Chapter 13

The auditor’s reporting obligations

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Learning objective 1:Obligations to report

• ASA/ISA 200.11: objective of an audit of the financial report is to enable the auditor to express an opinion as to whether the financial report is prepared, in all material respects, in accordance with an applicable financial reporting framework.

• Audit to be conducted in accordance with approved auditing standards.

• In Australia, the auditor has an obligation to form a conclusion as to whether the financial report has been prepared using Australian accounting standards issued by the AASB.

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Obligations to report (cont.)

• The Corporations Act 2001, s 307, requires the auditor to form an opinion as to:(a) Whether the financial report is in accordance

with the Act, including:

(i) s 296 or 304 (compliance with accounting standards), and

(ii) s 297 or 305 (true and fair view), and

(aa) if the financial report includes additional information … (to give a true and fair view of the financial

position and performance) — whether the inclusion of that information was necessary to give the true and fair view required by s 297 or 305, and

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Obligations to report (cont.)• s 307 continued:

(b) whether the auditor has been given all information, explanation and assistance necessary for the conduct of the audit, and

(c) whether the company, registered scheme or disclosing entity has kept financial records

sufficient to enable a financial report to be prepared and audited, and

(d) whether the company, registered scheme or disclosing entity has kept other records and

registers as required by this Act.

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Obligations to report (cont.)

• The Corporations Act 2001, s 308(1), also clearly specifies that the audit report shall state the auditor’s opinion in relation to:

– subs (a)(i) of s 307(1) — compliance with accounting standards

– subs (a)(ii) of s 307(1) — true and fair view

• Section 308(3)(b) states that auditor is required to form an opinion on the matters noted in points (b) to (d) on previous slide, but need only include these in the auditor’s report if there is a deficiency, failure or shortcoming in respect of any of those matters

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Who the auditor has an obligation to report to

• The engagement letter (chapter 6) should clearly specify who the auditor has an obligation to report to.

• Audit report is usually addressed to either the governing body and members.

• In addition to audit report, auditor’s have reporting responsibilities to:

– Management and the board of directors on anything prejudicial to the interests of shareholder

– ASIC where there are reasonable grounds to suspect a contravention of the provision of the Corporations Act, that will not be adequately dealt with by comment in the audit report or by notifying directors.

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Learning objective 2: True and fair view

• ASA/ISA 700.35 requires the auditor to express an opinion as to 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.

• For the purposes of approved auditing standards, the two phrases are equivalent.

• A financial reporting framework can either be a fair presentation framework or a compliance framework.

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Fair presentation and compliance frameworks

• A fair presentation financial reporting framework requires compliance with the requirements of the framework and acknowledges that:

i. To achieve fair presentation it may be necessary for management to provide disclosures beyond the framework

ii. It may be necessary for management to depart from a framework requirement to achieve fair presentation

• These disclosures or departures are commonly referred to as true and fair overrides.

• A compliance framework is one that requires that the framework be complied with and does not contain the acknowledgments in (i) or (ii) above.

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Learning objective 3:Structure of the audit report

(Example report at Exhibit 1.1, chapter 1, pp. 29-30)• Title• Addressee• Introductory paragraph • Responsibility of those charged with governance• Auditor’s responsibility• Independence section (Australia)• Auditor’s opinion• Other reporting responsibilities• Auditor’s signature• Date of auditor’s report• Auditor’s address

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Learning objective 4: Types of audit opinions

• ASA/ISA 700 covers the auditor’s responsibility to form an opinion on the financial report, and the form and content of unmodified auditor’s reports.

• ASA/ISA 705 covers the types of modified opinions that can be issued:

– Qualified opinion– Disclaimer of opinion, or– Adverse opinion.

• ASA/ISA 706 covers those situations where it is necessary to draw users’ attention to an issue by an:

– Emphasis of Matter paragraph, or– Other Matter paragraph.

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Unqualified opinion

• This type of opinion is expressed when the auditor is satisfied in all material respects that the financial report:

– Has been prepared in accordance with the Corporations Act 2001, including giving a true and fair view and complying with Australian accounting standards and with the Corporations Regulations 2001, and

– Complies with IFRSs.

• This form of opinion gives rise to the unqualified opinion paragraph, as shown in Exhibit 1.1.

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Unqualified opinion• Issuing an unqualified opinion means that the auditor

has concluded that they have obtained reasonable assurance that the financial report as a whole is free from material misstatement, whether due to fraud or error.

