AUDIT REPORT

ISA 700 - deals with the auditor’s responsibility to

form an opinion on the financial statements. It also
deals with the form and content of the auditor’s
report issued as a result of an audit of financial
statements
ISA 701 - Communicating Key Audit Matters in
the Independent Auditor’s Report
ISA 705 - Modifications to the Opinion in the
Independent Auditor’s Report.
ISA 706 – Emphasis of Matter Paragraphs and Other
Matter Paragraphs in the Independent Auditor’s Report.
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UPDATE On Auditor’s Report
The International Auditing and Assurance Standards
Board (IAASB) finalised its project on auditor reporting
in 2015, which resulted in a set of new and revised
standards on auditor reporting as well as revised
versions of ISA, 570 Going Concern and a number of
other International Standards on Auditing (ISAs).
the requirements of the new ISA 701, Communicating
Key Audit Matters in the Independent Auditor’s Report;
how ISA 701 interacts with the other reporting
standards (ISA 705 and 706); and the new reporting
requirements in ISA 570 (Revised), Going Concern.
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ISA 701- Communicating Key Audit Matters in
the Independent Auditor’s Report
In January 2015 the IAASB issued ISA 701, Communicating
Key Audit Matters in the Independent Auditor’s Report. This
standard is required to be applied to the audit of all listed
entities. The objectives of ISA 701 are for the auditor to:
 determine those matters which are to be regarded as KAM; and
 communicate those matters in the auditor’s report.

The term ‘key audit matters’ is defined in ISA 701 as:

 ‘Those matters that, in the auditor’s professional judgment, 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.’ (ISA 701
para 8))
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ISA 701- Communicating Key Audit Matters
in the Independent Auditor’s Report
DETERMINATION OF KAM
The definition in paragraph 8 of ISA 701 states that KAM are
selected from matters which are communicated with those charged
with governance. Matters which are discussed with those charged with
governance are then evaluated by the auditor who then determines
those matters which required significant auditor attention during the
course of the audit. There are three matters which the ISA requires the
auditor to take into account when making this determination:
 Areas which were considered to be susceptible to higher risks of
material misstatement or which were deemed to be ‘significant risks’ in
accordance with ISA 315 (Revised), Identifying and Assessing the Risks
of Material Misstatement through Understanding the Entity and Its
Environment.

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ISA 701- Communicating Key Audit Matters
in the Independent Auditor’s Report
DETERMINATION OF KAM (CONTINUE..)
Significant auditor judgments in relation to areas of the
financial statements that involved significant
management judgment. This might include accounting
estimates which have been identified by the auditor as
having a high degree of estimation uncertainty.
The effect on the audit of significant events or
transactions that have taken place during the period.
The auditor must determine which matters are of most
significance in the audit of the financial statements and
these will be regarded as KAM.
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ISA 701- Communicating Key Audit Matters
in the Independent Auditor’s Report
COMMUNICATING KAM
Once the auditor has determined which matters will be
included as KAM, the auditor must ensure that each matter is
appropriately described in the auditor’s report including a
description of:
 Why the matter was determined to be one of most significance
and therefore a key audit matter, and
 How the matter was addressed in the audit (which may include
a description of the auditor’s approach, a brief overview of
procedures performed with an indication of their outcome and
any other key observations in respect of the matter).

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 Example – unmodified audit opinion but material
uncertainty exists in relation to going concern and
the disclosures are adequate
 Report on the Audit of the Financial Statements (extract)
 
 Opinion
In our opinion, the accompanying financial statements present fairly, in all material
respects, the financial position of the Company as at 31 December 2015, and its financial
performance and its cash flows for the year then ended in accordance with International
Financial Reporting Standards (IFRSs).
 
 Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our
responsibilities under those standards are further described in the Auditor’s
Responsibilities for the Audit of the Financial Statements section of our report. We are
independent of the Company in accordance with the ethical requirements that are relevant
to our audit of the financial statements in Farland, and we have fulfilled our other ethical
responsibilities in accordance with these requirements. We believe that the audit evidence
we have obtained is sufficient and appropriate to provide a basis for our opinion.
 

