AUDIT REPORTS

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 COMPANIES ACT
REQUIREMNTS
• Report on all accounts laid before members
• Attach copy of report to accounts.
• Report
– Describe scope of audit
– True and fair view
– Compliance with Accounting Standards & CA06
– Consistency of directors report
• Report matters by exception

2
 1993 – 2008 REPORTS
• Audit failures in 1980s
• APB replaced APC
• Education of users
• Increasing importance of corporate
governance

 Expanded audit report (example 2)

3
 NEED TO REVISE AUDIT
REPORT

• Companies Act 2006

• IAASB revised ISA 700

• Audit Quality Forum report

4
 CONCERNS
• Over long, complex with standard wording.
• Description of audit no longer necessary
• Provisos and caveats
• Increased positive statements
• Information on risks and uncertainties

5
 PROJECTS
• Revised ISAs issued

• FRC discussion papers

– Effective Company Stewardship (Jan 2011)
– Effective Company Stewardship – Next Steps (Sept 2011)

• IAASB (2012)

• FRC Consultation paper (2013)

6
 2012 CHANGES
• Commentary in own words rejected.

• Strengthen reporting to audit committee

• Expand audit report

– Comment on audit committee report
– Other information

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 PROPOSALS
IAASB
•Auditor commentary

FRC
•Describe risks identified and assessed.
•Application of materiality
•Scope of audit

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UNMODIFIED AUDIT REPORT
See example 3.

• Title
• Introductory paragraph
• Responsibilities of directors and auditors
• Scope of the audit
• Opinion
• Opinion on other matters
• Identity of the auditor & location
• Date
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 RESTRICTION OF LIABILITY
• Royal Bank of Scotland v Bannerman
Johnstone Maclay and others, 2002.

• Additional wording clarifies but does not

change auditor liability

• See example four

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 MODIFIED AUDIT REPORTS
Matters that do not affect the audit opinion
• Emphasis of matter
• Other matters

Matters that do affect the audit opinion

• Qualified opinion
• Disclaimer of opinion
• Adverse opinion
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 EMPHASIS OF MATTER
• Accounts show a true and fair view

• Highlight significant uncertainties

• How? (example five)

– Paragraph after opinion, with sub-heading.
– Describe matter
– Quantify if possible
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 MATTERS THAT AFFECT THE
AUDIT OPINION
The auditor has reservations about matters
which have a material effect on the financial
statements.

– Limitation of scope
– Disagreement

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 LIMITATION OF SCOPE
Arises when the auditor has been unable to
obtain all information and explanations that
would normally be available.

Imposed by:
– Directors, who refuse to allow the auditor to
carry out certain procedures.
– Circumstances

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 DISAGREEMENT
• Inappropriate accounting policies
• Disagreements to amounts in financial
statements.
• Disagreements to manner or extent of
disclosure.
• Non‑compliance with legislation or other
requirements.

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 AUDIT REPORT
Material but Pervasive to
not pervasive the whole
accounts
Limitation of Qualified Disclaimer
scope (example 6) (example 7)

Disagreement Qualified Adverse

(example 8) (example 9)

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 AVOIDING QUALIFICATIONS
• Discuss with management
• Management can amend accounts
• Auditor obtains more evidence
• Obtain second opinion (opinion
shopping).
• Some qualifications cannot be avoided

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 REASONS FOR LACK OF
QUALIFICATIONS
• Auditors assist directors with accounts
preparation so conflicts do not arise.
• Directors amend accounts to avoid bad
publicity of qualification.
• Auditors may be willing to accept true
and fair over ride.
• Poor auditing
• Rarity of qualifications make auditors
more reluctant to qualify.
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