Audit Reports & Communications

🟢 Lite — Quick Review (1h–1d)

Audit Reports & Communications — Key Facts

• ISA 700 — Forming an opinion and reporting on financial statements
• ISA 701 — Communicating Key Audit Matters (KAM)
• ISA 705 — Modifications to the opinion in the independent auditor’s report
• ISA 706 — Emphasis of Matter paragraphs and Other Matter paragraphs
• ISA 720 — Other information in documents containing audited FS

Unmodified Opinion (Clean Opinion):

• FS present fairly in all material respects
• Prepared in accordance with applicable framework

Modified Opinions (ISA 705):

• Qualified Opinion: Material misstatement (but not pervasive) OR limitation (but not pervasive)
• Adverse Opinion: Material AND pervasive misstatements
• Disclaimer of Opinion: Cannot obtain sufficient appropriate evidence AND pervasive

Key Audit Matters (ISA 701): For listed entities — matters of most significance requiring significant auditor attention (disclosed voluntarily for non-listed)

⚡ Exam Tip: “Pervasive” is the key word. Pervasive = affects many items, not just isolated items. If misstatement is widespread → Adverse or Disclaimer (not Qualified).

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🟡 Standard — Regular Study (2d–2mo)

Audit Reports & Communications — Detailed Content

ISA 700 — The Auditor’s Report:

Standard Unmodified Report Structure:

1. Title (Independent Auditor's Report)
2. Addressee (Shareholders/Those Charged with Governance)
3. Opinion paragraph (clean or modified)
4. Basis for Opinion paragraph
5. Going Concern paragraph (if applicable)
6. Key Audit Matters (listed entities only — ISA 701)
7. Other Information paragraph (ISA 720)
8. Responsibilities (Management/TCWG/Auditor)
9. Auditor's Signature
10. Date and Location

Opinion Paragraph Wording (Unmodified):

“In our opinion, the financial statements present fairly, in all material respects, the financial position of [Entity] as at [date], and its financial performance and cash flows for the year then ended in accordance with [applicable financial reporting framework].”

ISA 705 — Modified Opinions:

Situation	Opinion	Basis
Material misstatement (not pervasive)	Qualified	”except for” the misstatement
Material misstatement (pervasive)	Adverse	FS are materially misstated
Limitation of scope (not pervasive)	Qualified	”subject to” the limitation
Limitation of scope (pervasive)	Disclaimer	Unable to express an opinion

Qualified Opinion — Example Wording:

“Our opinion is qualified on the basis of the matter described in the Basis for Qualified Opinion paragraph. The company failed to capitalize finance leases totaling Rs. X million…”

Adverse Opinion — Example Wording:

“In our opinion, because of the significance of the matters described in the Basis for Adverse Opinion paragraph, the financial statements do not present fairly…”

Disclaimer of Opinion — Example Wording:

“We were unable to obtain sufficient appropriate evidence about [matter]. Accordingly, we do not express an opinion on the financial statements.”

ISA 706 — Emphasis of Matter (EOM) and Other Matter (OM):

Emphasis of Matter (EOM): Used to draw attention to a matter PRESENTED AND DISCLOSED in FS that is fundamental to users’ understanding.

• Not a modified opinion
• Placed immediately after opinion paragraph
• Uses wording: “We draw attention to…”

Examples:

• Going concern uncertainty
• Major catastrophe affecting assets
• Significant regulatory changes

Other Matter (OM): Used when auditor is unable to withdraw but OTHER matters exist that are relevant to users’ understanding.

• Used when restriction on scope exists BEFORE appointment
• Used when reporting on other legal requirements

ISA 701 — Key Audit Matters (KAM):

For listed entities (mandatory from 2016 for listed companies globally):

KAMs are matters that, in the auditor’s professional judgment, were of most significance in the audit of current period FS.

Determining KAMs — Process:

Step 1: Identify matters requiring significant auditor attention
Step 2: Evaluate which are most significant (magnitude, complexity, judgment)
Step 3: Select 3-6 KAMs (avoid too many)
Step 4: Describe each KAM with:
         - Why it was significant
         - How it was addressed in audit
         - Reference to related disclosure

Examples of KAMs:

• Revenue recognition (judgments in timing, amount)
• Goodwill impairment (significant estimates)
• Valuation of complex financial instruments
• Business combinations
• Going concern assessments

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🔴 Extended — Deep Study (3mo+)

Comprehensive Audit Reports & Communications Notes

Comparative Financial Statements:

When FS include comparative figures:

• Auditor’s report covers CURRENT period only
• If prior period FS are restated → new report on restated comparatives
• If comparatives are unaudited → state in Other Matter paragraph
• If emphasis on prior year matter → EOM paragraph applies to comparatives

ISA 720 — Other Information:

Auditor must read other information (annual report, chairman’s statement, MD&A) to:

• Identify material inconsistencies with audited FS
• Consider whether other information is misstated

Material inconsistency found:

• Request management to revise other information
• If not revised → include in Other Matter paragraph OR modify opinion
• Consider implications for auditor’s report

Responsibilities Paragraphs:

Management’s Responsibility:

“Management is responsible for the preparation and fair presentation of these financial statements in accordance with [framework]. This includes: designing, implementing and maintaining internal controls relevant to preparation…”

Those Charged with Governance:

“Those charged with governance are responsible for overseeing the entity’s financial reporting process.”

