UNIT VI-AUDIT REPORT

AND CERTIFICATE
 TOPICS TO BE COVERED

Definition – Distinction between Report and Certificate-

Different Types of Report Contents of Audit Report

(As per Companies Act and Standards on Auditing.

True and Fair View – Concept Materiality – Concept

and Relevance.
 SA 700(R) FORMING AN OPINION AND
REPORTING ON FINANCIAL STATEMENTS

Scope
It covers the following:
i. Auditor’s responsibility to form an opinion on the financial
statements.
ii. Form and content of independent auditor’s report.
• It is framed in the context of an audit of a complete set of
general-purpose financial statements prepared in accordance with general
purpose framework.
• This SA also applies to audits for which SA 800 or SA 805 applies.
Objectives
a. Forming an opinion on the financial statements based on conclusions
drawn from evidences obtained and
b. Expressing clearly that opinion through a written report.
 Auditors have the option of choosing among four different types of
auditor opinion reports. An auditor opinion report is a letter that
auditors attach to the statutory audit report that reflects their opinion
of the audit. The four types of auditor opinions are:

Unqualified opinion-clean report

FOUR TYPES OF Qualified opinion-qualified report

AUDIT REPORTS

Disclaimer of opinion-disclaimer report

Adverse opinion-adverse audit report

• Unqualified Opinion – Clean Report
An unqualified opinion is considered a clean report. This is the type of report that auditors
give most often. This is also the type of report that most companies expect to receive. An
unqualified opinion doesn’t have any kind of adverse comments and it doesn’t include any
disclaimers about any clauses or the audit process. This type of report indicates that the
auditors are satisfied with the company’s financial reporting. The auditor believes that the
company’s operations are in good compliance with governance principles and applicable laws.
The company, the auditors, the investors and the public perceive such a report to be free
from material misstatements.
• Qualified Opinion-Qualified Report
When an auditor isn’t confident about any specific process or transaction that prevents
them from issuing an unqualified, or clean, report, the auditor may choose to issue a qualified
opinion. Investors don’t find qualified opinions acceptable, as they project a negative opinion
about a company’s financial status. Auditors write up a qualified opinion in much the same
way as an unqualified opinion, with the exception that they state the reasons they’re not able
to present an unqualified opinion.
• Disclaimer of Opinion-Disclaimer Report
When an auditor issues a disclaimer of opinion report, it means that they are distancing
themselves from providing any opinion at all related to the financial statements. Some of the
reasons that auditors may issue a disclaimer of opinion are because they felt like the company
limited their ability to conduct a thorough audit or they couldn’t get satisfactory explanations for
their questions. They may not have been able to decipher the correct nature of some transactions
or to secure enough evidence to support good financial reporting. Auditors that aren’t allowed an
opportunity to observe operational procedures or to review particular procedures may feel like
they’re not able to express a definite opinion, so they feel a disclaimer is necessary and in order.
The general consensus is that a disclaimer of opinion constitutes a very harsh stance. As a result, it
creates an adverse image of the company.
• Adverse Opinion-Adverse Audit Report
The final type of audit opinion is an adverse opinion. Auditors who aren’t at all satisfied with the financial
statements or who discover a high level of material misstatements or irregularities know that this creates a
situation in which investors and the government will mistrust the company’s financial reports.
An auditor’s adverse opinion is a big red flag. An adverse audit report usually indicates that financial reports
contain gross misstatements and have the potential for fraud. Adverse opinions send out a high alert that the
company’s records haven’t been prepared according to GAAP. Financial institutions and investors take this
opinion seriously and will reject doing any kind of business with the company.
Auditors use all types of qualified reports to alert the public as to the transparency, reliability and accountability
of companies. Auditor opinions place pressure on companies to change their financial reporting processes so
that they’re clear and accurate. Companies, investors and the public highly value unqualified reports.
 CONTENTS OF AUDIT REPORT
1. Title
2. Addressee
3. Opinion
4. Basis of opinion
5. Going concern(as per SA 570)
6. Key Audit Matters (as per SA 701)
7. Responsibility of Management
• Preparation of FS
• Internal Controls
• Assessing Going concern
• Fair presentation
8. Responsibility of Auditor
9. Other legal requirements
10. Date
11. Place
12. Signature
 Objective of the auditor
To express clearly an appropriately modified opinion on the FS
when the auditor:
a. Concludes, based on the evidences obtained that the FS are
not free from material misstatements, or
SA 705(R)
MODIFICATIONS TO b. Is unable to obtain sufficient and appropriate evidences to
THE OPINION IN conclude that financial statements are free from material
THE INDEPENDENT misstatements.
AUDITOR’S REPORT Types of modified opinion
i. A Qualified opinion
ii. An adverse opinion
iii. A disclaimer opinion
Determining type of modification

