Week 9 lecture

Reporting
MAN3098 Auditing
Vicky Milligan
v.milligan@surrey.ac.uk

Tuesday 15 April 2025 1

Objectives of an audit
• When the audit work is complete, the auditor will prepare the auditor’s
report containing an opinion on the financial statements.
• The objectives of an auditor, in accordance with ISA 700 (Revised)
Forming an Opinion and Reporting on Financial Statements, are:
• to form an opinion on the financial statements based upon an
evaluation of their conclusions drawn from audit evidence.
• to express clearly that opinion through a written report.
• The auditor forms an opinion on whether the financial statements are
prepared, in all material respects, in accordance with the applicable
financial reporting framework.
Audit opinion
• The auditor’s opinion provides the auditor's conclusion as to whether
the financial statements give a true and fair view.

• The audit opinion can be unmodified or modified.

Unmodified opinion
• When the auditor concludes that the financial statements are prepared,
in all material respects, in accordance with the applicable financial
reporting framework they issue an unmodified opinion in the auditor's
report.
• The audit opinion will state that the financial statements give a true
and fair view.
• This means:
• The financial statements adequately disclose the significant
accounting policies.
• The accounting policies selected are consistently applied and
appropriate.
• Accounting estimates made by management are reasonable.
• Information is relevant, reliable, comparable and understandable.
• The financial statements provide adequate disclosures to enable the
users to understand the effects of material transactions and events.
Modified opinions
Modified opinions
• The auditor will need to modify the opinion when they conclude that:
• Based upon the evidence obtained the financial statements as a
whole are not free from material misstatement.
• This is where the client has not complied with the applicable
financial reporting framework.
• OR
• They have been unable to obtain sufficient appropriate evidence to
be able to conclude that the financial statements as a whole are
free from material misstatement.
• This is evidence the auditor would expect to exist to support the
figures in the financial statements.
• The nature of the modification depends on whether the matter is
material but not pervasive, or material and pervasive, to the financial
statements.
Pervasive
• A matter is considered 'pervasive' if, in the auditor's judgment:
• The effects are not confined to specific elements, accounts or items
of the financial statements, or
• Represent or could represent a substantial proportion of the
financial statements, or
• In relation to disclosures, are fundamental to users' understanding
of the financial statements.

• A pervasive matter must be fundamental to the financial statements,

making them unreliable as a whole.
Qualified opinion
• If the misstatement or lack of sufficient appropriate evidence is
material but not pervasive, the auditor will issue a qualified opinion.
• This means the matter is material to the area of the financial
statements affected but does not affect the remainder of the financial
statements.
• ‘Except for’ this matter, the financial statements give a true and fair
view.
• The material matter can be isolated whilst the remainder of the
financial statements may be relied upon.
Adverse opinion
• An adverse opinion is issued when a misstatement is considered
material and pervasive. This will mean the financial statements do not
give a true and fair view.

• Examples include:
• Preparation of the financial statements on the wrong basis.
• Non-consolidation of a subsidiary.
• Material misstatement of a balance which represents a substantial
proportion of the assets or profits e.g. would change a profit to a
loss.
Disclaimer of opinion
• A disclaimer of opinion is issued when the auditor has not obtained
sufficient appropriate evidence and the effects of any possible
misstatements could be pervasive. The auditor does not express an
opinion on the financial statements in this situation.

• Examples include:
• Failure by the client to keep adequate accounting records.
• Refusal by the directors to provide written representation.
• Failure by the client to provide evidence over a single balance which
represents a substantial proportion of the assets or profits or over
multiple balances in the financial statements.
Basis of opinion
Within a report containing an unmodified or modified opinion
• Refers to the professional standards the auditor has followed in order to
be able to form an opinion on the financial statements, to provide
confidence to users that the report can be relied upon.
Within a report containing a modified opinion
• Amend the heading 'Basis for Opinion' to 'Basis for Qualified Opinion',
'Basis for Adverse Opinion' or 'Basis for Disclaimer of Opinion', as
appropriate.
• Explain the reason why the opinion is modified.
• Explain how the disclosures are misstated, or in the case of omitted
disclosures, include the disclosure if the information is readily available.
Summary of opinions
Key audit matters
• Key audit matters are those that in the auditor's professional judgment
were of most significance in the audit and are selected from matters
communicated to those charged with governance.
• ISA 701 Communicating Key Audit Matters in the Independent Auditor's
Report requires auditors of listed companies to determine key audit
matters and to communicate those matters in the auditor's report.
• Auditors of non-listed entities may voluntarily, or at the request of
management or those charged with governance, include key audit
matters in the auditor's report.
• The purpose of including these matters is to assist users in
understanding the entity, and to provide a basis for the users to engage
with management and those charged with governance about matters
relating to the entity and the financial statements.
Key audit matters
• Key audit matters include:
• Areas of higher assessed risk of material misstatement, or significant
risks identified in accordance with ISA 315 (Revised) Identifying and
Assessing the Risks of Material Misstatement Through Understanding
the Entity and its Environment.
• Significant auditor judgments relating to areas in the financial
statements that involved significant management judgment, including
accounting estimates that have been identified as having high
estimation uncertainty.
• The effect on the audit of significant events or transactions that
occurred during the period.
Key audit matters
• Each key audit matter should describe why the matter was considered
to be significant and how it was addressed in the audit.
Additional communication
• In certain circumstances auditors are required to make additional
communications in the auditor's report even though the financial
statements show a true and fair view.
• Issues requiring communication include:
• Material Uncertainty Related to Going Concern (ISA 570 Going
Concern)
• Emphasis of Matter paragraph (ISA 706 Emphasis of Matter
Paragraphs and Other Matter Paragraphs in an Auditor's Report)
• Other Matter paragraph (ISA 706)
• It is important to note that these do not impact the wording of the
opinion and do not constitute either a qualified, adverse or disclaimer
of opinion.
Material uncertainty relating to
going concern
• Included when there is a material uncertainty regarding the going
concern status which the directors have adequately disclosed in the
financial statements.

