Chartered Accountants Audit Conference
Problem Audit Reports
Andrew Stringer
Head of Audit
The Institute of Chartered Accountants in Australia
Heather Watson
Director, Financial Audit Services
The Audit Office of NSW
charteredaccountants.com.au
Problem Audit Reports
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The “old” – AUS 702 and AUS 802
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The “new” – ASA 700, ASA 701 and ASA 800
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Problem audit reports –
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•
Uncertainty in general
•
Going concern issues
•
Scope limitations
•
Emphasis of matter requirements
•
Events occurring after balance date affecting audit report
•
“Except for” opinions
•
Denials of opinion
•
Adverse opinions
Corporations Act breach reporting
Audit reports – the “old”
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AUS 702 – The audit report on a general
purpose financial report
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AUS 802 – The audit report on financial
information other than a general purpose
financial report
Other
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Guidance Note issued July 2003 by the AuASB
- issued in Australia knowing that changes
being proposed at international level – clearer
and more informative – optional – improved
structure & wording
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Auditing Guidance Statement – AGS 1028 –
“Uncertainty” – now withdrawn
Audit reports – the “old”
AUS 702 and AUS 802 – format of the audit
report
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Title, addressee, signature, address & date
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Scope section (AUS 802 included ref to reason
for preparation of the special purpose financial
report)
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Audit opinion
Audit reports – the “new”
THE AUDIT REPORT
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Old AUS 702 now split into two standards
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ASA 700 – The auditor’s report on a general purpose financial report
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ASA 701 – Modifications to the auditor’s report
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Split into:
A. Emphasis of matter
B. Other than unqualified
i.
Qualified opinions (old – “except for”)
ii. Disclaimers of opinion (old – “inability to form opinion”)
iii. Adverse opinions
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Effective for financial reporting periods commencing on or after 1 July 2006
Audit reports – the “new”
THE AUDIT REPORT
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Old AUS 802 “The Audit Report on Financial Information other
than a General Purpose Financial Report”
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Replaced by ASA 800 “The Auditor’s Report on Special
Purpose audit Engagements”
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Effective for financial reporting periods commencing on or after 1
July 2006
Audit reports – the “new”
Terminology used & applicable standard
Unqualified
Unmodified
Other than
Unqualified
ASA 700
Emphasis of Matter
ASA 701
Modified
ASA 701
Qualified
ASA 701
Disclaimer
ASA 701
Adverse
ASA 701
Audit reports – the “new”
MANDATORY REQUIREMENTS - THE AUDIT REPORT NEEDS
1. Title and Addressee
2. Identify entity, what has been audited, and period covered
3. Responsibility of Those Charged with Governance for Financial
Report (Directors’ responsibility for the financial report)
4. Auditor’s responsibility (what we used to call the ‘scope’
paragraph)
5. Statement of independence (required for Corporations Act audits
– recommended for all others)
6. Audit opinion
Audit reports – the “new” (ASA 700)
6
The auditor’s report shall contain a clear expression of the
auditor’s opinion on the financial report
8
Unless required by law or regulation to use different wording,
the auditor’s opinion on a general purpose financial report
prepared in accordance with a financial reporting framework
that is designed to achieve fair presentation shall state whether
the financial report “gives a true and fair view” or “presents
fairly, in all material respects,” in accordance with the
applicable financial reporting framework.
15 The auditor shall evaluate the conclusions drawn from the audit
evidence obtained as the basis for forming an opinion on the
financial report.
Audit reports – the “new” (ASA 700)
TITLE
23 The auditor’s report shall have a title that clearly indicates
that it is the report of an independent auditor
ADDRESSEE
25 The auditor’s report shall be addressed as required by the
circumstances of the engagement
Audit reports – the “new” (ASA 700)
INTRODUCTORY PARAGRAPH
27 The introductory paragraph in the auditor’s report shall
identify the entity whose financial report has been audited
and shall state that the financial report has been audited.
