Audit report

 

Audit report is a document obtained as a result of an audit of financial statements and attached to the financial statements. This report is needed to convey the opinion expressed by the auditors to the shareholders (or other parties as required by the engagement) on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. 

Matters to be considered when forming the audit opinion on the financial statements

To form an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework the auditor shall consider the following matters:

·       Whether sufficient appropriate audit evidence has been obtained.

·       Whether uncorrected misstatements are material, individually or in aggregate.

·     The qualitative aspects of the entity’s accounting practice, including indicators of possible bias in management’s judgments.

·      Whether the financial statements adequately disclose the significant accounting policies selected and applied.

·   Whether the accounting policies selected and applied are consistent with the applicable financial reporting framework and are appropriate.

·     Whether accounting estimates made by management are reasonable.

· Whether the information in the financial statements is relevant, reliable, comparable, and understandable.

·     Whether the financial statements provide adequate disclosures to allow users to understand the effect of material transactions and events on the information presented in the financial statements.

·       Whether the terminology used in the financial statements is appropriate.

·       The overall presentation, structure, and content of the financial statements.

·    Whether the financial statements represent the underlying transactions and events to achieve fair presentation.

·     Whether the financial statements adequately refer to or describe the applicable financial reporting framework.

The types of audit opinions

An audit opinion could be unmodified (unqualified) opinion or modified opinion.

An unmodified opinion is the opinion expressed by the auditor when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

As for the modified opinion there are three types of modified opinion: a qualified opinion, an adverse opinion and a disclaimer of opinion.

A qualified opinion is expressed in the auditor's report in the following two situations:

(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements.

(b)   The auditor cannot obtain sufficient appropriate audit evidence on which to base the opinion but concludes that the possible effects of undetected misstatements, if any, could be material but not pervasive.

An adverse opinion is expressed when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements are both material and pervasive to the financial statements.

An opinion must be disclaimed when the auditor cannot obtain sufficient appropriate audit evidence on which to base the opinion and concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.

Information to be provided in an audit report

The auditor's report must be in writing and includes the following basic elements:

·       Title.

·       Addressee.

·       Auditor’s Opinion.

·       Basis for Opinion.

·       Going Concern (if applicable).

·       Key Audit Matters (for listed companies).

·       Other Information (if applicable).

·       Responsibilities for the financial statements.

·       Auditor's responsibilities for the audit of the financial statements.

·       Other reporting responsibilities.

·       Name of the engagement partner.

·       Auditor's signature.

·       Auditor’s address.

An audit opinion on financial statements prepared in accordance with a fair presentation framework and an audit opinion on financial statements prepared in accordance with a compliance framework

The financial reporting framework may be a fair presentation framework or a compliance framework. The term “fair presentation framework” is used to refer to a financial reporting framework that requires compliance with the requirements of the framework and

Acknowledges, to achieve fair presentation of the financial statements by providing disclosures beyond those specifically required by the framework or

Acknowledges explicitly that it may be necessary for management to depart from a requirement of the framework to achieve fair presentation of the financial statements.

The term “compliance framework” is used to refer to a financial reporting framework that requires compliance with the requirements of the framework but does not contain the acknowledgements mentioned in “fair presentation framework”.

When expressing an unmodified opinion on financial statements prepared in accordance with a fair presentation framework, the auditor’s opinion shall use one of the following phrases,

(a) In our opinion, the accompanying financial statements present fairly, in all material respects, […] in accordance with [the applicable financial reporting framework]; or

(b) In our opinion, the accompanying financial statements give a true and fair view of […] in accordance with [the applicable financial reporting framework].

An example of the audit opinion on financial statements prepared in accordance with a fair presentation framework is presented below.

“In our opinion, the accompanying financial statements present fairly, in all material respects, (or give a true and fair view of) the financial position of the 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 Reporting Standards (IFRSs).”

When expressing an unmodified opinion on financial statements prepared in accordance with a compliance framework, the auditor’s opinion shall be that the accompanying financial statements are prepared, in all material respects, in accordance with [the applicable financial reporting framework].

An example of the audit opinion on financial statements prepared in accordance with a compliance framework is presented below.

