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Period to be covered by the evaluation
21.4.16 In evaluating management’s assessment of going concern the auditor shall cover the
same period as that used by management to make its assessment as required by the
applicable financial reporting framework , or by law or regulation if it specifies a longer period.
If management’s assessment of the entity’s ability to continue as a going concern covers less
than twelve months from the date of the financial statements as defined in ISA 560, the auditor
shall request management to extend its assessment period to at least twelve months from that
date. This requirement may, for example, be satisfied by discussion, enquiry and inspection of
supporting documentation, for example orders received for future supply, evaluated as to their
feasibility or otherwise substantiated.
21.4.17 Most financial reporting frameworks requiring an explicit management assessment
specify the period for which management is required to take into account all available
information.
21.4.18 IAS 1, for instance, states “ In assessing whether the going concern assumption is
appropriate, management takes into account all available information about the future, which is
at least, but not limited to, twelve months from the end of the reporting period.
21.4.19 In evaluating management’s assessment, the auditor shall consider whether
management’s assessment includes all relevant information of which the auditor is aware as a
result of the audit.
Period beyond management’s assessment
21.4.20 The auditor shall inquire of management as to its knowledge of events or conditions
beyond the period of management’s assessment that may cast significant doubt on the entity’s
ability to continue as a going concern.
21.4.21 If such events or conditions are identified, the auditor may need to request
management to evaluate the potential significance of the event or condition on its assessment
of the entity’s ability to continue as a going concern.
21.4.22 Other than enquiry of management, the auditor does not have a responsibility to
perform any other audit procedures to identity events or conditions that may cast significant
doubt on the entity’s ability to continue as a going concern beyond the period assessed by
management, which would be at least twelve months from the date of the financial statements.
21.5. Additional audit procedures when events or conditions are identified
21.5.1 When events or conditions have been identified (either at the planning stage or during
the course of the audit) which may cast significant doubt on the entity’s ability to continue as a
going concern, the auditor shall obtain sufficient appropriate audit evidence to determine
whether or not a material uncertainty exists through performing additional audit procedures,
including consideration of mitigating factors. These procedures include:
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Where management has not yet performed an assessment of the entity’s ability to
continue as a going concern, requesting management to make its assessment.
Evaluating management’s plans for future actions in relation to its going concern
assessment, whether the outcome of those plans is likely to improve the situation and
whether management’s plans are feasible in the circumstances.
Whether the entity has prepared a cash flow forecast, and analysis of the forecast is a
significant factor in considering the future outcome of events or conditions in the evaluation
of management’s plans for future action:
• Evaluating the reliability of the underlying data generated to prepare the forecast; and
• Determining whether there is adequate support for the assumptions underlying the
forecast.
Considering whether any additional facts or information have become available since the
date on which management made its assessment.
Requesting written representations from management and, where appropriate, those
charged with governance, regarding their plans for future action and the feasibility of these
plans and also on the completeness of information in relation to matters pertaining to the
going concern assumption.
21.5.2 Audit procedures that are relevant when events or conditions are identified that may
cast significant doubt on the entity’s ability to continue as a going concern may include the
following:
Analysing and discussing cash flow, profit and other relevant forecasts with management,
and stress testing of the forecasts.
Analysing and discussing the entity’s latest available interim financial statements.
Reading the terms of debentures and loan agreements and determining whether any have
been breached.
Reading minutes of the meeting of shareholders, those charged with governance and
relevant committees for reference to financing difficulties.
Inquiring of the entity’s legal counsel regarding the existence of litigation and claims and
the reasonableness of management’s assessments of their outcome and the estimate of
their financial implications.
Confirming the existence, legality and enforceability of arrangements to provide or maintain
financial support with related and third parties and assessing the financial ability of such
parties to provide additional funds.
Evaluating the entity’s plans to deal with unfilled customer orders.
Performing audit procedures regarding subsequent events to identify those that can either
mitigate or otherwise affect the entity’s ability to continue as a going concern.
Confirming the existence, terms and adequacy of borrowing facilities.
Obtaining or reviewing reports on regulatory actions.
Determining the adequacy of support for any planned disposals of assets.
21.5.3 In addition to these procedures the auditor may compare:
The prospective financial information for recent prior periods with historical results; and
The prospective financial information for the current period with results achieved to date.
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Form 4.02 - Going concern review programme set out in part I of the manual provides
guidance on some of the audit procedures that may be adopted in carrying out a review of
going concern.
Appendix II: The Z score model provides a method to weight various key ratios to produce an
indicator of possible going concern problems. The Z score relative to last year is important.
Appendix III: The A score model provides a particular view on the insolvency.
21.6. Audit conclusion and reporting
21.6.1 Based on the audit evidence obtained, the auditor shall conclude whether, in the
auditor’s judgment, a material uncertainty exists related to events or conditions that individually
or collectively, may cast significant doubt on the entity’s ability to continue as a going concern.
A material uncertainty exists when the magnitude of the potential impact and likelihood of
occurrence is such that, in the auditor’s judgment, appropriate disclosure of the nature and
implications of the uncertainty is necessary for
In the case of a fair presentation financial reporting framework, the fair presentation of the
financial statements, or
In the case of a compliance framework, the financial statements not to be misleading.
Use of going concern appropriate but a material uncertainty exists
21.6.2 If the auditor concludes that the use of the going concern assumption is appropriate in
the circumstances but a material uncertainty exists, the auditor shall determine whether the
financial statements:
Adequately describe the principal events or conditions that may cast significant doubt on
the entity’s ability to continue as a going concern and management’s plans to deal with
these events or conditions; and
Disclose clearly there is a material uncertainty related to events or conditions that may cast
significant doubt on the entity’s ability continue as a going concern and, therefore, that it
may be unable to realize its assets and discharge its liabilities in the normal course of
business.
21.6.3 If adequate disclosure is made in the financial statements, the auditor shall express an
unmodified opinion and include an Emphasis of Matter paragraph in the auditor’s report to:
Highlight the existence of a material uncertainty relating to an event or condition that may
cast significant doubt on the entity’s ability to continue as a going concern; and
Draw attention to the note in the financial statements that discloses the matters set out in
the paragraph above.
21.6.4 The IASB framework notes that an essential quality of the information provided in
financial statements is that it is readily understandable by users. In reviewing the presentation
of the disclosures the auditor considers whether the notes to the financial statements taken
together with the primary financial statements present a true and fair view. The
understandability of the disclosures is an important factor in determining whether the financial
statements give a true and fair view.
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21.6.5 In extreme cases, such as situations involving multiple material uncertainties that are
significant to the financial statements, it may be considered appropriate to express a disclaimer
of opinion instead of adding an emphasis of matter paragraph.
21.6.6 If adequate disclosure is not made in the financial statements, the auditor shall express
a qualified opinion or adverse opinion, as appropriate, in accordance with ISA 705. The auditor
shall state in the auditor’s report that there is a material uncertainty that may cast significant
doubt about the entity’s ability to continue as a going concern.
Use of going concern inappropriate
21.6.7 If the financial statements have been prepared on a going concern basis but, in the
auditor’s judgment, management’s use of the going concern assumption in the financial
statements is inappropriate, the auditor shall express an adverse opinion.
21.6.8 In some circumstances, where management feels that preparation of the financial
statements on a going concern assumption is not appropriate, the financial statements may be
prepared on an alternative authoritative basis. If the auditor determines that this alternative
basis is appropriate, an unqualified opinion may be issued, if there is adequate disclosure
made in the financial statements. However, the auditor may decide to include an emphasis of
matter paragraph in the auditor’s report to draw the user’s attention to that basis.
Management unwilling to make or extend its assessment
21.6.9 If management is unwilling to make or extend its assessment when requested to do so
by the auditor, the auditor shall consider the implications for the audit report. A qualified
opinion or a disclaimer of opinion in the auditor’s report may be appropriate, because it may
not be possible for the auditor to obtain sufficient appropriate audit evidence regarding the use
of the going concern assumption in the preparation of the financial statements, such as audit
evidence regarding the existence of plans management has put in place or the existence of
other mitigating factors.
Communication with those charged with governance
21.6.10 Unless all of those charged with governance are involved in managing the entity, the
auditor shall communicate with those charged with governance events or conditions identified
that may cast significant doubt on the entity’s ability to continue as a going concern. Such
communication with those charged with governance shall include:
Whether events of conditions constitute a material uncertainty;
Whether the use of the going concern assumption is appropriate on the preparation of the
financial statements; and
The adequacy of the related disclosures in the financial statements.
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Significant delay in the approval of the financial statements
21.6.11 If there is significant delay in the approval of the financial statements by management
or those charged with governance after the date of financial statements, the auditor shall
enquire as to the reasons for the delay. If the auditor believes that the delay could be related to
events or conditions relating to the going concern assessment, the auditor shall perform the
additional procedures necessary where there is a doubt about the ability of the entity to
continue as a going concern, as well as consider the effect on the auditor’s conclusion
regarding the existence of a material uncertainty.
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APPENDIX I: LETTER OF SUPPORT
(Date)
The Directors
(Address)
(Town)
Dear Sir,
Re: Letter of support in respect of _____________________ Ltd.
We are aware that the Balance Sheet of ___________________ Limited reflects a net liability
position as at 31st December 200_ amounting to CU. , and an excess of current
liabilities over current assets of CU. .
We nonetheless believe that the going concern basis is appropriate in preparing the financial
statements for the year ended and we hereby give a formal undertaking to provide the
Company with the necessary financial support to enable it to meet its liabilities as they fall due,
for at least 12 months from the date the above financial statements are approved by the Board
of Directors.
Yours faithfully
For: ________________ Limited
CC (The Auditors)
(Address)
(Town)
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APPENDIX II: Z SCORE MODEL
The Z Score model aims to predict whether an entity will become insolvent in the near future. It
is based on a combination of a number of different financial factors. The model is most accurate
for predicting corporate failures in the next year, and is not accurate beyond 2 years.
Example 1: A Manufacturing sector model
‘Z’ score equals:
3.3 x Profit before interest
+ 0.99 x Total assets
+ 0.6 x Turnover
+ 1.2 x Total assets
+ 1.4 x Market value of equity
Total debt
Working capital =Z
Total assets
Retained earnings or reserves
Total assets
Z Score < 1.81 = strong possibility of insolvency within the next two years
little chance of insolvency in the next two years
Z Score > 2.99 = medium risk of insolvency in the next two years
Z Score > 1.81 < 2.99 =
This model is not suitable for retail companies, banks or railroads.
Example 2: A General model
‘Z’ score equals:
6.56 x Working capital
+ 3.26 x Total Assets
+ 6.72 x Retained earnings or reserves
+ 1.05 x Total Assets
Profit before interest and tax
Total assets =Z
Net assets
Total liabilities
Z Score < 1.1 = strong possibility of insolvency within the next two years
Z Score > 2.6 = little chance of insolvency in the next two years
Z Score > 1.1 < 2.6 = medium risk of insolvency in the next two years
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APPENDIX III: A SCORE MODEL
A Scores try to assess the non-financial indications of insolvency. The A Score model is based
on the belief that company failure can be caused by long standing management defects and
errors. It assumes the following failure sequence:
Specific defects especially in top management
↓
Mistakes
↓
Signs and symptoms of failure
For each entity examined, the defects listed below should be looked for. Entities score zero if
the defect is not evident. If the defect is evident, the maximum number of points shown should
be awarded.