The introductory paragraph shall also:
(a) identify the title of each of the financial statements
that comprise the financial report;
(b) refer to the summary of significant accounting
policies, other explanatory notes and, when
appropriate, the directors’ declaration; and
(c) specify the date and period covered by the financial
report
Audit reports – the “new” (ASA 700)
THE RESPONSIBILITY OF THOSE CHARGED WITH GOVERNANCE
FOR THE FINANCIAL REPORT
33 The auditor’s report shall state that those charged with
governance are responsible for the preparation and the fair
presentation of the financial report in accordance with the
applicable financial reporting framework and that this
responsibility includes:
(a) establishing (previously “designing, implementing”) and
maintaining internal controls relevant to the preparation
and fair presentation of the financial report that is free
from material misstatement, whether due to fraud or error;
(b) selecting and applying appropriate accounting policies;
and
(c) making accounting estimates that are reasonable in the
circumstances
Audit reports – the “new” (ASA 700)
AUDITOR’S RESPONSIBILITY
37 The auditor’s report shall state that the responsibility of
the auditor is to express an opinion on the financial report
based on the audit
39 The auditor’s report shall state that the audit was
conducted in accordance with Australian Auditing
Standards. The auditor’s report shall also explain that
those standards require that the auditor complies with
relevant ethical requirements relating to audit
engagements and that the auditor plans and performs the
audit to obtain reasonable assurance whether the financial
report is free from material misstatement
Audit reports – the “new” (ASA 700)
AUDITOR’S RESPONSIBILITY
42 The auditor’s report shall describe an audit by stating that:
(a) an audit involves performing procedures to obtain
audit evidence about the amounts and disclosures in
the financial report;
Audit reports – the “new” (ASA 700)
AUDITOR’S RESPONSIBILITY (cont’d)
42
The auditor’s report shall describe an audit by stating that:
(b) the procedures selected depend on the auditor’s judgement,
including the assessment of the risks of material misstatement of the
financial report, whether due to fraud or error. In making those risk
assessments, the auditor shall consider internal control relevant to
the entity’s preparation and fair presentation of the financial report 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. In circumstances
when the auditor also has a responsibility to express an opinion on
the effectiveness of internal control in conjunction with the audit of
the financial report, the auditor shall omit the phrase that the
auditor’s consideration of internal control is not for the purpose of
expressing an opinion on the effectiveness of internal control; and
Audit reports – the “new” (ASA 700)
AUDITOR’S RESPONSIBILITY (cont’d)
42 The auditor’s report shall describe an audit by stating that:
(c) an audit also includes evaluating the appropriateness of the
accounting policies used, the reasonableness of accounting
estimates made by those charged with governance, as well as
the overall presentation of the financial report
Audit reports – the “new” (ASA 700)
AUDITOR’S RESPONSIBILITY
43 The auditor’s report shall state that the auditor believes
that the audit evidence the auditor has obtained is
sufficient and appropriate to provide a basis for the
auditor’s opinion.
Audit reports – the “new” (ASA 700)
AUDITOR’S OPINION
44 An unqualified opinion shall be expressed when the
auditor concludes that the financial report gives a true and
fair view or presents fairly, in all material respects, in
accordance with the applicable financial reporting
framework.
Audit reports – the “new” (ASA 700)
AUDITOR’S OPINION
45 When expressing an unqualified opinion, the auditor shall
include a section headed “Auditor’s Opinion”. The
opinion paragraph of the auditor’s report shall state the
auditor’s opinion that the financial report gives a true and
fair view or presents fairly, in all material respects, in
accordance with the applicable financial reporting
framework (unless the auditor is required by law or
regulation to use different wording for the opinion, in
which case the prescribed wording shall be used).
Audit reports – the “new” (ASA 700)
AUDITOR’S OPINION
46 When Australian Accounting Standards are not used as
the financial reporting framework, the reference to the
financial reporting framework in the wording of the
opinion shall identify the jurisdiction or country of origin
of the financial reporting framework.
Audit reports – the “new” (ASA 700)
CHANGE EFFECTIVE FOR 30 JUNE 2007 YEAR ENDS
ONWARDS
49A When an entity, in accordance with Accounting Standard
AASB 101 Presentation of Financial Statements, has
included in the notes to the financial statements, an
explicit and unreserved statement of compliance with
International Financial Reporting Standards (IFRSs), and
the auditor agrees with the entity’s statement of
compliance, the auditor shall state that in the auditor’s
opinion, the financial report complies with IFRSs.
Audit reports – the “new” (ASA 700)
OTHER REPORTING RESPONSIBILITIES
51 When the auditor addresses other reporting
responsibilities within the auditor’s report on the financial
report, these other reporting responsibilities shall be
included in a separate section in the auditor’s report that
follows the opinion paragraph.
Audit reports – the “new” (ASA 700)
AUDITOR’S SIGNATURE
53 The auditor’s report shall be signed in one or more of the
name of the audit firm, the name of the audit company or
the personal name of the auditor, as appropriate.
Audit reports – the “new” (ASA 700)
DATE OF THE AUDITOR’S REPORT
54 The auditor’s report shall be dated as of the date the auditor
signs that report. The auditor shall date the auditor’s report
on the financial report no earlier than the date on which the
auditor has obtained sufficient appropriate audit evidence
on which to base the opinion on the financial report.
Sufficient appropriate audit evidence shall include evidence
that the entity’s financial report has been prepared and that
those charged with governance have asserted that they
have taken responsibility for it.
Audit reports – the “new” (ASA 700)
AUDITOR’S ADDRESS
58 The report shall name the location in the country or
jurisdiction where the auditor practices.
OTHER
59 The auditor’s report shall be in writing.
Audit reports – the “new” (ASA 700)
AUDITOR’S REPORT FOR AUDITS CONDUCTED IN
ACCORDANCE WITH BOTH AUSTRALIAN AUDITING STANDARDS
AND INTERNATIONAL STANDARDS ON AUDITING
62
The auditor may conduct the audit in accordance with both the
Australian Auditing Standards and the International Standards on
Auditing (“ISAs”) issued by the International Auditing and Assurance
Standards Board (“IAASB”). The conformity section explains the
relationship of this Auditing Standard with its equivalent ISA issued by
the IAASB.
