Audit & Assurance

Class Synopsis - 09 & 10

Prepared by: Abdullah-Al-Mamun, FCA

Reporting

Communication with those charged with governance

Various auditing standards require auditors to report certain audit matters arising to those
charged with governance. This report will be ‘private’ and just for the attention of those
charged with governance, as opposed to the auditor’s report, which is a published document.

The requirements in relation to this private reporting are found in the main in ISA 260
Communication with those Charged with Governance which deals with the auditor’s
responsibility to communicate with those charged with governance in an audit of financial
statements.

ISA 265 Communicating Deficiencies in Internal Control to Those Charged with Governance and
Management specifically requires the auditor to communicate any significant deficiencies in
internal control encountered during the course of their audit work. Whether a deficiency is
significant is a matter of professional judgment for the auditor. Matters to consider will include
the likelihood of material misstatements and potential losses or fraud.

Those charged with governance is the term used to describe the role of persons entrusted
with the supervision, control and direction of the entity. In the Bangladesh, those charged with
governance include the directors (non-executive directors and MD & CEO as ex-offico) of a
company and the members of an audit committee where one exists. For other types of entity,
those charged with governance usually include equivalent persons such as the partners,
proprietors, committee of management or trustees.

The auditors may communicate with the whole board, or the audit committee depending on the
governance structure of the organization. The auditor should ensure that those charged with
governance are provided with a copy of the audit engagement letter on a timely basis.

To avoid misunderstandings, the engagement letter should explain that auditors will only
communicate matters that come to their attention as a result of the performance of the
audit. It should state that the auditors are not required to design procedures for the
purpose of expressing an opinion on the effectiveness of the entity’s internal control.

The letter may also:

 Describe the form which any communications on governance matters will take.
 Identify the appropriate persons with whom such communications will be made.
 Identify any specific matters of governance interest which it has agreed are to be
communicated.

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Matters to be communicated

The scope of ISA 260 is limited to matters that come to the auditors’ attention as a result of the
audit; the auditors are not required to design procedures to identify matters of governance
interest.

Such matters would include:

 The auditor’s responsibilities in relation to the financial statement audit

 Planned scope and timing of the audit
 Significant findings from the audit
 Auditor independence (in the case of listed entities)
Under significant findings the standard lists the following:

 Written representations the auditor is requesting.

 The auditor’s views about significant qualitative aspects of the entity’s accounting practices,
including accounting policies, accounting estimates and financial statement disclosures.
 Significant difficulties, if any, encountered during the audit.
 Significant matters, if any, arising from the audit that were discussed with management.
 Other matters, if any, arising from the audit that, in the auditor’s professional judgement,
are significant to the oversight of the financial reporting process.

Where the audited entity is listed, auditors shall:

 Confirm that the engagement team have complied with ethical requirements relating to
independence.
 Declare all relationships between the firm and the entity that may have a bearing on
independence, including details of fees for non-audit services.
 Detail the related safeguards that have been applied to eliminate identified threats
to independence or reduce them to an acceptable level.

Communicating deficiencies in internal control

ISA 265 does not require auditors to perform specific tests on internal control, over and above
their normal audit work, but it does require them to report on deficiencies encountered during
the course of that work. The specific requirements are the following:

 The auditor shall determine whether deficiencies in internal control have been identified.
 Where deficiencies have been identified the auditor shall determine whether those
deficiencies are significant.
• Significant deficiencies shall be communicated in writing to those charged with governance.
• Significant deficiencies shall be communicated in writing to management.

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• Other deficiencies shall be communicated to management if the auditor considers them
important enough to warrant management attention.
• Written communication shall include a description of the deficiencies and their potential
effects, and sufficient information to understand the context of the communication.
The written communication shall include sufficient information to enable those charged with
governance and management to understand the context, in particular:

 The purpose of the audit was for the auditor to express an opinion on the financial
statements.
 The audit included consideration of internal control relevant to the preparation of
financial statements in order to design audit procedures, not in order to express an
opinion on those controls.
 The matters being reported are limited to those deficiencies that the auditor has
identified during the audit that merit being reported to those charged with governance.

The standard gives examples of matters that the auditor may consider in determining whether
deficiencies are significant. These examples include:

 The likelihood of the deficiencies leading to material misstatements

 The susceptibility to loss or fraud
 The financial statement amounts
 The volume of activity
 The importance of the controls to the financial reporting process
How?

Matters may be communicated orally or in writing, but they should be recorded in the audit
working papers, however discussed. Auditors should make clear that the audit is not
designed to identify all relevant matters connected with governance and they should have
regard to local laws and regulations, and local guidance on confidentiality when communicating
with management.