If the entity scores less than 10 in total, a cause for concern is unlikely. If an entity scores
between 10 and 25, there may be some cause for concern. If the entity scores more than 25,
then there may be cause for alarm! The A Score model should not, however, be used as
anything more than a guide. In particular, allowances should be made for small companies
which, in many cases, will score highly on the management section as they are owner-
managed businesses without any prospect of their ceasing to trade.
DEFECTS
1. Management
Autocratic management style 8
The same person is the chief executive and chairman 4
Passive, non-contributing directors on the board 2
Lack of multi-disciplined directors 2
Lack of a strong finance director 2
Lack of strong management at the board level 1
2. Accounting factors
No budgets, budgetary control and variance reports 3
No up-to-date cash flow forecasts and no knowledge of
borrowing requirements 3
No costing system and contribution by product analysis 3
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43
3. Inability to change
15
Failure to notice or respond to changes in the business 15
(old fashioned products, old equipment and plant, ageing 15
directors) 45
Sub-total
4
4. Mistakes 4
High leverage or gearing levels 3
Over-trading: the entity is expanding faster than its funding 1
levels allow 12
Failure of a big project - the entity will collapse if failure occurs 100
Sub-total
5. Other factors
Financial factors, Z Scores and ratios indicate weaknesses
Creative accounting exists
Non-financial factors (such as offices need painting,
capital expenditure decisions have been delayed,
staff turnover has increased)
Other failure factors
Sub-total
Grand Total
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APPENDIX IV: SPECIMAN AUDIT REPORT WORDINGS
Unqualified Opinion: Emphasis of matter (Adequate disclosure of material uncertainty)
Emphasis of Matter
Without qualifying our opinion, we draw attention to Note X in the financial statements, which
indicates that the company incurred a net loss of ZZZ during the year ended 31 December 20X1,
and as of that date, the company’s current liabilities exceeded its total assets by YYY. These
conditions, along with other matters as set out in Note X, indicate the existence of a material
uncertainty which may cast significant doubt about the company's ability to continue as a going
concern.
Qualified opinion: Lack of disclosure
Basis for Qualifying Opinion
The company’s financing arrangements expire and amounts outstanding are payable on March
19 20X1. The company has been unable to re-negotiate or obtain replacement financing. This
situation indicates the existence of a material uncertainty that may cast significant doubt on the
company’s ability to continue as a going concern. The financial statements (and notes thereto)
do not fully disclose this fact.
Qualified Opinion
In our opinion, except for the incomplete disclosure of the information referred to in the Basis for
Qualified Opinion paragraph, the financial statements present fairly (or “give a true and fair view
of”), in all material respects the financial position of the company as at 31 December 20X0, and
of its financial performance and its cash flows for the year then ended in accordance with..
Adverse opinion: Lack of disclosure
Basis for Adverse Opinion
The company’s financing arrangements expired and the amount outstanding was repayable on
31 December 20X0. The company has been unable to re-negotiate replacement financing and is
considering filing for bankruptcy. These events indicate a material uncertainty that may cast
significant doubt on the company’s ability to continue as a going concern and therefore the
company may be unable to realise its assets and discharge its liabilities in the normal course of
business. The financial statements (and notes thereto) do not disclose this fact.
Adverse Opinion
In our opinion, because of the omission of the information mentioned in the Basis for Adverse
Opinion paragraph, the financial statements do not present fairly (or “give a true and fair view
of”) the financial position of the company as at 31 December 20X0, and of its financial
performance and its cash flows for the year then ended in accordance with...
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22. WRITTEN REPRESENTATIONS (INCORPORATING ISA 580)
22.1. Introduction
22.1.1 The objectives of the auditor are:
To obtain written representations from management and, where appropriate, those charged
with governance that they believe that they have fulfilled their responsibility for the
preparation of the financial statements and for the completeness of the information
provided to the auditors;
To support other audit evidence relevant to the financial statements or specific assertions in
the financial statements by means of written representations if determined necessary by
the auditor or required by other ISAs; and
To respond appropriately to written representations provided by management and, where
appropriate, those charged with governance or if management or, where appropriate, those
charged with governance do not provide written representations requested by the auditor.
22.2. Representations as audit evidence
22.2.1 The engagement team shall request written representations from management with
appropriate responsibilities for the financial statements and knowledge of the matters
concerned.
22.2.2 The auditor shall request management to provide a written representation that it has
fulfilled its responsibility for the preparation of the financial statements in accordance with the
applicable financial reporting framework, including where relevant their fair presentation, as set
out in the terms of engagement. The auditor shall also request a written representation from
management that;
It has provided the auditor with all relevant information and access as agreed in the terms
of the audit engagement, and
All transactions have been recorded and are reflected in the financial statements.
22.2.3 Management responsibilities shall be described in the written representations referred
to above in the same manner as these responsibilities are described in the letter of
engagement.
22.2.4 The auditor shall disclaim an opinion on the financial statements in accordance with
ISA705 if the auditor concludes that there is sufficient doubt about the integrity of management
such that the written representations referred to above, on the preparation and presentation of
the financial statements and the information provided to the auditor, are not reliable of if
management will not provide those written representations.
22.2.5 Other ISAs have paragraphs which specifically require the auditor to request written
representations:
ISA 240, “The Auditor’s Responsibility Relating to Fraud in an Audit of Financial
Statements” – paragraph 39.
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ISA 250, “Consideration of Laws and Regulations in an Audit of Financial Statements” –
paragraph 16.
ISA 450, “Evaluation of Misstatements Identified during the Audit” – paragraph 14.
ISA 501, “Audit Evidence – Specific Considerations for Selected Items” – paragraph 12.
ISA 540, “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and
Related Disclosures” – paragraph 22.
ISA 550, “Related Parties” – paragraph 26.
ISA 560, “Subsequent Events” – paragraph 9.
ISA 570, “Going Concern” – paragraph 16(e).
ISA 710, “Comparative Information – Corresponding Figures and Comparative Financial
Statements” – paragraph 9.
22.2.6 In addition to representations required by ISAs the auditor may determine that it is
necessary to obtain other written representations to support other audit evidence relevant to
the financial statements or one or more specific assertions in the financial statements. If the
management does not provide the other written representations or a representation required
by an ISA the auditor shall:
Discuss the matter with management;
Re-evaluate the integrity of management and the effect this may have on management
representations and audit evidence in general; and
Take appropriate actions including determining the possible effect on the opinion in the
auditor’s report.
22.2.7 Where representations relate to matters that are material to the financial statements,
the engagement team should:
Seek corroborative audit evidence from sources inside or outside the entity;
Evaluate the reasonableness of management representations and consistency with other
audit evidence; and
Consider whether the individuals making the representations are knowledgeable on those
particular matters.
22.2.8 Where other audit evidence could reasonably be expected to be available, management
representations cannot be substituted for that audit evidence. For example, a representation
by management as to the cost of an asset is not a substitute for the audit evidence of such
cost that an engagement team would ordinarily expect to obtain.
22.2.9 If the auditor has concerns about the competence, integrity, ethical values or diligence
of management, or about its commitment to or enforcement of these, the auditor needs to
consider what effect such concerns may have on the reliability of the representations (and
indeed audit evidence in general).
Where written representations are inconsistent with other audit evidence, the engagement
team should perform audit procedures to attempt to resolve the matter, if the matter is still
unresolved, reconsider the reliability of other representations made by management and audit
evidence in general.
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22.2.10 If the auditor concludes that the written representations are not reliable the auditor
needs to consider the possible impact on the opinion in the audit report.
22.3. Documentation
22.3.1 As stated in Chapter 12, Audit evidence, documentary evidence is more reliable than oral
evidence. Thus, management’s representations should be obtained in a written form. This also
reduces the possibility of misunderstandings between the engagement team and management.
22.3.2 The basic elements of the management representation letter are:
It should be addressed to the auditor.
The date of the written representations shall be as near as practicable to, but not after the
date of the auditor’s report.
The written representations shall be for all financial statements and all period(s) referred to in
the audit report.
It is normally signed by members of management, or those charged with governance, who
have responsibility for the entity and its financial aspects, based on the best of their
knowledge and belief.
A letter of representation is set out as form 203 - Draft letter of representation in part I of the
manual.
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23. EVALUATION OF MISSTATEMENTS IDENTIFIED DURING THE AUDIT
(INCORPORATING ISA 450)
23.1. Objective
23.1.1 The objective of the auditor is to evaluate:
The effect of the identified misstatements on the audit: and
The effect of uncorrected misstatements, if any, on the financial statements.
23.2. Definitions
23.2.1 Misstatement – A difference between the amount, classification, presentation or
disclosure of a reported financial statement item and the amount, classification, presentation,
or disclosure that is required for the item to be in accordance with the applicable financial
reporting framework.
23.2.2 Misstatements may result from:
An inaccuracy in gathering or processing data from which the financial statements are
prepared;
An omission of an amount or disclosure;
An incorrect accounting estimate arising from the overlooking, or clear misinterpretation of,
facts; and
Judgments of management concerning accounting estimates that the auditor considers
unreasonable or the selection of accounting policies that the auditor considers
inappropriate.
23.2.3 Uncorrected Misstatements – Misstatements that the auditor has accumulated during
the audit and that have not been corrected.
23.3. Procedures
Accumulation of identified misstatements
23.3.1 The auditor shall accumulate misstatements identified during the audit, other than those
that are clearly trivial.
23.3.2 The auditor may designate an amount below which misstatements would be clearly
trivial and would not need to be accumulated because the auditor expects that the
accumulation of such amounts clearly would not have a material effect on the financial
statements.
23.3.3 To assist the auditor in evaluating the effect of misstatements accumulated during the
audit and in communicating misstatements to management and those charged with
governance, it may be useful to distinguish between factual misstatements, judgmental
misstatements and projected misstatements.
Factual Misstatements are misstatements which are in no doubt.
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Judgmental Misstatements are differences arising from the judgments of management
concerning accounting estimates that the auditor considers unreasonable, or the selection
of accounting policies that the auditor considers inappropriate.
Projected Misstatements are the auditor’s best estimate of misstatements in populations,
involving the projection of misstatements identified in audit samples to the entire
populations from which the samples were drawn. Guidance on the determination of
projected misstatements and evaluation of the results is dealt with in chapter 17 on
Sampling.
Consideration of identified misstatements as the audit progresses
23.3.4 The auditor shall determine whether the overall audit plan and strategy need to be
revised if:
The nature of the identified misstatements and the circumstances of their occurrence
indicate that other misstatements may exist that, when aggregated with misstatements
accumulated during the audit, could be material; or
The aggregate of misstatements accumulated during the audit approaches materiality
determined in accordance with ISA 320.
23.3.5 A misstatement may not be an isolated occurrence. Evidence that other misstatements
may exist include, for example, where the auditor indentifies that a misstatement arose from a
breakdown in internal control or from inappropriate assumptions or valuation methods that
have been widely applied by the entity.
