Relevant Standard (ISA 700)

This is the final procedure of the audit engagement which provides an auditor with an avenue or opportunity to communicate his opinion on the financial statement to the users.

The auditor should review and assess the conclusions drawn from the audit evidence which was obtained as a basis for the expression of an opinion on the financial statements.

The assessment includes:

Considering whether the financial statements have been properly prepared and

Whether they do comply with the statutory requirements.

The audit or should confirm a clear written expression of an opinion on the financial statements taken as whole.


Purpose of the Audit Report

1)It enables the auditor to express an opinion on true and fair view of the financial statements.

2)A statutory audit report confirms the status or the financial position of the company who’s the account has been audited.

3)Potential users of the financial statements and the management are able to make vital decisions about the entity in respect to investment through the audited report.

4)A statutory report is a legal requirement for a limited company and therefore it confirms the company’s compliance with the legal requirements.

The auditor’s report allows the management to publish its accounts which becomes public accounts / records.

Contents & Format of the Audit Report

The company’s Act does not prescribe a format for a suitable audit report. The auditor therefore considers the 7th schedule basically as giving the minimum contents of the auditor’s report or as a guideline on the contents of the audit report to be issued by the auditor as a result of the audit performed by an independent auditor.

The auditor’s report should expressly state the matters prescribed by the 7th schedule on the company’s Act i.e. he should clearly express in the report:

  1. I) Whether proper books of accounts have been maintained

2)Whether the financial statements do agree with the books of accounts

3)Whether all the information and explanation for the audit have been received including returns from the branches not visited by the audit have been received.

4)Whether the accounts /financial statements prepared do comply with the company’s Act requirement.

5)Whether the financial statements prepared and presented show true and fair view of the company’s state of affairs as the balance sheet date and whether the balance sheet and profit and loss do comply with the Acts requirement.

The parts/ elements of an audit report

Now we are going to look at some of the key parts of an audit report.

  1. The title and addressees: Independent Auditor’s Report

First of all, it is clearly titled “Independent Auditor’s Report.” That should mean that no one has any doubt about what this document is. It next states to whom the audit report is addressed and that’s members of the company. We will see shortly that audit reports go to some lengths to point out that only the members should rely on the audit report.

  1. The audit opinion and identification of what’s been audited

The opinion paragraph and comes right at the top of the audit report.

An unmodified opinion will state that the financial statements give a true and fair view (or present fairly, in all material respects), and have been prepared in accordance with International Financial Reporting Standards (IFRSs). (The example of the report shown later in this chapter shows an unmodified audit report. We will have to see later the various sorts of modification that are seen in audit reports if the auditors are unable to say without reservation that the financial statements give a true and fair view.)

As appropriate, depending on the type of opinion given, this paragraph can be named:

– Unqualified Opinion

– Qualified opinion

– Adverse opinion

– Disclaimer of opinion

The title is modified to alert users about problems.

The opinion paragraph must:

– Identify the entity whose financial statements have been audited.

-State that the financial statements have been audited.

– Identify the title of each element of the financial statements and the period audited, ie:

‣ The statement of financial position

‣ The statement of comprehensive income

‣ The statement of changes in equity

‣ The statement of cash flows for the year

‣ Notes to the financial statements, including a summary of significant accounting policies.

  1. The Basis of Opinion

This will refer to compliance with the ISAs (complying with ISAs is key to the basis of opinion) and will refer to the auditor’s responsibilities section of the audit report. It must include an assertion of the auditor’s independence and that other ethical matters have been complied with.

If the audit opinion has been modified, the explanation would be here too.

As appropriate, this paragraph would be called:

– Basis of audit opinion

– Basis of qualified audit opinion

– Basis of adverse audit opinion

– Basis of disclaimer of audit opinion

  1. Material uncertainty related to going concern (if any)

A separate paragraph is required if there is a material uncertainty related to the going concern of the company. The need for such a paragraph is covered more fully in the following chapter.

This paragraph is not a modification of the audit opinion – provided the uncertainty has been disclosed by the directors in the notes to the financial statements.

  1. Key audit matters

Key audit matters are those matters that were of most significance during the audit. E.G

(1) Areas of higher assessed risk of material misstatement or significant risks.

(2) Significant auditor judgments relating to areas in the financial statements that involved significant management judgment, including accounting estimates that have been identified as having high estimation uncertainty.

(3) The effect on the audit of significant events or transactions that occurred during the period.

  1. Emphasis of matter paragraph (if any)

This paragraph is used to draw users’ attention to a matter already properly disclosed in the financial statements. For example, a note stating that there had been a fire at the company’s premises after the date of the statement of financial position.