• The auditor uses this section to draw the attention of the user to the
client’s disclosure note.
Emphasis of matter paragraph
• Used to refer to a matter that has been adequately presented or
disclosed in the financial statements by the directors.
• The auditor's judgment is that these matters are of such fundamental
importance to the users' understanding of the financial statements that
the auditor should emphasise the disclosure.
• Examples
• Major catastrophes that have had a significant effect on the entity's
financial position.
• An uncertainty relating to the future outcome of exceptional
litigation or regulatory action.
• A significant subsequent event occurs between the date of the
financial statements and the date of the auditor's report.
Emphasis of matter paragraph
• An Emphasis of Matter paragraph is not used to draw attention to
immaterial misstatements. The fact that they are immaterial means
they do not warrant the attention of the shareholders.
• An Emphasis of Matter paragraph can only be used when adequate
disclosure has been made of the matters mentioned above. The auditor
can only emphasise something that is already included.
• Where adequate disclosure has not been made the opinion will need to
be modified and an Emphasis of Matter paragraph should NOT be used.
Other matter paragraph
• An Other Matter paragraph is included in the auditor's report to
communicate matters that are not presented or disclosed in the
financial statements that, in the auditor's judgment, are relevant to
understanding the audit, the auditor's responsibilities, or the auditor's
report.
• To communicate that the auditor's report is intended solely for the
intended users, and should not be distributed to or used by other
parties.
• When law, regulation or generally accepted practice requires or permits
the auditor to provide further explanation of their responsibilities.
Other information
• Other information refers to financial or non-financial information, other
than the financial statements and auditor's report thereon, included in
the entity's annual report that is not necessarily subject to audit.

• Examples:
• Chair's report
• Operating and financial review
• Social and environmental reports
• Corporate governance statements
Auditor responsibilities for other
information
• The auditor must read it to identify any material inconsistencies with
the financial statements or the auditor’s knowledge obtained during the
audit.
• If the auditor identifies a material inconsistency they should:
• Perform limited procedures to evaluate the inconsistency. The
auditor should consider whether it is the financial statements or the
other information that requires amendment.
• Discuss the matter with management and ask them to make the
correction.
• If management refuse to make the correction, communicate the
matter to those charged with governance.
• If the matter remains uncorrected withdraw from the engagement
as the issue casts doubt over management integrity.
• If withdrawal is not possible, the auditor must describe the material
misstatement in the auditor's report.
Communicating with those charged
with governance
• ISA 260 (Revised) Communication with Those Charged with Governance
and ISA 265 Communicating Deficiencies in Internal Control to Those
Charged with Governance and Management, require the external
auditor to engage in communications with management.

• Objectives:
• To communicate the responsibilities of the auditor and an overview
of the scope and timing of the audit.
• To obtain information relevant to the audit.
• To report matters from the audit on a timely basis.
• To promote effective two-way communication.
Matters to be communicated
• Auditor independence.
• Auditor's responsibilities in relation to the audit.
• Planned scope and timing of the audit.
• Significant findings from the audit:
• Auditor's views about qualitative aspects of the entity's accounting
practices, policies, estimates and disclosures.
• Significant difficulties encountered during the audit.
• Significant matters discussed with management.
• Written representations requested.
• Circumstances that affect the form and content of the auditor's
report, if any.
• Other matters arising significant to the oversight of the reporting
process.
Non-audit reporting
• There are two types of assurance engagements

• Reasonable assurance engagement - eg the statutory audit of a

company’s financial statements

• Limited assurance engagement - eg review of interim financial

statements for listed companies, reports of social and
environmental issues

• There are some engagements that do not provide assurance – eg

compilation of financial statements
Limited assurance reports
• The practitioner:
• Gathers sufficient appropriate evidence to be satisfied that the
subject matter is plausible in the circumstances
• Gives a report in the form of a negative statement of opinion
(“nothing has come to our attention”)
• The level of assurance given is moderate

• Examples: review of financial statements (ISRE2400), risk

assessment reports, performance measurement reports, reviews
of internal controls, reports on socials and environmental issues
M&S Plan A assurance report
Sustainability reporting
• The new International Standard on Sustainability Assurance (ISSA)
5000 has been published by the International Auditing and
Assurance Standards Board (IAASB).

• These standards establish clear expectations for ethical behaviour

in sustainability reporting and assurance and provide more specific
requirements for practitioners and organizations in relation
to assurance engagements on sustainability information.

• ISSA 5000 is effective for assurance engagements on sustainability

information reported for periods beginning on or after 15 December
2026, or as at a specific date on or after 15 December 2026.
ISSA 5000 sustainability assurance
Next steps

• Come to the seminar – bring the questions with you either printed out or
downloaded on your laptop/tablet so you can have a go at them during
class. Remember the more you do in seminars, the less you have to do at
home!
• Make sure that you do the guided learning and independent learning
activities – see the bottom of the on-demand folder. Ask if you are not sure
about the answers.

Tuesday 15 April 2025 32