Auditing – Summary of SA 700, 705, and 706

Umirul Iffa Daniswari (422970)

SA 700: Forming an Opinion and Reporting on Financial Statements
Requirements of Forming an Opinion
The auditor shall form an opinion on whether the financial statements are prepared, in all material respects,
in accordance with the applicable financial reporting framework including qualitative aspects of entity’s
accounting policies and possible bias in management’s judgments.
He shall conclude as to whether he has obtained reasonable assurance about whether the financial statements
are free of material misstatements due to Fraud or Error based on: sufficient and appropriate audit evidence;
and whether uncorrected misstatements are material, individually or in aggregate.
Auditors’ evaluation to include particularly the following:
 Significant accounting policies applied
 Consistency of those policies
 Reasonable estimates are used by the management
 Information presented in relevant, reliable, comparable and understandable
 Disclosures are adequate to enable users to understand the effect of material transactions
 Terminology used is appropriate
Form of an Opinion
When the auditors concludes that the financial statements are prepared, in all material respects, in
accordance the applicable financial reporting framework, he shall express an UNMODIFIED OPINION
If the auditor concludes: (a) that based on audit evidence, the financial statements are NOT free of material
misstatements; (b) that he is unable to obtain sufficient appropriate audit evidence to conclude that the
financial statements are free of material misstatements; then he shall issue a modified opinion in accordance
with SA 705
Structure of the Auditors’ Report
Title: Should have a clear title – “Independent Auditors’ Report”
Addressee: Should be addressed as per the terms of engagement
Introductory Paragraph: The following information to be mentioned:
 Identify whose financial statements have been audited
 State the financial statements audited
 Identify the title of each statement in the financial statements
 Refer to the summary of significant accounting policies and explanatory information
 Specify the date or period covered
Management Responsibility Statement: Auditor shall describe the management responsibility for the
preparation of financial statements which includes design, implementation and maintenance of internal
control that the financial statements are free of material misstatements due to fraud or error
Auditors’ Responsibility: State that the auditors’ responsibility is to express an opinion on the financial
statements based on the audit. That the audit has been conducted in accordance with the Standards on
Auditing issued by the Institute of Chartered Accountants of India (ICAI). He should also explain that he has
to comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatements. The auditor should describe:
 That he has performed procedures to obtain audit evidence
 These procedures are based on auditors’ professional judgment
 That the audit also includes assessment of appropriateness of accounting policies used and
reasonableness of accounting estimates made. Evidence obtained should be sufficient and
appropriate
Auditors’ Opinion: The auditors’ opinion shall state that the financial statements are prepared, in all material
respects, in accordance with the applicable financial reporting framework. If the applicable financial
reporting framework is not the accounting standards issued by the ICAI, NACAS, ASB, etc., then the
auditor shall identify the jurisdiction.
Other reporting responsibilities: If other reporting responsibilities are addressed, they should be indicated.
Signature: The report shall be signed in the name of the partner and the membership number and firm
registration number should be mentioned
Date: report should be dated no earlier that the date when he obtains sufficient appropriate audit evidence
Place: The place of signature should also be mentioned
SA 705: Modifications to the Opinion in the Independent Auditor’s Report
Modifications in the Report
The auditor shall modify the opinion when: he concludes that, based on audit evidence, the financial
statements as a whole are NOT free of material misstatements; or the auditor is UNABLE to obtain
sufficient appropriate audit evidence to conclude that the financial statements are free of material
misstatements
Qualified Opinion
The auditor shall express qualified opinion when: he concludes that the misstatements, individually or in
aggregate, are MATERIAL, BUT NOT PERVASIVE to the financial statements; he is unable to obtain
sufficient appropriate audit evidence but also concludes that the possible effects of undetected misstatements
could be MATERIAL, BUT NOT PERVASIVE,
Adverse Opinion
When the auditor concludes that having obtained sufficient appropriate audit evidence, the misstatements,
individually or in aggregate, are BOTH MATERIAL AND PERVASIVE, he issues an adverse opinion.
Disclaimer of Opinion
When auditor is unable to obtain sufficient appropriate audit evidence and concludes that the possible effects
of undetected misstatements are BOTH MATERIAL AND PERVASIVE, he issues a disclaimer of opinion
Material Misstatements—Explained
Appropriateness of the selected accounting policies
Material misstatements relating to appropriateness may arise when: selected accounting policies are not
consistent with the applicable financial reporting framework; financial statements, including notes thereon,
do not represent underlying transactions and events that achieves fair presentation.