Attributes for effective communication to those charged with governance

The communication should have the following attributes:

 Timing: It should be sufficiently prompt to enable those charged with governance to take
appropriate action, for example, items relating to the financial statements should be
reported before the financial statements are approved.
 Extent, form and frequency: Should be appropriate. What is appropriate will depend on
the size of the entity and the way in which those charged with governance operate.
 Expectations: It should fulfil the expectations of the auditors and those charged with
governance, and therefore, the nature of the communication should be agreed early in the

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 audit process, for example, in the letter of engagement, so that misunderstandings are
minimised.
 Management comments: Should be included where they are relevant and will aid the
understanding of those charged with governance.
• Previous year’s points: Should be repeated if no action has been taken and the auditors
believe that they are still relevant. If there are no new points to be made, the auditors
should make that point.
• Disclaimer: Should be included so that third parties do not seek to rely on the information
given within the report.

Assurance reports

There is less formality surrounding more general assurance reports and these reports will often
take the most appropriate form.

Reviews Report

International Standard on Review Engagements (ISRE) 2400 (Revised) Engagements to Review

Historical Financial Statements gives guidance about review reports. Limited assurance is
given on review assignments. The ISRE defines limited assurance as ‘the level of assurance
obtained where engagement risk is reduced to a level that is acceptable in the circumstances of
the engagement, as the basis for expressing a conclusion.’

The practitioner’s conclusion ‘states that nothing has come to the practitioner’s attention that
causes the practitioner to believe that the financial statements do not present fairly, in all
material respects (or do not give a true and fair view) in accordance with the applicable fair
presentation framework.’

The requirements of ISRE 2400 are expressed under the following headings:

 Conduct of a review engagement

 Ethical requirements
 Professional scepticism and professional judgement
 Engagement level quality control
 Acceptance and continuance of client relationships and review engagements
 Communication with management and those charged with governance
 Performing the engagement
 Subsequent events
 Written representations
 Evaluating evidence obtained from the procedures performed
 Forming the practitioner’s conclusion on the financial statements
 The practitioner’s report
 Documentation

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Reviews of interim financial information

In July 2007 the ISRE 2410 Review of Interim Financial Information Performed by the
Independent Auditor of the Entity was published by IAASB. This applies the basic principles of
conducting reviews and preparing review reports as set out in ISRE 2400 to one specific type of
review.

Reports following examination of prospective information

The nature of prospective information, such as forecasts and projections, affects the level of
assurance can be given. Reports on these assignments may well contain additional ‘warnings’
for readers.

IAASB issued and ICAB adopted ISAE 3400 The Examination of Prospective Financial
Information gives the following list of components for this type of report:

(a) Title
(b) Addressee
(c) Identification of the prospective financial information
(d) A reference to the ISAE or relevant national standards
(e) A statement that management is responsible for the prospective financial information
including the assumptions on which it is based
(f) When applicable, a reference to the purpose and/or restricted distribution of the
prospective financial information
(g) A statement of negative assurance as to whether the assumptions provide a reasonable
basis for the prospective financial information
(h) An opinion as to whether the prospective financial information is properly prepared on the
basis of the assumptions and is presented in accordance with the relevant financial
reporting framework
(i) Appropriate caveats concerning the achievability of the results indicated by the prospective
financial information
(j) Date of the report which should be the date procedures have been completed
(k) Reporting accountant’s address, and
(l) Signature

The standard also gives an extract from a report on a review of prospective financial
information:

We have examined the forecast in accordance with the International Standard on Assurance
Engagements applicable to the examination of prospective financial information. Management is
responsible for the forecast including the assumptions set out in Note X on which it is based.

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Based on our examination of the evidence supporting the assumptions, nothing has come to
our attention which causes us to believe that these assumptions do not provide a reasonable
basis for the forecast. Further, in our opinion the forecast is properly prepared on the basis of
the assumptions and is presented in accordance with…
Actual results are likely to be different from the forecast since anticipated events frequently do
not occur as expected and the variation may be material.

The auditor's report

Auditors must provide clear and understandable auditor's reports on the financial statements
audited.

Unmodified auditor’s reports ISA 700 (Revised)

Unmodified/Unqualified opinion: the auditor is satisfied that the evidence obtained is

sufficient and appropriate and supports the view presented in the financial statements prepared
by the company’s management.

An unqualified opinion should be expressed when the auditor concludes that the financial
statements give a true and fair view (or presented fairly, in all material respects) in
accordance with the identified financial reporting framework.

Details of the format of the revised auditor's report in accordance with ISA 700 are given below
but the main changes you should be aware of are as follows:

 The audit opinion is placed at the start of the report.

 The auditor's reports of certain entities will include a description of key audit matters.

