1.

0 REVIEW OF FINANCIAL STATEMENTS

Definition
A review of financial statements by an independent auditor or public accountant involves
making inquiries of management and other key personnel of the Company and performing
analytical procedures on the financial information to conclude with limited assurance that the
financial statements of a Company are free of material misstatement.

Objective
The objective of a review of financial statements is to allow the practicing professional to
indicate whether, based on the use of procedures, he or she has reached a conclusion that
leads him or her to believe that the financial information has been prepared in all material
respects in accordance with the accounting framework in force.

Scope
The scope of a review of financial statements includes planning through interviews with
management and then, based on the professional judgment of the independent auditor or
public accountant, determining the most appropriate procedures to express a conclusion on
the Company’s financial statements.

Procedures in a review of financial statements

Financial statement review procedures generally include :

 Obtaining knowledge of the Company’s business and the sector in which it operates.
 Inquiry into the accounting principles and practices applied by the Company.
 Inquiries regarding accounting records procedures, classification and grouping of
transactions, collection of information for disclosure of financial statements and their
preparation.
 Inquiries regarding all material statements included in the financial statements.
 Analytical procedures designed to identify unusual relationships and specific items.
 Inquiries regarding resolutions adopted by the General Shareholders’ Meeting, Board
of Directors, Committees, among others.
 Inquiries with accounting personnel regarding accounting and financial matters.
Conclusion of a review of financial statements
At the end of the procedures executed by the independent auditor or public accountant, a
report is prepared stating the conclusions based on the evidence obtained during the
execution of the work. In the report of a review of the financial statements, the report
describes the scope of the assignment, so that the user can understand the nature of the work
performed and to clarify that an audit has not been performed and, therefore, does not express
an audit opinion.

Is a review of financial statements the same as a financial audit?

A review of financial statements does not satisfy the requirements of a financial audit,
because, in a review, procedures are executed that end with a conclusion with limited
certainty. The main procedures in a review are the inquiry (understanding of the nature of the
business and accounting practices) and analytical procedures applied to the financial
statements.
A financial audit, apart from obtaining an understanding of the business, also includes an
understanding of the Company’s internal control over financial reporting. Based on that
understanding, the auditor performs tests of control and substantive tests to evaluate whether
the balances in the financial statements are fairly stated in accordance with current
accounting standards. Upon completion of the audit procedures, the independent auditor
issues an opinion on the reasonableness of the financial statements in conformity with the
accounting standards in force.
Finally, a review of financial statements provides reasonable assurance regarding the
reasonableness of the financial statements, whereas a financial audit involves more extensive
procedures for expressing an opinion on the Company’s financial position and performance.

When to request a review of financial statements?

A Company may request a review of financial statements when it does not yet feel prepared
to undertake a financial audit because it might have an adverse opinion on the reasonableness
of the financial statements.
With a review of the financial statements, the Company will be able to improve its
accounting practices in general terms; however, it is clarified that accounting errors may exist
because of the moderate security.
The cost of servicing a financial statement audit is less than the cost of a financial audit
because the procedures performed are limited.

2.0 ANALYTICAL PROCEDURES

To obtain audit evidence, the auditor performs one – or a combination – of the

following procedures:

 inspection
 observation
 external confirmation
 inquiry
 reperformance
 recalculation
 analytical procedures.

It is mandatory that the auditor should perform risk assessment for the identification and
assessment of risks of material misstatement at the financial statement and assertion level,
and the risk assessment procedures should include analytical procedures (ISA 315). It is also
mandatory that the auditor should perform analytical procedures near the end of the audit that
assess whether the financial statements are consistent with the auditor’s understanding of the
entity (ISA 520).

Analytical procedures are also commonly used in non-audit and assurance engagements, such
as reviews of prospective financial information, and non-audit reviews of historical financial
information. While the use of analytical procedures in such engagements is not covered in the
ISAs, the principals regarding their use are relevant.

