Auditing and Assurance

(ACT 380)

Summer, 2020 1
 Auditing at a Glance:
 Basic Understanding of Auditing Process
 Assurance and auditing: An overview & Structure of Profession Ch1 & Ch 2 (Lecture 1)
 Auditor’s liability, Ethics and Independence Ch 2 & Ch 3 (Lecture 2)
 The financial report audit process Ch 4 (Lecture 3)

 Client Acceptance, Plan and risk assessment

 Planning, understanding the entity and assessing business risk Ch 5 (Lecture 4)  
 Specific business risks and materiality Ch 6 (Lecture 5)

 Response to Assessed Risks

 Understanding Internal Control and Testing controls Ch 7 & 8 (Lecture 6)
 Substantive tests of transactions and balances Ch 9 (Lecture 7)
 Audit sampling Ch 10 (Lecture 8)

 Complete the Audit and Issue a Report plus Others

 Completing the audit Ch 11 (Lecture 9)
 The auditor’s reporting obligations Ch 12 (Lecture 10)
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This lecture will cover following topics
Topic 1: Obligations to report – Auditing Standard
Topic 2: The revised structure of the Unmodified Auditor’s Report
Topic 3: Summary of Opinions Available
Topic 4: Audit Opinions – Some Examples
Topic 5: Circumstances giving rise to the different opinions
Topic 6: Communication of Audit Opinion

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 Topic 1: Obligations to report – Auditing Standard (ISA 200)

The objective of an audit of the financial report is to enable the

auditor to express an opinion as to whether the financial report is
prepared, in all material respects, in accordance with an identified
financial reporting framework:
• Accounting Standards
• Relevant statutory req’ments

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 Obligations to report - Corporation Act

The Company Act 1994, requires the auditor to form an

opinion as to:
(a) Whether the financial report is in accordance with the Act,
including:
(i) compliance with accounting standards; and
(ii) true and fair view; and

(aa) if the financial report includes additional information

(to give a true and fair view of the financial position and performance)
whether the inclusion of that information was necessary to give
the true and fair; and

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 Obligations to report (cont.)

(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.

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 Financial Report Includes:

 Balance Sheet
 Income Statement
 Cash Flow Statement
 Statement of Changes in Equity
 Notes to the financial Statements
 Director’s Declaration

Excludes: Other information in the Annual Report, such as graphs

in the glossy pages relating to the current year and the future…
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 Auditor’s responsibilities for other information in
annual report

• Auditor does not usually have any specific responsibility to

substantiate such other information.

• Auditor should review such information to ensure it does not

contain material inconsistencies or misstatements of fact.

• If inconsistency identified, and the client does not change it,

an unqualified opinion with other matter usually results
(refer circumstances giving rise to OM).
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 Who the auditor has an obligation to report to:

Audit report is usually addressed to either the governing body

and/or members.

In addition to audit report, auditor’s has reporting responsibilities

to:
• Management and the board of directors on anything prejudicial to the
interests of shareholder
• Securities and Investments Commission where there are reasonable
grounds to suspect a contravention of the provision of the Company
Act, that will not be adequately dealt with by comment in the audit
report or by notifying directors.
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 Topic 2: The revised structure of the Unmodified Auditor’s Report:
 Title => Independent Auditor’s Report
 Addressee => to the shareholders
Para 16. When the auditor modifies the audit opinion, the auditor shall use
the heading “Qualified Opinion,” “Adverse Opinion,” or “Disclaimer of
 Opinion Opinion,” as appropriate.

