Chapter 15 Edited

15
AUDITOR’S REPORT
Learning Outcomes
After studying this chapter, you should be able to:

 Explain the process of preparing an audit report
 Prepare an audit report appropriate for various
audit opinions
 Communicate with the client’s management on key
findings
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4
Audit Opinion Formulation

Process

Introduction
 An audit report is a written opinion of an auditor

regarding an organization’s financial statements.
 The report is written in a standard format, as
mandated by the Companies Act 2016 and
International Standards on Auditing (ISA).

Introduction (cont.)
 ISA 700 (Revised) – Forming an Opinion and

Reporting on Financial Statements deals with the
auditor’s responsibility to form an opinion on the
financial statements, as well as the form and
content of the auditor’s report issued as a result of
the audit.
 Audit opinion can be categorized into:

Introduction (cont.)
1. Unqualified opinion- if the financial statements are a

fair representation of an entity’s financial position;
2. Qualified opinion- if there are any scope limitations
that were imposed upon the auditor’s work;
3. Adverse opinion- if the financial statements were
materially misstated; and
4. Disclaimer of opinion- can be triggered by several
situations (e.g. auditor may not be independent, or if
there is a going concern issue with the auditee).

Objectives and Format of an
Audit Report
 The objectives of an audit report is to communicate

auditors’ findings to the users of the financial
statements, and to express an opinion on the truth
and fairness of the financial statements.
 In order to form that opinion, auditors must
conclude as to whether they have obtained
reasonable assurance that the financial statements
are free from material misstatement, either due to
fraud or error.

Audit Report (cont.)
Figure 15.1


 The typical audit report contains three paragraphs,

which cover the following topics:
(a) The responsibilities of the auditor and the
management of the entity (introductory paragraph);
(b) The nature of the audit process (scope paragraph);
(c) The auditor’s opinion of the entity’s financial
statements (opinion paragraph).

1. Unqualified Report
 According to ISA 700, an unqualified or unmodified

opinion should be expressed when the auditor
concludes that the financial statements give a true
and fair view (or are presented fairly, in all material
respects) in accordance with the identified financial
reporting framework.

1. Unqualified Report (cont.)
 To enable users to understand the language of audit

reports, ISA provides a uniform wording.
 Issued when the following conditions are met:
– All statements are included in the FS.
– The ISAs have been followed.
– sufficient evidence has been accumulated.
– FS are presented in accordance with approved accounting
std. (adequate disclosures have been included).

– No circumstances requiring an explanatory paragraph or

modification of the report.
– No circumstances requiring qualification or modification.
 Sometimes called a clean opinion
 Most common audit opinion.

Figure 15.2


Types of Modified Report
 According to ISA 705 – Modifications to the Opinion

in the Independent Auditor’s Report, there are three
types of modified opinions, namely, a qualified
opinion, an adverse opinion, and a disclaimer of
opinion.
 The decision regarding which type of modified
opinion is appropriate depends upon:

Types of Modified Report (cont.)
(a) The nature of the matter giving rise to the

modification; that is, whether the financial
statements are materially misstated or, in the case
of an inability to obtain sufficient appropriate audit
evidence, may be materially misstated; and
(b) The auditor’s judgment about the pervasiveness of
the effects or possible effects of the matter on the
financial statements.

(cont.)
 ISA 700
– Whenever the auditor expresses an opinion other
than unqualified, a clear description of all the
substantive reasons should be included in the
report & (unless impracticable) a quantification of
the possible effect(s) on the FS.

(cont.)
 If the auditor concludes that the issue of an

unqualified report is not appropriate, there are three
other types of audit reports:
(a) Qualified audit report
 when there is a limitation on the scope of the
auditor’s examination, or a disagreement with
material consequences, but not pervasive to the
financial statement.

(cont.)
 Scope Limitation
– When auditor has not accumulated sufficient
evidence to conclude whether FS are stated in
accordance with Companies Act 2016.
– Major causes of restrictions:
• Imposed by the client or;
• Caused by circumstances beyond the client’s or
auditor’s control.

(cont.)
 Disagreement
– Where the auditor is able to express an opinion but his
opinion differs from the view expressed by management.
– May be caused by:
• Non-conformity with the provision of the Companies Act etc.
• Non-compliance with acctg std.
• Disagreement with facts or amounts in FS.
• Inadequate disclosure of facts or amounts.

(b) Disclaimer audit report

 issued when the auditor is unable to obtain sufficient
appropriate audit evidence on which to base the
opinion, and the auditor concludes that the possible
effects on the financial statements of undetected
misstatements, if any, could be both material and
pervasive.
 Option to be issued for GC problems.
 Arise from lack of knowledge by the auditor.