63
The auditor’s report shall refer to the audit having been
conducted in accordance with the Australian Auditing Standards
and ISAs only when the auditor has complied fully with all of the
Auditing Standards and ISAs relevant to the audit.
Audit reports – the “new” (ASA 700)
UNAUDITED SUPPLEMENTARY INFORMATION
PRESENTED WITH AN AUDITED FINANCIAL REPORT
64 The auditor shall be satisfied that any supplementary
information presented together with the financial report
that is not covered by the auditor’s opinion is clearly
differentiated from the audited financial report.
67 If the auditor concludes that the entity’s presentation of
any unaudited supplementary information does not
differentiate it sufficiently from the audited financial
report, the auditor shall explain in the auditor’s report that
that information has not been audited.
Audit reports – the “new” (ASA 700)
WORDING FOR 30 JUNE 2007 YEAR ENDS ONWARDS (where there is
a statement of compliance with IFRS)
Directors’ Responsibility for the Financial Report
The directors of the company are responsible for the preparation and fair
presentation of the financial report in accordance with Australian
Accounting Standards (including the Australian Accounting
Interpretations) and the Corporations Act 2001. This responsibility
includes establishing and maintaining internal control relevant to the
preparation and fair presentation of the financial report that is 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. [In note XX, the
Directors also state, in accordance with Accounting Standard AASB 101
Presentation of Financial Statements, that compliance with the Australian
equivalents to International Financial Reporting Standards (IFRSs)
ensures that the financial report, comprising the financial statements and
notes, complies with IFRSs. ]
Audit reports – the “new” (ASA 700)
WORDING FOR 30 JUNE 2007 YEAR ENDS ONWARDS (where there is a
statement of compliance with IFRS)
Auditor’s Opinion
In our opinion:
(a) the financial report of [name of entity] is in accordance with the
Corporations Act 2001, including:
(i) giving a true and fair view of the [company/registered scheme/disclosing
entity]’s financial position as at 30 June 20XX and of its performance
for the year ended on that date;
and
(ii) complying with Australian Accounting Standards (including the
Australian Accounting Interpretations) and the Corporations
Regulations 2001; and
(b) the financial report also complies with International Financial
Reporting Standards as disclosed in Note XX.
Special Purpose Audit Engagements
– (ASA 800)
ASA 800 “The Auditor’s Report on Special Purpose Audit
Engagements” applies to four audit engagements:
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Financial reports prepared in accordance with a comprehensive
alternative basis of accounting
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Components of financial reports
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Compliance with contractual agreements
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Summarised financial reports.
Special Purpose Financial Reports –
(ASA 800)
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Financial reports designed to meet the needs of specific users
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Financial reports prepared in accordance with an alternative
comprehensive basis of accounting are often referred to as ‘special
purpose financial reports’
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Financial reports prepared in accordance with all recognition and
measurement requirements (but not the disclosure requirements) of
accounting standards are special purpose
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Auditor’s report must identify the basis of accounting applied
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Auditor reports on whether financial report is prepared in accordance
with the basis of accounting
Special Purpose Financial Reports –
(ASA 800)
WORDING FOR SPECIAL PURPOSE FINANCIAL REPORT OPINIONS
“We have audited the accompanying financial report, being a special purpose
financial report…”
“Those charged with governance …have determined that the accounting
policies described in Note 1 are appropriate to meet the financial reporting
requirements…”
“No opinion is expressed as to whether the accounting policies used, as
described in Note 1, are appropriate to meet the needs of the members.”
“In our opinion, the financial report presents fairly…in accordance with the
accounting policies described in Note 1…”
Components of a financial report –
(ASA 800)
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Engagement may be undertaken in conjunction with an audit of an
entity’s financial report, or as a separate engagement
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Components include a single financial statement (e.g. balance
sheet), an account balance or line item from a financial report (e.g.
