Audit Reports and Communication Principles of Auditing: An Introduction to International Standards on Auditing - - Ch. 12

1
Audit Reports and Communication Principles of
Auditing An Introduction to International
Standards on Auditing - - Ch. 12

• Rick Stephan Hayes,
• Roger Dassen, Arnold Schilder,
• Philip Wallage

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The objectives of the auditor are

• To form an opinion on the financial statements
  based on an evaluation of the conclusions drawn
  from the audit evidence obtained and
• To express clearly that opinion through a written
  report that also describes the basis for that
  opinion.

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• In order to form an opinion, the 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, whether due to fraud or error.
• The auditors conclusion shall take into account
  
• Whether sufficient appropriate audit evidence has
  been obtained
• Whether uncorrected misstatements are material,
  individually or in aggregate and next slide

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The auditors conclusion shall also take into
account whether the financial statements

• Are prepared, in all material respects, in
  accordance with the requirements of the
  applicable financial reporting framework
• Disclose significant accounting policies
• Use estimates made by management that are
  reasonable
• Use information that is relevant, reliable,
  comparable, and understandable
• Provide adequate disclosures and uses appropriate
  terminology

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Management Responsibility for Audit Report - SOx

• Sox Requires that the principal executive officer
  or officers and the principal financial officer
  or officers, certify in each report filed with
  the SEC the following
• the signing officer has reviewed the report
• the report does not contain any untrue statement
  of a material fact or omit to state a material
  fact
• the financial statements, and other financial
  information, fairly present in all material
  respects the financial condition of the company 
• the signing officers
• are responsible for establishing and maintaining
  internal controls
• have evaluated the effectiveness of the companys
  internal controls and
• have presented in the report their conclusions
  about the effectiveness of their internal
  controls based on their evaluation

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Corporate Responsibility for Audit Report under
SOx (cont.)

• Requires that the principal executive officer or
  officers and the principal financial officer or
  officers, certify in each report filed with the
  SEC the following
• the signing officers have disclosed to the
  companys auditors and the audit committee of the
  board of directors
• all significant deficiencies in the design or
  operation of internal controls which could
  adversely affect the companys ability to record,
  process, summarize, and report financial data and
  have identified for the companys auditors any
  material weaknesses in internal controls and
• any fraud, whether or not material, that involves
  management or other employees who have a
  significant role in the companys internal
  controls

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Contents of the Auditor's Report (AS 5)

• title,
• Addressee (not required PCAOB AS 5)
• opening or introductory paragraph
• scope paragraph (describing the nature of an
  audit)
• Definition paragraph
• Limitations paragraph
• opinion paragraph containing an expression of
  opinion on the financial statements,
• the date of the report, the auditor's address,
  and auditors signature

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Example PCAOB sample audit report from Audit
Standard No. 5 NEXT SLIDES
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Report of Independent Registered Public
Accounting Firm Introductory paragraph We have
audited the accompanying balance sheets of W
Company as of December 31, 20X8 and 20X7, and the
related statements of income, stockholders'
equity and comprehensive income, and cash flows
for each of the years in the three-year period
ended December 31, 20X8. We also have audited
management's assessment, included in the
accompanying title of managements report, that
W Company maintained effective internal control
over financial reporting as of December 31, 20X8,
based on Identify control criteria, for example,
"criteria established in Internal
ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the
Treadway Commission (COSO)." . W Company's
management is responsible for these financial
statements, for maintaining effective internal
control over financial reporting, and for its
assessment of the effectiveness of internal
control over financial reporting. Our
responsibility is to express an opinion on these
financial statements and an opinion on the
company's internal control over financial
reporting based on our audits.
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Scope paragraph We conducted our audits in
accordance with the standards of the Public
Company Accounting Oversight Board (United
States). Those standards require that we plan and
perform the audits to obtain reasonable assurance
about whether the financial statements are free
of material misstatement and whether effective
internal control over financial reporting was
maintained in all material respects. Our audits
of the financial statements included examining,
on a test basis, evidence supporting the amounts
and disclosures in the financial statements,
assessing the accounting principles used and
significant estimates made by management, and
evaluating the overall financial statement
presentation. Our audit of internal control over
financial reporting included obtaining an
understanding of internal control over financial
reporting, assessing the risk that a material
weakness exists, testing and evaluating the
design and operating effectiveness of internal
control based on the assessed risk, and
performing such other procedures as we considered
necessary in the circumstances. We believe that
our audits provide a reasonable basis for our
opinions.
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Definition paragraph A company's internal
control over financial reporting is a process
designed to provide reasonable assurance
regarding the reliability of financial reporting
and the preparation of financial statements for
external purposes in accordance with generally
accepted accounting principles. A company's
internal control over financial reporting
includes those policies and procedures that (1)
pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets
of the company (2) provide reasonable assurance
that transactions are recorded as necessary to
permit preparation of financial statements in
accordance with generally accepted accounting
principles, and that receipts and expenditures of
the company are being made only in accordance
with authorizations of management and directors
of the company and (3) provide reasonable
assurance regarding prevention or timely
detection of unauthorized acquisition, use, or
disposition of the company's assets that could
have a material effect on the financial
statements.
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Inherent limitations paragraph Because of its
inherent limitations, internal control over
financial reporting may not prevent or detect
misstatements. Also, projections of any
evaluation of effectiveness to future periods are
subject to the risk that controls may become
inadequate because of changes in conditions, or
that the degree of compliance with the policies
or procedures may deteriorate. Opinion
paragraph In our opinion, the financial
statements referred to above present fairly, in
all material respects, the financial position of
W Company as of December 31, 20X8 and 20X7, and
the results of its operations and its cash flows
for each of the years in the three-year period
ended December 31, 20X8 in conformity with
accounting principles generally accepted in the
United States of America. Also in our opinion, W
Company maintained, in all material respects,
effective internal control over financial
reporting as of December 31, 20X8, based on
Identify control criteria, for example,
"criteria established in Internal
ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the
Treadway Commission (COSO)." . Signature City
and State or Country Date
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ISA 700 Auditors Opinion on F/S