“In our opinion, the accompanying financial statements of the Company are prepared, in all material respects, in accordance with ABC Law of Jurisdiction Y.”

“Key audit matters” in audit report

Key audit matters—Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period.

Matters which the auditor may determine to be KAMs include:

· Areas of higher risk of material misstatement, or ‘significant risks’ identified in line with ISA 315 (eg at the planning stage).

· Significant judgements in relation to areas where management made judgement.

· The effect of significant events or transactions.

Listed company auditor’s reports include a description of the key audit matters.

A matter giving rise to a modified opinion, or a material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern shall not be described in the Key Audit Matters section of the auditor’s report.

Rather, the auditor shall Include a reference to the Basis for Qualified (Adverse) Opinion or the Material Uncertainty Related to Going Concern section(s) in the Key Audit Matters section.

 The circumstances in which a matter determined to be a Key Audit Matter is not communicated in the auditor’s report

The auditor shall describe each key audit matter in the auditor’s report unless:

(a)   Law or regulation precludes public disclosure about the matter (for example, law or regulation may specifically prohibit any public communication that might prejudice an investigation by an appropriate authority into an actual, or suspected, illegal act); or

(b)  In extremely rare circumstances, the auditor determines that the matter should not be communicated in the auditor’s report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

What are the Key Audit Matters to choose?

The auditor shall determine, from the matters communicated with those charged with governance, those matters that required significant auditor attention in performing the audit.

The auditor may develop a preliminary view at the planning stage about matters that are likely to be areas of significant auditor attention in the audit and therefore may be key audit matters.

However, the auditor’s determination of key audit matters is based on the results of the audit or evidence obtained throughout the audit.

In making this determination, the auditor shall consider the following:

·       Areas of higher assessed risk of material misstatement, or significant risks

Significant risk—An identified risk of material misstatement for which the assessment of inherent risk is close to the upper end of the spectrum of inherent risk due to the degree to which inherent risk factors affect the combination of the likelihood of a misstatement occurring and the magnitude of the potential misstatement should that misstatement occur.

·      Significant auditor judgments relating to areas in the financial statements that involved significant management judgment, including accounting estimates.

In many cases, this relates to critical accounting estimates and related disclosures, which are likely to be areas of significant auditor attention, and also may be identified as significant risks.

·    The effect on the audit of significant events or transactions that occurred during the period.

For example, the auditor may have had extensive discussions with management and those charged with governance at various stages throughout the audit about the effect on the financial statements of significant transactions with related parties or significant transactions that are outside the normal course of business for the entity or that otherwise appear to be unusual.

Auditor’s report for audits conducted in accordance with both auditing standards of a specific jurisdiction and international standards on auditing

The auditor may refer in the auditor’s report to the audit having been conducted in accordance with both International Standards on Auditing as well as the national auditing standards when n, in addition to complying with the relevant national auditing standards, the auditor complies with each of the ISAs. A reference to both International Standards on Auditing and the national auditing standards is not appropriate if there is a conflict between the requirements in ISAs and those in the national auditing standards that would lead the auditor to form a different opinion or not to include an Emphasis of Matter or Other Matter paragraph. In such a case, the auditor’s report refers only to either International Standards on Auditing or the national auditing standards.

When the auditor’s report refers to both the national auditing standards and International Standards on Auditing, the auditor’s report shall identify the jurisdiction of origin of the national auditing standards.

Reference to More than One Financial Reporting Framework in the audit report

In some cases, the financial statements may represent that they are prepared in accordance with two financial reporting frameworks (e.g., the national framework and IFRSs). This may be because management is required, or has chosen, to prepare the financial statements in accordance with both frameworks, in which case both are applicable financial reporting frameworks.

To be regarded as being prepared in accordance with both frameworks, the financial statements need to comply with both frameworks simultaneously and without any need for reconciling statements.

If the financial statements comply with each of the frameworks individually, two opinions are expressed: that is, that the financial statements are prepared in accordance with one of the applicable financial reporting frameworks (e.g., the national framework) and an opinion that the financial statements are prepared in accordance with the other applicable financial reporting framework (e.g., IFRSs). These opinions may be expressed separately or in a single sentence.