 There is a more detailed description of the auditor's responsibilities and the features of
an audit.
 Changes to reporting on going concern as required by revisions to ISA 570.

 Inclusion of an 'Other information' section as required by revisions to ISA 720.

 Changes to the requirements for enhanced audit reporting applicable to public interest
entities and/or listed companies.

ISA 700 (Revised) states that the auditor's report must contain the following:

Title

The report needs an appropriate title to distinguish it from the other material included with
the financial statements.

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It may be appropriate to use the term “Independent Auditor” in the title to distinguish the
auditor’s report from the report that might be issued by others such as officers of the entity,
the board of directors, or from the reports of other auditors who may not have to abide by the
same ethical requirements as the independent auditor.

Addressee

The auditor’s report should be appropriately addressed as required by the circumstances of the
engagement and local regulations. The report is ordinarily addressed either to the
shareholders or to the board of directors of the entity whose financial statements are
being audited.

Opinion paragraph

The first section of the auditor’s report shall include the auditor’s opinion, and shall have the
heading “Opinion.”

The Opinion section of the auditor’s report shall also:

(a) Identify the entity whose financial statements have been audited;
(b) State that the financial statements have been audited;
(c) Identify the title of each statement comprising the financial statements;
(d) Refer to the notes, including the summary of significant accounting policies; and
(e) Specify the date of, or period covered by, each financial statement comprising the
financial statements.

When expressing an unmodified opinion on financial statements prepared in accordance with a

fair presentation framework, the auditor’s opinion shall, unless otherwise required by law or
regulation, use one of the following phrases, which are regarded as being equivalent:

(a) In our opinion, the accompanying financial statements present fairly, in all material
respects, […] in accordance with [the applicable financial reporting framework]; or
(b) In our opinion, the accompanying financial statements give a true and fair view of […] in
accordance with [the applicable financial reporting framework].

Basis for Opinion

The auditor’s report shall include a section, directly following the Opinion section, with the
heading “Basis for Opinion”, that:
(a) States that the audit was conducted in accordance with International Standards on
Auditing;

(b) Refers to the section of the auditor’s report that describes the auditor’s responsibilities
under the ISAs;

(c) Includes a statement that the auditor is independent of the entity in accordance with the
relevant ethical requirements relating to the audit, and has fulfilled the auditor’s other
ethical responsibilities in accordance with these requirements. The statement shall

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 identify the jurisdiction of origin of the relevant ethical requirements or refer to the
International Ethics Standards Board for Accountants’ Code of Ethics for Professional
Accountants (IESBA Code); and

(d) States whether the auditor believes that the audit evidence the auditor has obtained is
sufficient and appropriate to provide a basis for the auditor’s opinion.

Key Audit Matters

For audits of complete sets of general purpose financial statements of listed entities, the auditor
shall communicate key audit matters in the auditor’s report in accordance with ISA 701.

When the auditor is otherwise required by law or regulation or decides to communicate key
audit matters in the auditor’s report, the auditor shall do so in accordance with ISA 701:

(a) Law or regulation may require communication of key audit matters for audits of entities
other than listed companies, for example, entities characterized in such law or regulation
as public interest entities.

(b) The auditor may also decide to communicate key audit matters for other entities,
including those that may be of significant public interest, for example because they have
a large number and wide range of stakeholders and considering the nature and size of
the business. Examples of such entities may include financial institutions (such as banks,
insurance companies, and pension funds), and other entities such as charities.

(c) ISA 210 requires the audit engagement letter or other suitable form of written
agreement to include reference to the expected form and content of any reports to be
issued by the auditor. When the auditor is not otherwise required to communicate key
audit matters, ISA 210 explains that it may be helpful for the auditor to make reference
in the terms of the audit engagement to the possibility of communicating key audit
matters in the auditor’s report and, in certain jurisdictions, it may be necessary for the
auditor to include a reference to such possibility in order to retain the ability to do so.

Other Information

Where applicable, the auditor shall report in accordance with ISA 720 (Revised): The Auditor’s
Responsibilities to Other Information.

Responsibilities for the Financial Statements

A) The auditor’s report shall include a section with a heading “Responsibilities of

Management for the Financial Statements.” The auditor’s report shall use the term
that is appropriate in the context of the legal framework in the particular jurisdiction and
need not refer specifically to “management”. In some jurisdictions, the appropriate
reference may be to those charged with governance.

B) This section of the auditor’s report shall describe management’s responsibility for:

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 (a) Preparing the financial statements in accordance with the applicable financial reporting
framework, 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; and

(b) Assessing the entity’s ability to continue as a going concern and whether the use of the
going concern basis of accounting is appropriate as well as disclosing, if applicable, matters
relating to going concern. The explanation of management’s responsibility for this
assessment shall include a description of when the use of the going concern basis of
accounting is appropriate.

