Aninditra Nurauf Sardjono EAK 1406555675 Summary : Chapter 12 - Audit Reports and Communication 1.1 .1..
Basi sicc El Eleme men nts of th the Au Audi dittor or’’s Re Repo porrt
ISA 700, “Forming an Opinion and Reporting on Financial Statements” states: “The auditor shall shall evalua evaluate te hethe hetherr the !inanc !inancial ial statem statements ents are prepar prepared, ed, in all materi material al respect respects, s, in accorda accordance nce ith ith the re"uir re"uireme ements nts o! the applic applica#l a#lee !inanci !inancial al report reporting ing !rameor !rameor$%
%$This This
evaluation shall include consideration o! the "ualitative aspects o! the entit&'s accounting practices, including indicators o! possi#le #ias in management's (udgment%” The auditor's report should contain a clear ritten e)pression o! opinion on the !inancial statements ta$en as a hole% *oever, e no have a ne !ormat as set out #& ISA 700 and this !ormat is di!!erent !rom that used in man& countries% The !ormat ill sta#ili+e sta#ili+e to the ISA standard in the near !uture, !uture, #ut toda& toda& the audit audit standar standards ds organi organi+at +ation ionss o! the orld orld are restl restling ing ith ith providing a !ormat that ill give the user o! the auditor's report more in!ormation a#out the audit process% In the nited States, !or instance, the -.AO/ has issued a concept release to solicit pu#lic comment on the potential direction o! a proposed standardsetting pro(ect on the content and !orm o! reports on audited aud ited !inancial statements%
Contents of the Auditor’s Report
The auditor's report should #e ritten and include the !olloing #asic elements that are discussed in more detail in the #alance o! this section : •
A title, e%g% “Independent Auditor's Report”
•
An addressee, as re"uired #& the circumstances o! the engagement, e%g%”Shareholders o! A/. compan&”1
•
An introductor& paragraph that identi!ies the !inancial statements audited1
•
A description o! the responsi#ilit& o! management !or the preparation o! the !inancial statements1
•
A descri descripti ption on o! the auditor' auditor'ss respon responsi# si#ili ilit& t& to e)pres e)presss an opinio opinion n on the !inanci !inancial al statements and the scope o! the audit, that includes: o
A re!erence to International Standards on Auditing Auditing and the la or o r regulation1 and
o
A description o! an audit in accordance ith those standards1
•
An opinion paragraph containing an e)pression o! opinion on the !inancial statements and a re!erence to the applica#le !inancial reporting !rameor$ used to prepare the !inancial statements 2including identi!&ing the (urisdiction o! origin o! the !inancial reporting !rameor$ that is not International Financial Reporting Standards or International -u#lic Sector Accounting Standards,
•
The auditor's signature1
•
The date o! the auditor's report1 and
•
The auditor's address%
Title
The auditor's report should have an appropriate title that helps the reader to identi!& it and easil& distinguish it !rom other reports, such as that o! management% The most !re"uentl& used title is “Independent Auditor” or “Auditor's Report” in the title to distinguish the auditor's report !rom reports that might #e issued #& others%
Addressee
The report should #e addressed as re"uired #& the circumstances o! the engagement and the local regulations% The report is usuall& addressed either to the shareholders or supervisor& #oard or the #oard o! directors o! the entit& hose !inancial statements have #een audited% In some countries, such as The 3etherlands, auditor's reports are not addressed at all #ecause the reports are meant to #e used #& 2the anon&mous4 pu#lic at large%
penin! or "ntroductory #ara!raph
The report should identi!& the entit& hose !inancial statements that have #een audited% This should include the name o! the entit& and the date and period covered #& the !inancial statements% The report should state that the !inancial statements have #een audited, identi!&ing the title o! each statement that comprises the !inancial statements% The report should also re!er to the summar& o! signi!icant accounting policies and other e)planator& in!ormation%
