Imrul kayas, FCA, AFA(UK), MIPA(Australia)

(Mobile No : 01737231658)

Reporting
Content
By the end of this session, you should be able to:
 Determine the form and content of an unmodified auditor’s report and assess the
appropriateness of the contents of an unmodified auditor’s report
 Recognize and evaluate the factors to be taken into account when forming an audit
opinion in a given situation and justify audit opinions that are consistent with the results
of audit procedures
 Critically appraise the form and content of an auditor’s report in a given situation
 Assess whether or not a proposed audit opinion is appropriate
 Advise on the actions which may be taken by the auditor in the event that a modified
auditor’s report is issued
 Recognize when the use of an emphasis of matter paragraph, other matter paragraph
and KAM disclosure would be appropriate
 Discuss the courses of action available to an auditor if a material inconsistency or
material misstatement exists in relation to other information such as contained in the
integrated report
 Critically assess the quality of a report to those charged with governance and
management
 Advise on the content of reports to those charged with governance and management
in a given situation and answer questions relating to these areas.

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 Imrul kayas, FCA, AFA(UK), MIPA(Australia)
(Mobile No : 01737231658)

The independent auditor’s report

Objectives of an auditor
The objectives of an auditor, in accordance with ISA 700 (Revised) Forming an Opinion and
Reporting on Financial Statements, are:

➢ to form an opinion on the financial statements based upon an evaluation of their

conclusions drawn from audit evidence.
➢ to express clearly that opinion through a written report.

The auditor forms an opinion on whether the financial statements are prepared, in all material
respects, in accordance with the applicable financial reporting framework.

Forming an opinion
Unmodified opinion
➢ Financial statements give a true and fair view
➢ Financial statements are prepared, in all material respects, in accordance with the
applicable financial reporting framework

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 Imrul kayas, FCA, AFA(UK), MIPA(Australia)
(Mobile No : 01737231658)

Additional communication (if applicable)

May be required to draw the user’s attention to something important for their
understanding:

Material uncertainty relating to going concern

➢ Emphasis of matter
➢ Other matter

Modified opinion
Material misstatement

➢ The financial statements are not prepared in all material respects with the applicable
financial reporting framework
➢ Qualified opinion
–the misstatement is material but not pervasive ‘TFV Except for...’
➢ Adverse opinion
– the misstatement is material and pervasive ‘Do not give a TFV’

Inability to obtain sufficient appropriate evidence

➢ The auditor does not have sufficient appropriate evidence to be able to form an opinion
➢ Qualified opinion – the effect of any possible misstatement is material but not pervasive
‘TFV Except for...’
➢ Disclaimer of opinion – the effect of any possible misstatement is material and pervasive
‘Do not express an opinion’

Unmodified opinion
When the auditor concludes that the financial statements are prepared, in all material respects,
in accordance with the applicable financial reporting framework they issue an unmodified
opinion in the auditor's report.

The audit opinion will state that the financial statements give a true and fair view.

This will mean:

➢ The financial statements adequately disclose the significant accounting policies.

➢ The accounting policies selected are consistently applied and appropriate.
➢ Accounting estimates made by management are reasonable.
➢ Information is relevant, reliable, comparable and understandable.
➢ The financial statements provide adequate disclosures to enable the users to understand
the effects of material transactions and events.
➢ The terminology used is appropriate.

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 Imrul kayas, FCA, AFA(UK), MIPA(Australia)
(Mobile No : 01737231658)

Other information section

ISA 720 (Revised) The Auditor's Responsibilities Relating to Other Information Other information
refers to financial or non-financial information, other than the financial statements and auditor's
report thereon, included in the entity's annual report that is not necessarily subject to audit

Examples of Other Information

• Chair's report
• Operating and financial review
• Social and environmental reports
• Corporate governance statements

Content of the Other Information section The Other Information

section:
• Identifies the other information obtained by the auditor prior to the date of the auditor's
report.
• States that the auditor has not audited the other information and accordingly does not
express an opinion or conclusion on that information.
• Includes a description of the auditor’s responsibilities with respect to the other
information.
• States either that the auditor has nothing to report, or, a description of the material
misstatement if applicable.

Purpose of the Other Information section

• The auditor must not be knowingly associated with information which is misleading.
• Misstatement of other information exists when the other information is incorrectly stated
or otherwise misleading (including because it omits or obscures information necessary
for a proper understanding of a matter).