Nature of Matter Giving Auditor’s Judgement about the Pervasiveness of the

Rise to the Modification Effects or Possible Effects on the Financial
Statements
Material but Not Material and Pervasive
Pervasive
FS are materially misstated Qualified opinion Adverse opinion
Inability to obtain Qualified opinion Disclaimer of opinion
sufficient appropriate audit
evidence

Note: Pervasive effects on the FS are those that, in the auditor’s judgement:
• Are not confined to specific elements, accounts or items of the FS;
• If so confined, represent or could represent a substantial proportion of the FS; or
• In relation to disclosures, are fundamental to users understanding of the FS.
 Qualified Opinion
The auditor shall express a qualified opinion when:
• The auditor, having obtained sufficient appropriate
DETERMINING audit evidence, concludes that misstatements,
THE TYPE OF individually or in the aggregate, are material, but not
MODIFICATION pervasive, to the financial statements; or
TO THE • The auditor is unable to contain sufficient
AUDITOR’S appropriate audit evidence on which to base the
OPINION opinion, but the auditor concludes that the possible
effects on the financial statements of undetected
misstatements, if any, could be material but not
pervasive.
Adverse Opinion
The auditor shall express an adverse opinion when the auditor,
having obtained sufficient appropriate audit evidence, concludes
that misstatements, individually or in the aggregate, are both
material and pervasive to the financial statements.
Disclaimer of Opinion
• The auditor shall disclaim an opinion when the auditor is
unable to obtain sufficient appropriate audit evidence on
which to base his opinion, and the auditor concludes that the
possible effects on the financial statements of undetected
misstatements, could be both material and pervasive.
• The auditor shall disclaim an opinion when, in extremely rare
circumstances involving multiple uncertainties, the auditor
concludes that, notwithstanding having obtained sufficient
appropriate audit evidence regarding each of the individual
uncertainties, it is not possible to form an opinion on the
financial statements due to the potential interaction of the
uncertainties and their possible cumulative effect on the
financial statements.
 SA 706 EMPHASIS OF MATTER PARAGRAPHS & OTHER MATTER
PARAGRAPHS IN THE INDEPENDENT AUDITOR’S REPORT

Objective of the auditor

To draw user’s attention by way of additional communication in the auditor’s report, to
• Matter appropriately incorporated in the financial statements, that is of such importance
that it is fundamental to user’s understanding of financial statements; or
• Any other matter(other than those in financial statements) relevant to users or auditor’s
responsibility or his report.
 ”EMPHASIS OF MATTER” PARA

Meaning
• Para which refers to a matter appropriately incorporated in the financial
statements,
• That is of such importance that it is fundamental to user’s understanding of
financial statements.
Note: SA 570(R) and SA 720(R) establishes requirements and provides guidance
about communication in the auditor’s report relating to going concern and other
information, respectively. Thus he shall consider SA 570 and 720 in addition to this
SA.
In audit report
The auditor shall include an Emphasis of Matter paragraph in the auditor’s report
provided:
1. The auditor would not be required to modify the opinion in accordance with
SA 705(Revised) as a result of the matter; and
2. When SA 701 applies, the matter has not been determined to be a key audit
matter to be communicated in the auditor’s report.
Heading
“Emphasis of matter”
It includes
• Clear reference to the matter being emphasized; and
• Where exactly it can be found in the financial statements.
Clarification by auditor
That audit opinion is not modified in respect of the matter emphasized
Examples where EOM may be necessary
• An uncertainty relating to the future outcome of exceptional litigation or regulatory action
• A significant subsequent event that occurs between the date of the financial statements and the date of
the auditor’s report.
• Early application(where permitted) of a new accounting standard that has a material effect on the
financial statements
• A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial
position.
 “OTHER MATTER” PARA
Meaning
• Para relating to matter other than those on financial statements which is relevant to user’s
understanding or auditor’s responsibility or his report
In audit report
The auditor shall include an Other Matter paragraph in the auditor’s report, provided:
• This is not prohibited by law or regulation; and
• When SA 701 applies, the matter has not been determined to be a key audit matter to be
communicated in the auditor’s report.
Heading
“Other Matter”
SA’s containing requirements for Other Matter paragraphs
• SA 560, Subsequent Events
• SA 710, Comparative Information- Corresponding Figures and Comparative Financial Statements
• SA 720, The Auditor’s Responsibilities Relating to Other information in Documents Containing Audited
Financial Statements

