Chapter 16

The auditors’ report

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 Learning objectives
• To explain the nature and importance of the audit report.
• To describe the various components of the audit report.
• To explain the nature of the auditor’s responsibility for ‘other information’ contained in the annual report.
• To discuss the nature of the assurance provided in the audit report in respect of information other than financial
statements disclosed in the annual report.
• To describe the auditors’ responsibilities in respect of the directors’ report and the strategic report.
• To discuss the information provided in audit report about the auditor’s work.
• To discuss when an ‘emphasis of matter’ or ‘other matter’ paragraph might be required in the audit report.
• To discuss the various forms of modified opinions and identify the circumstances under which each type would be
issued by auditors.
• To outline the reason why auditors have started to include a disclaimer to third parties paragraph in the audit report.
• To outline auditors’ responsibilities for reporting on corporate governance issues.
• To outline the procedures the auditor will undertake to review the corporate governance statement.
• To describe the implications of electronic publication of the audit report.

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 Signing audit report completes audit process
• In signing audit report auditors communicate satisfaction or dissatisfaction
with financial statements.
• If satisfied – unmodified or clean opinion.
• If dissatisfied – modified opinion (qualified opinions – disclaimers of opinion –
opinions with ‘emphasis of matter’ or ‘other matter’ paragraph).
• FRC and APB earlier – adopted auditing standards issued by IAASB, except ISA
700 and APB revised and issued in 2013 a clarified version of ISA 700 for use in
the UK and Ireland.
• APB/FRC did adopt ISA 705 and ISA 706.

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 The modified audit opinion – main features
• Title
• To whom the report is addressed
• Identification of statements upon which the auditors are reporting
• Statement of auditors’ responsibilities
• Statement of directors’ responsibilities
• Scope of the audit of the financial statements
• The opinion on truth and fairness and compliance with CA 2006 and
accounting standards
• Emphasis of ‘matter’ or ‘other matters’ paragraphs

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The unmodified opinion (1)
Figure 16.1

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The unmodified opinion (2)
Figure 16.1 (continued)

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The unmodified opinion (3)
Figure 16.1 (continued)

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The unmodified opinion (4)
Figure 16.1 (continued)

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 Directors’ Report
• Companies Act 2006 requires a directors’ report to be prepared and for the auditor to
report whether the information contained therein is consistent with the financial
statements.
• Where the auditors consider that the directors’ report is inconsistent with the
financial statements they should discuss the matter with the directors and try to get
them to adjust either the directors’ report or the financial statements to remove the
inconsistency.
• If the directors refuse and the auditors believe the inconsistency is material, the
auditor is required to describe the inconsistency in a separate paragraph in their
report.

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 Strategic Report
• Statutory instrument in 2013 states that all companies except small companies)
should prepare a strategic report to … inform users about the company and … how
successful the directors have been in promoting the success of the company. All
strategic reports must contain the following information:
– A fair review of the company’s business.
– A description of the principal risks and uncertainties facing the company.
• Quoted companies are required to disclose additional matters (see p 673-4)
• Auditors have, in their audit report, to provide a positive statement that the strategic
report is consistent with the financial statements

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 Quoted companies – additional audit requirements

• Explanations of audit work for companies complying with the UK Corporate

Governance Code
• Directors’ remuneration
• Matters reported on by exception
• Corporate governance

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Companies complying with the UK Corporate Governance Code:
Explanations of audit work

• Since 2013 ISA 700 requires the following to be disclosed in the audit report:
i. Description of the assessed risks of material misstatement highlighted by the auditor as
having the greatest effect on:
a) the overall audit strategy
b) the allocation of resources in the audit
c) directing the efforts of the audit team.
ii. An explanation of how the auditor applied the concept of materiality in planning and
performing the audit.
iii. The audit report should provide an overview of the scope of the audit, identifying how
they addressed the issues of risk and materiality.

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 Directors’ remuneration
• The Cos Act 2006 states quoted companies must prepare an annual directors’ remuneration
report, and the auditors must ensure it is consistent with their knowledge of the company.
• They have specific responsibility for checking the accuracy and completeness of information in
a table showing as a single figure total remuneration of each director and the amount of each
component, such as salary, fees, benefits, deferred amounts, the value of shares received or
share options, and pension input.
• If it has not been prepared in accordance with the Act, and is not in agreement with the
accounting records and returns, they must give details in the audit report. Before doing this
they should try to convince the directors/audit committee to include the correct information
in the remuneration report.
• Since the remuneration report contains both an audited and an unaudited part they should
ensure the two parts are adequately distinguished in the annual report.

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 Matters reported on by exception: FRC suggested wording

• We have nothing to report in respect of the following:

• Under the ISAs (UK and Ireland), we are required to report to you if, in our opinion,
information in the annual report is:
– materially inconsistent with the information in the audited financial statements; or
– apparently materially incorrect based on, or materially inconsistent with our knowledge of
the Group acquired in the course of performing our audit; or
– is otherwise misleading.
• In particular, we are required to consider whether we have identified any inconsistencies
between our knowledge acquired during the audit and the directors’ statement that they
consider the annual report is fair, balanced and understandable and whether the annual
report appropriately discloses those matters that we communicated to the audit committee
which we consider should have been disclosed.

