Slide 12.

Audit Reports and

Communication
Principles of Auditing: An Introduction to
International Standards on Auditing - - Ch. 12

Waqar Ali

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.2

Management Responsibility for Audit Report -

SOX
Signing Officer / Financial Officer’s duty to review

Report does not contain any untrue statement of a

material fact or omit to state a material fact.

They are responsible for establishing and maintaining

internal controls:
• have evaluated the effectiveness of the company’s internal
controls; and
• have presented their conclusions on effectiveness of their
internal controls based on their evaluation;
• Disclosure to auditors / audit committee of any
material deficiencies.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.3

ISA 700 Auditor’s Opinion

[Illustrate to students using Burberry’s Auditor Report.]
 Title: Independent Auditor’s Report / [Addressee]
 Introductory Paragraph [Report on Financial Statements]
 Management’s Responsibility for
the Financial Statements
 Auditor’s Responsibility
 Opinion
 Report on Other Legal and Regulatory Requirements
[Form and content of this section of the auditor’s report will
vary depending on the nature of the auditor’s other
reporting responsibilities.]
 [Auditor’s signature]
 [Date of the auditor’s report]
 [Auditor’s address]

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.4

Objectives of the Auditor / Audit itself

 To form an opinion on the financial

statements based on an evaluation of the
conclusions drawn from the audit evidence
obtained.
 To express clearly that opinion through a
written report that also describes the basis for
that opinion.
 Discuss with students the extensive work that
goes behind this. Remember the structure of
a file!
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.5

The opinion expressed in the

auditor's report may be one of four
types…
 Unmodified / Unqualified?
 Three Modified Opinions:
Qualified Q U A D
Adverse
Disclaimer of
opinion

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.6

Unqualified Audit Opinion – Also called

Unmodified Opinion
• The auditor concludes…
– the financial statements are prepared, in all
material respects,
– in accordance with the applicable financial
reporting framework.
• Most common type of audit report (Burberry)
• Called “clean opinion”
• Used for more than 90 per cent of all audit
reports. Why?

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.7

Qualitative aspects forming basis of an

Unmodified Report
 Disclosure of significant accounting policies (FSLIs):
 consistent and appropriate;
 Accounting estimates made by management are
reasonable;
 Information presented in the financial statements is
relevant, reliable, comparable, and understandable;
 Disclosures to enable the intended users to understand
the effect of material transactions and events on the
information conveyed in the financial statements; and
 Terminology used in the financial statements, including
the title of each financial statement, is appropriate.
 Fair Representation
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.8

Modified Reports: Navigation Chart

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.9

Modified opinion is necessary when…

a) Evidence-based conclusion: Financial

statements as a whole are not free from
material misstatement.
b) Unable to obtain sufficient appropriate
audit evidence to conclude that the
financial statements as a whole are free
from…

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.10

ISA 705 Types of Modified Opinions

[Illustrate to students each example.]

Auditor’s Judgement about the

Pervasiveness of the Effects on the
Nature of Matter Financial Statements
[Cause of Modification] Material but Not Material &
Pervasive Pervasive

Material
Misstatement in Qualified Opinion Adverse Opinion
Financial Statements
Inability to obtain
Sufficient Appropriate Qualified Opinion Disclaimer of
Evidence Opinion
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.11

Auditor’s Qualified Opinion

[Left quadrants in previous slide]
 The auditor (having obtained sufficient
appropriate audit evidence) concludes:
misstatements, individually or in the aggregate,
are material, but not pervasive, to the FS; or

 The auditor is unable to obtain sufficient

appropriate audit evidence (on which to base the
opinion):
but the auditor concludes that the possible effects
on the financial statements of undetected
misstatements, if any,
could be material but not pervasive.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.12

Students to review on their own:

Auditors Responsibility …We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our qualified audit opinion.

Basis for Qualified Opinion (NB: Precedes Opinion Paragraph

below.)
ABC Company’s investment in XYZ Company, a foreign associate acquired
during the year and accounted for by the equity method, is carried at xxx on the
statement of financial position as at December 31, 20X1, and ABC’s share of
XYZ’s net income of xxx is included in ABC’s income for the year then ended.
We were unable to obtain sufficient appropriate audit evidence about the carrying
amount of ABC’s investment in XYZ as at December 31, 20X1 and ABC’s share
of XYZ’s net income for the year because we were denied access to the financial
information, management, and the auditors of XYZ. Consequently, we were
unable to determine whether any adjustments to these amounts were necessary.

Qualified Opinion
In our opinion, except for the possible effects of the matter described in the Basis
for Qualified Opinion paragraph, the financial statements present fairly, in all
material respects, (or give a true and fair view of) the financial position of ABC
Company as at December 31, 20X1, and (of) its financial performance and its
cash flows for the year then ended in accordance with International Financial
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.13

Auditor’s Adverse Opinion (ISA 705)

When the auditor, having obtained

sufficient appropriate audit
evidence, concludes that
misstatements, individually or in
the aggregate, are both material
and pervasive to the financial
statements.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.14

Auditor’s Disclaimer of Opinion (ISA

705)
When the auditor is unable to obtain
sufficient appropriate audit evidence
on which to base the opinion, and the
auditor concludes that the possible
effects on the financial statements of
undetected misstatements, if any, could
be both material and pervasive.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.15

Basis for Modification Paragraph

• When the auditor modifies the opinion on the
financial statements, shall,
• Include a paragraph in the auditor’s report
that provides a description of the matter
giving rise to the modification.
• The auditor shall place this paragraph
immediately before the opinion paragraph,
• Using the heading (as apt):
– “Basis for Qualified Opinion,”
– “Basis for Adverse Opinion,” or
– “Basis for Disclaimer of Opinion.”