$ana!ement’s Responsi%ility for the &inancial Statements
The 5anagement's Responsi#ilit& section o! the auditor's report descri#es the responsi#ilities o! those in the organi+ation that are responsi#le !or the preparation o! the !inancial statements% The auditor's report need not re!er speci!icall& to “management,” #ut shall use the term appropriate to the legal !rameor$ in that particular countr&% In some (urisdictions, the appropriate re!erence ma& #e to those charged ith governance% The auditor's report shall include a section ith the heading “5anagement's 6or other appropriate term Responsi#ilit& !or the Financial Statements%” The description shall include an e)planation that management is responsi#le !or the preparation o! the !inancial statements in accordance ith the applica#le !inancial reporting !rameor$, and !or internal control to ena#le the preparation o! !inancial statements that are !ree !rom material misstatement, hether due to !raud or error% 8here the !inancial statements are prepared in accordance ith a !air presentation !rameor$, the e)planation o! management's responsi#ilit& !or the !inancial statements in the auditor's report shall re!er to “the preparation and !air presentation o! these !inancial statements” or “the preparation o! !inancial statements that give a true and !air vie,” as appropriate in the circumstances%
Auditor’s Responsi%ility
The auditor's report ill include a section ith the heading “Auditor's Responsi#ilit&%” The auditor's report shall state that the responsi#ilit& o! the auditor is to e)press an opinion on the !inancial statements #ased on the audit% The audit report e)plains that ISA standards re"uire that the auditor compl& ith ethical re"uirements and that the auditor plan and per!orm the audit to o#tain reasona#le assurance a#out hether the !inancial statements are !ree !rom material misstatement% The present auditor's report !ormat under “auditor's responsi#ilit&” 2the third, !ourth and !i!th paragraph4 descri#es the scope o! an audit #& stating that: •
An audit involves per!orming procedures to o#tain audit evidence a#out the amounts and disclosures in the !inancial statements1
•
The procedures selected depend on the auditor's (udgment, including the assessment o! the ris$s o! material misstatement o! the !inancial statements, hether due to !raud or error% In ma$ing those ris$ assessments, the auditor considers internal control relevant to the entit&'s preparation o! the !inancial statements in order to design audit procedures that are
appropriate in the circumstances, #ut not !or the purpose o! e)pressing an opinion on the e!!ectiveness o! the entit&'s internal control% 2In circumstances hen the auditor also has a responsi#ilit& to e)press an opinion on the e!!ectiveness o! internal control in con(unction ith the audit o! the !inancial statements, the auditor shall omit the phrase that the auditor's consideration o! internal control is not !or the purpose o! e)pressing an opinion on the e!!ectiveness o! internal control41 and •
An audit also includes evaluating the appropriateness o! the accounting policies used and the reasona#leness o! accounting estimates made #& management, as ell as the overall presentation o! the !inancial statements%
8here the !inancial statements are prepared in accordance ith a !air presentation !rameor$, the description o! the audit in the auditor's report must re!er to “the entit&'s preparation and !air presentation o! the !inancial statements” or “the entit&'s preparation o! !inancial statements that give a true and !air vie,” as appropriate in the circumstances% The auditor's report shall state hether the auditor #elieves that the audit evidence the auditor has o#tained is su!!icient and appropriate to provide a #asis !or the auditor's opinion
pinion #ara!raph