 Basis for Opinion Para 20. When the auditor modifies the opinion on the financial report, the
auditor shall amend the heading to “Basis for Qualified Opinion,” “Basis for
 Emphasis of Matter (if applic.) Adverse Opinion,” or “Basis for Disclaimer of Opinion,” as appropriate.
 Key audit matters If use of Going Concern Basis of Accounting is appropriate but a material
uncertainty exists, the auditor expresses an unmodified opinion and includes
 Other information a separate section under the heading “Material Uncertainty Related to Going
 Other Matter (if applic.) Concern”

 Responsibilities of management and those charged with governance for the financial report
 Auditor’s responsibilities for the audit of the financial report
 Report on Other Legal and Regulatory Requirements (eg. Remuneration Report)
 Name of the engagement partner
 Signature & name of the audit firm &/OR the personal name of the auditor
 Date of the auditor’s report
 Auditor address
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The information gap
 The enhanced auditor’s report
The major changes for improving the auditor’s report are:
changing the location of the auditor’s opinion in the auditor’s report to the beginning
of the report, to give it greater emphasis
the auditor providing additional information about the entity and the financial report
(in the form of key audit matters)
expanding the auditor’s responsibilities for consideration of other information
presented with the audited financial reports.
improved description of the responsibilities (Mgt & Auditor)
increased reporting on both management’s and the auditor’s responsibility with
regard to going concern
Clarifying relationship between Emphasis of matter & Other Matter

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 Relevant Auditing Standards
ISA 700
• Forming an Opinion and Reporting on a Financial Report
• Form & Content of an unmodified opinion.

ISA 701
• Communicating Key Audit Matters in the Independent Auditor’s Report 

ISA 705
• Modifications to the Opinion in the Independent Auditor's Report:
• Qualified opinion
• Disclaimer of opinion, or
• Adverse opinion.

ISA 706
• Covers those situations where it is necessary to draw users’ attention to an issue by an:
• Emphasis of Matter paragraph, or
13 • Other Matter paragraph. 
 Topic 3: Summary of Opinions Available:

Unmodified Modified
Unqualified Qualified
Unqualified with EoM Qualified with E0M
Unqualified with OM Qualified with OM
Adverse
Disclaimer of Opinion

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 Unmodified auditor’s report
 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 Company Act 1994, including giving a true
and fair view and complying with accounting standards and with the Finance Act, and
 complies with IFRSs.
 Unmodified auditor’s report (continued)
 Issuing an unmodified auditor’s 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 ISA 330)
 any uncorrected misstatements are immaterial, both individually and in
aggregate (in accordance with ISA 450)
 the financial report is prepared, in all material respects, in accordance with
the requirements of the applicable financial reporting framework (ISA 700).
Modifications affecting the auditor’s opinion
 Nature of the matter giving rise to the modification and pervasiveness of its
effects on the financial report, determine the type of opinion expressed.
 Effects are considered to be pervasive if 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, or
 in relation to disclosures, are fundamental to users’ understanding of the financial report
(ASA/ISA 705.05).
 For all the types of modified opinions, a basis for the modification paragraph is
inserted just before the opinion paragraph.

Types of Modifications under ISA 705:

• A qualified opinion (“except for”)
• An adverse opinion
• A disclaimer of opinion (“inability to form an opinion)
How different types of modifications affect the
auditor’s opinion
 Qualified opinion
 A qualified opinion is expressed when the auditor:
 concludes that misstatements are material but not pervasive to the
financial report
 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 (ISA 705.07).
 The most common types of qualified opinions issued relate to: -
- material departures from a specific accounting standard or
- material disagreements over the carrying value of a specific
asset or liability and its potential effect on profit.
 Adverse opinion

 An adverse opinion should be issued when the effect of the misstatements are
so material and pervasive that the financial report as a whole is misleading (ISA
705.08).
 The most common situation in which adverse opinions are issued is when there
is doubt whether the business will be able to continue as a going concern (ISA
570.21).
 Disclaimer of opinion
(Also known as: inability to form/ scope limitation)
 A disclaimer of opinion is expressed when the auditor is unable to obtain
sufficient appropriate evidence to form an opinion, and concludes that the
possible effect of undetected misstatements on the financial report could be both
material and pervasive (ISA 705.09–10).
 In issuing a disclaimer of opinion 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.
An inability to obtain sufficient appropriate audit evidence

 An inability to obtain sufficient appropriate audit evidence (scope limitation on

the auditor’s work) may arise for one of three reasons (ISA 705.A8):
 circumstances beyond the control of the entity

 circumstances related to the nature or timing of the auditor’s work, or

 limitations imposed by the entity.

