1. Chapter 13 The auditor’s reporting obligations

2. Learning objective 1: Obligations to report
ASA/ISA : objective of an audit of the financial report is to enable the auditor to express an opinion as to whether the financial report is prepared, in all material respects, in accordance with an applicable financial reporting framework.
Audit to be conducted in accordance with approved auditing standards.
In Australia, the auditor has an obligation to form a conclusion as to whether the financial report has been prepared using Australian accounting standards issued by the AASB.
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

3. Obligations to report (cont.)
The Corporations Act 2001, s 307, requires the auditor to form an opinion as to:
(a) Whether the financial report is in accordance with the Act, including:
(i) s 296 or 304 (compliance with accounting standards), and
(ii) s 297 or 305 (true and fair view), and
(aa) if the financial report includes additional information … (to give a true and fair view of the financial position and performance) — whether the inclusion of that information was necessary to give the true and fair view required by s 297 or 305, and
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

4. Obligations to report (cont.)
s 307 continued:
(b) whether the auditor has been given all information, explanation and assistance necessary for the conduct of the audit, and
(c) whether the company, registered scheme or disclosing entity has kept financial records sufficient to enable a financial report to be prepared and audited, and
(d) whether the company, registered scheme or disclosing entity has kept other records and registers as required by this Act.
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

5. Obligations to report (cont.)
The Corporations Act 2001, s 308(1), also clearly specifies that the audit report shall state the auditor’s opinion in relation to:
subs (a)(i) of s 307(1) — compliance with accounting standards
subs (a)(ii) of s 307(1) — true and fair view
Section 308(3)(b) states that auditor is required to form an opinion on the matters noted in points (b) to (d) on previous slide, but need only include these in the auditor’s report if there is a deficiency, failure or shortcoming in respect of any of those matters
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

6. Who the auditor has an obligation to report to
The engagement letter (chapter 6) should clearly specify who the auditor has an obligation to report to.
Audit report is usually addressed to either the governing body and members.
In addition to audit report, auditor’s have reporting responsibilities to:
Management and the board of directors on anything prejudicial to the interests of shareholder
ASIC where there are reasonable grounds to suspect a contravention of the provision of the Corporations Act, that will not be adequately dealt with by comment in the audit report or by notifying directors.
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

7. Learning objective 2: True and fair view
ASA/ISA requires the auditor to express an opinion as to whether the financial report ‘gives a true and fair view’ or ‘presents fairly, in all material respects’ in accordance with the applicable financial reporting framework.
For the purposes of approved auditing standards, the two phrases are equivalent.
A financial reporting framework can either be a fair presentation framework or a compliance framework.
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

8. Fair presentation and compliance frameworks
A fair presentation financial reporting framework requires compliance with the requirements of the framework and acknowledges that:
To achieve fair presentation it may be necessary for management to provide disclosures beyond the framework
It may be necessary for management to depart from a framework requirement to achieve fair presentation
These disclosures or departures are commonly referred to as true and fair overrides.
A compliance framework is one that requires that the framework be complied with and does not contain the acknowledgments in (i) or (ii) above.
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

9. Learning objective 3: Structure of the audit report
(Example report at Exhibit 1.1, chapter 1, pp )
Title
Addressee
Introductory paragraph
Responsibility of those charged with governance
Auditor’s responsibility
Independence section (Australia)
Auditor’s opinion
Other reporting responsibilities
Auditor’s signature
Date of auditor’s report
Auditor’s address
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

10. Learning objective 4: Types of audit opinions
ASA/ISA 700 covers the auditor’s responsibility to form an opinion on the financial report, and the form and content of unmodified auditor’s reports.
ASA/ISA 705 covers the types of modified opinions that can be issued:
Qualified opinion
Disclaimer of opinion, or
Adverse opinion.
ASA/ISA 706 covers those situations where it is necessary to draw users’ attention to an issue by an:
Emphasis of Matter paragraph, or
Other Matter paragraph.
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

11. Unqualified opinion
This type of opinion is expressed when the auditor is satisfied in all material respects that the financial report:
Has been prepared in accordance with the Corporations Act 2001, including giving a true and fair view and complying with Australian accounting standards and with the Corporations Regulations 2001, and
Complies with IFRSs.
This form of opinion gives rise to the unqualified opinion paragraph, as shown in Exhibit 1.1.
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