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 Emphasis of matter paragraph

• Likely to be rare.
• A modification but not a qualification, but paragraph refers to
financial statement note where matter is described:
– An uncertainty relating to the future outcome of exceptional litigation or
regulatory action or ability to continue as a going concern
– Early application of a new accounting standard with pervasive effect in
advance of its effective date.
– A major catastrophe with significant effect on the entity’s financial position.

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 Emphasis of Matter – uncertain outcome of potential
litigation
• In forming our opinion on the financial statements, which is not modified, we have considered the
adequacy of the disclosures made in note 22 to the financial statements concerning the uncertain
outcome of the potential litigation following the receipt of two letters before claim from legal advisors to
Craig Whyte and Aidan Earley. The Company commissioned an independent investigation … to
investigate the first letter before claim, which was concluded on 17 May 2013. On 30 May 2013,
following the receipt of a second letter before claim, the Company announced that the investigation had
been concluded. The Company is satisfied that a thorough investigation was conducted despite the
inherent limitations of a private inquiry, and considers the claims have no legal merit. The Company has
also engaged the services of Allen and Overy to defend against these possible claims, and the Company
has had no communication with Messrs Whyte & Earley or their legal advisers since 30 May 2013. The
ultimate outcome of this matter cannot presently be determined, and accordingly no adjustments have
been made to these financial statements as a result of this matter.

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 Other matter paragraph examples

• MAY BE QUALIFICATION
• where limitation of scope imposed by management is pervasive but auditor
has not withdrawn from audit engagement – should disclaim an opinion and
explain in other matter paragraph why not possible to withdraw
• OR NOT A QUALIFICATION
• where an entity prepares two sets of financial statements in compliance with
two accounting frameworks, both appropriate, auditor may include an other
matter paragraph stating they have issued an audit report on another set of
financial statements prepared using a different Accounting Framework and
that they issued an audit report on those statements.

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 Forms of modification
Figure 16.2

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 Limitation of scope (1)

• Arises if auditors are not able to obtain all the evidence required to issue an
unqualified opinion.
• May be material but not persuasive – except for limitation – see pages 684-5.
• May be persuasive – disclaimer see pages 686–7

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 Limitation of scope (2)

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 Limitation of scope (3)

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Disclaimer of responsibility(1)

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Disclaimer of responsibility (2)

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 Disagreement

• Disagreement arises when auditors can form an opinion on a …

matter that differs from opinion of management. For instance:
– Inappropriate accounting policies
– Inappropriate application of accounting policies; or
– Inappropriate or inadequate disclosures.
• Material but not persuasive – except for disagreement – see page
691.
• Persuasive – adverse opinion – see page 692.

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Except for disagreement

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Adverse opinion

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 Disclaimer of responsibility

• Suggested wording following the ‘Bannerman’ case

• This report is made solely to the company’s members, as a body, in accordance
with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been
undertaken so that we might state to the company’s members those matters
we are required to state to them in an auditor’s report and for no other
purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company and the company’s members
as a body, for our audit work, for this report, or for the opinions we have
formed.

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 Reporting on corporate governance (1)
• Combined Code and Listing Rules set framework for responsibilities of
directors/auditors. Rules require directors of listed companies to set out in
the Annual Report how they have applied the Code principles in a way
useful and understandable to shareholders. The directors include a
statement on whether they have complied, and, where not, state which
provisions have not been complied with and why.
• Listing Rules require auditors to review ten provisions in the companies’
statement of corporate governance. Of particular importance is the
requirement for auditors to review whether the information in respect of
going concern and internal control are appropriately disclosed. Code
requires auditors to describe their reporting responsibilities – usually in
audit report.

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 Reporting on corporate governance (2)
• Where, a company does not comply with a Combined Code requirement,
within scope of the auditors’ review, but has properly disclosed fact in its
corporate governance statement, the auditors are not required to make
reference to non-compliance.
• Auditor need not perform additional procedures to determine the
appropriateness of reasons given for nondisclosure of a provision but
merely that the directors’ description of the non-disclosure is adequate.
Where auditors do not believe the disclosure of a departure from a
provision of the code has been adequate, they need to report this fact in
their audit report – not a qualification but an other matter.

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 Example of non-qualification of corporate governance
matters – Rolls Royce 2013
• Under the Listing Rules we are required to review:
• the directors’ statement set out on page 72, in relation to going
concern; and
• the part of the corporate governance report on page 39 relating to
the company’s compliance with the nine provisions of the UK
Corporate Governance Code (2010) specified for our review.
• We have nothing to report in respect of the above responsibilities
• Note: the 2012 Code increased to ten the number of provisions to
be reviewed

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Ten listing rules on which auditor is to report (1) Table 16.1

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Nine listing rules on which auditor is to report (2)
Table 16.1 (continued)

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Nine listing rules on which auditor is to report (3)
Table 16.1 (continued)

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Nine listing rules on which auditor is to report (3)
Table 16.1 (continued)

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 Electronic publication of auditors’ reports
• Publication of audit reports on internet problematic:
– Information on the web is more easily changed.
– May not be apparent what information audited.
– Information can be accessed world-wide.
• Where a client intends to distribute its financial statements electronically
auditors should:
– Review process by which electronic financial statements are derived from
manually signed accounts.
– Check proposed electronic version is identical in content with manually
signed accounts.
– Check conversion of manually signed accounts into an electronic form has
not distorted overall presentation of the financial information.

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Figure 16.1 Example of an unmodified audit opinion for a non-
publicly traded company

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Figure 16.2 Forms of qualification matrix

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