Auditors Report

The auditor’s report
Chapter 16
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Stuart Manson ISBN 1-86152-946-5
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LEARNING OBJECTIVES
After studying this chapter you should be

able to:
• Explain the nature and importance of the audit
report.
• Explain how auditors report fundamental
uncertainties.
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LEARNING OBJECTIVES CONT'D
• Discuss the various forms of qualified audit

report and identify the circumstances under
which each type would be issued by auditors.
• Outline auditors’ responsibilities for reporting
on corporate governance issues.
• Outline the reason why auditors have started
to include a disclaimer to third parties
paragraph in the audit report.
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LEARNING OBJECTIVES CONT'D
• Describe the implications of electronic

publication of the audit report.
• Discuss the audit reporting implication of an
audit qualification for a company making a
distribution.
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KEY POINTS – p.604
Auditors communicate their views on accounts in

the audit report. If they are satisfied the accounts
give a true and fair view and comply with legislation,
they give an unqualified opinion, but, if dissatisfied,
a qualified opinion may be appropriate.
Auditing standards require ‘reasonable assurance’
but other engagements may provide only ‘limited
assurance’. The current audit report is an
‘expanded’ or ‘long-form’ report.
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KEY POINTS – p.604 CONT'D
An unqualified audit report for an unlisted company

has the following sections:
(a) addressee;
(b) scope and identification of subject matter;
(c) responsibilities;
(d) basis of opinion;
(e) opinion;
(f) name and address of auditors;
(g) date of audit report.
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Auditors must identify the published information

upon which they are reporting. Auditors check
that information not audited does not conflict with
the view given by the financial statements. If they
believe there is an inconsistency or incorrect
information auditors consider whether an
amendment to the other information or the
financial statements is required.
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Auditors state their responsibility to form an opinion on

the financial statements. Directors’ responsibilities
include:
(a) preparation of financial statements that give a true
and fair view;
(b) selection of suitable consistently applied
accounting policies; making prudent and
reasonable judgements and estimates; following
applicable accounting standards; determining
appropriateness of the going-concern assumption;
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(c) ensuring the entity keeps proper accounting

records; safeguarding the assets; taking
appropriate action to prevent and detect fraud
and other irregularities.
Responsibilities statements are to make clear to

readers the extent and scope of the respective
responsibilities of the directors and auditors, and to
remove misconceptions that users may have had.
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ACTIVITY 16.1
The inclusion of responsibilities statements was

seen as a way of educating users and in the
process helping to eliminate the audit
expectations gap.
List any misconceptions users may have had

about the respective responsibilities of the
auditors and directors.
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KEY POINTS – pp.610–611
The basis of opinion section refers to:

(a) conformity of audit work to auditing standards;
(b) basis of the audit opinion, including that the
auditors had:
(i) examined evidence on a test basis;
(ii) formed assessments of significant estimates
and judgements;
(iii) determined whether the accounting policies
are appropriate, consistently applied and
adequately disclosed.
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ACTIVITY 16.2
Suggest reasons why the first two items in the

above list may have been included in the opinion
part of the audit report.
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KEY POINTS – pp.610–611 CONT'D
In the opinion section auditors express an opinion

and not a guarantee – an opinion of value because
it is given by independent and competent experts.
The opinion is directed towards two basic matters:
(1) the truth and fairness of the accounts;
(2) compliance with CA 1985.
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CA 1985 requires companies to state whether

accounts have been prepared in accordance with
applicable accounting standards and, where there
is material departure from standards, that details,
together with financial effect, are given with
reasons.
In very exceptional circumstances companies may
depart from a provision of CA 1985 in order to give
a true and fair view, but the reasons for departure
and the effect should be disclosed.
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Exercise of judgement is very important where it

involves uncertainty, particularly when it relates to
the outcome of a future event.
Uncertainty only becomes a major problem when
the extent of the uncertainty and potential effect is
fundamental to the view given by the financial
statements.
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ACTIVITY 16.3
List items whose amount in the financial

statement may depend on the future events.
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In assessing the magnitude of an inherent

uncertainty auditors consider:
(1) the risk an estimate may be subject to change;

(2) the range of possible outcomes;
(3) the consequence of outcomes on financial
statements.
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If an item affected by fundamental uncertainty

has been adequately accounted for and
disclosed, auditors issue an unqualified audit
report with an explanatory paragraph in the
‘basis of opinion’.
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ACTIVITY 16.4
Why do you believe that it was thought

necessary for ISA 700 to require that auditors
should refer to a fundamental uncertainty in their
audit report?
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Where auditors believe the directors’ estimate of

the likely outcome is materially misstated or
disclosures are inadequate, they may issue a
qualified audit report for disagreement.
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Qualifications in the audit report indicate there are

material matters about which the auditors are not
completely satisfied.
Dissatisfaction could be because of:
(a) limitation in audit scope;
(b) auditors’ disagreement with treatment or
disclosure.
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Figure 16.2 Forms of qualification matrix
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KEY POINTS – pp.617–618
Limitation of scope arises if auditors are unable to

obtain sufficient appropriate evidence. If the
possible effect is so material or pervasive that they
cannot form an opinion, they issue a disclaimer, but
if not they issue an ‘except for’ opinion.
The audit report includes a description of factors
that lead auditors to give a qualified opinion so
users can more fully appreciate the implications of
the limitation of scope and why qualification is
necessary.
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Disagreement arises when the auditors form an

opinion on a specific matter that differs from the
opinion of management. An adverse opinion is
given when the effect of the disagreement is so
material or pervasive that the financial statements
are seriously misleading.
An ‘except for’ opinion is used where
disagreement about an item is material but not
seriously misleading.
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Disagreement can arise from:

