SESSION 11
AUDIT REPORT
1. ISA 700 THE INDEPENDENT AUDITOR’S REPORT ON A COMPLETE SET OF
GENERAL PURPOSE FINANCIAL STATEMENTS (REVISED)
2. ISA 701 MODIFICATIONS TO THE INDEPENDENT AUDITOR’S REPORT
Learning objective:
 describe and analyse the format and content of unmodified and modified
audit reports.
 The purpose of this International Standard on Auditing (ISA) is to establish
standards and provide guidance on the independent auditor’s report issued as
a result of an audit of a complete set of general purpose financial statements
prepared in accordance with a financial reporting framework that is designed
to achieve fair presentation.
 It also provides guidance on the matters the auditor considers in forming an
opinion on those financial statements.
Introduction:
 Forming an opinion as to whether the financial statements give a true and
fair view or are presented fairly, in all material respects, in accordance with
the applicable financial reporting framework involves evaluating whether the
financial statements have been prepared and presented in accordance with
the specific requirements of the applicable financial reporting framework for
particular classes of transactions, account balances and disclosures.
 This evaluation includes considering whether, in the context of the applicable
financial reporting framework:
1. The accounting policies selected and applied are consistent with the
financial reporting framework and are appropriate in the
circumstances.
2. The accounting estimates made by management are reasonable in the
circumstances.
3. The information presented in the financial statements, including
accounting policies, is relevant, reliable, comparable and
understandable.
4. The financial statements provide sufficient disclosures to enable users
to understand the effect of material transactions and events on the
information conveyed in the financial statements, for example, in the
case of financial statements prepared in accordance with International
Financial Reporting Standards (IFRSs), the entity’s financial position,
financial performance and cash flows.
Audit report
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 At the conclusion of the audit engagement, it is necessary for the auditor to
communicate to the members of the company via an audit report. This report
is a result of the review work carried out by the auditor.
 In addition the auditor will usually give feedback to management on the
matters arising from audit engagement in the form of a “management letter”.
This letter usually contains the weakness identified during the audit within the
clients accounting systems and procedures. Recommendation is also given to
improve and overcome the weakness within the system.
True and Fair View:
 For the financial statements to give a true and fair view they should contain
information that is sufficient in quantity and quality to enable financially
knowledgeable shareholders to obtain an understanding of the state of affairs
and profit or loss and is commensurate with both their reasonable needs and
expectations.

Fair: the information is presented fairly and not materially mis-stated.

