AAA Focus Notes Learning week 5

Syllabus area E: Reporting

Learning week 5 covers syllabus area E. After completing week 5 you will understand:
1. Audit reports
What goes into a standard audit report, including the audit opinion
2. Audit reports - extra paragraphs
When ‘extra’ paragraphs are included in the audit report, and why
3. Reporting to Those Charged With Governance (TCWG)
Why the auditor reports separately to TCWG, and what is reported.

How is this area examined?

Section A: Case Study
Good news! Reporting does NOT form part of the case study question.

Section B: Extended written question

Bad news! One of the section B questions will ALWAYS cover reporting in detail. Typically 5-15
marks out of 25 on a section B question. Either on audit reports or reporting to TCWG

There are 3 typical questions that are regularly examined.

1) Critically evaluate an audit report
2) Describe the impact on the audit opinion/report of matters in the scenario
3) Report a matter to TCWG

What do I need to know to pass?

Memorise the ‘standard’ contents of the different reports
This is necessary but not sufficient….you need to know what is ‘supposed’ to be in an audit report,
so you can critically evaluate a report given in the exam.
However, most of the marks are for using the scenario….rather than for demonstrating rote
learned knowledge. Applying that knowledge is the key to success!

Understand when each type of audit opinion is issued

Apply your knowledge to a scenario-based question, advising on the appropriate opinion in the
circumstances.

Know the ‘extra paragraphs’ in detail

Audit reporting questions often focus on the ‘extra paragraphs’ like Key Audit Matters (KAMs),
Emphasis of Matter paragraphs (EOMs) and Material Uncertainty Relating to Going Concern
paragraphs (MURGCs).

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Learning week 5: Reporting

1 Audit reports Your notes

1.1 A standard auditor’s report

1) Title (independent auditor’s report)

2) Addressee (shareholders)

3) Auditor’s opinion

4) Basis of opinion

5) Key extra paragraphs (if needed)

- Material uncertainty over going concern
- Emphasis of matter
- Key Audit Matters

6) Other information (management responsible for

additional information)

7) Management’s responsibilities (preparing)

8) Auditor’s responsibilities (assessing)

9) Report on other legal / regulatory requirements

(country specific)

10) Other extra paragraph (if needed)

- Other matters

11) Name of the engagement partner / firm

12) Signature

13) Auditor’s address

14) Date (that the auditor’s report was signed)

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1.2 Audit opinions Your notes

What is an audit opinion?

The auditor (an independent 3rd party) giving their
verdict on the financial statements (the subject
matter) that are prepared by management (the
preparer).

As the auditor is independent, their ‘opinion’ adds to

the credibility of the financial statements for a user of
the accounts.

Unmodified audit opinion

A ‘clean’ audit opinion is given if the financial
statements are:
- True and fair, free from material misstatement
- Properly prepared

In the real world…most audit opinions are unmodified

(clean).

In the exam world...most audit opinions need to be

modified!

Why might an audit opinion be modified?

There are two categories of modified audit opinion:

1) Something is WRONG in the accounts.

The auditor disagrees with management over a
significant issue.
The accounts are MATERIALLY MISSTATED
e.g. disagreement over the correct accounting
treatment

2) The auditor cannot tell if the accounts are

correct, they’ve not been able to form an
opinion. The scope of the audit has been limited
in some way.
There is a lack of SUFFICIENT APPROPRIATE
EVIDENCE
e.g. accounting records damaged in a cyber
attack

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Learning week 5: Reporting

Your notes
How serious can the issue be?

The auditor decides if the issues is significant

(material) or huge (material and pervasive).

1) Material
- By size
- By nature

2) Material and pervasive

- Issue impacts many parts of the financial
statements (e.g. all accounting records
destroyed)
- Fundamental to users understanding of the
accounts (e.g. a huge disclosure is missing)
- Dramatically changes the presentation of the
accounts (e.g. the issue would turn profit to a
loss)

Exam focus - use your judgement to decide if the

issue is material only, or material and pervasive.

You must discuss and clearly conclude.

Modified audit opinions

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Your notes
2 Audit reports – extra paragraphs

2.1 Basis of opinion paragraph (standard)

When included?
In EVERY audit report….immediately after the audit
opinion.

Why included?
The basis paragraph explains WHY the opinion has
been given, to build a user’s understanding of what
the audit opinion really means.

What is included?
- Statement that the audit was conducted in
accordance with the International Standards on
Auditing (ISAs).
- Statement that the auditor is independent of the
company, and that the Ethical Standards have
been followed.
- Statement that the audit evidence obtained is
sufficient and appropriate to provide a basis for
the opinion (unmodified opinion).
OR
- A description of the matter that has led to the
opinion being modified.
The matter should be quantified, with enough
detail given for a user to fully understand why
the opinion has been modified.

Title of the basis paragraph

Must be consistent with the opinion

Unmodified opinion…Basis of opinion

Qualified opinion…Basis of qualified opinion
Adverse opinion…Basis of adverse opinion
Disclaimer…Basis of disclaimer of opinion

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Learning week 5: Reporting

2.2. Key Audit Matters (KAM) section (standard) Your notes

When included?
Public Interest Entity (PIE) audit reports MUST
include a KAM section. It is a standard section in a
PIE audit report.

Why included?
The KAM section gives extra detail on how the audit
was performed, as there is greater public interest in
the financial statements of a PIE.