Definition of analytical procedures 

Analytical procedures consist of ‘evaluations of financial information through analysis of

plausible relationships among both financial and non-financial data’. They also encompass
‘such investigation as is necessary of identified fluctuations or relationships that are
inconsistent with other relevant information or that differ from expected values by a
significant amount’ (ISA 520). A basic premise underlying the application of analytical
procedures is that plausible relationships among data may reasonably be expected to exist and
continue in the absence of conditions to the contrary.

 The auditor should apply analytical procedures as risk assessment procedures to obtain an
understanding of the entity and its environment.
 Analytical procedures means evaluation of financial information made by a study of
plausible relationship among both financial and non financial data.
 Analytical procedures also encompass both investigation of identified fluctuations and
relationships that are inconsistent with other relevant information or deviate significantly
from predicted amounts.
Nature and purpose of analytical procedures

 Analytical procedures include the consideration of comparison of the entity` financial

information with for example;
comparable information for prior periods.
anticipated results of the entity such as budgets of forecasts.
similar industry information such as a comparison f the entity’s ratio of sales to
accounts receivable with industry averages or with other entities of comparable size in
the entity`s industry.
 Analytical procedures also include consideration of relationships:
 Amongst elements of financial information that will be expected to conform to a
predictable pattern based on the entity’s experience such as gross margin percentage.
 Between financial information and relevant non financial information such as payroll
costs to number of employees.

Purposes of analytical procedures

Analytical procedures are used throughout the audit process and are conducted for three
primary purposes:

1. Preliminary analytical review – risk assessment (required by ISA 315)

Preliminary analytical reviews are performed to obtain an understanding of the
business and its environment (eg financial performance relative to prior years and
 relevant industry and comparison groups), to help assess the risk of material
misstatement in order to determine the nature, timing and extent of audit procedures,
ie to help the auditor develop the audit strategy and programme.
2. Substantive analytical procedures Analytical procedures are used as substantive
procedures when the auditor considers that the use of analytical procedures can be
more effective or efficient than tests of details in reducing the risk of material
misstatements at the assertion level to an acceptably low level.

3. Final analytical review (required by ISA 520) Analytical procedures are performed as
an overall review of the financial statements at the end of the audit to assess whether
they are consistent with the auditor’s understanding of the entity. Final analytical
procedures are not conducted to obtain additional substantive assurance. If
irregularities are found, risk assessment should be performed again to consider any
additional audit procedures are necessary.
Furthermore, Analytical procedures are used for the following purposes:
 As risk assessment procedures to obtain an understanding of the entity and it’s
environment
 As substantive procedures when their use can be more efficient and effective than tests of
details in reducing the risk of material misstatements at the assertion level to an
acceptably low level.
 As an overall review of the financial statements at the end of the audit.
Extent of use
Factors determining the extent of use of substantive procedures include:
 the closeness of relationships between the items of data.
 analytical procedures are more appropriate when relations are plausible and predictable
for example commission and sales revenue.
 the availability and reliability of financial data.
 the relevance of information available
 the comparability of the available information.
Extent of reliance
Factors determining the extent of reliance on substantive analytical procedures include:
 the risk that analytical procedures will fail to identify a material misstatement.
 the less significant an account balance or class of transactions, the more reliance can be
placed on analytical procedures.
 a reduction in the extent of tests of detail will be justified where significant fluctuations
and inconsistencies have been corroborated.
 Income and expenditure accounts tend to be more predictable than balance sheet items.
 Non recurring accounting entries such as asset revaluations do not lend themselves to
effective analytical procedures.
 If control risk is high more reliance on tests of details for drawing conclusions may be
required.

Use of substantive analytical procedures

One of the objectives of ISA 520 is that relevant and reliable audit evidence is obtained when
using substantive analytical procedures. The primary purpose of substantive analytical
procedures is to obtain assurance, in combination with other audit testing (such as tests of
controls and substantive tests of details), with respect to financial statement assertions for one
or more audit areas. Substantive analytical procedures are generally more applicable to large
volumes of transactions that tend to be more predictable over time.