Application of selected accounting policies
Material misstatements relating to application may arise when accounting policies are not applied
consistently, including consistency between periods, similar transactions and events; method of application
is erroneous.
Appropriateness or adequacy of disclosures in the financial statements
Material misstatements relating to appropriateness or adequacy of disclosures may arise when: financial
statements do not include all disclosures required by the applicable financial reporting framework;
disclosures are not presented in accordance with the applicable financial reporting framework; the financial
statements do not provide the disclosures necessary to achieve fair presentation.
Form and Content of Modified Report
Basis of modification paragraph
- This is placed immediately before the opinion paragraph and under the heading “Basis of Qualified
Opinion, Basis of Adverse Opinion, Basis of Disclaimer of Opinion”
- Modification may relate to: specific amounts in the financial; narrative disclosures in the financial
statements; non-disclosure of information required to be disclosed.
- If it is an inability to obtain sufficient appropriate audit evidence, include the reason for inability
Amendments in the opinion paragraph
- Use the heading – “Qualified Opinion”, “Adverse Opinion”, or “Disclaimer of Opinion”
- Must use the phrases - “with the foregoing explanation” or “subject to” or “except that”
- Where a qualified opinion is issued due to material misstatement the auditor shall state in the opinion
paragraph that except for the matters described in the basis of qualified opinion, the financial
statements have been prepared, in all material respects, in accordance with the applicable financial
reporting framework
- When it is an inability to obtain sufficient appropriate audit evidence, the auditor shall use the
corresponding phrase “except for the possible effects of the matter(s)…” for the modified opinion
- When issuing an adverse opinion, the auditor shall state: that the financial statements DO NOT
PRESENT a true and fair view…
- When the auditor disclaims an opinion due to inability to obtain sufficient appropriate audit
evidence, he shall state: because of the significance of the matter(s) …
Amendments in the Auditors’ responsibility paragraph
 - In case of qualified opinion or adverse opinion, the auditor shall state that he believes that the audit
evidence is sufficient and appropriate to provide a basis for his MODIFIED audit opinion
- In case of disclaimer of opinion due to inability to obtain sufficient appropriate audit evidence: the
auditor shall amend the introductory paragraph to state that he was engaged to audit the financial
statements;
SA 706: Emphasis of Matter Paragraphs & Other Matter Paragraphs in Independent Auditor’s
Report
- The standard is effective for audit of financial statements for the period beginning on or after January
1 2013 (for issuer), or January 1 2014 (for entity aside from issuer)
- An emphasis of matter paragraph is useful when the auditor, having formed an opinion, intends to
draw the attention of the users to:
o A matter although appropriately presented or disclosed in financial statements that is of such
importance that it is fundamental to users understanding of the financial information
o As appropriate, any other matter that is relevant to users understanding of the audit, the
auditor responsibilities or the auditor’s report
o Any other matter relevant to the users’ understanding of the audit, auditor’s responsibility or
auditors’ report.
o Where an emphasis of matter paragraph is required by any other auditing standard, the
disclosure shall be as per this SA.
- Emphasis on matter paragraph means:
o Matter appropriately presented or disclosed in financial statements
o In auditors judgment it is fundamental to users understanding
- Other matter paragraph means:
o Matter other than those presented or disclosed
o In auditors judgment it is fundamental to users understanding.
o The auditor shall include this paragraph immediately after “Opinion paragraph” or any
“Emphasis on matter paragraph”
o The auditor shall use the heading of “other matter paragraph” or other appropriate heading.
- When the auditor decide to use emphasis on matter paragraph the auditor shall:
1. Include immediately after opinion paragraph in auditor’s report.
2. Use the heading of “Emphasis of matter” or other appropriate heading.
3. Include in the paragraph a clear reference to the matter being emphasized and to where the matter
can be found
4. Indicate that the auditors opinion is not modified in respect to matter emphasized
- Such a paragraph shall refer to information presented and disclosed
- The auditor should have obtained sufficient appropriate audit evidence that the matter is not
materially misstated
- The emphasis of matter paragraph shall be placed immediately after the Opinion paragraph in the
Auditors’ Report under the heading “Emphasis of Matter Paragraph”
- Include a clear reference to the matter being emphasized and to the relevant disclosures
- Indicate that the auditors’ opinion is NOT modified by using words like “Without qualifying our
opinion”
- If auditor wants to communicate any other matter not prohibited by law, he may do so using an
“Other Matter” paragraph immediately after the Emphasis of matter paragraph.