The auditor's report ill include a section ith the heading “ Opinion%” 8hen e)pressing an unmodi!ied 2un"uali!ied4 opinion on !inancial statements prepared in accordance ith a !air presentation !rameor$, the auditor's opinion shall use one o! the !olloing phrases, hich are regarded as #eing e"uivalent: •
The !inancial statements present !airl&, in all material respects, 9 in accordance ith 6the applica#le !inancial reporting !rameor$1 or
•
The !inancial statements give a true and !air vie o! 9 in accordance ith 6the applica#le !inancial reporting !rameor$%
8hen e)pressing an unmodi!ied opinion on !inancial statements prepared in accordance ith a compliance !rameor$, the auditor's opinion shall #e that the !inancial statements are prepared, in all material respects, in accordance ith 6the applica#le !inancial reporting !rameor$% I! the re!erence to the applica#le !inancial reporting !rameor$ in the auditor's opinion is not to International Financial Reporting Standards issued #& the International Accounting Standards /oard or International -u#lic Sector Accounting Standards issued #& the
International -u#lic Sector Accounting Standards /oard, the auditor's opinion shall identi!& the (urisdiction o! origin o! the !rameor$% International Standard on Auditing 2ISA4 00, states that the purpose o! an audit is to enhance the degree o! con!idence o! intended users in the !inancial statements% This is achieved #& the e)pression o! an opinion #& the auditor on hether the !inancial statements are prepared, in all material respects, in accordance ith an applica#le !inancial reporting !rameor$% he !inancial reporting !rameor$ is determined #& International Financial Reporting Standards 2IFRSs4, rules issued #& pro!essional #odies, and the develop ment o! general practice ithin the countr&, ith the appropriate consideration o! !airness and ith due regard to local legislation% To advise the reader o! the conte)t in hich !airness is e)pressed, the auditor's opinion ould indicate the !rameor$ upon hich the !inancial statements are #ased #& using ords such as “%%%in accordance ith International Accounting Standards 2or 6title o! !inancial reporting !rameor$ ith re!erence to the countr& o! origin4%%%”
Report on ther 'e!al and Re!ulatory Re(uirements
I! the auditor addresses other reporting responsi#ilities in the auditor's report on the !inancial statements that are in addition to the auditor's responsi#ilit& under the ISAs to report on the !inancial statements, these other reporting responsi#ilities shall #e addressed in a separate section in the auditor's report that shall #e su#titled “Report on Other ;egal and Regulator& Re"uirements,”
or
otherise
as
appropriate
to
the
content
o!
the
section%
Si!nature of the Auditor and )ate of the Report
The auditor's report must #e signed% The report must #e dated% The auditor shall date the report no earlier than the date on hich the auditor has o#tained su!!icient appropriate audit evidence on hich to #ase the auditor's opinion on the !inancial statements including evidence that: 2a4 all the statements that comprise the !inancial statements, including the related notes, have #een prepared1 and 2#4 those ith recogni+ed authorit& have asserted that the& have ta$en responsi#ilit& !or those !inancial statements% This in!orms the reader that the auditor has considered the e!!ect on the !inancial statements and on the report o! events or transactions a#out hich the auditor #ecame aare and that occurred up to that date% Since the auditor's responsi#ilit& is to report on the !inancial statements as prepared and presented #&
management, the auditor should not date the report earlier than the date on hich the !inancial statements are signed or approved #& management%
Auditor’s Address
The report should name a speci!ic location, hich is usuall& the cit& in hich the auditor maintains an o!!ice that serves the client audited% -.AO/'s Auditing Standard 3o%< also re"uires that an auditor include the cit& and state 2or cit& and countr&, in the case o! nonlocal auditors4 !rom hich the auditor's report has #een issued% 3ote: In some countries it is not re"uired that the audit report give the speci!ic address !or the auditor%
