Day 1 Audit Report (Day 1)

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KnS School of Business Studies

ACCA F8 Audit & Assurance
Audit Report – ISA 700,701,705 and 706
Expected Questions on ‘Audit Report’

1. List & briefly explain the contents of an external audit report as per
ISA 700 (Revised).
2. List the contents of an audit report and also explain the reasons for
such para in the audit report/ appropriateness of such statements in
the audit report.
3. Explain the term modified opinion as per ISA 705.
4. Briefly explain the types of modifications.
5. Explain the term unmodified opinion and also draft an opinion
paragraph for such an opinion.
6. Briefly list the contents of an auditor’s responsibility para as per
ISA 700.
7. Identify & explain the errors in the given extracts of an audit report.
8. Define / briefly explain the term Pervasive & explain with
examples.
9. Briefly explain the conditions of an E.O.M para & also list the
example of situations under which an E.O.M para can be given by
the Auditor.
10. List the contents of an E.O.M para / Features of an EOM para.
11. Briefly explain the conditions of an O.M para & also list the
example of situations under which an O.M para can be given by the
Auditor.
12. Briefly list the contents of a basis for modification paragraph.
13. List the changes in the audit report as per ISA 705 in the case of a
disclaimer of opinion.
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Prepared by M.Sajid Kapadia (ACA,FCCA,APFA)

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14. Define KAM & list the factors to be considered by the auditor to
place KAM para in the audit report.
15. List the contents of KAM para as per ISA 701.
16. Scenario based question (V.Imp)
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Example of an Unmodified Opinion

INDEPENDENT AUDITOR'S REPORT (As per ISA 700 Revised)
To the Shareholders of Company [or Other Appropriate Addressee]
Report on the Audit of the Financial Statements
Opinion
We have audited the financial statements of ABC Company (the Company), which comprise the
statement of financial position as at December 31, 2OX1, and the statement of comprehensive
income, statement of changes in equity and statement of cash flows for the year then ended, and
notes to the financial statements, including a summary of significant accounting policies.
( 2nd Para – This is opinion on the F/S)

In our opinion, the accompanying financial statements present fairly, in all material
respects, (or give a true and fair view) of the financial position of the Company
as at December 31, 20X1, and (of) its financial performance and its cash flows for the year
then ended in accordance with international Financial Reporting Standards (IFRS).
Basis for Opinion para (This is standard para)

We conducted our audit in accordance with international Standards on Auditing (ISAs). Our
responsibilities under those standards are further described in the Auditors Responsibilities for the
Audit of the Financial Statements section of our report. We are independent of the Company in
accordance with Code of Ethics for Professional Accountants (IESBA Code) together with the
ethical requirements that are relevant to our audit of the financial statements, and we have
fulfilled our other ethical responsibilities in accordance with these requirements.
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We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.
Key Audit Matters (ISA 701) ------Significant Matters for the current period
Key audit matters are those matters that, in our professional judgment, were of most significance
in our audit of the financial statements of the current period. These matters
were addressed in the context of our audit of the financial statements as a whole, and in forming
our opinion thereon, and we do not provide a separate opinion on these matters.
[Description of each key audit matter in accordance with ISA 701, which applies to audits of the
financial statements of listed entities.]
Other Information (ISA 720)
Responsibilities of Management and Those Charged with Governance

for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in
accordance with IFRS and for such internal control as management determines is necessary to
enable the preparation of financial statements that are free from material misstatement, whether
due to fraud or error.
(To be covered in ISA 570)

In preparing the financial statements, management is responsible for assessing the Company’s
ability to continue as a going concern, disclosing, as applicable, matters related to going concern
and using the going concern basis of accounting unless management either intends to liquidate
the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting
process.
Auditor’s Responsibilities for the Audit of the Financial Statements

……(Most Important)
Our objectives are to obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error, and to issue an
auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but
is not a guarantee that an audit conducted in accordance with ISAs will always detect a material
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misstatement when it exists.

