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Rick Stephan Hayes, Roger Dassen, Arnold Schilder, Philip Wallage

Audit Reports and Communication Principles of Auditing: An Introduction to International Standards on Auditing - - Ch. 12. Rick Stephan Hayes, Roger Dassen, Arnold Schilder, Philip Wallage. The objectives of the auditor are :.

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Rick Stephan Hayes, Roger Dassen, Arnold Schilder, Philip Wallage

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  1. Audit Reports and CommunicationPrinciples of Auditing: An Introduction to International Standards on Auditing - - Ch. 12 Rick Stephan Hayes, Roger Dassen, Arnold Schilder, Philip Wallage

  2. 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 and • To express clearly that opinion through a written report that also describes the basis for that opinion.

  3. In order to form an 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. • The auditor’s conclusion shall take into account: • Whether sufficient appropriate audit evidence has been obtained; • Whether uncorrected misstatements are material, individually or in aggregate; and – next slide

  4. The auditor’s conclusion shall also take into account whether the financial statements : • Are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework • Disclose significant accounting policies • Use estimates made by management that are reasonable • Use information that is relevant, reliable, comparable, and understandable • Provide adequate disclosures and uses appropriate terminology

  5. Management Responsibility for Audit Report - SOx Sox Requires that the principal executive officer or officers and the principal financial officer or officers, certify in each report filed with the SEC the following: • the signing officer has reviewed the report; • the report does not contain any untrue statement of a material fact or omit to state a material fact; • the financial statements, and other financial information, fairly present in all material respects the financial condition of the company; • the signing officers • are responsible for establishing and maintaining internal controls; • have evaluated the effectiveness of the company’s internal controls; and • have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation;

  6. Corporate Responsibility for Audit Report under SOx (cont.) Requires that the principal executive officer or officers and the principal financial officer or officers, certify in each report filed with the SEC the following: • the signing officers have disclosed to the company’s auditors and the audit committee of the board of directors — • all significant deficiencies in the design or operation of internal controls which could adversely affect the company’s ability to record, process, summarize, and report financial data and have identified for the company’s auditors any material weaknesses in internal controls; and • any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal controls;

  7. Contents of the Auditor's Report (AS 5) • title, • Addressee (not required PCAOB AS 5) • opening or introductory paragraph • scope paragraph (describing the nature of an audit) • Definition paragraph • Limitations paragraph • opinion paragraph containing an expression of opinion on the financial statements, • the date of the report, the auditor's address, and auditor’s signature

  8. Example PCAOB sample audit report from Audit Standard No. 5 NEXT SLIDES

  9. Report of Independent Registered Public Accounting Firm [Introductory paragraph] We have audited the accompanying balance sheets of W Company as of December 31, 20X8 and 20X7, and the related statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 20X8. We also have audited management's assessment, included in the accompanying [title of management‘s report], that W Company maintained effective internal control over financial reporting as of December 31, 20X8, based on [Identify control criteria, for example, "criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)." ]. W Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the company's internal control over financial reporting based on our audits.

  10. [Scope paragraph] We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

  11. [Definition paragraph] A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

  12. [Inherent limitations paragraph] Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. [Opinion paragraph] In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of W Company as of December 31, 20X8 and 20X7, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 20X8 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, W Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 20X8, based on [Identify control criteria, for example, "criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)." ]. [Signature] [City and State or Country] [Date]

  13. ISA 700 Auditors Opinion on F/S • INDEPENDENT AUDITOR’S REPORT • [Appropriate Addressee] • Introductory Paragraph (Report on Financial Statements) • Management’s Responsibility for the Financial Statements • Auditor’s Responsibility • Opinion • Report on Other Legal and Regulatory Requirements [Form and content of this section of the auditor’s report will vary depending on the nature of the auditor’s other reporting responsibilities.] • [Auditor’s signature] • [Date of the auditor’s report] • [Auditor’s address]

  14. ISA 700 Sample Audit Report INDEPENDENT AUDITOR’S REPORT [Appropriate Addressee] Report on the Financial Statements We have audited the accompanying financial statements of ABC Company, which comprise the statement of financial position as at December 31, 20X1, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

  15. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, 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. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