• INDEPENDENT AUDITORS REPORT
• Appropriate Addressee
• Introductory Paragraph (Report on Financial
  Statements)
• Managements Responsibility for the Financial
  Statements
• Auditors Responsibility
• Opinion
• Report on Other Legal and Regulatory Requirements
  Form and content of this section of the
  auditors report will vary depending on the
  nature of the auditors other reporting
  responsibilities.
• Auditors signature
• Date of the auditors report
• Auditors address

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ISA 700 Sample Audit Report

• INDEPENDENT AUDITORS REPORT
• Appropriate Addressee
• Report on the Financial Statements
• We have audited the accompanying financial
  statements of ABC Company, which comprise the
  statement of financial position as at December
  31, 20X1, and the statement of comprehensive
  income, statement of changes in equity and
  statement of cash flows for the year then ended,
  and a summary of significant accounting policies
  and other explanatory information.

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• Managements Responsibility for the Financial
  Statements
• Management is responsible for the preparation
  and fair presentation of these financial
  statements in accordance with International
  Financial Reporting Standards, and for such
  internal control as management determines is
  necessary to enable the preparation of financial
  statements that are free from material
  misstatement, whether due to fraud or error.
• Auditors Responsibility
• Our responsibility is to express an opinion
  on these financial statements based on our audit.
  We conducted our audit in accordance with
  International Standards on auditing. Those
  standards require that we comply with ethical
  requirements and plan and perform the audit to
  obtain reasonable assurance about whether the
  financial statements are free from material
  misstatement.

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• An audit involves performing procedures to
  obtain audit evidence about the amounts and
  disclosures in the financial statements. The
  procedures selected depend on the auditors
  judgment, including the assessment of the risks
  of material misstatement of the financial
  statements, whether due to fraud or error. In
  making those risk assessments, the auditor
  considers internal control relevant to the
  entitys preparation and fair presentation of the
  financial statements in order to design audit
  procedures that are appropriate in the
  circumstances, but not for the purpose of
  expressing an opinion on the effectiveness of the
  entitys internal control. An audit also includes
  evaluating the appropriateness of accounting
  policies used and the reasonableness of
  accounting estimates made by management, as well
  as evaluating the overall presentation of the
  financial statements.
• We believe that the audit evidence we have
  obtained is sufficient and appropriate to provide
  a basis for our audit opinion.

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• Opinion
• In our opinion, the financial statements
  present fairly, in all material respects, (or
  give a true and fair view of) the financial
  position of ABC Company as at December 31, 20X1,
  and (of) its financial performance and its cash
  flows for the year then ended in accordance with
  International Financial Reporting Standards.
• Report on Other Legal and Regulatory Requirements
• Form and content of this section of the
  auditors report will vary depending on the
  nature of the auditors other reporting
  responsibilities.
• Auditors signature
• Date of the auditors report
• Auditors address

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The opinion expressed in the auditor's report may
be one of four types

• Unmodified
• (unqualified),
• Three Modified Opinions
• qualified,
• adverse, or
• disclaimer of opinion

Q
U
A
D
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Unqualified Audit Opinion Also called
Unmodified Opinion

• Unmodified (unqualified) opinionThe opinion
  expressed by the auditor when the auditor
  concludes that the financial statements are
  prepared, in all material respects, in accordance
  with the applicable financial reporting
  framework.
• Most common type of audit report
• Called clean opinion
• Used for more than 90 per cent of all audit
  reports
• Other audit reports are referred to as modified
  opinion. (adverse opinion, disclaimer of opinion,
  and qualified opinion).