Communication with TCWG

If auditor expects to include an EOM or OM paragraph, he shall communicate the same to TCWG.
SA 315 IDENTIFYING AND ASSESSING THE RISK OF
MATERIAL MISSTATEMENT THROUGH UNDERSTANDING
THE ENTITY AND ITS ENVIRONMENT

Scope of this SA
This Standard on Auditing (SA) deals with the auditor’s responsibility to identify and
assess the risks of material misstatement in the financial statements, through
understanding the entity and its environment, including the entity’s internal control.

Objective
The objective of the auditor is to identify and assess the risks of material misstatement,
whether due to fraud or error, at the financial statement and assertion levels, through
understanding the entity and its environment, including the entity’s internal control,
thereby providing a basis for designing and implementing responses to the assessed risks
of material misstatement. This will help the auditor to reduce the risk of material
misstatement to an acceptably low level.
Definitions
• (a) Assertions – Representations by management, explicit or otherwise, that are embodied in the
financial statements, as used by the auditor to consider the different types of potential misstatements
that may occur.
• (b) Business risk – A risk resulting from significant conditions, events, circumstances, actions or
inactions that could adversely affect an entity’s ability to achieve its objectives and execute its strategies,
or from the setting of inappropriate objectives and strategies.
• (c) Internal control – The process designed, implemented and maintained by those charged with
governance, management and other personnel to provide reasonable assurance about the achievement
of an entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of
operations, safeguarding of assets, and compliance with applicable laws and regulations. The term
“controls” refers to any aspects of one or more of the components of internal control.
• (d) Risk assessment procedures – The audit procedures performed to obtain an understanding of
the entity and its environment, including the entity’s internal control, to identify and assess the risks of
material misstatement, whether due to fraud or error, at the financial statement and assertion levels.
• (e) Significant risk – An identified and assessed risk of material misstatement that, in the auditor’s
judgment, requires special audit consideration.
 RISK ASSESSMENT PROCEDURES AND RELATED
ACTIVITIES
• The auditor shall perform risk assessment procedures to provide a basis for the identification and
assessment of risks of material misstatement at the financial statement and assertion levels. Risk
assessment procedures by themselves, however, do not provide sufficient appropriate audit evidence on
which to base the audit opinion.
• The risk assessment procedures shall include the following:
• (a) Inquiries of management and of others within the entity who in the auditor’s judgment
may have information that is likely to assist in identifying risks of material misstatement due
to fraud or error.
• (b) Analytical procedures.
• (c) Observation and inspection.
• The auditor shall consider whether information obtained from the auditor’s client acceptance or
continuance process is relevant to identifying risks of material misstatement.
• Where the engagement partner has performed other engagements for the entity, the engagement
partner shall consider whether information obtained is relevant to identifying risks of material
misstatement.
• When the auditor intends to use information obtained from the auditor’s previous experience with the
entity and from audit procedures performed in previous audits, the auditor shall determine whether
changes have occurred since the previous audit that may affect its relevance to the current audit.
• The engagement partner and other key engagement team members shall discuss the susceptibility of the
entity’s financial statements to material misstatement, and the application of the applicable financial
reporting framework to the entity’s facts and circumstances. The engagement partner shall determine
which matters are to be communicated to engagement team members not involved in the discussion.
 IDENTIFYING AND ASSESSING THE RISKS OF
MATERIAL MISSTATEMENT
• The auditor shall identify and assess the risks of material misstatement at:
• (a) the financial statement level; and
• (b) the assertion level for classes of transactions, account balances, and disclosures;
to provide a basis for designing and performing further audit procedures.
• For this purpose, the auditor shall:
• (a) Identify risks throughout the process of obtaining an understanding of the entity and its environment, including
relevant controls that relate to the risks, and by considering the classes of transactions, account balances, and
disclosures in the financial statements;
• (b) Assess the identified risks, and evaluate whether they relate more pervasively to the financial statements as a
whole and potentially affect many assertions;
• (c) Relate the identified risks to what can go wrong at the assertion level, taking account of relevant controls that
the auditor intends to test; and
• (d) Consider the likelihood of misstatement, including the possibility of multiple misstatements, and whether the
potential misstatement is of a magnitude that could result in a material misstatement.
 RISKS FOR WHICH SUBSTANTIVE
PROCEDURES ALONE DO NOT PROVIDE
SUFFICIENT APPROPRIATE AUDIT EVIDENCE