Si!nature
The report should #e signed in the name o! the audit !irm, or the personal name o! the auditor, or #oth, as appropriate% The auditor's report is ordinaril& signed in the name o! the !irm #ecause the !irm assumes responsi#ilit& !or the audit% 3ote: In several countries 2e%g% the SA, the =, the 3etherlands4 it is currentl& not re"uired that the personal name o! the auditor #e signed% Inclusion o! the name in a re!erence is su!!icient%
ther &ormats of the Auditor’s Report
An auditor ma& #e re"uired to conduct an audit in accordance ith the auditing standards o! a speci!ic (urisdiction 2the “national auditing standards”4, #ut ma& additionall& have complied ith the ISAs in the conduct o! the audit% I! this is the case, the auditor's report ma& re!er to International Standards on Auditing in addition to the national auditing standards% *oever, the auditor shall ma$e re!erence to ISAs and the national standards onl& i! there is no con!lict #eteen the re"uirements o! the to sets o! standards that ould lead the auditor to !orm a di!!erent opinion, or not to include an >mphasis o! 5atter paragraph that, in the particular circumstances, is re"uired #& ISAs% Furthermore, the auditor's report must still include each o! the elements re"uired #& the ISA !ormat hen he uses the la&out or ording speci!ied #& the national auditing standards%
8hen the auditor's report re!ers to #oth the national auditing
standards and International Standards on Auditing, the auditor's report must identi!& the (urisdiction o! origin o! the national auditing standards%
Form of an Auditor’s Report
The most common t&pe o! audit report is the standard unmodi!ied 2historicall& called an “un"uali!ied”4 audit report% It is used !or more than ?0 percent o! all audit reports% Other audit reports are re!erred to as “other than unmodi!ied reports”% Other than unmodi!ied reports include those reports that e)press: an adverse opinion, disclaimer o! opinion, and modi!ied% The !orm o! an auditor's report ill generall& #e the !orm o! the unmodi!ied report hich traditionall& consisted o! (ust three paragraphs 2 introduction, scope, and opinion4, #ut no it ma& consist o! several paragraphs so long as the #asic elements are covered 2Introduction, 5anagement's Responsi#ilit&, Auditor's Responsi#ilit& 2including audit scope4, and Auditor's Opinion4% For unmodi!ied !inancial statement opinions the -.AO/ currentl& re"uires the traditional, three paragraph report% Reports can also include a paragraph a!ter the opinion paragraph called “an emphasis o! a mater paragraph” 2see ISA 70@4” In some countries a paragraph re!erring a "uali!ication as a result o! inade"uate accounting procedures or disclosure ma& #e inserted (ust #e!ore the opinion paragraph% The !inal paragraph in the standard unmodi!ied report states the auditor's conclusion #ased on the results o! the audit e)amination% This paragraph is so important that the entire audit report is !re"uentl& re!erred to as “the auditor's opinion%” The opinion paragraph is stated as an opinion rather than as statement o! a#solute !act or a guarantee% The intent is to indicate that the conclusions are #ased on pro!essional (udgment%
Modified Opinion
An auditor's report is considered to #e modi!ied in the to d i!!erent situations: <% 5atters that do not a!!ect the Auditor's Opinion 2hich ould mean adding an emphasis of matter para!raph 41
% 5atters that do a!!ect the Auditor's Opinion 2instances that call !or either a 2a4 (ualified opinion , 2#4 disclaimer of opinion , or 2c4 ad*erse opinion 4%
As the user's understanding ill #e #etter i! the !orm and content o! each t&pe is uni!orm, ISA 70, 5odi!ications to the Opinion in the Independent Auditor's Report, includes suggested ording to e)press a "uali!ied, adverse or disclaimer o! opinion%
1.2.