The application of substantive analytical procedures is based on the expectation that

relationships among data exist and continue in the absence of known conditions to the
contrary. The presence of these relationships provides audit evidence as to the completeness,
accuracy and occurrence of transactions. Due to their nature, substantive analytical
procedures can often provide evidence for multiple assertions, identify audit issues that may
not be apparent from more detailed work, and direct the auditor’s attention to areas requiring
further investigation. Furthermore, the auditor may identify risks or deficiencies in internal
control that had not previously been identified, which may cause the auditor to re-evaluate his
planned audit approach and require the auditor to obtain more assurance from other
substantive testing than originally planned.

To derive the most benefit from substantive analytical procedures, the auditor should perform
substantive analytical procedures before other substantive tests because results of substantive
analytical procedures often impact the nature and extent of detailed testing. Substantive
analytical procedures might direct attention to areas of increased risk, and the assurance
obtained from effective substantive analytical procedures will reduce the amount of assurance
needed from other tests.

There are four elements that comprise distinct steps that are inherent in the process to using
substantial analytical procedures:

STEP 1: Develop an independent expectation

The development of an appropriately precise, objective expectation is the most important step
in effectively using substantive analytical procedures. An expectation is a prediction of a
recorded amount or ratio. The prediction can be a specific number, a percentage, a direction
or an approximation, depending on the desired precision.

The auditor should have an independent expectation whenever s/he uses substantive
analytical procedures (ISA 520). The auditor develops expectations by identifying plausible
relationships (eg between store square footage and retail sales, market trends and client
revenues) that are reasonably expected to exist based on his knowledge of the business,
industry, trends, or other accounts.

STEP 2: Define a significant difference (or threshold)

While designing and performing substantive analytical procedures the auditor should
consider the amount of difference from the expectation that can be accepted without further
investigation (ISA 520). The maximum acceptable difference is commonly called the
‘threshold’.

Thresholds may be defined either as numerical values or as percentages of the items being
tested. Establishing an appropriate threshold is particularly critical to the effective use of
substantive analytical procedures. To prevent bias in judgment, the auditor should determine
the threshold while planning the substantive analytical procedures, ie before Step 3, in which
the difference between the expectation and the recorded amount are computed.

The threshold is the acceptable amount of potential misstatement and therefore should not
exceed planning materiality and must be sufficiently small to enable the auditor to identify
misstatements that could be material either individually or when aggregated with
misstatements in other disaggregated portions of the account balance or in other account
balances.

STEP 3: Compute difference

The third step is the comparison of the expected value with the recorded amounts and the
identification of significant differences, if any. This should be simply a mechanical
calculation.

It is important to note that the computation of differences should be done after the
consideration of an expectation and threshold. In applying substantive analytical procedures,
it is not appropriate to first compute differences from prior-period balances and then let the
results influence the ‘expected’ difference and the acceptable threshold.

STEP 4: Investigate significant differences and draw conclusions

The fourth step is the investigation of significant differences and formation of conclusions
(ISA 520). Differences indicate an increased likelihood of misstatements; the greater the
degree of precision, the greater the likelihood that the difference is a misstatement.

Explanations should be sought for the full amount of the difference, not just the part that
exceeds the threshold. There is a chance that the unexplained difference may indicate an
increased risk of material misstatement. The auditor should consider whether the differences
were caused by factors previously overlooked when developing the expectation in Step 1,
such as unexpected changes in the business or changes in accounting treatments.

If the difference is caused by factors previously overlooked, it is important to verify the new
data, to show what impact this would have on the original expectations as if this data had
been considered in the first place, and to understand any accounting or auditing ramifications
of the new data.