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Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken
on the basis of these financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgment and maintain
professional skepticism throughout the audit. We also:
1. Identify and assess the risks of material misstatement of the financial statements, whether
due to fraud or error, design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement resulting
from fraud is higher than for one resulting from error, as fraud may involve collusion,
forgery, intentional omissions, misrepresentations, or the override of internal control.
2. Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but NOT for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control.
3. Evaluate the appropriateness of accounting policies used and the reasonableness of

accounting estimates and related disclosures made by management.
( to be covered under ISA 570)

4. Conclude on the appropriateness of management’s use of the going concern basis of
accounting and, based on the audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast significant doubt on the Company’s
ability to continue as a going concern. If we conclude that a material uncertainty exists,
we are required to draw attention in our auditor’s report to the related disclosures in the
financial statements or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date of our auditor’s
report. However, future events or conditions may cause the Company to cease to continue
as a going concern.
5. Evaluate the overall presentation, structure and content of the financial statements,
including the disclosures, and whether the financial statements represent the underlying
transactions and events in a manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the
planned scope and timing of the audit and significant audit findings, including any significant
deficiencies in internal control that we identify during our audit.
(in the case of Listed company)

We also provide those charged with governance with a statement that we have complied with
relevant ethical requirements regarding independence, and to communicate with them
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all relationships and other matters that may reasonably be thought to bear on our independence,
and where applicable, related safeguards.
(in the case of Listed company)

From the matters communicated with those charged with governance, we determine those
matters that were of most significance in the audit of the financial statements of the current
period and are therefore the key audit matters. We describe these matters in our auditor’s report
unless law or regulation precludes public-disclosure about the matter or when, in extremely rare
circumstances, we determine that a matter should not be communicated in our report because the
adverse consequences of doing so would reasonably be expected to outweigh the public interest
benefits of such communication.
Report on Other Legal & Regulatory Requirements (This para depends upon the local law)
[The form and content of this section of the auditor’s report would vary depending on the nature
of the auditor's other reporting responsibilities prescribed by local law or national auditing
standards.
Name of Engagement Partner
Signature in the name of the audit firm, the personal name of the auditor, or both, as appropriate
Auditor Address
Date of Audit Report

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Contents of an Audit Report (ISA 700 Revised)
Shortcut to REM contents
Explanation
Title of the Report The auditor’s report must have a title that clearly
indicates that it is the report of the independent auditor.
This signifies that the auditor has met all the ethical
requirements concerning independence and therefore
distinguishes the auditor’s report from other reports.
Addressee The address will be determined by the law or regulation,

but is likely to be the shareholders or those charged with
governance.
Opinion paragraph The opinion paragraph must identify the entity being
audited, state that the financial statement have been
audited, identify the title of each statement that
comprises the F/S being audited refer to the summary of
significant accounting policies and other explanatory
notes, and specify the notes, and specify date or period
covered by each statement comprises the financial
statements
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If the auditor expresses an unmodified opinion on
financial, the opinion shall use one of the following
equivalent phrases
 The financial statements present fairly, in all

material respects, OR give a true and fair view of
…. In accordance with [ the applicable financial
reporting framework eg IFRS].
Basis for opinion Para The basis for opinion paragraph must state that the
audit was conducted in accordance with ISAs, and refer
to the Auditor’s responsibilities for the audit of the
financial statements’ section which describes the
auditor’s responsibilities under the ISAs.
The Auditor must also state that they are independent
of audited entity, in accordance with the relevant
ethical requirements relating to the audit.
Finally, the auditor must state that they believe the

audit evidence obtained is sufficient, and appropriate to
provide a basis for the audit opinion.
Key audit matters (ISA 701) For the audit of listed entities, or where required by law
or regulation, the auditor should include Key audit
matters section. This section describes the matters that,
in the auditor’s professional, judgment, are most
significant to the audit of the current period.
Other information For the audit of listed entities or any other entity where
(ISA 720) the auditor has obtained other information, another
information section should be included in the auditor’s
report. This section should include
 A statement that management is responsible for
the other information
 A statement that the auditor’s opinion does not