An emphasis of matter paragraph is not a modification of the audit opinion and It will state that the audit opinion is not modified in this respect.

  1. Other matters paragraph (if any)

For example, an audit covers the financial statements but does not cover the directors’ report. So what if the directors’ report contains something that conflicts with the financial statements? The audit opinion cannot be modified because it does not cover the directors’ report, but it might be better if shareholders were alerted. This can be done in the other matter paragraph.

This is not a modification of the audit opinion.

Note that the interactions between the going concern paragraph, key audit matters paragraph and emphasis of matter/other matters paragraph are covered in detail in the following chapter.

  1. Responsibilities of management and those charged with governance for the financial statements

This section is very important and points out that it is management’s responsibility to prepare the financial statements in accordance with the International Financial Reporting Standards or International Accounting Standards where appropriate, to maintain the system of internal control and to consider the going concern position of the company.

  1. Auditor’s responsibilities for the audit of the financial statements

The auditors’ responsibilities are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes their opinion.

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. Misstatements can arise from fraud or error and 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.

The following matters in respect of auditors’ responsibilities can be included as an appendix to the audit report. They state that the auditors:

– Exercise professional judgment and maintain professional skepticism throughout the audit.

– Identify and assess the risks of material misstatement of the financial statements, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for their opinion.

– State that the risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

– Obtain an understanding of internal control relevant to the audit 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 Company’s internal control.

– Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

– Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern.

– If a material going concern uncertainty exists, draw attention in the audit report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify their opinion.

– Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

– Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that were identified during our audit. From the matters communicated with those charged with governance, the auditors determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters.

-Describe these matters in the auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

  1. Name of the engagement partner, address of the auditing firm, date the audit report was signed and the auditor’s signature

Finally, the auditors must sign the audit report and must give their address and the date on which it is signed. The date of the audit report is very important because before that date the auditor has an active duty: the audit is not yet over. The auditor should still be investigating whether receivables are being paid and inventory is selling at above cost etc. After that date the auditor has a passive duty only. This means that the auditor is not ‘on the lookout’ for events affecting the truth and fairness of the financial statements, but if any are brought to his attention he might have to act.


  1. Audit report v audit opinion

There is often confusion between the terms “modified audit report” and “modified opinion”.

You know that the audit report is about a page of A4 including paragraphs setting out managements responsibilities, auditors responsibilities, key audit matters etc. The opinion is only a short paragraph within the overall report and you have to be clear what is being modified and what the effect of the modification is.

  1. Unmodified audit report

It simply states that the financial statements show a true and fair view. There are no ‘ifs’, ‘buts’ or additional information provided. Obviously the content of the Key Audit Matters paragraph will differ from audit to audit, but that is not regarded as a modification.

Once this starting point is departed from, the audit report becomes modified and there are two types of modified audit report.

  1. Modified audit report

The audit report can then be modified in several ways:

-Matters that DO affect the auditor’s opinion e.g.:

  1. i) Financial statements contain a material misstatement/ disagreement:

‣ Qualified (‘except for’) opinion

‣ Adverse (‘do not show a true and fair view’) opinion.

Unlike in the limitation of scope, in the case of disagreement the auditor is able to reach an objective conclusion i.e. he has obtained all the information and explanations but the conclusions varies with the position adopted by the management on the view of the financial statements.

Issues from which disagreement can arise:

  1. The acceptability of an accounting policy.
  2. The method of application of the accounting policy.
  3. The interpretation of the accounting standards or the requirements of the company’s Acts.
  4. Extent of disclosures
  5. Provisions

Whether the auditor agrees with the accounting treatment or disclosure of a matter in the financial statements and in the auditor’s opinion, the effect of that disagreement is material to the financial statements, the auditor should;

  • Include in his report a description of all the factors giving rise to the disagreement.
  • The implications of such factors on the financial statements
  • A quantification of the effect on the financial statements


Effects of disagreements on auditor’s opinion

When the auditor concludes that the effect of the matter giving rise to disagreement is so fundamental that the financial statements are misleading, the auditor should issue an adverse opinion. If the nature of the disagreement is material but not fundamental (pervasive), the auditor should issue a qualified opinion indicating that all other aspects of the financial statements are okay except for the matter giving rise to the disagreement


  1. ii) Unable to obtain sufficient appropriate audit evidence to conclude Financial Statements are free from material misstatement i.e Limitation of scope

‣ Qualified (‘except for’)

‣ Disclaimer (‘we are unable to form an opinion’).

