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Lecture 7 - Independent Auditor's report (S)

The document outlines the structure and key components of an independent auditor's report, including the auditor's opinion, key audit matters, and emphasis of matter paragraphs. It differentiates between unmodified and modified opinions, detailing the circumstances that lead to each type. Additionally, it discusses the importance of reports to management regarding internal control deficiencies and their implications.

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Anhthu Lehuynh
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3 views

Lecture 7 - Independent Auditor's report (S)

The document outlines the structure and key components of an independent auditor's report, including the auditor's opinion, key audit matters, and emphasis of matter paragraphs. It differentiates between unmodified and modified opinions, detailing the circumstances that lead to each type. Additionally, it discusses the importance of reports to management regarding internal control deficiencies and their implications.

Uploaded by

Anhthu Lehuynh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Lecture 7

Independent
Auditor's report

Objectives

• Describe the structure audit report.


• Explains cases that lead to
different audit opinions.

Contents

1. Audit Report
2. Audit Opinion
3. Key audit matters
4. Emphasis of matter paragraphs
5. Other matter paragraphs
6. Reports to management

3
Audit Report

• The primary purpose of an audit


report presents auditor’s opinion
on the financial statements.
• It provides assurance to the
users of the financial statements
that these statements are
reliable.

Audit Report
Audit Report include the following basic elements :
• Title
• Addressee
• Auditor’s Opinion
• Basis for opinion
• Going concern
• Key audit matters
• Other information
• Management’s Responsibility for the Financial
Statements
• Auditor’s Responsibility
• Auditor's signature and address
• Date of the Auditor’s Report

Type of audit opinions:

Unmodified opinion
Audit
Opinion Modified opinion:

• Qualified opinion
• Adverse opinion
• Disclaimer of opinion

6
Unmodified opinion

• An unmodified opinion is the


opinion expressed by the auditor
when the auditor concludes that
the financial statements are
prepared, in all material respects,
in accordance with the applicable
financial reporting framework.

Modified opinion

The key aspect to separate among modified opinions:


Disclaimer of
Qualified opinion Adverse opinion
opinion

Are whether misstatement pervasive and ability to


obtain sufficient appropriate audit evidence?

Audit Report
• Pervasive: describe the case
where financial statement
misstatements affect substantial
proportion of or spreading through
the financial statements.

9
Qualified opinion
The auditor concludes that misstatements, individually or
in the aggregate, are material, but not pervasive, to the
financial statements; or

The auditor is unable to obtain sufficient appropriate


audit evidence on which to base the opinion but
concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be
material but not pervasive.

10

Adverse opinion

11

Disclaimer of opinion
The auditor shall disclaim an
opinion 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.

12
Key audit matters

Those matters that, in the auditor’s professional


judgment, were of most significance in the audit
of the financial statements of the current period.

Key audit matters (KAM) are selected from


matters communicated with those charged with
governance.

13

Key audit matters


• KAM paragraph should address:
➢Why these matters was one of most
significance in the audit; and
➢How these matters were addressed in the audit.

14

KAMs include:
• Areas of higher risk of material
misstatement.
Key • Significant judgements in
relation to areas where
audit management made
judgements.
matters • The effect of significant events
or transactions.

15
Key Audit Matters
Other factors to consider when determining KAMs include:
• The importance of the matter to intended users.
• The complexity or subjectivity involved.
• Any misstatements related to the matter.
• The difficulties in applying audit procedures, obtaining
evidence or forming conclusions, including more subjective
judgements.
• The severity of any control deficiencies.

16

Key Audit Matters

• If a modified opinion is expressed, the matter that


gives rise to the modified opinion will be described
in the ‘basis for modified opinion’ paragraph, so it
must not be included as a KAM.
• The auditor disclaims an opinion on the financial
statements, a KAM section must not be included in
the auditor’s report.
• Going concern issues should not be included as a
KAM.

17

Emphasis of matter
paragraphs

• This paragraph 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
statement.

18
Emphasis of matter paragraphs
• The emphasis of matter paragraph can come either
before or after the KAMs, depending on how significant
the matters discussed is.
• The paragraph must contain a clear reference to the
matter being emphasised and to where relevant
disclosures that fully describe it can be found in the
financial statements. The paragraph must state that the
auditor's opinion is not modified in respect of the
matter emphasised.

19

Emphasis of
matter paragraphs
They are not used in relation
to going concern.

20

Other matter paragraphs


It is 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
judgment, is relevant to users’
understanding of the audit, the auditor’s
responsibilities or the auditor’s report.
(ISA/VSA 706)

21
Other matter
paragraphs
Other matter paragraph
must not refer to
something that has been
included as a KAM.

22

These can be sent by external


auditors after both the interim and
final audits (on a timely basis!).

Reports to
management They point out deficiencies in
internal control, the implications
of those deficiencies on the business
and suggested recommendations
to mitigate them.

23

Reports to management
The report:
• Should not include language that conflicts with the opinion in
the auditor's report.
• State that the control system were considered only to the extent
necessary to determine the auditing procedures and not to
determine the adequacy of internal control for management
purposes or to provide assurances on the system.
• State that it discusses only deficiencies in internal control which
have come to the auditors’ attention (Other deficiencies may still
exist).
• Is for use only by management (or another specific named
party).

24

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