C) This section of the auditor’s report shall also identify those responsible for the oversight of
the financial reporting process, when those responsible for such oversight are different from
those who fulfill the responsibilities described in paragraph 34 of ISA 700. In this case, the
heading of this section shall also refer to “Those Charged with Governance” or such term
that is appropriate in the context of the legal framework in the particular jurisdiction.

D) When the financial statements are prepared in accordance with a fair presentation
framework, the description of responsibilities for the financial statements in the auditor’s
report shall refer to “the preparation and fair presentation of these financial statements” or
“the preparation of financial statements that give a true and fair view,” as appropriate in the
circumstances.

Auditor’s Responsibilities for the Audit of the Financial Statements

A) The auditor’s report shall include a section with the heading “Auditor’s Responsibilities for
the Audit of the Financial Statements.”

B) This section of the auditor’s report shall:

(a) State that the objectives of the auditor are to:

i. Obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error;
and
ii. Issue an auditor’s report that includes the auditor’s opinion.

(b) State that reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with ISAs will always detect a material
misstatement when it exists; and

(c) State that misstatements can arise from fraud or error, and either

i. Describe that they are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of
users taken on the basis of these financial statements; or

ii. Provide a definition or description of materiality in accordance with the

applicable financial reporting framework.

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C) The Auditor’s Responsibilities for the Audit of the Financial Statements section of the
auditor’s report shall further:

(a) State that, as part of an audit in accordance with ISAs, the auditor exercises
professional judgment and maintains professional skepticism throughout the audit;
and
(b) Describe an audit by stating the auditor’s responsibilities.

Other Reporting Responsibilities

If the auditor addresses other reporting responsibilities in the auditor’s report on the financial
statements that are in addition to the auditor’s responsibilities under the ISAs, these other
reporting responsibilities shall be addressed in a separate section in the auditor’s report with a
heading titled “Report on Other Legal and Regulatory Requirements”.

In the context of Bangladesh “Report on Other Legal and Regulatory Requirements” is

required to design in the following ways:

Besides the regular reporting under ISA, the auditor shall have other reporting responsibilities
(as mentioned in Companies Act 1994, Securities & Exchange Rule 1987, Bank Company Act
1991, Insurance Rules 1958, etc.), which shall be addressed in a separate subtitled as “Report
on other legal and regulatory frameworks”. In Bangladesh, the auditors shall to use the
following based on the nature of the company:

For an Unlisted Company (other than a Bank or Insurance Company)

We also report that:

(a) We have obtained all the information and explanations which to the best of our
knowledge and belief were necessary for the purposes of our audit and made due
verification thereof.

(b) In our opinion, proper books of account as required by law have been kept by the
Company so far as it appeared from our examination of those books and (where
applicable) proper returns adequate for the purposes of our audit have been received
from branches not visited by us.

(c) The Company’s balance sheet and profit and loss account dealt with by the report are in
agreement with the books of account and returns.

For a Listed Company (other than a Bank or an Insurance Company)

We also report that:

(a) We have obtained all the information and explanations which to the best of our
knowledge and belief were necessary for the purposes of our audit and made due
verification thereof.

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 (b) In our opinion, proper books of account as required by law have been kept by the
Company so far as it appeared from our examination of those books and (where
applicable) proper returns adequate for the purposes of our audit have been
received from branches not visited by us.

(c) The Company’s balance sheet and profit and loss account dealt with by the report
are in agreement with the books of account and returns.

(d) The expenditure incurred was for the purposes of the Company’s business.

For a Listed Baking Company

In addition to above (a) to (d) some other issues shall have to be incorporated by the auditors
as per Section 39 of Bank Company Act 1991 (amended up to 2013). See an “Annual Report” of
Bank Company for the additional issues to be included in the auditor’s report.

For a Listed Insurance (General and Life) Company

In addition to above (a) to (d) other two additional issues shall have to be incorporated by the
auditors. The said issues reference section of Insurance Act is different for General Insurance
and Life Insurance Company. See an “Annual Report” of General Insurance Company and
another ”Annual Report” of Life Insurance Company for the additional issues to be included in
the auditor’s report.

Name of Engagement Partner

The name of the engagement partner shall be included in the auditor’s report for audits of
complete sets of general purpose financial statements of listed entities unless, in rare
circumstances, such disclosure is reasonably expected to lead to a significant personal security
threat. In the rare circumstances that the auditor intends not to include the name of the
engagement partner in the auditor’s report, the auditor shall discuss this intention with those
charged with governance to inform the auditor’s assessment of the likelihood and severity of a
significant personal security threat.