accounts receivable)
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Auditor’s report must identify the basis of accounting
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“In our opinion, the schedule of accounts receivable…presents
fairly the accounts receivable of the entity as of [date] in
accordance with the Australian Accounting Standards that are
relevant to the preparation and presentation of the schedule of
accounts receivable”
Compliance with contractual agreements –
(ASA 800)
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ASA 800 only addresses contractual agreements when the overall
aspects of compliance relate to accounting and financial matters
(otherwise consider ASAE 3000 “Assurance Engagements other
than Audits or Reviews of Historical Financial Information”)
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Auditor’s opinion relates to compliance with particular provisions of
the agreement
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“In our opinion, the entity was, in all material respects, in
compliance with the accounting and financial reporting matters of
the agreement”
Summarised financial report – (ASA 800)
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A financial report summarising the annual audited financial report –
not a concise financial report prepared in accordance with AASB
1039 “Concise Financial Reports”
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Auditor cannot report on a summarised financial report unless they
have also reported on the “full” financial report
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Auditor reports on whether the summarised financial report is
consistent with the audited financial report
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“In our opinion, the information…is, in all material respects,
consistent with the financial report from which it was derived”
Other ASA 800 considerations
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Many prescribed auditor’s reports do not comply with auditing standards
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An audit engagement does not provide sufficient assurance to “certify”
that information is correct
13. When requested to report in a prescribed format, the auditor shall
consider the substance and wording of the prescribed report and,
when necessary, shall make appropriate changes to conform to the
requirements of this Auditing Standard
>
The basic elements of an ASA 800 auditor’s report are similar to those
required by ASA 700. Refer to paragraph 9 for basic elements and
appendices of ASA 800 for templates
Corporations Act Requirements – Part 2M.3
These could be ASA 700 or ASA 800 engagements.
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Duty to form an opinion whether financial report:
•
Complies with accounting standards
•
Gives a true and fair view
•
Any additional information was necessary to give a true and fair view
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Whether auditor given all info, explanations and assistance necessary for
conduct of audit
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Whether entity kept financial records sufficient to enable financial report to
be prepared and audited
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Whether entity kept other records and registers as required by Act
Corporations Act Requirements – Part 2M.3
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Auditor must report to members
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If don’t comply with accounting standards, auditor must, to the extent
practicable, quantify the effect of non-compliance. If this not
practicable, report must say why
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Audit report must describe any defect or irregularity in the financial
report
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Audit report must include any statements or disclosures required by
the auditing standards
>
Include a statement of auditor’s opinion on whether the inclusion of
any additional information the entity included to give a true and fair
view, was necessary to give a true and fair view
Corporations Act Requirements – Part 2M.3
Auditor’s independence declaration
Auditor must give the directors of the company, registered scheme or
disclosing entity:
(a) a written declaration that, to the best of the auditor’s knowledge
and belief, there have been:
(i) no contraventions of the auditor independence requirements of
the Act in relation to the audit or review; and
(ii) no contraventions of any applicable code of professional
conduct in relation to the audit or review; or
(b) a written declaration that, to the best of the individual auditor’s
knowledge and belief, the only contraventions of:
(i) the auditor independence requirements of the Act in relation to
the audit or review; or
(ii) any applicable code of professional conduct in relation to the
audit or review,
are those contraventions details of which are set out in the
declaration.
Corporations Act – Breach Reporting
Does an audit qualification for non-compliance with accounting
standards require notification to ASIC under Section 311 of the
Corporations Act?
A: Yes, a notification to ASIC would usually be required in these
circumstances
Under Section 311(1)(a) of the Corporations Act, an auditor is required
to notify ASIC if the auditor has reasonable grounds to suspect a
contravention of the Act and they believe that the contravention is
either significant or, if not significant, cannot be adequately dealt with
by inclusion in the audit report or by bringing it to the attention of the
directors
Corporations Act – Breach Reporting
Section 311 of the Corporations Act
>
Auditor has to notify ASIC in writing within 28 days of becoming
aware:
i. Have reasonable grounds to suspect a contravention of the
Act
ii. Or an attempt to unduly influence, coerce manipulate or
mislead a person involved in conduct of audit
IF
>
>
The contravention is significant, OR
The contravention is not significant and the auditor believes it has
not or will not be adequately dealt with by comment in the audit
report or bringing to the attention of directors
Corporations Act – Breach Reporting
ASIC – Regulatory Guide 34 (re-issued December 2007)
(previously Practice Note 34) clarifies auditor’s obligations
>
Guidance to help auditors comply with S311 (and S601HG – AFS
licensees) reporting obligations
>
What considered to be significant contraventions
>
Suspected contraventions that are unlikely to be significant include:
• Isolated relatively minor failure to assist auditor
• Entity’s failure to lodge accounts where required (NB – however if
the failure continues – auditor should notify ASIC)
Audit report wording
Is this wording acceptable?
In our opinion, except for our inability to form an opinion
on (the nature of the uncertainty), the financial report
presents fairly in accordance with . . .
Audit report wording
Generally “No”
>
Cannot qualify your way out of doing audit work
>
You must do enough audit work to be able to form an opinion
>
However, it may be acceptable if uncertainty relates to a
disagreement with management or scope limitation
>
The uncertainty could possible result in an “emphasis of matter”
• where effect of matter not capable of reasonable estimation
• potential for matter to affect financial report not so remote as to
make its disclosure irrelevant
Audit report wording
THE AUDIT REPORT – WHAT’S WRONG WITH THIS?
I have examined the records of ABC Pty Ltd for the year ended 30
June 2006.
For most of the year the accounts were properly maintained
however three times during the year clients were paid money in
excess of funds held in the trust and the money was outstanding
for some weeks. This is unacceptable without Principal’s funds
being held in the account to cover such overpayments.
The trust has only been used in relation to transactions for client
funds that have been received and require disbursement on behalf
of clients.
