Professional Documents
Culture Documents
10
the main objectives of the audit are to offer fair assurance on the
lack of any material misstatement, due to errors of fraud and issue a
written report containing his own unbiassed opinion;
11
when the financial statement complies with all the regulations of the
framework.
Unadequate descriptions such as the financial statements are in
substantial compliance with IFRS are examples of imprecise qualified and
limited language and it might mislead the users of the financial
statements.
Given the fact that the financial statements are written in
conformity with the corresponding financial reporting framework, it
uncovers the degree of compliance with a different framework. Such
information is included in the opinion of the auditor if it cannot be plainly
distinguished from the financial statements. In accordance with proposed
ISA:
706, if the disclosure is not ambiguous, but the auditor thinks its of such
importance that its vital to the users understanding, an Emphasis of
matter paragraph is inclosed.
As it is stipulated in the applicable reporting framework, the
entire set of financial statement must be covered by the opinion of the
auditor. An eloquent example is the one which has included in the
financial statement: an income statement, a balance sheet, a statement
of changes in equity, a cash flow statement and relevant notes, which
commonly comprise a summary of important accounting guidelines and
other information.
The auditors report should be signed. Regarding this aspect,
different jurisdictions have different rules as to whether the report must
be signed in the name of the engagement partner or in the name of the
company.
ISA 700 (Revised) introduced the demand that the name of the
engagement partner should be included in the report of audit of listed
entities unless, in particular situations, this disclosure is expected to lead
to a security threat to that person.
Regarding the date, it signifies the end of the auditors active
responsibilities. Once the audit report is signed the passive duty
commences.
The date of the auditors report should be after the day on which
the auditor has obtained enough audit proof on which to base his opinion,
including proof that:
all the financial statements and respective notes have been made;
13
those with the allowed authority have affirmed that they have taken
responsability for the financial statements.
In terms of address, as many audit firms have more than one
office, the audit report should name the specific location, where the
auditor maintains the office that has responsibility for the audit.
14
1.4.
OPINION
THE
UNMODIFIED
REPORT
WITH
UNMODIFIED
the aspects that are presented in the financial statement and have a
significant importance, as represent the basis for users understanding;
different aspects than the ones presented in the financial statement, but
are just as important for the users understanding of the audit report, the
auditors responsabilities and the audit process as a whole.
Each time the auditor decides to include and emphasis of matter
paragraph in his report, he should:
specify that the opinion of the auditor has not been modified in
accordance with the matter emphasized.
there are specific and rare cases when the auditor is not allowed to
withdraw from his engagement, due to a limitation on the scope of the
audit process, which has been imposed by the management and will have
an effect of incapacity of obtaining proper audit evidence. In this cases,
the auditor might consider it is necesary to include an Other matter
paragraph in his report, which will clearly explain why the auditor is not
allowed to withdraw from his engagement;
there are cases when the auditor is asked to report on two different sets
of financial statements: first in accordance with a general framework, as
it is the national one, and secondly, in accordance with a different
general purpose framework, as it is the IFRS. After the auditor decides
that both frameworks can be used in the given situation, he has the
possibility of including an Other matter section in his report, specifing
that the same entity has prepared another set of financial statements,
but in accordance with a different framework.
The Other matter section clearly states that this other matter
is not necessarily presented in the financial statements. Also, the Other
matter section does not contain information according to which the
auditor is forbidden from providing by law, rules or regulations.
If the auditor decided to include an Emphasis of matter or
Other matter paragraph in the auditors report, the auditor should
communicate his decision to the ones charged with governance,
regarding the proposed working of the paragraph and its final
expectations.
17
The auditors may decide that they need to modify the opinion
when they conclude that:
based on the evidence collected, the financial statements are not free
from material misstatement. This is when the client has not complied
with the applicable reporting framework;
qualified opinions;
adverse opinions;
disclaimer of option.
The nature of the modification depends upon whether the
auditor considers the matter to be material and if so, whether it is
pervasive to the financial statements. The term pervasive is explained in
ISA 705 as those effects that, in the auditors judgement:
to
users
capacity
of
the paragraph will explain the reason why the opinion is modified (for
example, which balances are misstated, which disclosures are missing or
inadequate, from which balances the auditor was unable to obtain
sufficient or appropriate evidence and why);
the financial statement is justly presented, on a fair and true view and in
conformity with the suitable financial reporting framework, as it reports
based on a reasonable presentation framework;
the financial statement has been prepared and written accordingly to the
suitable financial framework.