(1) use of an inappropriate accounting base;
(2) disagreement with client as to facts or
amounts;
(3) non-compliance with relevant legislation.
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ISA 260 requires auditors to report their findings

to those charged with governance.
Examples of matters that would be reported
include:
(a) expected modifications to the audit report;
(b) any misstatements that have not been adjusted
by management in preparing the financial
statements.
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Where the financial statements are not adjusted

for misstatements the auditors obtain written
representations from those charged with
governance as to why they were unwilling to make
the necessary adjustments.
Even where management have adjusted the
financial statements auditors may communicate
details to those charged with governance for their
consideration.
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A recent addition to the wording of the standard

audit report is a paragraph disclaiming
responsibility to third parties, arising from the
Bannerman case.
Adding this wording has become common practice
among the Big Four.
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APB introduced the expanded audit report as an

attempt to close the audit expectations gap and
reduce misunderstandings relating to:
(1) the nature of audited financial statements;
(2) the type and extent of work undertaken by
auditors;
(3) the level of assurance provided by auditors.
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The listing rules require the auditors’ report on the

financial statements to cover the disclosure of
certain items affecting directors.
They also require auditors to describe their
reporting responsibilities in the corporate
governance report.
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Auditors are not currently required to report

publicly on whether the directors’ statement on
internal control covers all risks and controls.
Nor are they required to report on the

effectiveness of corporate governance procedures
or its risk and control procedures.
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However, in reviewing the directors’ statement on

internal controls, auditors:
(a) determine how directors reviewed the
effectiveness of the system of internal control;
(b) review and evaluate documentation prepared
for the directors;
(c) determine if the directors’ statement accords
with the auditors’ knowledge of the system of
internal control and of the company.
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Auditors are not currently required to report

publicly on whether the directors’ statement on
internal control covers all risks and controls, or
on the effectiveness of corporate governance
procedures or its risk and control procedures.
They also require auditors to describe their
reporting responsibilities in the corporate
governance report.
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Companies often post financial reports on the

web.This raises problems for auditors because:
(1) information on the web is easily changed;
(2) it may not be readily apparent what information
has been subject to audit;
(3) information on the web can be accessed in
many different countries.
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Where a client intends to distribute its financial

statements electronically auditors should:
(a) review the process by which the electronic
financial statements are derived;
(b) check that the proposed electronic version is
identical in content with the manually signed
accounts;
(c) check that the conversion of the manually
signed accounts into an electronic form has
not distorted overall presentation.
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CHAPTER SUMMARY
This chapter has introduced:

• The way in which auditors report the results of
their audit investigation to members of the company;
• The main components of the unqualified audit
report as given in SAS 600;
• The uncertainty that always surrounds financial
statements, and the consequent need for users to
be aware of its implications.
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CHAPTER SUMMARY CONT'D
• The role of auditors in drawing attention to

fundamental uncertainties in their audit report;
• The qualified audit report;
• The classification of qualifications into
‘limitations of scope’ and ‘disagreements’;
• The expansion of the role of auditors to
include the requirement that they report on
certain corporate governance issues;
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CHAPTER SUMMARY CONT'D
• The Combined Code of Corporate Governance

and its revision in the light of the Cadbury
Committee Report;
• The implications of these amendments for
auditors of companies using electronic means;
• A discussion of the auditors’ reporting
responsibilities when a company makes a
distribution after having received a qualified
audit report.
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FURTHER READING
ISA 700, Auditors’ Reports on Financial

Statements, Auditing Practices Board, December
2004.
David Hatherly, ‘Audit Reports’, in Michael Sherer
and Stuart Turley (eds.), Current Issues In Auditing
(3rd edn), London: Paul Chapman Publishing,
1997, Chap. 10.
The Audit Agenda, Auditing Practices Board,
December 1994.
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The auditor’s report

After studying this chapter you should be

• Discuss the various forms of qualified audit

• Describe the implications of electronic

Auditors communicate their views on accounts in

An unqualified audit report for an unlisted company

Auditors must identify the published information

Auditors state their responsibility to form an opinion on

(c) ensuring the entity keeps proper accounting

Responsibilities statements are to make clear to

The inclusion of responsibilities statements was

List any misconceptions users may have had

The basis of opinion section refers to:

Suggest reasons why the first two items in the

In the opinion section auditors express an opinion

CA 1985 requires companies to state whether

Exercise of judgement is very important where it

List items whose amount in the financial

In assessing the magnitude of an inherent

(1) the risk an estimate may be subject to change;

If an item affected by fundamental uncertainty

Why do you believe that it was thought

Where auditors believe the directors’ estimate of

Qualifications in the audit report indicate there are

Limitation of scope arises if auditors are unable to

Disagreement arises when the auditors form an

Disagreement can arise from:

ISA 260 requires auditors to report their findings

Where the financial statements are not adjusted

A recent addition to the wording of the standard

APB introduced the expanded audit report as an

The listing rules require the auditors’ report on the

Auditors are not currently required to report

Nor are they required to report on the

However, in reviewing the directors’ statement on

Auditors are not currently required to report

Companies often post financial reports on the

Where a client intends to distribute its financial

This chapter has introduced:

• The role of auditors in drawing attention to

• The Combined Code of Corporate Governance

ISA 700, Auditors’ Reports on Financial

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