Factors affecting the precision of analytical procedures

There are four key factors that affect the precision of analytical procedures:
1 Disaggregation

The more detailed the level at which analytical procedures are performed, the greater the
potential precision of the procedures. Analytical procedures performed at a high level may
mask significant, but offsetting, differences that are more likely to come to the auditor’s
attention when procedures are performed on disaggregated data.

The objective of the audit procedure will determine whether data for an analytical procedure
should be disaggregated and to what degree it should be disaggregated. Disaggregated
analytical procedures can be best thought of as looking at the composition of a balance(s)
based on time (eg by month or by week) and the source(s) (eg by geographic region or by
product) of the underlying data elements. The reliability of the data is also influenced by the
comparability of the information available and the relevance of the information available.

2 Data reliability

The more reliable the data is, the more precise the expectation. The data used to form an
expectation in an analytical procedure may consist of external industry and economic data
gathered through independent research. The source of the information available is particularly
important. Internal data produced from systems and records that are covered by the audit, or
that are not subject to manipulation by persons in a position to influence accounting
activities, are generally considered more reliable.

3 Predictability

There is a direct correlation between the predictability of the data and the quality of the
expectation derived from the data. Generally, the more precise an expectation is for an
analytical procedure, the greater will be the potential reliability of that procedure. The use of
non-financial data (eg number of employees, occupancy rates, units produced) in developing
an expectation may increase the auditor’s ability to predict account relationships. However,
the information is subject to data reliability considerations mentioned above.

Type of analytical procedures

There are several types of analytical procedures commonly used as substantive procedures
and will influence the precision of the expectation. The auditor chooses among these
procedures based on his objectives for the procedures (ie purpose of the test, desired level of
assurance).

1. Trend analysis – the analysis of changes in an account over time.

2. Ratio analysis – the comparison, across time or to a benchmark, of relationships
between financial statement accounts and between an account and non-financial data.

3. Reasonableness testing – the analysis of accounts, or changes in accounts between

accounting periods, that involves the development of a model to form an expectation
based on financial data, non - financial data, or both.

Each of the types uses a different method to form an expectation. They are ranked from
lowest to highest in order of their inherent precision. Scanning analytics are different from
the other types of analytical procedures in that scanning analytics search within accounts or
other entity data to identify anomalous individual items, while the other types use aggregated
financial information.

If the auditor needs a high level of assurance from a substantive analytical procedure, s/he
should develop a relatively precise expectation by selecting an appropriate analytical
procedure (eg a reasonableness test instead of a simple trend or ‘flux’ analysis). Thus,
determining which type of substantive analytical procedure to use is a matter of professional
judgment.

In summary, there is a direct correlation between the type of analytical procedure selected
and the precision it can provide. Generally, the more precision inherent in an analytical
procedure used, the greater the potential reliability of that procedure.

Investigating unusual items

 When analytical procedures identify significant fluctuations or relationships that are
inconsistent with other relevant information or that deviate from predicted amounts, the
auditor should investigate and obtain adequate explanation and appropriate corroborative
audit evidence.
 The investigation of unusual fluctuations and relationships ordinarily begins with
enquiries of management followed by:
 comparing management’s responses with the auditor’s understanding of the entity and
other audit evidence obtained during the course of the audit.
 consideration of the need to apply procedures based on the results of such enquiries if
management is not able to provide an explanation or if the explanation is not considered
adequate.

Key messages:

 Substantive analytical procedures play an important part in a risk-based audit

approach.
 Properly designed and executed analytical procedures can allow the auditor to achieve
audit objectives more efficiently by reducing or replacing other detailed audit testing.

 The effectiveness of analytical procedures depends on the auditor’s understanding of

the entity and its environment and the use of professional judgment; therefore,
analytical procedures should be performed or reviewed by senior members of the
engagement team.

