ISA 700 Revised & ISA701 THE AUDITOR'S REPORT ON FINANCIAL STATEMENTS & ITS MODIFICATIONS

LACPA ISA Presentation

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Overview of session
ISA 700 revised 1. Introduction 2. The auditor's report 3. Elements of the auditor's report 4. Illustration of the auditor's report ISA 701 Modified Reports
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ISA 700 Revised

1. Introduction

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Introduction
ISA 700 before latest revision, which is applicable to audit reports dated prior to 31 December 2006, used to cover the Standards and guidance on the Auditor's report on the FS and the modifications to the audit report ( unqualified and modified reports) ISA 700 revised and ISA 701 is applicable for audit reports dated on or after 31 December 2006. ISA 700 revised covers the standards and guidance of the Independent Auditor's Report on a Complete Set of General purpose Financial Statements. ISA 701 covers the Modifications to the Independence Auditor's report.

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ISA 700 Revised

2. The Auditor's Report

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The Auditor's Report on Financial Statements

Forming an Opinion on the Financial Statements The auditor's report should contain a clear expression of the auditor's opinion on the financial statements (''FS''). The auditor's opinion on a complete set of general purpose financial statements prepared in accordance with a financial reporting framework that is designed to achieve fair presentation states whether the FS ''give a true and fair view'' or ''are presented fairly, in all material respects,'' in accordance with the applicable financial reporting framework. The auditor should evaluate the conclusions drawn from the audit evidence obtained as the basis for forming an opinion on the financial statements.
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The Auditor's Report on Financial Statements

Forming an Opinion on the Financial Statements (cont'd) This evaluation includes considering whether:
The accounting policies selected and applied are consistent with the financial reporting framework and are appropriate in the circumstances;
The accounting estimates made by management are reasonable in the circumstances; The information presented in the FS, including accounting policies, is relevant, reliable, comparable and understandable; and The FS provide sufficient disclosures to enable users to understand the effect of material transactions and events on the information conveyed in the FS.
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ISA 700 Revised

2. Elements of the Auditor's Report

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Elements of the Auditor's Report

a) Title
The auditor's report should have a title that clearly indicates that it is the report

of an independent auditor.

b) Addressee
The auditor's report should be addressed as required by the circumstances of the engagement.

c) Introductory paragraph
It should identify the entity whose FS have been audited and should state that the FS have been audited. It should also: Identify the title of each of the FS that comprise the complete set of FS. Refer to the summary of significant accounting policies and other explanatory notes; and Specify the date and period covered by the FS.
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Elements of the Auditor's Report (cont'd)

d) Management's responsibility for the financial statements The auditors should state that management is responsible for the preparation and the fair presentation of the FS in accordance with the applicable financial reporting framework and that this responsibility includes:
Designing, implementing and maintaining internal control relevant to the preparation and fair presentation of FS that are free from material misstatement; Selecting and applying appropriate accounting policies; and Making accounting estimates that are reasonable in the circumstances.

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Elements of the Auditor's Report (cont'd)

e) Auditor's responsibility
The auditor's report should state that : the responsibility of the auditor is to express an opinion on the FS based on the audit. the audit was conducted in accordance with International Standards on Auditing. the auditor believes that the audit evidence the auditor has obtained is sufficient and appropriate to provide a basis for the auditor's opinion

The auditor's report should describe an audit by stating that:

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the FS The procedures selected depends on the auditor's judgement, including the assessment of the risks of material misstatement of the FS, whether due to fraud or error An audit also includes evaluating the appropriateness of the accounting policies used, the reasonableness of the accounting estimates made by management, as PwC well as the overall presentation of the FS. 11

Elements of the Auditor's Report (cont'd)

f) Auditor's opinion
An unqualified opinion that the FS give a true and fair view or are presented fairly, in all material respects, in accordance with applicable financial reporting framework. An expression of opinion on the financial statements. A reference of the financial reporting framework used to prepare the FS When IFRS are not used, the reference to the financial reporting framework should identify the jurisdiction or country of origin of the financial reporting framework e.g. United Kingdom generally accepted accounting standards.
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Elements of the Auditor's Report (cont'd)

g) Other reporting responsibilities;
Other reporting responsibilities should be addressed in a separate section in the auditor's report that follows the opinion paragraph. h) Auditor's signature The auditor's report should be signed.