23.3.6 If the aggregate of the uncorrected misstatements accumulated during the audit
approaches materiality, there may be a greater than acceptably low level of risk that possible
misstatements accumulated during the audit, could exceed materiality. Uncorrected
misstatements could exist because of the presence of sampling risk and non-sampling risk.
23.3.7 If at the auditor’s request management has examined a class of transactions, account
balance or disclosure and corrected misstatements that were detected, the auditor shall
perform additional audit procedures to determine whether misstatements remain. The auditor
may request management to examine a class of transactions, account balance or disclosure in
order for management to understand the cause of a misstatement identified by the auditor,
perform procedures to determine the amount of the actual misstatement in the class of
transactions, account balance or disclosure, and to make appropriate adjustments to the
financial statements.
Communication and correction of misstatements
23.3.8 The auditor shall communicate on a timely basis all misstatements accumulated during
the audit with the appropriate level of management, unless prohibited by law or regulation. The
auditor shall request management to correct those misstatements.
23.3.9 Timely communication of misstatements to the appropriate level of management is
important as it enables management to evaluate whether the items are misstatements, inform
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the auditor if it disagrees, and take action as necessary. Ordinarily, the appropriate level of
management is the one that has the responsibility and authority to evaluate the misstatements
and to take the necessary action.
23.3.10 Law or regulation may prohibit the auditor’s communication of certain misstatements to
management, or others, within the entity. (E.g. Investigation ongoing by appropriate authority)
In such cases, the auditor may consider seeking legal advice.
23.3.11 The correction by management of all misstatements, including those communicated by
the auditor, enables management to maintain accurate accounting books and records and
reduces the risks of material misstatement of future financial statements because of the
cumulative effect of immaterial uncorrected misstatements related to prior periods.
23.3.12 If management refuses to correct some or all of the misstatements communicated by
the auditor, the auditor shall obtain an understanding of management’s reasons for not making
the corrections and shall take that understanding into account when evaluating whether the
financial statements as a whole are free from material misstatement. The evaluation includes
consideration of the qualitative aspects of the entity’s accounting practices, including indicators
of possible bias in management’s judgments, which may be affected by the auditor’s
understanding of management’s reasons for not making the corrections.
Evaluating the effect of uncorrected misstatements
23.3.13 Prior to evaluating the effect of uncorrected misstatements, the auditor shall reassess
materiality determined in accordance with ISA 320 to confirm whether it remains appropriate in
the context of the entity’s actual financial results. The initial determination of materiality in
accordance with ISA 320 may have to be based on estimates of the entity’s financial results,
because the actual financial results may not have been known at the time.
23.3.14 If this evaluation gives rise to a lower amount (or amounts), then performance
materiality and the appropriateness of the nature, timing and extent of the further audit
procedures are reconsidered so as to obtain sufficient appropriate audit evidence on which to
base the audit opinion.
23.3.15 The auditor shall determine whether uncorrected misstatements are material,
individually or in aggregate. In making this determination, the auditor shall consider:
The size and nature of the misstatements, both in relation to the particular classes of
transactions, account balances, or disclosures and the financial statements as a whole, and
the particular circumstances of their occurrence; and
The effect of uncorrected misstatements related to prior periods on the relevant classes of
transactions, account balances or disclosures, and the financial statements as a whole.
23.3.16 The cumulative effect of immaterial uncorrected misstatements related to prior periods
may have a material effect on the current period’s financial statements. There are different
acceptable approaches to the auditor’s evaluation of such uncorrected misstatements on the
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current period’s financial statements. Using the same evaluation approach provides
consistency from period to period.
23.3.17 Each individual misstatement is considered to evaluate its effect on the relevant
classes of transactions, account balances or disclosures, including whether the materiality
level for that particular class of transactions, account balance or disclosure, if any, has been
exceeded.
23.3.18 If an individual misstatement is judged to be material, it is unlikely that it can be offset
by other misstatements. For example, if revenue has been materially overstated, the financial
statements as a whole will be materially misstated, even if the effect of the misstatement on
earnings is completely offset by an equivalent overstatement of expenses. It may be
appropriate to offset misstatements within the same account balance or class of transactions;
however, the risk that further undetected misstatements may exist is considered before
concluding that offsetting even immaterial misstatements is appropriate. It should be noted that
the identification of a number of immaterial misstatements within the same account balance or
class of transactions may require the auditor to reassess the risk of material misstatement for
that account balance or class of transactions.
23.3.19 Determining whether a classification misstatement is material involves the evaluation
of qualitative considerations, such as the effect of the classification misstatement on debt or
other contractual covenants, the effect on individual line items or sub-totals, or the effect on
key ratios. There may be circumstances where the auditor concludes that a classification
misstatement is not material in the context of the financial statements as a whole, even though
it may exceed the materiality level or levels applied in evaluating other misstatements. For
example, a misclassification between balance sheet line items may not be considered material
in context of the financial statements as a whole when the amount of the misclassification is
small in relation to the size of the related balance sheet line items and the misclassification
does not affect the income statement or any key ratios.
23.3.20 The circumstances related to some misstatements may cause the auditor to evaluate
them as material, individually or when considered together with other misstatements
accumulated during the audit, even if they are lower than materiality for the financial
statements as a whole. Circumstances that may affect the evaluation include the extent to
which the misstatement:
Affects compliance with regulatory requirements;
Affects compliance with debt covenants or other contractual requirements;
Relates to the incorrect selection or application of an accounting policy that has an
immaterial effect on the current period’s financial statements but is likely to have a material
effect on future period’s financial statements;
Masks a change in earnings or other trends, especially in the context of general economic
and industry conditions;
Affects ratios used to evaluate the entity’s financial position, results of operations or cash
flows;
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Affects segment information presented in the financial statements (for example, the
significance of the matter to a segment or other portion of the entity’s business that has
been identified as playing a significant role in the entity’s operations or profitability);
Has the effect of increasing management compensation, for example, by ensuring that the
requirements for the award of bonuses or other incentives are satisfied;
Is significant having regard to the auditor’s understanding of known previous
communications to users, for example, in relation to forecast earnings;
Relates to items involving particular parties (for example, whether parties to the transaction
are related to members of the entity’s management);
In an omission of information not specifically required by the applicable financial reporting
framework but which, in the judgement of the auditor, is important to the users’
understanding of the financial position, financial performance or cash flows of the entity; or;
Affects other information that will be communicated in documents containing the audited
financial statements (for example, information to be included in a “Management Discussion
and Analysis” or an “Operating and Financial Review”) that may reasonably be expected to
influence the economic decisions of the users of the financial statements ISA 720 deals
with the auditor’s consideration of other information, on which the auditor has no obligation
to report, in documents containing audited financial statements.
23.3.21 These circumstances are only examples; not all are likely to be present in all audits
nor is the list necessarily complete. The existence of any circumstance such as these does not
necessarily lead to a conclusion that the misstatement is material.
23.3.22 ISA 240 explains how the implications of a misstatement that is, or may be, the result
of fraud ought to be considered in relation to other aspects of the audit, even if the size of the
misstatement is not material in relation to the financial statements.
Communication with those charged with governance
23.3.23 The auditor shall communicate with those charged with governance uncorrected
misstatements and the effect that they, individually or in aggregate, may have on the opinion in
the auditor’s report, unless prohibited by law or regulation. The auditor’s communication shall
identify material uncorrected misstatements individually. The auditor shall request that
uncorrected misstatements be corrected.
23.3.24 If uncorrected misstatements have been communicated with person(s) with
management responsibilities, and those person(s) also have governance responsibilities, they
need not be communicated again with those same person(s) in their governance role. The
auditor nonetheless has to be satisfied that communication with person(s) with management
responsibilities adequately informs all of those with whom the auditor would otherwise
communicate in their governance capacity.
23.3.25 Where there is a large number of individual immaterial uncorrected misstatements, the
auditor may communicate the number and overall monetary effect of the uncorrected
misstatements, rather that the details of each individual uncorrected misstatement.
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23.3.26 ISA 260 requires the auditor to communicate with those charged with governance the
written representations the auditor is requesting. The auditor may discuss with those charged
with governance the reasons for, and the implications of, a failure to correct misstatements,
having regard to the size and nature of the misstatement judged in the surrounding
circumstances, and possible implications in relation to future financial statements.
23.3.27 The auditor shall also communicate with those charged with governance the effect of
uncorrected misstatements related to prior periods on the relevant classes of transactions,
account balances or disclosures, and the financial statements as a whole.
Written representations
23.3.28 The auditor shall request a written representation from management, and, where
appropriate those charged with governance whether they believe the effects of uncorrected
misstatements are immaterial, individually and in aggregate, to the financial statements as a
whole. A summary of such items should be included in or attached to the written
representation.
23.3.29 Because the preparation of the financial statements requires management and, where
appropriate, those charged with governance to adjust the financial statements to correct
material misstatements, the auditor is required to request them to provide a written
representation about uncorrected misstatements. In some circumstances, management and,
where appropriate, those charged with governance may not believe that certain uncorrected
misstatements are misstatements. For that reason, they may want to add to their written
representation words such as: “We do not agree that items and constitute misstatements
because (description of reasons).” Obtaining this representation does not, however, relieve
the auditor of the need to form a conclusion on the effect of uncorrected misstatements.
Documentation
23.3.30 The auditor shall include in the audit documentation:
The amount below which misstatements would be regarded as clearly trivial;
All misstatements accumulated during the audit and whether they have been corrected;
and
The auditor’s conclusion has to whether uncorrected misstatements are material
individually or in aggregate, and the basis for that conclusion.
23.3.31 The auditor’s documentation of the uncorrected misstatements may take into account:
The consideration of the aggregate effect of uncorrected misstatements;
The evaluation of whether the materiality level or levels for particular classes of
transactions, account balances or disclosures, if any, have been exceeded; and
The evaluation of the effect of uncorrected misstatements on key ratios or trends, and
compliance with legal, regulatory and contractual requirements (for example, debt
covenants).
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24. COMPLETION AND REVIEW
24.1. Objectives
24.1.1 Audit completion procedures are carried out to ensure that:
Sufficient audit evidence has been obtained to support the audit opinion;
All decisions taken have been documented;
The audit file has been completed; and
Any audit matters of governance interest have been documented and discussed with the
client.
24.1.2 Audit completion procedures include:
Applying analytical procedures (covered under chapter 16 of the Manual).
Review of subsequent events (covered under chapter 20 of the Manual).
Confirmation that the entity is a going concern (covered under chapter 21 of the Manual).
Review of presentation and disclosure - do the financial statements comply with the entity’s
applicable financial reporting framework and legal requirements e.g. International Financial
Reporting Standards (IFRS’s) and the Companies Act/local statute.
Consultation, where necessary.
Obtaining written representations from management (covered in chapter 22 of the Manual).
Engagement partner review.
Engagement quality control review.
24.2. Completion of audit areas
24.2.1. Lead and supporting schedules
Lead schedules and appropriate supporting schedules should be completed and cross-
referenced for each relevant audit area.