When the auditor is unable to gather sufficient and relevant
audit evidence, and the modification arises as a consequence, the auditor
has to use the phrase except for the possible effects of the matter(s) ...
to express the modified opinion.
When the auditor obtains enough and approrpiate audit
evidence, but has an adverse opinion, he should assert in the opinion
paragraph that based on the matter described in the Basis for adverse
20
opinion paragraph:
the financial statement does not justly present, in a fair and true view,
according to the pertinent financial reporting framework, when the report
is based on a fair presentation framework;
the financial statement has not been prepared and written in conformity
with the corresponding financial reporting framework, when the report is
based on a compliance framework.
If the auditor disclaims an opinion as a consequence of the fact
that was unable to gather enough audit evidence, the auditor should
state in the opinion paragraph because of the matters described in the
Basis for disclaimer of opinion paragraph, the auditor has been unable
to obtain sufficient and appropriate evidence to provide the basis of the
audit report, and, as a consequence, he does not express an opinion on
the financial statements.
There are certain circumstances when the auditor can not gather
enough evidence:
management inhibits the auditor from taking part in the counting of the
physical inventory;
the auditor to inform those charged with governance upon the intended
modifications and their reasons;
the auditor to seek for competition of the ones charged with governance
relating the facts of the matter which gave rise to expected modification,
or even to confirm aspects of disagreement with the management;
the ones charged with governance have the opportunity of offering the
auditor further information or explanations regarding the matter which
gave rise to modifications.
Modification of the audit report is always the final course of
action. As the directors have a legal responsibility to prepare the financial
statements to show a true and fair view, the number of modified opinions
is in real life very low.
If the auditor has to modify the report, the following actions will
be taken:
discuss the matter with those charged with governance. This may lead to
the matter being resolved as the client may decide to amend the
financial stataments or the auditor may be provided with further
evidence to suggest that a modification is not necessary;
seek external advice. Before resigning, the auditor may decide to seek
legal advice or consult with the relevant professional organisation about
the issues;
resign. Where the auditor has reason to doubt the management integrity
or where the auditor expects in the future that there will be a need to
issue a disclaimer, resignation must be considered. These are both
matters that would have been considered at the acceptance stage and
they must be reconsidered at the end of the audit to decide whether to
continue with the engagement.
The practicality of resigning from the audit team depends on the
stage of finalisation of the commitment when the management enforces
the limitation of scope. If the auditor has considerably finalised the audit,
the auditor could decide to finalise the audit as much as possible,
22
disclaim an opinion and elucidate the limitation of scope in the Basis for
disclaimer of opinion section preceding resignation.
In some circumstances, resignation from the audit could not be a
possibility if the auditor is requested by law to finish the audit
engagement. This could be the situation for an auditor of public sector
entities.
When the auditor concludes that resignation is necessary due to
a limitation of scope, there may be a legal or proffesional requisite for the
auditor to disclose the issues related to the resignation from the
engagement to the entitys owners or regulators.
23
2. CASE STUDY
24
2.1.
The users of the financial statements have pointed out that the
opinion of the auditors regarding the financial statements is valuable, but
it should be more informatory. They have asked the auditors to provide
more relevant content to the reports. IAASB responds to this request by
developing a new ISA 701 (Communicating key audit matters in the
independent auditors report) and it represents the main enhancement
brought to the auditor report through the new and revised standards.
Selected from matters discussed with those charged with
governance, the key audit matters are those matters that have been in
the professional judgment of the auditor of highly noteworthiness during
25
provide users a basis to discuss with those charged with governance and
management about particular subjects regarding the audited financial
statements, the entity or the performed audit;
the results on the audit of certain transactions that took place over the
year.
As soon as the auditor determined the matters that needed
meaningful consideration from the auditor, he is then challenged to
establish which of those matters have been of most importance in the
financial statements audit and consequently, which are key audit matters.
ISA 701 provides guidance in order to assist the decision making
framework in estabishing the importance of a communicated matter and
whether this matter is a key audit matter:
the
establishing the key audit matters is to select less matters from those
communicated with the persons charged with governance.
Consequently, key audit matters may vary depending on the
view of the auditor due to the fact that some audit or entity particular
elements could impact the judgment of the auditor regarding which
matters have been of most importance during the audit process of the
ongoing period.
