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• distinguish between the circumstances that could give rise to…

- - - - Qualified opinion
        
        after having obtained sufficient appropriate audit evidence, they conclude that uncorrected misstatements, either individually or in the aggregate, are material, but not pervasive, to the financial statements
        
        or, if unable to obtain sufficient appropriate audit evidence, that the possible effects of undetected misstatements on the financial statements are potentially material, but not pervasive (ISA 705, para. 7).
        
        Thus, the auditor is stating that in their opinion, except for the reservations outlined, the remainder of the financial statements can be relied upon.
        
        As outlined previously, the auditor should quantify any reservations so that the user can adjust the information contained in the financial statements.
        
        Qualified opinions are the most common of the three forms of modified opinions observed in practice, although they are still issued relatively infrequently.
      - Adverse Opinion
        
        An adverse opinion is a very serious form of modified opinion issued when the auditor concludes that misstatements are, either individually or in aggregate, material and pervasive to the financial statements (ISA 705, para. 8).
        
        The underlying message that the auditor is trying to convey is that they consider the financial statements to be misleading or of little use to the intended users.
      - General
        
        ISA 705 establishes standards and provides guidance to the auditor about the form and content of any modifications to the standard auditor’s opinion that are required.
        
        What does the auditor's decisions to give a modified opinion depend on?
        
        The nature of the matter giving rise to the modification
        
        the auditor's judgement about the pervasiveness of the effects or possible effects of the matter on the financial statements.
        
        Pervasive means that the effects or possible effects of misstatements are usually not confined to specific elements, accounts or items in the financial statements.
        
        What are the two types of modifications? [p304]
        
        Modifications of the auditor's opinion
        a. (most common) a qualified opinion [p305]: Except for the reservations outlined, the remainder of the financial statements present a true and fair view.
        b. (rare) an adverse opinion [p305]: the financial statements do not present a true and fair view
        c. (rare) a disclaimer of opinion (aka inability to form an opinion) [p306]: do not express an opinion of the financial reports as the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects could be both material and pervasive.
        i. ISA 580 says if there are sufficient doubts about the integrity of management and management does not provide written representations then the auditor should issue a disclaimer of opinion
        
        Modifications to the standard auditor's report but do not modify the auditor's opinion
        [p309]: Auditor believes it necessary to draw the reader's attention to either
        a. (emphasis of matter paragraph) matter appropriately presented or disclosed in the financial statements that are of such importance that they are fundamental to users' understanding of the financial statements
        b. (other matter paragraph) other matter not presented or disclosed in the financial statements that are relevant to users' understanding of the audit, the auditor's responsibilities or the auditor's report
        
        3 options table!!!
        
        Format
        
        The form and content of the standard (unmodified) auditor’s report changes when a modification to the auditor’s opinion is issued.
        
        if they become aware of these limitations after accepting an engagement and consider them likely to result in the issuing of a qualified opinion or disclaimer of opinion, they should request that management remove the limitation (ISA 705, para. 11).
        
        If management refuses to remove the limitation, the auditor should then discuss this with those charged with governance, and determine whether they can undertake alternative procedures to obtain sufficient appropriate audit evidence (ISA 705, para. 12).
        
        If the auditor is unable to obtain sufficient appropriate audit evidence and:
        (a) concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive, the auditor shall qualify the opinion; or
        (b) if the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive so that a qualification of the opinion would be inadequate to communicate the gravity of the situation, the auditor shall:
        (i) Withdraw from the audit, where practicable and possible under applicable law or regulation; or
        (ii) If withdrawal from the audit before issuing the auditor’s report is not practicable or possible, disclaim an opinion on the financial statements (ISA 705, para. 13).
        
        Matters giving rise to a modified opinion and the type of modification
        
        table 5.1!!!!!!
        