Types of Report E+pressin! Audit pinion
The opinion e)pressed in the auditor's report ma& #e one o! !our t&pes: unmodi!ied, "uali!ied, adverse or disclaimer o! opinion%
Standard Unmodified Opinion Auditor’s Report
The auditor's unmodi!ied report should #e e)pressed hen the auditor concludes that the !inancial statements are prepared, in all material respects, in accordance ith the identi!ied !inancial reporting !rameor$% An auditor's report containing an unmodi!ied opinion also indicates implicitl& that an& changes in accounting principles or in the method o! their application, and their e!!ects, have #een properl& determined and disclosed in the !inancial statements% Illustration<% earlier shos sample ording !or an auditor's unmodi!ied report%
Re(uirements to ,i*e nmodified pinion
In order to !orm that opinion, the auditor shall conclude as to hether he has o#tained reasona#le assurance a#out hether the !inancial statements as a hole are !ree !rom material misstatement, hether due to !raud or error% That conclusion shall ta$e into account hether su!!icient appropriate audit evidence has #een o#tained, i! uncorrected misstatements are material, individuall& or in aggregate1 and certain evaluations as to correspondence o! !inancial statements to the re"uirements o! the applica#le !inancial reporting !rameor$% In particular, the auditor must evaluate: •
hether the !inancial statements ade"uatel& disclose the signi!icant accounting policies selected and the& are consistent and appropriate1
•
accounting estimates made #& management are reasona#le1
•
in!ormation presented in the !inancial statements is relevant, relia#le, compara#le, and understanda#le1
•
disclosures to ena#le the intended users to understand the e!!ect o! material transactions and events on the in!ormation conve&ed in the !inancial statements1 and
•
terminolog& used in the !inancial statements, including the title o! each !inancial statement, is appropriate%
8hen the !inancial statements are prepared in accordance ith a !air presentation !rameor$, the evaluation a#ove ill also include hether the !inancial statements achieve !air presentation% I! the auditor concludes #ased on the audit evidence that the !inancial statements as a hole are not !ree !rom material misstatement1 or is una#le to o#tain su!!icient appropriate audit evidence he must modi!& the opinion in the auditor's report #& e)pressing a "uali!ied, adverse or disclaimer o! opinion% Auditor’s Report Containing a Modified Opinion
The auditor ill e)press a "uali!ied opinion hen: •
*aving o#tained su!!icient appropriate audit evidence, the auditor concludes that misstatements, individuall& or in the aggregate, are material, #ut not pervasive, to the !inancial statements1 or
•
The auditor is una#le to o#tain su!!icient appropriate audit evidence on hich to #ase the opinion, #ut the auditor concludes that the possi#le e!!ects on the !inancial statements o! undetected misstatements, i! an&, could #e material #ut not pervasive%
The $e& concepts to consider are materialit& and pervasiveness% In!ormation is material i! its omission or misstatement could in!luence the economic decisions o! users ta$en on the #asis o! the !inancial statements% 5aterialit& depends on the si+e o! the item or error (udged in the particular circumstances o! its omission or misstatement% Thus, materialit& provides a threshold or cuto!! point rather than #eing a primar& "ualitative characteristic hich in!ormation must have i! it is to #e use!ul% #er*asi*e is a term used to descri#e the e!!ects on the !inancial statements o! misstatements or the possi#le e!!ects on the !inancial statements o! misstatements that are undetected due to an ina#ilit& to o#tain su!!icient appropriate audit evidence% -ervasive e!!ects on the !inancial statements are those that, in the auditor 's (udgment: •
Are not con!ined to speci!ic elements, accounts or items o! the !inancial statements1
•
I! so con!ined, represent or could represent a su#stantial proportion o! the !inancial statements1 or
•