The requirement regarding the disclosure of key audit matters is
meant to result in a depiction that allows the users of the audit report
comprehend why the matter was considered to be one of importance in
the audit and how it was dealt with during the audit. Also, the level of
details comprised in the description of key audit matters is a question of
professional judgment and could differ according to the particular
circumstances of the engagement. This flexibility allows the auditors to be
creative and adaptable to the audit and company particular situations in
the presentation of a key audit matter in order to reduce the concerns of
the stakeholders that communication of key audit matters could soon
result in a standardized transmission of information.
ISA 701 shows that auditors can portray how a key audit matter
was dealt with during the audit by presenting:
facts regarding the approach of the auditor that were relevant to the
matter;
does not suggest that the situation was not solved by the auditor;
29
Table no. 1
No
.
Sourc
e
Stakeholde
r class
Detailed responses
PWC
Accounting
firm
KPMG
Accounting
firm
As auditors, we believe that including key audit matters in the auditors report is
an important first step towards better meeting the needs of users who want more
insight into the audit that was performed than is possible under the current
7 PricewaterhouseCoopers International Limited, Submitted Comment Letters, https://www.ifac.org/system/files/publications/exposuredrafts/comments/IAASBAuditorReportingED.PwCNetwork.21.11.2013.pdf, accessed May 2015
31
model.
We believe it is important that the IAASB evaluates user reaction to the expanded
auditors report. We therefore support the IAASBs planned post-implementation
review. A critical part of such a review will be to understand if the information
reported as key audit matters meets the expectations of users and whether
further enhancements are needed, for example, by broadening the key audit
matters reported by auditors and/or the information included in the report
regarding the auditors response to such matters.
While we recognize that the IAASB is not able to require changes to auditors
reporting responsibilities on its own within existing ISAs, it is nevertheless
important that the IAASBs post-implementation review include consideration of
whether users expectations may be better met by having the auditor provide
assurance on company information beyond the annual financial statements.
Examples of such information may include earnings announcements, certain
financial and non-financial information presented outside the financial statements
such as information included in management discussion and analysis, company
disclosures of key performance indicators or other operational or risk disclosures.
We believe such additional assurance would contribute to narrowing the
significant expectations gap that exists today between what the audit is and what
many in the market place believe or would like the audit to include.
The implementation of change works best when there is alignment of the goals of
all stakeholders. Whilst the IAASB does not set rules that govern reporting by
management and those charged with governance, we believe it is important the
IAASB encourages global and national organizations that establish governance
standards and reporting for management and those charged with governance to
report on matters that were of most significance in the discharging of their
responsibilities with respect to the preparation of the financial statements and
oversight thereof. This will help to better align the reporting responsibilities of
32
Deloitt
e
Accounting
firm
8 KPMG IFRG Limited, Submitted Comment Letters, https://www.ifac.org/system/files/publications/exposuredrafts/comments/KPMGresponsetoEDReportingonAuditedFinancialStatements.pdf, accessed May 2015
33
statements. As such, DTTL believes it will enhance the usefulness of the auditors
report.9
4
EY
Accounting
firm
9 Deloitte Touche Tohmatsu Limited, Submitted Comment Letters, https://www.ifac.org/system/files/publications/exposuredrafts/comments/DTTLIAASBReportingProposalCommentLetter.pdf, accessed May 2015
34
ACCA
Member
Body
We agree that the inclusion of a new section in the auditors report, as specified
in proposed ISA 701 Communicating Key Audit Matters in the Independent
Auditors Report, will be beneficial for users. As we said in our response to an
earlier consultation Improving the auditors report, we support the concept
because it is a focused and timely response to meet the diverse demands of
stakeholders, particularly institutional investors and financial analysts.
There is, by now, a reasonable body of evidence that users value such information
and, no doubt, the current consultation will provide further insights.11
FAP Federa
tion of
Accou
nting
Profes
sions
National
Auditing
Standard
Setter
Yes, many users of the audited financial statements believe that the introduction
of a new section in the auditors report describing the matters the auditor
determined to be of most significance in the audit will enhance the usefulness of
the auditors report because the introduction of a new section in the auditors
report will be able to provide the users of the audited financial statements with an
useful information. Moreover, this new section could add further value to the audit
opinion and helps to reinvigorate the publics trust and confidence in the
10 Ernst & Young Global Limited, Submitted Comment Letters, https://www.ifac.org/system/files/publications/exposuredrafts/comments/EYGCommentLettertoIAASBonAuditorReportingProposalsED22.11.pdf, accessed May 2015
11Association of Chartered Certified Accountants, Submitted Comment Letters, https://www.ifac.org/system/files/publications/exposuredrafts/comments/TECH-CDR-1224_0.pdf, accessed May 2015
35
Thaila
nd
EAIG
Europe
an
Audit
Inspec
tion
Group
Regulator
We believe that the "Key Audit Matters" (KAM) section could be an appropriate
means of informing the users of the financial statements about the audit. It also
provides a positive incentive for management to enhance the quality of
information disclosed.