 It is vital that the analytical procedures be sufficiently documented to enable an

experienced auditor, having no previous connection with the audit, to understand the
work done (ISA 230).
MANAGEMENT REPRESENTATIONS
 The auditor should obtain appropriate representations from management.
 The auditor should obtain evidence that management acknowledges its responsibility for
the fair presentation of the financial information in the financial statements in accordance
with the relevant financial reporting framework, and has approved the financial statements.
 The auditor can obtain evidence of management’s acknowledgement of such responsibility
and approval from relevant minutes of the meetings of the board of directors, or a similar
body or by obtaining a written representation from management.
 The auditor should obtain written representations from management on matters material to
the financial statements when other sufficient appropriate audit evidence cannot reasonably
be expected to exist.
 The possibility of misunderstandings between the auditor and management is reduced when
oral representations are confirmed by management in writing.
 Written representations requested from management may be limited to matters that are
considered either individually or collectively to be material to the financial statements.
 During the course of an audit, management makes many representations to the auditor.
 When such representations relate to matters that are material to the financial statements, the
auditor will need to:
 seek corroborative audit evidence from sources inside or outside the entity.
 evaluate whether or not the representations made by management appear reasonable
and consistent with other audit evidence obtained, including other representations.
  consider whether or not the individuals making the representations can be fully
expected to be sufficiently well informed on the particular matters.
 Representations by management cannot be a substitute for other audit evidence that the
auditor could reasonably expect to be available.
 If the auditor is unable to obtain sufficient appropriate audit evidence regarding a matter
that has, or may have, a material effect on financial statements, and such evidence is
expected to be available, this will constitute a limitation in the scope of the audit, even if a
representation from management has been received on the matter.
 In certain instances a representation by management may be the only audit evidence that
can reasonably be expected to be available.
 If a representation by management is contradicted by other audit evidence, the auditor
should investigate the circumstances and where necessary reconsider the reliability of other
presentations made by management.
 A written representation is better audit evidence than an oral representation and can take
the form of:
 a representation letter from management.
 A letter from the auditor outlining the auditor’s understanding of management’s
representations duly acknowledged and confirmed by management.
 relevant minutes of meetings of the board of directors or similar body.
 A management representation letter would ordinarily be signed by the members of
management that have primary responsibility for the entity and it’s financial aspects.
 In certain circumstances, the auditor may wish to obtain representations letters from other
members of management.
Action if management refuses to provide representations
 If management refuses to provide any representation that the auditor considers necessary
in order to provide sufficient, appropriate audit evidence, this constitutes a scope
limitation and the auditor should express a qualified opinion or a disclaimer of opinion.
In such circumstances, the auditor would evaluate any reliance placed on other
representations made by management during the course of the audit, and consider if the other
implications of the refusal may have any additional effects.
COMPLETION OF THE AUDIT

The completion stage refers to those steps which are taken by the auditor after the routine
checking and verification of accounting records has been completed, in order to enable him
to wind up his examination and report.

The completion stage normally involves the following activities:

Completion procedure

 Review the Post balance sheet events

 Financial statement review
 Obtaining letter of representation
 Sending a letter to management
 Forwarding points for consideration at subsequent audit
 Maintaining errors and omission summery

COMPLETION PROCEDURE

1. POST BALANCE SHEET EVENTS

Those events, favorable or unfavorable, that occurs between the Balance Sheet date and the
date on which the financial statement are authorized to issue are called Post Balance Sheet
Events. Events classified into two categories:

i, Those events which provide further evidence of conditions that existed at the balance sheet
date called Adjusting Events.
ii. Those events that are indicative of conditions that arose subsequent to the balance sheet
date called Non-Adjusting Events.

▫ The auditor should perform the procedures designed to obtain sufficient audit evidence that
all events up to the date of the auditor’s report that must require adjustments, or disclosure
in, the financial statement have been identified.

2. Review of Financial Statement

The auditor should review the financial statement in such a manner that he may be able to:

 draw conclusions from the order evidence obtained by him

 to give him a reasonable basis of his opinion on the financial statements.

The auditor should satisfy himself as to whether:

i. Financial Statement have been drawn up in accordance with the GAAP which are
consistent and appropriate to the enterprise.