(c) Adverse audit report

 The auditor believes the overall financial statements are
so materially misstated or misleading that they do NOT
present fairly in accordance with the approved
accounting standards (after conducting adequate
investigation & have in-depth knowledge of the
unconformity).
 Uncommon & rarely used.

Emphasis of Matter
 ISA 706 – Emphasis of Matter Paragraphs and

Other Matter Paragraphs in the Independent
Auditor’s Report defines the following paragraphs:
a) Emphasis of matter: A paragraph included in the
auditor’s report that refers to a matter appropriately
presented or disclosed in the financial statements
that, in the auditor’s judgement, is of such importance
that it is fundamental to users’ understanding of the
financial statements.

Emphasis of Matter (cont.)
b) Other matter: A paragraph included in the auditor’s

report that refers to a matter other than those
presented or disclosed in the financial statements
that, in the auditor’s judgement, is relevant to users’
understanding of the audit, the auditor’s
responsibilities or the auditor’s report.

 Circumstances in which the auditor would issue

an unqualified report that includes an emphasis
of matter paragraph are:
a) An uncertainty relating to the future outcome of
exceptional litigation or regulatory action;

b) Early application (where permitted) of a new

accounting standard (for example, a new
International Financial Reporting Standard) that
has a pervasive effect on the financial statements
in advance of its effective date; and
c) A major catastrophe, or continues to have, a
significant effect on the entity’s financial position.

 When the auditor includes an Emphasis of Matter

paragraph in the auditor’s report, the auditor shall:
a) Include it immediately after the Opinion paragraph in the
auditor’s report;
b) Use the heading “Emphasis of Matter,” or other appropriate
heading;
c) Include in the paragraph a clear reference to the matter
being emphasized and to where relevant disclosures that
fully describe the matter can be found in the financial
statements; and
d) Indicate that the auditor’s opinion is not modified in
respect of the matter emphasized.
Communicating Key Audit
Matters in the Independent
Auditor’s Report
 For audits of complete sets of general purpose financial

statements of listed entities, the auditor shall
communicate key audit matters (KAM) in the auditor’s
report in accordance with ISA 701.
 The auditor shall describe each key audit matter, using
an appropriate subheading, in a separate section of the
auditor’s report under the heading “Key Audit Matters” .

Communicating Key Audit Matters
in the Independent Auditor’s
Report
 helps provide additional information to users of the
financial statements to assist them in understanding
those matters that, in the auditor’s professional
judgement, were of most significance in the audit of the
financial statements of the current period.
 also provide users of the financial statements with a
basis to further engage with management and those
charged with governance about certain matters relating
to the entity and the audited financial statements.

Conclusion
 An auditor’s report provides an opinion on the true

and fair view of a company’s financial statements.
 This report provides an overview of the evaluation
on the validity and reliability of the financial
statements.
 The goal of an auditor’s report is to document
reasonable assurance that the financial statements
are free from error or any misstatement.


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15

After studying this chapter, you should be able to:

FUNDAMENTALS OF AUDITING All Rights Reserved

Audit Opinion Formulation

FUNDAMENTALS OF AUDITING All Rights Reserved

 An audit report is a written opinion of an auditor

FUNDAMENTALS OF AUDITING All Rights Reserved

 ISA 700 (Revised) – Forming an Opinion and

FUNDAMENTALS OF AUDITING All Rights Reserved

1. Unqualified opinion- if the financial statements are a

FUNDAMENTALS OF AUDITING All Rights Reserved

 The objectives of an audit report is to communicate

FUNDAMENTALS OF AUDITING All Rights Reserved

FUNDAMENTALS OF AUDITING All Rights Reserved

FUNDAMENTALS OF AUDITING All Rights Reserved

 The typical audit report contains three paragraphs,

FUNDAMENTALS OF AUDITING All Rights Reserved

 According to ISA 700, an unqualified or unmodified

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 To enable users to understand the language of audit

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– No circumstances requiring an explanatory paragraph or

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FUNDAMENTALS OF AUDITING All Rights Reserved

FUNDAMENTALS OF AUDITING All Rights Reserved

 According to ISA 705 – Modifications to the Opinion

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(a) The nature of the matter giving rise to the

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 If the auditor concludes that the issue of an

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(b) Disclaimer audit report

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(c) Adverse audit report

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 ISA 706 – Emphasis of Matter Paragraphs and

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b) Other matter: A paragraph included in the auditor’s

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 Circumstances in which the auditor would issue

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b) Early application (where permitted) of a new

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 When the auditor includes an Emphasis of Matter

 For audits of complete sets of general purpose financial

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 An auditor’s report provides an opinion on the true

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