We welcome the fact that the content of the additional paragraphs on KAM is
based on the audit, and that it presents those matters of most importance to the
audit of the financial statements, rather than on the content of the financial
statements, which are the responsibility of management.13
In conclusion, all of the above mentioned parties (accounting firms, standard setters and regulators)
consider that adding the KAM from the audit report is a big change, a significant step towards a better encountering
of the users needs who expect more comprehension of the audit. Also they believe that out of all the proposed
changes for the report of the auditor, the introduction of the KAMs is the most precious to stakeholders.
12 Federation of Accounting Professions Thailand, Submitted Comment Letters, https://www.ifac.org/system/files/publications/exposuredrafts/comments/CommentsfromFAPThailand.pdf , accessed May 2015
13 EAIG European Audit Inspection Group, Submitted Comment Letters, https://www.ifac.org/system/files/publications/exposuredrafts/comments/EAIGMembersCommentLetter-AuditorReporting-20131120.pdf, accessed May 2015
36
37
a unmodified opinion
reference to the note from the financial statement where the material
uncertainty is described;
an assertion in the Basis for adverse opinion part of the report that a
material uncertainty which might reveal serious doubts regarding the
40
capacity of the company to carry on as a going concern and that this fact
is not adequately disclosed in the financial statements.
Stakeholders have asked for prior notice of possible problems that
might exist regarding a companys capacity to carry on as a going
concern. Such cases were identified and may cast significant ambiguity on
the entitys capacity to carry on as a going concern, but after
understanding the plans of the management in dealing with these
incidents, the auditor determines that material uncertainty does not exist
(situations called close call).
The appreciation and disclosure about a companys capacity to
carry on as a going concern as per the requisitions of the appropriate
financial reporting framework are the duty of those charged with
governance and the management, taking into account that going concern
is a basic characteristic of the financial reporting.
These amendments to ISA 570 answer the general interest of the
public for higher consideration by the auditor to going concern and will be
finalized in an improved working effort by the auditor related to going
concern close call episodes and an ascending concentration on
disclosures when a substantial uncertainty exists. This improved focus of
the auditors might result in enhanced disclosures from management,
which is as well in the interest of the public.
IAASB has made amendments within ISA 570 to improve the
work of the auditor regarding disclosures by:
42
Table no. 2
No
.
Sourc
e
Stakehold
er class
Detailed responses
PWC
Accounting
firm
(iii) it may aid consistency in treatment where auditors judge that a close call
situation also qualifies as a key audit matter, as discussed above.
Against this, some of the difficulties of inclusion of going concern matters in key
audit matters are: (i) auditors reports on non-listed companies may not include a
key audit matters section; (ii) where there are no issues or uncertainties
regarding going concern, it is questionable as to whether the matter should be
elevated as a key audit matter; and (iii) highlighting a matter as a key audit
matter may have unintended consequences (for example, provoking undue
concern among investors and other users of reports, particularly in the case of
financial institutions).
On balance, we believe inclusion in the illustrative auditors report of a separate
section headed going concern is appropriate. However, the IAASB, in finalising
these proposals, should give further thought to the interaction between key audit
matters and going concern and the impact on international convergence and
should consider providing further guidance.15
2
KPMG
Accounting
firm
15 PricewaterhouseCoopers International Limited, Submitted Comment Letters, https://www.ifac.org/system/files/publications/exposuredrafts/comments/IAASBAuditorReportingED.PwCNetwork.21.11.2013.pdf, accessed May 2015
45
statements; or
4) a material uncertainty exists and the disclosure in the financial statements is
inadequate.
The proposals indicate that scenarios 1, 3, and 4 are matters dealt with under
ISA 570 (Revised) and would be discussed in the going concern section of the
auditors report (and in the basis of opinion, in certain circumstances). However,
we believe that the second scenario may represent a key audit matter, but it is
not clear from ISA 570 (Revised) and proposed ISA 701 if such a matter could be
considered a key audit matter.
To clarify and improve the value of the auditors report, we recommend that the
proposals specifically acknowledge that scenario 2 above may represent a key
audit matter.