Lead schedules for audit work (or other documents supporting each lead schedule, such as
a summary memorandum) should clearly show the audit objective, the work performed and
the conclusions reached. Lead schedule figures should be cross-referenced to relevant
audit working papers and to the financial statements.
The preparer of the schedule should consider whether the detailed information contained in
all schedules has been adequately summarised, and required disclosures have been
properly reflected in the financial statements.
All schedules should be carefully reviewed to ensure that audit procedures have been
carried out in accordance with the audit plan and audit programmes. Each schedule should
normally show documentary evidence of such review (e.g. the reviewer’s initials).
Any adjustments made to the figures in the financial statements should also be reflected in
relevant schedules.
24.2.2 The auditor shall prepare documentation that provides:
A sufficient and appropriate record of the basis for the auditor’s report; and
Evidence that the audit was planned and performed in accordance with ISAs and
applicable legal and regulatory requirements.
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The auditor shall prepare documentation on a timely basis.
24.3. Analytical review
24.3.1 Analytical review procedures should be summarised and notes made of explanations of
material changes and variations. This enables the reviewer to corroborate conclusions formed
during the audit of individual components or elements of the financial statements and assist in
analytical procedures identifying a previously unrecognised risk of material misstatement, ISA
315 requires the auditor to revise the auditor’s risks of material misstatement and modify the
further planned audit procedures accordingly.
24.3.2 If the auditor identified information that is inconsistent with the auditor’s final conclusion
regarding a significant matter, the auditor shall document how the auditor addressed the
inconsistency.
24.4. Audit area conclusions
The auditor shall prepare audit documentation that is sufficient to enable an experienced
auditor, having no previous connection with the audit, to understand:
The nature, timing and extent of the audit procedures performed to comply with the ISAs
and applicable legal and regulatory requirements;
The results of the audit procedures performed, and the audit evidence obtained; and
Significant matters arising during the audit, the conclusions reached thereon, and
significant professional judgments made in reaching those conclusions.
(For this purpose an experienced auditor is an individual (whether internal or external to the
firm) who has practical audit experience, and a reasonable understanding of:
• Audit processes;
• ISAs and applicable legal and regulatory requirements;
• The business environment in which the entity operates; and
• Auditing and financial reporting issues relevant to the entity’s industry.)
24.4.1 While ISA 230 requires a conclusion on all significant aspects of the audit, it is
recommended that a conclusion be drawn for each audit area by the engagement team
member in charge of the audit area. Key issues arising should be summarised on Form 393.1 -
Matters for partner’s attention or form 393.2- Matters for manager’s attention as appropriate.
24.4.2 Before drawing a conclusion, the engagement team member in charge of the audit area
should ensure that the audit has been carried out in accordance with the Audit Strategy and
Plan and that audit procedures indicated in the audit programmes have been carried out as
required. Any deviations from the Audit Strategy and Plan should be documented in Form 402,
substantiated and approval obtained from the engagement partner.
24.4.3 The working papers should also be updated by the audit senior to reflect responses to
queries raised by reviewers.
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24.4.4 Internal control and other weaknesses should also be summarised and included in form
202 - Management letter.
24.4.5 Any areas where the engagement team has had to rely on representations should be
included in form 203 - draft letter of representation.
24.4.6 Any points identified during the audit, which are particularly relevant to the planning of
the following year's audit should be included in form 395 - Points carried forward for
subsequent audit.
24.5. Departures from ISAs
24.5.1 If, in exceptional circumstances, the auditor judges it necessary to depart from a
relevant requirement in an ISA, the auditor shall document how the alternative audit
procedures performed achieve the aim of that requirement, and the reasons for the departure.
24.6 Differences of opinion
24.6.1 When differences of opinion arise within the audit team, the procedures
described in chapter 4.19 of the Manual on Consultations should be followed.
24.7. Points for partner’s attention
24.7.1 All matters which have an effect on the audit opinion or need to be discussed with
management should be recorded in form 393.1 - Matters for partner’s attention.
24.7.2 The points for partner’s attention is ordinarily drafted by the senior, completed by the
manager and reviewed by the engagement partner. The points for partner’s attention include any
material problems or other uncleared matters encountered during the course of the audit.
Unusual matters noted should also be included in the points for partner’s attention for
information purposes, even if these have been cleared during the course of the audit.
Points for partner’s attention would ordinarily include the following points:
Major points for the engagement partner’s attention.
Analytical review at the completion stages.
Errors found, distinguishing between adjusted errors (Form 6.4) and unadjusted errors (Form
335).
Information that contradicts or is inconsistent with the engagement team’s final conclusions
regarding a significant matter, including how the contradiction has been addressed.
24.7.3 All matters recorded in the points for partner’s attention should be reviewed by the
engagement partner, who should sign the document to confirm that all matters have been
cleared satisfactorily.
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24.8. Review of financial statements
Accounting policies
24.8.1 The entity’s accounting policies should be reviewed as part of the substantive
procedures adopted to ensure that:
The policies disclosed in the previous year's financial statements have been amended to
reflect:
• Changes as a result of changes to the financial reporting framework and corporate
legislation;
• Any policies not previously disclosed; and
• Modifications to accounting policies.
The accounting policies used by the entity are:
• Acceptable (e.g. in accordance with IFRS);
• Consistently applied; and
• Appropriate to the nature of business, industry and environment in which the entity
operates.
Requirements of the entity’s applicable financial framework have been complied with in
relation to any changes in the accounting policies.
Compliance with local legal requirements and applicable financial reporting standards
24.8.2 The financial statements should be checked for compliance with local legal
requirements and the entity’s applicable financial reporting framework.
Presentation and disclosure
24.8.3 The financial statements should be presented and disclosures made in accordance with
legal requirements and the entity’s applicable financial reporting framework.
24.8.4 The engagement team should consider the use of checklists (e.g. IFRS disclosure
checklist, Companies Act checklist etc.) or compare the entity’s financial statements with the
firm’s model set of financial statements to ensure consistency and compliance with
requirements. The financial statements should also be proof-read to ensure that clerical errors
are eliminated.
24.8.5 The audit senior should ensure:
All the additions and cross-casts are correct.
Items shown in more than one place on the financial statements are all shown at the
correct amounts.
Cross-references and page references are complete and correct.
The audit opinion is supported by the audit evidence on the file.
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Comparative figures agree with the previous year's financial statements.
All pages and paragraphs are numbered and follow in sequence.
Dates have been changed from the previous period's financial statements.
All page and column headings are correct.
There are no errors of fact (for example, directors' names are correct).
Form 210 - Calling over checklist in part I of the manual should be completed by the audit
senior and approved by the manager / engagement partner.
Reasonableness
24.8.6 As discussed in chapter 16 - Analytical Procedures, ISA 520 requires the auditor to
apply analytical procedures at or near the end of the audit when forming an overall conclusion
as to whether the financial statements as a whole, are consistent with the auditor’s
understanding of the entity. The conclusions drawn from the results of such audit procedures
are intended to corroborate conclusions formed during the audit of individual components or
elements of the financial statements and assist in arriving at the overall conclusion as to the
reasonableness of the financial statements.
Audit opinion
24.8.7 The review of the financial statements, together with the results of other appropriate
audit procedures, should enable the auditor to give an opinion on the financial statements.
24.9. Review of file
24.9.1 The objectives of review of the audit file and working papers are to:
Check for compliance with the firm’s and professional standards of work.
Ensure that the work has been carried out in accordance with the audit plan and strategy,
modified as necessary during the course of the audit.
Confirm that working papers provide sufficient appropriate audit evidence to support
conclusions reached.
Assess whether work has been performed efficiently, within timetable and budget.
Identify areas of weakness in the client’s system of internal controls and opportunities for
provision of additional services to the client.
Communicate learning points to those whose work is being reviewed, so as to develop their
understanding and professional competence.
24.9.2 Factors to consider in the review of audit files are:
Working papers should be reviewed as soon as possible after completion of the work.
The review should be neat and legible.
The review should be carried out positively, and review points clearly explained, including
an explanation of their importance.
Sarcastic and flippant remarks should be avoided.
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Issues arising from the review and discussed with those whose work is being reviewed.
Those being reviewed should, whenever possible, be present when their work is being
reviewed.
The person who carried out the work should resolve any queries raised by the reviewer on
the relevant working papers, and not on the face of the review notes.
Matters identified during the review should be promptly followed up and cleared by the
reviewer.
The review should be evidenced by signatures on the working papers reviewed, the audit
programme and the review notes.
The reviewer should balance his review between "file maintenance points" (such as cross-
referencing and signatures missing), and points of significance to the audit opinion. A
review which solely consists of administrative points may indicate a failure to take a view of
the audit and financial statements as a whole, and hence a failure to identify important
points.
24.9.3 When reviewing the working papers, the reviewer should check for the following:
Each schedule is headed, dated, initialled, and indexed.
Cross-referencing is complete.
Audit ticks used are clearly explained.
Working papers are organised in a logical fashion.
The tests carried out are explained.
Sample sizes appear adequate.
The method and basis of sample selection has been explained.
All outstanding points from the tests have been cleared.
Errors and exceptions have been properly treated, and where appropriate, entered on the
summary of errors’ schedule.
Conclusions to tests are meaningful, accurate and supported by the evidence.
The working papers must be initialled and dated by the reviewer as evidence of review.
Manager review
24.9.4 Depending on the structure of the engagement team, the manager should review the
senior's working papers in detail, and enough of the audit assistants' working papers, to ensure
that the senior has carried out a proper review of the audit assistants’ work.
24.9.5 The manager should also review the financial statements in detail, taking an overview to
ensure the important issues affecting the financial statements have been satisfactorily treated,
and there is sufficient appropriate audit evidence to support the audit opinion.
24.9.6 The manager should normally review the audit file at the client's premises. The
advantages of this are:
Any additional information required to clear review points can easily be obtained
The staff carrying out the work are available to answer questions and / or carry out further
audit procedures, as required.
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It improves relationship with the client. There can be commercial advantages in a manager
reviewing on site and taking an opportunity at the same time to strengthen the firm's
professional relationship with the client.
Review notes arising from the manager’s review should be noted in form 392.4 - manager’s /
senior’s review notes.
Engagement partner review
24.9.7 Before the auditor’s report is issued, the engagement partner, through review of the
audit documentation and discussion with the engagement team should be satisfied that
sufficient appropriate audit evidence has been obtained to support the conclusions reached for
the auditor’s report to be issued.
24.9.8 In order to do this, the engagement partner should at least review the following sections
of the file:
201 - Financial Statements.
393.1 - Matters for Partner’s Attention.
203 - Draft Letter of Representation
202 - Management letter.
402 - Overall Audit Strategy and Plan (to ensure the original strategy has been followed
and is still considered appropriate).
450 - Time budgets and summary.
Lead schedules and audit conclusions of each material area.
A more detailed review of specific areas where necessary.
24.9.9 The engagement partner shall document discussions of significant matters with
management, those charged with governance, and others, including the nature of the
significant matters discussed and when and with whom the discussions took place. This should
be recorded in form 330 - Client meeting agenda / notes, including the conclusions reached.