Audit reports – the “new”
Terminology used & applicable standard
Unqualified
Unmodified
Other than
Unqualified
ASA 700
Emphasis of Matter
ASA 701
Modified
ASA 701
Qualified
ASA 701
Disclaimer
ASA 701
Adverse
ASA 701
Circumstances for modification – the “old”
Type of modification
Circumstances
Material but not
extreme
Extreme*
Scope limitation
“Except for”
Inability to form
opinion
Disagreement with management (including
inherent uncertainty not adequately disclosed)
“Except for”
Adverse
Conflict between applicable financial reporting
frameworks
“Except for”
Adverse
* Extreme – where effects or possible effects are so material that auditor is unable
to obtain sufficient appropriate audit evidence, or where an unqualified opinion is
inadequate to disclose the misleading or incomplete nature of financial report
Circumstances for modification – the “new”
Type of modification
Circumstances
Material but not
extreme
Extreme*
Scope limitation
Qualified
Disclaimer
Disagreement with those charged with
governance
Qualified
Adverse
Conflict between applicable financial reporting
frameworks
Qualified
Adverse
* Extreme – where effects or possible effects are so material that auditor is unable
to obtain sufficient appropriate audit evidence, or where an unqualified opinion is
inadequate to disclose the misleading or incomplete nature of financial report
Circumstances for modification – the “old”
Circumstances
Type of Modification
Inherent uncertainty (going concern or other) that is
adequately disclosed
Unqualified opinion with
emphasis of matter
Additional disclosures with which the auditor concurs
Unqualified opinion with
emphasis of matter
Accompanying information is inconsistent with audited
financial report
Unqualified opinion with
emphasis of matter
Subsequent event creates new conditions which did not
exist at reporting date and which render going concern
basis inappropriate, and this is adequately disclosed
Unqualified opinion with
emphasis of matter
Subsequent event results in a new audit report on a
revised financial report
Unqualified opinion with
emphasis of matter
Circumstances for modification – the “new”
Circumstances
Type of Modification
Significant uncertainty – going concern
Emphasis of matter
Significant uncertainty – other
Emphasis of matter
Additional disclosures with which the auditor concurs
Emphasis of matter
Inconsistent other information
Emphasis of matter
Subsequent event resulting in a new auditor’s report on
a revised financial report
Emphasis of matter
Modified Audit reports (ASA 701)
SIGNIFICANT UNCERTAINTY – GOING CONCERN
9
The auditor shall modify the auditor’s report by adding a
paragraph to highlight a significant uncertainty regarding a
going concern problem.
SIGNIFICANT UNCERTAINTY – OTHER
11 The auditor shall modify the auditor’s report by adding a
paragraph if there is a significant uncertainty (other than a
significant uncertainty regarding a going concern problem), the
resolution of which is dependent upon future events and which
may materially affect the financial report.
Modified Audit reports (ASA 701)
ADDITIONAL DISCLOSURES
15 When an unqualified opinion is expressed in the rare circumstances described
in paragraph 34, the auditor’s report shall include an emphasis of matter section
headed "Application of Australian Accounting Standard AASB ..." which:
(a) draws attention to the additional disclosures;
(b) states that in the auditor's opinion application of the particular
Accounting Standard has, in this instance, resulted in the financial report
being potentially misleading;
(c) states the specific reasons why the auditor believes the additional
disclosures are necessary to ensure the financial report as a whole is not
misleading (the auditor's reasons are to be stated in the auditor’s report
itself rather than only by reference to the reasons included in the financial
report); and
(d) states that, in the auditor's opinion, the additional disclosures are
relevant and reliable in meeting the objectives of the financial report.
Modified Audit reports (ASA 701)
INCONSISTENT OTHER INFORMATION
17 When information in a document containing the audited
financial report is materially inconsistent with that
financial report, the auditor’s report shall include an
emphasis of matter section describing the material
inconsistency.
Modified Audit reports (ASA 701)
SUBSEQUENT EVENTS RESULTING IN A NEW AUDITOR’S
REPORT ON A REVISED FINANCIAL REPORT
19
When a financial report and the auditor’s report thereon
have been issued, and a fact is discovered that leads
those charged with governance to prepare a revised
financial report, the new auditor’s report on the revised
financial report shall include an emphasis of matter
paragraph. That paragraph shall refer to a note to the
financial statements that more extensively discusses the
reason for the revision of the previously issued financial
report, and to the earlier report issued by the auditor.
Modified Audit reports (ASA 701)
MATTERS THAT DO AFFECT THE AUDITOR’S OPINION
22 A qualified opinion shall be expressed when the auditor
concludes that an unqualified opinion cannot be expressed
but that the effect of any disagreement with those charged
with governance, a conflict between applicable financial
reporting frameworks or limitation on scope is not so material
and pervasive as to require an adverse opinion or a disclaimer
of opinion. A qualified opinion shall be expressed as being
“except for” the effects of the matter to which the qualification
relates.
