b. To express clearly that opinion through a written Introduction report
Investors and creditors want to rely on auditors’ independence and care in developing the audit opinion. In particular, the auditor shall evaluate whether, in view of But, the possibility of an auditor who violates ethical the requirements of the applicable financial reporting principles is an important aspect of the expectations gap framework (ISA 700, Para. 13):
between the auditor’s perception of their responsibility a. The financial statements adequately disclose the and the stakeholders’ expectations of the audit. significant accounting policies selected and
Audits are concerned with misstatements arising from two applied; distinct types of acts (Pany, 2002): b. The accounting policies selected and applied are consistent with the applicable financial reporting 1. Fraudulent Financial Reporting: Intentional framework and are appropriate; misstatements in financial statements to deceive c. The accounting estimates made by management financial statement users. are reasonable; 2. Misappropriation of assets: Theft of company’s d. The information presented in the financial assets the effect of which has not been statements is relevant, reliable, comparable, and appropriately reflected in the financial understandable; statements. e. The financial statements provide adequate An audit concerning with misstatements mentioned above disclosures to enable the intended users to can be conducted by considering a process consisting of understand the effect of material transactions and three main steps (Cullinan, 2004): events on the information conveyed in the financial statements; and 1. Awareness of the problem transaction, f. The terminology used in the financial statements, 2. Recognition that the transaction’s accounting including the title of each financial statement, is treatment results in a misstatement, and appropriate 3. A willingness to modify the audit opinion to disclose the nature of misstatement if Qualified Opinion
management does not correct the misstatements. The auditor shall express a qualified opinion when (ISA 705, Para.7): Forming an Opinion and Reporting on Financial Statements a. The auditor, having obtained sufficient appropriate audit evidence, concludes that International Standard on Auditing (ISA) 700 (Revised), misstatements, individually or in the aggregate, Forming an Opinion and Reporting on Financial are material, but not pervasive, to the financial Statements, deals with the auditor’s responsibility to form statements; or an opinion on the financial statements. It also deals with b. The auditor is unable to obtain sufficient the form and content of the auditor’s report issued as a appropriate audit evidence on which to base the result of an audit of financial statements. opinion, but the auditor concludes that the
ISA 700 requires the auditor, in order to form an opinion possible effects on the financial statements of on the financial statements, to conclude as to whether undetected misstatements, if any, could be reasonable assurance has been obtained about whether the material but not pervasive
financial statements as a whole are free from material Adverse Opinion misstatement (ISA 705, Para.A2) The auditor shall express an adverse opinion when the ISA 701 deals with the auditor’s responsibility to auditor, having obtained sufficient appropriate audit communicate key audit matters in the auditor’s report. ISA evidence, concludes that misstatements, individually or in 705 (Revised) and ISA 706 (Revised) deal with how the the aggregate, are both material and pervasive to the form and content of the auditor’s report are affected when financial statements (ISA 705, Para.8). the auditor expresses a modified opinion or includes an Emphasis of Matter paragraph or an Other Matter When the auditor expresses an adverse opinion, the paragraph in the auditor’s report. Other ISAs also contain auditor shall state that, in the auditor’s opinion, because of reporting requirements that are applicable when issuing an the significance of the matter(s) described in the Basis for auditor’s report. Adverse Opinion section (ISA 705, Para.18):
The term ISA is used to state International Standard on a. When reporting in accordance with a fair Auditing) as follows (ISA 700, Para. 6): presentation framework, the accompanying financial statements do not present fairly (or give a. To form an opinion on the financial statements a true and fair view of ) [...] in accordance with based on an evaluation of the conclusions drawn [the applicable financial reporting framework]; from the audit evidence obtained; and