cover the other information
 A description of auditor’s responsibilities for

reading considering and reporting on other
information, and
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 Where other information has been obtained,
either a auditor has nothing to report, or a
description of any uncorrected material
misstatement.
Responsibilities for the This part of the report describes the responsibilities of
Financial statements those who are responsible for the preparation of the
(Mgmt. and TCWG) financial statements. This section should describe
management’s responsibilities including the following
 The preparation of financial statement in

accordance with the applicable financial
reporting framework;
 The implementation of such internal control as

are necessary to enables the preparation of the
financial statements that are free from material
misstatement, whether due to error or fraud.
 The assessment of the entity’s ability to continue

as a going concern, the appropriateness of the
going concern basis of accounting and adequacy
of its disclosures;
Auditor's responsibilities for the

audit of financial statements  The auditor’s objectives are to obtain reasonable
assurance whether the financial statements as a
whole are free from material misstatement, and
to issue an auditor’s report that includes the
auditor’s opinion; and
 Reasonable assurance is a high level of
assurance, but is not a guarantee that an audit
conducted in accordance with the ISAs will
always detect a material misstatement when it
exists.
The report must also:

 Explain that misstatements can arise from
fraud or error
 Describe the meaning of materiality
 Explain that the auditor exercises
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professional judgment and maintains
professional skepticism throughout the audit
 Describe the auditor’s responsibilities in an
audit.
Other reporting responsibilities If the auditor is required by law to report on any other
matters, this must be done in an additional paragraph
titled ‘Report on the other legal and regulatory
requirements or otherwise as appropriate’.
Name of the engagement partner The name of engagement partner should be identified in
the Audit report.
Auditor’s signature The report must contain the auditor’s signature, whether
this is the auditor’s own name or the audit firm’s name.
Auditor’s Address The location where the auditor practices must be

mentioned.
Date of the report (D.O.R) The report must be dated no earlier than the date on
which the auditor has obtained sufficient appropriate
audit evidence on which to base the auditor’s opinion.
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Audit Report
Types of Audit Opinions
1. Unmodified Opinion
This opinion is expressed when there is no Material misstatement and there is no inability
to obtain sufficient appropriate audit evidence by the External auditor.
2. Modified Opinion (Covered under ISA 705)

When the audit opinion is not in the original form i.e other than Unmodified opinion.
There are three types of modified opinions.
 Qualified opinion
 Adverse opinion
 Disclaimer of opinion
Core elements of an Audit Report (as per ISA 700 Revised)
Shortcut is TOK-BRAND (there are 13 contents)
(Already covered in previous handout )
When auditor MODIFY’s the AUDIT opinion…….
The ISA 705 states that the auditor shall modify the opinion in the auditor’s report when:
 The auditor concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement; or
 The auditor is unable to obtain sufficient appropriate audit evidence to conclude
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that the financial statements as a whole are free from material misstatement.

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Modified Opinions:
Qualified Opinion, Adverse Opinion
and a Disclaimer of Opinion
Concept of Pervasive:
Definition
A term used, in the context of misstatements, to describe the effects on the financial
statements of misstatements or the possible effects on the financial statements of
misstatements, if any, that are undetected due to an inability to obtain sufficient
appropriate audit evidence. Pervasive effects on the financial statements are those that, in
the auditor’s judgment:
1.Are not confined to specific elements, accounts or items of the financial statements;
(Misstatements are multiple and are in various heads of both P&L and B/S and multiple
elements could not be verified)
2.If so confined, represent or could represent a substantial proportion of the financial
statements; or
(One misstatement is 30% of profit before tax or say that Inventory could not be verified
amounting to 45 % of total assets.)
3.In relation to disclosures, are fundamental to users’ understanding of the financial