• In respect of some risks, the auditor may judge that it is not possible or
practicable to obtain sufficient appropriate audit evidence only from
substantive procedures. Such risks may relate to the inaccurate or incomplete
recording of routine and significant classes of transactions or account balances,
the characteristics of which often permit highly automated processing with
little or no manual intervention. In such cases, the entity’s controls over such
risks are relevant to the audit and the auditor shall obtain an understanding of
them.
 REVISION OF RISK ASSESSMENT

• The auditor’s assessment of the risks of material misstatement at the assertion

level may change during the course of the audit as additional audit evidence is
obtained. In circumstances where the auditor obtains audit evidence from
performing further audit procedures, or if new information is obtained, either
of which is inconsistent with the audit evidence on which the auditor originally
based the assessment, the auditor shall revise the assessment and modify the
further planned audit procedures accordingly.
 SA 320 (REVISED) MATERIALITY IN PLANNING AND
PERFORMING AN AUDIT

Concept
• Materiality vs. Performance Materiality
• SA 320 (R) only defines ‘Performance Materiality’.
• Particular information are considered to be material if the their misstatement,
disclosure or non-disclosure, individually or in the aggregate, could reasonably
be expected to influence the economic decisions of users taken on the basis of
the financial statements.
• Judgments about materiality are made in the light of surrounding
circumstances, and are affected by the size or nature of a misstatement, or a
combination of both
 JUDGMENTS AFFECTING MATERIALITY

❑ Whether a particular item is material or not can be judged from:

✔ Its size or amount
✔ Its nature
✔ Its legality
✔ Contractual violation (if any)
✔ Qualitative aspects (like inadequate or non-disclosure of related party relationships, etc.)
❑ The auditor’s determination of materiality is a matter of professional judgement, and
is affected by the auditor’s perception of the financial information needs of users of
the financial statements.
 PERFORMANCE MATERIALITY

❑ Performance materiality means the amount or amounts set by the auditor at

less than materiality for the financial statements as a whole to reduce to an
appropriately low level the probability that the aggregate of uncorrected and
undetected misstatements exceeds materiality for the financial statements as a
whole.
❑ If applicable, performance materiality also refers to the amount or amounts set
by the auditor at less than the materiality level or levels for particular classes
of transactions, account balances or disclosures.
 DETERMINING MATERIALITY AND PERFORMANCE
MATERIALITY WHEN PLANNING AN AUDIT

• When establishing the overall audit strategy, the auditor shall determine materiality
for the financial statements as a whole.
• If, in the specific circumstances of the entity, there is one or more particular classes
of transactions, account balances or disclosures for which misstatements of lesser
amounts than the materiality for the financial statements as a whole could reasonably
be expected to influence the economic decisions of users taken on the basis of the
financial statements, the auditor shall also determine the materiality level or levels to
be applied to those particular classes of transactions, account balances or disclosures.
• The auditor shall determine performance materiality for purposes of assessing the
risks of material misstatement and determining the nature, timing and extent of
further audit procedures.
 REVISION AS THE AUDIT PROGRESSES

• The auditor shall revise materiality for the financial statements as a whole (and, if
applicable, the materiality level or levels for particular classes of transactions, account
balances or disclosures) in the event of becoming aware of information during the
audit that would have caused the auditor to have determined a different amount (or
amounts) initially.