The results of operation, states of affairs of the financial position, other information reflected
in the financial statement and the directors report are comparable.

All matters have been properly disclosed and classified.

Financial Statement comply to the statutory requirements to the regulation and constitution
of the enterprise.

3. Obtaining a Letter of Representation

 It confirms the various representation made by management in respect of matters

which are material and for which the auditor has not been able to obtain sufficient
independent evidence.
 It should be consistent with other available advances given by management.
 It should either be recorded in the minutes of the board meeting or formally approved
by the board of directors.
 Directors should acknowledge in the letter their responsibilities for the preparation of
financial statements.
4. Sending Letter to Management

 It points out the areas where inefficiencies were observed and the suggested
constructive advice for improvement in financial control.
 It also deals with an appreciation for cooperation and assistance extended by the
client’s staff and management during the course of an audit.

5. Points Carried to Subsequent Audit

 All the unsettled points have to be taken up at the next period and settled with the
client at the start of the next audit.
 Auditors have to maintain adequate records of all such items.

6. Summary Records of Error

1. Audit staff should prepare a summary of all such errors and omissions which have
been observed during the course of the audit and which have remained unadjusted.
2. On the basis of this summary, the auditor should decide whether the nature of any
error justifies its opportunity to the management.
THE QUALIFIED AND UNQUALIFIED EXTERNAL AUDIT REPORTS

Investors are particularly interested in the audit opinion because it serves as a reflection of the
integrity of the audit report and projects an image of the company.

The audit opinion is based on several variables, including how available the data was to them,
whether they had an opportunity to follow all due procedures, and the level of materiality.
Each of these variables are subjective in nature and depend on the auditor’s opinion.

An adverse audit opinion can damage a company’s status. In some cases, adverse audit
opinions may lead to litigation. Regulatory bodies may also scrutinize the audit opinion and
the audit report to verify the information for accuracy and any impact on taxation matters.

What Do Auditors Do During an Audit?

Before the audit, management provides financial information to the audit committee. During
the annual audit, the auditor has to review the processes and procedures that the company
used to prepare the financial information. The auditors check to see whether the company
uses GAAP or other applicable reporting frameworks in preparing the reports.

Annual audits demonstrate transparency in corporate financial reporting, which is a positive

step in establishing good relationships between companies and their investors, as well as the
public.

Different Types of Auditor Opinions

Auditors have the option of choosing among four different types of auditor opinion reports.
An auditor opinion report is a letter that auditors attach to the statutory audit report that
reflects their opinion of the audit. The types of auditor opinions are:

1. Unqualified opinion-clean report

 2. Qualified opinion-qualified report

Unqualified Opinion – Clean Report

An unqualified opinion is considered a clean report. This is the type of report that auditors
give most often. This is also the type of report that most companies expect to receive.

An unqualified opinion doesn’t have any kind of adverse comments and it doesn’t include
any disclaimers about any clauses or the audit process. This type of report indicates that the
auditors are satisfied with the company’s financial reporting. The auditor believes that the
company’s operations are in compliance with governance principles and applicable laws. The
company, the auditors, the investors and the public perceive such a report to be free from
material misstatements.

 Qualified Opinion-Qualified Report

When an auditor isn’t confident about any specific process or transaction that prevents them
from issuing an unqualified, or clean, report, the auditor may choose to issue a qualified
opinion. Investors don’t find qualified opinions acceptable, as they project a negative opinion
about a company’s financial status.

Auditors write up a qualified opinion in much the same way as an unqualified opinion, with
the exception that they state the reasons they’re not able to present an unqualified opinion.

A common for reason for auditors issuing a qualified opinion is that the company didn’t
present its records with GAAP.