• Material misstatements or inconsistencies in the other information may undermine the

credibility of the financial statements and the auditor’s report.

• If the auditor obtains the final version of the other information before the date of the
auditor’s report, they must read it to identify any material inconsistencies with the
financial statements or the auditor’s knowledge obtained during the audit.

• If the auditor identifies a material inconsistency they should

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 Imrul kayas, FCA, AFA(UK), MIPA(Australia)
(Mobile No : 01737231658)

✓ Perform limited procedures to evaluate the inconsistency. The auditor should

consider whether it is the financial statements or the other information that
requires amendment.
✓ Discuss the matter with management and ask them to make the correction.
✓ If management refuse to make the correction, communicate the matter to
those charged with governance.
✓ If the matter remains uncorrected the auditor should withdraw from the
engagement, if possible, under applicable law or regulation as the issue casts
doubt over management integrity.
✓ If withdrawal is not possible, the auditor must describe the material
misstatement in the auditor's report.

Position of the Other Information section within the report

The Other Information section is included in the auditor's report below the Basis for Opinion
and Key Audit Matters section (if applicable) and above the Responsibilities of Management.

Key audit matters

• ISA 701 Communicating Key Audit Matters in the Independent Auditor's Report requires
auditors of listed companies to determine key audit matters and to communicate those
matters in the auditor's report.
• Auditors of non-listed entities may voluntarily, or at the request of management or those
charged with governance, include key audit matters in the auditor's report.
• Key audit matters are those that in the auditor's professional judgment were of most
significance in the audit and are selected from matters communicated to those charged
with governance.
• The purpose of including these matters is to assist users in understanding the entity, and
to provide a basis for the users to engage with management and those charged with
governance about matters relating to the entity and the financial statements.
• Each key audit matter should describe why the matter was considered to be significant
and how it was addressed in the audit.

Key audit matters include:

• Areas of higher assessed risk of material misstatement, or significant risks identified in
accordance with ISA 315 (Revised) Identifying and Assessing the Risks of Material
Misstatement Through Understanding the Entity and its Environment.
• Significant auditor judgments relating to areas in the financial statements that involved
significant management judgment, including accounting estimates that have been
identified as having high estimation uncertainty.
• The effect on the audit of significant events or transactions that occurred during the
period.

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 Imrul kayas, FCA, AFA(UK), MIPA(Australia)
(Mobile No : 01737231658)

Specific examples include:

➢ Significant fraud risk
➢ Goodwill
➢ Valuation of financial instruments
➢ Fair values
➢ Effects of new accounting standards
➢ Revenue recognition
➢ Material provisions such as a restructuring provision
➢ Implementation of a new IT system, or significant changes to an existing system.

Note that a matter giving rise to a qualified or adverse opinion, or a material uncertainty related
to going concern are by their nature key audit matters.

However, they would not be described in this section of the report. Instead, a reference to the
Basis for qualified or adverse opinion or the going concern section would be included.

If there are no key audit matters to communicate, the auditor shall:

Discuss this with the engagement quality control reviewer, if one has been appointed.
Communicate this conclusion to those charged with governance.

Explain in the key audit matters section of the auditor's report that there are no matters to
report

Additional communications
➢ Material uncertainty related to going concern
➢ ISA 570 (Revised) Going Concern

Purpose Included when there is a material uncertainty regarding the going concern status which
the directors have adequately disclosed in the financial statements.

The auditor uses this section to draw the attention of the user to the client's disclosure note.

➢ Position in the auditor's report

➢ Below the Basis for Opinion section.

Emphasis of Matter paragraph

ISA 706 (Revised) Emphasis of Matter Paragraphs and Other Matter Paragraphs in an Auditor's
Report

Purpose
Used to refer to a matter that has been adequately presented or disclosed in the financial
statements by the directors.

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 Imrul kayas, FCA, AFA(UK), MIPA(Australia)
(Mobile No : 01737231658)

The auditor's judgment is that these matters are of such fundamental importance to the users'
understanding of the financial statements that the auditor should emphasize the disclosure.

Examples
Major catastrophes that have had a significant effect on the entity's financial position. An
uncertainty relating to the future outcome of exceptional litigation or regulatory action.

A significant subsequent event occurs between the date of the financial statements and the
date of the auditor's report.

Position in the auditor's report

Below the Basis for Opinion section.

When a Key Audit Matters section is presented in the auditor’s report, an Emphasis of Matter
paragraph may be presented either directly before or after the Key Audit Matters section, based
on the auditor’s judgment as to the relative significance of the information included in the
Emphasis of Matter paragraph.

