
auditor to issue something stronger than an opinion. As the financial report includes
estimates and approximations, and the audit process is based on test checks tailored to the
circumstances of a particular engagement, the auditor’s report cannot be more than a
statement of belief. This belief is based on a series of judgments made after an expert
examination of available evidence.
Other reporting requirements: There are some instances in which the auditor may be
required to report on other matters that are additional to their responsibility to express an
opinion on the financial report. For example, under certain legislation the auditor may need
to report on whether certain registers are properly maintained. These other reporting requ
irements are included in a separate section of the auditor’s report. By including these
specific reporting requirements in a separate section, the comparability of the auditor’s
report as it relates to the financial report is enhanced.
An example of one of these other reporting requirements that is common in Australia is

contained in Exhibit 12.2 . This is an opinion on the remuneration report contained in
the directors’ report, which is not part of the financial report (the discussion above on the
introductory paragraph of the auditor’s report discusses the composition of the financial
report). A separate opinion is contained towards the end of the auditor’s report on whether
the remuneration report complies with section 300A of the Corporations Act 2001.
Name and signature of the engagement partner: Naming the engagement partner in the
auditor’s report is intended to provide further transparency to the users of the auditor’s
report. As outlined earlier, auditors are known to specialise in industries and there are
limitations on audit partner tenure. Disclosure of the audit partner’s name helps the user
make these assessments.
Name and location of the audit firm: In Australia, the signing partner signs their own name
as well as the name of the firm. The report also shows their location, usually the city in
which the auditor’s office is located. This advises the report user of the person and firm
responsible for the report, and their location if contact is necessary.
Date of the auditor’s report: The auditor’s report is dated as of the date the auditor signs
that report. This informs the reader that the auditor considered the effect on the financial
report of events and transactions that occurred up until that date and about which the
auditor was aware. Auditors’ responsibilities for events before and after this date were
discussed in Chapter 11 .
Key audit matters

One of the major changes made recently to the auditor reporting standards is the
requirement to disclose key audit matters (KAMs) , in accordance with ASA 701 (ISA
701) Communicating Key Audit Matters in the Independent Auditor’s Report.
Communication of key audit matters in the auditor’s report is required for all audits of
listed entities, or when otherwise required by law or regulation (ASA 700.30–31/ISA
700.30–31).
Key audit matters are defined as ‘those matters that, in the auditor’s professional Page 505
judgment, were of most significance in the audit of the [current period’s] financial
statements’ (ASA 701.8/ISA 701.8). They are selected from the population of those matters
that are communicated to those charged with governance (ASA 701.9/ISA 701.9). It is
anticipated that there will only be a small number of such key matters disclosed in the
auditor’s report. In practice a number between three and five is commonly being observed.
Areas of significant auditor attention are often areas of complexity or areas involving
significant management judgment.
In accordance with ASA 701.11 (ISA 701.11), the auditor describes each KAM in a
separate section of the auditor’s report, headed ‘Key Audit Matters’. As illustrated in the
KAMs section of Exhibit 12.2 , the introductory language in the KAM’s section of the
auditor’s report states that:
(a) key audit matters are those matters that, in the auditor’s professional judgment, were
of most significance in the audit of the financial statements [of the current period];
and
(b) these matters were addressed in the context of the audit of the financial statements
as a whole, and in forming the auditor’s opinion thereon, and the auditor does not
provide a separate opinion on these matters.
Communicating key audit matters cannot be a substitute for disclosures that management is
required to make in the financial report. In accordance with ASA 701.12 (ISA 701.12),
when the auditor modifies their opinion as a result of what they have identified as a key
matter, they do not include this matter in the KAMs section of the auditor’s report), but
rather outline it as a basis for modification.
As per ASA 701.13 (ISA 701.13), the auditor should use an appropriate subheading to
identify each key audit matter. The description of each matter in the KAM section should
include a reference to any related disclosure in the financial statements and should outline:
(a) why the matter was considered to be one of most significance in the audit and
therefore determined to be a key audit matter; and
(b) how the matter was addressed in the audit.
The IAASB has prepared some examples of key audit matters. An example for revenue
recognition is contained in Exhibit 12.3 .
EXHIBIT 12.3 REVENUE RECOGNITION
The amount of revenue and profit recognized in the year on the sale of [name of
product] and aftermarket services is dependent on the appropriate assessment of
whether or not each long-term aftermarket contract for services is linked to or
separate from the contract for sale of [name of product]. As the commercial
arrangements can be complex, significant judgment is applied in selecting the
accounting basis in each case. In our view, revenue recognition is significant to our
audit as the Group might inappropriately account for sales of [name of product] and
long-term service agreements as a single arrangement for accounting purposes and
this would usually lead to revenue and profit being recognized too early because the
margin in the long-term service agreement is usually higher than the margin in the
[name of product] sale agreement.
Source: IAASB (2015) Auditor Reporting—Illustrative Key Audit Matters, p. 5, www.ifac.org/system/files/

publications/files/IAASB-Auditor-Reporting-Toolkit-Illustrative-Key-Audit-Matters.pdf.
In Australia, KPMG undertook an evaluation of the 128 entities in the ASX 200 that
reported with 30 June 2017 year ends. They found that the auditor’s report length has
increased to an average 5.7 pages, despite more firms taking advantage of the option of
removing standardised text from the auditor’s responsibilities section and cross referring to
the full descriptions contained on the website of the AUASB. They also found that on
average there were 2.8 KAMs per auditor’s report, with a range of from 1 to 6. Details of
the types of KAMs are contained in Auditing in the global news 12.2 .
Page 506
Key audit matters: auditor’s report snapshot September 2017
Our fourth auditor’s report snapshot provides insights and observations on

Key Audit Matters from 128 entities in the ASX 200 with 30 June 2017 year
ends. Key Audit Matters (KAMs) are those matters that required significant
auditor attention in performing the audit, and are communicated in auditor’s
reports of listed entities.
For the 128 audit reports released, the top 5 Key Audit Matter (KAM) topics
are:
Goodwill (and related CGU assets such as intangibles and PPE)
The most common KAM relates to carrying value assessments or impairment of

goodwill and the related cash-generating unit (CGU) assets such as intangibles
and property, plant and equipment (PPE) (‘Goodwill KAM’).
About a quarter of these KAMs report an impairment charge was booked. For
some sectors this percentage is almost double . . .
Revenue
Revenue is the next common KAM. This is no surprise given revenue is a key
driver of an entities performance and shareholder value. What is surprising is a
Goodwill KAM is more than twice as likely to appear than a Revenue KAM . . .
Taxation
Taxation KAMs feature in a third of entities in the energy and natural resources
(ENR), infrastructure, government and healthcare (IGH) and technology, media

and telecommunications (TMT) sectors . . .
Acquisitions
Acquisitions continue to feature high in the top KAMs for 30 June reporters . . .
Inventory
For the first time, inventory KAMs appear in the top KAMs. Each industry sector
appears to have nuanced drivers of Inventory KAMs.
Source: KPMG (2017) ‘Key audit matters: auditor’s report snapshot 20 September 2017’, https://home.k
pmg.com/au/en/home/insights/2017/09/key-audit-matters-auditor-report-20-september-2017.html,
accessed 5 December 2017.
QUICK REVIEW
1. Recent changes have been made to the auditor’s report, resulting from
feedback suggesting that:
other than communicating the auditor’s overall conclusion, the content of
the auditor’s report is not viewed as being particularly useful or
informative
the communicative value of the auditor’s report could be improved if
changes were made to the structure and wording of the auditor’s report
there is richer information available about the entity and its financial
report that is available to the auditor but is not being communicated to
the user.
2. Users have pointed to the existence of an ‘information gap’ between what
they believe is needed to make informed investment and fiduciary
decisions and what is available to them through the entity’s audited
financial report and other publicly available information.
3. The structure of the unmodified auditor’s report consists of:
the title
the addressee
the opinion Page 507
the basis for opinion

material uncertainty related to going concern
key audit matters
other information
responsibilities of management for the financial report
auditor’s responsibilities for the audit of the financial report
other reporting requirements
name of the engagement partner
signature of the auditor
date of the auditor’s report.

4. A benefit of standard-format auditors’ reports is to emphasise
comparability and to highlight departures from the standard form when
they arise. The auditor reporting standards contain suggested illustrative,
but not required, standard auditors’ reports.
5. Standardised wording clearly conveys the different parties’ responsibilities
and the work that was undertaken by the auditor in preparing the report.
Although the structure and wording contained in the auditing standards
and other guidance material are only suggested, they are rarely departed
from in practice.
6. The communication of key audit matters (KAMs) in the auditor’s report is
required for all audits of listed entities. KAMs are those matters that, in the
auditor’s professional judgment, were of most significance in the audit of
the current period’s financial statements.
LO 12.3 Fair presentation and compliance frameworks
A financial reporting framework can either be a fair presentation framework or a com
pliance framework . A fair presentation financial reporting framework requires
compliance with the requirements of the framework and:
1. acknowledges that to achieve fair presentation it may be necessary for management to

provide disclosures beyond those specifically required by the framework (that is, to
include additional disclosures in the notes to the financial report to achieve fair
presentation), or
2. acknowledges that it may be necessary for management to depart from a requirement of
the framework to achieve fair presentation of the financial report (that is, to change the
reported figures in the financial report). Such departures are only expected to be
necessary in extremely rare circumstances.
When undertaking an audit under a fair presentation framework, ASA 700.25 (ISA 700.25)
requires the auditor to express an opinion as to whether the financial report ‘gives a true a
nd fair view’ or ‘presents fairly , in all material respects’ in accordance with the
applicable financial reporting framework. For the purposes of approved auditing standards,
the two phrases are equivalent (ASA 700.25/ISA 700.25). Acknowledgments of disclosures
or departures under (1) or (2) above are commonly referred to as true and fair overrides.
A compliance framework is one that requires that the framework be complied with and
does not contain the acknowledgments in (1) or (2) above. When undertaking an audit
under a compliance framework, ASA 700.26 (ISA 700.26) requires that the auditor express
an opinion as to whether the financial report ‘is prepared, in all material respects’ in
accordance with the applicable financial reporting framework.
Section 297 of the Corporations Act 2001 requires that the auditor give an opinion as to
whether the accounts are drawn up so as to give a true and fair view. It also states that this
section does not affect the obligation under section 296 for a financial report to comply
with accounting standards, and that directors must add such information as is necessary to
give a true and fair view. Thus, the Corporations Act 2001 is a fair presentation framework,
acknowledging that to achieve fair presentation it may be necessary for Page 508
management to provide additional disclosures in the notes to the accounts beyond
those specifically required by the framework.
QUICK REVIEW
1. A financial reporting framework can be either a fair presentation
framework or a compliance framework.
2. For audits under a fair presentation framework the auditor is required to
state whether the financial report ‘gives a true and fair view’ or ‘presents
fairly, in all material respects’ in accordance with the applicable financial
reporting framework. For the purposes of approved auditing standards, the
phrases ‘gives a true and fair view’ and ‘presents fairly, in all material
respects’ are equivalent.
3. For audits under a compliance framework the auditor is required to state
whether the financial report is prepared in accordance with the applicable
financial reporting framework.
4. The Corporations Act 2001 is a fair presentation framework and requires
the auditor to use the phrase ‘true and fair view’.
LO 12.4 Types of auditor’s opinions
ASA 700 (ISA 700) covers the auditor’s responsibility to form an opinion on the financial
report, and the form and content of unmodified auditors’ reports. These are the standard
unmodified reports that have been discussed up until now, and are issued for approximately
70 per cent of Australian companies listed on the Australian Securities Exchange.
ASA 705 (ISA 705) covers the form and content of the auditor’s report when the auditor
believes it is necessary to modify the auditor’s opinion. The types of modified opinions that
can be issued are:
qualified opinion (ASA 705.7/ISA 705.7)