• If the auditor concludes that a lower materiality for the financial statements as a
whole (and, if applicable, materiality level or levels for particular classes of
transactions, account balances or disclosures) than that initially determined is
appropriate, the auditor shall determine whether it is necessary to revise
performance materiality, and whether the nature, timing and extent of the further
audit procedures remain appropriate.
 DOCUMENTATION

The audit documentation shall include the following amounts and the factors
considered in their determination:
a) Materiality for the financial statements as a whole;
b) If applicable, the materiality level or levels for particular classes of
transactions, account balances or disclosures;
c) Performance materiality; and
d) Any revision of (a)-(c) as the audit progressed.
 MATERIALITY AND AUDIT RISK

• Audit risk is the risk that the auditor expresses an inappropriate audit opinion when
the financial statements are materially misstated.
• Audit risk is a function of the risks of material misstatement and detection risk.
• Materiality and audit risk are considered throughout the audit, in particular, when:
a) Identifying and assessing the risks of material misstatement;
b) Determining the nature, timing and extent of further audit procedures; and
c) Evaluating the effect of uncorrected misstatements, if any, on the financial
statements and in forming the opinion in the auditor’s report.
 INVERSE RELATION

• There is an inverse relationship between materiality and the degree of audit

risk which means higher the materiality level, the lower the audit risk and
lower the materiality level higher the audit risk.

• For example: The probability that a large (material) amount in an account will
be left misstated in the financial statements is lower than the probability that a
small (immaterial) amount will remain misstated.
 SA 330 THE AUDITOR’S
RESPONSES TO ASSESSED RISKS

Scope of this SA
This Standard on Auditing (SA) deals with the auditor’s responsibility to design
and implement responses to the risks of material misstatement identified and
assessed by the auditor in accordance with SA 315, “Identifying and Assessing
Risks of Material Misstatement Through Understanding the Entity and Its
Environment” in a financial statement audit.
Objective
• The objective of the auditor is to obtain sufficient appropriate audit evidence
about the assessed risks of material misstatement, through designing and
implementing appropriate responses to those risks.
Definitions
• (a) Substantive procedure – An audit procedure designed to detect material misstatements at the
assertion level. Substantive procedures comprise:
• (i) Tests of details (of classes of transactions, account balances, and disclosures), and
• (ii) Substantive analytical procedures.
• (b) Test of controls – An audit procedure designed to evaluate the operating effectiveness of controls in
preventing, or detecting and correcting, material misstatements at the assertion level.
 AUDIT PROCEDURES RESPONSIVE TO THE ASSESSED RISKS OF
MATERIAL MISSTATEMENT AT THE ASSERTION LEVEL
• The auditor shall design and perform further audit procedures whose nature, timing and extent are
based on and are responsive to the assessed risks of material misstatement at the assertion level.
• In designing the further audit procedures to be performed, the auditor shall:
• (a) Consider the reasons for the assessment given to the risk of material misstatement at the assertion
level for each class of transactions, account balance, and disclosure, including:
• (i) The likelihood of material misstatement due to the particular characteristics of the relevant class of
transactions, account balance, or disclosure (i.e., the inherent risk); and
• (ii) Whether the risk assessment takes into account the relevant controls (i.e., the control risk), thereby requiring
the auditor to obtain audit evidence to determine whether the controls are operating effectively (i.e., the auditor
intends to rely on the operating effectiveness of controls in determining the nature, timing and extent of
substantive procedures); and
• (b) Obtain more persuasive audit evidence the higher the auditor’s assessment of risk.
 TESTS OF CONTROLS
• The auditor shall design and perform tests of controls to obtain sufficient appropriate audit evidence as
to the operating effectiveness of relevant controls when:
• (a) The auditor’s assessment of risks of material misstatement at the assertion level includes an
expectation that the controls are operating effectively (i.e., the auditor intends to rely on the operating
effectiveness of controls in determining the nature, timing and extent of substantive procedures); or
• (b) Substantive procedures alone cannot provide sufficient appropriate audit evidence at the assertion
level.
• In designing and performing tests of controls, the auditor shall obtain more persuasive audit evidence
the greater the reliance the auditor places on the effectiveness of a control.
 NATURE AND EXTENT OF TESTS OF
CONTROLS

• In designing and performing tests of controls, the auditor shall:

• (a) Perform other audit procedures in combination with inquiry to obtain
audit evidence about the operating effectiveness of the controls, including:
• (i) How the controls were applied at relevant times during the period under audit.
• (ii) The consistency with which they were applied.
• (iii) By whom or by what means they were applied.
• (b) Determine whether the controls to be tested depend upon other controls
(indirect controls), and if so, whether it is necessary to obtain audit evidence
supporting the effective operation of those indirect controls.
 TIMING OF TESTS OF CONTROLS
• The auditor shall test controls for the particular time, or throughout the period, for which the auditor
intends to rely on those controls, subject to paragraphs below, in order to provide an appropriate basis
for the auditor’s intended reliance. Using audit evidence obtained during an interim period
• When the auditor obtains audit evidence about the operating effectiveness of controls during an interim
period, the auditor shall:
• (a) Obtain audit evidence about significant changes to those controls subsequent to the interim period;
and
• (b) Determine the additional audit evidence to be obtained for the remaining period.
 USING AUDIT EVIDENCE OBTAINED IN PREVIOUS
AUDITS
• In determining whether it is appropriate to use audit evidence about the operating effectiveness of
controls obtained in previous audits, and, if so, the length of the time period that may elapse before
retesting a control, the auditor shall consider the following:
• (a) The effectiveness of other elements of internal control, including the control environment, the
entity’s monitoring of controls, and the entity’s risk assessment process;
• (b) The risks arising from the characteristics of the control, including whether it is manual or
automated;
• (c) The effectiveness of general IT-controls;
• (d) The effectiveness of the control and its application by the entity, including the nature and extent of
deviations in the application of the control noted in previous audits, and whether there have been
personnel changes that significantly affect the application of the control;
• (e) Whether the lack of a change in a particular control poses a risk due to changing circumstances;
and
• (f) The risks of material misstatement and the extent of reliance on the control.
 SUBSTANTIVE PROCEDURES
• Irrespective of the assessed risks of material misstatement, the auditor shall design and perform
substantive procedures for each material class of transactions, account balance, and disclosure.
• The auditor shall consider whether external confirmation procedures are to be performed as
substantive audit procedures.
• Substantive Procedures Related to the Financial Statement Closing Process
• The auditor’s substantive procedures shall include the following audit procedures related to the financial
statement closing process:
• (a) Agreeing or reconciling the financial statements with the underlying accounting records; and
• (b) Examining material journal entries and other adjustments made during the course of preparing the
financial statements.
 SUBSTANTIVE PROCEDURES RESPONSIVE TO
SIGNIFICANT RISKS

• When the auditor has determined that an assessed risk of material

misstatement at the assertion level is a significant risk, the auditor shall
perform substantive procedures that are specifically responsive to that risk.
When the approach to a significant risk consists only of substantive
procedures, those procedures shall include tests of details.
 TIMING OF SUBSTANTIVE PROCEDURES

• When substantive procedures are performed at an interim date, the auditor shall
cover the remaining period by performing:
• (a) substantive procedures, combined with tests of controls for the intervening
period; or
• (b) if the auditor determines that it is sufficient, further substantive procedures only;
• that provide a reasonable basis for extending the audit conclusions from the interim
date to the period end.
• If misstatements that the auditor did not expect when assessing the risks of material
misstatement are detected at an interim date, the auditor shall evaluate whether the
related assessment of risk and the planned nature, timing, or extent of substantive
procedures covering the remaining period need to be modified.
 EVALUATING THE SUFFICIENCY AND APPROPRIATENESS OF
AUDIT EVIDENCE
• Based on the audit procedures performed and the audit evidence obtained, the auditor shall evaluate
before the conclusion of the audit whether the assessments of the risks of material misstatement at the
assertion level remain appropriate.
• The auditor shall conclude whether sufficient appropriate audit evidence has been obtained. In forming
an opinion, the auditor shall consider all relevant audit evidence, regardless of whether it appears to
corroborate or to contradict the assertions in the financial statements.
• If the auditor has not obtained sufficient appropriate audit evidence as to a material financial statement
assertion, the auditor shall attempt to obtain further audit evidence. If the auditor is unable to obtain
sufficient appropriate audit evidence, the auditor shall express a qualified opinion or a disclaimer of
opinion.