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 Example – unmodified audit opinion but material
uncertainty exists in relation to going concern and the
disclosures are adequate
 Material uncertainty related to going concern
We draw attention to Note 6 in the financial statements, which indicates that the
Company incurred a net loss of $125,000 during the year ended 31 December 2015 and,
as of that date, the Company’s current liabilities exceeded its total assets by $106,000.
As stated in Note 6, these events or conditions, along with other matters as set forth in
Note 6, indicate that a material uncertainty exists that may cast significant doubt on the
Company’s ability to continue as a going concern. Our opinion is not modified in respect
of this matter.
 
 Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the financial statements of the current period. These matters
were addressed in the context of our audit of the financial statements as a whole, and in
forming our opinion thereon, and we do not provide a separate opinion on these matters.
In addition to the matter described in the Material Uncertainty Related to Going
Concern section, we have determined the matters described below to be the key audit
matters to be communicated in our report.
 
 [Include a description of each key audit matter]
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 AUDIT REPORT –ISA 700
The objectives of the auditor are:
(a) To form an opinion on the financial statements
based on an evaluation of the conclusions drawn from
the audit evidence obtained; and
(b) To express clearly that opinion through a
written report that also describes the basis for that
opinion.

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 AUDIT REPORT
Modified audit report
Auditor’s report is said to be modified if the contents of the
unmodified report as stated under ISA 700 are changed:
either because of the addition of emphasis of matter
paragraph or other matters paragraph where opinion is still
unmodified (modified report with unmodified opinion)
or because of the modified opinion i.e. (modified report
with modified opinion):
Qualified opinion
Adverse opinion
Disclaimer of opinion

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 AUDIT REPORT
Audit reports are classified n TWO broad categories which are
then further classified as follows:
1. Unmodified audit report
Unmodified report with unmodified opinion – Standard
Unqualified Opinion
2. Modified audit report
a. Unmodified opinion – EMP/OMP
Modified report with unqualified opinion AND emphasis of
matter paragraph and/or other matter paragraph/modified
para
b. Modified opinion
 Qualified opinion (qualified report)

 Adverse opinion (adverse report)

 Disclaimer of opinion (disclaimer report)

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 AUDIT REPORT
Modified report with unmodified opinion
This is called modified report because the contents of
the unmodified report are modified as additional
paragraph(s) is (are) added. Additional paragraphs
can be either or both of the following:
Emphasis of matter paragraph
Other matter paragraph

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 AUDIT REPORT
Emphasis of Matter Paragraph ( to highlight
Going concern issue)
Auditor includes an emphasis of matter paragraph (EMP)
when auditor considers that it is necessary to draw the
attention of users of financial statements to the matter
that is already disclosed or reported in the financial
statements and understanding of the specified matter is
important in understanding of the financial
statements. EMP is included after the opinion paragraph
in the audit report.

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 AUDIT REPORT
Other Matter Paragraph
Auditor includes an other matter paragraph (OMP) when
auditor considers that it is necessary to communicate a
matter other than those that are presented or disclosed
in the financial statements and in auditor’s judgment
understanding that matter is vital for users’ understanding
of the audit, the auditor’s responsibilities or the
auditor’s report and this is not prohibited by law or
regulation. OMP is included after opinion paragraph and any
EMP in the auditor’s report or somewhere else in the
auditor’s report if the content of the Other Matter paragraph
is relevant to the Other Reporting Responsibilities section.

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 AUDIT REPORT
Modified report with modified opinion
Auditor modify his opinion when he concludes that it will not be
appropriate to express an unmodified/unqualified opinion.
Auditor reaches such conclusion when:
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.
The modification to the audit opinion is determined by the
auditor by applying his professional judgment on the
circumstances at hand. He may modify his opinion to express a
qualified opinion, an adverse opinion or a disclaimer.
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 AUDIT REPORT
Qualified opinion
Audit report containing a qualified opinion is also called
qualified report.
Auditor expresses 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.