b. When reporting in accordance with a Appropriateness or Adequacy of Disclosures in the compliance framework, the accompanying Financial Statements financial statements have not been prepared, in In relation to the appropriateness or adequacy of all material respects, in accordance with [the disclosures in the financial statements, material applicable financial reporting framework]. misstatements of the financial statements may arise when
Disclaimer of Opinion (ISA 705, Para.A7):
The auditor shall disclaim an opinion when the auditor is a. The financial statements do not include all of the unable to obtain sufficient appropriate audit evidence on disclosures required by the applicable financial which to base the opinion, and the auditor concludes that reporting framework; the possible effects on the financial statements of b. The disclosures in the financial statements are not undetected misstatements, if any, could be both material presented in accordance with the applicable and pervasive (ISA 705, Para.9). financial reporting framework; or c. The financial statements do not provide the When the auditor disclaims an opinion due to an inability disclosures necessary to achieve fair presentation. to obtain sufficient appropriate audit evidence, the auditor shall (ISA 705, Para.19): Nature of an Inability to Obtain Sufficient Appropriate Audit Evidence a. State that the auditor does not express an opinion on the accompanying financial statements; The auditor’s inability to obtain sufficient appropriate b. State that, because of the significance of the audit evidence (also referred to as a limitation on the matter(s) described in the Basis for Disclaimer of scope of the audit) may arise from (ISA 705, Para.A8):
Opinion section, the auditor has not been able to a. Circumstances beyond the control of the entity; obtain sufficient appropriate audit evidence to b. Circumstances relating to the nature or timing of provide a basis for an audit opinion on the the auditor’s work; or financial statements; and c. Limitations imposed by management. c. Amend the statement required by ISA 700, which indicates that the financial statements have been Consequence of an Inability to Obtain Sufficient audited, to state that the auditor was engaged to Appropriate Audit Evidence Due to a Management- audit the financial statements. Imposed Limitation after the Auditor Has Accepted the Engagement Circumstances When a Modification to the The practicality of withdrawing from the audit may Auditor’s Opinion is Required depend on the stage of completion of the engagement at
ISA 700 (Revised) requires the auditor, in order to form an the time that management imposes the scope limitation. If opinion on the financial statements, to conclude as to the auditor has substantially completed the audit, the whether reasonable assurance has been obtained about auditor may decide to complete the audit to the extent whether the financial statements as a whole are free from possible, disclaim an opinion and explain the scope material misstatement (ISA 705, Para. A2) limitation within the Basis for Disclaimer of Opinion section prior to withdrawing (ISA 705, Para.A13). Accordingly, a material misstatement of the financial statements may arise in relation to (ISA 705, Para.A3): When the auditor concludes that withdrawal from the audit is necessary because of a scope limitation, there may a. The appropriateness of the selected accounting be a professional, legal or regulatory requirement for the policies; auditor to communicate matters relating to the withdrawal b. The application of the selected accounting from the engagement to regulators or the entity’s owners policies; (ISA 705, Para.A15). c. The appropriateness or adequacy of disclosures in the financial statements. Content of the Auditor’s Report when the
Appropriateness of the Selected Accounting Policies Opinion is Modified
In relation to the appropriateness of the accounting When the auditor modifies the opinion on the financial policies management has selected, material misstatements statements, the auditor amends the content of the auditor’s of the financial statements may arise when (ISA 705, report according to “Qualified Opinion”, “Adverse Para.A4): a. The selected accounting policies are not Opinion” or “Disclaimer of Opinion” as follows.
consistent with the applicable financial reporting Auditor’s Opinion framework; or b. The financial statements, including the The types of auditor’s opinion have been previously related notes, do not represent the underlying transactions explained in the previous section of the Chapter and events in a manner that achieves fair presentation.