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An Unmodified (Unqualified)Audit Opinion should
be expressed when the auditor concludes that
the financial statements are prepared, in all
material respects, in accordance with the
applicable financial reporting framework.
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The objective of the auditor is to express
clearly an appropriately modified opinion on the
financial statements that is necessary when

• The auditor concludes, based on the audit
  evidence obtained, that the financial statements
  as a whole are not free from material
  misstatement or
• The auditor is unable to obtain sufficient
  appropriate audit evidence to conclude that the
  financial statements as a whole are free from
  material misstatement.

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Auditors Qualified Opinion

• Express a qualified opinion when
• 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 or
• 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.

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Auditors Adverse Opinion ( ISA 705)

• 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.

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Auditors Disclaimer of Opinion (ISA 705)

• 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.

or interaction of multiple uncertainties on F/S
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ISA 705 Appendix Types of Modified Opinions
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Basis for Modification Paragraph

• When the auditor modifies the opinion on the
  financial statements, the auditor shall, in
  addition to the specific elements required by ISA
  700, include a paragraph in the auditors 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 auditors report and use the
  heading Basis for Qualified Opinion, Basis for
  Adverse Opinion, or Basis for Disclaimer of
  Opinion, as appropriate.

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An Emphasis of a Matter Paragraph with an
Unmodified (Unqualified) Opinion

• An auditors unqualified report is sometimes
  expanded upon to explain matters that do not
  affect the auditors opinion, but should be
  emphasized to the financial statement user.

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ISA 706 Emphasis of Matter Paragraphs and Other
Matters Paragraphs in the Independent Auditors
Report (Not in text)

• The auditors report should emphasize a matter
  when it is necessary to
• (a) Draw users attention to matters presented or
  disclosed in the financial statements that are of
  such importance that they are fundamental to
  users understanding of the financial statements
  or
• (b) Draw users attention to any matters other
  than those presented or disclosed in the
  financial statements that are relevant to users
  understanding of the audit, the auditors
  responsibilities or the auditors report.

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• Report of Independent Registered Public
  Accounting Firm
• Standard Introductory Paragraph
• Standard Scope Paragraph
• Standard Opinion Paragraph
• Required Emphasis Paragraphs
• Emphasize those matters that are important in
  understanding the financial statement
  presentation, including significant management
  judgments and estimates and areas with
  significant measurement uncertainty. Discuss the
  audit procedures performed on these significant
  matters. This discussion should not include
  matters that the company has not disclosed in the
  financial statements and should make reference to
  the notes in the financial statements that
  disclose each matter.
• Signature
• City and State or Country
• Date

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When the auditor includes an Emphasis of Matter
paragraph in the auditors report, the auditor
shall

• (a) Include it immediately after the Opinion
  paragraph in the auditors report
• (b) Use the heading Emphasis of Matter,
• (c) Include in the paragraph a clear reference to
  the matter being emphasized and to where relevant
  disclosures that fully describe the matter can be
  found in the financial statements and
• (d) Indicate that the auditors opinion is not
  modified in respect of the matter emphasized

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An auditor might write an Emphasis of a Matter
paragraph

• If there is a significant uncertainty which may
  affect the financial statements, the resolution
  of which is dependent upon future events
• Examples of uncertainties that might be
  emphasized include
• the existence of related party transactions,
• important accounting matters occurring subsequent
  to the balance sheet date
• matters affecting the comparability of financial
  statements with those of previous years (e.g.
  change in accounting methods)
• Litigation, long-term contracts, recoverability
  of asset values, losses on discontinued
  operations
• To highlight a material matter regarding a going
  concern problem.

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Going Concern
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In a going concern judgment, the objectives of
the auditor are

• To obtain sufficient appropriate audit evidence
  about the appropriateness of managements use of
  the going concern assumption in the preparation
  and presentation of the financial statements
• To conclude, based on the audit evidence
  obtained, whether a material uncertainty exists
  related to events or conditions that may cast
  significant doubt on the entitys ability to
  continue as a going concern and
• (c) To determine the implications for the
  auditors report.

