The Last Lecture

• Live with integrity

• Leave a space better than you saw it
• Love not sleep, lest thou come to poverty; open thine eyes,
and thou shalt be satisfied with bread.
• Acknowledge your Creator
Audit Reporting
ISA 700(R), 701, 705(R), 706(R)
Learning Objectives
At the end of this lecture you should be able to:
• State the effective date of the ISA 700 Revised (ISA 700(R))
• Identify and describe the basic components of the auditor’s report
• Explain unmodified audit opinions in the auditor’s report
• Explain the types of audit opinions that can be issued when an unmodified
opinion is not justified.
• Describe the format and content of the emphasis of matter and other
matter paragraphs
• Discuss the reporting implications of the findings of going concern review
• Explain how materiality affects audit reporting decisions.
Content
ISA 700 (Revised) FORMING AN OPINION AND
REPORTING ON FINANCIAL STATEMENTS

Effective for audits of financial statements for periods ending on or after

December 15, 2016

Requirements
• The auditor shall form an opinion on whether the FS are prepared, in all
material respects, in accordance with the applicable financial reporting
framework.
To do this the auditor needs to consider the following:
• Whether sufficient appropriate audit evidence has been obtained (ISA 330)
• Whether uncorrected misstatements are material (ISA 450)
Auditor’s Report - components
• Title
• Addressee
• Auditor’s Opinion
• Basis for Opinion
• Going Concern (if necessary)
• Emphasis of matter (if necessary)
• Key Audit Matters (listed entities)
• Other Information (if applicable)
The auditor’s report shall be in writing
• Responsibilities for the Financial
Statements
• Auditor’s Responsibilities for the
Audit of the Financial Statements
• Other reporting responsibilities
• Name of the Engagement Partner
(listed entities)
• Signature of the Auditor
• Auditor’s Address
• Date of the Auditor’s Report
Key Audit Matters (KAMs) (1 of 3)
Communication of KAM only required for listed entities

Definition
A KAM is a matter which in the auditor’s professional judgement, is
significant in the audit of the FS for the current period.
It’s an issue which required significant auditor attention during the audit
and would have be communicated in writing to those charged with
governance (TCWG) in accordance with ISA 260
Key Audit Matters (KAMs) (2 of 3)
Examples of KAMs:
• Areas where the risk of material misstatement has been assessed as high at
the planning stage – example: complex accounting transaction
• Areas of the FS where management exercised significant judgement –
example: asset valuation or accounting estimate where there's high level of
uncertainty
• The effect on the audit of significant events or transaction that occurred
during the period – example: acquisition of a subsidiary

KAMs relate to matters which are already included in the FS

Key Audit Matters (KAMs) (3 of 3)
Presentation of KAMs in the audit report:
Each KAM in the audit report should refer to the related disclosure in the FS
and will explain:
• Why the matter was considered to be significant and therefore a KAM, and
• How the matter was addressed in the audit

Where a KAM leads to a modification of the auditor’s opinion the issue

would not be include in the KAM paragraph but rather in the “Basis for
modified opinion” paragraph
See example of KAM >>>>
Other Reporting Responsibilities
If the auditor addresses other reporting responsibilities in the auditor’s
report on the FS that are in addition to the auditor’s responsibilities under
the ISAs, these other reporting responsibilities shall be addressed in a
separate section in the auditor’s report with a heading titled "Report on
Other Legal and Regulatory Requirements" or otherwise as appropriate to
the content of the section

Example – Company Act Requirements

See example >>>>>

Forms of Opinion
• Unmodified opinion - when the auditor concludes that the FS are
prepared, in all material respects, in accordance with the applicable
financial reporting framework.

• Modified opinion in accordance with ISA 705 (Revised) - If the auditor:

• concludes that, based on the audit evidence obtained, the FS as a whole
are not free from material misstatement; or
• is unable to obtain sufficient appropriate audit evidence to conclude
that the FS as a whole are free from material misstatement
There are 3 types of modified opinions- Qualified, Adverse & Disclaimer
Unmodified Opinion (1 of 2)

Use one of the following phrases, which are regarded as being equivalent:
• The financial statements present fairly, in all material respects, … in
accordance with [the applicable financial reporting framework]; or

• The financial statements give a true and fair view of … in accordance

with [the applicable financial reporting framework].
Unmodified Opinion (2 of 2)

Conditions for a standard unmodified opinion:

1. Includes all financial statements
2. Sufficient appropriate evidence accumulated
3. Financial statements are presented fairly in accordance
with IFRS or other framework
4. No circumstances requiring the addition of an
emphasis-of-matter paragraph or modification

Copyright © 2017 Pearson Education, Ltd. 3-13

Modified Opinion (1 of 3)
• Modified opinion - the auditor gives a modified opinion when the
auditor:
• concludes, based on the evidence obtained, that the FS as a whole are
not free from material misstatement; or
• is unable to obtain sufficient appropriate audit evidence to conclude
that the FS as a whole are free from material misstatement

• There are 3 types of modified opinions- Qualified, Adverse &

Disclaimer
Modified Opinion (2 of 3)
In both circumstances where the auditor gives a modified opinion there can
be two “levels” of modified opinion:
1. Material but not pervasive , where the circumstances prompting
the misstatement are material
2. material and pervasive, where the FS could be misleading
Four Categories of Audit Opinions
1. Unmodified

2. Qualified

Modified
3. Adverse

4. Disclaimer
Emphasis of matters and
other matters paragraphs
Emphasis of Matter paragraph (1 of 3)
An emphasis of matter paragraph is a paragraph included in
the auditor’s report which aims to draw attention to a matter:
• Which is appropriately presented or disclosed in the FS; but
• Which is of such significance, in the auditor’s judgement, that it
is fundamental to users’ understanding of the FS
Emphasis of Matter paragraph (2 0f 3)

Examples of circumstances where the auditor may want to emphasize

specific matters regarding the financial statements, even though the
auditor intends to express an unmodified opinion.