        The auditor’s inability to obtain sufficient appropriate audit evidence may arise from: BTM
        (a) circumstances that are beyond the control of the entity, such as an entity’s records having been destroyed by fire
        (b) circumstances relating to the nature or timing of the auditor’s work, such as the auditor being appointed after year end and being unable to attend the inventory stocktake
        (c) limitations imposed by management, such as the entity refusing the auditor’s request to undertake a debtors’ confirmation procedure with certain debtors.
        
        The auditor is particularly concerned about limitations imposed by management,
        
        Material misstatements may arise when there is a disagreement between the auditor and management in relation to: MAD
        (a) the appropriateness of the accounting policies selected by management, such as the choice of an accounting policy that is not allowed under the applicable financial reporting framework
        (b) the method by which selected accounting policies have been applied, such as management applying an accounting policy inconsistently to similar transactions
        (c) the appropriateness or adequacy of disclosures in the financial statements, such as the omission of certain disclosures required by the applicable financial reporting framework.
      - Disclaimer of Opinion
        
        A disclaimer of opinion should be expressed when the auditor ‘is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects’ of the adjustments could be both material and pervasive (ISA 705, para. 9).
        
        There is also a specific requirement in ISA 580, which states that if the auditor ‘concludes that there is sufficient doubt about the integrity of management such that the written representations required’ of management under ISA 580, paras 10–11 cannot be relied upon, or if management does not provide the required written representations, the auditor should issue a disclaimer of opinion (ISA 580, para. 20).
        
        communicate that the auditor cannot reasonably obtain the necessary evidence to resolve the uncertainty or multiple uncertainties that have arisen. Before issuing such an opinion,
        the auditor should first exhaust all reasonable alternative means of obtaining sufficient appropriate audit evidence.
    - - An auditor’s report may include additional communication
        
        (a) matters appropriately ‘presented or disclosed in the financial statements that are of such importance that they are fundamental to users’ understanding of the financial statements’ (emphasis of matter), or
        (b) any matters not ‘presented or disclosed in the financial statements that are relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report’ (ISA 706, para. 1). (other matter)
        
        Other Matter
        
        The inclusion of an Other Matter paragraph in the auditor’s report provides the auditor with the ability to draw the user’s attention to any other matter that is not presented or disclosed in the financial statements that they believe are sufficiently important to highlight and are relevant to the users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report (ISA 706, para. 10).
        
        Circumstances in which an Other Matter paragraph may be necessary include: WRF
        • where it is not possible to withdraw from the audit even though a limitation imposed by management on the scope of the audit is pervasive (a matter relevant to the users’ understanding of the audit)
        • where national regulations require or permit the auditor to further elaborate on their responsibilities in the audit (a matter relevant to the users’ understanding of the auditor’s responsibilities)
        • where the auditor’s report covers more than one set of financial statements, both prepared in accordance with general purpose financial frameworks, such as a national framework and International Financial Reporting Standards (a matter relating to reporting on more than one set of financial statements) (ISA 706, paras A9–14).
        
        Emphasis of Matter
        
        When the auditor determines that this is appropriate, the auditor includes an Emphasis of Matter paragraph in the auditor’s report provided that they have ‘obtained sufficient appropriate audit evidence that the matter is not materially misstated in the financial statements’.
        
        This paragraph should not contain any new information, but should ‘refer only to information presented or disclosed in the financial statements’ (ISA 706, para. 9).
        
        An Emphasis of Matter paragraph is not a modification to the auditor’s opinion
        
        care needs to be taken to ensure that this is clear to the user of the auditor’s report when describing the matter.
        
        First, the paragraph should be placed ‘within a separate section of the auditor’s report with an appropriate heading that includes the term ‘Emphasis of Matter’ (ISA 706, para. 9(a)).
        Second, the paragraph should clearly communicate ‘that the auditor’s opinion is not modified in respect of the matter emphasized’ (ISA 706, para. 9(c)) by use of words such as ‘Our opinion is not modified in respect of this matter’
        
        Examples
        
        an uncertainty relating to the future outcome of exceptional litigation or regulatory action;
        a significant subsequent event that occurs between the date of the financial statements and the date of the auditor’s report;
        early application (where permitted) of a new accounting standard [e.g. a new International Financial Reporting Standard] that has a material effect on the financial statements; and
        a major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position (ISA 706, para. A5).
        