True: the information in the financial statement is factual not
fictitious.
The auditors’ reporting duties
 Companies Legislation requires the auditor to form an opinion on the financial
statement whether or not:
-
The financial statements are true and fair and also the view of the
company’s state of affairs or group’s state of affairs.
-
The financial statements are properly prepared in accordance with
National Companies legislation.
 Proper accounting records have been kept
 All information and explanations has been received that was necessary for
the audit work.
 Adequate information received from branches not visited by the auditor
 The financial statement complies with accounting records and relevant
accounting standard.
 Director’s report is consistent with the financial statements.
 The director’s transaction has been completely and accurately disclosed.
Directors’ responsibility:
 To prepare financial statements that give a true and fair view and also
comply with the National Companies legislation and with relevant accounting
standard.
Audit report
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 To make reasonable and prudent judgements and accounting estimates
 Consistent application of proper accounting policies.
 To prepared the financial statements on the going concern basis.
 To maintain adequate accounting records
 To safeguard assets
 To prevent and detect fraud
INDEPENDENT AUDITOR’S REPORT
[Appropriate Addressee]
Report on the Financial Statements
We have audited the accompanying financial statements of ABC Company, which comprise the balance
sheet as at December 31, 20X1, and the income statement, statement of changes in equity and cash
flow statement for the year then ended, and a summary of significant accounting policies and other
explanatory notes.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
accordance with International Financial Reporting Standards. This responsibility includes: designing,
implementing and maintaining internal control relevant to the preparation and fair presentation of
financial statements that are free from material misstatement, whether due to fraud or error; selecting
and applying appropriate accounting policies; and making accounting estimates that are reasonable in
the circumstances.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We
conducted our audit in accordance with International Standards on Auditing. Those standards require
that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance whether the financial statements are free from material misstatement. An audit involves
performing procedures to obtain audit evidence about the amounts and disclosures in the financial
statements. The procedures selected depend on the auditor’s judgment, including the assessment of the
risks of material misstatement of the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control relevant to the entity’s preparation and
fair presentation of the financial statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s
internal control. An audit also includes evaluating the appropriateness of accounting policies used and
the reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements give a true and fair view of (or “present fairly, in all material
respects,”) the financial position of ABC Company as of December 31, 20X1, and of its financial
performance and its cash flows for the year then ended in accordance with International Financial
Reporting Standards.
Report on Other Legal and Regulatory Requirements
[Form and content of this section of the auditor’s report will vary depending on the nature of the
auditor’s other reporting responsibilities.]
Auditor’s signature
Audit report
Date of the auditor’s report
Auditor’s address
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Elements of the Auditor’s Report in an Audit Conducted in Accordance with
International Standards on Auditing:
 Consistency in the auditor’s report, when the audit has been conducted in
accordance with the ISAs, promotes credibility in the global marketplace by
making more readily identifiable those audits that have been conducted in
accordance with globally recognized standards.
 It also helps to promote the reader’s understanding and to identify unusual
circumstances when they occur.
Title
 The auditor’s report should have a title that clearly indicates that it is the
report of an independent auditor.
 A title indicating the report is the report of an independent auditor, for
example, “Independent Auditor’s Report,” affirms that the auditor has met all
of the relevant ethical requirements regarding independence and, therefore,
distinguishes the independent auditor’s report from reports issued by others.
Addressee
 The auditor’s report should be addressed as required by the circumstances of
the engagement.
 National laws or regulations often specify to whom the auditor’s report on
general purpose financial statements should be addressed in that particular
the auditor’s report when the audit has been conducted in accordance with
both ISAs and auditing standards of a specific jurisdiction or country. The
auditor’s report on general purpose financial statements is addressed to those
for whom the report is prepared, often either to the shareholders or to those
charged with governance of the entity whose financial statements are being
audited.
Introductory Paragraph
 The introductory paragraph in the auditor’s report should identify the entity
whose financial statements have been audited and should state that the
financial statements have been audited. The introductory paragraph should
also:
1. Identify the title of each of the financial statements that comprise the
complete set of financial statements.
2. Refer to the summary of significant accounting policies and other
explanatory notes.
3. Specify the date and period covered by the financial statements.
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Management’s Responsibility for the Financial Statements:
 Paragraph identifying directors responsibilities (as discussed above)
1. Designing, implementing and maintaining internal control relevant to
the preparation and fair presentation of financial statements that are
free from material misstatement, whether due to fraud or error.
2. Selecting and applying appropriate accounting policies.
3. Making accounting estimates that are reasonable in the
circumstances.
Unqualified opinion:
 When the financial statements give a true and fair view an unqualified
opinion should be expressed. It means that financial statement is free of
material errors and prepared in accordance with companies legislation and
comply with relevant accounting standard.
ISA 701 MODIFICATIONS TO THE INDEPENDENT AUDITOR’S REPORT
Modified Opinion
Qualified Opinion
Disclaimer of Opinion
Adverse Opinion
Modified opinion:
 A Qualified opinion be expressed when the auditor concludes that an
unqualified opinion cannot be expressed but that the effect of any
disagreement with management or limitation of scope is not so material and
pervasive as to require an adverse opinion or a disclaimer of opinion. A
qualified opinion should be expressed a being “except for “the effects of the
matter to which the qualification relates.
 A disclaimer of opinion should be expressed when the possible effects of a
limitation of scope is so material and pervasive that the auditor has not be
able to obtain sufficient appropriate audit evidence and accordingly is unable
to express an opinion on the financial statements.
 An adverse opinion should be expressed when the effect of a disagreement is
so material and pervasive to the financial statement that the auditor
concludes that a qualification of the report is not adequate to disclose the
misleading or incomplete nature of the financial statement.
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 There are 2 circumstances giving rise to audit qualification:
-
Disagreement
-
Limitation of scope
 Example of disagreement:
-
Disagreement over Accounting policies
Disagreement over accounting estimates
Disagreement over accounting disclosure notes
Lack or non -compliance with legislation and regulations
 Material but not fundamental:
-
This means that the matter which the auditor disagrees is significant
by is capable of isolation from the rest of the financial statements and
therefore does not distort the overall view given.
-
This form of qualification would be an Qualified opinion “ Expect for”.
 So material and pervasive:
-
In this situation the matter in question is so significant that it cannot