  16. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements 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. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

  17. Opinion In our opinion, the financial statements present fairly, in all material respects, (or give a true and fair view of) the financial position of ABC Company as at December 31, 20X1, and (of) its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Report on Other Legal and Regulatory Requirements [Form and content of this section of the auditor’s report will vary depending on the nature of the auditor’s other reporting responsibilities.] [Auditor’s signature] [Date of the auditor’s report] [Auditor’s address]

  18. The opinion expressed in the auditor's report may be one of four types: Unmodified (unqualified), Three Modified Opinions: qualified, adverse, or disclaimer of opinion Q U A D

  19. Unqualified Audit Opinion – Also called Unmodified Opinion • Unmodified (unqualified) 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. • Most common type of audit report • Called “clean opinion” • Used for more than 90 per cent of all audit reports • Other audit reports are referred to as ‘modified opinion. (adverse opinion, disclaimer of opinion, and qualified opinion).

  20. An Unmodified (Unqualified)Audit Opinion should be expressed when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

  21. The objective of the auditor is to express clearly an appropriately modified opinion on the financial statements that is necessary when • The auditor concludes, based on the audit evidence obtained, that 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.

  22. Auditor’s Qualified Opinion 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.

  23. Auditor’s Adverse Opinion ( ISA 705) 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.

  24. Auditor’s Disclaimer of Opinion (ISA 705) 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. or interaction of multipleuncertainties on F/S

  25. ISA 705 Appendix Types of Modified Opinions

  26. Basis for Modification Paragraph When the auditor modifies the opinion on the financial statements, the auditor shall, in addition to the specific elements required by ISA 700, include a paragraph in the auditor’s report that provides a description of the matter giving rise to the modification. The auditor shall place this paragraph immediately before the opinion paragraph in the auditor’s report and use the heading “Basis for Qualified Opinion,” “Basis for Adverse Opinion,” or “Basis for Disclaimer of Opinion,” as appropriate.

  27. An Emphasis of a Matter Paragraph with an Unmodified (Unqualified) Opinion An auditor’s unqualified report is sometimes expanded upon to explain matters that do not affect the auditor’s opinion, but should be emphasized to the financial statement user.

  28. ISA 706 “Emphasis of Matter Paragraphs and Other Matters Paragraphs in the Independent Auditor’s Report” (Not in text) The auditor’s report should emphasize a matter when it is necessary to: (a) Draw users’ attention to matters presented or disclosed in the financial statements that are of such importance that they are fundamental to users’ understanding of the financial statements; or (b) Draw users’ attention to any matters other than those presented or disclosed in the financial statements that are relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.

  29. Report of Independent Registered Public Accounting Firm [Standard Introductory Paragraph] [Standard Scope Paragraph] [Standard Opinion Paragraph] Required Emphasis Paragraph[s] [Emphasize those matters that are important in understanding the financial statement presentation, including significant management judgments and estimates and areas with significant measurement uncertainty. Discuss the audit procedures performed on these significant matters. This discussion should not include matters that the company has not disclosed in the financial statements and should make reference to the notes in the financial statements that disclose each matter.] [Signature] [City and State or Country] [Date]

  30. When the auditor includes an Emphasis of Matter paragraph in the auditor’s report, the auditor shall: (a) Include it immediately after the Opinion paragraph in the auditor’s report; (b) Use the heading “Emphasis of Matter,” (c) 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; and (d) Indicate that the auditor’s opinion is not modified in respect of the matter emphasized

  31. An auditor might write an Emphasis of a Matter paragraph: • If there is a significant uncertainty which may affect the financial statements, the resolution of which is dependent upon future events • Examples of uncertainties that might be emphasized include • the existence of related party transactions, • important accounting matters occurring subsequent to the balance sheet date • matters affecting the comparability of financial statements with those of previous years (e.g. change in accounting methods) • Litigation, long-term contracts, recoverability of asset values, losses on discontinued operations • To highlight a material matter regarding a going concern problem.

  32. Going Concern

  33. In a going concern judgment, the objectives of the auditor are: • To obtain sufficient appropriate audit evidence about the appropriateness of management’s use of the going concern assumption in the preparation and presentation of the financial statements; • To conclude, 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; and (c) To determine the implications for the auditor’s report.