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Going Concern Disclosure

• The disclosure should
• Highlight the existence of a material uncertainty
  relating to the event or condition that may cast
  significant doubt on the entitys ability to
  continue as a going concern
• Draw attention to the note in the financial
  statements
• the principal events or conditions that may cast
  significant doubt on the entitys ability to
  continue as a going concern
• there is a material uncertainty related to events
  or conditions that may cast significant doubt on
  the entitys ability to continue as a going
  concern

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Reports involving other auditors and experts

• ISA 620 suggests that when expressing an
  unmodified (unqualified) opinion the auditor
  should not refer to the work of an expert in her
  report as such a reference might be misunderstood
  to be a qualification of the auditor's opinion or
  a division of responsibility. If the auditor
  references the work of an expert in the auditors
  report because it is relevant to a modification
  to the auditors opinion, the auditor shall
  indicate this does not reduce the auditors
  responsibility for that opinion.

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Communications With Those Charged With Governance

• The objective of the auditor is to provide those
  charged with governance with timely observations
  arising from the audit that are significant and
  relevant to their responsibility to oversee the
  financial reporting process including
• Qualitative aspects of the entitys accounting
  practices
• Significant difficulties encountered during the
  audit
• Significant matters arising from the audit that
  were discussed with management
• Other matters arising from the audit that are
  significant to the oversight of the financial
  reporting process

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Auditor Communications to Governance Entity

• Audit matters of governance interest to be
  communicated by the auditor to the board or audit
  committee ordinarily include
• Material deficiencies in internal control
• Non-compliance with laws and regulations.
• Fraud involving management
• Questions regarding management integrity
• The general approach and overall scope of the
  audit
• The selection of, or changes in, significant
  accounting policies and practices that have a
  material effect on the financial statements

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Auditor Communications to Governance Entity (cont)

• Audit matters of governance interest to be
  communicated by the auditor to the board or audit
  committee ordinarily include
• The potential effect on the financial statements
  of any significant risks and exposures, such as
  pending litigation, that requires disclosure in
  the financial statements
• Significant audit adjustments to the accounting
  records
• Material uncertainties related to the entitys
  ability to continue as a going concern
• Disagreements with management about matters that
  could be significant to the entitys financial
  statement.
• Expected modifications to the auditors report

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Governance Structures

• The structures of governance vary from country to
  country reflecting cultural and legal
  backgrounds.
• In some countries, the supervision function, and
  the management function are legally separated
  into different bodies, such as a supervisory
  (wholly or mainly non-executive) board and a
  management (executive) board.
• In other countries, like the U.S., both functions
  are the legal responsibility of a single, unitary
  board.

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Reporting Fraud and Error

• If the auditor has identified a fraud or has
  obtained information that indicates that a fraud
  may exist, the auditor shall communicate these
  matters on a timely basis to the appropriate
  level of management
• The auditor shall determine whether there is a
  responsibility to report the occurrence or
  suspicion to a party outside the entity. The
  auditors legal responsibilities may override the
  duty of confidentiality in some circumstances.

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Reporting of Non-compliance with Laws

• If non compliance is suspected, the auditor
  should communicate to those charged with
  governance.
• If the auditor concludes that the noncompliance
  has a material effect on the financial
  statements, and has not been properly reflected
  in the financial statements, the auditor should
  express a qualified or an adverse opinion.
• The auditor shall determine whether the auditor
  has responsibility to report the identified or
  suspected non-compliance to parties outside the
  entity.

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Long-Form Audit Report

• In many countries it is customary for the auditor
  to prepare a long-form report to the Audit
  Committee of an entitys board of directors in
  addition to the publicly published short-form
  report discussed in this chapter.
• A long- form report ordinarily includes
• Overview of the Audit Engagement
• Analysis of Financial Statements
• Risk Management and Internal Control
• Optional Topics
• Auditor independence and quality control
• Fees

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• XBRL is a freely licensed, open technology
  standard that makes it possible to store and/or
  transfer data along with the complex hierarchies,
  data-processing rules and descriptions.
• Permits the automatic exchange and reliable
  extraction of financial information across all
  software formats and technologies, including the
  Internet
• Reduces the need to enter financial information
  more than one time, reducing the risk of data
  entry error and eliminating the need to manually
  key information for various formats

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Continuous Reporting and Auditing

• Continuous reporting is the real-time disclosure
  of transaction data.
• Embedded audit modules (EAM) are database
  software routines that are placed at
  predetermined points to gather information about
  transactions or events within the system that
  auditors deem to be material. EAMs allow
  auditors to proactively monitor auditable
  conditions.

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Thank You for Your Attention

• Any Questions?