statements.
(A disclosure that if not given or not adequate could seriously mislead the shareholders and stake
holders eg No disclosure in the case of going concern as per ISA 570)
PERVASIVENESS……………………………………………….( bohat ala !!!)
Pervasiveness is a matter that confuses many candidates as; once again, it is a matter that requires
professional judgment. In this case the judgment is whether the matter is isolated to specific
components of the financial statements, or whether the matter pervades many elements of the
financial statements, rendering them unreliable as a whole.
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The bottom line is that ….IF the auditor believes that the financial statements may be relied
upon in some part for decision making then the matter is material and not pervasive. If,
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however, they believe the financial statements should NOT be relied upon at all for making
decisions then the matter is PERVASIVE.
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Qualified Opinion:
When there is ……
Material Misstatement = Material but not Pervasive

OR Auditor is Unable to obtain S.A.A.E = Material but not Pervasive
Drafting of QUALIFIED OPINION
In the case of Material Misstatement…………….
Because of TREATMENT
In our opinion, except for the effects of the matter described in the Basis for Qualified
Opinion section of our report, the accompanying financial statements present fairly, in all
material respects, (or give a true and fair view of) the financial position of the Company as at
December 31, 20Xl, and (of) its financial performance and its cash flows for the year then
ended in accordance with International Financial Reporting Standards (IFRSs).
Because of DISCLOSURE
In our opinion, except for the incomplete disclosure of the matter described in the Basis for
Qualified Opinion section of our report, the accompanying financial statements present
fairly, in all material respects, (or give a true and fair view of) the financial position of the
Company as at December 31, 20Xl, and (of) its financial performance and its cash flows for
the year then ended in accordance with International Financial Reporting Standards
(IFRSs).
In the case of Inability to obtain S.A.A.E
In our opinion, except for the possible effects of the matter described in the Basis for Qualified
Opinion section of our report, the accompanying financial statements present fairly, in all
material respects, (or give a true and fair view of) the financial position of the company as at
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December 31, 20Xl, and (of) its financial performance and its consolidated cash flows for the
year then ended in accordance with International Financial Reporting Standards (IFRSs).

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Adverse Opinion
When there are Material Misstatements individually or in the aggregate and are both Material
&Pervasive to the Financial statements taken as a whole.
Because of TREATMENT
In our opinion, because of the significance of the matter discussed in the Basis for Adverse
Opinion section of our report the accompanying financial statements do not present fairly (or
do not give a true and fair view of) the financial position of the company as at December 31
20X1, and (of) its financial performance and its cash flows for the year then ended in
accordance with International Financial Reporting Standards (IF'RSs).
Because of DISCLOSURE
In our opinion, because of the omission of the matter discussed in the Basis for Adverse
Opinion section of our report the accompanying financial statements do not present fairly (or
do not give a true and fair view of) the financial position of the company as at December 31
20X1, and (of) its financial performance and its cash flows for the year then ended in
accordance with International Financial Reporting Standards (IF'RSs).
Adverse opinion
An adverse opinion is expressed when the auditor, having obtained sufficient appropriate audit
evidence, concludes that misstatements are both material and pervasive to the financial
statements. The table below gives on example of why an adverse opinion might be expressed for
each of the three possible reasons for misstatements being determined as pervasive.
Reason deemed pervasive Explanation
Misstatements are NOT confined to No depreciation has been provided on plant

specific elements accounts or items in the and equipment, a receivable balance
financial statements consisting half of total receivable and has not
been provided and trade payable have been
significantly understated.
All misstatements are material and these
balances are significant on the statement of
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financial position (SOFP)

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Misstatements are not confined to specific A house building company has included all
elements accounts or items in the financial the houses it has constructed in the year as
statements and represent a substantial non-current assets rather than inventory. The
portion of the financial statements. value of these houses constitutes 90% of the
total assets value on the SOFP.
Misstatements related to disclosures which There is a material uncertainty in respect of

are fundamental to users understanding of going concern which has not been
the financial statements adequately disclosed.
Disclaimer of Opinion
Auditor is Unable to obtain S.A.A.E on which to base the audit opinion AND the matter is
Material AND Pervasive
ISA 705 states that the auditor shall disclaim an opinion 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 on the financial statements of undetected misstatements, if any, could be both
material and pervasive.
We do not express an opinion on the accompanying financial statements of Company.