 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.
 Additional communications in the auditor’s report:
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 when there is a 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.
 Circumstances giving rise to Emphasis of Matter

 ISA 706.A1 outlines circumstances in which Emphasis of Matter (EoM) can be

issued:
 uncertainty relating to the future outcome of exceptional litigation or regulatory action
 early application of a new accounting standard that has a pervasive effect on the
financial report in advance of its effective date
 a major catastrophe that has had, or continues to have, a significant effect on the
entity’s financial position.
 Until 2018, approximately 90% of auditor’s reports containing EoM paragraphs
related to uncertainty regarding going concern status, with going concern
modifications now classed as a separate category of modification.
 ‘Other Matter’ Paragraph
• Not an opinion in itself –> attached to an opinion

• Draws attention to (emphasizes) a matter that:

• is not presented or disclosed in the financial report, that the auditor
believes is sufficiently important to be highlighted;
• is relevant to enhancing user’s understanding of the audit, the
auditor’s responsibilities or the audit report
• Examples:
• Auditor’s inability to withdraw from an audit (pervasive mgt-imposed scope
limitation)
• National regulations requiring further elaboration of audit responsibilities
• Auditor’s report covers more than one financial report
• Prior year audit was modified & undertaken by a different auditor
• Inconsistent ‘other’ information
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 Auditor’s responsibilities for other information in annual report

• Auditor does not usually have any specific responsibility to

substantiate such other information.

• Auditor should review such information to ensure it does not

contain material inconsistencies or misstatements of fact (ISA
720).

• If inconsistency identified, and the client does not change it,

an Unqualified opinion with an OTHER MATTER paragraph
usually results.

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Types of auditor’s report issued in Australia, 2005–10

<Insert Table 12.2, page 560 here>

 Types of auditor’s report issued in Bangladesh, 2014–18
Types of Audit Opinion Issued in Bangladesh (2014-2018)
2014 2015 2016 2017 2018
160 159 194 168 199
Unqualified 86.02% 82.38% 88.58% 85.71% 80.57%
5 9 13 12 24
Unqualified with EOM 2.69% 4.66% 5.94% 6.12% 9.72%
4 8 2 7 9
Unqualified with OM 2.15% 4.15% 0.91% 3.57% 3.64%
169 176 209 187 232
Total Unqualified 90.86% 91.19% 95.43% 95.41% 93.93%
17 17 6 4 10
Qualified 9.14% 8.81% 2.74% 2.04% 4.05%
0 0 4 5 3
Qualified with EOM 0 0 1.83% 2.55% 1.21%
0 0 0 0 2
Qualified with OM 0 0 0 0 0.81%
17 17 10 9 15
Total Qualified 9.14% 8.81% 4.57% 4.59% 6.07%
0 0 0 0 0
Adverse 0 0 0 0 0
0 0 0 0 0
Disclaimer 0 0 0 0 0

Total number of audit reports 186 193 219 196 247

Source: Unpublished work of M Azim, 2020

 Topic 4: Audit Opinions – Some Examples

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 Unmodified Opinion:

Auditor’s Opinion
In our opinion:
(a)  the financial report of …. Limited 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 2015 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 the significant accounting policies.