An inherent issue with our recommendation is that under IFRS, an entity is not
specifically required to make going concern disclosures when a material
uncertainty has not been identified. Practice today relating to the nature and
extent of disclosures by entities in such a situation varies significantly. Therefore,
including guidance that such circumstances may meet the criteria of a key audit
matter may result in having the auditor include original information about the
entitys operations, liquidity, business risks and future plans. Our view is that this
issue could be overcome if the IASB were to introduce specific disclosure
requirements that address the scenario described above. Absent a corresponding
change by the IASB, we believe that indicating that going concern related
matters could be a key audit matter may improve financial statement disclosures
in these situations since management may be reluctant to have the auditor as
primary provider of such information.
47
Deloitt
Accounting
DTTL supports the auditor addressing, in the auditors report, matters relating to
going concern where the applicable financial reporting framework, laws, or
16 KPMG IFRG Limited, Submitted Comment Letters, https://www.ifac.org/system/files/publications/exposuredrafts/comments/KPMGresponsetoEDReportingonAuditedFinancialStatements.pdf, accessed May 2015
48
firm
EY
Accounting
firm
17 Deloitte Touche Tohmatsu Limited, Submitted Comment Letters, https://www.ifac.org/system/files/publications/exposuredrafts/comments/DTTLIAASBReportingProposalCommentLetter.pdf, accessed May 2015
50
ISA 570 and proposed ISA 701, and when the disclosures in proposed ISA 701
would be required. In addition, we believe the IAASB should provide specific
guidance as to whether a KAM about going concern should be included in the
auditors report when the auditor concludes that no material uncertainty exists.
This specific guidance also should take into account the concerns expressed
about auditors providing disclosure of original information in the auditors report.
Conclusion regarding material uncertainty
We understand that the going concern section of the auditors report does not
extend our responsibilities regarding going concern beyond what is currently
required by professional standards, but merely explicitly states the implicit
conclusions we have made regarding going concern during the course of our
audit.
However, we are concerned that the suggested conclusions (i.e., we have
concluded that managements use of the going concern basis of accounting in
the preparation of the financial statements is appropriate and we also have not
identified such a material uncertainty) could result in misunderstanding or
confusion by users. Because of the lack of disclosures in the financial statements,
and the use of specialized terminology, such as material uncertainty, users
may misinterpret a statement about the appropriateness of managements use
of the going concern assumption as conveying more than simply a conclusion on
the basis of accounting used to prepare the financial statements.
We believe that it is possible that users of the auditors report will infer more
from these paragraphs than intended, particularly in the absence of disclosures
in the financial statements, as mentioned above.
IASBs work on going concern
51
ACCA
Member
18 Ernst & Young Global Limited, Submitted Comment Letters, https://www.ifac.org/system/files/publications/exposuredrafts/comments/EYGCommentLettertoIAASBonAuditorReportingProposalsED22.11.pdf, accessed May 2015
52
Body
FAP Federa
tion of
Accou
nting
Profes
sions
Thaila
nd
National
Auditing
Standard
Setter
EAIG
Europe
Regulator
Yes, we agree with the proposed standard requiring the explicit conclusion about
going concern issue in the auditors report. However we understand that the
users may not be aware how long of the period of assurance is. Hence, we
suggest that the IAASB adds some information regarding the period covered by
the going concern matters mention in the auditors report for identification of
material uncertainty i.e. 12 months from the financial reporting date.
However, we woud like to raise concerns about some misunderstandings which
could occur among users. Because it is possible that some users might get
confused whether an entity with going concern issue disclosed in the auditors
report could carry on its operations or not.20
We are aware that the issue of the disclosure of information regarding going
concern is one that is currently being addressed by both the auditing and
19 Association of Chartered Certified Accountants, Submitted Comment Letters, https://www.ifac.org/system/files/publications/exposuredrafts/comments/TECH-CDR-1224_0.pdf, accessed May 2015
20 Federation of Accounting Professions Thailand, Submitted Comment Letters, https://www.ifac.org/system/files/publications/exposuredrafts/comments/CommentsfromFAPThailand.pdf , accessed May 2015
53
an
Audit
Inspec
tion
Group
21 EAIG European Audit Inspection Group, Submitted Comment Letters, https://www.ifac.org/system/files/publications/exposuredrafts/comments/EAIGMembersCommentLetter-AuditorReporting-20131120.pdf, accessed May 2015
54
no uncertainty exists;
57
enhanced description of
characteristics of the audit
auditor
responsibilities
and
basic
charged
with
58
CONCLUSIONS
61
63