  34. Going Concern Disclosure • The disclosure should: • Highlight the existence of a material uncertainty relating to the event or condition that may cast significant doubt on the entity’s ability to continue as a going concern; • Draw attention to the notein the financial statements • the principal events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern • there is a material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern

  35. Reports involving other auditors and experts ISA 620 suggests that when expressing an unmodified (unqualified) opinion the auditor should not refer to the work of an expert in her report as such a reference might be misunderstood to be a qualification of the auditor's opinion or a division of responsibility. If the auditor references the work of an expert in the auditor’s report because it is relevant to a modification to the auditor’s opinion, the auditor shall indicate this does not reduce the auditor’s responsibility for that opinion.

  36. Communications With Those Charged With Governance • The objective of the auditor is to provide those charged with governance with timely observations arising from the audit that are significant and relevant to their responsibility to oversee the financial reporting process including: • Qualitative aspects of the entity’s accounting practices • Significant difficulties encountered during the audit • Significant matters arising from the audit that were discussed with management • Other matters arising from the audit that are significant to the oversight of the financial reporting process

  37. Auditor Communications to Governance Entity Audit matters of governance interest to be communicated by the auditor to the board or audit committee ordinarily include: • Material deficiencies in internal control; • Non-compliance with laws and regulations. • Fraud involving management • Questions regarding management integrity; • The general approach and overall scope of the audit; • The selection of, or changes in, significant accounting policies and practices that have a material effect on the financial statements;

  38. Auditor Communications to Governance Entity (cont) Audit matters of governance interest to be communicated by the auditor to the board or audit committee ordinarily include: • The potential effect on the financial statements of any significant risks and exposures, such as pending litigation, that requires disclosure in the financial statements; • Significant audit adjustments to the accounting records; • Material uncertainties related to the entity’s ability to continue as a going concern; • Disagreements with management about matters that could be significant to the entity’s financial statement. • Expected modifications to the auditor’s report

  39. Governance Structures • The structures of governance vary from country to country reflecting cultural and legal backgrounds. • In some countries, the supervision function, and the management function are legally separated into different bodies, such as a supervisory (wholly or mainly non-executive) board and a management (executive) board. • In other countries, like the U.S., both functions are the legal responsibility of a single, unitary board.

  40. Reporting Fraud and Error • If the auditor has identified a fraud or has obtained information that indicates that a fraud may exist, the auditor shall communicate these matters on a timely basis to the appropriate level of management • The auditor shall determine whether there is a responsibility to report the occurrence or suspicion to a party outside the entity. The auditor’s legal responsibilities may override the duty of confidentiality in some circumstances.

  41. Reporting of Non-compliance with Laws • If non compliance is suspected, the auditor should communicate to those charged with governance. • If the auditor concludes that the noncompliance has a material effect on the financial statements, and has not been properly reflected in the financial statements, the auditor should express a qualified or an adverse opinion. • The auditor shall determine whether the auditor has responsibility to report the identified or suspected non-compliance to parties outside the entity.

  42. Long-Form Audit Report • In many countries it is customary for the auditor to prepare a ‘long-form’ report to the Audit Committee of an entity’s board of directors in addition to the publicly published ‘short-form’ report discussed in this chapter. • A long- form report ordinarily includes: • Overview of the Audit Engagement • Analysis of Financial Statements • Risk Management and Internal Control • Optional Topics • Auditor independence and quality control • Fees

  43. XBRL is a freely licensed, open technology standard that makes it possible to store and/or transfer data along with the complex hierarchies, data-processing rules and descriptions. • Permits the automatic exchange and reliable extraction of financial information across all software formats and technologies, including the Internet • Reduces the need to enter financial information more than one time, reducing the risk of data entry error and eliminating the need to manually key information for various formats

  44. Continuous Reporting and Auditing • Continuous reporting is the real-time disclosure of transaction data. • Embedded audit modules (EAM) are database software routines that are placed at predetermined points to gather information about transactions or events within the system that auditors deem to be material. EAMs allow auditors to proactively monitor auditable conditions.

  45. Thank You for Your Attention Any Questions?

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