Auditor’s signature

The auditor’s report shall be signed.

The auditor’s signature is either in the name of the audit firm, the personal name of the auditor
or both, as appropriate for the particular jurisdiction. In addition to the auditor’s signature in
certain jurisdictions, the auditor may be required to declare in the auditor’s report the auditor’s
professional accountancy designation or the fact that the auditor or firm, as appropriate, has
been recognized by the appropriate licensing authority in that jurisdiction.

Address

The auditor’s report shall name the location in the jurisdiction where the auditor practices.

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Date

The auditor’s report shall be dated no earlier than the date on which the auditor has obtained
sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial
statements, including evidence that:

(a) All the statements that comprise the financial statements, including the related notes,
have been prepared; and

(b) Those with the recognized authority have asserted that they have taken responsibility
for those financial statements.

The date of the auditor’s report informs the user of the auditor’s report that the auditor has
considered the effect of events and transactions of which the auditor became aware of and that
has occurred up to that date. The auditor’s responsibility for events and transactions after the
date of the auditor’s report is addressed ISA 560 (Subsequent Events).

Since the auditor’s opinion is provided on the financial statements and the financial statements
are the responsibility of management, the auditor is not in a position to conclude that sufficient
appropriate audit evidence has been obtained until evidence is obtained that all the statements
and disclosures that comprise the financial statements have been prepared and management
has accepted responsibility for them. So the date of the auditor’s report should not be before
the date of approval of the financial statements by the board/competent authority.

Key audit matters (ISA 701)

Key audit matters: Those matters, that in the auditor's professional judgment, were of most
significance in the audit of the financial statements of the current period. Key audit matters
are selected from matters communicated with those charged with governance.

ISA 701 identifies the purpose of including this information as being to:

 Enhance the communicative value of the auditor's report;

 Provide additional information to intended users; and
 Assist users in understanding significant audit matters and the judgments involved.
The inclusion of a KAM section does not constitute a modification of the auditor's report
and cannot be used as a substitute for a modified opinion. In addition, the KAM section
cannot be used as a substitute for disclosures that should have been made.

ISA 701 suggests a three-step 'filtering' approach to determining what constitutes a KAM:

Step 1: The auditor starts by considering all the matters communicated with those
charged with Governance.

Step 2: From these the auditor will assess which of these matters required significant audit
attention. This process will involve taking into account areas of higher/significant risk,

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significant auditor/management judgment and the effect of significant events or
transactions that occurred in the period.

Step 3: The auditor will then select from those matters identified in Step 2 the matters which
were of most significance in the audit.

Step 3 is clearly the most important step of the process in which the auditor is required to apply
judgment in evaluating the relative significance of different issues.

In making this decision the auditor would consider the following:

 Matters which resulted in significant interaction with those charged with governance.
 The importance of the matter to the intended users' understanding of the financial
statements as a whole.
 The nature/complexity/subjectivity of selection of accounting policies.
 The nature and materiality of misstatements (corrected and uncorrected).
 The nature and extent of audit effort needed to address the matter.
 Whether there were issues in applying audit procedures.
 Extent of related control deficiencies.
 Whether the matter affected more than one area of the financial statements.
Where relevant the auditor's report must include a separate section with the heading 'Key Audit
Matters'. This includes an introduction followed by information about each individual KAM. The
introductory material states that:

 The matters described are the matters of 'most significance'; and

 The auditor does not provide a separate opinion on these matters.
The description of an individual KAM would include the following:

 Why the matter was considered to be one of the most significant in the audit.
 How the matter was addressed in the audit.
Reference should also be made to any related disclosures in the financial statements.

Here is an example of how KAMs could appear, taken from the IAASB's guidance publication
Auditor Reporting – Illustrative Key Audit Matters:

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the financial statements of the current period. These matters were
addressed in the context of our audit of the financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these matters.

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Goodwill

Under IFRSs, the Group is required to annually test the amount of goodwill for impairment. This
annual impairment test was significant to our audit because the balance of XX as of December
31, 20X1 is material to the financial statements. In addition, management's assessment process
is complex and highly judgmental and is based on assumptions, specifically [describe certain
assumptions], which are affected by expected future market or economic conditions,
particularly those in [name of country or geographic area].

Our audit procedures included, among others, using a valuation expert to assist us in evaluating
the assumptions and methodologies used by the Group, in particular those relating to the
forecasted revenue growth and profit margins for [name of business line]. We also focused on
the adequacy of the Group's disclosures about those assumptions to which the outcome of the
impairment test is most sensitive, that is, those that have the most significant effect on the
determination of the recoverable amount of goodwill.