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.16

An Emphasis of a Matter Paragraph

with an Unmodified Opinion
 Specialty Case
 Features: Fundamental to _____?, or
Other Matter beyond FS
 After Opinion Paragraph
 An unqualified report...
expanded upon
to explain matters that do not affect the
auditor’s opinion,
but should be emphasized to the financial
statement user. Examples?

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.17

Students to Review:
Report of Independent Registered Public Accounting Firm
[Standard Introductory Paragraph]
[Management Responsibility Paragraph]
[Auditor Responsibility Paragraphs]
[Opinion Paragraph]
Required Emphasis Paragraph[s] (Succeeds Opinion Paragraph)
[Emphasize those matters that are important in understanding the financial statement
presentation, including significant management judgments and estimates and areas with
significant measurement uncertainty. Discuss the audit procedures performed on these
significant matters. This discussion should not include matters that the company has not
disclosed in the financial statements and should make reference to the notes in the financial
statements that disclose each matter.]
“Without qualifying our opinion we draw attention to Note X to the financial statements. The
Company is the defendant in a lawsuit alleging infringement of certain patent rights and claiming
royalties and punitive damages. The Company has filed a counter action, and preliminary
hearings and discovery proceedings on both actions are in progress. The ultimate outcome of the
matter cannot presently be determined, and no provision for any liability that may result has been
made in the financial statements.”
[Signature]
[City and State or Country]
[Date]

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.18

Emphasis of a Matter Examples

Uncertainty affecting FSLIs
resolution of which is dependent upon future events
Uncertainty ‘Sponges’:
 Existence of related party transactions,
 Important accounting matters occurring subsequent
(events) to the B/S date
 Matters affecting the comparability of financial
statements with those of previous years (e.g. change
in accounting methods)
 Litigation, long-term contracts, recoverability of asset
values / held for sale, losses on discontinued
operations
A material matter regarding a going concern problem
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.19

Going Concern Objectives

(a) Sufficient / appropriate audit evidence:
– about the appropriateness of management’s use
of the going concern assumption in the
preparation and presentation of the financial
statements;
(b) To conclude, whether a material uncertainty
exists related to events or conditions that may
cast significant doubt on the entity’s ability to
continue as a going concern; and
(c) To determine the implications for the auditor’s
report.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.20

The Going Concern

disclosure should:
 describe the principal conditions that raise doubt;
 state that there are doubts about going concern,
therefore the entity may be unable to realize its
assets and discharge its liabilities in the normal
course of business;
 state that the financial statements do not include
any adjustments relating to the recoverability and
classification of recorded asset amounts or to
amounts and classification of liabilities that may
be necessary should the entity be unable to
continue as a going concern.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.21

Communications With Those Charged

With Governance (Financial Process)
Timely observations arising from the audit that are
significant and to their responsibility to oversee the
financial reporting process:
 Qualitative aspects of accounting practices
 Significant difficulties during the audit
 Significant matters arising from the audit that
were discussed with management
 Other matters arising from the audit that are
significant to the oversight of the financial
reporting process
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.22

Auditor Communications
(Governance) I
Material deficiencies in internal control

Non-compliance with laws and regulations / their impact

on FSLIs

Fraud involving management / Questions regarding

management integrity

The selection of, or changes in, significant accounting

policies and practices that have a material effect on the
financial statements

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.23

Auditor Communications (Governance) II

Potential effect on FS of:

significant risks and exposures / disclosure in FS
Significant audit adjustments to the accounts
Going Concern uncertainty
Disagreements with management
about matters that could be significant to FS

Expected modifications to the auditor’s report

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.24

Long-Form Audit Report (Can you relate

this to Burberry?)
 In many countries it is customary for the auditor
to prepare a ‘long-form’ report to the Audit
Committee of an entity’s board of directors in
addition to the publicly published ‘short-form’
report discussed in this chapter.
 A long- form report ordinarily includes:
 Overview of the Audit Engagement
 Analysis of Financial Statements
 Risk Management and Internal Control
 Optional Topics
 Auditor independence and quality control
 Fees
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.25

Management Letter / Audit Findings

Report
Identifies issues not required to be disclosed
in the Annual Financial Report, 
But represent the auditors concerns and
suggestions noted during the audit.
An evaluation is made of the present system,
pointing out problem areas.
Recommendations for improvement
(Illustrate using a business example.)
Problem which may require immediate action to
correct.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.26

XBRL is a freely licensed, open technology standard that makes

it possible to store and/or transfer data along with the complex
hierarchies, data-processing rules and descriptions.
Permits the automatic exchange and reliable extraction of
financial information across all software formats and
technologies, including the Internet.
Reduces the need to enter financial information more than one
time, reducing the risk of data entry error and eliminating the
need to manually key information for various formats.
Illustrate to students audit / professional efficacy (Tax)

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 12.27

Continuous Reporting and Auditing

Real-time disclosure of transaction data.
Embedded audit modules (EAM) are database
software routines that are placed at
predetermined points to gather information
about transactions or events within the system
that auditors deem to be material.
EAMs allow auditors to proactively monitor
auditable conditions. Auditability (FSLIs in
response to risk assessment)
Daily Book Close

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007