The Auditor's Reporting Obligations: Gay & Simnett, Auditing and Assurance Services in Australia, 6e

CHAPTER 12
The auditor’s reporting

obligations
Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd

Gay & Simnett, Auditing and Assurance Services in Australia, 6e 12-1
Learning objectives
12.1 Understand the nature and significance of the auditor’s
reporting obligations.
12.2 Understand the structure and qualitative characteristics of the
auditor’s report and appreciate the recent changes to the report
which are designed to enhance its communication effectiveness.
12.3 Explain the differences between the concepts of ‘true and fair’
and ‘presents fairly in accordance with’, and between a fair
presentation framework and a compliance framework.
12.4 Identify the different types of auditor’s reports—unmodified
auditor’s report; modifications to the auditor’s opinion (resulting in a
qualified opinion, adverse opinion or disclaimer of opinion); and
auditor’s reports containing additional communications (Emphasis
of Matter or Other Matter paragraphs)—and describe the
circumstances under which an auditor would issue each type of
report. Continued

Learning objectives (continued)
12.5 Identify the reasons for departures from a standard
unmodified auditor’s report, material misstatement and
limitations imposed on the scope of the audit and understand
the factors giving rise to these reasons.
12.6 Describe the auditor’s responsibility for reporting on
comparative information and understand the auditor’s
responsibility with respect to other information in an annual
report.
12.7 Describe communications other than the auditor’s report
between the auditor and shareholders, those charged with
governance and management.

Figure 12.1 Flowchart of completion and
communication stages of a financial report audit

LO 12.1: Obligations to report
• ASA/ISA 200.11: the objective of an audit of the financial
report is to obtain reasonable assurance about whether the
financial report taken as a whole is free of material
misstatement, thereby enabling the auditor to express an
opinion as to whether the financial report is prepared, in all
material respects, in accordance with an applicable
financial reporting framework.
• Audit is to be conducted in accordance with approved
auditing standards.
• In Australia, the auditor has an obligation to form a
conclusion as to whether the financial report has been
prepared using Australian accounting standards issued by
the AASB.

Obligations to report: s 307
The Corporations Act 2001, s 307, requires the auditor to
form an opinion as to:
(a) Whether the financial report is in accordance with the
Act, including:
(i) s 296 or 304 (compliance with accounting standards),
and
(ii) s 297 or 305 (true and fair view), and
(aa) if the financial report includes additional information
… (to give a true and fair view of the financial position and
performance)—whether the inclusion of that information was
necessary to give the true and fair view required by s
297 or 305, and
Continued

(continued)
s 307 continued:
(b) whether the auditor has been given all
information, explanation and assistance necessary
for the conduct of the audit, and
(c) whether the company, registered scheme or
disclosing entity has kept financial records sufficient
to enable a financial report to be prepared and
audited, and
(d) whether the company, registered scheme or
disclosing entity has kept other records and registers
as required by this Act.

• The Corporations Act 2001, s 308(1), also clearly
specifies that the auditor’s report shall state the
auditor’s opinion in relation to:
– subs (a)(i) of s 307(1)—compliance with
accounting standards
– subs (a)(ii) of s 307(1)—true and fair view.
• Section 308(3)(b) states that auditor is required to
form an opinion on the matters noted in points (b) to
(d) on previous slide, but need only include these in
the auditor’s report if there is a deficiency, failure or
shortcoming in respect of any of those matters.

Who does the auditor have an
obligation to report to?
• The engagement letter (Chapter 5) should clearly specify
who the auditor has an obligation to report to.
• Auditor’s report is usually addressed to either the
governing body or members.
• In addition to auditor’s report, auditors have reporting
responsibilities to:
– management and the board of directors on anything prejudicial
to the interests of shareholder
– ASIC where there are reasonable grounds to suspect a
significant contravention of the provisions of the Corporations
Act 2001 or other contraventions that will not be adequately
dealt with by comment in the auditor’s report or by notifying
directors.
LO 12.2: The auditor’s report and
changes to improve its
communication effectiveness
• There have been a number of improvements to the
standard auditor’s report over the past few years,
including clarification of the scope of the audit and the
respective responsibilities of management and the
auditor.
• These improvements were primarily intended to address
the expectations gap (discussed in Chapter 1) and to
promote international consistency in auditor reporting.
• Recognised that it is time for a more fundamental
change to auditor reporting.