• This means that the auditor has concluded that:– Sufficient appropriate audit evidence has been obtained (in

accordance with ASA/ISA 330)– Uncorrected misstatements are immaterial, both individually

and in aggregate (in accordance with ASA/ISA 450), and– That the financial report is prepared, in all material respects,

in accordance with the requirements of the applicable financial reporting framework (ASA/ISA 700.11–12).

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Modifications affecting the auditor’s opinion

• Nature of the matter giving rise to the modification, and pervasiveness of its effects on the financial report, determine the type of opinion expressed.

• Effects are considered to be pervasive if they:– Are not confined to specific elements, accounts or items of

the financial report– If so confined, represent or could represent a substantial

proportion of the financial report, or– In relation to disclosures, are fundamental to users’

understanding of the financial report (ASA/ISA 705.5).

• For all the types of modified opinions, a basis for modification paragraph is inserted just before the opinion paragraph.

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Modifications affecting the auditor’s opinion (cont.)

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Qualified opinion• A qualified opinion is expressed when the auditor

concludes:– That misstatements are material but not pervasive to the

financial report, or – When the auditor is unable to obtain sufficient appropriate

evidence on which to base the opinion but concludes that the possible effects on the financial report could be material but not pervasive (ASA/ISA 705.7).

• The most common types of qualified opinions issued relate to material departures from a specific accounting standard or material disagreements over the carrying value of a specific asset or liability and its potential effect on profit.

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Basis for qualified auditor’s opinion paragraph, and a qualified auditor’s opinion paragraph

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Adverse opinion• An adverse opinion should be expressed when the

effect of the misstatements, individually or in the aggregate, are so material and pervasive that the financial report taken as a whole is, in the auditor’s opinion, misleading or of little use to the addressee of the auditor’s report (ASA/ISA 705.8).

• The most common situation in which they are issued is where the accounts are prepared on a going concern basis and the auditor concludes that it is highly improbable that the entity will continue as a going concern (ASA/ISA 570 Appendix 1).

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Example of qualification and qualified opinion paragraph for an adverse opinion

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Disclaimer of opinion• A disclaimer of opinion, also referred to as an inability

to form an opinion, is expressed when the auditor is unable to obtain sufficient appropriate evidence to form an opinion, and concludes that the possible effect of undetected misstatements on the financial report could be both material and pervasive (ASA/ISA 705.9–10).

• In issuing a disclaimer of opinion the auditor is communicating that there has been such a limitation on the evidence gathering procedures that they are unsure whether the financial report is reliable.

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Example of qualified audit opinion paragraph for a disclaimer of opinion

(statement of inability to form an opinion)

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Emphasis of Matter• In certain limited circumstances it is appropriate for

the auditor to draw attention to or emphasise a matter that is appropriately presented or disclosed in the financial report and is considered relevant to users of the auditor’s report, but which, because of its nature, does not affect the auditor’s opinion.

• The major examples would be where there is a disclosure in the notes to the financial report that the auditor considers to be complete and adequate, but important enough to bring to users’ attention.

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Circumstances giving rise to Emphasis of Matter

• ASA/ISA 706.A1 outlines circumstances in which Emphasis of Matter (EoM) can be issued:

– Uncertainty relating to the future outcome of exceptional litigation or regulatory action

– Early application of a new accounting standard that has a pervasive effect on the financial report in advance of its effective date, and

– A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position.

• Currently, approximately 80% of auditor’s reports in Australia containing EoM paragraphs relate to uncertainty regarding going concern status.

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‘Emphasis of Matter’ paragraph relating to inherent uncertainties

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Other Matter paragraph

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• The ability to include an Other Matter (OM) paragraph in the auditor’s report allows auditor to draw user’s attention to any other matters, not presented or disclosed in the financial report, that the auditor believes are sufficiently important to be highlighted.

• Circumstances giving rise to an OM paragraph are those relevant to enhancing user’s understanding of the audit, the auditor’s responsibilities or the audit report.

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Learning objective 5: Circumstances giving rise to a

modified opinion• The auditor’s opinion should be modified when:

– The auditor concludes, based on the audit evidence obtained, that the financial report is not free from material misstatements, or

– The auditor is unable to obtain sufficient appropriate evidence to conclude that the financial report is free of material misstatements (ASA/ISA 705.6).

• The auditor should take all reasonable steps to overcome the issues giving rise to the material misstatement (disagreements with management) or the issues causing the auditor to be unable to obtain sufficient appropriate evidence (limitations on scope).