The Company's disclosures about goodwill are included in Note 3, which specifically explains
that small changes in the key assumptions used could give rise to an impairment of the goodwill
balance in the future.

Revenue Recognition

The amount of revenue and profit recognized in the year on the sale of [name of product] and
aftermarket services is dependent on the appropriate assessment of whether or not each long-
term aftermarket contract for services is linked to or separate from the contract for sale of
[name of product]. As the commercial arrangements can be complex, significant judgment is
applied in selecting the accounting basis in each case. In our view, revenue recognition is
significant to our audit as the Group might inappropriately account for sales of [name of
product] and long-term service agreements as a single arrangement for accounting purposes
and this would usually lead to revenue and profit being recognized too early because the
margin in the long-term service agreement is usually higher than the margin in the [name of
product] sale agreement.

Our audit procedures to address the risk of material misstatement relating to revenue
recognition, which was considered to be a significant risk, included:

 Testing of controls, assisted by our own IT specialists, including, among others, those
over: input of individual advertising campaigns' terms and pricing; comparison of those
terms and pricing data against the related overarching contracts with advertising
agencies; and linkage to viewer data; and
 Detailed analysis of revenue and the timing of its recognition based on expectations
derived from our industry knowledge and external market data, following up variances
from our expectations.

In very limited circumstances it may be the case that KAMs exist but cannot or should not
be disclosed. These might include circumstances where law are regulation does not allow

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disclosure or where the adverse consequences of disclosure would outweigh the public interest
benefit.

It is also possible, although again very rare, that there may be no KAMs to disclose in the KAMs
section. Where this is the case a KAM section is still included in the auditor's report but a
statement is made that there are no KAMs to communicate. 701.A58 provides the following
illustration of the appropriate wording in this situation:

'[Except for the matter described in the Basis for Qualified (Adverse) Opinion section or Material
Uncertainty Related to Going Concern section,] We have determined that there are no [other]
key audit matters to communicate in our report.'

Modified auditor’s reports (ISA 705)

ISA 705 (Revised), ‘Modifications to the Opinion in the Independent Auditor’s Report’ deals with
the auditor’s responsibility to issue an appropriate report in circumstances when the auditor
concludes that a modification to the auditor’s opinion on the financial statements is necessary.
ISA 705 (Revised) also deals with how the form and content of the auditor’s report is affected
when the auditor expresses a modified opinion.

ISA 705 (Revised) establishes three types of modified opinions, namely, a qualified opinion,
an adverse opinion, and a disclaimer of opinion.

The type of modified opinion expressed will depend on the circumstances and the effect of any
actual or potential misstatements on the financial statements. Misstatements that are material
but not pervasive will lead to an ‘except for’ qualified opinion, whereas if the misstatements
are deemed to be pervasive the opinion will be adverse or will be disclaimed. The term
‘pervasive’ is defined in ISA 705 (Revised) as something that affects the financial
statements as a whole or a substantial part of them, and which is fundamental to the
users’ understanding of the financial statements.

Modification to the audit opinion

The auditor shall modify the opinion when:

(a) There is a limitation on the scope of the auditor’s work

The auditor is unable to obtain sufficient appropriate audit evidence to conclude that
the financial statements as a whole are free from material misstatements e.g. a limitation on
the scope of the audit.

A limitation on the scope of the auditor’s work may sometimes be imposed by:

1. The entity (for example, when the terms of the engagement specify that the auditor
will not carry out an audit procedure that the auditor believes is necessary).

2. The situation or circumstances (for example, when the timing of the auditor’s
appointment is such that the auditor is unable to observe the counting of physical

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 inventories. It may also arise when, in the opinion of the auditor, the entity’s
accounting records are inadequate or when the auditor is unable to carry out an audit
procedure believed to be desirable).
In these circumstances there are two possible outcomes:
i. The possible effects of undetected misstatements, if any, could be material but not
pervasive – this will result in a ‘qualified opinion’ (‘except for’).

ii. The possible effects of undetected misstatements on the financial statements could be
both material and pervasive, so serious that the auditor is unable to form an opinion
on the financial statements – a ‘disclaimer of opinion’.
Whenever the auditor expresses an opinion that is other than unqualified, a clear description
of all the substantive reasons should be included in the report and unless impracticable, a
qualification of the possible effect(s) on the financial statements.
(b) The auditor concludes that the financial statements as a whole are not free from material
misstatement e.g. where there is disagreement with management about
 Selection of accounting policies
 Accounting treatment (i.e. the method of accounting policies’ application)
 Adequacy of Disclosures in the financial statements
In these circumstances there are two possible outcomes:
i. The resulting misstatements are material, but not pervasive, to the financial
statements – this will result in a ‘qualified opinion’ (‘except for’).
ii. The resulting misstatements are both material and pervasive to the financial
statements such that the auditor concludes that the accounts do not give a true and
fair view – an ‘adverse opinion’.