24.9.10 The engagement partner should review the manager's work to ensure that the
manager has carried out a proper review.
24.10. Overall audit conclusion
24.10.1 During the final stages of the audit, there are usually one or more meetings between
the engagement partner, audit manager and senior members of the client’s staff. At these
meetings, any final adjustments are agreed, any other matters identified in the ‘points for
partner’s attention’ are discussed, and all outstanding points are cleared. Notes should be
made of all such meetings, including notes of any contentious areas discussed and
conclusions reached. These should be recorded in form 370 - Discussions with engagement
team and de-briefing notes.
24.10.2 After the final adjustments have been made, the overall audit conclusions schedule
should be completed, noting any outstanding matters (usually, only matters to be signed at the
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same time as the financial statements, such as the letter of representation) and the
engagement partner should countersign this schedule.
24.10.3 The engagement partner should also sign off the overall audit conclusion prior to
release of the financial statements for the board’s approval to ensure that all outstanding
matters have been cleared.
Form 310 - Overall audit conclusion is set out in part I of the manual.
24.11. Engagement quality control review
24.11.1 As discussed in chapter 4 - Quality Control in relation to Audit Engagements, ISQC 1
requires the firm to establish policies and procedures required for appropriate engagements,
an engagement quality control review that provides an objective evaluation of significant
judgements made by the engagement team and the conclusions reached in arriving at the
audit opinion. Refer to chapter 4 of the manual on audits where an engagement quality control
is required, the process for carrying out the review and the completion requirements.
24.12. Second opinion on modified, emphasis of matter and other matter paragraphs
24.12.1 If a modified opinion, emphasis of matter or other matter paragraph is going to be
issued, a second opinion should be sought from either the Engagement Quality Control
Reviewer, the firm’s technical department or another partner. (see also sections 4.6 to 4.11 of
the ISQC Manual). This agreement should be documented.
24.13. Assembly of the final audit file
24.13.1 Assembly of the final audit file is covered in section 3.5.
24.13.2 ISQC 1 (or national requirements that are at least as demanding) requires firms to
establish policies and procedures for the timely completion of the assembly of audit files. An
appropriate time limit within which to complete the assembly of the final audit file is ordinarily
not more than 60 days after the date of the audit report.
24.13.3 The completion of the assembly of the final audit file after the date of the auditor’s
report is an administrative process that does not involve the performance of new audit
procedures or the drawing of new conclusions.
24.13.4 Examples of changes of an administrative nature include:
Deleting or discarding superseded documentation.
Sorting, collating and cross-referencing working papers.
Signing off on completion checklist relating to the file assembly process.
Documenting audit evidence that the auditor has obtained, discussed and agreed with the
relevant members of the engagement team before the date of the auditor’s report.
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24.13.5 After the assembly of the final audit file has been completed, the auditor shall not
delete or discard audit documentation of any nature before the end of its retention period.
24.13.6 In circumstances other than those envisaged in matters arising after the Date of the
Auditor’s Report (below) where the auditor finds it necessary to modify existing audit
documentation or add new audit documentation after the assembly of the final audit file has
been completed, the auditor shall, regardless of the nature of the modifications or additions,
document:
The specific reasons for making them; and
When and by whom they were made and reviewed.
24.14. Matters arising after the date of the auditor’s report
24.14.1 If, in exceptional circumstances, the auditor performs new or additional audit
procedures or draws new conclusions after the date of the auditor’s report, the auditor shall
document:
The circumstances encountered;
The new or additional audit procedures performed, audit evidence obtained, and
conclusions reached, and their effect on the auditor’s report; and
When and by whom the resulting changes to audit documentation were made and
reviewed.
24.15. Effectiveness review
24.15.1 Effectiveness review is an essential part of the audit process, necessary to ensure that
lessons and improvements to efficiency are identified, and personal development is enhanced.
24.15.2 The key elements of effectiveness review are:
De-briefing meetings
24.15.3 The aims of de-briefing meetings are:
To consider whether the overall audit approach should be changed in the following year.
To identify any audit areas where changes in the approach or audit programmes should be
made (e.g. where the audit was either ineffective or inefficient).
To consider how factors that caused delays this year can be prevented in the following
year.
To identify any other points to be carried forward to next year’s file.
To seek opportunities to help the client.
24.15.4 Ideally, all members of the audit team, including the partner, should be able to
contribute at a de-briefing meeting.
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Appraisals
24.15.5 Appraisals of all staff, including managers should be made after every assignment. In
general, the appraiser should be the person to whom the individual has reported in the first
instance. Appraisals can be informal or formal, but a formal appraisal should generally be
carried out for lengthy assignments.
24.15.6 In order for appraisals to be effective, they must be carried out promptly.
24.15.7 The following questions are relevant when an appraisal of an assignment is made:
Have the objectives of the task or role been met satisfactorily?
Has the individual performed well?
If not, where were the problems and what action needs to be taken to resolve them?
Did the individual feel he or she was well briefed?
Was the work allocated appropriately?
Did the individual feel challenged by the task?
Was the work too difficult for them and if so, how?
Did unexpected problems or complications arise? If so, how well did the individual cope
with them?
Did the individual’s performance exceed expectations and if so, how?
Are there any changes that should be made to existing work patterns?
Are there any new development areas that may benefit the individual?
24.15.8 The points arising from the de-briefing meeting should be recorded in form 370 -
Discussions with engagement team and de-briefing notes.
24.15.9 The auditor shall ensure that the firm’s procedures for the confidentiality, safe custody,
integrity, accessibility and retrievability of engagement documentation are followed. (see
Chapter 4.6 to 4.11.).
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25. Reporting on Audited Financial Statements (Incorporating ISA 700(Revised),
ISA 701 (Revised), ISA 705 (Revised) and ISA 706 (Revised)
25.1. Objectives
25.1.1 The objectives of the auditor are:
To form an opinion on the financial statements based on an evaluation of the
conclusions drawn from the audit evidence obtained;
To express clearly an appropriately modified opinion on the financial statements that
is necessary when:
i. The auditor concludes, based on the audit evidence obtained, that the financial
statements as a whole are not free from material misstatement; or
ii. The auditor is unable to obtain sufficient appropriate audit evidence to
conclude that the financial statements as a whole are free from material
misstatement;
To express clearly that opinion through a written report;
To determine key audit matters and, having formed an opinion on the financial
statements, communicate those matters by describing them in an auditor's report;
To draw users' attention, when in the auditor's judgement it is necessary to do so
after he has formed an opinion on the financial statements, by way of clear additional
communication in the auditor's report, to:
i. A matter, although appropriately presented or disclosed in the financial
statements, that is of such importance that it is fundamental to users'
understanding of the financial statements; or
ii. As appropriate, any other matter that is relevant to users' understanding of the
audit, the auditor's responsibilities or the auditor's report.
25.2 Definitions
25.2.1 Unmodified opinion – The opinion expressed by the auditor when the auditor
concludes that the financial statements are prepared, in all material respects, in
accordance with the applicable financial reporting framework.
25.2.2 Key audit matters – Those matters that, in the auditor's professional judgement,
were of most significance in the audit of the financial statements of the current period.
Key audit matters are selected from matters communicated with those charged with
governance.
25.2.3 Pervasive – A term used, in the context of misstatements, to describe the effects
on the financial statements of misstatements or the possible effects on the financial
statements of misstatements, if any, that are undetected due to an inability to obtain
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sufficient appropriate audit evidence. Pervasive effects on the financial statements are
those that, in the auditor’s judgement:
Are not confined to specific elements, accounts or items of the financial statements;
If so confined, represent or could represent a substantial proportion of the financial
statements; or
In relation to disclosures, are fundamental to users’ understanding of the financial
statements.
25.2.4 Modified opinion – A qualified opinion, an advance opinion or a disclaimer of
opinion on the financial statements.
25.2.5 Emphasis of matter paragraph – A paragraph included in the auditor’s report that
refers to a matter appropriately presented or disclosed in the financial statements that,
in the auditor’s judgement, is of such importance that it is fundamental to users’
understanding of the financial statements.
25.2.6. Other matter paragraph – A paragraph included in the auditor’s report that refers
to a matter other than those presented or disclosed in the financial statements that, in
the auditor’s judgement, is relevant to users’ understanding of the audit, the auditor’s
responsibilities or the auditor’s report.
25.3. Forming an Opinion on the Financial Statements
25.3.1 The auditor shall form an opinion on whether the financial statements are
prepared, in all material respects, in accordance with the applicable financial reporting
framework.
25.3.2 In order to form that opinion, the auditor shall conclude as to whether the auditor
has obtained reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error. That conclusion shall
take into account:
The auditor’s conclusion, in accordance with ISA 330, whether sufficient appropriate
audit evidence has been obtained;
The auditor’s conclusion, in accordance with ISA 450, whether uncorrected
misstatements are material, individually or in aggregate; and
The evaluations required by paragraphs 25.3.4-25.3.6
25.3.3 The auditor shall evaluate whether the financial statements are prepared, in all
material respects, in accordance with the requirements of the applicable financial
reporting framework. This evaluation shall include consideration of the qualitative
aspects of the entity’s accounting practices, including indicators of possible bias in
management’s judgements.
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25.3.4 In particular, the auditor shall evaluate whether, in view of the requirements of the
applicable financial reporting framework:
The financial statements adequately disclose the significant accounting policies
selected and applied;
The accounting policies selected and applied are consistent with the applicable
financial reporting framework and are appropriate;
The accounting estimates made by management are reasonable;
The information presented in the financial statements is relevant, reliable,
comparable, and understandable;
The financial statements provide adequate disclosures to enable the intended users
to understand the effect of material transactions and events on the information
conveyed in the financial statements; and
The terminology used in the financial statements, including the title of each financial
statement, is appropriate.
25.3.5 When the financial statements are prepared in accordance with a fair
presentation framework, the evaluation shall also include whether the financial
statements achieve fair presentation. The auditor’s evaluation as to whether the
financial statements achieve fair presentation shall include consideration of:
The overall presentation, structure and content of the financial statements; and
Whether the financial statements, including the related notes, represent the
underlying transactions and events in a manner that achieves fair presentation.
25.3.6 The auditor shall evaluate whether the financial statements adequately refer to or
describe the applicable financial reporting framework.
25.4. Form of Opinion
Unmodified Opinion
25.4.1 The auditor shall express an unmodified opinion when the auditor concludes that
the financial statements are prepared, in all material respects, in accordance with the
applicable financial reporting framework.
Modified Opinion
25.4.2 The auditor shall modify the opinion in the auditor's report if:
The auditor concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement; or
The auditor is unable to obtain sufficient appropriate audit evidence to conclude that
the financial statements as a whole are free from material misstatement.
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25.4.3 The auditor shall express a qualified opinion when:
The auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are material, but not pervasive, to
the financial statements; or
The auditor is unable to obtain sufficient appropriate audit evidence on which to base
the opinion, but the auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be material but not pervasive.
25.4.4 The auditor shall express an adverse opinion when the auditor, having obtained
sufficient appropriate audit evidence, concludes that misstatements, individually or in the
aggregate, are both material and pervasive to the financial statements.