        The auditor is cautioned that the widespread use of Emphasis of Matter paragraphs diminishes the effectiveness of the auditor’s communication of such matters
        
        In some cases the auditor considers it necessary to draw the reader’s attention to a matter presented or disclosed in the financial statements (usually in the notes to the financial statements) that is of such importance that the auditor considers it is fundamental to the users’ understanding of the financial statements.
- - - - figure 5.1!!!!
    - - ISA 700 deals with the auditor’s responsibility to form an opinion on the financial statements and the types of opinion that can be issued. It provides details of the form and the content of the auditor’s report, which effectively outline its predominant structure, with the requirement that this report be written and contain a clear expression of opinion as well as describing the basis for the opinion formed.
      - The opinion that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework means that the auditor has concluded that they have obtained reasonable assurance that the financial statements as a whole are free of material misstatement, whether due to fraud or error.
        
        This conclusion will take into account whether:
        (a) sufficient appropriate evidence has been obtained in accordance with ISA 330, which was discussed in Modules 3 and 4
        (b) any uncorrected misstatements are material, either individually or in aggregate, in accordance with ISA 450, which was discussed in Module 3 (ISA 700, para. 11).
        
        In evaluating whether the financial statements are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework, the auditor’s consideration includes whether: DEFTREP
        (a) the financial statements appropriately disclose the significant accounting policies selected and applied;
        (b) the accounting policies selected and applied are consistent with the applicable financial reporting framework and are appropriate;
        (c) the accounting estimates made by management are reasonable’;
        (d) the information presented in the financial statements is relevant, reliable, comparable and understandable;
        (e) the financial statements provide adequate disclosures to enable the intended users to understand the effect of material transactions and events on the information conveyed in the financial statements; and
        (f) the terminology used in the financial statements, including the title of each financial statement, is appropriate (ISA 700, para. 13).
        
        In determining whether the accounting estimates made by management are reasonable, the auditor takes into account qualitative aspects of the entity’s accounting practices.
        
        An important part of this is indicators of management bias, or a lack of neutrality, which may arise in the judgments made by management with regards to the amounts and disclosures in the financial statements.
        
        Indicators of a lack of neutrality include:
        (a) management adjusting misstatements that have the effect of increasing reported earnings, but not adjusting those that have the effect of decreasing reported earnings
        (b) possible management bias in the accounting estimates they have made (ISA 700, para. A2).
        Indicators of possible management bias do not constitute misstatements for purposes of drawing conclusions on the reasonableness of individual accounting estimates. They may, however, affect the auditor’s evaluation of whether the financial statements as a whole are free from material misstatement (ISA 700, para. A3).
      - If the auditor concludes that a standard (unmodified) auditor’s report is appropriate, this is generally communicated by the use of a standard format audit report.
        
        A measure of consistency in the format of the auditor’s report is seen as desirable in order to make more readily identifiable those audits that have been conducted in accordance with recognised auditing standards, and aiding the identification of any modifications to the auditor’s report.
      - Independence declarations
        
        the auditor is independent of the company in accordance with the International Ethics Standards Board for Accountants (IESBA) Code and other relevant ethical requirements in the jurisdiction (ISA 700, para. 28(c)).
        
        Australia
        
        a further independence declaration is also currently required of the auditors. It is seen as important that the auditor makes such a statement and communicates this to the financial statement users.
        
        This has been imposed in Australia through the Corporations Act, which requires auditors, when undertaking audits of companies, registered schemes or disclosing entities, to abide by certain independence requirements.
        