In relation to disclosures, are !undamental to users' understanding o! the !inancial statements%
Auditor’s Report Containing an Adverse Opinion
The auditor shall e)press an adverse opinion hen the auditor, having o#tained su!!icient appropriate audit evidence, concludes that misstatements, individuall& or in the aggregate, are #oth material and pervasive to the !inancial statements% An adverse opinion is issued hen the e!!ect o! a disagreement is so material and pervasive to the !inancial statements that the auditor concludes that a "uali!ication o! his report is not ade"uate to disclose the misleading or incomplete nature o! the !inancial statements%
Auditor’s Report Containing a Disclaimer of Opinion
The auditor ill disclaim an opinion hen he is una#le to o#tain su!!icient appropriate audit evidence on hich to #ase the opinion, and he concludes that the possi#le e!!ects on the !inancial statements o! undetected misstatements, could #e #oth material and pervasive% The auditor ould also disclaim an opinion hen, in e)tremel& rare circumstances involving multiple uncertainties, the auditor concludes that, notithstanding having o#tained su!!icient appropriate audit evidence regarding each o! the individual uncertainties, it is not possi#le to !orm an opinion on the !inancial statements due to the potential interaction o! the uncertainties and their possi#le cumulative e!!ect on the !inancial statements% An auditor's report containing a disclaimer o! opinion should #e e)pressed hen the possi#le e!!ect o! a limitation on scope is so material and pervasive that the auditor has not #een a#le to o#tain su!!icient appropriate audit evidence and there!ore is una#le to e)press an opinion on the !inancial statements% 8hen an auditor issues a disclaimer o! opinion, more o!ten than not there is a !inding regarding the internal controls 2controls or either ine!!ective or are missingBnot in place, or a com#ination4% 8henever the auditor issues a report that is other than unmodi!ied, he should include a clear description o! all the su#stantive reasons that should #e included in the report and a "uali!ication o! the possi#le e!!ect2s4 on the !inancial statements% This in!ormation should #e set out in a separate paragraph, preceding the opinion or disclaimer o! opinion and ma& include a re!erence to a more e)tensive discussion, i! an&, in a note to the !inancial statements%
Conse(uence of an "na%ility to %tain Sufficient Appropriate Audit E*idence )ue to a $ana!ement-"mposed 'imitation after the Auditor as Accepted the En!a!ement
I! the auditor is una#le to o#tain su!!icient appropriate audit evidence, the auditor shall determine i! the possi#le e!!ects on the !inancial statements o! undetected misstatements% I! the e!!ects could #e material #ut not pervasive, the auditor shall "uali!& the opinion% I! the auditor concludes that the possi#le e!!ects on the !inancial statements o! undetected misstatements could #e #oth material and pervasive he must ithdra !rom the audit% I! ithdraal !rom the audit #e!ore issuing the auditor's report is not practica#le or possi#le, the auditor should disclaim an opinion on the !inancial statements%
/e!ore ithdraing, the auditor ill
communicate to those charged ith governance an& matters regarding misstatements identi!ied% 8hen the auditor considers it necessar& to e)press an adverse opinion or disclaim an opinion on the !inancial statements as a hole, the auditor's report shall not also include an unmodi!ied opinion ith respect to the same !inancial reporting !rameor$ on a single !inancial statement or one or more speci!ic elements, accounts or items o! a !inancial statement% To include such an unmodi!ied opinion in the same report in these circumstances ould contradict the auditor's adverse opinion or disclaimer o! opinion on the !inancial statements as a hole%
&orm and Content of the Auditor’s Report /hen the pinion "s $odified