25.4.5. The auditor shall disclaim an opinion when the auditor is unable to obtain
sufficient appropriate audit evidence on which to base the opinion, and the auditor
concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be both material and pervasive.
25.4.5.1 The auditor shall disclaim an opinion when, in extremely rare circumstances
involving multiple uncertainties, the auditor concludes that, notwithstanding having
obtained sufficient appropriate audit evidence regarding each of the individual
uncertainties, it is not possible to form an opinion on the financial statements due to
the potential interaction of the uncertainties and their possible cumulative effect on the
financial statements.
25.4.6. If, after accepting the engagement, the auditor becomes aware that management
has imposed a limitation on the scope of the audit that the auditor considers likely to
result in the need to express a qualified opinion or to disclaim an opinion on the
financial statements, the auditor shall request that management remove the limitation.
25.4.6.1 If management refuses to remove the limitation, the auditor shall communicate
the matter to those charged with governance, unless all of those charged with
governance are involved in managing the entity, and determine whether it is possible to
perform alternative procedures to obtain sufficient appropriate audit evidence.
25.4.6.2 If the auditor is unable to obtain sufficient appropriate audit evidence, the
auditor shall determine the implications as follows:
If the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be material but not pervasive, the auditor
shall qualify the opinion; or
If the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive so that a
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qualification of the opinion would be inadequate to communicate the gravity of the
situation, the auditor shall:
i. Withdraw from the audit, where practicable and possible under applicable law
or regulation; or
ii. If withdrawal from the audit before issuing the auditor’s report is not practicable
or possible, disclaim an opinion on the financial statements.
25.4.6.3 If the auditor withdraws as contemplated by paragraph 13(b)(i), before
withdrawing, the auditor shall communicate to those charged with governance any
matters regarding misstatements identified during the audit that would have given rise to
a modification of the opinion.
25.4.7 Other Considerations Relating to an Adverse Opinion or Disclaimer of Opinion:
When the auditor considers it necessary to express an adverse opinion or disclaim an
opinion on the financial statements as a whole, the auditor’s report shall not also include
an unmodified opinion with respect to the same financial reporting framework on a single
financial statement or one or more specific elements, accounts or items of a financial
statement. To include such an unmodified opinion in the same report in these
circumstances would contradict the auditor’s adverse opinion or disclaimer of opinion on
the financial statements as a whole.
25.4.8 If financial statements prepared in accordance with the requirements of a fair
presentation framework do not achieve fair presentation, the auditor shall discuss the
matter with management and, depending on the requirements of the applicable financial
reporting framework and how the matter is resolved, shall determine whether it is
necessary to modify the opinion in the auditor’s report in accordance with this section.
25.4.9 When the financial statements are prepared in accordance with a compliance
framework, the auditor is not required to evaluate whether the financial statements
achieve fair presentation. However, if in extremely rare circumstances the auditor
concludes that such financial statements are misleading, the auditor shall discuss the
matter with management and, depending on how it is resolved, shall determine
whether, and how, to communicate it in the auditor’s report.
25.5. Auditor’s Report for Audits Conducted in Accordance with International
Standards on Auditing
25.5.1 The auditor’s report shall be in writing.
25.5.2 The auditor’s report shall have a title that clearly indicates that it is the report of
an independent auditor.
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25.5.3 The auditor’s report shall be addressed, as appropriate, based on the
circumstances of the engagement.
Auditor’s Opinion
25.5.4 The first section of the auditor’s report shall include the auditor’s opinion, and
shall have the heading “Opinion.”
25.5.5 The Opinion section of the auditor’s report shall also:
Identify the entity whose financial statements have been audited;
State that the financial statements have been audited;
Identify the title of each statement comprising the financial statements;
Refer to the notes, including the summary of significant accounting policies; and
Specify the date of, or period covered by, each financial statement comprising the
financial statements.
25.5.6 When expressing an unmodified opinion on financial statements prepared in
accordance with a fair presentation framework, the auditor’s opinion shall, unless
otherwise required by law or regulation, use one of the following phrases, which are
regarded as being equivalent:
In our opinion, the accompanying financial statements present fairly, in all material
respects, [...] in accordance with [the applicable financial reporting framework]; or
In our opinion, the accompanying financial statements give a true and fair view of [...]
in accordance with [the applicable financial reporting framework].
25.5.7 When expressing an unmodified opinion on financial statements prepared in
accordance with a compliance framework, the auditor’s opinion shall be that the
accompanying financial statements are prepared, in all material respects, in accordance
with [the applicable financial reporting framework].
25.5.8 If the reference to the applicable financial reporting framework in the auditor’s
opinion is not to IFRSs issued by the International Accounting Standards Board or
IPSASs issued by the International Public Sector Accounting Standards Board, the
auditor’s opinion shall identify the jurisdiction of origin of the framework.
Modified Opinion paragraph
25.5.9 When the auditor modifies the audit opinion, the auditor shall use the heading
“Qualified Opinion,” “Adverse Opinion,” or “Disclaimer of Opinion,” as appropriate, for the
Opinion section.
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Qualified Opinion
25.5.10 When the auditor expresses a qualified opinion due to a material misstatement
in the financial statements, the auditor shall state that, in the auditor’s opinion, except for
the effects of the matter(s) described in the Basis for Qualified Opinion section:
When reporting in accordance with a fair presentation framework, the accompanying
financial statements present fairly, in all material respects (or give a true and fair
view of) [...] in accordance with [the applicable financial reporting framework]; or
When reporting in accordance with a compliance framework, the accompanying
financial statements have been prepared, in all material respects, in accordance with
[the applicable financial reporting framework].
When the modification arises from an inability to obtain sufficient appropriate audit
evidence, the auditor shall use the corresponding phrase “except for the possible effects
of the matter(s) ...” for the modified opinion.
Adverse Opinion
25.5.11 When the auditor expresses an adverse opinion, the auditor shall state that, in
the auditor’s opinion, because of the significance of the matter(s) described in the Basis
for Adverse Opinion section:
When reporting in accordance with a fair presentation framework, the accompanying
financial statements do not present fairly (or give a true and fair view of) [...] in
accordance with [the applicable financial reporting framework]; or
When reporting in accordance with a compliance framework, the accompanying
financial statements have not been prepared, in all material respects, in accordance
with [the applicable financial reporting framework].
Disclaimer of Opinion
25.5.12 When the auditor disclaims an opinion due to an inability to obtain sufficient
appropriate audit evidence, the auditor shall:
State that the auditor does not express an opinion on the accompanying financial
statements;
State that, because of the significance of the matter(s) described in the Basis for
Disclaimer of Opinion section, the auditor has not been able to obtain sufficient
appropriate audit evidence to provide a basis for an audit opinion on the financial
statements; and
Amend the statement which indicates that the financial statements have been
audited, to state that the auditor was engaged to audit the financial statements (Ref.
section 25.5.5).
Basis for Opinion
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25.5.13 The auditor’s report shall include a section, directly following the Opinion
section, with the heading “Basis for Opinion”, that:
States that the audit was conducted in accordance with International Standards on
Auditing;
Refers to the section of the auditor’s report that describes the auditor’s
responsibilities under the ISAs;
Includes a statement that the auditor is independent of the entity in accordance with
the relevant ethical requirements relating to the audit, and has fulfilled the auditor’s
other ethical responsibilities in accordance with these requirements. The statement
shall identify the jurisdiction of origin of the relevant ethical requirements or refer to
the International Ethics Standards Board for Accountants’ Code of Ethics for
Professional Accountants (IESBA Code); and
States whether the auditor believes that the audit evidence the auditor has obtained
is sufficient and appropriate to provide a basis for the auditor’s opinion.
Basis for Modified Opinion
25.5.14 When the auditor modifies the opinion on the financial statements, the auditor
shall:
Amend the heading “Basis for Opinion” to “Basis for Qualified Opinion,” “Basis for
Adverse Opinion,” or “Basis for Disclaimer of Opinion,” as appropriate; and
Within this section, include a description of the matter giving rise to the modification.
25.5.15 If there is a material misstatement of the financial statements that relates to
specific amounts in the financial statements (including quantitative disclosures in the
notes to the financial statements), the auditor shall include in the Basis for Opinion
section a description and quantification of the financial effects of the misstatement,
unless impracticable. If it is not practicable to quantify the financial effects, the auditor
shall so state in this section.
25.5.16 If there is a material misstatement of the financial statements that relates to
narrative disclosures, the auditor shall include in the Basis for Opinion section an
explanation of how the disclosures are misstated.
25.5.17 If there is a material misstatement of the financial statements that relates to the
non-disclosure of information required to be disclosed, the auditor shall:
Discuss the non-disclosure with those charged with governance;
Describe in the Basis for Opinion section the nature of the omitted information; and
Unless prohibited by law or regulation, include the omitted disclosures, provided it is
practicable to do so and the auditor has obtained sufficient appropriate audit
evidence about the omitted information.
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25.5.18 If the modification results from an inability to obtain sufficient appropriate audit
evidence, the auditor shall include in the Basis for Opinion section the reasons for that
inability.
25.5.19 When the auditor expresses a qualified or adverse opinion, the auditor shall
amend the statement about whether the audit evidence obtained is sufficient and
appropriate to provide a basis for the auditor’s opinion to include the word “qualified” or
“adverse”, as appropriate (Ref: section 25.5.13).
25.5.20 When the auditor disclaims an opinion on the financial statements, the auditor’s
report shall not include the following elements (Ref: section 25.5.13):
A reference to the section of the auditor’s report where the auditor’s responsibilities
are described; and
A statement about whether the audit evidence obtained is sufficient and appropriate
to provide a basis for the auditor’s opinion.
25.5.21 Even if the auditor has expressed an adverse opinion or disclaimed an opinion
on the financial statements, the auditor shall describe in the Basis for Opinion section
the reasons for any other matters of which the auditor is aware that would have required
a modification to the opinion, and the effects thereof.
Going Concern
25.5.22 Where applicable, the auditor shall report in accordance with ISA 570
(Revised).
Key Audit Matters (Ref.: Appendix I)
25.5.23 For audits of complete sets of general purpose financial statements of listed
entities, the auditor shall communicate key audit matters in the auditor’s report.
25.5.24 When the auditor is otherwise required by law or regulation or decides to
communicate key audit matters in the auditor’s report, the auditor shall do so.
Determining Key Audit Matters
25.5.25 The auditor shall determine, from the matters communicated with those charged
with governance, those matters that required significant auditor attention in performing
the audit. In making this determination, the auditor shall take into account the following:
Areas of higher assessed risk of material misstatement, or significant risks identified
in accordance with ISA 315 (Revised).
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Significant auditor judgements relating to areas in the financial statements that
involved significant management judgement, including accounting estimates that
have been identified as having high estimation uncertainty.
The effect on the audit of significant events or transactions that occurred during the
period.
25.5.26 The auditor shall determine which of the matters determined in accordance with
section 25.5.25 were of most significance in the audit of the financial statements of the
current period and therefore are the key audit matters.