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Material Misstatement

• ASA/ISA 450 defines a misstatement as the difference between the amount, classification, presentation or disclosure of an item reported by an entity in the financial report and the way that item is required to be treated in accordance with the applicable financial reporting framework.

• Therefore, a material misstatement in the financial report may arise in relation to:

– The appropriateness of the accounting policies selected– The application of those accounting policies, or– The appropriateness or adequacy of disclosures in the

financial report (ASA/ISA 705.A3).

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Scope limitation

• A limitation on the scope of the auditor’s work may arise for one of the following three reasons (ASA/ISA 705.A8):

– Circumstances beyond the control of the entity– Circumstances related to the nature or timing of the auditor’s

work, or– Limitations imposed by the entity.

• A limitation on the performance of a particular procedure does not necessarily constitute a limitation on the scope of the audit if the auditor is able to obtain sufficient appropriate evidence by performing alternative procedures.

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The effect of materiality on the audit qualification

• The primary factor when considering whether to qualify an audit opinion, or attempting to determine what sort of qualification to apply, is the materiality of the subject matter giving rise to the qualification.

• One critical aspect is the dollar magnitude of the effects of the matter on the financial report.

• The auditor also needs to consider the nature of the matter when making judgments regarding materiality.

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Learning objective 6: The audit of comparative amounts

• Most entities disclose information from previous periods for comparison purposes.

– Such comparative information is an integral part of the current period’s financial report, but is intended to be read only in relation to the information relating to the current period

• The assessment of risk of material misstatement includes the following considerations:

– The accounting policies used for the comparative information should be in accordance with the financial reporting framework and consistent with those of the current period

– The comparative information and other disclosures required should agree with those in the previous financial report

– The comparative information should be free of material misstatement.

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Auditor’s responsibilities for other information in annual report

• Most annual reports include information that is not part of the financial report, much of which contains or refers to financial information (e.g. summaries of 5–10 years of operating results, chairperson’s and directors’ reports).

• No specific responsibility to substantiate other information but should review such information to ensure it does not contain material inconsistencies or misstatements of fact.

• If revision of ‘other information’ is necessary and management refuses, auditor should include an OM paragraph.

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Learning objective 7:Communication with shareholders

• Principal means of communication with shareholders is the auditor’s opinion on the financial report included in the annual report

• A second major method of communicating with shareholders is at the company’s annual general meeting (AGM).

– However, the effectiveness of auditors’ attendance at AGMs as a communication mechanism is limited, as only a small minority of shareholders usually attend these meetings.

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Communication with management and those charged with governance

• ASA/ISA 260, supported by ASA/ISA 450, provides guidance for the auditor in communicating with all groups of directors and management.

• If the matter concerns a significant deficiency in internal control, the auditor should, also on a timely basis, communicate in writing such deficiencies to those charged with governance (ASA/ISA 265.9).

• ASA/ISA 450.12 requires that the auditor communicate with those charged with governance any uncorrected misstatements and the effects that they may have on the auditor’s report.

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Communication with management

• Contacts between the auditor and management are more extensive, more frequent and less formal than those with shareholders, audit committees and boards of directors.

• The auditor should also communicate to the appropriate level of management any significant deficiencies in internal control that they have communicated to those charged with governance, as well as other deficiencies identified during the audit that are deemed sufficiently important to merit management’s attention (ASA/ISA 265.10).

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The management letter

• The management letter is a written communication between the auditor and management that is normally issued at the conclusion of the audit engagement.

• This letter summarises the auditor’s recommendations resulting from their assessment of the entity’s business risk and inherent risk, and any recommended improvements in internal control.

• The most critical discussions between the auditor and management concerns the form and content of the financial report.

– If the accounting policies proposed by management differ materially from those the auditor believes are appropriate, an alternative presentation must be agreed on.

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Communicating with the audit committee or board

• There is an increased emphasis on a company having an effective audit committee (chapter 3).

• Effective audit committees could be expected to inquire of their auditor the extent to which executive management has been aggressive in its choice of accounting policies, and the extent to which the auditor is independent of management.

• At the conclusion of the audit, the audit committee should ask the auditor about any significant disagreements with management and whether they have been satisfactorily resolved.

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Communicating through electronic presentation of financial reports

• GS 006 Electronic Publication of the Auditor’s Report provides guidance for the auditor in circumstances where the entity decides to publish its audited financial report on its website.

• Auditor must consider whether audit report might be construed as providing assurance on other information on the website that was unaudited.

• Auditor should review website to ensure audit report cannot be construed as providing assurance on this other unaudited information.

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