Tutorial notes:
➢ An Emphasis of Matter paragraph is not used to draw attention to immaterial
misstatements. The fact that they are immaterial means they do not warrant the
attention of the shareholders.
➢ An Emphasis of Matter paragraph can only be used when adequate disclosure has been
made of the matters mentioned above. The auditor can only emphasize something that
is already included.
➢ Where adequate disclosure has not been made the opinion will need to be modified and
an Emphasis of Matter paragraph should NOT be used.
➢ The heading of the paragraph can be amended to provide further context, for example,
Emphasis of Matter – Subsequent event.
➢ INT Syllabus: An Emphasis of Matter should not be used to highlight an issue already
included in the Key Audit Matters section. The auditor must use judgment to determine
which section they consider is the most appropriate to highlight the issue.
➢ UK Syllabus: Law or regulation may require a matter to be emphasized in the auditor’s
report in addition to communicating such a matter as a key audit matter.

Other Matter paragraph

ISA 706 (Revised)
Purpose
An Other Matter paragraph is included in the auditor's report if the auditor considers it
necessary to communicate to the users regarding matters that are not presented or
disclosed in the financial statements that, in the auditor's judgment, are relevant to
understanding the audit, the auditor's responsibilities, or the auditor's report.

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 Imrul kayas, FCA, AFA(UK), MIPA(Australia)
(Mobile No : 01737231658)

➢ To communicate that the auditor's report is intended solely for the intended users, and
should not be distributed to or used by other parties.
➢ When law, regulation or generally accepted practice requires or permits the auditor to
provide further explanation of their responsibilities.

Position in the auditor's report

When an Other Matter paragraph is included to draw user's attention to a matter relating to
other reporting responsibilities addressed in the auditor's report, the paragraph may be
included in the Report on Other Legal and Regulatory Requirements section.

When relevant to all auditors’ responsibilities or users' understanding of the auditor's

report, the Other Matter paragraph may be included as a separate section following the
Report on the Other Legal and Regulatory Requirements.

Tutorial notes:
➢ An Other Matter paragraph does not include confidential information or information
required to be provided by management.
➢ The heading may be amended to provide further context, for example, Other Matter
➢ Scope of the audit.

Modified opinions
Actions when the opinion is to be modified

• Discuss the matter with those charged with governance

• Consider management integrity
• Seek external advice
• Resign

Reasons for modifying the opinion

There are two main reasons for the auditor to modify the opinion.

A modified opinion will be necessary when the auditor concludes that:

➢ Based upon the evidence obtained the financial statements as a whole are not free from
material misstatement. This is where the client has not complied with the applicable
financial reporting framework.

Or

➢ They have been unable to gather sufficient appropriate evidence to be able to conclude
that the financial statements as a whole are free from material misstatement. This is the

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 Imrul kayas, FCA, AFA(UK), MIPA(Australia)
(Mobile No : 01737231658)

evidence the auditor would expect to exist to support the figures in the financial
statements.

The nature of the modification depends upon whether the auditor considers the matter to
be material but not pervasive, or material and pervasive, to the financial statements.

Material but not pervasive

➢ If the misstatement or lack of sufficient appropriate evidence is material but not
pervasive, the auditor will issue a qualified opinion.
➢ This means the matter is material to the area of the financial statements affected but
does not affect the remainder of the financial statements.
➢ ‘Except for’ this matter, the financial statements give a true and fair view.
➢ Whilst significant to users' decision making, a material matter can be isolated whilst the
remainder of the financial statements may be relied upon.

Material and pervasive

A matter is considered 'pervasive' if, in the auditor's judgment:

➢ The effects are not confined to specific elements, accounts or items of the financial
statements
➢ If so confined, represent or could represent a substantial proportion of the financial
statements,
or
➢ In relation to disclosures, are fundamental to users' understanding of the financial
statements.

Adverse opinion
An adverse opinion is issued when a misstatement is considered material and pervasive. This
will mean the financial statements do not give a true and fair view.

Examples include:
➢ Preparation of the financial statements on the wrong basis.
➢ Non-consolidation of a subsidiary.
➢ Material misstatement of a balance which represents a substantial proportion of the
assets or profits e.g., would change a profit to a loss.

