AUDITING AND

ASSURANCE

7. Audit Report
 Auditors reports
 International standard on Audit(ISA) deals with the
auditor’s responsibility to form an opinion on the
financial statements.
The form and content of the auditor’s report issued
as a result of an audit of financial statements.

how the form and content of the auditor’s report are

affected
 when the auditor expresses a modified opinion
 Including an Emphasis of Matter paragraph or an Other
Matter paragraph in the auditor’s report
 Objectives of auditor are;
To form an opinion on the financial
statements based on an evaluation of the
conclusions drawn from the audit evidence
obtained
To express clearly that opinion through a
written report that also describes the basis
for that opinion
 Standards of reporting
• accepted reporting standards related to:
– General purpose framework
– consistency;
– Adequate disclosure;
– Expressing an opinion;
 General purpose framework – A financial
reporting framework designed to meet the
common financial information needs of a wide
range of users
 General purpose financial statements –
Financial statements prepared in accordance
with a general purpose framework.
 The financial reporting framework may be a
fair presentation framework or a compliance
framework
• Acknowledges explicitly or implicitly that, to
achieve fair presentation of the financial
statements, it may be necessary for management
to provide disclosures beyond those specifically
required by the framework

• Acknowledges explicitly that it may be necessary

for management to depart from a requirement of
the framework to achieve fair presentation of the
financial statements. Such departures are
expected to be necessary only in extremely rare
circumstances.
 General purpose framework
• The accounting principle selected and applied
have general acceptance;
• The accounting principles are appropriate in
the circumstances;
• The f/statements, including the related notes,
are informative of matters that may affect
their use, understanding, and interpretation;
 consistency
• The report shall identify those
circumstances in which such principles
have not been consistently observed in
the current period in relation to the
preceding period.
• Note: unless the report contains a
specific language to the contrary, the
reader can conclude that accounting
principles have been consistently
applied.
 The objectives of consistency are :
• To give assurance that comparability of
f/statements b/n accounting periods
have not been materially affected by
change in accounting principles; and

• To require appropriate reporting by the

auditor when comparability has been
materially affected by such changes.
 Adequate disclosure
• Informative disclosures in the
f/statements are to be regarded as
reasonably adequate unless otherwise
stated in the report.
• In the absence of explicit wording
in the auditor’s report to the
contrary, the reader can conclude
that the disclosure reporting
standard has been met.
 Expressing opinion
• The report shall either contains an expression of opinion
regarding the f/statements taken as a whole, or an
assertion to the effect that an opinion can not be
expressed.

• When an overall opinion can not be expressed, the

reason therefore should be stated.
• In all cases where the auditor’s name is associated with
the f/statements, the report should contain a clear – cut
indication of the character of the auditor’s work, if any,
and the degree of responsibility the auditor is taking.
 Forming an Opinion on the Financial Statements
 The auditor shall form an opinion on whether the
financial statements are prepared, in all material
respects, in accordance with the applicable financial
reporting framework

 Auditor shall conclude as to whether the auditor has obtained

reasonable assurance about whether the financial statements as
a whole are free from material misstatement
– adequately disclose the significant accounting
policies selected and applied
– accounting policies selected and applied are
consistent
– The overall presentation, structure and content of
the financial statements
 Types of audit opinion
The auditors based on their conclusion can
issue;
1. Unmodified opinion/unqualified opinion
2. Modified opinion
The modified opinion further can be
I. Modified or qualified audit opinion
II. Adverse audit opinion
III. Disclaimer audit opinion
 Unmodified /unqualified/ opinion
• Auditor shall express an unmodified opinion
» when the auditor concludes that the financial statements
are prepared, in all material respects, in accordance with
the applicable financial reporting framework

• Auditor shall modify the opinion in the

auditor’s report , if auditor
i. concludes that, based on the audit evidence obtained, the
financial statements as a whole are not free from material
misstatement;

ii. is unable to obtain sufficient appropriate audit evidence to

conclude that the financial statements as a whole are free
from material misstatement,
 The Auditor’s Standard Report
• The standard report can be issued when the ff.
conditions are met:
1.All financial statements are included.
2. The general audit standards have been followed in all
respects on the engagement.
 competence, independence, and due professional care.
3. Sufficient evidence has been accumulated to conclude .
 Adequate planning and supervision,
 sufficient understanding of internal control, and
 obtaining sufficient competent evidential matter.
 The Auditor’s Standard Report
The standard report can be issued when the ff.
conditions are met (cont.):