The opinion paragraph shall be headed “Qualified Auditor’s
Opinion”.
Modified Audit reports (ASA 701)
MATTERS THAT DO AFFECT THE AUDITOR’S OPINION
23 A disclaimer of opinion shall be expressed when the
possible effect of a limitation on scope is so material and
pervasive that the auditor has not been able to obtain
sufficient appropriate audit evidence and accordingly is
unable to express an opinion on the financial report. The
opinion paragraph shall be headed “Disclaimer of
Auditor’s Opinion”.
Modified Audit reports (ASA 701)
MATTERS THAT DO AFFECT THE AUDITOR’S OPINION
24 An adverse opinion shall be expressed when the effect of
a disagreement or a conflict between applicable financial
reporting frameworks is so material and pervasive to the
financial report that the auditor concludes that a
qualification of the auditor’s report is not adequate to
disclose the misleading or incomplete nature of the
financial report. The opinion paragraph shall be headed
“Adverse Auditor’s Opinion”.
Modified Audit reports (ASA 701)
MATTERS THAT DO AFFECT THE AUDITOR’S OPINION
25 Whenever the auditor expresses an opinion that is other
than unqualified, a clear description of all the substantive
reasons shall be included in the auditor’s report and,
unless impracticable, a quantification of the possible
effect(s) on the financial report. If the effects or possible
effects are incapable of being measured reliably, a
statement to that effect and the reasons therefore shall be
included in the basis for modification paragraph of the
auditor’s report.
Modified Audit reports (ASA 701)
MATTERS THAT DO AFFECT THE AUDITOR’S OPINION
27 When a major component of the financial report has been
omitted, or is fundamentally misstated and the auditor is
unable to generate the required information necessary to
fully detail the financial effect of the matter, the auditor’s
report shall include a statement indicating that the
financial effect of the omission has not been detailed and
the reasons therefore.
Modified Audit reports (ASA 701)
CIRCUMSTANCES THAT MAY RESULT IN OTHER THAN AN
UNQUALIFIED OPINION
Limitation on Scope
31 When there is a limitation on the scope of the auditor’s
work that requires expression of a qualified opinion or a
disclaimer of opinion, the auditor’s report shall describe
the limitation and indicate the possible adjustments to the
financial report that might have been determined to be
necessary had the limitation not existed.
Modified Audit reports (ASA 701)
CIRCUMSTANCES THAT MAY RESULT IN OTHER THAN AN
UNQUALIFIED OPINION
Disagreement with those Charged with Governance
33 If disagreements between the auditor and those charged
with governance about the acceptability, selection,
application or adequacy of disclosures in the financial
report are material to the financial report, the auditor shall
express a qualified or an adverse opinion.
Modified Audit reports (ASA 701)
CIRCUMSTANCES THAT MAY RESULT IN OTHER THAN AN UNQUALIFIED
OPINION
Disagreement with those Charged with Governance
34 When the financial report has been prepared in accordance with Australian
Accounting Standards but additional disclosures have been made in the financial
report on the basis that, or which imply that, application of a particular Accounting
Standard has resulted in the financial report being potentially misleading, a qualified
opinion shall be expressed in relation to the additional disclosures, unless the
auditor is of the opinion that:
(a) it is likely, in the absence of the additional disclosures, that users would be
misled when making evaluations or decisions about the allocation of scarce
resources; and
(b) the additional disclosures contain all, and only, relevant and reliable
information, and are presented in such a manner as to ensure the financial
report as a whole is comparable and understandable in meeting the objectives
of the financial report. When these circumstances exist, the auditor shall apply
the mandatory requirements in paragraph 15.
Modified Audit reports (ASA 701)
CIRCUMSTANCES THAT MAY RESULT IN OTHER THAN AN
UNQUALIFIED OPINION
Conflict Between Applicable Financial Reporting Frameworks
35 When the application of accounting policies required or
allowed by relevant statutory and other requirements has not
resulted in a fair presentation in accordance with Australian
Accounting Standards:
(a) an unmodified opinion shall be expressed with respect to
presentation in accordance with relevant statutory and other
requirements; and
(b) a qualified or adverse opinion shall be expressed with
respect to presentation in accordance with Australian
Accounting Standards as appropriate.
Modified Audit reports (ASA 701)
CIRCUMSTANCES THAT MAY RESULT IN OTHER THAN AN
UNQUALIFIED OPINION
Conflict Between Applicable Financial Reporting Frameworks
36 When the accounting policies applied are contrary to
those required by relevant statutory and other
requirements, the auditor’s opinion shall be modified with
respect to presentation in accordance with those
requirements, whether or not the auditor's opinion with
respect to presentation in accordance with Australian
Accounting Standards is modified.
Going concern – considerations (ASA 570)
Does initial risk
assessment indicate that
the probability of going
concern problems arising
is low?
N
Do modified audit
procedures indicate a
reasonable expectation
the entity will continue as
a going concern?