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 Imrul kayas, FCA, AFA(UK), MIPA(Australia)
(Mobile No : 01737231658)

Reporting
Disclaimer of opinion
A disclaimer of opinion is issued when the auditor has not obtained sufficient appropriate
evidence and the effects of any possible misstatements could be pervasive. The auditor does
not express an opinion on the financial statements in this situation.

Examples include:
➢ Failure by the client to keep adequate accounting records.
➢ Refusal by the directors to provide written representation.
➢ Failure by the client to provide evidence over a single balance which represents a
substantial proportion of the assets or profits or over multiple balances in the financial
statements.

Impact of a disclaimer
The statement that sufficient appropriate evidence has been obtained is not included.

➢ The statement that the financial statements have been audited is changed to ‘we were
engaged to perform the audit’.
➢ The statement regarding the audit being conducted in accordance with ISAs and ethical
responsibilities are moved to the Auditor Responsibilities section rather than the Basis
for Disclaimer of Opinion.
➢ The Other Information section is not included in the auditor’s report as to do so may
overshadow the disclaimer of opinion.
➢ INT Syllabus: The Key Audit Matters section is not included in the auditor’s report as to
do so would suggest the financial statements are more credible in relation to those
matters.
➢ UK Syllabus: A Key Audit Matters section will be included in the auditor’s report even if a
disclaimer of opinion is issued.

Basis for modified opinion

➢ When the auditor decides to modify the opinion, they must amend the heading 'Basis for
Opinion' to 'Basis for Qualified Opinion', 'Basis for Adverse Opinion' or 'Basis for
Disclaimer of Opinion', as appropriate.
➢ The section will explain the reason why the opinion is modified e.g. which balances are
misstated, which disclosures are missing or inadequate, which balances the auditor was
unable to obtain sufficient appropriate evidence over and why.

If possible, a quantification of the financial effect of the modification will be included.  If the
material misstatement relates to narrative disclosures, an explanation of how the disclosures are
misstated should be included, or in the case of omitted disclosures, the disclosure should be
included if the information is readily available.

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 Imrul kayas, FCA, AFA(UK), MIPA(Australia)
(Mobile No : 01737231658)

Where a qualified or adverse opinion is being issued, the auditor must amend the statement
'...the audit evidence is sufficient and appropriate to provide a basis for the auditor's
qualified/adverse opinion'.

Summary of modified opinions

Material but Not Pervasive Material & Pervasive

Financial statements are Qualified Opinion Except for Adverse Opinion FS do not
materially misstated ... Basis for qualified opinion give a true and fair view Basis
for adverse opinion

Inability to obtain sufficient Qualified Opinion Except for Disclaimer of Opinion Do not
appropriate audit evidence ... Basis for qualified opinion express an opinion Basis for
disclaimer of opinion

Exam focus – auditor’s reports

There are two common styles of question requirement relating to auditor’s reports:

➢ Explain the implications for the auditor's report

➢ Critically appraise the suggested auditor's report. Below are suggested
approaches/considerations you can make when answering these questions:

Explain the implications for the auditor's report

• Calculate the materiality of the issue.
• Comment on the issue given in the scenario. This may be a misstatement that has been
caused by an inappropriate accounting treatment, or where the auditor has been unable
to obtain sufficient and appropriate evidence.

Explicitly state the type of issue arising

• Material misstatement
• Inability to obtain sufficient and appropriate evidence
• Material uncertainty relating to going concern
• A matter which is accounted for correctly, disclosed as a note by management which the
auditor wishes to highlight
• An inconsistency between the financial statements and the other published information
or a material misstatement within the other information (not the financial statements)
• A matter which is accounted for correctly by a listed client, required significant audit
attention and the auditor wishes to include it as a key audit matter

Conclude on the opinion:

− Unmodified opinion if there are no material issues
− Modified opinion if there are material issues

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 Imrul kayas, FCA, AFA(UK), MIPA(Australia)
(Mobile No : 01737231658)

➢ Where the opinion is to be modified, state whether the matter is material but not
pervasive or material and pervasive

State the type of opinion and the key wording of that opinion
✓ Unmodified opinion
✓ Present fairly/give a true and fair view
✓ Qualified opinion
✓ Except for
✓ Adverse opinion
✓ Do not present fairly/give a true and fair view
✓ Disclaimer of opinion
✓ Do not express an opinion

State any other reporting implications

➢ Basis for modified opinion if the opinion is modified
➢ Material Uncertainty Related to Going Concern section if there are uncertainties over
going concern which have been adequately described
➢ Emphasis of Matter paragraph to highlight a disclosure
➢ Other Matter paragraph
➢ Other Information section needs to describe the inconsistency/material misstatement in
the other published information
➢ key Audit Matter point for a listed entity.