adverse opinion (ASA 705.8/ISA 705.8)
disclaimer of opinion (ASA 705.9–10/ISA 705.9–10).
ASA 706 (ISA 706) covers those situations in which the auditor considers that it is
necessary to include additional disclosures in the auditor’s report to draw users’ attention
to:
matters that are presented or disclosed in the financial report (usually disclosed in the
notes to the financial report) that are of such importance that they are fundamental to
users’ understanding of the financial report—called an Emphasis of Matter paragra
ph (ASA 706.7(a)/ISA 706.7(a)), or
matters other than those presented or disclosed in the financial report that are relevant to
users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report—
called an Other Matter paragraph (ASA 706.7(b)/ISA 706.7(b)).
In addition, the auditor has reporting responsibilities in relation to reporting in accordance

with ASA 570 (ISA 570) Going Concern.
Unmodified auditor’s report

An example of an unmodified auditor’s report for an Australian company was
provided earlier in this chapter as Exhibit 12.2 . This type of report is issued when the
auditor is satisfied in all material respects that the financial report has been prepared in
accordance with the Corporations Act 2001, including giving a true and fair view and
complying with Australian accounting standards and with the Corporations Regulations
2001.
Issuing this type of report means that the auditor has determined that they have obtained
reasonable assurance that the financial report as a whole is free from material
misstatement, whether due to fraud or error. This means that the auditor has concluded
that:
sufficient appropriate audit evidence has been obtained (in accordance with ASA
330/ISA 330)
any uncorrected misstatements are immaterial, both individually and in aggregate (in
accordance with ASA 450/ISA 450)
the financial report is prepared, in all material respects, in accordance with the Page 509
requirements of the applicable financial reporting framework (ASA 700.11/ISA
700.11).
The third conclusion above is reached by evaluating whether:
the financial report adequately discloses the significant accounting policies that are
selected and applied
the accounting policies selected and applied are consistent with the applicable financial
reporting framework and are appropriate
the accounting estimates made by management are reasonable
the information presented in the financial report is relevant, reliable, comparable and
understandable
the financial report provides adequate disclosures to enable the intended users to
understand the effect of material transactions and events on the information conveyed in
the financial report
the terminology used in the financial report, including the title of each financial
statement, is appropriate (ASA 700.13/ISA 700.13).
As outlined earlier, this form of conclusion is by far the most common one observed in
practice, with approximately two-thirds of all listed companies in Australia currently
receiving a standard unmodified report. The fact that departure from this form of report is
relatively rare adds weight to the effectiveness of the sanctioning provided by emphasising
modifications to the standard report format: entities generally do not want to be in the
minority and to be required to explain why they have received a modified report.
Modifications affecting the auditor’s opinion

The types of modifications that affect the auditor’s opinion are shown in Table 12.1 .
This table illustrates how the auditor’s judgment about the nature of the matter giving rise
to the modification, and the pervasiveness of its effects or possible effects on the financial
report, determine the type of opinion to be expressed. The first thing to notice is that, for
any modification to be made to the auditor’s opinion, the effect or possible effect must be
material. For the more serious types of modifications (adverse opinions and disclaimers of
opinion), this material effect must also be pervasive. Effects are considered to be perva
sive if, in the auditor’s judgment, they:
are not confined to specific elements, accounts or items of the financial report
if so confined, represent or could represent a substantial proportion of the financial report
in relation to disclosures, are fundamental to users’ understanding of the financial report
(ASA 705.5/ISA 705.5).
HOW DIFFERENT TYPES OF MODIFICATIONS AFFECT

TABLE 12.1
THE AUDITOR’S OPINION
Auditor’s judgment regarding the

Nature of matter giving rise to pervasiveness of the effects or possible
the modification effects on the financial report
Material but not Material and

pervasive pervasive
Financial report is materially Qualified opinion Adverse opinion

misstated (disagreement with
management)
Auditor is unable to obtain Qualified opinion Disclaimer of

sufficient appropriate audit opinion
evidence (scope limitation)
Source: Australian Auditing and Assurance Standards Board (AUASB) 2014, ASA 705 Modifications to the
Opinion in the Independent Auditor’s Report, paragraph A1. (c) 2018 Auditing and Assurance Standards Board
(AUASB). The text, graphics and layout of this publication are protected by Australian copyright law and the
comparable law of other countries. No part of the publication may be reproduced, stored or transmitted in any
form or by any means without the prior written permission of the AUASB except as permitted by law. For
reproduction or publication permission should be sought in writing from the Auditing and Assurance Standards
Board. Requests in the first instance should be addressed to the Technical Director, Auditing and Assurance
Standards Board, PO Box 204, Collins Street West, Melbourne, Victoria, 8007.
For all the types of modified opinions, the basis for opinion paragraph required Page 510
under ASA 700/ISA 700 is modified to provide a description of the matter giving rise to
the modification, under the heading ‘Basis for qualified opinion’, ‘Basis for adverse
opinion’ or ‘Basis for disclaimer of opinion’, as appropriate. A description and
quantification of the financial effects of the misstatement should be included in the
modified basis for opinion paragraph where practicable. If it is not practicable to quantify
the financial effects, this should be stated in the basis for modification paragraph. The
following examples are drawn from qualified opinions issued in practice, although
identifying characteristics have been changed to preserve anonymity.
Qualified opinion
A qualified opinion is expressed when the auditor concludes, after obtaining sufficient
appropriate evidence, that misstatements are material but not pervasive to the financial
report; or when the auditor is unable to obtain sufficient appropriate evidence on which to
base the opinion but concludes that the possible effects on the financial report could be
material but not pervasive (ASA 705.7/ISA 705.7).
By far the most common types of qualified opinions issued relate to material departures
from a specific AASB or other Australian accounting standard, or to material
disagreements over the carrying value of a specific asset or liability and its potential effect
on profit.
An example of a basis for qualified auditor’s opinion paragraph, and the qualified auditor’s
opinion paragraph that was issued by Smarte Auditors for Premium Ltd (and its
subsidiaries), are presented in Exhibit 12.4 .
EXAMPLE OF ADDITIONAL DISCLOSURE CONTAINED
IN A BASIS FOR QUALIFIED AUDITOR’S OPINION
EXHIBIT 12.4
PARAGRAPH, AND A QUALIFIED AUDITOR’S OPINION
PARAGRAPH
Basis for qualified auditor’s opinion
As disclosed in Note 3 to the financial report, the company has recognised an

investment in a subsidiary at a carrying value of $3 034 578 after an impairment
expense of $1 375 687. Australian Accounting Standard AASB 139 Financial
Instruments: Measurement and Recognition requires an asset to be carried at no more
than its recoverable amount. All the assets of the subsidiary have passed to the
control of a receiver subsequent to year end. We have not been provided with
sufficient appropriate audit evidence of the recoverable amount of the investment as a
consequence of the receiver’s future realisation process and, accordingly, we have
been unable to determine whether the recoverable amount of that asset is at least
equal to its carrying value. In the event that the carrying value of the asset exceeds its
recoverable amount, it would be necessary for the carrying value of that asset to be
written down to its recoverable amount. In the event that the recoverable amount
exceeds the impaired carrying value, the impairment expense is overstated and the
investment in the subsidiary is understated by an amount equal to the lower of $1 375
687 or the excess above written down value.
Qualified auditor’s opinion
In our opinion, except for the effects of such adjustments, if any, as might have been
determined to be necessary had we been able to satisfy ourselves as to the
recoverable amount of the Investment in Subsidiaries recorded by the company
(a) the financial report of Premium Ltd is in accordance with the Corporations
Act 2001, including:
(i) giving a true and fair view of the company’s and consolidated entity’s
financial positions as at 30 June 2018 and of their performance for the
year ended on that date
(ii) complying with Australian Accounting Standards (including the
Australian Accounting Interpretations) and the Corporations
Regulations 2001
(b) the financial report complies with International Financial Reporting Page 511
Standards as disclosed in Note 2 . . .
Smarte Auditors
[signed]
John Delisle
Partner
Chartered Accountants
Sydney, 28 September 2018
In issuing this type of opinion the auditor is communicating that, in their opinion, except
for the reservations outlined, the remainder of the financial report can be relied on. The
auditor attempts to quantify their reservations so that the user can appropriately adjust the
information contained in the financial report if desired.
Adverse opinion
An adverse opinion should be expressed when the effects of the misstatements,

individually or in the aggregate, are so material and pervasive that the financial report
taken as a whole is, in the auditor’s opinion, misleading or of little use to the addressee of
the auditor’s report (ASA 705.8/ISA 705.8).
An example of a basis for an adverse opinion paragraph, and the adverse auditor’s opinion
paragraph that was issued for Traill Ecosystems Ltd, are presented in Exhibit 12.5 .
These types of opinions are very rare in practice, with less than five issued for listed
companies in Australia since 2010. The most common situation in which they are issued is
where there are going concern considerations—where the accounts are prepared on a going
concern basis and the auditor concludes that it is highly improbable that the entity will
continue as a going concern (see ASA 570.21/ISA 570.21).
IN A BASIS FOR ADVERSE AUDITOR’S OPINION
EXHIBIT 12.5
PARAGRAPH, AND AN ADVERSE AUDITOR’S OPINION
PARAGRAPH
Basis for adverse auditor’s opinion
The Directors have prepared the financial report on the going concern basis as
described in Note 1, and state in the Directors’ declaration that in their opinion there
are reasonable grounds to believe that the company will be able to pay its debts as
and when they fall due.
Note 1 discusses a number of matters that may affect the ability of the company to
continue as a going concern. In that note, the directors state their opinion that the
going concern basis used in the preparation of the financial report is appropriate. In
our opinion, however, it is highly improbable that the company will be able to
continue as a going concern. In arriving at our opinion we have considered the
following:
1 The company went into administration on 22 August 2018 and on 4 October

2018 Traill Ecosystems Ltd entered into a Deed of Company Arrangements
(‘DOCA’). Subsequent to this, on 2 December 2018 Traill Ecosystems Ltd
entered into a reconstruction deed to reconstruct and recapitalise the company.
2 As at 30 June 2018, the company had a net asset deficiency position of $720
460. The company is currently not trading and does not have any cash or
revenue-generating assets on hand at 30 June 2018.
3 At the date of signature of the financial report there is insufficient evidence to
support the ability of the company to raise sufficient capital to commence
exploration activities.
These events indicate that it is highly improbable that the entity will continue as a
going concern and therefore be able to realise its assets and discharge its liabilities in
the normal course of business. The financial report (and notes thereto) does not
disclose this fact.
Page 512
A going concern basis presumes that the company will be able to realise its assets
and extinguish its liabilities in the normal course of business and at the amounts
stated in the financial report.
The financial report does not include any adjustments relating to the recoverability
and classification of asset carrying amounts or the amount of liabilities that might
result should the company be unable to continue as a going concern and meet its
debts as and when they fall due.
Adverse auditor’s opinion
In our opinion, for the reasons set out in the basis for opinion paragraph above:
(a) the financial report of Traill Ecosystems Ltd is not in accordance with the
Corporations Act 2001, and does not:
(i) give a true and fair view of the company’s and consolidated entity’s
financial position as at 30 June 2018 and of their performance for the
year ended on that date, and
(ii) comply with Australian Accounting Standards (including the Austral
Accounting Interpretations) and the Corporations Regulations 2001,
and
(b) the financial reports also do not comply with International Financial Reportin
Standards as disclosed in Note 1 . . .
BP & D
[signed]
Mandi Glossop
Partner
Dated at Adelaide, South Australia, on the 10th day of December 2018.
Disclaimer of opinion
A disclaimer of opinion is expressed when the auditor is unable to obtain sufficient