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 AUDIT REPORT
Adverse opinion
Audit report containing an adverse opinion is also
called adverse report.
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.

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 AUDIT REPORT
Disclaimer
Audit report containing a disclaimer of opinion is also
called disclaimer report
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

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 AUDIT REPORT
Unmodified audit report
When auditor on the basis of examination and the
evidence obtained expresses his opinion that financial
statements of the entity are prepared in all material
respects in accordance with applicable financial
reporting framework or financial statements give true
and fair view than such audit report or auditor’s report
is called unmodified or unqualified report.
ISA 700 describes the contents and format of the
unmodified report in detail.
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 AUDIT REPORT – ISA 705
The decision regarding which type of modified opinion
is appropriate depends upon:
(a) The nature of the matter giving rise to the
modification, that is, whether the financial statements
are materially misstated or, in the case of an inability
to obtain sufficient appropriate audit evidence, may
be materially misstated; and
(b) The auditor’s judgment about the pervasiveness of
the effects or possible effects of the matter on the
financial statements
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 Summary of modification of opinion
Nature of Matter Giving Material but Not Material and
Rise to the Modification Pervasive Pervasive

Financial statements
are materially
misstated Qualified opinion Adverse opinion

Inability to obtain
sufficient appropriate
Qualified opinion Disclaimer of opinion
audit evidence

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 AUDIT REPORT – ISA 705
Circumstances When a Modification to the
Auditor’s Opinion Is Required
The auditor shall modify the opinion in the auditor’s
report when:
(a) The auditor concludes that, based on the audit
evidence obtained, the financial statements as a
whole are not free from material misstatement; or
(b) 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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 AUDIT REPORT - ISA 705
Determining the Type of Modification to the
Auditor’s Opinion - Qualified Opinion
The auditor shall express a qualified opinion when:
(a) 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
(b) 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.

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 AUDIT REPORT - ISA 705
Adverse Opinion
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.

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 AUDIT REPORT - ISA 705
Disclaimer of Opinion
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.
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.
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 Types of Audit Report:
Unqualified Opinion
 An unqualified opinion should be expressed when
the auditor concludes that the financial
statements give a true and fair view (or are
presented fairly, in all material respects) in
accordance with the applicable financial reporting
framework.

 An unqualified opinion also indicates implicitly

that any changes in accounting principles or in the
method of their application, and the effects thereof,
have been properly determined and disclosed in the
financial statements.

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 Types of Audit Report:
Unqualified Opinion
 Unqualified opinion is issued when following condition
have been met (in all material respects):
 the auditor has obtained all the information and
explanation..
 FS prepared according to applicable accounting
standards, relevant regulations and statutory
requirements…..
 The auditor concludes that financial statements are
free from material misstatements….
 There are no circumstances requiring additional
explanatory paragraph…(EOM/OMP)
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 AUDIT REPORT - CONTENT
An audit opinion or report in accordance with ISA 700
includes the following contents in this specific order:
1. Title
2. Addressee
3. Introductory paragraph
4. Statement that preparation of the financial statements
& maintenance of the records is the responsibility of
management rather than the auditor
5. The auditor’s responsibility to form an opinion on the
financial statements
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 AUDIT REPORT - CONTENT
6. Methodology used (i.e audit conducted in
accordance with ISA)
7. Limitations on methodology (i.e a limitation on
scope modification)
8. Any matters of disagreement (i.e any material
disagreement)
9. Auditor’s opinion (either the financial statements
give a true and fair view, or a true ad fair view
except for the matter above)

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 AUDIT REPORT - CONTENT
10. Any other reporting requirements, such as
requirements to report on whether the financial
statements comply with local legislation
11. Any emphasis of a matter paragraph
12. Audit signature
13. Date of audit report
14. Auditor’s address

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