Basis for Opinion Adequate Disclosure of a Material Uncertainty Is Not When the auditor modifies the opinion on the financial Made in the Financial Statements
statements, the auditor shall, in addition to the specific The auditor has obtained sufficient appropriate audit elements (ISA 705, Para.A20): evidence regarding the appropriateness of the management’s use of the going concern basis of accounting a. Amend the heading “Basis for Opinion” required but adequate disclosure of a material uncertainty is not by paragraph 28 of ISA 700 (Revised) to “Basis made in the financial statements (ISA 570, Para.A32). for Qualified Opinion,” “Basis for Adverse Opinion,” or “Basis for Disclaimer of Opinion,” 1. Auditor’s report contains an unmodified opinion as appropriate; and when the auditor has concluded that a material b. Within this section, include a description of the uncertainty exists and disclosure in the financial matter giving rise to the modification statements is adequate. 2. Auditor’s report contains a qualified opinion when If there is a material misstatement of the financial the auditor has concluded that a material statements that relates to specific amounts in the financial uncertainty exists and that the financial statements statements (including quantitative disclosures in the notes are materially misstated due to inadequate to the financial statements), the auditor shall include in the disclosure. Basis for Opinion section a description and quantification 3. Auditor’s report contains an adverse opinion when of the financial effects of the misstatement, unless the auditor has concluded that a material impracticable. uncertainty exists and the financial statements omit When the auditor disclaims an opinion on the financial the required disclosures relating to a material statements, the auditor’s report shall not include those uncertainty. elements (ISA 705, Para.A26): According to ISA 570, if the financial statements have a. A reference to the section of the auditor’s report been prepared using the going concern basis of accounting where the auditor’s responsibilities are described; but, in the auditor’s judgment, management’s use of the and going concern basis of accounting in the financial b. A statement about whether the audit evidence statements is inappropriate, the auditor expresses an adverse obtained is sufficient and appropriate to provide a opinion regardless of whether or not the financial basis for the auditor’s opinion. statements include disclosure of the inappropriateness of management’s use of the going concern basis of accounting. Material Uncertainty Related to Going Concern If the financial statements have been prepared using the Key Audit Matters
going concern basis of accounting but, in the auditor’s The objectives of the auditor are to determine key audit judgment, management’s use of the going concern basis of matters and, having formed an opinion on the financial accounting in the financial statements is inappropriate, the statements, communicate those matters by describing them requirement in paragraph 21 for the auditor to express an in the auditor’s report (ISA 701, Para. 7). adverse opinion applies regardless of whether or not the The auditor shall determine, from the matters financial statements include disclosure of the communicated with those charged with governance, those inappropriateness of management’s use of the going matters that required significant auditor attention in concern basis of accounting (ISA 570, Para.A26) performing the audit. In making this determination, the The identification of a material uncertainty is a matter that auditor shall take into account the following (ISA 701, is important to users’ understanding of the financial Para. 9): statements. The use of a separate section with a heading a. Areas of higher assessed risk of material that includes reference to the fact that a material misstatement, or significant risks identified in uncertainty related to going concern exists alerts users to accordance with ISA 315. this circumstance (ISA 570, Para.A28). b. Significant auditor judgments relating to areas in Adequate Disclosure of a Material Uncertainty is Made in the financial statements that involved significant the Financial Statements management judgment, including accounting The Appendix of ISA 700 is an example of an auditor’s estimates that have been identified as having high report when the auditor has obtained sufficient appropriate estimation uncertainty. audit evidence regarding the appropriateness of c. The effect on the audit of significant events or management’s use of the going concern basis of transactions that occurred during the period.
