CHAPTER24

FORMINGANOPINIONANDREPORTING
ONFINANCIALSTATEMENTS
Questions
1.

The entire audit process culminates in the preparation of the auditors report.
The auditors report is the primary product of the audit. The auditor should
review and assess the conclusions drawn from the audit evidence obtained as the
basis for the expression of an opinion on the financial statements. This review
and assessment involves considering whether the financial statements have been
prepared in accordance with an acceptable financial reporting framework. It may
also be necessary to consider whether the financial statements comply with
statutory requirements. The auditors report should contain a clear written
expression of opinion on the financial statements taken as a whole.

2.

In order to form that opinion, the auditor shall conclude as to whether the
auditor has obtained reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud
or error. That conclusion shall take into account:
(a) The auditors conclusion, in accordance with PSA 330 (Clarified),
whether sufficient appropriate audit evidence has been obtained;
(b) The auditors conclusion, in accordance with PSA 450 (Clarified),
whether uncorrected misstatements are material, individually or in
aggregate; and
(c) The evaluations required by paragraphs 12 to 15.

3.

The auditor shall evaluate whether the financial statements are prepared, in all
material respects, in accordance with the requirements of the applicable
financial reporting framework. This evaluation shall include consideration of the
qualitative aspects of the entitys accounting practices, including indicators of
possible bias in managements judgments.

4.

In particular, the auditor shall evaluate whether, in view of the requirements of

the applicable financial reporting framework:
(a) The financial statements adequately disclose the significant accounting
policies selected and applied;

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(b) The accounting policies selected and applied are consistent with the
applicable financial reporting framework and are appropriate;
(c) The accounting estimates made by management are reasonable;
(d) The information presented in the financial statements is relevant,
reliable, comparable and understandable;
(e) The financial statements provide adequate disclosures to enable the
intended users to understand the effect of material transactions and
events on the information conveyed in the financial statements; and
(f) The terminology used in the financial statements, including the title of
each financial statement, is appropriate.

5.

When the financial statements are prepared in accordance with a fair

presentation framework, the evaluation required by paragraphs 12 to 13 of PSA
700 (Clarified) shall also include whether the financial statements achieve fair
presentation. The auditors evaluation as to whether the financial statements
achieve fair presentation shall include consideration of:
(a) The overall presentation, structure and content of the financial
statements; and
(b) Whether the financial statements, including the related notes, represent
the underlying transactions and events in a manner that achieves fair
presentation.
The auditor shall evaluate whether the financial statements adequately refer to or
describe the applicable financial reporting framework.

6.

The auditor shall express an unmodified opinion when the auditor concludes that
the financial statements are prepared, in all material respects, in accordance with
the applicable financial reporting framework.

7.

If the auditor:
(a) concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement; or
(b) is unable to obtain sufficient appropriate audit evidence to conclude
that the financial statements as a whole are free from material
misstatement.
The auditor shall modify the opinion in the auditors report in accordance with
PSA 705 (Clarified).
If financial statements prepared in accordance with the requirements of a fair
presentation framework do not achieve fair presentation, the auditor shall

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discuss the matter with management and, depending on the requirements of the
applicable financial reporting framework and how the matter is resolved, shall
determine whether it is necessary to modify the opinion in the auditors report in
accordance with PSA 705 (Clarified).
8.

Refer to pages 905 to 916 of the textbook.

9.

The introductory paragraph in the auditors report shall:

(a) Identify the entity whose financial statements have been audited;
(b) State that the financial statements have been audited;
(c) Identify the title of each statement that comprises the financial
statements;
(d) Refer to the summary of significant accounting policies and other
explanatory information; and
(e) Specify the date or period covered by each financial statement
comprising the financial statements.

10. Managements responsibility for the financial statements paragraph in the

audit report is important because it describes the responsibilities of those in the
organization that are responsible for the preparation of the financial statements.
The auditors report need not refer specifically to management, but shall use
the term that is appropriate in the context of the legal framework in the
particular jurisdiction. In some jurisdictions, the appropriate reference may be to
those charged with governance.
11. The auditors report shall include a section with the heading Auditors
Responsibility.
The auditors report shall state that the responsibility of the auditor is to express
an opinion on the financial statements based on the audit.
The auditors report shall state that the audit was conducted in accordance with
PSAs. The auditors report shall also explain that those standards require that the
auditor comply with ethical requirements and that the auditor plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free from material misstatement.
12. The auditors report shall be dated no earlier than the date on which the auditor
has obtained sufficient appropriate audit evidence on which to base the auditors
opinion on the financial statements, including evidence that:
(a) All the statements that comprise the financial statements, including the
related notes, have been prepared; and

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(b) Those with the recognized authority have asserted that they have taken
responsibility for those financial statements.

Multiple Choice Questions

1.
2.
3.
4.
5.

B
A
D
D
C

6.
7.
8.
9.

C
B
D
B

Cases
1.

You must determine whether an unqualified opinion satisfies the PSA reporting
standard, in particular:
a.

Determine whether the financial statements are presented in conformity

with PFRS.
1.

Read the footnote description of accounting policies.

2.

Use a PFRS checklist.

3.

Review the working papers for any indication of accounting policies

not described in the footnote or ones apparently not in conformity with
PFRS.

4.

Determine if:
(i) The accounting principles are generally acceptable, having
authoritative support.
(ii) The accounting principles are appropriate in the circumstances.
(iii) The financial statements are informative.
(iv) The information is reasonably summarized.
(v) Material adjustments have not been waived without good reasons.

2.

b.

Determine whether any accounting changes have been made and whether
accounting principles have been applied consistently.

c.

Determine whether the footnote disclosures are adequate to inform users of

any material information evident in the working papers.

1.

Title. The report needs a title referring to Rose as the independent auditor
or independent accountant.

2.

Notice of audit. The report does not give the proper declaration of an audit
of the financial statements, especially the part about in accordance with

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your instructions, which suggest that Rose surrendered some audit

independence. The reference to a complete audit is ill advised because it
suggests a 100% investigation, which is contradicted by the sentence about
tests of the sales records.
3.

Responsibilities. The report says nothing about the auditors responsibility

for the audit report.

4.

Opinion. The opinion sentence should not be modified with the phrase
with the explanation given above.

5.

Opinion. The opinion sentence should not mention minor errors we

consider immaterial, but it should contain the phrase presents fairly in all
material respects.

6.

Opinion/Identification of Financial Statements. The opinion should not

include reference to cash flows because the introductory paragraph did not
state that the cash flow statement was audited. This may be a deficiency in
the identification of the financial statements that were actually audited.

7.

Opinion.
The opinion paragraph refers improperly to ASC
pronouncements. It should refer to generally accepted accounting
principles.

8.

Date. The date accompanying Roses signature should be September 23

the day the field work was completed not the companys fiscal year-end
date.

9.

Other. The commentary on the economy and the strike are not generally
appropriate for an audit report. Even if the auditor wanted to draw attention
to these matters, their relevance for understanding the financial statements
and their manner of expression are both questionable.

10. Other. The negative assurance (concerning the recording of sales) is not
permitted in audit reports.

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