Because of the significance of the matters described in the basis for Disclaimer of Opinion
section of our report, we have not been able to obtain sufficient appropriate audit evidence
provide a basis for an audit opinion on the financial statements.
EXCEPTION
ISA 705 states that the auditor shall disclaim an opinion when, in extremely rare circumstances
involving multiple uncertainties, the auditor concludes that, notwithstanding having obtained
sufficient appropriate audit evidence regarding each of the individual uncertainties, it is not
possible to form an opinion on the financial statements due to the potential interaction of the
uncertainties and their possible cumulative effect on the financial statements.
IMPORTANT…Changes in the Audit Report in the case of Disclaimer of Opinion
1.
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2.

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3.
4.
5.
6.
7.
8.
(The above has been covered via Video lecture)
Report Structure in the case of ………………..MODIFICATION IMP
Headings for OPINION PARA plus its IMP wordings
Qualified opinion……..In our opinion Except for the effects of the

matter……………………………………..
Qualified opinion……..In our opinion Except for the POSSIBLE EFFECT…………
Adverse opinion………In our opinion because of the significance……………………
Disclaimer of Opinion…Because of the significance of the matter……………………
BASIS FOR MODIFICATION PARA………….Contents !
1.Reason for modification

2.Amount involved.
3.M.M or Inability to obtain SAAE
4.Reference of relevant IAS or IFRS
5.Impact on variables like P&L and B/S had the adjustment been made in the F/S.
6.In the case of inability to obtain SAAE, the reason for that inability to obtain SAAE.
7.Reference to a disclosure note in the F/S where the matter is explained further in detail.
.
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In case of M.M due to disclosures

There may be an inadequate disclosure OR No Disclosure
In the case of inadequacy of Disclosure

The external auditor to explain in the basis para that inadequacy of disclosure in the F/S
If there is a M.M that relates to non-disclosure the auditor shall:
 Discuss the matter with top mgmt.

 Describe the nature of omitted information in basis for modification para
 If practically possible, include the omitted disclosures UNLESS prohibited by law /regulation.
Disclosing the omitted information in the basis for modification paragraph would not be
practicable if:
 The disclosures have not been prepared by management or the disclosures are otherwise not
readily available to the auditor; or
 In the auditor’s judgment, the disclosures would be unduly voluminous in relation to the
auditor’s report.
Inability to obtain sufficient appropriate audit evidence

Inability to obtain S.A.A.E (also called Limitation of Scope)
(1) Circumstances BEYOND the control of the entity:

Force majeure events (fire, floods, storms etc.)
Assets have been misappropriated by Govt.
Accounting records have been seized by Govt. authorities
(2) Circumstances relating to the NATURE OR TIMING of the Auditor’s work:

Timing: Auditors appointment was such that they could NOT verify the stock counting or other
counting of assets at the B/S date.
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Nature : Substantive Procedures cannot be performed because of system automation and the
results of TOCs are not effective.
(3) Limitations imposed by management:

(In this case, external auditor is being prevented by management to perform the desired Audit
procedures.
Eg :
Not allowing the dispatch of debtor / creditor confirmation,
Preventing the counting of stock at yearend,
Preventing from meeting with persons whom auditors think appropriate for the purpose of audit
Not providing the required Purchase Orders and sales invoices etc.
IMP
If alternative/further audit procedures can be performed by the External Auditor, this will NOT
constitute an inability to obtain sufficient appropriate audit evidence.
Material Misstatement………….3 Things
Difference between the amount, classification presentation or disclosure of an item which is

reported in financial statements and what was required to be reported in accordance with AFRF.
Accordingly, a material misstatement of the financial statements may arise in relation to:
a) The appropriateness of the selected accounting policies;

b) The application (Treatment) of the selected accounting policies; or
c) The appropriateness or adequacy of disclosures in the FS.
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Emphasis of Matter Paragraph (E.O.M) + Other Matter Para (ISA 706 Revised)
E.O.M= Matter is FUNDAMENTAL to the User’s

understanding +
The matter has already been presented & disclosed in
the financial statements
Further Conditions:
There is no Material Misstatement &
Inability to obtain sufficient appropriate audit evidence
IMP POINTS
1. EOM will not be given for a matter that has already been discussed in KAM para.
2. EOM will not be given for a matter that has already been discussed in Basis for
Modification para.
3. EOM will not be given for a matter that has already been discussed in Other matter
para.
Few circumstances / Examples of E.O.M: ………………… (Please Learn…! )
1. An uncertainty relating to the future outcome of exceptional litigation or regulatory action.

2. Early application of new IFRS/IAS that has a MATERIAL effect on the financial statements.
3. Major catastrophe that has had or continues to have a significant effect on the entity’s
financial position
4. Significant subsequent events ( ISA 560 ) that occur between the date of F/S and the
auditor’s report
5. Any Other case as the external auditor may think appropriate in the circumstances.
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E.O.M required by standard
ISA 560
ISA 570
Contents of an E.O.M Paragraph (also called features of an EOM para) (Please Learn…! )
1. It highlights a matter affecting the financial statements.

2. It highlights a matter already disclosed in the notes to the financial statements.
3. The Para must clearly refer to the note in the financial statements that more extensively
discusses the matter highlighted.
4. The EOM Para is inserted immediately before / after the KAM Para. ( with the Heading of
EOM)
5. The Para must clearly mention that our opinion is not MODIFIED in respect of this matter.
EXAMPLE of an E.O.M PARA
Other Matter Paragraph
If the auditor considers it necessary to communicate matters not presented or disclosed in the
financial statements that in the auditor’s judgment is RELEVANT to;
the user’s understanding of the audit;

the auditor’s responsibility or
auditor’s report,
The auditor shall do so by adding paragraph in the auditor’s report called “Other Matter
Paragraph” provided such communication is not prohibited by law or regulation.
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(It refers to a matter other than those presented or disclosed in the financial statements)

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Important Points:
Examples / Circumstances when OTHER MATTER Para is given in the Audit

Report…………
1. If prior period financial statements were NOT audited.
2. If prior period financial statements were audited by a predecessor auditor (date of report +
opinion expressed to be mentioned in the other matter para)
Example of Other Matter para
3. Relevant to Users Understanding of the Audit
In rare circumstances auditor could not withdraw (because of legal requirements) even
though the effect of inability to obtain SAAE (due to management imposed limitation)
was material and pervasive, auditor may consider to include an OTHER MATTER Para
describing the reason for not withdrawing from the engagement.
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EXAMPLES OF MODIFICATIONS
Illustration 1:
Qualified Opinion – M.M
INDEPENDENT AUDITOR'S REPORT
To the Shareholders of ABC Company [or Other Appropriate Addressee]
Qualified Opinion
We have audited the financial statements of ABC Company (the Company),which comprise the
statement of financial position as at December 31 20XI and the statement of comprehensive
.. .. .' !
income, statement of changes in equity and statement of cash flows for the year then ended, and
notes to the financial statements, including a summary of significant accounting policies.
In our opinion, except or the effects of the matter described in the Basis for Qualified Opinion
section of our report, the accompanying financial statements present fairly, in all material
respects, (or give a true and fair view of) the financial position of the Company as at December 31,
20Xl, and (of) its financial performance and its cash flows for the year then ended in accordance
with International Financial Reporting Standards (IFRSs).
Basis for Qualified Opinion