Structure and qualitative
characteristics of the current
auditor’s report
• The standard-format auditor’s report, in use for the last 20
years, was designed to emphasise comparability and to
highlight departures from the standard form (such as a
qualified opinion) when they arose.
• A suggested standard format covered both the structure of the
report and the wording.
• This structure consisted of an introductory paragraph that
described the responsibility of those charged with governance,
a description of the auditor’s responsibility and an opinion
paragraph. It then included the auditor’s opinion, and if the
auditor’s opinion was modified, the basis for the modification.

Reasons for enhancing the
auditor’s report
• Identified issues.
– Other than communicating the auditor’s overall conclusion, the
content of the auditor’s report is not viewed as being
particularly useful or informative.
– The communication value of the auditor’s report could be
improved if changes were made to the structure and wording of
the auditor’s report.
– There is richer information available about the entity and its
financial report that is available to the auditor but is not being
communicated to the user.
• Currently there is an ‘information gap’ between what users believe
is needed to make informed investment and fiduciary decisions,
and what is available to them through the entity’s audited financial
report or other publicly available information.

Figure 12.2 The information gap

The enhanced auditor’s report
A number of options for enhancing auditor
reporting and narrowing the information gap were
considered, including:
•changing the format and structure of the current
standard auditor’s report
•expanding the auditor’s responsibilities for consideration
of other information presented with audited financial
reports
•providing additional information about the entity and the
financial report.
Continued

The enhanced auditor’s report (continued)
As can be seen by comparing Exhibit 12.1 (pages
542-543) with Exhibit 12.2 (pages 547-549), the major
changes for improving the communicative value of the
auditor’s report are:
•changing the location of the auditor’s opinion in the
financial report to the beginning of the report, to give it
greater emphasis
•the auditor providing additional information about the
entity and the financial report (key audit matters)
•expanding the auditor’s responsibilities when considering
other information.
Continued

The enhanced auditor’s report (continued)
Other changes noted include:
•improved description of the responsibilities of management
and those charged with governance for the financial report
and of the auditor’s responsibilities for the audit of the
financial report
•increased reporting on both management’s and the auditor’s
responsibility with regard to going concern
•clarifying the relationship between Emphasis of Matter
paragraphs and Other Matter paragraphs (discussed later in
this chapter) and the Key Audit Matters section of the
auditor’s report
•allowing for standardised materials such as components of
the description of the responsibilities of the auditor and key
aspects of the audit to be relocated to a website or appendix.

LO 12.3: Fair presentation and
compliance frameworks
• A financial reporting framework can either be a fair
presentation framework or a compliance framework.
• A fair presentation financial reporting framework
requires compliance with the requirements of the
framework and acknowledges that:
– to achieve fair presentation it may be necessary for
management to provide disclosures beyond the framework
– it may be necessary for management to depart from a
framework requirement to achieve fair presentation.
• These disclosures or departures are commonly
referred to as true and fair overrides.

Fair presentation and
compliance frameworks
• ASA/ISA 700.35 requires the auditor to express an
opinion as to whether the financial report ‘gives a true
and fair view’ or ‘presents fairly, in all material
respects’ in accordance with the applicable financial
reporting framework.
• For the purposes of approved auditing standards, the
two phrases are equivalent.
• A compliance framework is one that requires that the
framework be complied with and does not contain the
acknowledgments on the previous slide (true and fair
overrides).