8hen the auditor modi!ies the opinion on the !inancial statements, the auditor ill include a paragraph in the auditor's report that provides a description o! the #asis !or the modi!ication% This paragraph is placed immediatel& #e!ore the opinion paragraph in the auditor's report under the heading “/asis !or Cuali!ied Opinion,” “/asis !or Adverse Opinion,” or “/asis !or Disclaimer o! Opinion,” as appropriate% The auditor includes in the #asis !or modi!ication paragraph a description and "uanti!ication o! the !inancial e!!ects o! the misstatement% I! it is not practial to "uanti!& the !inancial e!!ects, the auditor shall state that in the #asis !or modi!ication paragraph%
I! the modi!ication results !rom an ina#ilit& to o#tain su!!icient
appropriate audit evidence, the auditor shall include in the #asis !or modi!ication paragraph the reasons !or that ina#ilit&% I! there is a material misstatement o! the !inancial statements that relates to narrative disclosures, an e)planation o! ho the disclosures are misstated should #e included in the #asis !or modi!ication paragraph% I! a material misstatement relates to the nondisclosure o! in!ormation re"uired to #e disclosed, the auditor shall discuss the nondisclosure ith those
charged ith governance1 descri#e in the #asis !or modi!ication paragraph the nature o! the omitted in!ormation1 and include the omitted disclosures%
pinion #ara!raph /hen the pinion is A $odified ne
8hen the auditor modi!ies the audit opinion, the auditor uses the heading “Cuali!ied Opinion,” “Adverse Opinion,” or “Disclaimer o! Opinion,” as appropriate, !or the opinion paragraph% 8hen the auditor e)presses a "uali!ied opinion, the auditor states in the opinion paragraph that, in the auditor's opinion, >E.>-T FOR the e!!ects o! the matter2s4 descri#ed in the /asis !or Cuali!ied Opinion paragraph, the !inancial statements present !airl&, in all material respects 2or give a true and !air vie4 in accordance ith the applica#le !inancial reporting !rameor$ hen reporting in accordance ith a !air presentation !rameor$ OR in accordance ith the applica#le !inancial reporting !rameor$ hen reporting in accordance ith a compliance !rameor$% 8hen the modi!ication arises !rom an ina#ilit& to o#tain su!!icient appropriate audit evidence, the auditor shall use the corresponding phrase “e)cept !or the possi#le e!!ects o! the matter2s4 %%%” !or the modi!ied opinion% 8hen the auditor e)presses an AD>RS> O-I3IO3, the auditor ill state in the opinion paragraph that, in the auditor's opinion, #ecause o! the signi!icance o! the matter2s4 descri#ed in the /asis !or Adverse Opinion paragraph the !inancial statements do not present !airl& 2or give a true and !air vie4 in accordance ith the applica#le !inancial reporting !rameor$ hen reporting in accordance ith a !air presentation !rameor$1 or in accordance ith the applica#le !inancial reporting !rameor$ hen reporting in accordance ith a compliance !rameor$% 8hen the auditor DIS.;AI5S an opinion due to an ina#ilit& to o#tain su!!icient appropriate audit evidence, the auditor states in the opinion paragraph that #ecause o! the signi!icance o! the matter2s4 descri#ed in the /asis !or Disclaimer o! Opinion paragraph, the auditor has not #een a#le to o#tain su!!icient appropriate audit evidence to provide a #asis !or an audit opinion1 and, accordingl&, the auditor does not e)press an opinion on the !inancial statements%
)escription of Auditor’s Responsi%ility for 0ualified Ad*erse or )isclaimer
8hen the auditor disclaims an opinion due to an ina#ilit& to o#tain su!!icient appropriate audit evidence, the auditor must amend the I3TROD.TORG paragraph o! the auditor's report to state that the auditor as engaged to audit the !inancial statements% The auditor shall also amend the description o! the auditor's responsi#ilit& and the description o! the scope o! the audit to state onl& the !olloing: “Our responsi#ilit& is to e)press an opinion on the !inancial statements #ased on conducting the audit in accordance ith International Standards on Auditing% /ecause o! the matter2s4 descri#ed in the /asis !or Disclaimer o! Opinion paragraph, hoever, e ere not a#le to o#tain su!!icient appropriate audit evidence to provide a #asis !or an audit opinion%”
1..