be isolated from the rest of the financial statements it pervades the
whole of the financial statements and therefore distort the overall
view given.
-
The opinion given would be an adverse opinion, i.e. the financial
statements do not give a true and fair view.
 Limitation Scope:
It means that the auditor could not obtain the evidence that was necessary to
form an opinion for example on whether or not one or more items in the
accounts is fairly stated. A limitation could arise because of:
-
Limitation imposed on the auditors by entity (auditor should not
accepts the appointment).
-
Limitation outside the control of directors and auditors (imposed by
circumstances for example appointed after physical inventory count or
lack of adequate accounting records).
 Examples of imposed limitations:
Audit report
-
Loss or corruptions of accounting records due to poor controls
-
Lack of access to the records of overseas branches
-
Refusal to allow the auditors to attend a physical inventories count.
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
Refusal to allow the auditors to perform a circularisation of trade
receivables.
Examples of Limitations outside the control of directors and auditors:
-
The auditors have been appointed after the inventories count was
performed.
-
Third party such as major customers or agent holding inventories
refuses to co-operate by returning confirmations.
-
External political circumstances such as revolutions or civil wars
 If the limitation of scope “so material and pervasive” that unable to express
opinion “Disclaimer of opinion” should be appropriate.
 If the limitation of scope is “not so material and pervasive” Qualified opinion
“except for” should be appropriate.
Sample of modified audit report:
Limitation on Scope
Example 1
Limitation on Scope—Disclaimer of Opinion
“We were engaged to audit the accompanying balance sheet of the
ABC Company as of December 31, 2001, and the related statements of income and cash flows for
the year then ended. These financial statements are the responsibility of the Company’s
management.
(Omit the sentence stating the responsibility of the auditor).
(The paragraph discussing the scope of the audit would either be omitted or amended according
to the circumstances.)
(Add a paragraph discussing the scope limitation as follows:)
We were not able to observe all physical inventories and confirm accounts receivable due to
limitations placed on the scope of our work by the Company. Because of the significance of the
matters discussed in the preceding paragraph, we do not express an opinion on the financial
statements.”
Audit report
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Example 2
Limitation on Scope—Qualified Opinion
“We have audited ... (remaining words are the same as illustrated in
the introductory paragraph ).
Except as discussed in the following paragraph, we conducted our audit in accordance with ...
(remaining words are the same as illustrated in the scope paragraph ). We did not observe the
counting of the physical inventories as of
December 31, 2001, since that date was prior to the time we were initially engaged as auditors for
the Company. Owing to the nature of the Company’s records, we were unable to satisfy ourselves
as to inventory quantities by other audit procedures.
In our opinion, except for the effects of such adjustments, if any, as might have been determined
to be necessary had we been able to satisfy ourselves as to physical inventory quantities, the
financial statements give a true and ... (remaining words are the same as illustrated in the opinion
paragraph).”
Disagreement with Management:
Example 3
Disagreement on Accounting Policies—Inappropriate Accounting Method- Qualified Opinion
“We have audited ... (remaining words are the same as illustrated in the introductory paragraph).
We conducted our audit in accordance with ... (remaining words are the same as illustrated in the
scope paragraph). As discussed in Note X to the financial statements, no depreciation has been
provided in the financial statements which practice, in our opinion, is not in accordance with
International Accounting Standards. The provision for the year ended December 31, 2001, should
be xxx based on the straight-line method of depreciation using annual rates of 5% for the building
and 20% for the equipment.
Accordingly, the fixed assets should be reduced by accumulated depreciation of xxx and the loss
for the year and accumulated deficit should be increased by xxx and xxx, respectively.
In our opinion, except for the effect on the financial statements of the matter referred to in the
preceding paragraph, the financial statements give a true and ... (remaining words are the same
as illustrated in the opinion paragraph).”
Example 4
Disagreement on Accounting Policies—Inadequate Disclosure—
Qualified Opinion
“We have audited ... (remaining words are the same as illustrated in the introductory paragraph).
We conducted our audit in accordance with ... (remaining words are the same as illustrated in the
scope paragraph). On January 15, 2002, the Company issued debentures in the amount of xxx for
the purpose of financing plant expansion. The debenture agreement restricts the payment of
future cash dividends to earnings after December 31, 19X1. In our opinion, disclosure of this
information is required by:
In our opinion, except for the omission of the information included in the preceding paragraph, the
financial statements give a true and ...
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INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF XYZ PLC
We have audited the financial statements of (name of entity) for the year ended ...
which comprise [specify the financial statements, such as the Group and Parent
Company Statements of Financial Position, the Group and Parent Company
Statements of Comprehensive Income, the Group and Parent Company Statements
of Cash Flows, the Group and Parent Company Statements of Changes in Equity,]
and the related notes1. The financial reporting framework that has been applied in
their preparation is applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union.
Respective responsibilities of directors and auditors
As explained more fully in the Directors’ Responsibilities Statement [set out [on
pages...]], the directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view. Our
responsibility is to audit the financial statements in accordance with applicable law
and International Standards on Auditing (UK and Ireland). Those standards require
us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for
Auditors.
Scope of the audit of the financial statements
Opinion on financial statements
In our opinion the financial statements:

give a true and fair view of the state of the group’s and the parent company’s
affairs as at ... and of the group’s and the parent company’s profit [loss] for the
year then ended;

have been properly prepared in accordance with IFRSs as adopted by the
European Union; and

have been prepared in accordance with the requirements of the Companies Act
2006 and, as regards the group financial statements, Article 4 of the IAS
Regulation.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:

the part of the Directors’ Remuneration Report to be audited has been properly
prepared in accordance with the Companies Act 2006; and

the information given in the Directors’ Report for the financial year for which the
financial statements are prepared is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
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
adequate accounting records have not been kept, or returns adequate for our
audit have not been received from branches not visited by us; or

the parent company financial statements and the part of the Directors’
Remuneration Report to be audited are not in agreement with the accounting
records and returns; or

certain disclosures of directors’ remuneration specified by law are not made;
or

we have not received all the information and explanations we require for our
audit.
Under the Listing Rules we are required to review:

the directors’ statement, [set out [on page]], in relation to going concern;
and

the parts of the Corporate Governance Statement relating to the company’s
compliance with the nine provisions of the [2006] [June 2008]2 Combined
Code specified for our review.
[Signature] Address
John Smith (Senior statutory auditor) Date
for and on behalf of ABC LLP, Statutory Auditor
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