Y
Y
Issue an unmodified
audit report (para 35)
Y
N
Y
N
Is it highly improbable the
entity will continue as a
going concern?
Do results of other audit
procedures support initial
risk assessment?
N
Have mitigating
circumstances been
adequately disclosed?
Is there adequate
disclosure of the
significant uncertainty?
N
Express qualified
opinion (inadequate
disclosure) (para 36)
Y
Express unqualified
opinion. Add emphasis
of matter (para 39)
N
Y
Express adverse opinion
(going concern basis
inappropriate (para 43)
Express qualified or
adverse opinion
(inadequate disclosure)
(para 41)
Some examples – emphasis of matter
>
Audit report worded as normal
>
Additional paragraph:
Significant Uncertainty Regarding Litigation
Without qualifying our opinion, as discussed in Note x to the
financial statements, the company is a defendant in a lawsuit
alleging infringement of certain patent rights and claiming
royalties and punitive damages. The company has filed a
counter action and preliminary hearings and discovery
proceedings on both actions are in progress. The ultimate
outcome of the matter cannot be currently determined, and no
provision has been made in the financial statements for any
liability that may result.
Some examples – going concern
Included with the accounting policy notes.
Going concern
The financial report has been prepared on a going concern basis,
which contemplates continuity of normal business activities, the
realisation of assets and the settlement of liabilities in the ordinary
course of business.
The company incurred a loss from ordinary activities after income
tax of $xxxx (2006: $xxxx) and net operating cash outflows of
$xxxx (2006: outflow of $xxxx), for the year ended 30 June 2007,
and has equity of $xxxx (2006: $xxxx) as at 30 June 2007. The
Directors nevertheless believe that it is appropriate to prepare the
consolidated financial statements on a going concern basis for the
following reasons:
Some examples – going concern (cont’d)
Included with the accounting policy notes.
Going concern
At 30 June 2007, the entity had a cash balance of $xxxxxxx and net current
assets of $xxxxxxx;
Since 30 June 2007, the entity has continued with strategies to reduce cash
usage commenced at the start of the 2007 financial year;
The entity prepares revenue and cash flow forecasts which are reviewed and
updated monthly. Based on these forecasts, the company is expected to
generate sufficient cash flow to ensure that there are sufficient funds available
to pay debts as they fall due.
The ability of the company to continue to pay its debts as and when they fall
due is dependent upon the continuing financial support of its principal
shareholder and the ability to generate sufficient cash flows in the future.
Audit report – emphasis of matter
>
Audit report worded as normal
>
Additional paragraph:
Material Uncertainty Regarding Continuation as a Going
Concern
Without qualifying our opinion, we draw attention to Note X in the
financial report which indicates that the company incurred a net
loss of $xxxx and had net operating cash outflows of $xxxx for the
year ended 30 June 2007. As of that date the company’s equity
amounted to $xxxx. These conditions, along with other matters as
set forth in Note X, indicate the existence of a material uncertainty
which may cast significant doubt about the company’s ability to
continue as a going concern.
Case study – going concern
The entity has incurred losses and has negative working capital and
negative equity. However, the financial report has been prepared on a
going concern basis.
Management has well documented plans and budgets that indicate
the entity will be profitable in the following years. In addition, the
parent entity has provided written confirmation that it will provide
ongoing financial support as required.
What is the impact on the auditor’s report?
Case study – going concern
The entity has incurred losses and has negative working capital and
negative equity. However, the financial report has been prepared on a
going concern basis.
Management has well documented plans and budgets that indicate
the entity will be profitable in the following years.
What is the impact on the auditor’s report?
Some examples
Scope Limitation
Basis for Qualified Auditor’s Opinion
We did not observe the counting of physical inventories as of 30 June 2006, since
that date was prior to our appointment as auditors for the company. The nature of
the company’s records are such that we were unable to satisfy ourselves as to
inventory quantities by alternate audit procedures.
Qualified Auditor’s Opinion
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 report of [name of entity] is in accordance with the
Corporations Act 2001, including:
(a) giving a true and fair view of the company’s financial position as at 30 June 2006
and of its performance for the year ended on that date; and
(b) complying with Australian Accounting Standards (including the Australian
Accounting Interpretations) and the Corporations Regulations 2001.
Some examples
Scope Limitation
Basis for Qualified Auditor’s Opinion
Credit card sales form the majority of the company’s sales. Cash sales are
nevertheless a significant proportion of the company’s sales revenue and the
company has no controls over this form of revenue until its initial entry in the
accounting records upon banking. Accordingly, as the evidence available to us
regarding revenue from this source was limited, our audit procedures with
respect to cash sales were restricted to the amounts recorded in the financial
records upon banking. We are therefore unable to express an opinion whether
sales revenue is complete.