appropriate evidence to form an opinion, and they conclude that the possible effect of
undetected misstatements on the financial report could be both material and pervasive
(ASA 705.9/ISA 705.9).
However, it should be recognised that the auditor has a duty to form an opinion. Where
there is significant uncertainty, the auditor should first exhaust all effective alternative
means of obtaining sufficient appropriate audit evidence before issuing a disclaimer of
opinion. An example of a basis for disclaimer of auditor’s opinion paragraph, and the
disclaimer of auditor’s opinion issued for Tracksafe Ltd for 2018, are presented in Exhibit
12.6 . These audit modifications are very rare in practice, with less than 1 per cent of
listed Australian companies receiving such modifications.
IN A BASIS FOR DISCLAIMER OF AUDITOR’S OPINION
EXHIBIT 12.6
PARAGRAPH AND A DISCLAIMER OF AUDITOR’S
OPINION PARAGRAPH
Basis for disclaimer of auditor’s opinion
During the performance of our audit we became aware of multiple material

uncertainties which are as follows:
As indicated in Note 32 ‘Contingent assets and contingent liabilities’ in the financial

report, Tracksafe Ltd is a defendant to legal proceedings seeking to recover
unspecific damages arising from a terminated contract. The legal claim was issued on
21 March 2018 and, on 11 May 2018, Tracksafe Ltd filed a counterclaim for in
excess of $50 million for loss and damages suffered. Discovery and inspection of
documents relating to the proceedings are in progress. The circumstances of the case
are such that the ultimate outcome of the litigation proceedings cannot presently be
determined with an acceptable degree of reliability, and accordingly no provision for
any liability or recording of any asset that may result have been recognised in the
financial report.
Page 513
We draw attention to Note 1 (c) ‘Going Concern’ in the financial report. Tracksafe
Ltd incurred a net loss of $41 224 000 during the year ended 30 June 2018 and, as of
that date, the consolidated entity’s total liabilities exceeded its total assets by $6 171
000. The company is currently finalising the restructure of its businesses, including
the sale of certain components to related parties to facilitate the settlement of their
liabilities. Tracksafe Ltd proposes to seek shareholder approval of the restructure at a
general meeting of shareholders to be held in November 2018. Accordingly, the
ultimate outcome of the restructure cannot presently be determined. These
conditions, along with other matters as set forth in Note 1 (c) ‘Going Concern’ and
the litigation proceedings set forth in the preceding paragraph, indicate the existence
of material uncertainties which may cast significant doubt about the consolidated
entity’s and company’s ability to continue as going concerns. The financial report
does not include adjustments, if any, relating to the recoverability and classification
of recorded asset amounts or the amounts and classification of liability that might be
necessary should the consolidated entity and company not continue as going
concerns.
Disclaimer of auditor’s opinion

Due to the existence of the multiple material uncertainties as described in the basis
for disclaimer paragraphs above, we are unable to and do not express an opinion as to
whether:
(a) the financial report of Tracksafe Ltd is in accordance with the Corporations
Act 2001, including:
(i) giving a true and fair view of the company’s and consolidated entity’s
financial position as at 30 June 2018 and of their performance for the
year ended on that date, and
(ii) complying with Australian Accounting Standards (including the
Australian Accounting Interpretations) and the Corporations
Regulations 2001, and
(b) the financial report also complies with International Financial Reporting
Standards as disclosed in Note 1.
Smarte Auditors
[signed]
LF Francis
Partner
Chartered Accountants
Sydney, 29 September 2018
Thus, the auditor is communicating that there has been such a limitation on the evidence-
gathering procedures that they are unsure whether the financial report is reliable. The
adverse opinion and the disclaimer of opinion can be distinguished as follows: for the
adverse opinion, the auditor knows that the financial report, taken as a whole, is of little
use, whereas for the disclaimer of opinion, the auditor has been unable to collect sufficient
appropriate audit evidence and is thus unable to form an opinion regarding the financial
report.
Additional communications in the auditor’s report:

Emphasis of Matter and Other Matter paragraphs
As outlined earlier, ASA 706 (ISA 706) covers those situations where the auditor does not
necessarily believe that the auditor’s opinion needs to be modified, but feels that it is
necessary to draw users’ attention to a matter that, although appropriately presented or
disclosed in the financial report, is fundamental to their understanding of the financial
report (called an Emphasis of Matter), or to any other matter relevant to users’
understanding of the audit, the auditor’s responsibilities or the auditor’s report (called an
Other Matter).
Emphasis of Matter
In certain limited circumstances it is appropriate for the auditor to draw attention to or

emphasise a matter that is appropriately presented or disclosed in the financial report and is
considered relevant to users of the auditor’s report, but which, because of its nature, does
not affect the auditor’s opinion. The major examples would be where there is a Page 514
disclosure in the notes to the financial report that the auditor considers to be
complete and adequate, but important enough to bring to users’ attention.
As outlined in ASA 706.A5 (ISA 706.A5), examples of circumstances in which the auditor
may consider it necessary to include an Emphasis of Matter paragraph include:
uncertainty relating to the future outcome of exceptional litigation or regulatory action

early application (where permitted) of a new accounting standard (for example, a new
Australian accounting standard) that has a material effect on the financial report
a major catastrophe that has had, or continues to have, a significant effect on the entity’s
financial position.
Table 12.2 shows that the major change in auditor reporting from 2005 to 2013 is the
change from unmodified to unmodified with Emphasis of Matter. These types of opinions
have more than doubled over that period. By far the category of Emphasis of Matter that is
the most commonly observed, accounting for approximately 90 per cent of auditors’ reports
containing Emphasis of Matter paragraphs issued for publicly listed companies in
Australia, is that relating to uncertainty regarding going concern status (see
Auditing in the global news 12.3 see also Carson, Fargher and Zhang (2016)).
Modified opinions have also increased, but in no year do they comprise in total more than
5 per cent of auditors’ reports. The rareness of these types of modified reports adds to their
effectiveness as a sanctioning and communications device, in communicating that the
financial report is or could be materially misstated.
TABLE 12.2 TYPES OF AUDITOR’S OPINION ISSUED IN AUSTRALIA,
2005 2006 2007 2008 2009 2010 2011 2012
Unmodified
Unmodified 84.8% 84.8% 85.6% 77.8% 73.3% 74.5% 75.4% 70.6%

reports
Unmodified 13.0% 12.1% 11.4% 18.4% 22.4% 20.7% 20.5% 25.0%

with an
Emphasis of
Matter
Total 97.7% 96.9% 97.0% 96.2% 95.7% 95.2% 95.9% 95.6%

Unmodified
Modified
Except for – 0.8% 0.7% 1.3% 1.3% 1.1% 1.2% 1.5% 1.3%
Other
Except for – 0.1% 0.5% 0.7% 0.5% 0.3% 0.1% 0.2%

Going
Concern
Adverse 0.1%
Opinion –
Other
Adverse 0.1% 0.1% 0.1% 0.3% 0.2% 0.1% 0.1%

Opinion –
Going
Concern
Disclaimer – 0.1% 0.2% 0.6% 0.4% 0.4% 0.8% 0.7% 0.5%

Other
Disclaimer – 0.4% 0.4% 0.3% 0.3% 0.7% 0.6% 0.5% 0.6%

Going
Concern
Qualification 0.2% 0.1% 0.1% 0.1%

Plus
Emphasis of
Matter –
Other
Qualification 0.8% 0.9% 0.7% 0.7% 1.4% 1.8% 1.4% 1.6%

Plus
Emphasis of
Matter –
Going
Concern
Total 2.3% 3.1% 3.0% 3.8% 4.3% 4.8% 4.1% 4.4%

Modified
Total 1489 1601 1745 1817 1832 1854 1861 1819

number of
auditor’s
reports
Source: Carson, E., Fargher, N.L. and Zhang, Y. (2016) ‘Trends in auditor reporting in Australia: a synthesis and
opportunities for research’, Australian Accounting Review, Vol. 26, pp. 226–42.
Page 515
Why are modifications to, and additional communications in, the

auditor’s report back in vogue?
In research by Carson, Fargher and Zhang (2016) examining the frequency
with which different types of auditors’ opinions were issued for listed
companies in Australia for the period 2005–13, combined with the findings of
earlier research (for example, Carson, Ferguson and Simnett, 2006), the
authors found that the range of auditors’ reports containing modified
opinions and additional communications (Emphasis of Matter) increased from
12 per cent in 1996–2000 to about 20 per cent in 2001–03. In 2004–07 this
rate steadily decreased again, until it hit 13 per cent in 2007, but jumped
again to 22 per cent and 26 per cent in 2008 and 2009, respectively. It has
continued to increase so that in 2013 it comprised nearly one-third of all
auditors’ reports issued for Australian listed entities. These jumps were due
mainly to an increase in one type of report—those reports containing an
unmodified opinion with an Emphasis of Matter paragraph relating to
significant uncertainty about a going concern issue.
What would explain these increases?

Some disastrous events for the auditing profession occurred in 2001,
including the collapse of Enron in the US and of HIH in Australia. As
mentioned above, the decrease in unmodified auditors’ reports has been
mainly due to an increase in Emphasis of Matter opinions relating to going
concern issues. It may be that the company population has become more
risky; one factor that supports this contention is that the economic boom
resulted in the listing of many speculative mining companies in Australia from
2002 to 2007. It may also be that auditors became more conservative in
their reporting of these situations, with the recent events increasing auditors’
risk profile and encouraging them to include such additional
communications.
Again, 2008 and 2009 were disastrous years for the economy, with the
impact of the global financial crisis. Many companies’ profits collapsed and
companies with high levels of financial leverage were suddenly seen as very
risky. The future economic climate also became very unclear. Auditors may
have responded either to the worse financial profiles of their clients or to the
more uncertain outlook and greater risk faced by both their clients and
themselves, by increasingly modifying their reports. But the rate of
modification has continued to increase to the extent that in 2013 more than
one-third of Australian listed entities had other than unmodified opinions,
even though the economy was relatively stable.
There may be other possible reasons for these increases that you are able to
think of.
The revised auditor reporting standards include a separate paragraph in the auditor’s report
where there is material uncertainty related to going concern. If, in the auditor’s opinion, the
use of the going concern basis of accounting is appropriate but a material uncertainty exists
of which there is adequate disclosure in the financial report, the auditor would express an
unmodified opinion and include a separate paragraph in the auditor’s report under the
heading ‘Material uncertainty related to going concern’. This is effectively equivalent to
what was the Emphasis of Matter paragraph related to going concern that was so common
under the previous auditor reporting standards. However, it has become so common in
practice that it has been elevated to its own category. As outlined in ASA 706.A7 (ISA
706.A7), an Emphasis of Matter paragraph is not a substitute for reporting in accordance
with ASA 570 (ISA 570) when a material uncertainty exists relating to events or conditions
that may cast significant doubt on an entity’s ability to continue as a going concern.
It should be noted that the use of Emphasis of Matter paragraphs is not intended to Page 516
be a substitute for individual key audit matters, which were described earlier in
this chapter (ASA 706.A1/ISA 706.A1). There may, however, be a matter that the auditor
determines is not a key audit matter (that is, because it did not require significant auditor
attention), but which, in the auditor’s judgment, is fundamental to users’ understanding of
the financial report (for example, a subsequent event). If the auditor considers it necessary
to draw users’ attention to such a matter, the matter should be included in an Emphasis of
Matter paragraph (ASA 706.A3/ISA 706.A3).
Like modification to the auditor’s opinion, widespread use of Emphasis of Matter

paragraphs will diminish the effectiveness of the auditor’s communication of such matters
(ASA 706.A6/ISA 706.A6). Additionally, to include more information in an Emphasis of
Matter paragraph than is presented or disclosed in the financial report may imply that the
matter has not been appropriately presented or disclosed; accordingly, the information
contained in an Emphasis of Matter paragraph should be limited to matters presented or
disclosed in the financial report.
An Emphasis of Matter section can accompany either an unmodified or a modified