Emphasis of a $atter #ara!raph
The auditor, having !ormed an opinion on the !inancial statements, sometimes must dra the !inancial statement users' attention to a matter, although appropriatel& presented or disclosed in the !inancial statements, that is o! such importance that it is !undamental to users' understanding o! the !inancial statements1 or an& other matter that is relevant to users' understanding o! the audit, the auditor's responsi#ilities, or the auditor's report% This part o! the opinion is called an emphasis o! a matter paragraph or other matter paragraph% An Emphasis of $atter para!raph is a paragraph included in the auditor's report that re!ers to a matter
appropriatel& presented or disclosed in the !inancial statements that, in the auditor's (udgment, is o! such importance that it is !undamental to users' understanding o! the !inancial statements% The ther $atter para!raph is a paragraph included in the auditor's report that re!ers to a matter other than those presented or disclosed in the !inancial statements that, in the auditor's (udgment, is relevant to users' understanding o! the audit, the auditor's responsi#ilities or the auditor's report% 8hen the auditor includes an >mphasis o! 5atter paragraph in the auditor's report, the auditor shall include it immediatel& a!ter the Opinion paragraph in the auditor's report and use the heading “>mphasis o! 5atter”% Furthermore, the auditor ill include in the paragraph a clear re!erence to the matter #eing emphasi+ed and to here relevant disclosures that !ull& descri#e the matter can #e !ound in the !inancial statements and indicate that the auditor's opinion is not modi!ied in respect o! the matter emphasi+ed%
I! the auditor considers it necessar& to communicate a matter other than those that are presented or disclosed in the !inancial statements that is relevant to users' understanding o! the audit, the auditor shall do so in a paragraph in the auditor's report, ith the heading “Other 5atter”% This paragraph is placed immediatel& a!ter the Opinion paragraph and an& >mphasis o! 5atter paragraph% Ordinaril&, an auditor might rite an emphasis o! a matter paragraph:
i! there is a signi!icant uncertainty hich ma& a!!ect the !inancial statements, the
resolution o! hich is dependent upon !uture events1
to highlight a material matter regarding a going concern pro#lem%
other matters%
An illustration o! an emphasis o! matter paragraph !or a signi!icant uncertaint& in an auditor's report !ollos: >mphasis o! 5atter 8e dra attention to 3ote E to the !inancial statements hich descri#es the uncertaint& related to the outcome o! the lasuit !iled against the compan& #& EGH .ompan&% Our opinion is not "uali!ied in respect o! this matter% OR “8ithout "uali!&ing our opinion e dra attention to 3ote E to the !inancial statements% The .ompan& is the de!endant in a lasuit alleging in!ringement o! certain patent rights and claiming ro&alties and punitive damages% The .ompan& has !iled a counter action, and preliminar& hearings and discover& proceedings on #oth actions are in progress% The ultimate outcome o! the matter cannot presentl& #e determined, and no provision !or an& lia#ilit& that ma& result has #een made in the !inancial statements%”
Uncertainties in the Emphasis of a Matter Paragraph
>)amples o! uncertainties that might #e emphasi+ed include the e)istence o! related part& transactions, important accounting matters occurring su#se"uent to the #alance sheet and matters a!!ecting the compara#ilit& o! !inancial statements ith those o! previous &ears 2e%g% change in accounting methods4%
oing Concern Emphasis of Matter
The !oin! concern assumption is one o! the !undamental assumptions underl&ing preparation o! !inancial statements% An enterprise is normall& vieed as a going concern, that is, as continuing in operation !or the !oreseea#le !uture% ISA 70 esta#lishes standards and provides guidance on the auditor's responsi#ilities regarding the appropriateness o! the going concern assumption as a #asis !or preparing !inancial statements% 8hen a "uestion arises regarding the appropriateness o! the going concern assumption, the auditor should gather su!!icient appropriate audit evidence to attempt to resolve, to the auditor's satis!action, the "uestion regarding the entit&'s a#ilit& to continue in operation !or the !oreseea#le !uture%
oing Concern Disclosure
A!ter the auditor has carried out the additional procedures deemed necessar&, o#tained all re"uired in!ormation and considered the e!!ect o! management's plans, he should determine hether the "uestions raised regarding going concern have #een satis!actoril& resolved% I! the going concern "uestions are not resolved, the auditor must ade"uatel& disclose in his report the principal conditions that raise dou#t a#out the entit&'s a#ilit& to continue in operation in the !oreseea#le !uture% The disclosure should:
descri#e the principal conditions that raise dou#t1
state that there are dou#ts a#out going concern, there!ore the entit& ma& #e una#le to
reali+e its assets and discharge its lia#ilities in the normal course o! #usiness1
state that the !inancial statements do not include an& ad(ustments relating to the
recovera#ilit& and classi!ication o! recorded asset amounts or to amounts and classi!ication o! lia#ilities that ma& #e necessar& should the entit& #e una#le to continue as a going concern%
