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Audit Report Writing

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Objectives of this Module

Audit Report Writing:
1. To gain an understanding about auditing and
financial audit
2. To know about the audit report and its
contents
3. To know about various types of audit report
and preconditions to issue various report
4. To familiarize with the wording of various
audit report
5. To know the auditor’s decision process to issue
an audit report
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Auditing and Audit Report

Concept and Nature of Auditing

“Auditing means the accumulation and

evaluation of evidence about
information to determine and report on
the degree of correspondence
between the information and
established criteria. Auditing should be
done by a competent and
independent person.”
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Concept and Nature of Auditing

Nature of Auditing:

▫ Evidence accumulation and evaluation on

provided information
▫ Determine the degree of correspondence
▫ Between information and established
criteria
▫ Provide opinion
▫ Done be competent and independent
person
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Audit of Historical Financial

Statements
Now define the audit of historical financial
statements:
▫ Provided information= draft financial
statements provided by the Mgt.
▫ Evidence= Source documents, bills and
vouchers, books and records etc.
▫ Established criteria= Reporting framework
i.e Bangladesh Financial Reporting Standards/
Bangladesh Accounting Standards as adopted
by ICAB
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Audit of Financial Statements

Now define the audit of historical financial
statements:
• Objective=To assess the true and fair view
between provided information and BFRS/BAS
i.e degree of correspondence between
information and established criteria.
• Output: Form an opinion
• Independent and Competent person: By a
chartered accountants (Chartered accountants
firms)
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Audit of an Income Tax Return

Try your self to link the audit criteria for doing an

audit of an income tax return by NBR
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Audit Report of F/S-Its Contents

Contents are-
1. Title of the report-Should clearly indicate
that it is an independent auditor’s report.
2. Addressee- It is based on the circumstances
(generally addressed to the shareholders)
3. Introductory paragraph- It includes-
i. Name of the audited entity
ii. A statement that F/S have been audited
iii. Shall mention the name of the components of F/S
which have been audited
iv. Shall specify date/period covered under audit.
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Audit Report of F/S-Its Contents

Con----d
Contents are-
4. Statement on Management responsibilities-
i. To prepare and presenting the F/S as per established
criteria (BFRS)
ii. Responsible for internal control systems

5. Statement of Auditor’s responsibilities-

i. To provide audit opinion based on the audit
ii. Acknowledgement for complying the auditing standards
as well as ethical standards as applicable
iii. Reduce expectation gap by mentioning that
v It provides reasonable assurance
v They ensure material misstatements
v Disclose audit procedure which is test nature
v Apply professional judgment
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Audit Report of F/S-Its Contents

Con----d
Contents are-
6. Auditor’s opinion- Based on available
information and evidence
7. Other reporting responsibilities- shall be a
separate title for this section as “ Reporting on
Other Legal and Regulatory Requirements” or
other wise as appropriate.
8. Signature of the auditor
9. Date of the Auditor’s report
10. Auditor’s address
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Types of Audit Report

Audit Report

Unmodified Modified
Unmodified with
Emphasis Paragraph

Qualified Adverse Disclaimer

Opinion Opinion of Opinion
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Unmodified Audit Report/Clean Report

Unmodified audit report is given by the auditor when
fulfill the following conditions:
1. The general purpose financial statement (GPFS)
must be “complete set of financial
statements”
i. Statement of financial position/Balance sheet
ii. Statement of comprehensive income/
Income statement
iii. Statement of changes of equity
iv. Statement of cash flow, and
v. Supplementary notes and schedules
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Unmodified Audit Report/Clean Report
con---d
2. The F/S are prepared in all material respects
in accordance with Bangladesh Financial
Reporting Standards (BFRS) and/or other
applicable laws and regulations and reflects
true and fair view.
3. The are no circumstances requiring for
emphasis paragraph.
4. Audit is conducted as per Bangladesh
Standards of Auditing (BSA), and
5. Sufficient and appropriate audit evidence has
been accumulated to support the opinion.
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Unmodified Audit Report/Clean Report-An
Example con---d

Refer to various audit report.