Subsequent Material Related Party

Events Uncertainties Transactions

Early
application of
new
accounting Major catastrophe
standard
Emphasis of Matter paragraph (3 0f 3)
• The emphasis of matter paragraph comes immediately before or after the
KAMs, depending on the significance of the matter
• The paragraph must state that the auditor’s opinion is not modified
in respect of the matter emphasized
• An item cannot be included in both the emphasis of matter paragraph and
the KAMs. If it required significant attention it’s a KAM
• Emphasis of matter paragraph is not used to highlight going concern
issues. Those issues are included in a separate paragraph titled “material
uncertainty related to going concern”
See example 7 >>>>>
Other Matter paragraph (1 0f 2)
• The other matters paragraph is a paragraph included in the auditor’s report that
refers to a matter:
• Which is not presented or disclosed in the FS (because it’s outside the scope of the
FS), but
• Which is of such importance, in the auditor’s judgement, that it is relevant to users’
understanding of the audit, the auditor’s responsibilities or the auditor’s report.
• Examples of circumstances where other matter paragraph may be included are where
prior year FS:
• Have not been audited; or
• Have been audited by another auditor
Other Matter paragraph (2 0f 2)
• The other matter paragraph comes immediately after the KAMs,
depending on the significance of the matter
• An item cannot be included in both other matter paragraph and the
KAMs. If it required significant attention it’s a KAM

See example:
Other Matter
The financial ststement of XYZ Ltd for the year ended 31 December 2018
were audited by another auditor who expressed an unmodified opinion on
those financial statements on 31 March 2019.
Going Concern
implications
Going Concern (1 0f 4)

• It’s the directors’ responsibility to determine whether or not an entity is a

going concern
• The auditor’s responsibility is to assess whether the directors’
conclusion is appropriate
• The auditor must consider:
• Whether the use of the going concern basis is appropriate
• Whether adequate disclosures has been made of any material uncertainties affecting
going concern; and
• Whether management’s assessment was adequate.
If there are concerns above any of the above items, the auditor should
consider the implication for their report…there are 3 main scenarios >>>>
Going Concern (2 0f 4)

Audit report implication: Scenario 1

Going Concern (3 0f 4)

Audit report implication: Scenario 2

Going Concern (4 0f 4)

Audit report implication: Scenario 3

Modified reports
Additional Notes
Conditions Requiring Departure from
Unmodified Report
1. Auditor’s scope has been restricted (Scope
limitation)

2. Statements are not in conformity with GAAP

(GAAP departure)

3. Auditor not independent

Qualified Opinion

A qualified opinion report can result from a

limitation on the scope of the audit or failure to follow
generally accepted accounting principles.

The resulting misstatement is material but

nor pervasive
Adverse Opinion
It is used only when the auditor believes that the
overall financial statements are so materially
misstated or misleading that they do not present fairly
the financial position or results of operations and
cash flows in conformity with GAAP.

Resulting misstatement is material and

pervasive
Disclaimer of Opinion

It is issued when the auditor is unable to be satisfied

that the overall financial statements are fairly presented.
That is when the auditor is unable to obtain sufficient
appropriate audit evidence on which to base the opinion

Misstatements, if any, could be both

material and pervasive
Actual disclaimer
PWC QUITS AS EVEREADY INDUSTRIES INDIA AUDITOR (1 JULY 2019)
In informing Eveready of its decision PwC referred to its disclaimer in the Eveready’s
financial statements, which said PwC had ‘not been able to obtain sufficient appropriate audit
evidence to providea basis for an audit opinion’.
• Specifically PwC cited the reasons included in the ‘Basis of Disclaimer of Opinion’ on the
financial statements and internal financial controls within the auditor’s report for the
company’s year to 31 March 2019.
• With regard to certain inter-corporate deposits, corporate guarantees and post-dated cheques,
PwC had said in its auditor’s report on the financial statements: “We are unable to obtain
sufficient appropriate audit evidence regarding the extent of the loss allowance/impairment to
be recognised on these inter-corporate deposits and advances and of the potential liability to be
recognised for the corporate guarantees/post-dated cheques, if any, and the consequential
impact on the standalone financial statements…”
Materiality & Audit Reporting
Decisions

A misstatement in the financial statements can be

considered material if knowledge of the misstatement
would affect the decision of a reasonable user of the
financial statements.
Levels of Materiality
Amounts are immaterial.

Amounts are material but do not overshadow

the financial statements as a whole (not pervasive).

Amounts are so material or so pervasive that

overall fairness of the statements is in question.
Relationship of Materiality to Type of
Opinion
Materiality Significance in Terms of Type of
Level Reasonable Users’ Decisions Opinion
Users’ decisions are unlikely
Immaterial to be affected. Unmodified

Users’ decisions are likely to be

Material affected – significant but not Qualified
pervasive
Highly Users’ decisions are likely to be Disclaimer
material significantly affected (pervasive). or adverse
Materiality Decisions
Failure to
follow GAAP

Audit report to
issue?

Qualified
Unmodified Adverse
opinion only

Immaterial Material Pervasive

Materiality Decisions
Scope
limitation

Audit report to
issue?

Qualified scope
Unmodified Disclaimer
and opinion

Immaterial Material Pervasive

When Materiality Doesn’t Matter
Auditor Lack of
Independence

Audit report to
issue?

Disclaimer
Auditor’s Decision Process
Determine whether any condition exists
requiring a departure from a standard
unmodified report.

Decide the materiality for

each condition

Decide the appropriate

type of report

Write the audit report

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