4.The financial statements are presented in

accordance with generally purpose framework
5. There are no circumstances requiring the
addition of an explanatory paragraph or
modification of the wording of the report.
 The Auditor’s Standard Report
• The report may be addressed to the company
whose financial statements are being audited or
to its board of directors or stockholders;
• The standard auditor’s report is with an
unqualified audit opinion.
• Certain circumstances, while not affecting the
auditor's unqualified opinion on the financial
statements, may require that the auditor add
an explanatory paragraph (or other explanatory
language) to his or her report.
 The Auditor’s Standard Report
• The auditor's standard report states that the financial
statements present fairly, in all material respects, an entity's
financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles.
• The auditor's standard report identifies:
– Title : title that clearly indicates that it is the report of
an independent auditor
– Addressee : addressed as required by the circumstances
of the engagement
– Introductory Paragraph
– Managements responsibility
– Auditors responsibility
– Audit opinion
– Other reporting responsibility
– Signature
• Introductory Paragraph: includes
Identify the entity whose financial statements have
been audited;
State that the financial statements have been
audited
Identify the title of each statement that comprises
the financial statements;

Refer to the summary of significant accounting

policies and other explanatory information

Specify the date or period covered by each financial

statement comprising the financial statements
 Management’s Responsibility for the Financial
Statements
 auditor’s report describes the responsibilities of those in the
organization that are responsible for the preparation of the financial
statements

 The auditor’s report need not refer specifically to “management,”

but shall use the term that is appropriate in the context of the legal
framework in the particular jurisdiction

 description shall include an explanation that management is

responsible for the preparation of the financial statements
 internal control as it determines is necessary to enable the
preparation of financial statements

 auditor’s report shall include a section with the heading

“Management’s responsibility
 Auditor’s Responsibility:
• include a section with the heading “Auditor’s
Responsibility.”
• state that the responsibility of the auditor is to express an
opinion on the financial statements based on the audit
• auditor’s report shall state that the audit was conducted in
accordance with ISA
• explain that those standards require that the auditor
comply with ethical requirements and that the auditor
plan and perform the audit to obtain reasonable assurance
 Auditor’s Opinion
• The auditor’s report shall include a section
with the heading “Opinion.
Unqualified Report with Explanatory Paragraph

 Conditions for Unqualified Report with

Explanatory Paragraph
1. Lack of consistent application of accepted
accounting framework.
2. Substantial doubt about going concern.
3. Auditor agrees with a departure from
promulgated accounting principles.
4. Emphasis of a matter.
5. Reports involving other auditors.
Substantial Doubt About Going Concern

1. Significant recurring operating losses or

working capital deficiencies.
2. Inability of the company to pay its obligations
as they come due.
3. Loss of major customers, the occurrence of
uninsured catastrophes.
4. Legal proceedings, legislation that might
jeopardize the entity’s ability to operate.
 Auditor Agrees with a Departure from a
Promulgated Principle
 The auditor must be satisfied and must
state and explain, in a separate paragraph or
paragraphs in the audit report, that adhering
to the principle would have produced a
misleading result in that situation.
 Reports involving other auditors

• When part of the audit is carried out by another

audit firm has two options:
i. making no reference to other auditor’s work:
– The principal auditor assumes full responsibility;
– This is true when the other auditor is well known;
– When the principal hired the other auditor;
– The principal auditor has visited and reviewed
the work of the other auditor;
– No need of explanatory paragraph/wording.
 Modification to the Auditor’s Opinion
Modified opinion – A qualified opinion, an
adverse opinion or a disclaimer of opinion.
Modification to the auditor’s opinion is required
when:
I. auditor concludes that, based on the audit evidence obtained,
the financial statements as a whole are not free from material
misstatement
II. auditor is unable to obtain sufficient appropriate audit
evidence to conclude that the financial statements as a whole
are free from material misstatement
 Pervasiveness
• Pervasive – A term used, in the context of misstatements, to
describe the effects on the financial statements of
misstatements or possible effects on the financial statements
of misstatements the that are undetected due to an inability
to obtain sufficient appropriate audit evidence
• Pervasive effects on the financial statements are those that, in
the auditor’s judgment
1. Are not confined to specific elements, accounts or
items of the financial statements