Communicating Key Audit Matters
25.5.27 The auditor shall describe each key audit matter, using an appropriate
subheading, in a separate section of the auditor’s report under the heading “Key Audit
Matters,” unless the circumstances in section 25.5.30 apply. The introductory language
in this section of the auditor’s report shall state that:
Key audit matters are those matters that, in the auditor’s professional judgement,
were of most significance in the audit of the financial statements [of the current
period]; and
These matters were addressed in the context of the audit of the financial statements
as a whole, and in forming the auditor’s opinion thereon, and the auditor does not
provide a separate opinion on these matters.
25.5.28 The auditor shall not communicate a matter in the Key Audit Matters section of
the auditor’s report when the auditor would be required to modify the opinion as a result
of the matter.
25.5.29 The description of each key audit matter in the Key Audit 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:
Why the matter was considered to be one of most significance in the audit and
therefore determined to be a key audit matter; and
How the matter was addressed in the audit.
25.5.30 The auditor shall describe each key audit matter in the auditor’s report
unless:
Law or regulation precludes public disclosure about the matter; or (Ref: Para. A52)
In extremely rare circumstances, the auditor determines that the matter should not
be communicated in the auditor’s report because the adverse consequences of
doing so would reasonably be expected to outweigh the public interest benefits of
such communication. This shall not apply if the entity has publicly disclosed
information about the matter.
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25.5.31 A matter giving rise to a modified opinion in accordance with ISA 705 (Revised),
or a material uncertainty related to events or conditions that may cast significant doubt
on the entity’s ability to continue as a going concern in accordance with ISA 570
(Revised), are by their nature key audit matters. However, in such circumstances, these
matters shall not be described in the Key Audit Matters section of the auditor’s report
and the requirements in section 25.5.29 and 25.5.30 do not apply. Rather, the auditor
shall:
Report on these matter(s) in accordance with the applicable ISA(s); and
Include a reference to the Basis for Qualified (Adverse) Opinion or the Material
Uncertainty Related to Going Concern section(s) in the Key Audit Matters section.
Unless required by law or regulation, when the auditor disclaims an opinion on the
financial statements, the auditor´s report shall not include a Key Audit Matter section.
25.5.32 If the auditor determines, depending on the facts and circumstances of the entity
and the audit, that there are no key audit matters to communicate or that the only key
audit matters communicated are those matters addressed by section 25.5.31, the auditor
shall include a statement to this effect in separate section of the auditor’s report under
the heading “Key Audit Matters.”
Responsibilities for the Financial Statements
25.5.33 The auditor’s report shall include a section with a heading “Responsibilities of
Management for the Financial Statements.” The auditor’s report shall use the term that is
appropriate in the context of the legal framework in the particular jurisdiction and need not
refer specifically to “management”. In some jurisdictions, the appropriate reference may be
to those charged with governance.
25.5.34 This section of the auditor’s report shall describe management’s responsibility for:
Preparing the financial statements in accordance with the applicable financial
reporting framework, and for such internal control as management determines is
necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error; and
Assessing the entity’s ability to continue as a going concern and whether the use of
the going concern basis of accounting is appropriate as well as disclosing, if
applicable, matters relating to going concern. The explanation of management’s
responsibility for this assessment shall include a description of when the use of the
going concern basis of accounting is appropriate.
25.5.35 This section of the auditor’s report shall also identify those responsible for the
oversight of the financial reporting process, when those responsible for such oversight
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are different from those who fulfill the responsibilities described in section 25.5.34
above. In this case, the heading of this section shall also refer to “Those Charged with
Governance” or such term that is appropriate in the context of the legal framework in the
particular jurisdiction.
25.5.36 When the financial statements are prepared in accordance with a fair
presentation framework, the description of responsibilities for the financial statements in
the auditor’s report shall refer to “the preparation and fair presentation of these financial
statements” or “the preparation of financial statements that give a true and fair view,” as
appropriate in the circumstances.
Auditor’s Responsibilities for the Audit of the Financial Statements
25.5.37 The auditor’s report shall include a section with the heading “Auditor’s
Responsibilities for the Audit of the Financial Statements.”
25.5.38 This section of the auditor’s report shall:
State that the objectives of the auditor are to:
i. Obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error; and
ii. Issue an auditor’s report that includes the auditor’s opinion.
State that reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with ISAs will always detect a material
misstatement when it exists; and
State that misstatements can arise from fraud or error, and either:
i. Describe that they are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of
users taken on the basis of these financial statements; or
ii. Provide a definition or description of materiality in accordance with the
applicable financial reporting framework.
25.5.39 The Auditor’s Responsibilities for the Audit of the Financial Statements section
of the auditor’s report shall further:
State that, as part of an audit in accordance with ISAs, the auditor exercises
professional judgement and maintains professional scepticism throughout the audit;
and
Describe an audit by stating that the auditor’s responsibilities are:
i. To identify and assess the risks of material misstatement of the financial
statements, whether due to fraud or error; to design and perform audit
procedures responsive to those risks; and to obtain audit evidence that is
sufficient and appropriate to provide a basis for the auditor’s opinion. The risk
of not detecting a material misstatement resulting from fraud is higher than for
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one resulting from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal control.
ii. To 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 entity’s
internal control. In circumstances when the auditor also has a responsibility to
express an opinion on the effectiveness of internal control in conjunction with
the audit of the financial statements, the auditor shall omit the phrase that the
auditor’s consideration of internal control is not for the purpose of expressing
an opinion on the effectiveness of the entity’s internal control.
iii. To evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made by
management.
iv. To 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 entity’s ability to continue as a going concern. If
the auditor concludes that a material uncertainty exists, the auditor is required
to draw attention in the auditor’s report to the related disclosures in the
financial statements or, if such disclosures are inadequate, to modify the
opinion. The auditor’s conclusions are based on the audit evidence obtained
up to the date of the auditor’s report. However, future events or conditions
may cause an entity to cease to continue as a going concern.
v. When the financial statements are prepared in accordance with a fair
presentation framework, to 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.
When ISA 600 applies, further describe the auditor’s responsibilities in a group audit
engagement by stating that:
i. The auditor’s responsibilities are to obtain sufficient appropriate audit
evidence regarding the financial information of the entities or business
activities within the group to express an opinion on the group financial
statements;
ii. The auditor is responsible for the direction, supervision and performance of
the group audit; and
iii. The auditor remains solely responsible for the auditor’s opinion.
25.5.40 The Auditor’s Responsibilities for the Audit of the Financial Statements section
of the auditor’s report also shall:
State that the auditor communicates with those charged with governance regarding,
among other matters, the planned scope and timing of the audit and significant audit
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findings, including any significant deficiencies in internal control that the auditor
identifies during the audit;
For audits of financial statements of listed entities, state that the auditor provides
those charged with governance with a statement that the auditor has complied with
relevant ethical requirements regarding independence and communicate with them
all relationships and other matters that may reasonably be thought to bear on the
auditor’s independence, and where applicable, related safeguards; and
For audits of financial statements of listed entities and any other entities for which
key audit matters are communicated in accordance with ISA 701, state that, from
the matters communicated with those charged with governance, the auditor
determines 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. The
auditor describes these matters in the auditor’s report unless law or regulation
precludes public disclosure about the matter or when, in extremely rare
circumstances, the auditor determines that a matter should not be communicated in
the auditor’s report because the adverse consequences of doing so would
reasonably be expected to outweigh the public interest benefits of such
communication.
Location of the description of the auditor’s responsibilities for the audit of the
financial statements
25.5.41 The description of the auditor’s responsibilities for the audit of the financial
statements required by sections 25.5.39 and 25.5.40 shall be included:
Within the body of the auditor’s report;
Within an appendix to the auditor’s report, in which case the auditor’s report shall
include a reference to the location of the appendix; or
By a specific reference within the auditor’s report to the location of such a description
on a website of an appropriate authority, where law, regulation or national auditing
standards expressly permit the auditor to do so.
25.5.42 When the auditor refers to a description of the auditor’s responsibilities on a
website of an appropriate authority, the auditor shall determine that such description
addresses, and is not inconsistent with, the requirements in sections 25.5.39 and 25.5.40.
25.5.43 When the auditor disclaims an opinion on the financial statements due to an
inability to obtain sufficient appropriate audit evidence, the auditor shall amend the
description of the auditor’s responsibilities required by paragraphs 25.5.39. – 25.5.41 to
include only the following:
A statement that the auditor’s responsibility is to conduct an audit of the entity’s
financial statements in accordance with International Standards on Auditing and to
issue an auditor’s report;
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A statement that, however, because of the matter(s) described in the Basis for
Disclaimer of Opinion section, the auditor was not able to obtain sufficient
appropriate audit evidence to provide a basis for an audit opinion on the financial
statements; and
The statement about auditor independence and other ethical responsibilities required
by section 25.5.13.
Emphasis of Matter Paragraphs in the Auditor’s Report
25.5.45 If the auditor considers it necessary to draw users’ attention to a matter
presented or disclosed in the financial statements that, in the auditor’s judgement, is of
such importance that it is fundamental to users’ understanding of the financial
statements, the auditor shall include an Emphasis of Matter paragraph in the auditor’s
report provided:
The auditor would not be required to modify the opinion in accordance with ISA 705
(Revised) as a result of the matter; and
When ISA 701 applies, the matter has not been determined to be a key audit matter
to be communicated in the auditor’s report.(Ref. section 25.5.13)
25.5.46 When the auditor includes an Emphasis of Matter paragraph in the auditor’s
report, the auditor shall:
Include the paragraph within a separate section of the auditor’s report with an
appropriate heading that includes the term “Emphasis of Matter”;
Include in the paragraph a clear reference to the matter being emphasized and to
where relevant disclosures that fully describe the matter can be found in the financial
statements. The paragraph shall refer only to information presented or disclosed in
the financial statements; and
Indicate that the auditor’s opinion is not modified in respect of the matter
emphasized.
Other Matter Paragraphs in the Auditor’s Report
25.5.47 If the auditor considers it necessary to communicate a matter other than those
that are presented or disclosed in the financial statements that, in the auditor’s
judgement, is relevant to users’ understanding of the audit, the auditor’s responsibilities
or the auditor’s report, the auditor shall include an Other Matter paragraph in the
auditor’s report, provided:
This is not prohibited by law or regulation; and
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When ISA 701 applies, the matter has not been determined to be a key audit matter
to be communicated in the auditor’s report.
25.5.48 When the auditor includes an Other Matter paragraph in the auditor’s report, the
auditor shall include the paragraph within a separate section with the heading “Other
Matter,” or other appropriate heading.
Other Reporting Responsibilities
25.5.49 If the auditor addresses other reporting responsibilities in the auditor’s report on the
financial statements that are in addition to the auditor’s responsibilities under the ISAs, these
other reporting responsibilities shall be addressed in a separate section in the auditor’s
report with a heading titled “Report on Other Legal and Regulatory Requirements” or
otherwise as appropriate to the content of the section, unless these other reporting
responsibilities address the same topics as those presented under the reporting
responsibilities required by the ISAs in which case the other reporting responsibilities may be
presented in the same section as the related report elements required by the ISAs.