The KAM section enhances a users understanding of

the audit, making the audit opinion more credible and
valuable

What is included?
The auditor reports on the highest risk areas of the
audit (typically 4 or 5 areas).

For each high risk area:

- Why the area was considered high risk by the
auditor.
- Audit work that was undertaken to address the
risk.
- Results of that audit work.

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2.3 Other information paragraph (standard) Your notes

When included?
Where other information is presented (that is not
audited) alongside the financial statements (audited).

e.g. a Director’s report, or a Sustainability report

The auditor reviews the ‘other information’ to ensure

that it is materially consistent with the financial
statements (NOT a full audit of the other information).

Why included?
To make clear that the ‘other information’ is not
audited, and to highlight any inconsistencies between
the financial statements and the other information.

What is included?
- Statement that management are responsible for
the ‘other information’
- Statement that the audit opinion does NOT
cover the ‘other information’.
- Description of the auditor’s responsibilities (to
review the ‘other information and repost on any
inconsistencies with the financial statements).
- A statement that the auditor has nothing to
report (i.e. there are no material
inconsistencies)
OR
- A description of the uncorrected material
misstatement in the ‘other information’ (if there
is a material inconsistency).

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Your notes
2.4 Emphasis of Matter (EOM) paragraph (RARE)

When included?
If there is a HUGE issue in the financial statements
that has been CORRECTLY accounted for/disclosed
in the financial statements by management.

Why included?
To draw attention to the issue.

What is included?
- A short description of the issue.
- Reference to management’s correct
accounting/disclosure in the financial
statements.
- A statement that the auditor’s opinion is NOT
modified in respect of this matter.

2.5 Material Uncertainty Related to Going Concern

(MURGC) paragraph (RARE)

The standard assumption is that a company will

continue to trade for the foreseeable future (at least
12 months from the year-end).

When included?
If there is a material uncertainty relating to the going
concern status of the company that has been
CORRECTLY accounted for/disclosed in the financial
statements by management.

Why included?
To draw attention to the going concern uncertainty.

What is included?
- A short description of the issue.
- Reference to management’s correct
accounting/disclosure of the going concern
uncertainty in the financial statements.
- A statement that the auditor’s opinion is NOT
modified in respect of this matter.

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2.5 Other matters paragraph (RARE) Your notes

When included?
If there is a significant matter, related to the audit, that
is NOT present in the financial statements.

For example, if there has been a change in auditor.

Or if the company’s results are consolidated into

group financial statements that report under different
financial reporting standards.

Why included?
To draw attention to the matter, as it is relevant to
user’s understanding of the audit.

What is included?
A short description of the ‘other matter’

3 Reporting to TCWG
3.1 Who are TCWG?

TCWG have an oversight role. They are responsible

for making sure that the business is run effectively
(this is what ‘governance’ means).

TCWG are there to make sure that ‘management’ are

doing their job properly!

They oversee the strategic direction of the company

and hold management to account.

They also oversee the financial reporting process and

system of internal control at the company.

The TCWG team is made up of the audit committee

and other non-executive directors.

TCWG = make sure that the business is being run

effectively.

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3.2 Exam focus Your notes

‘Typical’ reporting to TCWG questions give you a

detailed scenario with issues encountered during the
audit (part of a ‘quality management’ question).

You are asked what should be reported to TCWG and

why. Most of the marks are for explaining why!

Or….you may be asked to ‘suggest actions for the

auditor to take’. There will be no mention of Reporting
to TCWG in the question…..but you are expected to
suggest relevant things to report as part of your
actions.

3.2 Reporting to TCWG BEFORE the audit

1) Auditor’s responsibilities
(reduce expectations gap)

2) Planned scope and timing of the audit

(how the audit will be performed)

3) Business risks that may lead to material

misstatements

4) Planned communication with any regulators

(confidentiality)

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Your notes
3.3 Reporting to TCWG AFTER the audit

1) Significant findings from the audit

- Changes in accounting policies / practices
- Difficulties encountered during the audit
- Significant judgement areas discussed with
management during the audit
- Written representations requested from
management
- Audit opinion (and reasons for it)
- Key Audit Matters (PIEs only)
- Anything that is relevant to the oversight of
the financial reporting process

2) Independence matters
- Statement that the Ethical Standards have
been followed
- Fees for both the audit and any non-audit
work
- Significant threats to auditor independence
- Safeguards implemented to mitigate ethical
threats

3) Deficiencies in internal controls

- Description of any significant deficiencies,
including their impact on the audit

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Learning week 5: Reporting

Up next… Questions!
We've covered the technical knowledge... but that is only the first small step to exam
success!
AAA requires you to develop techniques so that you can apply your knowledge effectively
to exam questions.
The only way to develop exam technique is to practice exam questions! This is the area
that many students neglect... and it can really harm your chances of passing.
As you work through the exam questions in the course, use the next few pages to make
notes of key learning points (after you have worked through the question).
Making your own notes is very helpful. You are much more likely to remember key
learning points if you have written them in your own words... and you'll be able to refer
back to them when you move into the Revision phase! Good luck!

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 Learning week 5: Reporting

Live class question

Make notes here, summarising your learning points from the question

Your notes

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Learning week 5: Reporting

Homework question
Make notes here, summarising your learning points from the question

Your notes

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