auditor’s opinion. Its placement in the auditor’s report will depend on the nature and
significance of the communication. For example, an Emphasis of Matter paragraph may be
presented either directly before or after the key audit matters section, based on the relative
significance of the information included in the Emphasis of Matter paragraph (ASA
706.A16/ISA 706.A16). An Emphasis of Matter is not a modification of the auditor’s
opinion, and care needs to be taken to make this clear to the user of the auditor’s report
when describing the matter. It can be introduced using words such as ‘Without
modification to the opinion expressed above, attention is drawn to . . .’ or, when the
auditor’s opinion has been modified, ‘Without further modification to the opinion
expressed above, attention is drawn to . . .’.
Other Matter
The ability to include an Other Matter paragraph in the auditor’s report allows the auditor
to draw the user’s attention to any other matters, not presented or disclosed in the financial
report, that the
auditor believes are sufficiently important to be highlighted (ASA 706.7(b)/ISA 706.7(b)).
The categories of circumstances that may give rise to an Other Matter paragraph are those
that are relevant to enhancing users’ understanding of the audit, the auditor’s
responsibilities or the auditor’s report.
Examples of circumstances in which an Other Matter paragraph may be necessary include:
where it is not possible to withdraw from the audit even though a limitation imposed by
management on the scope of the audit is pervasive (a matter relevant to the users’
understanding of the audit)
where national regulations require the auditor to further elaborate on their responsibilities
in the audit (a matter relevant to users’ understanding of the auditor’s responsibilities)
where the auditor’s report covers more than one financial report, each prepared in
accordance with general-purpose financial reporting frameworks, such as a national
framework and International Financial Reporting Standards (a matter relevant to users’
understanding of the auditor’s report (ASA 706.A9–A15/ISA 706.A9–A15).
An Other Matter paragraph may also be used in a situation where the auditor becomes
aware of a material inconsistency in other information attached to a financial report. In
accordance with ASA 720 (ISA 720), if revision of the other information is necessary and
management refuses to make this revision, the auditor should, in addition to meeting other
requirements, include in the auditor’s report an Other Matter paragraph describing the
material inconsistency in accordance with ASA 706 (ISA 706). An Other Matter paragraph
should be headed ‘Other Matter’. Its placement in the auditor’s report will depend on the
nature and significance of the communication. For example, when relevant to users’
understanding of the auditor’s report, the Other Matter paragraph may be included as a
separate section following the report on other legal and regulatory requirements (ASA
706.A16/ISA 706.A16), or elsewhere in the auditor’s report if the content of the Other
Matter paragraph is relevant to the ‘Other reporting requirements’ section (ASA 706/ISA
706).
Page 517
Auditor responsibilities in relation to going

concern
One of the areas in which there was a significant expectation gap (discussed in
Chapter 1 ), and which was considered carefully in the recent auditor reporting project
by the IAASB, was auditor reporting of going concern considerations. We have also
discussed that, over the past few years, there has been an increase in Emphasis of Matter
reporting. The most commonly observed, accounting for approximately 90 per cent of
auditors’ reports containing Emphasis of Matter paragraphs issued for publicly listed
companies in Australia, is that relating to uncertainty regarding going concern status.
Under the revised auditor reporting standards ASA 570 (ISA 570), and as outlined in
Exhibit 12.2 , the auditor now needs 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 company’s ability to continue as a going concern. If they conclude
that a material uncertainty exists, an additional paragraph to the unmodified auditor’s
report will be required if, in the auditor’s opinion, the use of the going concern basis of
accounting is appropriate but a material uncertainty exists of which there is adequate
disclosure in the financial report. The changes (and the types of changes) to the unmodified
auditor’s report and the circumstances when they will normally be required are summarised
below:
When the use of the going concern basis of accounting is not appropriate, management
may be required, or may elect, to prepare the financial report on another basis such as the
liquidation basis of accounting. The auditor may be able to express an unmodified
opinion on this financial report, provided there is adequate disclosure about the use of
this other basis of accounting. An Emphasis of Matter paragraph would normally be
included in the auditor’s report in accordance with ISA 706 to draw the user’s attention to
that alternative basis of accounting and the reasons for its use (ASA 570.A27/ISA
570.A27).
If the financial report has been prepared on the going concern basis but, in the auditor’s
judgment, management’s use of the going concern basis of accounting in the preparation
of the financial report is inappropriate, the auditor should express an adverse opinion
(ASA 570.21/ISA 570.21).
If, in the auditor’s opinion, the use of the going concern basis of accounting is
appropriate but a material uncertainty exists of which there is adequate disclosure in the
financial report, the auditor would express an unmodified opinion and include a separate
paragraph in the auditor’s report. This separate paragraph would be included under the
heading ‘Material uncertainty related to going concern’. In this additional paragraph, the
auditor would draw attention to the note in the financial report that discloses the matter.
They would also state that these events or conditions indicate that a material uncertainty
exists that may cast significant doubt on the entity’s ability to continue as a going concern
and that the auditor’s opinion is not modified in respect of the matter (ASA 570.22/ISA
570.22).
If, in the auditor’s opinion, there is not adequate disclosure about a material going
concern uncertainty in the financial report, the auditor should express a qualified opinion
or adverse opinion, as appropriate, in accordance with ISA 705. In the basis for
qualified/adverse opinion section of the auditor’s report, the auditor should state that a
material uncertainty exists that may cast significant doubt on the entity’s ability to
continue as a going concern and that the financial report does not adequately disclose this
matter.
QUICK REVIEW
1. The most commonly issued type of auditor’s report is the standard
unmodified report, with these types of auditors’ reports observed for
approximately 70 per cent of entities listed on the Australian Securities
Exchange.
2. Guidance on the format of a standard unmodified auditor’s report is
contained in ASA 700 (ISA 700).
3. ASA 705 (ISA 705) covers modifications to the auditor’s opinion. There are
three types of modified auditor’s opinions:
qualified opinion, where the auditor has a reservation that is material but
not so material as to preclude an expression of opinion on the financial
report taken as a whole (that is, with the exception of the stated
reservation, the rest of the financial report is fairly presented)
adverse opinion, where the financial report taken as a whole is Page 518
materially and pervasively misleading
disclaimer of opinion, where due to some limitation on scope the financial
report taken as a whole is potentially materially and pervasively
misleading, and correspondingly the auditor was not able to form an
opinion on the financial report.
4. The most commonly issued type of modified auditor’s opinion is the
qualified opinion. Adverse opinions and disclaimers of opinion are very
rarely issued in practice.
5. Under ASA 706 (ISA 706), an Emphasis of Matter paragraph is included in
the auditor’s report to draw attention to matters that are considered
relevant but that do not affect the auditor’s opinion and that have been
adequately disclosed in the financial report. An Emphasis of Matter is not a
modification of the auditor’s opinion and care needs to be taken to make
this clear to users of the auditor’s report when describing the matter.
6. Under ASA 706 (ISA 706), a further additional communication that the
auditor can include in the auditor’s report is an Other Matter paragraph.
This allows the auditor to draw users’ attention to any other matters not
presented or disclosed in the financial report that they believe are
sufficiently important to be highlighted and that are relevant to users’
understanding of the audit, the auditor’s responsibilities or the auditor’s
report.
LO 12.5 Circumstances giving rise to a modified opinion
As outlined in Table 12.1 , the auditor’s opinion should be modified when:
the auditor concludes, based on the audit evidence obtained, that the financial report is
not free from material misstatements, or
the auditor is unable to obtain sufficient appropriate evidence to conclude that the
financial report is free of material misstatements (ASA 705.6/ISA 705.6).
However, before issuing a modified opinion the auditor should take all reasonable steps to
overcome the issues giving rise to the material misstatements (commonly referred to as dis
agreements with management ), or the issues causing the auditor to be unable to obtain
sufficient appropriate evidence (commonly referred to as limitations on scope ).
Material misstatements
ASA 450 (ISA 450) defines a misstatement as the difference between the amount,
classification, presentation or disclosure of an item reported by an entity in the financial
report and the way that item is required to be treated in accordance with the applicable
financial reporting framework. Therefore, a material misstatement in the financial report
may arise in relation to:
the appropriateness of the selected accounting policies

the application of those accounting policies
the appropriateness or adequacy of disclosures in the financial report (ASA 705.A3/ISA
705.A3).
With regard to the appropriateness of the accounting policies that have been selected by
management, material misstatements may arise where the policies selected are not
consistent with the applicable financial reporting framework, or where they fail to fairly
present the underlying transactions and events in the financial report. It is also possible for
material misstatements to occur where an entity has changed its selection of significant
accounting policies but has failed to adequately explain and disclose this change (ASA
705.A4–A5/ISA 705.A4–A5).
With regard to the application of the selected accounting policies, material misstatements
may arise where management has not applied the accounting policies selected in
accordance with the relevant reporting framework, or has not applied the policies Page 519
consistently between periods or between similar transactions and events. Material
misstatements may also arise where accounting policies have been misapplied, resulting in
unintentional errors in application (ASA 705.A6/ISA 705.A6).
With regard to the appropriateness or adequacy of disclosures in the financial report,

material misstatements may arise where the financial report does not include all the
required disclosures, where the disclosures made in the financial report are not made in
accordance with the applicable financial reporting framework, or where the financial report
does not contain the disclosures necessary to achieve fair presentation (ASA 705.A7/ISA
705.A7).
Inability to obtain sufficient appropriate audit

evidence
An inability to obtain sufficient appropriate audit evidence from the auditor’s work may
arise for one of the following three reasons (ASA 705.A8/ISA 705.A8):
circumstances beyond the control of the entity (for example, where the entity’s
accounting records and supporting documentation are destroyed by fire)
circumstances related to the nature or timing of the auditor’s work (for example, where
the auditor is appointed after the balance date and is therefore unable to observe the
counting of inventory on the balance date)
limitations imposed by the entity (for example, where management requests that the
auditor not undertake a particular procedure).
A limitation on the performance of a particular procedure does not necessarily constitute a

limitation on the scope of the audit if the auditor is able to obtain sufficient appropriate
evidence by performing alternative procedures. For example, although the auditor may be
unable to attend the inventory stocktake, alternative procedures such as the inspection of
documentation of the subsequent sale of inventory items on hand at stocktake date may
provide sufficient appropriate evidence about the existence and condition (valuation and
allocation) of the inventory.
Where a limitation in the terms of an engagement is imposed by the entity, and the auditor
concludes that the possible effect of undetected misstatements on the financial report is
material but not pervasive, the auditor should issue a qualified opinion. If the limitation is
such that the auditor is unable to form an opinion (that is, where the potential effect is
material and pervasive), the auditor should issue a disclaimer of opinion, and consider
whether they should withdraw from future audit engagements with that entity (ASA
705.13–14/ISA 705.13–14). An auditor should not accept an audit engagement where the
client imposes a limitation on scope that the auditor believes will result in their having to
issue a disclaimer of opinion (ASA 210.7/ISA 210.7).
The effect of materiality on the audit modification