i)

Date of the report

Should date the report on FS no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the opinion on the FS.

j)

Auditor's address
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Illustration of The Auditor's Report

ISA 700 Revised Illustration of the Auditor's Report

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Illustration of The Auditor's Report

Independent auditor's report To the shareholders of ABC Company
We have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as at 31 December 2005, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. 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. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. PwC
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Illustration of The Auditor's Report

Independent auditor's report To the shareholders of ABC Company (cont'd)
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 whether the financial statements are free from material misstatement. 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 judgement, 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
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Illustration of The Auditor's Report

Independent auditor's report To the shareholders of ABC Company (cont'd)
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 for our audit opinion.

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Illustration of The Auditor's Report

Independent auditor's report To the shareholders of ABC Company (cont'd)

Opinion
In our opinion, the financial statements give a true and fair view of (or 'present fairly, in all material respects,') the financial position of ABC Company as of 31 December 2005, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (or [title of financial reporting framework with reference to the country of origin]). Auditor Date Address
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Illustration of The Auditor's Report

Illustration of the Auditor's Report based on ISA 700 before revision applicable on audit reports dated prior to 31 December 2006

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Illustration of The Auditor's Report

Independent auditor's report To the shareholders of ABC Company
We have audited the accompanying balance sheet of the ABC Company as of 31 December 2005, and the related statements of income and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. 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 plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. PwC
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Illustration of The Auditor's Report

Independent auditor's report To the shareholders of ABC Company (cont'd)

In our opinion, the financial statements give a true and fair view of (or 'present fairly, in all material respects,') the financial position of the Company as of 31 December 2005, and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards (or [title of financial reporting framework with reference to the country of origin]). Auditor Date Address

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ISA 701

Modified Reports

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Modified Reports
Matters That Do Not Affect The Auditor's Opinion

a) Emphasis of matter
Matters That Do Affect the Auditor's Opinion a) Qualified opinion,

b) Disclaimer of opinion, or
c) Adverse opinion.

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Modified Reports (Cont'd)

Matters That Do Not Affect The Auditor's Opinion
a) Adding an emphasis of paragraph; b) Instances include i. Highlighting a material matter regarding going concern problem matter paragraph after the opinion

ii. Highlighting a matter affecting the FS which is included in a note in the FS that more extensively discusses the matter iii. The existence of a significant uncertainty (other than going concern), the resolution of which is dependent upon future events and which may affect the FS;
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Modified Reports (Cont'd)

Illustration of an emphasis of matter paragraph
In our opinion ..(same as an unqualified opinion) Without qualifying our opinion we draw attention to Note XX to the financial statements. The accumulated losses of the company exceed its capital

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Modified Reports (Cont'd)

Matters That Do Affect The Auditor's Opinion
a) Circumstances which require the issuance of a modified opinion: i. There is a limitation on the scope of the auditor's work >> could lead to a qualified opinion or a disclaimer of opinion; ii. There is a disagreement with management regarding the acceptability of the accounting policies selected, the method of their application or the adequacy of the financial statement disclosures. >> could lead to a qualified opinion or an adverse opinion.

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Modified Reports (Cont'd)

A qualified opinion: a) Disagreement with management; b) Limitation on scope Not so material and pervasive as to require an adverse opinion or a disclaimer of opinion.

Expressed as being ''Except for'' the effects of the matter to which the qualification relates.

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Modified Reports (Cont'd)

A disclaimer of opinion: a) Limitation on scope

So material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and accordingly is unable to express an opinion on the financial statements.
the auditor's report should describe the limitation and indicate the possible adjustments to the financial statements that might have been determined to be necessary had the limitation not existed.

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Modified Reports (Cont'd)

An adverse opinion: a) Disagreement with management

So material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements.