Qualified Auditor’s Opinion
In our opinion, except for the effect on the financial report of such adjustments,
if any, as might have been required had the limitation on our audit procedures
referred to in the qualification paragraph not existed, the financial report of ABC
Pty Limited is in accordance with:
Some examples
Scope Limitation
Basis for Qualified Auditor’s Opinion
The company’s operations of XYZ division have resulted in significant and continued
losses. As required by AASB 136 “Impairment of Assets” the company has measured the
value in use of the assets associated with XYZ division totalling $xxxx and determined
that they are not impaired.
A major factor in the company’s calculation of the value in use is the expected cash
inflows from the disposal of the asset. The company has been unable to provide us with
adequate documentation to support its estimate of the amount that is expected to be
realised from the sale of XYZ division.
Consequently we are unable to satisfy ourselves as to whether the assets included in the
financial report associated with XYZ division $xxxx are carried at no more than their
recoverable amount.
Qualified Auditor’s Opinion
In our opinion, except for the effect on the financial report of such adjustments, if any, as
might have been required had the limitation on our audit procedures referred to in the
qualification paragraph not existed, the financial report of ABC Pty Limited
is in accordance with:
Case study – new clients
The entity is a new client of the firm for the year ended 30 June 2008.
In previous years, the financial report was not audited. The auditor
has been unable to obtain audit sufficient appropriate audit evidence
on comparative information.
What is the impact on the auditor’s report for 30 June 2008?
What is the impact on the auditor’s report for 30 June 2009?
Some examples
Disclaimer of Opinion
Basis for Disclaimer of Auditor’s Opinion
As noted in Note X to the financial statements, a fire at the company’s
computer centre destroyed many of the accounting and statutory
records. The fire occurred prior to the completion of our audit. As the
remaining accounting and statutory records are not adequate to permit
the application of necessary audit procedures, we are unable to obtain
all the information and explanations we require in order to form an
opinion on the financial report.
Some examples
Disclaimer of Opinion
Disclaimer of Auditor’s Opinion
In our opinion, because of the existence of the limitation on the scope of our
work, as described in the preceding paragraph, and the effects of such
adjustments, if any, as might have been determined to be necessary had the
limitation not existed, we are unable to and do not express an opinion as to
whether the financial report of [name of company] is in accordance with the
Corporations Act 2001, including:
(a) giving a true and fair view of the company’s financial position as at 30
June 20XX and of its performance for the year ended on that date; and
(b) complying with Australian Accounting Standards (including the
Australian Accounting Interpretations) and the Corporations
Regulations 2001.
Some examples
Disclaimer of Opinion
Report on Other Legal and Regulatory Requirements
Due to the matter described in the Basis for Disclaimer of Auditor’s
Opinion paragraph, we have not been given all information,
explanation and assistance necessary for the conduct of the audit;
and we are unable to determine whether the company has kept:
(a) financial records sufficient to enable the financial report to be
prepared and audited; and
(b) other records and registers as required by the Corporations Act
2001.
Some examples
Adverse Opinion
Basis for Adverse Auditor’s Opinion
Included in the financial report as a non-current asset is the company's
investment in [subsidiary company], recorded at a cost of $XXX. The company
has not presented a consolidated financial report which combines the financial
report of [subsidiary company] with that of [parent entity]. A consolidated
financial report is required by Australian Accounting Standard AASB 127
Consolidated and Separate Financial Statements because [parent entity] has
the capacity to dominate [subsidiary company's] decision making in relation to
its financial and operating policies. In our opinion, the presentation of a
consolidated financial report is fundamental to a proper appreciation of [parent
entity's] financial position, the results of its operations and its cash flows.
Had a consolidated financial report been presented, it would disclose a
different financial position, different results of operations and different cash
flows of the [parent entity]. The financial effect of this matter has not been
detailed in this report as it is not the purpose of an independent auditor’s report
to present financial information of this nature.
Some examples
Adverse Opinion
Adverse Auditor’s Opinion
In our opinion, because of the effects of the matter discussed in the
preceding paragraphs, the financial report of [name of company] is
not in accordance with the Corporations Act 2001, including:
(a) giving a true and fair view of the company’s and consolidated
entity’s financial position as at 30 June 20XX and of their
performance for the year ended on that date; and
(b) complying with Australian Accounting Standards (including the
Australian Accounting Interpretations) and the Corporations
Regulations 2001.
Case study – prior period error
The entity was qualified in the previous year. A loan portfolio held by the
entity did not accord with the measurement requirements of accounting
standards. This was due to inadequacies in the accounting systems.
In the current year, the entity improved its accounting systems and was
able to correctly apply AASB 139. They were able to quantify the prior
period error and restated comparatives in accordance with accounting
standards.
What is the impact on the current year auditor’s report?
Case study – prior period error
The entity was qualified in the previous year. Equity financial
instruments held by the entity were carried at management’s
estimations of fair value. In the auditor’s opinion, these estimations did
not meet the requirements of accounting standards.
In the current year, the equity instruments were still carried at
management’s estimation of fair value. However, the auditor’s opinion is
that the current year estimations are in accordance with accounting
standards.
What is the impact on the current year auditor’s report?
Thank you for your attention
Questions?