Audit Reports

 The final audit report should normally be drafted by the audit manager and signed by
the audit partner.
 Auditors‟ reports on financial statements should contain a clear expression of an
opinion, based on the review and assessment of the conclusions drawn from the
evidence obtained in the course of the audit.
Contents of the auditor’s report on financial statements.
 The auditor’s report should contain the following matters:
 A title identifying the person or persons to whom the report is addressed.
  An introductory paragraph identifying the financial statements audited.
 Separate sections, appropriately dealing with:
 respective responsibilities of directors and auditors.
 the basis of the auditor’s opinion and
 the auditor’s opinion on the financial statements.
 The date of the auditor’s report.
 The term independent auditors should be used in the title of the audit report to better
distinguish it from any other reports prepared by officers of the company.

Statement of responsibilities and basis of opinion

 Auditors should distinguish between their responsibilities and those of the directors
by including the following in their report:
(i) a statement that the financial statements are a responsibility of the directors. (ii)
a reference to a description of those responsibilities when set out in the financial
statements.
(iii) a statement that the auditor’s responsibility is to express an opinion on the
financial statements.
 Where the financial statements or accompanying information do not include an
adequate description of directors‟ responsibilities, the auditor’s report should include
a description of those responsibilities.
 The directors are required to prepare financial statements for each financial year
which give a true and fair view of the state of affairs of the company and of the profit
or loss of the company for that period.
 In preparing financial statements, the directors are required to:
(a) Select suitable accounting policies and then apply them consistently.
(b) Make judgements and estimates that are reasonable and prudent.
(c) State whether applicable accounting standards have been followed subject to any
material departures disclosed and explained in the financial statements.
(d) Prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the company will continue in business.
 The directors are responsible for keeping proper accounting records which disclose
with reasonable accuracy at any time, the financial position of the company to enable
 them to ensure that the financial statements comply with the Companies Act and
relevant legislation.
 Directors are responsible for safeguarding the assets of the company and hence for
taking reasonable steps for the prevention and detection of fraud and other
irregularities.

Basis of opinion
 Auditors should explain the basis of their opinion by including in their report:
(a) a statement as to the basis of their compliance with International Standards on
Auditing, together with the reasons for any departure there from.
(b) a statement that the audit process includes:
(i) examining on a test basis, evidence relevant to the amounts and disclosures.
(ii) assessing the significant estimates and judgements made by the reporting
entity’s directors in preparing financial statements.
(iii) considering whether the accounting policies are appropriate to the reporting
(iv)entity’s circumstances, consistently applied and adequately disclosed.
(c) a statement that they planned and performed the audit so as to obtain reasonable
assurance that the financial statements are free from material misstatements, and that
they have evaluated the overall presentation of the financial statements.
Expression of an opinion
 An unqualified audit opinion arises where the auditor concludes that:
(i) the financial statements have been prepared using appropriate accounting
policies which have been consistently applied.
(ii) the financial statement have been prepared in accordance with relevant legislation,
regulations or applicable financial reporting framework, and
(iii) there is adequate disclosure of all information relevant to the proper
understanding of the financial statements.

Modified Audit Opinions

Qualified Opinions
 A qualified opinion is issued when either of the following circumstances exist:
 There is a limitation on the scope of the auditor’s examination, or
 The auditor disagrees with the treatment or disclosure of a matter in the financial
statements, and in either case
 In the auditor’s judgement the effect of the matter is or may be material to the
financial statements and therefore those financial statement may not or do not
show a true and fair view.

(i) Adverse Opinion

 An adverse opinion is issued when the effect of a disagreement is so material or

pervasive that the auditor concludes that the financial statements are seriously
misleading.
 An adverse opinion is expressed by stating that the financial statements do not show a
true and fair view.

(ii) Disclaimer of opinion

 A disclaimer of opinion is expressed when the possible effect of a limitation on scope
is so material or pervasive that the auditor have not been able to obtain sufficient
evidence and accordingly is unable to express an opinion on the financial statements.
 Where the auditor concludes that the possible effect of the limitation is not so
significant as to require a disclaimer, the auditor issues a qualified opinion by stating
that the financial statements give a true and fair view except for the effects of any
adjustments that might have been found necessary had the limitation not affected the
evidence available to them.
 Departure from an accounting standard would, where material, result in a qualified
audit report unless the departure can be and is justified.