As is evident from Table 12.1 , a primary factor when considering whether to modify an
auditor’s opinion, or determining what sort of modification to apply, is the degree of
materiality of the subject matter giving rise to the modification. One critical aspect of this
is the dollar magnitude of the effects, or potential effects, of the matter on the financial
report. However, as discussed in Chapters 4 and 11 , materiality does not depend
entirely on dollar magnitude. The auditor also needs to consider the nature of the matter
when making judgments regarding materiality.
A departure from an accounting standard need not be noted in the auditor’s report where it
relates to an item of financial information that is not material. However, modifications may
arise if there is a legal requirement to disclose specific items irrespective of their dollar
magnitude. As outlined earlier, these include, for listed companies, the requirement to
disclose specified directors’ and executive fees and audit fees, in accordance with AASB
1046 and AASB 101, respectively. If not disclosed, such items will normally give rise to a
qualified opinion. For a matter to be considered pervasive, it must be of such magnitude, or
be so fundamental, as to affect the overall usefulness of the financial report taken as a
whole.
Every modified auditor’s report should contain a clear description of all material Page 520
matters about which the auditor has reservations. Each and every material
reservation should be reported by the auditor, even if it leads to more than one reason for a
modification being included in the basis for modification paragraph. The auditor needs to
consider the requirements of law and the audit mandate in relation to the reported
reservation to ensure that reporting of the reservation complies with all necessary
requirements.
Global example 12.1 illustrates the consideration of materiality in determining the type

of auditor’s opinion to be issued.
GLOBAL EXAMPLE 12.1 Consideration of materiality in issuing
opinion
Facts
During the attendance at the annual stocktake and while undertaking follow-
up procedures, an auditor identifies a range of obsolete stock. Subsequent
work by the client reveals that under the lower of cost and net realisable
value rule, inventory is overstated by $10 million, but the client decides not to
adjust the value because the reports are close to being issued. Testing of the
subsequent work of the client shows that the auditor is 95 per cent confident
that the overstatement is in the range of $5–15 million. The inventory
balance is $380 million and profit before tax is $693 million.
Required
Assuming that the auditor is satisfied in all other respects, what type of
opinion should the auditor issue?
Solution
The adjusting entry required would be to debit the expense account
‘inventory write-down’ and to credit the asset account inventory, for $10
million. As the required adjustment is less than 5 per cent of the inventory
balance as well as the appropriate profit balance, the auditor would likely
conclude that the concern over inventory valuation is immaterial and they
would issue an unmodified report.
QUICK REVIEW
1. Modifications to the auditor’s opinion may arise due to:
the auditor concluding, based on evidence obtained, that the financial
report is not free of material misstatements, or
the auditor being unable to obtain sufficient appropriate evidence to
conclude that the financial report is free of material misstatements.
2. A material misstatement in the financial report may arise in relation to:
the appropriateness of the accounting policies selected
the application of these accounting policies
the appropriateness or adequacy of disclosures in the financial report.
3. Limitation on the scope of the auditor’s work may arise due to:
circumstances beyond the control of the entity
circumstances related to the nature or timing of the auditor’s work
limitations imposed by the entity.
4. Materiality is an important consideration in determining whether
modification is necessary and, if so, the type of modification to be issued.
Consideration must be given to both quantitative and qualitative factors in
this regard.
Page 521
LO 12.6 Comparative information and other information in

the annual report
The audit of comparative information

Most entities disclose information from previous periods for comparison purposes. Such co
mparative information is an integral part of the current period’s financial report. The
auditor’s responsibilities in the audit of comparative information are contained in ASA 710
(ISA 710). There are two broad approaches to the auditor’s reporting responsibilities with
respect to such comparative information: corresponding figures and comparative financial
reports. Corresponding figures comprise comparative information which, while an
important part of the financial report, is intended to be read only in relation to the amounts
and other disclosures relating to the current period. Comparative financial reports
comprise comparative information where amounts and other disclosures are included for
comparison with the current period and are referred to in the auditor’s report.
The essential reporting differences and the main way in which these two approaches are
distinguished are as follows:
For corresponding figures, the auditor’s opinion on the financial report refers to the
current period only.
For comparative financial reports, the auditor’s opinion refers to each period for which
the financial report is presented.
As the prior financial information is not explicitly referred to in the auditor’s report in
Australia, comparative information in Australia is classified as corresponding figures.
For both types of comparative information, ASA 710 (ISA 710) requires that the auditor
evaluate whether:
the comparative information and other disclosures required agree with that presented in
the previous period’s financial report or, where appropriate, have been properly restated
the accounting policies reflected in the comparative information are consistent with those
of the current period. If they are not, the auditor must consider whether appropriate
adjustments and disclosures have been made.
It is expected that, for continuing audits, the extent of audit procedures performed with
respect to comparative information will be significantly less than for the audit of the
current period’s financial information. If, however, the auditor becomes aware of a possible
misstatement in the comparative information while performing the current period audit,
ASA 710 (ISA 710) requires that additional audit procedures be performed to identify
whether a material misstatement exists.
For corresponding figures, if the auditor’s report on the previous period included a
qualified opinion, adverse opinion or disclaimer of opinion, and the matter that gave rise to
the modification remains unresolved, then the auditor should modify the auditor’s opinion
on the current period’s financial report. In the basis for modification paragraph in the
auditor’s report, the auditor should either:
refer to both the current and the comparative figures in the description of the matter
giving rise to the modification when the effects of the issue on the current period’s
figures are material, or
explain that the auditor’s opinion has been modified because of the effects or possible
effects of the unresolved matter on the comparability of the current period’s figures and
the comparative figures (ASA 710/ISA 710).
If the financial report of the previous period was audited by another auditor, the incoming
auditor may rely on the work of the previous auditor or may gain knowledge during the
audit as to whether the opening balances were materially misstated. If the auditor is not
prohibited by law or regulation from referring to the predecessor auditor’s report Page 522
on the comparative figures and decides to do so, the auditor should disclose in an
Other Matter paragraph in the auditor’s report:
that the financial report of the prior period was audited by the predecessor auditor
the type of opinion expressed by the predecessor auditor and, if the opinion was
modified, the reasons therefore
the date of that report (ASA 710/ISA 710).
If the previous period’s financial report has not been audited, the auditor should state in an
Other Matter paragraph in the auditor’s report that the comparative figures are unaudited
(ASA 710/ISA 710). Such a statement does not, however, relieve the auditor of the
requirement to obtain sufficient appropriate audit evidence that the opening balances do
not contain misstatements that materially affect the current period’s financial report, as
required by ASA 510.6 (ISA 510.6) (see Chapter 5 ).
Auditor’s responsibilities for other information in
an annual report
Most annual reports include other information that is not part of the financial report, much
of which contains or refers to financial information. For example, management discussion
and analysis (in Australia called operating and financial review statements) and other
narrative sections of an entity’s financial report that currently form part of this other
information are increasingly being used by management to communicate relevant
information to users, and users are attaching greater importance to such information for
their decision making.
In addition, there may be summaries of 5 or 10 years operating results, highlights of key

figures from the financial report and analyses of financial data in a chairperson’s or
directors’ report. For companies listed on the Australian Securities Exchange, other
disclosures, such as the top 20 shareholders, are required. In many cases this other
information in an annual report is based on or related to material contained in the audited
financial report.
As outlined in Chapter 11 , the auditor should read the entire annual report to identify
whether the other information is consistent with the audited financial report. The auditor
has no responsibility to apply additional audit procedures to the other information to
corroborate it (unless this has been specified as part of the engagement). However, it is
appropriate for the auditor to read it and compare it with audited data. This is important
since the credibility of the audited financial report may be undermined by any material inc
onsistencies between it and any accompanying information. The auditor’s
responsibilities with respect to such information presented with audited financial reports
are dealt with in ASA 720 (ISA 720).
Since much of the other information is derived from the financial report, the auditor has a
basis for recognising material inconsistencies and material misstatements of fact . For
example, the directors’ report might mention an increase in net profit but omit the fact that
it occurs because of a material profit from discontinued operations, thus misleading
investors. An inconsistency is material when it contradicts information contained in the
financial report and may therefore raise doubts about the information in the financial report
and about the auditor’s conclusion and report. An auditor who concludes that the other
information causes a material inconsistency should ask the client to revise it. If the client
will not, the auditor has the following options:
1. revise the auditor’s report in accordance with ASA 705 (ISA 705), and consider including
in the auditor’s report an Other Matter paragraph describing the material inconsistency
2. withhold the use of the auditor’s report in the annual report
3. withdraw from the engagement, if possible under the laws and regulations governing the
audit (ASA 720/ISA 720).
In practice, management is usually happy to correct any material inconsistencies or

misstatements of fact brought to their attention. If they are not, option 1 above is the most
likely course of action, with options 2 and 3 being quite extreme. Note that the inclusion of
an Other Matter paragraph in the auditor’s report is not an auditor’s report modification,
because the deficiency is not in the audited financial report. If the other information is
correct and it is the financial report that requires revision which the client refuses to do, the
auditor issues a qualified or adverse opinion, depending on the circumstances.
As a basis for considering whether there is a material inconsistency between the Page 523
other information and the financial report, the auditor is now required to compare
selected amounts or items in the other information to such amounts or items in the
financial report (ASA 720.14).
As outlined in Exhibit 12.2 , ASA 720 (ISA 720) now requires the auditor’s report to
contain a separate section with a heading ‘Other Information’, when the auditor has
obtained, or expects to obtain, the other information (ASA 720.21/ISA 720.21).
ASA 720.22 (ISA 720.22) outlines the auditor’s reporting requirements for this other
information, including those outlined in Exhibit 12.7 .
AUDITOR’S REPORTING REQUIREMENTS FOR
EXHIBIT 12.7
‘OTHER INFORMATION’
(a) A statement that management is responsible for the other information

(b) An identification of:
(i) other information, if any, obtained by the auditor prior to the date of the
auditor’s report, and
(ii) for an audit of a financial report of a listed entity, other information, if
any, expected to be obtained after the date of the auditor’s report
(c) A statement that the auditor’s opinion does not cover the other information
and, accordingly, that the auditor does not express an audit opinion or any
form of assurance conclusion thereon
(d) A description of the auditor’s responsibilities relating to reading, considering
and reporting on other information as required by ASA 720 . . .
Source: Australian Auditing and Assurance Standards Board (AUASB) (2015) ASA 720 The Auditor’s
Responsibilities Relating to Other Information.
QUICK REVIEW
1. The auditor should obtain sufficient appropriate audit evidence that
comparative information is not materially misstated.
2. It is expected that, for continuing audits, the extent of audit procedures
performed with respect to comparative information will be significantly less
than for the audit of the current period’s financial information.
3. If the auditor’s opinion on the previous period was modified, and the
matter that gave rise to the modification remains unresolved, the auditor
should modify the auditor’s opinion on the current period’s financial report.
4. The auditor should review the other information in the annual report that is
not part of the audited financial report for any material inconsistencies or
material misstatements of fact.
5. The auditor should encourage management to correct any material

inconsistencies or material misstatements of fact. If management does not,
the auditor’s most likely course of action is to include in the auditor’s report
an Other Matter paragraph.
6. The auditor’s report should include a separate section under the heading
‘Other Information’ which outlines the responsibilities of the auditor and
management with respect to this information.
LO 12.7 Communications between the auditor and other
parties
The relationship between an auditor and a client has many dimensions. One factor that has
a significant effect on the relationship is the form in which the client is organised—whether
as a company, a partnership or a sole trader. This section focuses on the corporate client
whose shares are traded on a securities exchange.
Page 524
Communicating with shareholders through the

annual report
The primary communication between a company and its shareholders is the annual report.
The financial report included in the annual report should contain a statement of financial
position, an income statement, a statement of changes in equity and a cash flow statement,
with accompanying explanatory notes and the directors’ declaration.
Beyond the inclusion of the financial report, the form and content of annual reports vary
substantially. Some companies issue elaborate reports with pictures of physical facilities
and personnel, graphs and charts of operating data and supplementary financial
information. Other companies send shareholders only the basic financial report and
statutory reports with a covering letter. Most companies now make the annual report
available on the company’s website; issues associated with this form of communication
will be considered later in this section.
Regardless of the form and content of the annual report, the auditor’s opinion on the
financial report included in the annual report is the principal means of communication
between the auditor and shareholders. Thus, it is important that the auditor’s report,
discussed in detail in this chapter, is an effective communication device.
Communicating with shareholders at annual

general meetings
A second major method of communicating with shareholders is at the company’s annual
general meeting (AGM).
However, the effectiveness of an auditor’s attendance at the AGM as a communication
mechanism is limited, as only a small minority of shareholders usually attend these
meetings. Many of the companies listed on the Australian Securities Exchange have
attendances of less than 50 people at their AGMs, with attendances of more than 200
people usually occurring only for the largest public companies, or when there are
contentious issues on the agenda.
It is now more common for shareholder representatives to be in attendance through

associations such as the Australian Shareholders’ Association. Section 250T of the
Corporations Act 2001 states that members must be allowed a reasonable opportunity to
ask the auditor questions relevant to the conduct of the audit, the preparation and content of
the auditor’s report, the accounting policies adopted by the company and the independence
of the auditor. The auditor therefore has a legal obligation to attend the company’s annual
general meeting at which the auditor’s report is considered (Corporations Act 2001, section
250RA).
GS 010 Responding to Questions at an Annual General Meeting provides auditors with

guidance on this issue. GS 010.13 states that the auditor does not respond to questions
dealing with issues beyond the scope of the audit mandate or to questions relating to
matters that are the responsibility of those charged with governance. Therefore it is
important that the auditor, together with those charged with governance, adequately
prepare for participation at an AGM. If an auditor is asked to respond to inappropriate
questions, or if the auditor’s responses are not understood in an appropriate context, there is
a risk that any information provided could be misleading.
Guidance for auditors on responding to questions they may receive at an AGM on the
content of the new enhanced auditor’s report is outlined in
Auditing in the global news 12.4.
Responding to questions about Key audit matters at AGMs
In planning for the AGM, the auditor is encouraged to consider matters that
have been communicated as Key Audit Matters (KAMs) and the questions
they may receive that relate to these. For example, questions may be asked
in relation to:
why matters have or have not been identified as KAMs

why certain procedures in relation to a KAM were or were not performed
details on audit procedures performed in relation to a KAM as Page 525
detailed in the Auditor’s Report
what conclusion the auditor reached on these specific audit procedures or
on a KAM
the level of uncorrected misstatements in relation to a KAM
internal controls relative to a KAM
accounting policies relative to a KAM.
The auditor should use professional judgement when responding to

questions at the AGM. The following is guidance for auditors to assist in
preparation:
The purpose of communicating KAMs is to enhance the communicative

value of the Auditor’s Report by providing greater transparency about the
audit that was performed.
KAMs (as defined in ASA 701) are those matters which, in the auditor’s
professional judgement, were of most significance in the audit of the
Financial Report and required the most auditor attention. Not all matters
communicated to those charged with governance or significant risks are a