Modified opinions – a summary

The available forms of modification to the audit opinion may be summarized by the following
table:

Auditor's Judgement about the Pervasiveness of

the Effects or Possible Effects on the Financial
Statements
Nature of Matter Giving Rise to Material but Not Material and
the Modification Pervasive Pervasive
Financial statements are materially Qualified opinion
Adverse opinion
misstated (disagreement) ('Except for')
Inability to obtain sufficient
Qualified opinion
appropriate audit evidence (limitation Disclaimer of opinion
('Except for')
of scope)
Remember, that if an error or a lack of evidence is immaterial the audit opinion will not
be modified at all.

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Emphasis of Matter Paragraphs and Other Matter Paragraphs (ISA 706)
ISA 706 (Revised) ‘Emphasis of Matter Paragraph and Other Matter Paragraph in the
Independent Auditor’s Report’ deals with additional communication in the auditor’s report when
the auditor considers it necessary.
According to ISA 706 (Revised) the placement of an Emphasis of Matter paragraph or
Other Matter paragraph in the auditor’s report depends on the nature of the information
to be communicated, and the auditor’s judgment as to the relative significance of such
information to intended users compared to other elements required to be reported in
accordance with ISA 700 (Revised).
Emphasis of Matter Paragraph in the Auditor’s Report
The auditor should add an ‘emphasis of matter’ paragraph to the auditor’s report where the
auditor considers it necessary to draw users’ attention to a matter or matters presented
or disclosed in the financial statements that are of such importance that they are
fundamental to users’ understanding of the financial statements.
The auditor should add an “Emphasis of Matter” paragraph to the audit report:
 When the Emphasis of Matter paragraph relates to the applicable financial reporting
framework, the auditor may consider it necessary to place the Emphasis of Matter
paragraph immediately following the ‘Basis for Opinion’ section to provide
appropriate context to the auditor’s report.
 When a Key Audit Matters section is presented in the auditor’s report, an Emphasis of
Matter paragraph may be presented either directly before or after the Key Audit
Matters section, based on the auditor’s judgment as to the relative significance of the
information included in the Emphasis of Matter paragraph. The auditor may also add further
context to the heading “Emphasis of Matter”, such as “Emphasis of Matter – Subsequent
Event”, to differentiate the Emphasis of Matter paragraph from the individual matters
described in the Key Audit Matters section.
Circumstances in which an Emphasis of Matter Paragraph may be Necessary
ISA 706 (Revised) contains specific requirements for the Auditor to include Emphasis of matter
paragraph in the audit’s report in certain circumstances. These circumstances include:

1. When a financial reporting framework prescribed by law or regulation would be

unacceptable but for the fact that it is prescribed by law or regulation.
2. To alert users that the financial statements are prepared in accordance with a special
purpose framework.
3. When facts become known to the auditor after the date of the auditor’s report and the
auditor provides a new amended auditor’s report (i.e., subsequent events).
Examples of circumstances where the auditor may consider it necessary to include an Emphasis
of Matter paragraph:
1. An uncertainty relating to the future outcome of exceptional litigation or
regulatory action.

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 2. A significant subsequent event that occurs between the date of the financial
statements and the date of the auditor’s report.
3. Early application (where permitted) of a new accounting standard (for example, a
new IFRS) that has a material effect on the financial statements in advance of its
effective date.

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

An illustration of an emphasis of matter paragraph for a significant uncertainty in an auditor’s

report is as follows:

Emphasis of Matter

“We draw attention to Note X to the financial statements which describes the
uncertainty related to the outcome of the lawsuit filed against the company by XYZ
Company. Our opinion is not qualified in respect of this matter.” (This is an illustration
of an emphasis of matter paragraph relating to a pending exceptional litigation matter).

Other Matter Paragraphs in the Auditor’s Report

The auditor should add an ‘other matters’ paragraph to the auditor’s report where the auditor
considers it necessary to draw users’ attention to any matter or matters other than those
presented or disclosed in the financial statements that are relevant to users’
understanding of the audit, the auditor’s responsibilities or the auditor’s report.

When a Key Audit Matters section is presented in the auditor’s report and an Other Matter
paragraph is also considered necessary, the auditor may add further context to the heading
“Other Matter”, such as “Other Matter – Scope of the Audit”, to differentiate the Other Matter
paragraph from the individual matters described in the Key Audit Matters section.