25.5.50 If other reporting responsibilities are presented in the same section as the
related report elements required by the ISAs, the auditor’s report shall clearly
differentiate the other reporting responsibilities from the reporting that is required by the
ISAs.
25.5.51 If the auditor’s report contains a separate section that addresses other reporting
responsibilities, the requirements of section 25.5.1 – 25.5.40 shall be included under a
section with a heading “Report on the Audit of the Financial Statements.” The “Report
on Other Legal and Regulatory Requirements” shall follow the “Report on the Audit of
the Financial Statements.”
Name of the Engagement Partner
25.5.52 The name of the engagement partner shall be included in the auditor’s report for
audits of complete sets of general purpose financial statements of listed entities unless,
in rare circumstances, such disclosure is reasonably expected to lead to a significant
personal security threat. In the rare circumstances that the auditor intends not to include
the name of the engagement partner in the auditor’s report, the auditor shall discuss this
intention with those charged with governance to inform the auditor’s assessment of the
likelihood and severity of a significant personal security threat.
Signature of the Auditor
25.5.53 The auditor’s report shall be signed.
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Auditor’s Address
25.5.54 The auditor’s report shall name the location in the jurisdiction where the auditor
practices.
Date of the Auditor’s Report
25.5.55 The auditor’s report shall be dated no earlier than the date on which the auditor has
obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on the
financial statements, including evidence that:
All the statements that comprise the financial statements, including the related notes,
have been prepared; and
Those with the recognized authority have asserted that they have taken
responsibility for those financial statements.
25.6. Auditor’s Report Prescribed by Law or Regulation
25.6.1 If the auditor is required by law or regulation of a specific jurisdiction to use a
specific layout, or wording of the auditor’s report, the auditor’s report shall refer to
International Standards on Auditing only if the auditor’s report includes, at a minimum,
each of the following elements:
A title.
An addressee, as required by the circumstances of the engagement.
An Opinion section containing an expression of opinion on the financial statements
and a reference to the applicable financial reporting framework used to prepare the
financial statements (including identifying the jurisdiction of origin of the financial
reporting framework that is not International Financial Reporting Standards or
International Public Sector Accounting Standards, see section 25.5.8).
An identification of the entity’s financial statements that have been audited.
A statement that the auditor is independent of the entity in accordance with the
relevant ethical requirements relating to the audit, and has fulfilled the auditor’s other
ethical responsibilities in accordance with these requirements. The statement shall
identify the jurisdiction of origin of the relevant ethical requirements or refer to the
IESBA Code.
Where applicable, a section that addresses, and is not inconsistent with, the
reporting requirements in paragraph 22 of ISA 570 (Revised).
Where applicable, a Basis for Qualified (or Adverse) Opinion section that addresses,
and is not inconsistent with, the reporting requirements in paragraph 23 of ISA 570
(Revised).
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Where applicable, a section that includes the information required by ISA 701, or
additional information about the audit that is prescribed by law or regulation and that
addresses, and is not inconsistent with, the reporting requirements in that ISA.
A description of management’s responsibilities for the preparation of the financial
statements and an identification of those responsible for the oversight of the financial
reporting process that addresses, and is not inconsistent with, the requirements in
section 25.5.33 to 25.5.36.
A reference to International Standards on Auditing and the law or regulation, and a
description of the auditor’s responsibilities for an audit of the financial statements
that addresses, and is not inconsistent with, the requirements in section 25.5.37 to
25.5.40.
For audits of complete sets of general purpose financial statements of listed entities,
the name of the engagement partner unless, in rare circumstances, such disclosure
is reasonably expected to lead to a significant personal security threat.
The auditor’s signature.
The auditor’s address.
The date of the auditor’s report.
25.6.2 An auditor may be required to conduct an audit in accordance with the auditing
standards of a specific jurisdiction (the “national auditing standards”), and has
additionally complied with the ISAs in the conduct of the audit. If this is the case, the
auditor’s report may refer to International Standards on Auditing in addition to the
national auditing standards, but the auditor shall do so only if:
There is no conflict between the requirements in the national auditing standards and
those in ISAs that would lead the auditor (i) to form a different opinion, or (ii) not to
include an Emphasis of Matter paragraph or Other Matter paragraph that, in the
particular circumstances, is required by ISAs; and
The auditor’s report includes, at a minimum, each of the elements set out in sections
25.5.4 to 25.5.55 above when the auditor uses the layout or wording specified by the
national auditing standards. However, reference to “law or regulation” in section
25.5.4 shall be read as reference to the national auditing standards. The auditor’s
report shall thereby identify such national auditing standards.
25.6.3 When the auditor’s report refers to both the national auditing standards and
International Standards on Auditing, the auditor’s report shall identify the jurisdiction of
origin of the national auditing standards.
25.7. Supplementary Information Presented with the Financial Statements
25.7.1 If supplementary information that is not required by the applicable financial
reporting framework is presented with the audited financial statements, the auditor shall
evaluate whether, in the auditor’s professional judgement, supplementary information is
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nevertheless an integral part of the financial statements due to its nature or how it is
presented. When it is an integral part of the financial statements, the supplementary
information shall be covered by the auditor’s opinion.
25.7.2 If supplementary information that is not required by the applicable financial
reporting framework is not considered an integral part of the audited financial
statements, the auditor shall evaluate whether such supplementary information is
presented in a way that sufficiently and clearly differentiates it from the audited financial
statements. If this is not the case, then the auditor shall ask management to change
how the unaudited supplementary information is presented. If management refuses to
do so, the auditor shall identify the unaudited supplementary information and explain in
the auditor’s report that such supplementary information has not been audited.
25.8. Communication with Those Charged with Governance
25.8.1 The auditor shall communicate with those charged with governance:
Those matters the auditor has determined to be the key audit matters; or
If applicable, depending on the facts and circumstances of the entity and the audit,
the auditor’s determination that there are no key audit matters to communicate in the
auditor’s report.
The circumstances that led to the expected modification and the wording of the
modification of the opinion when the auditor expects to modify the opinion in the
auditor’s report
The expectation and the wording of an Emphasis of Matter or an Other Matter
paragraph in the auditor’s report if the auditor expects to include such a paragraph
25.9. Documentation Regarding Key Audit Matters
25.9.1 The auditor shall include in the audit documentation:
The matters that required significant auditor attention as determined in accordance
with section 25.5.25, and the rationale for the auditor’s determination as to whether
or not each of these matters is a key audit matter in accordance with section 25.5.26;
Where applicable, the rationale for the auditor’s determination that there are no key
audit matters to communicate in the auditor’s report or that the only key audit matters
to communicate are those matters addressed by section 25.5.31; and
Where applicable, the rationale for the auditor’s determination not to communicate in
the auditor’s report a matter determined to be a key audit matter.
Illustrations of the Auditor's Report are set out in Appendix II.
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Appendix I: Key Audit Matters
This Appendix comprises additional explanations regarding Key Audit Matters.
For further guidance we refer to the Applications and other Explanatory Material
of the ISA 700, 701, 705 and 706 (Revised)
When the auditor is not otherwise required to communicate key audit matters, ISA
210 explains that it may be helpful for the auditor to make reference in the terms of
the audit engagement to the possibility of communicating key audit matters in the
auditor’s report and, in certain jurisdictions, it may be necessary for the auditor to
include a reference to such possibility in order to retain the ability to do so.
Determining Key Audit Matters (Ref: Section 25.5.25.-25.5.26.)
The auditor’s decision-making process in determining key audit matters is designed
to select a smaller number of matters from the matters communicated with those
charged with governance, based on the auditor’s judgement about which matters
were of most significance in the audit of the financial statements of the current
period.
The auditor’s determination of key audit matters is limited to those matters of most
significance in the audit of the financial statements of the current period, even when
comparative financial statements are presented.
Notwithstanding that the auditor’s determination of key audit matters is for the audit
of the financial statements of the current period and the auditor is not faced to
update key audit matters included in the prior period’s auditor’s report, it may
nevertheless be useful for the auditor to consider whether a matter that was a key
audit matter in the audit of the financial statements of the prior period continues to
be a key audit matter in the audit of the financial statements of the current period.
Matters that Required Significant Auditor Attention (Ref: Section 25.5.25.)
When obtaining more persuasive audit evidence because of a higher assessment of
risk, the auditor may increase the quantity of the evidence, or obtain evidence that is
more relevant or reliable, for example, by placing more emphasis on obtaining third
party evidence or by obtaining corroborating evidence from a number of independent
sources.
Accordingly, matters that pose challenges to the auditor in obtaining sufficient
appropriate audit evidence or pose challenges to the auditor in forming an opinion on
the financial statements may be particularly relevant in the auditor’s determination of
key audit matters.
Areas of significant auditor attention often relate to areas of complexity and
significant management judgement in the financial statements, and therefore often
involve difficult or complex auditor judgements. In turn, this often affects the auditor’s
overall audit strategy, the allocation of resources and extent of audit effort in relation
to such matters.
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Various ISAs require specific communications with those charged with governance
and others that may relate to areas of significant auditor attention.
Considerations in Determining Those Matters that Required Significant Auditor
Attention (Ref: Section 25.5.25.)
The auditor’s determination of key audit matters is based on the results of the audit
or evidence obtained throughout the audit.
Section 25.5.25. includes specific required considerations in the auditor’s
determination of those matters that required significant auditor attention. The fact
that these considerations are required is not intended to imply that matters related to
them are always key audit matters; rather, matters related to such specific
considerations are key audit matters only if they are determined to be of most
significance in the audit in accordance with section 25.5.26. As the considerations
may be interrelated, the applicability of more than one of the considerations to a
particular matter communicated with those charged with governance may increase
the likelihood of the auditor identifying that matter as a key audit matter.
In addition to matters that relate to the specific required considerations in section
25.5.25., there may be other matters communicated with those charged with
governance that required significant auditor attention and that therefore may be
determined to be key audit matters in accordance with section 25.5.26. Such matters
may include, for example, matters relevant to the audit that was performed that may
not be required to be disclosed in the financial statements.
Areas of Higher Assessed Risk of Material Misstatement, or Significant Risks
Identified in Accordance with ISA 315 (Revised)
ISA 260 (Revised) requires the auditor to communicate with those charged with
governance about the significant risks identified by the auditor. Paragraph A13 of ISA
260 (Revised) explains that the auditor may also communicate with those charged
with governance about how the auditor plans to address areas of higher assessed
risks of material misstatement.
ISA 315 (Revised) defines a significant risk as an identified and assessed risk of
material misstatement that, in the auditor’s judgement, requires special audit
consideration. Areas of significant management judgement and significant unusual
transactions may often be identified as significant risks. Significant risks are therefore
often areas that require significant auditor attention.
However, this may not be the case for all significant risks. For example, ISA 240
presumes that there are risks of fraud in revenue recognition and requires the auditor
to treat those assessed risks of material misstatement due to fraud as significant
risks. In addition, ISA 240 indicates that, due to the unpredictable way in which
management override of controls could occur, it is a risk of material misstatement
due to fraud and thus a significant risk. Depending on their nature, these risks may
not require significant auditor attention, and therefore would not be considered in the
auditor’s determination of key audit matters.
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