KAM.
The auditor uses professional judgement when determining which
procedures are performed in order to obtain sufficient appropriate audit
evidence on the Financial Report as a whole.
The Auditor’s Report relates to the Financial Report as a whole and there is
no separate opinion on individual KAMs.
The auditor uses professional judgement when responding to questions in
relation to specific audit procedures performed, or the outcome of those
procedures. They take care not to conclude on a discrete aspect of the
Financial Report rather than the Financial Report as a whole.
If responding to a question in relation to uncorrected misstatements, the
auditor explains that an unmodified opinion indicates that any uncorrected
misstatements are not material.
No assurance is provided on the adequacy of internal controls, but rather,
controls are examined only to the extent considered necessary to provide
sufficient appropriate audit evidence on the KAM such that an opinion can
be formed over the Financial Report as a whole. Questions regarding
internal controls that go beyond the scope of the audit should be
addressed to those charged with governance.
If responding to a question in relation to accounting policies relative to a
KAM, the auditor should respond that their responsibility is to assess
whether they comply or do not comply—in all material respects—with the
Australian Accounting Standards, in the context of the Financial Report as a
whole. Those charged with governance may wish to comment on the
appropriateness of the choice of accounting policies within those choices
permitted by Australian Accounting Standards.
Source: AUASB Bulletin “The new enhanced Auditor’s Report – responding to questions at AGMs” 20
October 2017. Available http://auasb.createsend1.com/t/ViewEmail/r/C74117ECDEAFA4802540EF2
3F30FEDED. Accessed 8 December 2017. (c) 2018 Auditing and Assurance Standards Board (AUASB).
The text, graphics and layout of this publication are protected by Australian copyright law and the
comparable law of other countries. No part of the publication may be reproduced, stored or
transmitted in any form or by any means without the prior written permission of the AUASB except as
permitted by law. For reproduction or publication permission should be sought in writing from the
Auditing and Assurance Standards Board. Requests in the first instance should be addressed to the
Technical Director, Auditing and Assurance Standards Board, PO Box 204, Collins Street West,
Melbourne, Victoria, 8007.
Communicating with management and those

charged with governance
ASA 260 (ISA 260), supported by ASA 450 (ISA 450), provides guidance for the auditor in
communicating with all groups of directors and management. The standards distinguish
between:
‘those charged with governance ’, being the governing body (the board of directors
for a listed company) and other persons having responsibility for planning and directing
the activities of an entity, and
‘management’, being those with responsibility for supervision of the day-to-day activities
of the entity.
With regard to reporting the results of the audit, the auditor is required to report Page 526
matters of governance interest, identified as a result of audit procedures
performed, to the governing body on a timely basis. If the matter concerns communicating
a significant deficiency in internal control, the auditor should, also on a timely basis,
communicate in writing such deficiencies to those charged with governance (ASA
265.9/ISA 265.9).
ASA 450.12 (ISA 450.12) requires that the auditor communicate with those charged with
governance any uncorrected misstatements and the effects that they may have, either
individually or in aggregate, on the auditor’s report. In assessing the significance of each
matter identified, the auditor should consider the nature of the matter, the relevant
characteristics of the entity and the potential for the matter to materially affect the financial
report. All such matters should be reported on a timely basis, and any oral reports
regarding significant matters should be documented. The auditor should also review any
matters raised in previous reports and any subsequent actions taken by the governing body.
The auditor uses different means to communicate with various groups. The discussion
below reviews communication first with management, then with those charged with
governance, including the audit committee and the board of directors. The roles of these
various groups were discussed in the corporate governance section in Chapter 3 .
Communicating with management
Much of the communication between the auditor and the client is with the company’s
management. Contacts between the auditor and management are more extensive, more
frequent and less formal than those with shareholders, audit committees and boards of
directors. At the planning stage, management provides much of the information that is
needed to plan the audit, including news of major changes in the entity, both strategic and
operational. During the audit, management provides the auditor with information and
explanations as required. This includes the organisation and preparation of many schedules.
It is management that undertakes the preparation of the financial report, and it is with
management that the auditor first negotiates appropriate adjustments to be made to the
financial report as a result of matters being detected in the course of the audit.
The auditor should also communicate to the appropriate level of management any
significant deficiencies in internal control that they have communicated to those charged
with governance, as well as other deficiencies identified during the audit that are deemed
sufficiently important to merit management’s attention (ASA 265.10/ISA 265.10). The
‘appropriate level of management’ is that which has the responsibility and authority to
evaluate the deficiencies in internal control and to take the necessary remedial action. For
significant differences, this is likely to be the chief executive officer or the chief financial
officer. For other deficiencies, the appropriate level may be operational management that
has direct involvement in the control area identified and the authority to take appropriate
remedial action (ASA 265.A19/ISA 265.A19).
The management letter, or report to management
The principal written communication between the auditor and management is the manage
ment letter that is normally issued at the conclusion of the audit engagement. This
letter summarises the auditor’s recommendations resulting from their assessment of the
entity’s business risk and inherent risk, and any recommended improvements in internal
control. In Australia there is no recommended standard form for the management letter.
With regard to internal control, the communications that were discussed earlier as being
required under ASA 265 (ISA 265) may be communicated in the management letter, or
they may be communicated at an earlier time orally, to allow management to remedy the
identified deficiency. If communicated orally, this communication should also be
documented in writing, usually in the management letter, and should include the following
main points:
The purpose of the audit was for the auditor to be in a position to express an opinion on
the financial report.
The audit included a consideration of internal controls that are relevant to the preparation
of the financial report, not for the purpose of expressing an opinion on the effectiveness
of internal control.
The auditor’s study and evaluation do not necessarily disclose all weaknesses. Page 527
The matters being reported are those that the auditor has identified and has
concluded are sufficiently important to merit being reported to those charged with
governance.
Although the management letter will be reviewed by executive management, which is

expected to respond to items contained in it, the audit committee and the full board of
directors are required to be informed of the contents of this letter and to review the
response (see the discussion of the AWA decision in Chapter 2 ).
Discussions with management
The most critical communication between the auditor and management concerns the form
and content of the financial report. If the accounting policies or disclosures proposed by
management differ materially from those that the auditor believes are appropriate, either an
alternative presentation must be agreed on or the auditor must take up the issue with the
governing body.
If the auditor can convince management that a particular presentation is superior,

management may be persuaded to change the financial report. The auditor attempts to
demonstrate that the proposed presentation might be misleading or that it clearly departs
from the applicable financial reporting framework.
Sometimes questions concerning the appropriate application of generally accepted

accounting principles or the adequacy of informative disclosures fall into a grey area. In
this case, extensive discussion with management is usually necessary. Resolution of
differences will depend on the attitudes and personalities of management and the auditor
and on the working relationship that has developed between them.
Communicating with the audit committee or board of

directors
There is an increased emphasis on a company having an effective audit committee. The

broad objectives of an audit committee were discussed in Chapter 3 . The AUASB, in
conjunction with the Australian Institute of Company Directors and the Institute of Internal
Auditors—Australia (2017), recently revised their best-practice guide for audit committees.
With regard to communicating the results of the audit, an effective audit committee could
be expected to enquire of their auditor the extent to which executive management has been
aggressive in its choice of accounting policies, and the extent to which the auditor is
independent of management. For example, they may ask the auditor to inform them of any
circumstances that may affect the auditor’s independence, such as the provision by the
audit firm of non-audit services for that client. For listed companies in Australia, this is a
discussion of the issues associated with auditor independence with the audit committee
and/or the board of directors, as outlined in Chapter 3 .
At the conclusion of the audit, the audit committee should ask the auditor about any
significant disagreements with management and whether they have been satisfactorily
resolved. The auditor may also provide an independent judgment about the appropriateness
—not just the acceptability—of the accounting principles and the clarity of the financial
disclosure practices used or proposed to be adopted by the company, as put forward by
management. The audit committee should also review the management letter that the
auditor has provided and executive management’s response to it. Any matters that cannot
be satisfactorily resolved with the executive management must be discussed with the audit
committee and, if appropriate, with the full board of directors.
Communicating through electronic presentation