        Section 307C of the Corporations Act requires the individual auditor or lead auditor in a firm or company to give the directors of the audited entity a declaration that there have been no contraventions of the auditor independence requirements of the Corporations Act or any applicable ethics code or code of professional conduct.
        
        The declaration can be either an unqualified declaration or a qualified declaration; however, when a qualified declaration is given, the auditor is required to disclose in the declaration the details of the contraventions.
        
        Failure to give the declaration is a strict liability offence. However, s. 307C(7) provides some indemnity safeguards. Under s. 298(1)(c), the declaration is required to be included in the directors’ report for that year.
        
        non-audit services
        
        in Australia, s. 300(11B) of the Corporations Act also requires the board of directors of a listed company to provide
        a statement in the annual report that identifies all non-audit services provided by the audit firm and the fees applicable to each category of non-audit service.
        
        The section also requires the report to include a statement by the directors that they are satisfied that the provision of non‑audit services is compatible with the general standard of independence and an explanation of why those non‑audit services do not compromise audit independence.
        
        Section 300(11D) requires that where the listed company has an audit committee, this statement must be made in accordance with advice provided by that committee.
    - - One of the major changes made recently to the auditor reporting standards to disclose this information is under ISA 701 Communicating Key Audit Matters in the Independent Auditor’s Report.
      - definition
        
        ‘those matters that, in the auditor’s professional judgment, were of most significance in the audit of the [current period’s] financial statements’ (ISA 701, para. 8).
      - The KAMs that may be selected are from the population of those matters that are communicated to those charged with governance (ISA 701, para. 9).
      - average number of KAMs reported is slightly less than three.
      - Areas of significant auditor attention are often areas of complexity and/ or areas involving significant management judgment in the financial statements. They therefore often involve difficult or complex auditor judgments.
      - In making this determination, the auditor takes into account: REJ
        (a) Areas of higher assessed risk of material misstatement, or significant risks identified in accordance with ISA 315 [discussed in Module 3];
        (b) Significant auditor judgments relating to areas in the financial statements that involved significant management judgment, including accounting estimates that have been identified as having high estimation uncertainty;
        (c) The effect on the audit of significant events or transactions that occurred during the period (ISA 701, para. 9).
      - Communication of KAMs in the auditor’s report
        
        required for all audits of listed entities conducted in accordance with ISAs, or when otherwise required by law or regulation (ISA 700, paras 30–31). In accordance with ISA 701 (para. 11),
        
        the auditor describes each KAM in a separate section of the auditor’s report headed ‘Key Audit Matters’.
        
        The introductory language in this section of the auditor’s report states that:
        (a) Key audit matters are those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements [of the current period]; and
        (b) These matters were addressed in the context of the audit of the financial statements as a whole, and in forming the auditor’s opinion thereon, and the auditor does not provide a separate opinion on these matters (ISA 701, para. 11).
        
        The auditor uses an appropriate subheading to identify each KAM. The description of each matter in the KAM section should include a reference to any related disclosure in the financial statements and should outline:
        (a) why the matter was considered to be one of most significance in the audit and therefore determined to be a key audit matter; and
        (b) how the matter was addressed in the audit (ISA 701, para. 13).
        
        How should key audit matters be disclosed?
        
        • Disclosed under appropriate subheading in the key audit matter section of the auditor's report
        • Description of each matter should include a reference to any related disclosure in the financial report and outline why it is significance and how the matter was addressed in the audit
        
        Law or regulation precludes public disclosure about the matter
        
        (Rare circumstance) The auditor determines that the adverse consequences of communicating the matter would reasonably be expected to outweigh the public interest benefits of such communication.
        
        The auditor shall communicate those matters determined to be KAMs to those charged with governance, or, if applicable, their determination that there were no KAMs to communicate in the auditor’s report (ISA 701, para. 17).
      - ISA 705 - modified opinion
        
        When the auditor modifies their opinion in accordance with ISA 705 as a result of what they have identified as a key matter, they do not include this matter in the KAMs section of the auditor’s report (ISA 701, para. 12).