12. Unqualified opinion
Issuing an unqualified opinion means that the auditor has concluded that they have obtained reasonable assurance that the financial report as a whole is free from material misstatement, whether due to fraud or error.
This means that the auditor has concluded that:
Sufficient appropriate audit evidence has been obtained (in accordance with ASA/ISA 330)
Uncorrected misstatements are immaterial, both individually and in aggregate (in accordance with ASA/ISA 450), and
That the financial report is prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework (ASA/ISA –12).
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

13. Modifications affecting the auditor’s opinion
Nature of the matter giving rise to the modification, and pervasiveness of its effects on the financial report, determine the type of opinion expressed.
Effects are considered to be pervasive if they:
Are not confined to specific elements, accounts or items of the financial report
If so confined, represent or could represent a substantial proportion of the financial report, or
In relation to disclosures, are fundamental to users’ understanding of the financial report (ASA/ISA 705.5).
For all the types of modified opinions, a basis for modification paragraph is inserted just before the opinion paragraph.
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

14. Modifications affecting the auditor’s opinion (cont.)
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

15. Qualified opinion
A qualified opinion is expressed when the auditor concludes:
That misstatements are material but not pervasive to the financial report, or
When the auditor is unable to obtain sufficient appropriate evidence on which to base the opinion but concludes that the possible effects on the financial report could be material but not pervasive (ASA/ISA 705.7).
The most common types of qualified opinions issued relate to material departures from a specific accounting standard or material disagreements over the carrying value of a specific asset or liability and its potential effect on profit.
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

16. Basis for qualified auditor’s opinion paragraph, and a qualified auditor’s opinion paragraph
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

17. Adverse opinion
An adverse opinion should be expressed when the effect of the misstatements, individually or in the aggregate, are so material and pervasive that the financial report taken as a whole is, in the auditor’s opinion, misleading or of little use to the addressee of the auditor’s report (ASA/ISA 705.8).
The most common situation in which they are issued is where the accounts are prepared on a going concern basis and the auditor concludes that it is highly improbable that the entity will continue as a going concern (ASA/ISA 570 Appendix 1).
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

18. Example of qualification and qualified opinion paragraph for an adverse opinion
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

19. Disclaimer of opinion
A disclaimer of opinion, also referred to as an inability to form an opinion, is expressed when the auditor is unable to obtain sufficient appropriate evidence to form an opinion, and concludes that the possible effect of undetected misstatements on the financial report could be both material and pervasive (ASA/ISA 705.9–10).
In issuing a disclaimer of opinion the auditor is communicating that there has been such a limitation on the evidence gathering procedures that they are unsure whether the financial report is reliable.
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

20. Example of qualified audit opinion paragraph for a disclaimer of opinion (statement of inability to form an opinion)
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

21. Emphasis of Matter
In certain limited circumstances it is appropriate for the auditor to draw attention to or emphasise a matter that is appropriately presented or disclosed in the financial report and is considered relevant to users of the auditor’s report, but which, because of its nature, does not affect the auditor’s opinion.
The major examples would be where there is a disclosure in the notes to the financial report that the auditor considers to be complete and adequate, but important enough to bring to users’ attention.
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

22. Circumstances giving rise to Emphasis of Matter
ASA/ISA 706.A1 outlines circumstances in which Emphasis of Matter (EoM) can be issued:
Uncertainty relating to the future outcome of exceptional litigation or regulatory action
Early application of a new accounting standard that has a pervasive effect on the financial report in advance of its effective date, and
A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position.
Currently, approximately 80% of auditor’s reports in Australia containing EoM paragraphs relate to uncertainty regarding going concern status.
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

23. ‘Emphasis of Matter’ paragraph relating to inherent uncertainties
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

24. Other Matter paragraph
The ability to include an Other Matter (OM) paragraph in the auditor’s report allows auditor to draw user’s attention to any other matters, not presented or disclosed in the financial report, that the auditor believes are sufficiently important to be highlighted.
Circumstances giving rise to an OM paragraph are those relevant to enhancing user’s understanding of the audit, the auditor’s responsibilities or the audit report.
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

25. Learning objective 5: Circumstances giving rise to a modified opinion
The auditor’s opinion should be modified when:
The auditor concludes, based on the audit evidence obtained, that the financial report is not free from material misstatements, or
The auditor is unable to obtain sufficient appropriate evidence to conclude that the financial report is free of material misstatements (ASA/ISA 705.6).
The auditor should take all reasonable steps to overcome the issues giving rise to the material misstatement (disagreements with management) or the issues causing the auditor to be unable to obtain sufficient appropriate evidence (limitations on scope).
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

