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Chapter 10

The audit report and other completion issues

AUDIT REPORT CONTENTS • The Audit Report is based on a standard layout. • The standard layout is: – – – – – – – = Title = Addressee = Introduction = Respective Responsibilities of Directors and Auditors = Basis of Opinion = Opinion = Signature and Date. as the audit report is governed not just by audit standards. due to national requirements. but also by what individual governments require. . set out in ISA 700 Forming an Opinion and Reporting on Financial Statements • In different countries the precise layout will change. • The Opinion section may have additional opinions in it.

Disadvantages – = It guarantees no more than the minimum level of content! – = In being standardised. . all audit reports look similar. the language may be seen as overly technical – = It may restrict an auditor’s ability to say what they really wish to say. but it remains the case that in individual countries.Standardised audit reports • The Audit Standard provides a standard layout for an audit report. Individual countries have tailored the standard for their own purposes. This can have advantages and disadvantages: Advantages – = Comparability between companies – = It guarantees a minimum level of content.

Modified reports • There are 5 modifications to know: • Modifications to the Opinion (ISA 705) – 1. A qualification due to insufficient evidence being available on the audit. and no missing evidence… but there is something major that the auditors wish to draw to the shareholders’ attention. – 3. where there is such a significant amount of evidence missing that the auditors are unable to give an opinion at all. A qualification due to a misstatement of an amount or disclosure in the Financial Statements. where there is nothing wrong with the Financial Statements. – 4. An Emphasis of Matter. A disclaimer of opinion. as follows: Unmodified report • This is the standard report that is the outcome for the vast majority of companies. An adverse opinion – where the auditors disagree with the truth and fairness of the Financial Statements overall. For this exam. Emphasis of Matter Paragraphs (ISA 706) – 5. depending on the situation. In this situation: – = The auditors believe the Financial Statements are true and fair – = The auditors believe the Financial Statements were properly prepared – = There is nothing else the auditors wish to report.AUDIT REPORTS – POSSIBILITIES • There are several different possible forms of audit report. there are 6 forms that you need to understand. • The different outcomes are in groups. – 2. .

1. • There are many examples that would lead to this opinion. • The auditor reports that. the overall Financial Statements remain true and fair. . Except for the effect of the error(s). for example: – = Failure to provide for a material doubtful debt – = Material error in the calculation of depreciation – = The treatment of a material expense as an asset. the Financial Statements give a true and fair view. Qualification due to material misstatement • When there is a single material mistake in the Financial Statements (or a small number of individual mistakes).

Except for any adjustments that might have been necessary. due to being appointed auditor after the year end) – = There are lots of cash transactions (where there is not a lot of documentary evidence).g. Whilst he is happy that the overall Financial Statements show a true and fair view. Qualification due to insufficient evidence • With this problem. the auditor was unable to fully carry out his work due to a lack of the usual evidence. • The auditor reports that. had the auditor seen the evidence. Examples include: – = The auditor was unable to attend the year-end stocktake (e. . he has concerns about possible material errors with a particular balance (or balances).2. the Financial Statements give a true and fair view.

which is likely to result in disagreement with many of the figures in the Financial Statements. • The most common form of this in the exam is a disagreement that the company is a going concern.3. the auditor is disagreeing with the entire basis of preparation of the Financial Statements. it affects the opinion of the Financial Statements as a whole (pervasive). . Adverse opinion • This is a form of misstatement that is so strong. As such. • The auditor reports that the Financial Statements do not give a true and fair view.

• Imagine turning up to an audit client to be told that all of the accounting record were lost the previous day in a fire. Disclaimer of opinion • This is when a fundamental amount of evidence is missing and the auditor feels unable to report on the overall truth and fairness of the Financial Statements.4. so cannot give an opinion. • The auditor reports that “we are unable to form an opinion”. and that there are no backups. . Without any evidence. the auditor is unable to do an audit.

5. there remains something fundamental and uncertain that the auditor wishes to draw to the attention of those reading the Financial Statements: – = There is a very important Disclosure Note which the shareholders must ensure they have read (typically involving going concern threats) . and that all evidence has been received. Emphasis of matter • Sometimes the auditor is happy that the Financial Statements are true and fair. However.

They do this in the ‘Other Matter’ paragraphs. Examples of issues that may be mentioned in the other matters paragraph are: – = Elaboration of the auditor’s responsibilities – = Restrictions on distribution or use of the auditor’s report – = If there is a mistake/inconsistency in the unaudited documents attached to the Financial Statements (‘Other information’) .Other matter paragraphs (ISA 706) • Sometimes the auditors may wish to mention a matter in the audit report. which is not related to the financial statements.

OTHER COMPLETION ISSUES • = Subsequent events • = Going Concern • = Management Representations .

• The auditor has a responsibility to review subsequent events before they sign their audit report and may have to take action if they become aware of subsequent events arising between the date the audit report is signed and the financial statements are distributed to shareholders. . For detailed responsibilities. signed by the directors) that may affect the numbers or disclosures in the yearend financial statements.Subsequent events (ISA 560) • Subsequent events are those events occurring between the year-end and the date that the financial statements are authorised for issue (i.e. refer to the study manual.

Auditors therefore will need to: – = Identify going concern risks – = Apply audit procedures to assess a company’s going concern status. If there are doubts over going concern.Going concern (ISA 570) • Auditors have a responsibility to consider whether or not it is appropriate for the accounts to be prepared on a going concern basis. . auditors must ensure that these are adequately disclosed.

2 Indications of going concern problems • The possibilities are extensive but auditors should look out for potential indicators such as: – – – – – – – – = Net liabilities = Operating losses = Major debt repayments due = Loss of major customers or suppliers = Loss of key staff = Withdrawal of financing such as overdrafts = Cash flow problems = Technological advancements causing client’s product to become obsolete – = Major litigation .

.3 Audit procedures • The actual procedures that auditors will carry out will vary from client to client depending upon the exact circumstances but will tend to involve procedures such as: – = Review and discuss cash-flow forecasts to ensure company has enough cash to continue in operation for the next year – = Review budgets and interim financial statements to assess projected results over the next year and identify any concerns over profitability – = Inspect correspondence with the company’s bankers to assess the availability of financing such as overdrafts and loans – = Inspect business plans to assess company’s efforts to expand into new areas to replace unprofitable operations – = Inspect employee contracts to ensure company is replacing key staff and providing incentives for current staff – = Inspect correspondence to understand possible consequences of legal action being brought against the company – = Inspect new sales contracts to ensure company is replacing customers who have been lost – = Consider management’s process for identifying going concern problems and how they propose to respond to those problems.

appropriate audit evidence cannot reasonably be expected to exist.Management representations (ISA 580) • ISA 580 requires auditors to obtain written representations from management on matters material to the financial statements where other sufficient. .

2 Matters included in a management representation letter General matters • Directors confirm that: – = They are responsible for the financial statements – = They have provided the auditor with all relevant information and access as agreed in the terms of the audit engagement – = All transactions have been recorded in the financial statements – = They are responsible for internal controls and for preventing and detecting fraud – = The going concern basis is appropriate – = All related party transactions have been disclosed – = There are no undisclosed subsequent events that require adjustment or disclosure. .

Specific matters • Included here is anything else that the auditor would like a representation on for example: – = That a certain debt is recoverable – = All bank accounts have been disclosed – = Any plans to reorganise the business or discontinue product lines have already been disclosed. .