LO 12.4: Types of audit opinions
• ASA/ISA 700 covers the auditor’s responsibility to form
an opinion on the financial report and the form and
content of unmodified auditor’s reports.
• ASA/ISA 705 covers the types of modified opinions that
can be issued:
– qualified opinion
– disclaimer of opinion
– adverse opinion.
• ASA/ISA 706 covers those situations where it is
necessary to draw users’ attention to an issue by an:
– Emphasis of Matter paragraph
– Other Matter paragraph.

Unmodified auditor’s report
• This type of report is issued when the auditor is
satisfied in all material respects that the
financial report:
– has been prepared in accordance with the
Corporations Act 2001, including giving a true and
fair view and complying with Australian accounting
standards and with the Corporations Regulations
2001, and
– complies with IFRSs.
• This form of opinion gives rise to the
unmodified opinion paragraph, as shown in
Exhibit 12.1. Continued

Unmodified auditor’s report (continued)
• Issuing an unmodified auditor’s report means that the
auditor has determined that they have obtained
reasonable assurance that the financial report as a
whole is free from material misstatement, whether due
to fraud or error.
• This means that the auditor has concluded that:
– sufficient appropriate audit evidence has been obtained (in
accordance with ASA/ISA 330)
– any uncorrected misstatements are immaterial, both
individually and in aggregate (in accordance with ASA/ISA
450)
– the financial report is prepared, in all material respects, in
accordance with the requirements of the applicable financial
reporting framework (ASA/ISA 700).

Modifications affecting the
auditor’s opinion
• Nature of the matter giving rise to the modification and
pervasiveness of its effects on the financial report,
determine the type of opinion expressed.
• Effects are considered to be pervasive if they:
– are not confined to specific elements, accounts or items of the
financial report
– if so confined, represent or could represent a substantial
proportion of the financial report, or
– in relation to disclosures, are fundamental to users’
understanding of the financial report (ASA/ISA 705.05).
• For all the types of modified opinions, a basis for the
modification paragraph is inserted just before the
opinion paragraph.

How different types of
modifications affect the
auditor’s opinion

Qualified opinion
• A qualified opinion is expressed when the auditor:
– concludes that misstatements are material but not
pervasive to the financial report
– is unable to obtain sufficient appropriate evidence on
which to base the opinion but concludes that the possible
effects on the financial report could be material but not
pervasive (ASA/ISA 705.07).
• The most common types of qualified opinions issued
relate to material departures from a specific
accounting standard or material disagreements over
the carrying value of a specific asset or liability and
its potential effect on profit.

Basis for qualified auditor’s
opinion
<Insert Exhibit 12.3, page 556-7

as per 5th edition here>

Qualified auditor’s opinion

Adverse opinion
• An adverse opinion should be expressed when the
effect of the misstatements, individually or in the
aggregate, are so material and pervasive that the
financial report taken as a whole is, in the auditor’s
opinion, misleading or of little use to the addressee
of the auditor’s report (ASA/ISA 705.08).
• The most common situation in which adverse
opinions are issued is when the accounts are
prepared on a going concern basis and the auditor
concludes that it is highly improbable that the entity
will continue as a going concern (ASA/ISA 570.21).

Basis for adverse auditor’s opinion


Adverse auditor’s opinion

Disclaimer of opinion
• A disclaimer of opinion is expressed when the
auditor is unable to obtain sufficient appropriate
evidence to form an opinion, and concludes that
the possible effect of undetected misstatements on
the financial report could be both material and
pervasive (ASA/ISA 705.09–10).
• In issuing a disclaimer of opinion the auditor is
communicating that there has been such a
limitation on the evidence-gathering procedures
that they are unsure whether the financial report is
reliable.

Basis for disclaimer of
auditor’s opinion

Continued

Basis for disclaimer of
auditor’s opinion (continued)

Example of a disclaimer of
auditor’s opinion

Additional communications
in the auditor’s report:
Emphasis of Matter
• In certain limited circumstances it is appropriate for the
auditor to draw attention to or emphasise a matter that
is appropriately presented or disclosed in the financial
report and is considered relevant to users of the
auditor’s report, but which, because of its nature, does
not affect the auditor’s opinion.
• The major examples would be when there is a
disclosure in the notes to the financial report that the
auditor considers to be complete and adequate, but
important enough to bring to users’ attention.