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 Modified (Qualified /except for) Opinion:

 Qualification:
 Auditors were unable to conclude whether the intangible asset (IP) was carried at
an amount above its recoverable amount in accordance with AASB 138 Intangible
Assets.
 Opinion:
 In our opinion, except for the effects on the financial report of the matter referred in
the qualification paragraphs, the financial report of Intermoco Limited is in
accordance with:
a. Corp Act: True & Fair View and Acctg Stds
b. Other mandatory financial reporting req’ments in Australia

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 Adverse Opinion:
 Qualification:
 Number of matters that affect the entity’s ability to continue
as a going concern
 Opinion:
 In our opinion, because of the matter referred to in the
qualification paragraph, the financial report of …….. Limited
is not in accordance with:
a. Corp Act: True & Fair View and Acctg Stds
b. Other mandatory financial reporting req’ments in Australia

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 Disclaimer (inability to form an opinion):
 Qualified Audit Opinion:
Because of the existence of the limitation in the scope of our work and the
fundamental uncertainties…
a. We have not obtained all the information and explanations that we have
required; and
b. We are unable to, and do not express, an opinion as to whether the
financial report of …… Ltd:

i) gives a true & fair view

ii) is presented in accordance with the Corporations Act 2001, Int’l
Financial Reporting Stds and other generally accepted acctg principles in
Papua New Guinea.

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 Emphasis of Matter:

AUDIT OPINION
In our opinion, the financial report of the ……… Limited is in accordance with:
(a) the Corporations Act 2001 including:
(i) giving a true and fair view of the company’s financial position as at 30 June 2015 and of its
performance for the year ended on that date; and
(ii) complying with Accounting Standards and the Corporations Regulation 2001; and
(b) other mandatory professional reporting requirements in Australia.

EMPHASIS OF MATTER
Inherent Uncertainty regarding Continuation as a Going Concern
Without qualification to the opinion expressed above, attention is drawn to the following matter. As
described in Note1(a), the company is dependent on ongoing Council and Government support
to remain viable. The Directors believe the company will be successful in achieving its
objectives, and accordingly they have prepared the financial report on an ongoing concern
basis.

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Topic 5: Circumstances giving rise to the different opinions:
Circumstance Material Extreme
The financial report is prepared, in all material respects, in accordance with the Unmodified/Unqualified
applicable financial reporting framework

Report is materially missated (Disagreement with Management) Qualified Adverse

Auditor is unable to obtain sufficient appropriate evidence (scope limitation) Qualified Disclaimer of Opinion

Early application of a new accounting standard that has a pervasive effect on the
financial report in advance of its effective date Emphasis of Matter
Uncertainty relating to the future outcome of exceptional litigation or regulatory
action Emphasis of Matter

A major catastrophe that has had, or continues to have, a significant effect on the
entity’s financial position Emphasis of Matter

Additional disclosures with which the auditor concurs (ASA706, Aus 1.1) Emphasis of Matter

Inconsistent other information Other Matter

Subsequent event resulting in a new auditor's report on a revised financial report Emphasis of Matter

Going concern assumption considered appropriate by auditor Unmodified/Unqualified

Significant Uncertainty - going concern (adequately disclosed) Emphasis of Matter

Significant Uncertainty - going concern (not adequately disclosed) Qualified

Use of going concern assumption is inappropriate n/a Adverse

 Topic 6: Communication of Audit Opinion

• Principal means of communication of audit opinion with

shareholders is financial report.

• Secondary means of communication is through discussions at

annual general meetings. Shareholders can ask questions relating to:
• the conduct of audit

• preparation and content of audit report

• accounting policies adopted by the company

• independence of the auditor.

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 Communicating with 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.
 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/ISA 265.10).
 The management letter and discussions with
management
 The management letter is a written communication between the
auditor and management 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 (i) business risk and (ii) inherent risk,
and (iii) any recommended improvements in internal control.
 The most critical discussions between the auditor and management
concerns the form and content of the financial report. If accounting
policies proposed by management differ materially from those auditor
believes are appropriate, an alternative presentation must be agreed
or issue taken up with governing body.
 Communicating with the audit committee or board
• Auditor meets with audit committee at or near completion of audit
to discuss results of audit:
• draw their attention to aggressiveness of accounting policy choices; &
• any disagreements with management
• ensure that the audit committee or board of directors are aware of
contents of management letter.

Matters that cannot be satisfactorily resolved with executive management

must be discussed with the audit committee or the full board.

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