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Unmodified Audit Report with Emphasis
Para
It is special type of audit report where F/S fulfills
all the conditions of unmodified opinion except
3 mentioned above where the auditor
believes to bring the issue to the readers’
attention but it does not qualify the opinion.

So Emphasis paragraph is a paragraph included

in auditor’s report (located after audit
opinion) that refers to a matter appropriately
presented or disclosed in the F/S that, in the
auditor’s judgment, is of such important that it
is fundamental to users’ understanding.
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Unmodified Audit Report with Emphasis
Para Con----d
Circumstances for which auditor can issue unmodified
audit opinion with emphasis para:
1. Lack of consistent application of
standards (BFRS)[FIFO to LIFO,
change of reporting entity]
2. Substantial doubt about going concern
3. Auditor agree with departure or early
adoption of accounting standards.
4. Emphasis of a matter
5. In case of dual audit
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Unmodified Audit Report with Emphasis
Para- An Example
Audit report including emphasis para: (Emphasis
para must be written after opinion paragraph).
Wording would be like this under a title”

Emphasis of Matter
“We draw attention to note 10 to the financial
statements which describes the uncertainty
related to the outcomes of the lawsuit filed
against the company by PQR Company. Our
opinion is not qualified is respect of this matter.”
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Modified Audit Report

Audit report which is issued under following
circumstances is called modified report.
1. The financial statements have not been
prepared as per financial reporting
standards i.e departure from standards and
not free from material misstatements
2. Had a scope limitation and unable to obtain
sufficient evidence

3. Auditor is not independent i.e impaired the

independency of auditor
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Modified Audit Report- 1. Qualified
Opinion
This type of audit opinion is issued when-
üAuditor have sufficient evidence but believe an item
individually or in aggregate is material but not
pervasive; or
üUnable to obtain audit evident that could possible
material effect in F/S but not pervasive

Here auditor concludes that the overall financial

statements are fairly presented but have an issue
which is material but does not over shadow the
financial statement as a whole i.e not pervasive.
Hence a term “except for” is used to provide the
opinion. His type of opinion is called qualified
opinion.
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Modified Audit Report- 1. Qualified
Opinion- An Example
Basis of Qualified Opinion
“The company’s inventories are carried in the balance
sheet at 31 December 2011. Management has not stated
the inventories at the lower of cost and net realizable
value but has stated them solely at cost, which
constitutes a departure from Bangladesh Financial
Reporting Standards. The company’s record indicate
that had management stated the inventories at lower of
cost and net realiozable value, an amount of Tk 500,000
would have been required to write the inventories down
to their net realizable value. Accordingly, cost of sale
would have been increased by Tk------ and income tax,
net income and shareholders’ equity would have been
reduced by Tk ------, Tk------ and Tk------- respectively.”
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Modified Audit Report- 1. Qualified
Opinion- An Example Con--d
Qualified opinion
In our opinion, except for the effects of the matter
discussed in the basis for qualified opinion
paragraph, the financial statements presents
fairly, in all material respects of the financial
position of ABC Company as at 31 December
2011 and its financial performance and its cash
flows for the year then ended in accordance with
Bangladesh Financial Reporting Standards.
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Modified Audit Report- 2. Adverse opinion

An opinion which is provide when auditor

concludes that
üOverall financial statements are so materially
misstated where the misstatement is both
material and pervasive

üHaving sufficient and appropriate audit evidence to

conclude

Information could be material if misstatement of

the same influence in the decision making of the
users.
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Modified Audit Report- 2. Adverse
opinion- An Example
Basis for Adverse Opinion
As explained in note number -10, the company has not
consolidated the financial statements of subsidiary XYZ
Company it acquired during 2011 because it has not yet
been able to ascertain the fair values of certain of the
subsidiary’s material assets and liabilities at the
acquisition date. This investment is therefore accounted
for on cost basis. Under IFRS, the subsidiaries should
have been consolidated because it is controlled by the
company. Had XYZ been consolidated, many elements in
the accompanying financial statement would have been
materially affected. The effects on the consolidated
financial statements of the failure to consolidate have
not been determined.
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Modified Audit Report- 2. Adverse
opinion- An Example Con--d