The Company's inventories are carried in the statement of financial position at xxx
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 IFRSs. The Company's records
indicate that, had management stated the inventories at the lower of cost and net realizable value,
an amount of xxx would have been required to write the inventories down to their net realizable
value. Accordingly, cost of sales would have been increased by xxx, and income tax, net income
and shareholders' equity would have been reduced by xxx, xxx and xxx, respectively.
We conducted our audit in accordance with International Standards on Auditing, (ISAs). Our
responsibilities under those standards are further described in the Auditor's responsibilities for the
Audit of the financial statements section of our report. We are independent of the Company in
accordance with the ethical requirements that are relevant to our audit of the financial statements
in [jurisdiction], and we have fulfilled our other ethical responsibilities in accordance with these
requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
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basis for our qualified opinion.

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Illustration 2:
Adverse Opinion – M.M
Report on the Audit of the Consolidated Financial Statements
Adverse Opinion
We have audited the consolidated, financial statements of ABC Company and its subsidiaries
(the Group), which comprise the consolidated statement of financial position as at December 31,
20X1, and the consolidated statement of comprehensive income, consolidated statement of
changes in equity of the consolidated statement cash flows for the year then ended, and notes to
the consolidated financial statements, including summary of significant accounting policies.
In our opinion, because of the significance of the matter discussed in the Basis for Adverse
Opinion section of our report the accompanying consolidated financial statements do not present
fairly (or do not give a true and fair view of) the consolidated financial position of the Group as
at December 31 20X1, and (of) its consolidated financial performance and its consolidated cash
flows for the year then ended in accordance with International Financial Reporting Standards
(IF'RSs).
Basis for Adverse Opinion
As explained in Note X, the Group has not consolidated subsidiary XYZ Company that the
Group acquired during 20X1 because it has not yet been able to determine the fair values of
certain of the subsidiary's material assets and liabilities at the acquisition date. This investment is
therefore accounted for on a cost basis. Under IFRSs, the Company should have to consolidated
this subsidiary and accounted for the acquisition based on provisional amounts. Had XYZ
Company been consolidated, many elements in the accompanying consolidated financial
statements would have been materially affected. The effects on the consolidated financial
statements of the failure to consolidate have not been determined.
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our
responsibilities under those standards are further described in the Auditor's Responsibilities for
the Audit of the Consolidated Financial Statements section of our report. We are independent of
the Group in accordance with the ethical requirements that are relevant to our audit of the
consolidated financial statements in [jurisdiction], and we have fulfilled our other ethical
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responsibilities in accordance with the requirements.

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We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our adverse opinion.
Illustration 3:
Qualified Opinion – Inability to Obtain SAAE
Report on the Audit of the Consolidated Financial Statements
Qualified Opinion
We have audited the consolidated financial statements of ABC Company and its subsidiaries (the
Group),which comprise the consolidated statement of financial position as at December 31, 20X1,
and the consolidated statement of comprehensive income, consolidated statement of changes in
equity of the consolidated statement of cash flows for the year then ended, and notes to the
consolidated financial statements, including summary of significant accounting policies.
In our opinion, except for the possible effects of the matter described in the Basis for Qualified
Opinion section of our report, the accompanying consolidated financial statements present fairly,
in all material respects, (or give a true and fair view of) the financial position of the group as at
December 31, 20Xl, and (of) its consolidated financial performance and its consolidated cash
flows for the year then ended in accordance with International Financial Reporting Standards
(IFRSs).
Basis for Qualified Opinion·
The Group's investment in XYZ Company, a foreign associate acquired during the year and
accounted for by the equity method, is carried at xxx on the consolidated statement of financial
position as at December 31, 20X1, and ABC's share of XYZ's net income of xxx is included in
ABC's income for the year then ended. We were unable to obtain sufficient appropriate audit
evidence about the carrying amount of ABC's investment in XYZ as at December 31, 20X1and
ABC's share of XYZ's net income for the year because we were denied access to the financial
information, management and the auditors of XYZ. Consequently we were unable to determine
whether any adjustment to these amount were necessary.
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our
responsibilities under those standards are further described in the Auditor's Responsibilities for the
Audit of the Consolidated Financial Statements section of our report. We are independent of the
23
Group in accordance with the ethical requirements that are relevant, to our audit of the consolidated
financial statements in [jurisdiction], and we have fulfilled our other ethical responsibilities in