(iii) Limitation of audit scope

 Where there has been a limitation on the scope of the auditor’s work that prevents him
from obtaining sufficient evidence to express an unqualified opinion:
 (a) the auditor’s report should include a description of the factors leading to the limitation
on the scope.
(b) the auditor should issue a disclaimer of opinion when the possible effect of a
limitation on scope is so material or pervasive that they are unable to express an
opinion on the financial statements.
(c) a qualified opinion should be issued when the effect of the limitation is not so
material or pervasive as to require a disclaimer and the wording of the opinion should
indicate that it is qualified as to the possible adjustments to the financial statements
that might have been determined to be necessary had the limitation not existed.
 A description of factors leading to a limitation enables the reader to understand the
reasons for the limitation.

(iv) Disagreement on an accounting treatment or disclosure

 Where the auditor disagrees with the accounting treatment or disclosure of a matter in
the financial statements and in the auditor’s opinion the effect of that disagreement is
material to the financial statements, the auditor should include in the opinion section
of his report, a description of all substantive factors giving rise to the disagreement
and their implications for the financial statements.
 When the auditor concludes that the effect of the matter giving rise to disagreement is
so material or pervasive that the financial statements are seriously misleading, they
should issue an adverse opinion.

Date and signature of the auditor’s report

 The auditor should not express an opinion on financial statements until those financial
statements and other financial information contained in a report of which the audited
financial statements form part, have been approved by the directors and the auditor
have considered all necessary available evidence.
 The date of an auditor’s report on a client’s financial statements is the date on which
the auditor signed the report expressing an opinion on those statements.
 The auditor should sign the audit report after completion of all procedures necessary
to form an opinion on the financial statements including a review of post balance
sheet events.
Example of an unqualified audit report

Deloitte and Touche

Kenilworth Gardens
1 Kenilworth Road
Highlands
Harare

Report of the Independent Auditors

To the members of Africa Banking Corporation Limited

We have audited the accompanying balance sheet, income statement, and cash flow
statements of Africa Banking Corporation Limited as of 31 December 2022. 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 whether the financial statements are free from material misstatements. 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.

In our opinion, the financial statements give a true and fair view of the financial
position of the company as at 31 December 2022 and of the results of its operations
and its cash flows for the year then ended and comply with the Banking Act.

Deloitte and Touche

28 February 2023

Difference between Unqualified Report and Qualified Report

The two types of audit report, the differences between qualified and unqualified reports:

1. An unqualified or clean report presents that the financial statements depict the
financial position, results of operations and cash flows fairly in all material aspects
and adheres to the GAAP. As against, Qualified Report indicates that the financial
statements depict the financial position, results of operations and cash flows fairly in
all material aspects, and adheres to the GAAP besides the effect of the matter, relating
to the qualification.
2. An unqualified report represents that the financial statements are free from material
misstatements. Conversely, a qualified report issued by the auditor when after getting
sufficient audit evidence, he is of the view that misstatements are material but not
pervasive.
3. An unqualified report is an unmodified one, whereas any report issued other than an
unqualified report is said to be modified, be it qualified, adverse, or disclaimer.
4. In the case of an unqualified audit report, a clean opinion is given by the auditor, that
does not have any reservations, whereas, in the case of a qualified audit report, an
opinion with certain reservations is given by the auditor.
5. An unqualified audit report indicates that the auditor is satisfied with the points that
must be stated in his report and that too in a positive sense, without any reservations.
Conversely, it reflects that there is a limitation on the scope of audit or failure of the
auditee to follow GAAP.
6. In the case of the unqualified audit report, there are no specific duties of management.
As against, management is bound to give explanations and complete details with
regard to each qualification given in the qualified audit report.