accounting but a material uncertainty exists and disclosure The description of each key audit matter in the Key Audit is adequate in the financial statements. Matters section of the auditor’s report shall include a
reference to the related disclosure(s), if any, in the financial statements and shall address (ISA 701, Para. 13):
a. Why the matter was considered to be one of most appropriate in the circumstances, in view of the significance in the audit and therefore determined adverse opinion. to be a key audit matter; and Responsibilities of Management and those Charged with b. How the matter was addressed in the audit. Governance for the Financial Statements The auditor shall describe each key audit matter in the Management is responsible for the preparation and fair auditor’s report unless (ISA 701, Para. 14): presentation of the financial statements in accordance with
a. Law or regulation precludes public disclosure IFRSs, and for such internal control as management about the matter; or determines is necessary to enable the preparation of b. In extremely rare circumstances, the auditor financial statements that are free from material determines that the matter should not be misstatement, whether due to fraud or error. In preparing communicated in the auditor’s report because the the financial statements, management is responsible for adverse consequences of doing so would assessing the Company’s ability to continue as a going reasonably be expected to outweigh the public concern, disclosing, as applicable, matters related to going interest benefits of such communication. This concern and using the going concern basis of accounting shall not apply if the entity has publicly disclosed unless management either intends to liquidate the information about the matter. Company or to cease operations, or has no realistic alternative but to do so. These matters shall not be described in the Key Audit Matters section of the auditor’s report and the Auditor’s Responsibilities for the Audit of the Financial requirements in paragraphs 13–14 do not apply. Rather, Statements
the auditor shall (ISA 701, Para. 15): Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from a. Report on these matter(s) in accordance with the material misstatement, whether due to fraud or error, and applicable ISA(s); and to issue an auditor’s report that includes our opinion. b. Include a reference to the Basis for Qualified Reasonable assurance is a high level of assurance, but is (Adverse) Opinion or the Material Uncertainty not a guarantee that an audit conducted in accordance with Related to Going Concern section(s) in the Key ISAs will always detect a material misstatement when it Audit Matters section. exists. Misstatements can arise from fraud or error and are The auditor has determined that there are no other key considered material if, individually or in the aggregate, audit matters to be communicated in the auditor’s report they could reasonably be expected to influence the beyond matters addressed in the Basis for Qualified economic decisions of users taken on the basis of these (Adverse) Opinion section or Material Uncertainty financial statements (ISA 700, Appendix). Related to Going Concern section of the auditor’s report Illustrative Examples of Auditor’s Reports (ISA 701, Para. A6). Completing the Audit When the auditor expresses a qualified or adverse opinion, After the audit is completed, several potential communicating other key audit matters would still be communications from the auditor may be sent to the audit relevant to enhancing intended users’ understanding of the audit, and therefore the requirements to determine key committee or others charged with governance, including audit matters apply. However, as an adverse opinion is communication of detected fraud and illegal acts, internal expressed in circumstances when the auditor has control deficiencies, other communications with the audit concluded that misstatements, individually or in the committee, and a management letter.
aggregate, are both material and pervasive to the financial The Deficiencies of the Auditor statements (ISA 701, Para. A7): According to due professional care, the standards state
• Depending on the significance of the matter(s) that:
giving rise to an adverse opinion, the auditor may A. Due professional care requires the auditor to exercise determine that no other matters are key audit professional skepticism. Professional skepticism is an matters. In such circumstances, the requirement attitude that includes a questioning mind and a critical in paragraph 15 applies. assessment of audit evidence. Standards go on to state that • If one or more matters other than the matter(s) an auditor should neither assume that management is giving rise to an adverse opinion are determined dishonest nor assume unquestioned honesty. to be key audit matters, it is particularly important that the descriptions of such other key B. Gathering and objectively evaluating audit evidence audit matters do not imply that the financial requires the auditor to consider the competency and statements as a whole are more credible in sufficiency of the evidence. Since evidence is gathered relation to those matters than would be and evaluated throughout the audit, professional
skepticism should be exercised throughout the audit process.
C. The auditor neither assumes that management is dishonest nor assumes unquestioned honesty. In exercising professional skepticism, the auditor should not be satisfied with less than persuasive evidence because of a belief that management is honest.
The deficiencies of the auditors, as defined above, consist of:
1) Lack of due professional care and professional skepticism to find out schemes, and to obtain sufficient competent evidence, 2) Relying on hearsay evidence provided by management, 3) Ignoring some problem transactions, 4) Omissions of some divisions to audit, 5) Unwillingness to modify the audit opinion to disclose the nature of misstatement, 6) Materially false assessment, 7) Ineffectiveness in preventing a material misstatement in the financial statements, 8) Violations of the federal securities laws, SAS 99, and GAAS.