26. Material Misstatement
ASA/ISA 450 defines a misstatement as the difference between the amount, classification, presentation or disclosure of an item reported by an entity in the financial report and the way that item is required to be treated in accordance with the applicable financial reporting framework.
Therefore, a material misstatement in the financial report may arise in relation to:
The appropriateness of the accounting policies selected
The application of those accounting policies, or
The appropriateness or adequacy of disclosures in the financial report (ASA/ISA 705.A3).
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

27. Scope limitation
A limitation on the scope of the auditor’s work may arise for one of the following three reasons (ASA/ISA 705.A8):
Circumstances beyond the control of the entity
Circumstances related to the nature or timing of the auditor’s work, or
Limitations imposed by the entity.
A limitation on the performance of a particular procedure does not necessarily constitute a limitation on the scope of the audit if the auditor is able to obtain sufficient appropriate evidence by performing alternative procedures.
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

28. The effect of materiality on the audit qualification
The primary factor when considering whether to qualify an audit opinion, or attempting to determine what sort of qualification to apply, is the materiality of the subject matter giving rise to the qualification.
One critical aspect is the dollar magnitude of the effects of the matter on the financial report.
The auditor also needs to consider the nature of the matter when making judgments regarding materiality.
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

29. Learning objective 6: The audit of comparative amounts
Most entities disclose information from previous periods for comparison purposes.
Such comparative information is an integral part of the current period’s financial report, but is intended to be read only in relation to the information relating to the current period
The assessment of risk of material misstatement includes the following considerations:
The accounting policies used for the comparative information should be in accordance with the financial reporting framework and consistent with those of the current period
The comparative information and other disclosures required should agree with those in the previous financial report
The comparative information should be free of material misstatement.
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

30. Auditor’s responsibilities for other information in annual report
Most annual reports include information that is not part of the financial report, much of which contains or refers to financial information (e.g. summaries of 5–10 years of operating results, chairperson’s and directors’ reports).
No specific responsibility to substantiate other information but should review such information to ensure it does not contain material inconsistencies or misstatements of fact.
If revision of ‘other information’ is necessary and management refuses, auditor should include an OM paragraph.
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

31. Learning objective 7: Communication with shareholders
Principal means of communication with shareholders is the auditor’s opinion on the financial report included in the annual report
A second major method of communicating with shareholders is at the company’s annual general meeting (AGM).
However, the effectiveness of auditors’ attendance at AGMs as a communication mechanism is limited, as only a small minority of shareholders usually attend these meetings.
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

32. Communication with management and those charged with governance
ASA/ISA 260, supported by ASA/ISA 450, provides guidance for the auditor in communicating with all groups of directors and management.
If the matter concerns a significant deficiency in internal control, the auditor should, also on a timely basis, communicate in writing such deficiencies to those charged with governance (ASA/ISA 265.9).
ASA/ISA requires that the auditor communicate with those charged with governance any uncorrected misstatements and the effects that they may have on the auditor’s report.
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

33. Communication with management
Contacts between the auditor and management are more extensive, more frequent and less formal than those with shareholders, audit committees and boards of directors.
The auditor should also communicate to the appropriate level of management any significant deficiencies in internal control that they have communicated to those charged with governance, as well as other deficiencies identified during the audit that are deemed sufficiently important to merit management’s attention (ASA/ISA ).
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

34. The management letter
The management letter is a written communication between the auditor and management that is normally issued at the conclusion of the audit engagement.
This letter summarises the auditor’s recommendations resulting from their assessment of the entity’s business risk and inherent risk, and any recommended improvements in internal control.
The most critical discussions between the auditor and management concerns the form and content of the financial report.
If the accounting policies proposed by management differ materially from those the auditor believes are appropriate, an alternative presentation must be agreed on.
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

35. Communicating with the audit committee or board
There is an increased emphasis on a company having an effective audit committee (chapter 3).
Effective audit committees could be expected to inquire of their auditor the extent to which executive management has been aggressive in its choice of accounting policies, and the extent to which the auditor is independent of management.
At the conclusion of the audit, the audit committee should ask the auditor about any significant disagreements with management and whether they have been satisfactorily resolved.
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett

36. Communicating through electronic presentation of financial reports
GS 006 Electronic Publication of the Auditor’s Report provides guidance for the auditor in circumstances where the entity decides to publish its audited financial report on its website.
Auditor must consider whether audit report might be construed as providing assurance on other information on the website that was unaudited.
Auditor should review website to ensure audit report cannot be construed as providing assurance on this other unaudited information.
Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs t/a Auditing and Assurance Services in Australia 4e by Grant Gay and Roger Simnett
Slides prepared by Roger Simnett