Circumstances giving rise to
Emphasis of Matter
• ASA/ISA 706.A1 outlines circumstances in which Emphasis of
Matter (EoM) can be issued:
– uncertainty relating to the future outcome of exceptional litigation
or regulatory action
– early application of a new accounting standard that has a
pervasive effect on the financial report in advance of its effective
date
– a major catastrophe that has had, or continues to have, a
significant effect on the entity’s financial position.
• Until 2014, approximately 90% of auditor’s reports in Australia
containing EoM paragraphs related to uncertainty regarding
going concern status, with going concern modifications now
classed as a separate category of modification.

Types of auditor’s report
issued in Australia, 2005–10
<Insert Table 12.2, page 560

here>

Other Matter paragraph
• The ability to include an Other Matter (OM)
paragraph in the auditor’s report allows auditor
to draw user’s attention to any other matters,
not presented or disclosed in the financial
report, that the auditor believes are sufficiently
important to be highlighted.
• Circumstances giving rise to an OM paragraph
are those relevant to enhancing the user’s
understanding of the audit, the auditor’s
responsibilities or the auditor’s report.

LO 12.5: Circumstances giving
rise to a modified opinion
• The auditor’s opinion should be modified when:
– the auditor concludes, based on the audit evidence obtained,
that the financial report is not free from material misstatements,
or
– the auditor is unable to obtain sufficient appropriate evidence
to conclude that the financial report is free of material
misstatements (ASA/ISA 705.06).
• Before issuing a modified opinion, the auditor should
take all reasonable steps to overcome the issues giving
rise to the material misstatement (disagreements with
management) or the issues causing the auditor to be
unable to obtain sufficient appropriate evidence
(limitations on scope).

Material Misstatement
• ASA/ISA 450 defines a misstatement as the difference
between the amount, classification, presentation or
disclosure of an item reported by an entity in the
financial report and the way that item is required to be
treated in accordance with the applicable financial
reporting framework.
• Therefore, a material misstatement in the financial
report may arise in relation to:
– the appropriateness of the accounting policies
selected
– the application of those accounting policies, or
– the appropriateness or adequacy of disclosures in
the financial report (ASA/ISA 705.A3).

An inability to obtain sufficient
appropriate audit evidence
• An inability to obtain sufficient appropriate audit
evidence (scope limitation on the auditor’s work) may
arise for one of three reasons (ASA/ISA 705.A8):
– circumstances beyond the control of the entity
– circumstances related to the nature or timing of the
auditor’s work, or
– limitations imposed by the entity.
• A limitation on the performance of a particular procedure
does not necessarily constitute a limitation on the scope
of the audit if the auditor is able to obtain sufficient
appropriate evidence by performing alternative
procedures.

The effect of materiality on the
audit qualification
• The primary factor when considering whether to
modify the auditor’s opinion, or attempting to
determine what sort of modification to apply, is the
materiality of the subject matter giving rise to the
qualification.
• One critical aspect is the dollar magnitude of the
effects of the matter on the financial report.
• The auditor also needs to consider the nature of
the matter when making judgments regarding
materiality.

LO 12.6: Comparative information and
other information in the annual report
• Most entities disclose information from previous periods for
comparison purposes. Such comparative information is an integral
part of the current period’s financial report.
• Approaches to reporting on comparative amounts:
• Corresponding figures:
– comparative information, intended to be read only in relation to
amounts and disclosures relating to the current period
– the auditor’s opinion refers to the current period only.
• Comparative financial reports (used in Australia):
– comparative information, where amounts and other disclosures
are included for comparison with the current period and are
referred to in the auditor’s report
– auditor’s opinion refers to each period for which the financial
report is presented.