2. If so confined, represent or could represent a

substantial proportion of the financial statements
 Type of Modification to the Auditor’s
Opinion
A) Qualified Opinion: is issued when,
1. The auditor, having obtained sufficient appropriate
audit evidence, concludes that misstatements,
individually or in the aggregate, are material, but not
pervasive, to the financial statements
2. The auditor is unable to obtain sufficient appropriate audit
evidence on which to base the opinion, but the auditor
concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be
material but not pervasive
 Type of Modification to the Auditor’s Opinion
B)Adverse Opinion is issued when;
 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.
C) 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.
 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
 Form and Content of the Auditor’s Report
When the Opinion Is Modified
Basis for Modification Paragraph
 When the auditor modifies the opinion on the financial
statements ; auditor’s report that provides a description
of the matter giving rise to the modification.
 The auditor shall place this paragraph immediately
before the opinion paragraph in the auditor’s report and
use the heading “Basis for Qualified Opinion,” “Basis for
Adverse Opinion,” or “Basis for Disclaimer of Opinion,” as
appropriate
 matter giving rise to the modification or material
misstatement may include both quantitative
disclosures narrative disclosures, the auditor shall
include in the basis for modification paragraph an
explanation
 qualified Opinion
• A qualified opinion states that, except for the
effects of the matter(s) to which the
qualification relates, the financial statements
present fairly, in all material respects, the
financial position, results of operations, and
cash flows of the entity in conformity with
generally accepted accounting principles.
 qualified Opinion
• A qualified opinion (cont.)
• A separate explanatory paragraph before
opinion paragraph is added.
• The materiality of exception governs the issue
of qualified opinion.
• The materiality should be significantly
sufficient, but not so significant as to
necessitate a disclaimer or adverse opinion.
 qualified Opinion
• A qualified opinion (cont.)
• Conditions for qualified opinion:
1Departure from general purpose framework
– Disagreement of the departure by the
auditor;
– Immaterial departure – unqualified
opinion;
– Material departure – qualifies opinion;
– So material departure – adverse opinion.
 qualified Opinion
• Level of materiality determines whether to
issue qualified or disclaimer of opinion.
• Introductory paragraph is unaffected, but
there is modification on the scope and opinion
paragraph.
• Explanatory paragraph is added before
opinion paragraph.
Qualified Opinion Paragraph
When the auditor expresses a qualified opinion due to a
material misstatement in the financial statements, the
auditor shall state in the opinion paragraph that, in the
auditor’s opinion, except for the effects of the matter(s)
described in the Basis for Qualified Opinion paragraph:
The financial statements present fairly, in all material
respects (or give a true and fair view) in accordance with the
applicable financial reporting framework when reporting in
accordance with a fair presentation framework
The financial statements have been prepared, in all material
respects, in accordance with the applicable financial
reporting framework when reporting in accordance with a
compliance framework
 Adverse opinion
• Adverse opinion states that the financial
statements do not present fairly the financial
position, results of operations, or cash flows of the
entity in conformity with acceptable accounting
framework.
• The opposite of the unqualified opinion.
• Results from very material departure from
acceptable framework.
• When the departure overshadows the overall
f/statements or misleading f/statements
 adverse opinion
 When the auditor expresses an adverse opinion, the
auditor shall state in the opinion paragraph that, in the
auditor’s opinion, because of the significance of the
matter(s) described in the Basis for Adverse Opinion
paragraph:
1. The financial statements do not present fairly (or give a
true and fair view) in accordance with the applicable
financial reporting framework when reporting in
accordance with a fair presentation framework; or

2. The financial statements have not been prepared, in

all material respects, in accordance with the applicable
financial reporting framework when reporting in
accordance with a compliance framework.
Partial report of adverse…
 Disclaimer opinion
• Disclaimer of opinion states that the auditor
does not express an opinion on the financial
statements.
• It is with no – opinion.
• Issued when there is substantial scope
limitations.
• Issued in rare cases.
 Disclaimer opinion
• When the auditor disclaims an opinion due to an
inability to obtain sufficient appropriate audit
evidence, the auditor shall state in the opinion
paragraph that:
 Because of the significance of the matter(s) described in
the Basis for Disclaimer of Opinion paragraph, the auditor
has not been able to obtain sufficient appropriate audit
evidence to provide a basis for an audit opinion; and,
accordingly, The auditor does not express an opinion on
the financial statements.
 Description of Auditor’s Responsibility When the
Auditor Expresses a Qualified or Adverse Opinion

• When the auditor expresses a qualified or

adverse opinion, the auditor shall amend
the description of the auditor’s
responsibility to state that the auditor
believes that the audit evidence the
auditor has obtained is sufficient and
appropriate to provide a basis for the
auditor’s modified audit opinion.
Description of Auditor’s Responsibility When the Auditor Disclaims an
Opinion
When the auditor disclaims an opinion due to an inability to obtain
sufficient appropriate audit evidence ,
• auditor shall amend the introductory paragraph of the
auditor’s report to state that the auditor was engaged to
audit the financial statements .
• The auditor shall also amend the description of the
auditor’s responsibility and the description of the scope of
the audit to state as
“Our responsibility is to express an opinion on the financial
statements based on conducting the audit in accordance with
International Standards on Auditing. Because of the matter(s)
described in the Basis for Disclaimer of Opinion paragraph, however,
we were not able to obtain sufficient appropriate audit evidence to
provide a basis for an audit opinion.
Partial report on disclaimer opinion