of financial reports
GS 006 Electronic Publication of the Auditor’s Report provides guidance for the auditor in
circumstances where the entity decides to publish its audited financial report on its website.
This practice has become more popular since 2008 with the amendment of the
Corporations Act 2001 by the Corporations Legislation Amendment (Simpler Page 528
Regulatory System) Act 2007, which enables disclosing entities to meet their
statutory reporting obligations to shareholders by distributing their annual financial report
and certain other reports electronically.
The major risks are whether the financial report published on the website corresponds to
the printed financial report, and whether it is possible for the auditor’s report to be
construed as providing assurance on other information on the website that is unaudited.
Most entities publishing their financial report on their website provide a separate link on
the website to the financial report, and it is clear that the auditor’s report is attached to and
intended to be read with the financial report. The auditor should review the entity’s website
to ensure that the auditor’s report cannot be construed as being attached to or covering any
information to which it is not intended to apply.
If, in the auditor’s opinion, the auditor’s report may be construed to cover information that
was unaudited, the auditor should bring this to management’s attention. Under certain
circumstances the auditor may provide a separate auditor’s report for electronic
dissemination. This auditor’s report may be expanded to include specific references to the
audited statements by name, advice to readers that the auditor’s report refers only to those
statements named in the report, and advice to readers that they should consider referring to
the printed version of the entity’s financial report. If the auditor is not satisfied with the
proposed electronic presentation of the audited financial report and auditor’s report, the
auditor should request that the presentation be amended. If the presentation is not
amended, the auditor should not give consent for the electronic release of the auditor’s
report.
QUICK REVIEW
1. The auditor’s principal means of communication with shareholders is
through the auditor’s report on the financial report. A secondary means of
communication is through attendance at the annual general meeting. The
auditor should not respond to questions raised at an AGM dealing with
issues beyond the scope of the audit mandate.
2. Auditors have a responsibility to communicate to those charged with
governance any matters that they believe may be prejudicial to the
interests of shareholders. These include significant business risks and
material weaknesses in internal control. Usually the auditor lists these
weaknesses and recommendations for their improvement in the
management letter.
3. Auditors should ensure that the full board of directors is informed of the
contents of the management letter.
4. There is an increased emphasis in the current environment on the auditor’s
communication with the audit committee. Communications may include
such items as discussion of the aggressiveness of executive
management’s choice of accounting policy, and ensuring that the auditor is
independent of management.
5. Auditors should ensure that any electronic presentation of the auditor’s
report cannot be construed as providing assurance on any statements or
information for which it was not intended.
Summary
An auditor’s report formally communicates the auditor’s conclusion on the presentation of
the financial report and concisely states the basis for that conclusion. It is important that
the auditor’s report be an effective communication device, as it is the principal means of
communication between the auditor and the financial report user. This chapter has
considered how auditors’ reporting obligations for general-purpose financial reports arise,
and how auditors determine the type of opinion that is appropriate. The auditor’s reporting
obligations to other parties, along with the recent changes for improving the
communication effectiveness of the auditor’s report, including disclosing key audit matters,
have also been discussed.
Page 529
Key terms
adverse opinion
comparative financial reports
comparative information
compliance framework
corresponding figures
disagreement with management
disclaimer of opinion
Emphasis of Matter paragraph
fair presentation framework
key audit matters (KAMs)
limitation on scope
management letter
material inconsistencies
material misstatements of fact
Other Matter paragraph
other reporting requirements
pervasive
presents fairly
qualified opinion
those charged with governance
true and fair view
unmodified auditors’ reports
References and additional readings
Auditing and Assurance Standards Board (AUASB) (2017) ‘The new enhanced auditor’s
report—responding to questions at AGMs’, AUASB Bulletin, 20 October, http://auasb.
createsend1.com/t/View Email/r/C74117ECDEAFA 4802540EF23F30FEDED,
accessed 8 December 2017.
Auditing and Assurance Standards Board, Australian Institute of Company Directors
(AICD) and Institute of Internal Auditors—Australia (2017) Audit Committees: A
Guide to Good Practice, 3rd edn, AICD, Sydney.
Azim, M.I. (2013) ‘Independent auditor’s report: Australian trends from 1996 to 2010’,
Journal of Modern Accounting and Auditing, Vol. 9, No. 3, pp. 356–66.
Carson, E., Fargher, N.L. and Zhang, Y. (2016) ‘Trends in auditor reporting in Australia: a
synthesis and opportunities for research’, Australian Accounting Review, Vol. 26, pp.
226–42.
Carson, E., Ferguson, A. and Simnett, R. (2006) ‘Australian audit reports: 1996–2003’,
Australian Accounting Review, Vol. 16, No. 3, pp. 89–96.
Chong, K.M. and Pflugrath, G. (2008) ‘Do different audit report formats affect
shareholders’ and auditors’ perceptions?’, International Journal of Auditing, Vol. 12,
No. 3, pp. 221–42.
Fargher, N.L. and Jiang, A. (2009) ‘Changes in the audit environment and auditors’
propensity to issue going-concern opinions’, Auditing: A Journal of Practice & Theory,
Vol. 27, No. 2, pp. 55–78.
International Auditing and Assurance Standards Board (IAASB) (2011) Enhancing the
Value of Auditor Reporting: Exploring Options for Change, www.ifac.org/publication
s-resources/enhancing-value-auditor-reporting-exploring-options-change, accessed
December 2017.
International Auditing and Assurance Standards Board (2012) IAASB Strategy and Work
Program, 2012–2014, www.ifac.org/sites/default/files/publications/files/IAASB%20
Strategy%20and%20Work%20Program%202012-2014-final.pdf, accessed
December 2017.
International Auditing and Assurance Standards Board (2014) Strategy for 2015–2019:
Fulfilling Our Public Interest Mandate in an Evolving World, www.ifac.org/system/fil
es/publications/files/IAASB-Strategy-2015-2019_0.pdf, accessed December 2017.
International Auditing and Assurance Standards Board (2015) Auditor Reporting—
Illustrative Key Audit Matters, www.ifac.org/system/files/publications/files/IAASB-A
uditor-Reporting-Toolkit-Illustrative-Key-Audit-Matters.pdf, accessed December
2017.
KPMG (2017) ‘Key audit matters: auditor’s report snapshot 20 September 2017’, https://h
ome.kpmg.com/au/en/home/insights/2017/09/key-audit-matters-auditor-report-20-
september-2017.html, accessed 5 December 2017.
Mock, T.J., Bedard, J., Coram, P., Davis, S., Espahbodi, R. and Warne, R.C. (2013) ‘The
audit reporting model: current research synthesis and implications’, Auditing: A
Journal of Practice & Theory, Vol. 32, No. 1 (supplement), pp. 323–51.
Simnett, R. and Huggins, A. (2014) ‘Enhancing the auditor’s report: to what extent is there
support for the IAASB’s proposed changes?’, Accounting Horizons, Vol. 28, No. 4, pp.
719–48.
UK House of Lords (2011) ‘Auditors: Market concentration and their role’, Select
Committee on Economic Affairs, 2nd Report of Session 2010–11, Vol. 1: Report, HL
Paper 119–I, The Stationery Office Limited, London.
Xu, Y., Jiang, A.L., Fargher, N. and Carson, E. (2011) ‘Audit reports in Australia during
the global financial crisis’, Australian Accounting Review, Vol. 21, No. 1, pp. 22–31.
Page 530
Review questions
Obligations to report
12.1 Provide details of the matters that the auditor of a company is required to
report to the Australian Securities and Investments Commission
(ASIC). LO 12.1
The auditor’s report and its communication

effectiveness
12.2 List ten mandatory elements of the auditor’s report required when an audit
for a listed entity has been conducted in accordance with Australian
auditing standards. LO 12.2
12.3 Why does the auditor’s report contain a discussion of the auditor’s
responsibilities? LO 12.2
Fair presentation and compliance frameworks

12.4 Outline four items that you would consider when evaluating whether a
financial report gives a true and fair view (or presents fairly in all material
respects) in accordance with the specific requirements of the applicable
financial reporting framework. LO 12.3
12.5 Discuss and differentiate between a fair presentation framework and a
compliance framework. LO 12.3
Types of auditor’s opinions

12.6 Discuss the three basic types of modifications that can be made to the
auditor’s opinion, and outline the circumstances under which each might
be issued. LO 12.4
12.7 Explain four circumstances under which an auditor might consider it
necessary to include an Emphasis of Matter paragraph. LO 12.4
12.8 Describe four circumstances under which it may be appropriate for an
auditor to include an Other Matter paragraph. LO 12.4
Circumstances giving rise to a modified opinion

12.9 How does materiality affect a modification to the auditor’s opinion? LO 12.5
12.10 Under what two categories of circumstances does ASA 705 require
modification to the auditor’s opinion (assuming that the circumstance is
material)? Explain the possible auditor’s opinions that can be issued under
each circumstance. LO 12.5
12.11 When does the inability to perform a specific audit procedure not
constitute an inability to obtain sufficient appropriate evidence (scope
limitation)? LO 12.5
Comparative information and other information in

the annual report
12.12 What are the auditor’s responsibilities with respect to comparative
information contained in the financial report? LO 12.6
12.13 Explain what is meant by the term ‘inconsistency’ with respect to other
information in an annual report. What action would be required of the
auditor upon discovering a material inconsistency? LO 12.6
Communications between the auditor and other

parties
12.14 Outline four objectives of the auditor with respect to their communication
of audit matters with those charged with governance. LO 12.7
12.15 Explain whether an audit partner is required to attend the AGM of their
listed entity client. LO 12.7
Discussion problems and case studies
Obligations to report
12.16 EASY As the senior audit manager with large audit firm Smith, Black &
McDonald, you are responsible for conducting refresher auditing courses
for new recruits and existing junior auditors in your firm.
REQUIRED Page 531
Explain the auditor’s obligations to form an opinion and report on financial

reports under the Corporations Act 2001. LO 12.1
The auditor’s report and its communication

effectiveness
12.17 EASY You are conducting a staff training session for your junior auditors
and one of the participants has asked you why the auditor’s report for
listed entities now requires the auditor to include a key audit matters
section.
REQUIRED
Explain the reason for the key audit matters requirements of the auditor’s
report. LO 12.2
Fair presentation and compliance frameworks

12.18 EASY You are reviewing the financial report of Well-Kept Cleaning Pty Ltd
and your audit assistant has asked you how you decide whether the
financial report gives a true and fair view.
REQUIRED
Outline four items that you would consider when evaluating whether a
financial report gives a true and fair view (or presents fairly in all material
respects) in accordance with the specific requirements of the applicable

financial reporting framework. LO 12.3
Types of auditor’s opinions

12.19 EASY You are the auditor of Bricks & Mortar Ltd (BML) for the year ended
30 June 2018. You have identified a material misstatement of the property,
plant and equipment account. BML has not changed its depreciation rates
for the past four years. However, recent technological changes in the
industry have convinced you that the useful lives of BML’s assets need to
be adjusted downwards, resulting in an increased depreciation charge.
BML’s directors have refused to make any change to the depreciation
rates, despite you explaining that this will put them in breach of the
requirements regarding impairment tests contained in Australian
accounting standards.
REQUIRED
Explain the auditor’s opinion you would issue for BML for the year ended
30 June 2018. LO 12.4
12.20 EASY You are the auditor of Northern Forest Ltd for the year ended 30
June 2018. The audit of Northern Forest was extremely difficult this year,
as the company did not keep appropriate books and records. As the
accounting department was chronically understaffed, transactions were
not entered promptly and reconciliations not performed. In an attempt to
sort out the mess, a temporary accountant was employed; however, she
was unable to even reconcile the bank account at year end. You are not
satisfied all transactions that occurred during the year are reflected in the
financial report.
REQUIRED
Assuming that the matter remains unresolved, explain the auditor’s
opinion that should be issued for Northern Forest for the year ended 30
June 2018. LO 12.4
12.21 MEDIUM You are undertaking the audit for the year ended 30 June 2018
of Durable Drums Ltd, a manufacturer and retailer of steel drums. As in
previous years, Durable Drums has accounted for inventory on a last in,
first out (LIFO) basis. Durable Drums also uses a ‘just-in-time’ inventory
management system and therefore the effect of this departure from
Australian accounting standards was previously not material. In the current
year, however, the company has a large stockpile of inventory at year end,
due to an unexpected cancellation of a major order en route to its
destination. In order to cut freight costs, Durable Drums stored the goods
temporarily in Thailand, hoping for an order from another South-east Asian
customer.
Unfortunately, you were not told of this problem until after balance Page 532
date and did not conduct a stocktake of the inventory. You have
also been told that some of the inventory has since been shipped to a
number of different customers to fill outstanding orders. The available
audit procedures have been unable to validate the existence of this
inventory at balance date. The relevant inventory is currently recorded at
$2 500 000. Audit procedures have indicated that, had inventory been
accounted for on a first in, first out (FIFO) basis, it would have been
recorded at $3 500 000. Materiality for the audit has been set at
$1 000 000.
REQUIRED
What is the most appropriate auditor’s opinion for Durable Drums for the
year ended 30 June 2018? Explain your answer. LO 12.4
12.22 MEDIUM You are auditing Indian Imports Ltd for the year ended 30 June
2018. The company is incorporated in Australia and imports a variety of
products from India. A significant proportion (15 per cent) of Indian Imports’
assets, including warehouses and inventory, are located in New Delhi. In
previous years, an accountant in New Delhi has inspected these
warehouses and inventory on your behalf. Unfortunately this year, due to
recent economic and social turmoil, you have been unable to obtain
assistance from the New Delhi accountant.
The chief executive officer (CEO) of Indian Imports has assured you that
the company will be able to continue as a going concern, as it is currently
obtaining new suppliers and its existing customers and suppliers have
expressed a desire to continue trading with the company. However, your
audit procedures have not revealed any firm commitments from suppliers,
customers or financiers, and you have doubts about the ability of the entity
to continue as a going concern. The directors of Indian Imports have
agreed to make disclosures indicating the extent of the problems they are
facing. After reviewing the information, you are satisfied that the
disclosures are adequate.
REQUIRED
Explain the most appropriate auditor’s opinion for Indian Imports for the
year ended 30 June 2018. LO 12.4
12.23 HARD You are the audit partner at Preston & Associates, a mid-tier audit
firm. You are responsible for the audits of the following three independent
entities for the year ended 30 June 2018:
(a) Helping Hand Ltd is a non-profit entity. You have discovered that it
has not kept substantiating vouchers or receipts for more than 65
per cent of its expenses, excluding salaries and allowances.
(b) Skyscraper Ltd is a building contractor with a varying workload. In
order to compensate for the irregularity of its contracted building
projects, Skyscraper also purchases large vacant blocks of land that
it later subdivides for the construction of houses and units.
Skyscraper then sells these on its own account. Your analysis
strongly suggests that the apportionment of costs to houses and
units sold has been kept low in order to boost profits. In your
opinion, this has resulted in the overvaluation of the unsold
properties. The directors of the company do not agree, and hold to
their view that the stock of properties is correctly valued.
(c) Big Event Ltd arranges for popular overseas entertainment artists to
perform in Australia. The band Eclipse was booked by Big Event to
play in major cities across the country. Big Event’s written contract
required the company to pay the band in US dollars but, in order to
reduce costs, it did not hedge the amounts. Subsequent to year end,
the Australian dollar fell against the US dollar and a substantial loss
relating to the band’s tour was predicted. The management of Big
Event tried unsuccessfully to renegotiate the band’s contract and
has been unable to obtain finance to cover the expected shortfall.
Big Event has now cancelled the tour and expects a substantial
claim from Eclipse. It is clear to you, as the auditor, that Big Event
does not have the income, cash or other assets to sustain such a
loss.
REQUIRED
Assuming that all amounts involved are material, identify and discuss the
most likely auditor’s opinion that you would issue on each financial report
for the year ending 30 June 2018. LO 12.4
Source: This question was adapted from the Chartered Accountants Program of the Institute of
Chartered Accountants in Australia, 2011 (2) audit and assurance module.
Page 533
Circumstances giving rise to a modified opinion
12.24 EASY You are the auditor of a consolidated entity, a significant component
of whose accounting records have been seized indefinitely by government
authorities.
REQUIRED
Indicate whether this circumstance will require a modification to the
auditor’s opinion. Why? LO 12.5
12.25 MEDIUM You have completed the audit of Cruiser Ltd for the year ended
30 June 2018. You experienced a number of difficulties during the audit,
including significant disagreements over the valuation of Cruiser’s
investment property holdings. The audit partner had suggested that the
property value was overstated by $8 million, a figure which was twice the
level of materiality of $4 million set for the audit. As a result of discussions
with the audit committee, the CEO of Cruiser agreed to revise the
valuations downward by $5 million. All other issues were resolved to the
satisfaction of the audit partner, resulting in an overall misstatement in the
financial report of $3 million. The audit partner is now considering the
effect of this misstatement on the auditor’s report.
REQUIRED
Explain the effect of the misstatement on the auditor’s report for Cruiser
for the year ended 30 June 2018. LO 12.5
Comparative information and other information in

