Post on 14-Nov-2018
REPORTING – THE NEW AUDITOR’S REPORT
Presentation by:
CPA Francis K. Langat
Sirikwa Hotel, EldoretFriday, 16th March 2018
Uphold public interest
Presentation Outline
What motivated changes in an Auditors Report? Understanding the provisions and expectations of
the Standards: ISA 701 – Communicating Key Audit Matters in the
Independent Auditor’s Report. ISA 700 – Forming an opinion and reporting on FS ISA 705 – Modifications to the opinion in the
Independent Auditor’s Report. ISA 570 – Going Concern IAS 520 – Analytical Procedures
Reasons for Change
Greater investor demands for enhanced report.
Share holder interest on key concerns
Enlightened users of FS
Feedback from Professionals and uptake by
standards body- through a structured process.
New Auditor’s Report Structure The report will contain the following sections:1. After the Heading, the Auditor’s opinion is given
at the beginning.2. Basis for Opinion Paragraph. An affirmation
statement of auditors independence is also given.3. Description of Key Audit Matters(KAM).4. Explanation for responsibilities of management
and those charged with governance.5. Description of auditor’s responsibilities.
ISA 701: Communicating Key Audit Matters (KAM)
Definition of Key Audit Matters – are those
matters that in the auditor’s professional
judgment, were of most significance in the
audit of Financial Statements (FS) of the
current period.
KAM are selected from matters communicated
with those charged with Governance.
Issues to Note
From the definition the following are critical;
a. Professional judgment
b. Most significance
c. Current period
d. Communication.
Requirements of the Standard
The standard in Paragraph 8 requires that the
auditor in considering areas of “most
significance” will take into account;
I. Areas of significant risks
II. Areas of significant difficulty during the audit
III. Circumstances that required significant
modification of planned approach to the audit
Report Section on KAM
The determined KAM are communicated in a
separate section of the Audit’s Report.
The section of the report shall state that “ the
auditor’s opinion on the FS is NOTmodified with
respect to any of the KAM and that the auditor
does not express an opinion on these individual
matters”.
Report Section on KAM Cont’d
The KAM section of the report shall include;
Explanations for why each is a KAM and theireffect on the audit,
How it was addressed in the audit, Procedures performed, outcome and any key
observations. A cross reference to the related disclosure(s), if
any, in the FS.
Reasons for not including KAM
Paragraph 11 of the standard indicates;
A matter giving rise;
to a qualified or adverse opinion (ISA 705), or
existence of a material uncertainty related to events
or conditions that may cast significant doubt on
entity’s ability to continue as Going Concern (ISA
570) are KAM by nature. However, the Auditor Shall;
Reasons for not including KAM cont’d Report on these matter(s) in accordance with
applicable standard . Do NOT describe these matter(s) in KAM section
of the auditor’s report. Include a reference to the Basis for Qualified or
Adverse Opinion or the Going Concern Section(s)in the Introductory language of the KAM Section.
KAM is prohibited for a Disclaimer of Opinionsituations.
Examples of KAMs
Key Audit Matters may include; Areas of complexity and significant management
judgment which may affect the audit and report. Critical events/transactions of significant effect on
FS Accounting estimates and respective disclosures Circumstances that posed challenges in the
execution of the audit. Situations by the auditor that led to consultation
with others (auditors or experts).
Are KAMs mandatory?
No!However;
The Audit Report must contain the KAM(s) section and a statement indicating there were No KAMs.
ISA 700: Forming an Opinion and Reporting on FS
This revision came into effect on 17th June, 2016
It’s the auditor’s responsibility to form an opinionon FS based on conclusions drawn from auditevidence.
The opinion must be clear and concise in a writtenReport.
The standard should be read in conjunction withISA 200 – overall objectives of the independentauditor and the conduct of an Audit in accordancewith ISA.
ISA 700: Forming an Opinion and Reporting on FS To form an opinion the auditor must be satisfied
that: S/He has obtained reasonable assurance as to
whether FS as a whole are free from materialmisstatements, due to error or fraud.
Sufficient appropriate evidence audit evidencewas obtained.
FS were prepared in accordance with relevantstandards and necessary disclosures are made.
Types of Opinions
1. Unmodified / Unqualified Opinion2. Modified Opinion – ISA 705
a) Qualified Opinion – Misstatements are materialbut not pervasive to the FS.
b) Adverse Opinion – Misstatements are materialand pervasive.
c) Disclaimer of Opinion – Inability to obtainappropriate sufficient audit evidence to base anopinion.
Circumstances of Modification
The auditor SHALL modify the opinion in theauditors report when:
1. The auditor concludes that, based on auditevidence obtained, the FS as a whole are NOTfree from material misstatement.
2. The auditor is unable to obtain sufficientappropriate audit evidence to conclude that FS asa whole are free from material misstatements.
Illustrative table of modified Opinions
Nature of matter giving rise to the modification
Auditor's judgment about thepervasiveness of the effects orpossible effects on the FinancialStatements
Material but Not pervasive
Material and Pervasive
Financial Statements are materially misstated
Qualified Opinion Adverse Opinion
Inability to obtain sufficient appropriate audit evidence
Qualified Opinion Disclaimer
ISA 570: SCOPE
The standard deals with the auditorsresponsibilities in the audit of FSs relating togoing concern and implications for the auditor’sreport.
Under Going Concern basis accounting, the FS areprepared on the assumption that the entity is agoing concern and will continue its operations forthe foreseeable future.
Assessment of Entity's ability as GC
Management may be required to make a specificassessment of the entity’s ability to continue as aGoing Concern.
The auditor’s responsibilities are to obtainsufficient appropriate audit evidence regarding,and conclude on, the appropriateness ofmanagement’s use of the Going Concern basis ofaccounting in the preparation of FS, and toconclude, based on them, whether a materialuncertainty exists.
Definition
ISA 520 – analytical procedures meansevaluations of financial information throughanalysis of possible (plausible) relationshipsbetween financial and non-financial data.
Examples of Analytical procedures1. Comparing information with prior years.2. Examining budget performances and forecasts.3. Benchmarking to the industry performance.
ISA 520 -Scope
Deals with auditor’s analytical procedures assubstantive procedures (Substantive analyticalprocedures).
It also deals with auditor’s responsibility toperform analytical procedures that assists informing an opinion.
Suitability of Analytical Procedures (AP)
AP Applies in situations of large volume ofinformation.
Where available data is credible. Level of risk of material misstatement is low. Where tests of details are also performed on the
same data/assertion. Where controls over preparation of information
are functional and assures of completeness,accuracy and validity.