Adverse Opinion

In our opinion, because of the significance of the matter

discussed in the basis for adverse opinion paragraph, the
consolidated financial statements do not present fairly
the financial position of ABC Company as at 31
December 2011 and its financial performance and its
cash flows for the year then ended in accordance with
Bangladesh Financial Reporting Standards.
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Modified Audit Report- 3. Disclaimer of
Opinion
An opinion which is provide for-

üUnavailability of sufficient and appropriate

audit evidence for having scope limitation for
which he could not satisfy himself, and/or

üAuditor is not independent.

Here need to modify the auditor’s scope as well.

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Modified Audit Report- 3. Disclaimer of
Opinion- An Example
Here auditor’s responsibilities need of modify as
follows:
Auditor’s Responsibilities
Our responsibility is to express an opinion on these
financial statements based on conducting the audit in
accordance with Bangladesh Standards on Auditing.

Because of the matter described in the basis for disclaimer

of opinion paragraph, however, we were not able to
obtain sufficient appropriate audit evidence to provide a
basis for an audit opinion.
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Modified Audit Report- 3. Disclaimer of
Opinion- An Example Con---d

Basis for Disclaimer of opinion

We were not appointed as auditors of the company until
after 31 December 2011 and thus we did not observe the
counting of physical inventories at the beginning and
end of the year. We were unable to satisfy ourselves by
alternative means concerning the inventories quantities
held at 31 December 2010 and 2011 which are stated in
balance sheet at Tk --------- and Tk -------respectively. As
a result these matter, we were unable to determine
whether any adjustment might have been found
necessary in respect of recorded and unrecorded
inventories, and the elements making up the income
statement, statement of changes of equity and cash flow
statement.
•
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Modified Audit Report- 3. Disclaimer of
Opinion- An Example Con---d

Disclaimer of Opinion

Because of the significance of the matters described in the

basis for disclaimer of opinion paragraph, we have not
been able to obtain sufficient appropriate audit evidence
to provide a basis of our audit opinion. Accordingly we
do not express an opinion on the financial statements.
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Auditor’s Decision Process for Audit Report

Determine whether any
condition exists requiring a
departure from Unmodified
audit report

Decide the Materiality for each

condition

Decide the appropriate type of

report for the condition, given
materiality level

Write the Audit Report

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Reporting Decision at a Glance

Condition for Unmodified Level of Materiality
Report with Emphasis para
Immaterial Material

1 Inconsistent application of Unmodified Unmodified with

standards emphasis para
2 Substantial doubt about going Unmodified Unmodified with
concern emphasis para
3 Justified departure or adoption for Unmodified Unmodified with
fairness emphasis para
4 Emphasis of a matter Unmodified Unmodified with
emphasis para
5 Dual audit Unmodified Unmodified with
modified wording
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Reporting Decision at a Glance

Conditions for Level of Materiality
departing from
Unmodified Report

Immaterial Material but So Material

does not that
overshadow F/S overshadow
as a whole /not F/S as a whole
pervasive /pervasive

Standard departure i.e Unmodified Qualified opinion Adverse opinion

F/S are not prepared as by using ‘except
per standards for’
Scope restriction Unmodified Qualified opinion Disclaimer of
by using ‘except opinion
for
Lack of independency Disclaimer, regardless of materiality.
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Reading Materials
1. Bangladesh Standards on Auditing 700, 705
and 706

2. Auditing- An Integrated Approach

By Alvin A. Arens and J. K. Loebbecke

3. Various Annual Report for Audit Report