Critically appraise the suggested auditor’s report

When critically appraising the auditor’s report you need to explain what is wrong with the
suggested extracts. Look out for:

➢ Paragraphs being included in the wrong order.

➢ Titles of paragraphs using the wrong wording.
➢ Incorrect use of KAM, EOM and OM paragraphs.
➢ An inappropriate opinion being suggested for the issue.
➢ Inconsistent opinion wording with the name of the opinion e.g. adverse opinion being
suggested but the wording within the opinion using 'except for' which is the wording for
a qualified opinion.
➢ Unprofessional wording of the report in general e.g. the auditor ‘feels’ the financial
statements ‘may’ be materially misstated. The auditor needs to provide greater
confidence to the user than just a feeling. If the issue may be material, equally it may
not be material and therefore should not be referred to in the report. The auditor needs
to use their professional judgment to conclude that the issue is or is not material, they
cannot sit on the fence.

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 Imrul kayas, FCA, AFA(UK), MIPA(Australia)
(Mobile No : 01737231658)

➢ Insufficient explanation of the reason for the modification.

ISA 260 (Revised) Communication with Those Charged with Governance and, requires the
external auditor to engage in communications with management provides the following
guidance.

Definitions
Those charged with governance are defined as:

➢ ‘The persons with responsibility for overseeing the strategic direction of the entity and
obligations related to the accountability of the entity.’

This includes the directors (executive and non-executive) and the audit committee.

In contrast, management are defined as:

➢ ‘The persons with executive responsibility for the conduct of the entity's operations.’

Objectives of communicating with TCWG

➢ To communicate the responsibilities of the auditor and an overview of the scope and
timing of the audit.
➢ To obtain information relevant to the audit.
➢ To report matters from the audit on a timely basis.
➢ To promote effective two-way communication.

Matters to be communicated
➢ Auditor's responsibilities in relation to the audit.
➢ Planned scope and timing of the audit.
➢ An unreasonably brief time within which to complete the audit.
➢ Any other matters agreed upon in the terms of the audit engagement.
➢ Expected limitations on the audit, either imposed by management or other
circumstances.
➢ The potential effect on the financial statements of any material risks and exposures,
such as pending litigation, that are required to be disclosed in the financial statements.
➢ Significant findings from the audit:
➢ Auditor's views about qualitative aspects of the entity's accounting practices, policies,
estimates and disclosures.
➢ Significant difficulties encountered during the audit, e.g. unavailability of expected
information, delays obtaining information.
➢ Significant matters discussed with management.
➢ Written representations requested.

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 Imrul kayas, FCA, AFA(UK), MIPA(Australia)
(Mobile No : 01737231658)

➢ A summary of identified misstatements, whether corrected or not by the entity and a

request that they are adjusted.
➢ Circumstances that affect the form and content of the auditor's report, if any including
any expected modifications to the audit opinion and key audit matters to be
communicated in accordance with ISA 701 Communicating Key Audit Matters in the
Independent Auditor’s Report. – Other matters arising significant to the oversight of the
reporting process.
➢ Material uncertainties related to events and conditions that may cast significant doubt on
the entity’s ability to continue as a going concern.
➢ Auditor independence.

Link with KAM

Some of the matters given above will be selected for inclusion in the Key Audit Matters section
of the auditor’s report for a listed company. The purpose of including these matters is to assist
users in understanding the entity.

Communicating deficiencies in internal controls

✓ ISA 265 Communicating Deficiencies in Internal Control to Those Charged with
Governance and Management requires the auditor to communicate deficiencies that are
of sufficient importance to merit attention by the entity.
✓ The auditor must distinguish between simple deficiencies, which do not require
communication, and significant ones that do.
✓ Significant deficiencies are those which could have a material effect on the financial
statements or affect multiple balances.

The auditor communicates:

A description of the deficiencies and their potential effects.

✓ An explanation of the purpose of the auditor (i.e. to express an opinion on the financial
statements, not to help redesign internal systems).
✓ An explanation of why consideration of internal control is relevant to the audit.
✓ An explanation that the matters being reported are only those identified during the audit
and considered to be significant enough to report.

As well as reporting to those charged with governance, the auditor should communicate
deficiencies to management on a timely basis.

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