the annual report
12.26 MEDIUM You have completed the audit of the financial report of Doors &
Windows Ltd (Doors & Windows), and the client is in the process of
preparing its annual report. Doors & Windows has provided you with a first
draft of the annual report for review and, having reviewed the financial
report contained within the annual report, you are satisfied that it is
consistent with the audited information. You are now reviewing the
preliminary information contained within the annual report. Within the
chairperson’s review of operations, you note the following statement:
The directors are of the opinion that the economic conditions currently
facing Doors & Windows Ltd will soon abate, and closure of additional
manufacturing facilities will be unnecessary.
You are quite surprised, as your discussions with management have

indicated that closure of two further factories is imminent. In addition, the
financial report includes a large provision for redundancies, together with
disclosure of the nature of the item. You approach the CEO with your
concerns, and he replies: ‘Don’t worry—it’s only a first draft, and anyway
the auditors don’t report on that’.
REQUIRED
(a) Outline the auditor’s responsibilities with respect to information
accompanying a financial report.
(b) Indicate the most appropriate course of action for you as the auditor
if the chairperson’s review of operations is not amended. LO 12.6
12.27 MEDIUM You are the auditor of Clean Energy Ltd (CEL) for the year ended
30 June 2018. While completing your audit and finalising your auditor’s
report, you discover that the company has incorrectly stated in the
chairperson’s review of operations that CEL has complied with
environmental guidelines regarding its carbon emissions. Non-compliance
with these guidelines was investigated during the audit and it was noted
(in a conversation with a junior manager) that CEL’s emissions were
significantly above compliance standards. There is currently no financial
implication for non-compliance, so no further action was taken. You
believe, however, that the statement in the annual report will affect the
perception of readers of the annual report regarding the company’s
entitlement to future environmental incentives. This information is likely to
lead to a material adjustment of CEL’s share price.
REQUIRED Page 534
(a) What action would you take in regard to the above situation?
(b) What action would you take if the reports had already been signed
and the annual report issued? LO 12.6
Communications between the auditor and other

parties
12.28 EASY You are the audit partner assigned to the audit for the year ended
30 June 2018 of a new client, Gibson Pharmaceuticals Ltd (GPL), an
importer of pharmaceutical products. In order to hedge its foreign
currency transactions, GPL entered into a number of forward rate
agreements in October 2017. Prior to this, GPL had had little exposure to
derivative instruments, but a series of bad exchange rate experiences
convinced the company that a hedging strategy was necessary. During

planning for the audit of GPL, the company’s hedging arrangements were
identified as inherently risky and a thorough review of controls was
requested.
The audit of GPL has now been completed. A number of small errors were
noted in accounting for hedge transactions, but there did not appear to be
any material errors and, as such, no adjustments were made. A review of
the audit file suggests that the errors noted were a result of inexperience
and poor controls in the area. While all of the errors were brought to the
attention of the treasurer, who is responsible for the company’s hedging
strategy, no further action has been taken to date.
REQUIRED
What further action should you take in response to the errors and control
weaknesses identified? LO 12.7
Continuous case study
Background information for the continuous case study, Reliable Printers Ltd (RPL), is
contained in the Appendix to this book.
12.29 MEDIUM You are in the process of finalising the audit of

inventory of RPL for the year ended 30 June 2018. You are
concerned that during the year the balance of the allowance for
stock obsolescence has been written back into profit. As part of
your audit procedures, you researched companies in the same
industry as RPL to determine whether they make an allowance for
stock obsolescence as a matter of practice. Your research has
revealed that it is common for entities undertaking similar printing
activities to make a provision for the effects of storage hazards, as
paper is subject to deterioration during storage of between 4 per
cent and 5 per cent.
Accordingly, you have formed the view that an allowance for
obsolescence should be reinstated, for inventory to be recorded
at its true and fair value, and that the amount now required is $188
000.
You have approached William Jackson with a view to RPL
reinstating the allowance for obsolescence at $188 000. William
has advised you that the board is satisfied with their decision to
no longer provide for the effects of storage hazards and that they
have no intention of reinstating the allowance for obsolescence.
You have set the materiality level for the audit at 5 per cent.
REQUIRED
Based on the background information contained in the
Appendix and the information provided above, explain
whether the company’s refusal to reinstate the allowance for
inventory obsolescence will have any effect on your auditor’s
opinion. Justify your answer. LO 12.4
Source: This question was adapted from the Chartered Accountants Program of the
Institute of Chartered Accountants in Australia, 2012 (3) audit and assurance module.
12.30 MEDIUM You have completed the audit of RPL and William Page 535
Jackson has provided you with the draft annual report to peruse.
As noted in the background information contained in the
Appendix to this book, an article published in a medical journal
could cause the medical textbooks that RPL acquired the rights to
during the year to become obsolete. As a result, you found it
necessary to engage an expert to undertake the valuation of the
copyright attached to the medical textbooks. Based on the
expert’s findings, it was apparent that there was a significant
decline in the value of the copyright, which necessitated a write-
down of its value. After discussion with senior management at
RPL, the value of the copyright was written down and disclosed as
an impairment loss in the financial report in accordance with the
applicable accounting standard.
In reviewing the five-year analysis of results contained in the
directors’ report, you observe that the impairment loss associated
with the copyright has been excluded from that analysis, resulting
in a material discrepancy between the 2018 operating result
contained in the directors’ report and the operating result
disclosed in the draft audited financial report, with no explanation
of the cause of this material discrepancy.
REQUIRED
Explain the actions that you should undertake to address this
situation. LO 12.6
Source: This question was adapted from the Chartered Accountants Program of the
Institute of Chartered Accountants in Australia, 2012 (3) audit and assurance module.
Page 536

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Page 493

LEARNING OBJECTIVES (LO)

on the scope of the audit—and understand the factors giving rise

ASA 101 Preamble to Australian Auditing Standards

ASA 260/ISA 260 Communication with Those Charged with Governance

ASA 265/ISA 265 Communicating Deﬁciencies in Internal Control to Those

ASA 450/ISA 450 Evaluation of Misstatements Identiﬁed during the Audit

ASA 570/ISA 570 Going Concern

ASA 700/ISA 700 Forming an Opinion and Reporting on a Financial Report

ASA 701/ISA 701 Communicating Key Audit Matters in the Independent

ASA 705/ISA 705 Modiﬁcations to the Opinion in the Independent Auditor’s

ASA 706/ISA 706 Emphasis of Matter Paragraphs and Other Matter

ASA 710/ISA 710 Comparative Information—Corresponding Figures and

ASA 720/ISA 720 The Auditor’s Responsibilities Relating to Other

GS 006 Electronic Publication of the Auditor’s Report

GS 010 Responding to Questions at an Annual General Meeting

IAASB Preface to the International Standards on Quality Control,

Auditing, Review, Other Assurance and Related Services

LO 12.1 Obligations to report

As well as meeting the requirement to conduct an audit in accordance with Australian

EXHIBIT 12.1 REPORTING OBLIGATIONS OF THE AUDITOR

Who the auditor has an obligation to report to

Management and the board of directors

Australian Securities and Investments Commission Page 497

contained in RG 34, an auditor is obliged to report a ‘significant’ contravention of the Act

insolvent trading by a company

Background information gathered by the IAASB suggested the following:

FIGURE 12.2 Information gap

Auditor reporting—implementation support and post-

Structure and wording of the auditor’s report

Exhibit 12.2 reveals the standard elements of the auditor’s report.

Independent auditor’s report

To the shareholders of ABC Company Ltd [or other appropriate addressee]

Report on the Audit of the Financial Report

We conducted our audit in accordance with Australian Auditing Standards. Our

We confirm that the independence declaration required by the Corporations Act

Key Audit Matters

[Reporting requirements of other information should be in accordance with the

Responsibilities of the Directors for the Financial Report

directors determine is necessary to enable the preparation of the financial

Auditor’s Responsibilities for the Audit of the Financial Report

As part of an audit in accordance with the ASAs, we exercise professional judgment

Report on the Remuneration Report

Opinion on the Remuneration Report

We have audited the Remuneration Report included in [paragraphs a to b or pages x

on our audit conducted in accordance with Australian Auditing Standards.

Responsibilities of management for the financial report: A section outlining the

An example of one of these other reporting requirements that is common in Australia is

Key audit matters

Source: IAASB (2015) Auditor Reporting—Illustrative Key Audit Matters, p. 5, www.ifac.org/system/ﬁles/

Key audit matters: auditor’s report snapshot September 2017

Our fourth auditor’s report snapshot provides insights and observations on

Goodwill (and related CGU assets such as intangibles and PPE)

The most common KAM relates to carrying value assessments or impairment of

(ENR), infrastructure, government and healthcare (IGH) and technology, media

the basis for opinion

date of the auditor’s report.

1. acknowledges that to achieve fair presentation it may be necessary for management to

qualified opinion (ASA 705.7/ISA 705.7)

In addition, the auditor has reporting responsibilities in relation to reporting in accordance

Unmodiﬁed auditor’s report

The third conclusion above is reached by evaluating whether:

Modiﬁcations aﬀecting the auditor’s opinion