Auditor’s Responsibility:

“Our responsibility is to express an opinion on these financial statements based on our audit conducted in accordance with ISAs…”

ISA 700 (Revised) — Key Changes:

The revised ISA 700 (effective for audits of FS for periods ending on or after December 15, 2016):

• Auditor’s report must be in writing and in English (or local equivalent)
• Must address Going Concern separately
• Must address KAM for listed entities
• Auditor must be independent (explicit statement in report)
• Basis for Opinion must explain HOW the opinion was formed

Communicating with TCWG — ISA 260 (ISA 260 revised → ISA 260/ISA 450):

The auditor must communicate with TCWG:

• Planning matters (audit strategy, scope, timing)
• Significant findings (accounting policies, estimates, corrections)
• Internal control deficiencies (significant deficiencies in writing)
• Audit adjustments (recorded and unrecorded)
• Going concern (material uncertainty)

Format of Communication (ISA 260):

Written Representation to TCWG should include:
□ Acknowledgment of responsibility
□ Confirmation of understanding of engagement terms
□ Statement on FS preparation (applicable framework)
□ Statement on TCWG oversight responsibility
□ Request for confirmation of completeness of information
□ Request for representation letter

Going Concern in Audit Report — Decision Tree:

Is there material uncertainty about going concern?
        ↓
YES ↓ NO
        ↓
Adequately disclosed?     → Unmodified + EOM paragraph
(In notes + in FS)              (ISA 706)
        ↓ NO
        ↓
Qualified (disclosure) OR Adverse

Qualified vs Adverse vs Disclaimer — Decision Framework:

Is there a limitation of scope?
        ↓ YES
Unable to obtain sufficient appropriate evidence?
        ↓ YES (PERVASIVE)
        → Disclaimer of Opinion

Is there a material misstatement?
        ↓ YES (PERVASIVE)
        → Adverse Opinion

        ↓ (NOT PERVASIVE)
        → Qualified Opinion ("Except for")

Pervasive vs Not Pervasive:

Pervasive	Not Pervasive
Affects majority of FS items	Affects isolated items
Affects key assertions across FS	Limited to specific items
Could change overall FS impression	Doesn’t change overall FS impression
Impacts aggregated figures significantly	Isolated to specific disclosure

Common Exam Mistakes:

Mistake	Correction
”Qualified = minor issue”	Qualified = material but NOT pervasive — still significant
”EOM = modified opinion”	EOM is separate paragraph — opinion can still be unmodified
”KAM required for all entities”	KAM ONLY mandatory for listed entities; voluntary for others
”Disclaimer = no work done”	Disclaimer = auditor couldn’t obtain evidence (client restriction or circumstance)

⚡ High-Yield Modified Opinion Decision Table:

Scenario	Opinion
Receivables misstated by Rs. 5M (total assets = Rs. 100M) — isolated	Qualified
Revenue overstated by 40% — pervasive	Adverse
Management restricts access to inventory — cannot verify Rs. 30M of Rs. 40M total	Disclaimer
Single lawsuit provision inadequate — isolated but material	Qualified
FS prepared on wrong framework (going concern not addressed) — pervasive	Adverse

⚡ Audit Report — Quick Checklist:

□ Is the report addressed correctly?
□ Is the opinion clearly stated (first paragraph)?
□ Does Basis for Opinion explain how opinion was formed?
□ Is Going Concern addressed (if applicable)?
□ Are KAMs included (listed entities)?
□ Is Other Information paragraph included (ISA 720)?
□ Are responsibility paragraphs present and accurate?
□ Is the report signed, dated, and located?
□ Is the date AFTER completion of all procedures?
□ Have TCWG been communicated in writing?

⚡ Exam Answer Framework for Audit Report Questions:

1. Read the scenario — identify the ISSUE (what went wrong?)
2. Classify the issue — misstatement OR limitation
3. Assess pervasiveness — pervasive or not?
4. Determine opinion type — Qualified/Adverse/Disclaimer
5. Draft the appropriate paragraph wording
6. Consider EOM paragraph if going concern or other matter applies
7. Ensure correct structure of report

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