Circumstances in which an Other Matter Paragraph may be necessary

If the auditor considers it necessary to communicate a matter other than those that are
presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to
users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report and is not
prohibited by law or regulation, the auditor shall do so in a paragraph in the auditor’s report,
with the heading “Other Matter”, or other appropriate heading.

In the following circumstances the auditor may include an Other Matter Paragraph in the
auditor’s report:

 Law or regulation may require the auditor to communicate about planning and
scoping matters in the auditor’s report, or the auditor may consider it necessary
to communicate about such matters in an Other Matter paragraph.

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  An entity may prepare one set of financial statements in accordance with a general
purpose framework (for example, IFRS) and other set of financial statements in
accordance with another general purpose framework (for example, US GAAP), and
engage the auditor to report on both sets of financial statements. The auditor
may include an Other Matter paragraph in the auditor’s report, referring to the fact that
another set of financial statements has been prepared by the same entity in accordance
with another general purpose framework and that the auditor has issued a report on
those financial statements.

 In the rare circumstance where the auditor is unable to withdraw from an

engagement, even though the possible effect of an inability to obtain sufficient
appropriate audit evidence due to a limitation on the scope of the audit imposed by
management is pervasive, the auditor may consider it necessary to include an Other
Matter paragraph in the auditor’s report to explain why it is not possible for
the auditor to withdraw from the engagement.
The Auditor's Responsibilities Relating to Other Information: ISA 720 (Revised)
Other information is financial and non-financial information (other than financial statements
and the auditor's report) included in an entity's annual report.

Statutory other information includes the directors' report, the strategic report and the
separate corporate governance statement.
A misstatement of the other information exists when the other information is incorrectly
stated or otherwise misleading (including because it omits or obscures information necessary
for a proper understanding of a matter disclosed in the other information).

Appendix 1 of ISA 720 provides a comprehensive list of examples of amounts and other
items that may be included in the other information. This includes the following:

 Summaries of key financial results

 Selected operating data

 Financial measures or ratios

 Explanations of critical accounting estimates

 General descriptions of the business environment and outlook

 Overview of strategy

ISA 720.8 makes it clear that the auditor's responsibilities in relation to other information do
not constitute an assurance engagement or impose an obligation on the auditor to
obtain assurance about the other information. In other words the auditor does not
express an opinion on the other information.

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The auditor is required, however, to read the other information and do the following:

(a) Consider whether there is a material inconsistency between the other information and
the financial statements.

(b) Consider whether there is a material inconsistency between the other information and
the auditor's knowledge obtained in the audit.

(c) Respond appropriately when the auditor identifies that such a material inconsistency
appears to exist, or when the auditor otherwise becomes aware that other information
appears to be materially misstated.

(d) Report in accordance with ISA 720.

Access to other information

In order for the auditor to satisfy their obligations under ISA 720, timely access to other
information will be required. The auditors therefore must make arrangements with the client to
obtain such information before the date of their report where possible. Where some or all
of the documents will not be available until after the date of the auditor's report the auditor
must request a written representation that the information will be provided as soon as it is
available.

Material inconsistency or material misstatement of other information

If, on reading the other information, the auditor identifies a material inconsistency or
becomes aware that the other information appears to be materially misstated, the
auditor must determine whether:

 The audited financial statements need to be amended.

 The other information needs to be amended.

 Or whether the auditor's understanding of the entity and its environment needs
updating.
The auditor should seek to resolve the matter through discussion with those charged with
governance.

If an amendment is necessary in the audited financial statements and the entity refuses
to make the amendment, the auditor should express a qualified or adverse opinion.

If an amendment is necessary in the other information obtained before the date of the
auditor's report and the entity refuses to make the amendment, the auditor shall
communicate this to those charged with governance and:

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 (a) Include in the 'Other information' section of the auditor's report a statement describing
the uncorrected material misstatement; or

(b) Withdraw from the engagement. (ISA 720.18)

If the other information is not corrected the specific action taken would depend on the auditor's
legal rights and obligations. As a result it is likely that the auditor will seek legal advice. The
auditor may also consider using the right to be heard at the AGM.

Reporting

Auditor's reports must include an 'Other Information' section. This must include the following:

(a) A statement that management is responsible for other information

(b) Identification of:

 Other information obtained before the date of the auditor's report; and

 For the audit of a listed entity, other information, if any expected to be obtained
after the date of the auditor's report.

(c) A statement that the auditor's opinion does not cover the other information and that the
auditor does not express an audit opinion or any form of assurance conclusion on this.

(d) A description of the auditor's responsibilities relating to reading, considering and

reporting on other information

(e) When other information has been obtained before the date of the auditor's report, either

 A statement that the auditor has nothing to report; or

 Where there is a material uncorrected misstatement a statement that describes

this.

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