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Modified Reports (Cont'd)

Illustration of a limitation on Scope Qualified Opinion:
''We have audited ... (remaining words are the same as unqualified opinion). Management is responsible for . .. (remaining words are the same as unqualified opinion). Our responsibility is to express an opinion on these financial statements based on our audit. Except as discussed in the following paragraph, we conducted our audit in accordance with ... (remaining words are the same as unqualified opinion).

We did not observe the counting of the physical inventories as of December 31, 20X5, since that date was prior to the time we were initially engaged as auditors for the Company. Owing to the nature of the Company's records, we were unable to satisfy ourselves as to inventory quantities by other audit procedures. In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to satisfy ourselves as to physical inventory quantities, the financial statements give a true and ...(remaining PwC words are the same as unqualified opinion).'' 30

Modified Reports (Cont'd)

Illustration of a limitation on Scope Disclaimer of Opinion:
''We were engaged to audit the accompanying financial statements of the ABC Company which comprise the balance sheet as of December 31, 20X1, and the income statement, statement of changes in equity and cash flows for the year then ended and a summary of significant accounting policies and other explanatory notes. Management is responsible for . .. (remaining words are the same as unqualified opinion). (Omit the sentence stating the responsibility of the auditor). (The paragraph discussing the scope of the audit would either be omitted or amended according to the circumstances.)

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Modified Reports (Cont'd)

Illustration of a limitation on Scope Disclaimer of Opinion:
(Add a paragraph discussing the scope limitation as follows:) We were not able to observe all physical inventories and confirm accounts receivable due to limitations placed on the scope of our work by the Company. Because of the significance of the matters discussed in the preceding paragraph, we do not express an opinion on the financial statements.''

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Modified Reports (Cont'd)

Illustration of Disagreement on Accounting Policies Inappropriate Accounting Method Qualified Opinion:
''We have audited ... (remaining words are the same as unqualified opinion).

Management is responsible for . .. ( the same as unqualified opinion).

Our responsibility is . (remaining words are the same as unqualified opinion). As discussed in Note X to the financial statements, no depreciation has been provided in the financial statements which practice, in our opinion, is not in accordance with International Accounting Standards. The provision for the year ended December 31, 20X5, should be xxx based on the straight-line method of depreciation using annual rates of 5% for the building and 20% for the equipment. Accordingly, the fixed assets should be reduced by accumulated depreciation of xxx and the loss for the year and accumulated deficit should be increased by xxx and xxx, respectively. In our opinion, except for the effect on the financial statements of the matter referred to in the preceding paragraph, the financial statements give a true and ... (remaining words are the same as unqualified opinion).'' PwC
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Modified Reports (Cont'd)

Illustration of Disagreement on Accounting Policies Inadequate Disclosure Qualified Opinion:
''We have audited ... (remaining words are the same as unqualified opinion). Management is responsible for . .. ( the same as unqualified opinion). Our responsibility is . (remaining words are the same as unqualified opinion). On January 15, 20X6, the Company issued debentures in the amount of xxx for the purpose of financing plant expansion. The debenture agreement restricts the payment of future cash dividends to earnings after December 31, 19X5. In our opinion, disclosure of this information is required by ...

In our opinion, except for the omission of the information included in the preceding paragraph, the financial statements give a true and ... (remaining words are the same as unqualified opinion).'' PwC
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Modified Reports (Cont'd)

Illustration of Disagreement on Accounting Policies Inadequate Disclosure Adverse Opinion:
''We have audited ... (remaining words are the same as unqualified opinion). Management is responsible for . .. ( the same as unqualified opinion). Our responsibility is . (remaining words are the same as unqualified opinion).

(Paragraph(s) discussing the disagreement).

In our opinion, because of the effects of the matters discussed in the preceding paragraph(s), the financial statements do not give a true and fair view of (or do not 'present fairly') the financial position of ABC Company as of 31 December 2005, and of its financial performance and its cash flows for the year then ended in accordance with International Financial PwC Reporting Standards.'' 35

Questions

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QUESTIONS

THE END

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