The audit of comparative
information
• The auditor must evaluate whether:
– the comparative information and other disclosures agree with
that presented in the previous period’s financial report, or
where appropriate, has been properly restated, and
– the accounting policies reflected in the comparative
information are consistent with those of the current period.
• Extent of audit procedures performed will be significantly
less than for the audit of the current period’s financial
information.
• If auditor becomes aware of a possible misstatement
auditor must perform additional audit procedures to identify
whether a material misstatement exists (ASA/ISA 710.08).

Auditor’s responsibilities for other
information in annual report
• Most annual reports include information that is not part
of the financial report, much of which contains or refers
to financial information (e.g. summaries
of 5–10 years of operating results, chairperson’s
and directors’ reports).
• There is no specific responsibility to substantiate other
information but auditor should review such information to
ensure it does not contain material inconsistencies or
misstatements of fact.
• If revision of ‘other information’ is necessary and
management refuses, auditor should include an OM
paragraph.

LO 12.7: Communications between
auditor and other parties
Shareholder communication
•The primary means of communication with shareholders is
the auditor’s opinion on the financial report included in the
annual report.
•A second major method of communicating with
shareholders is at the company’s annual general meeting
(AGM).
– However, the effectiveness of auditors’ attendance at
AGMs as a communication mechanism is limited, as
only a small minority of shareholders usually attend
these meetings.

Communicating with management
and those charged with governance
• ASA/ISA 260, supported by ASA/ISA 450, provides
guidance for the auditor in communicating with all
groups of directors and management.
• If the matter concerns a significant deficiency in
internal control, the auditor should also, on a timely
basis, communicate in writing such deficiencies to
those charged with governance (ASA/ISA 265.9).
• ASA/ISA 450.12 requires that the auditor
communicate with those charged with governance
any uncorrected misstatements and the effects that
they may have on the auditor’s report.

Communicating with
management
• Contacts between the auditor and management are
more extensive, more frequent and less formal than
those with shareholders, audit committees and boards
of directors.
• The auditor should also communicate to the
appropriate level of management any significant
deficiencies in internal control that they have
communicated to those charged with governance, as
well as other deficiencies identified during the audit
that are deemed sufficiently important to merit
management’s attention (ASA/ISA 265.10).

The management letter and
discussions with management
• The management letter is a written communication
between the auditor and management that is normally
issued at the conclusion of the audit engagement.
• This letter summarises the auditor’s recommendations
resulting from their assessment of the entity’s business risk
and inherent risk, and any recommended improvements in
internal control.
• The most critical discussions between the auditor and
management concerns the form and content of the
financial report. If accounting policies proposed by
management differ materially from those auditor believes
are appropriate, an alternative presentation must be
agreed or issue taken up with governing body.

Communicating with the audit
committee or board
• There is an increased emphasis on a company having
an effective audit committee (Chapter 3).
• Effective audit committees could be expected to inquire
of their auditor the extent to which executive
management has been aggressive in its choice of
accounting policies, and the extent to which the auditor
is independent of management.
• At the conclusion of the audit, the audit committee
should ask the auditor about any significant
disagreements with management and whether they
have been satisfactorily resolved.

Communicating through electronic
presentation of financial reports
• GS 006 Electronic Publication of the Auditor’s Report
provides guidance for the auditor in circumstances
where the entity decides to publish its audited
financial report on its website.
• Auditor must consider whether auditor’s report might
be construed as providing assurance on other
information on the website that was unaudited.
• Auditor should review website to ensure auditor’s
report cannot be construed as providing assurance
on this other unaudited information.

Summary
• The auditor’s report formally communicates the
auditor’s conclusion on the presentation of the
financial report and concisely states the basis for that
conclusion.
• Auditors have a reporting obligation with regard to
general-purpose financial reports.
• There have been recent changes to the auditor’s
report to improve its communication effectiveness.
• Auditors must determine the appropriate type of
opinion to issue.
• Auditor has reporting obligations to other parties.


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CHAPTER 12

The auditor’s reporting

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<Insert Exhibit 12.3, page 556-7

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<Insert Exhibit 12.4, page 557-8

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<Insert Exhibit 12.5, page 558-9

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<Insert Table 12.2, page 560

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