  1. Limitation of scope
  • It is considered there is a limitation of scope in the audit work whereby the auditor for one reason or another is unable to obtain all the information and explanations that he reasonably requires for the audit.
  • When there is a limitation of scope the auditor cannot reach an objective conclusion.

Limitation of scope can either be:

  1. Limitation by the management and
  2. Limitation by circumstances.

Examples of circumstances that would lead to limitations of scope

  1. Hostility or lack of cooperation from the management.
  2. Where the auditor is denied permission to perform necessary audit tests and procedures for the audit.
  3. Restriction to access records and documents by the management.
  4. Appointment after the year ends such that he is unable to carry out certain procedures and tests.
  5. Destruction of documents/ records by a calamity or catastrophe e.g. fire, floods.
  6. Where he is given an engagement with limitations of extent of work he can perform.

Material but not pervasive

The auditor may not include qualifying remarks in his audit report unless the matter is material. Material but not pervasive means that the reservation the auditor has is material in the context of a segment of the financial statements but not to the financial statements taken as a whole.

Material and pervasive

A matter becomes material and pervasive when it is material in the context of the financial statements taken as a whole. A limitation of scope becomes pervasive when it makes the financial statements misleading for decision making purposes or of little value for decision making purposes. A disagreement becomes pervasive when it makes the financial statements taken as a whole to be totally misleading.


This can be summarized in form of a qualification matrix as shown below;


Qualification  Matrix Material but not pervasive Material but pervasive
Limitation of scope Qualified “Except for” opinion Disclaimer opinion
Disagreement/ financial statements contain misstatements Qualified “Except for” opinion Adverse opinion
Uncertainty Except for opinion Adverse opinion


Types of audit opinions

Unqualified opinion- this is an opnion issued when the auditor does not have reservations on the financial statements I.e. where financial statements reflect a true and fair view

Qualified opinion- this is an opinion issued when the extent of disagreements or limitations of scope is material but not pervasive

Adverse opinion – this is the worst opinion an entity can receive. It means that the financial statements contain material misstatements. i.e they do not reflect a true and fair view

Disclaimer opinion- this is where the auditor is unable to arrive at an opinion due to material limitation of scope. Its where the auditor lacks a basis of opinion








Reports/ communication to those charged with governance

ISA 260 requires the auditor to communicate to management and those charged with governance

The importance of communicating with those charged with governance

ISA 260 Communication with those charged with governance sets out guidance for auditors on the communication of audit matters arising from the audit of the financial statements of an entity with those charged with governance.

‘Those charged with governance’ is defined by ISA 260 as ‘the person(s) or organisation(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity’.

‘Management’ is defined by ISA 260 as ‘the person(s) with executive responsibility for the conduct of the entity’s operations’.

Communication with those charged with governance is important because:

  • It assists the auditor and those charged with governance to understand audit related matters in context and allows them to develop a constructive working relationship.
  • It allows the auditor to obtain information relevant to the audit.
  • It assists those charged with governance to fulfil their responsibility to oversee the financial reporting process, thus reducing the risks of material misstatement in the financial statements.

Matters to be communicated by auditors to those charged with governance

The following matters shall be communicated to those charged with governance:

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

Including that the auditor is responsible for forming and expressing an opinion on the financial statements and that the audit does not relieve management or those charged with governance of their responsibilities

2) Planned scope and timing of the audit

An overview of the planned scope and timing of the audit

3) Significant findings from the audit

The auditor shall communicate the following:

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 encountered during the audit

  • Material weaknesses in the design, implementation or operating effectiveness of internal control that have come to the auditor’s attention and have been communicated to management
  • Significant matters arising from the audit that were discussed or subject to correspondence with management
  • Written representations requested by the auditor
  • Other matters that, in the auditor’s professional judgement, are significant to the oversight of the financial reporting process

Auditor independence

The auditor shall communicate the following for listed entities:

  • A statement that the engagement team and others in the firm, the firm, and network firms have complied with relevant ethical requirements regarding independence
  • All relationships between the firm and entity that may reasonably be thought to bear on independence
  • Related safeguards that have been applied to eliminate identified threats to independence or reduce them to an acceptable level


Companies are legally obliged to include a director’s report in their annual accounts. This report should include the following

  1. Directors Reportsshould provide a review of the company’s business
  2. The Directors Report should disclose the dividend that the directors are recommending and the amount which they wish to carry to the reserves.
  3. The directors report should also highlight any changes to the board of directors.
  4. Other issues that should be included in a Directors Report are details of subsidiary undertakings, directors’ interests, details of annual general meeting, statement of responsibilities and the details of the directors’ remuneration report.
  5. The principal activities of the company
  6. The company’s compliance with laws and regulations



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