24

accordance with the requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our qualified opinion.
Illustration 5 Disclaimer of Opinion due to the Auditor's Inability to Obtain

Sufficient Appropriate Audit Evidence About Multiple Elements of the
Financial Statements
To the shareholders of ABC Company [or other the Company Appropriate Addressee]
Disclaimer of Opinion
We were engaged to audit financial statement of the ABC company, (the company) which
comprise the statement of financial position as at December 31, 20X1, and the statement of
comprehensive income, statement of changes in equity and statement of cash flow for the years
then ended, and notes to the financial statements, including a summary of significant accounting
policies.
We do not express an opinion on the accompanying financial statements of the company.

Because of the significance of the matter described in the Basis for Disclaimer of Opinion section of
our report, we have not been able to obtain sufficient appropriate audit evidence to provide a
basis for an audit opinion of the financial statements.
Basis for Disclaimer of Opinion
We were not appointed as auditors of the Company until after December 31, 20X1and thus 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 inventory quantities held at
December 3I, 20X0 and 20Xl, which are stated in the statements of financial position at xxx and
xxx, respectively. In addition, the introduction of a new computerized accounts receivable system
in September 20X1 resulted in numerous errors in accounts receivable. As of the date of our
report, management was still in the process of reflecting the system deficiencies and correcting the
errors.
We were unable to confirm or verify by alternative means accounts receivable included in the
statement of financial position at a total amount of xxx as at December 31, 20X1. As a result of
24
these matters, we were unable to determine whether any adjustments might have been found
necessary in respect of recorded or unrecorded inventories and accounts receivable, and the

25

elements making up the statement of comprehensive income statement of changes in equity and
statement of cash flows.
Responsibilities of Management and Those Charged with Governance for the

Financial Statements
[Reporting in accordance with ISA 700 (Revised)see illustration 1 in ISA 700 (Revised).]
Auditor's Responsibilities for the Audit of the Financial Statements

Our responsibility is to conduct an audit of the Company's financial statement in accordance with
International Standards on Auditing and to issue an auditor's report. However, because of the
matters described in the Basis for Disclaimer of Opinion section of our report, we were not able to
obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these
financial statements.
We are independent of the company in accordance with the ethical requirements that are relevant
to our audit of the financial statements in [jurisdiction], and we have fulfilled our other ethical
responsibilities in accordance with these requirements.
Report on Other Legal and Regulatory Requirements

[Report in accordance with ISA 700 (revised)- See illustration 1 in ISA 700 (Revised)]
Signature in the name of audit firm, the personal name of the auditor, or both, as approve for the particular
jurisdiction]
[Auditor Address]
[Date]
25

26

KEY AUDIT MATTERS (KAM- ISA 701)

Expected Questions on KAM
1. Briefly explain the concept of KAM and list examples of matters that can be
included or placed in KAM para as per ISA 701.
2. Determine the matters to be considered to place a matter as KAM in the
audit report.
3. Explain the factors to be considered in determining whether a matter will be
placed in KAM para.
4. Importance of KAM
5. Highlight errors in the standard KAM para
6. Placement of KAM in the audit report.
7. Scenario based question along with the audit report
---------------------------------------------------------------------------------------------------------------------------------------------------
Auditor shall communicate key audit matters in the auditor's report for audits of
 Listed entities
 Entities other than listed entities, if required by la w
 Other entities decided by the auditor using his professional judgment, including those that may be
of significant public interest,
Purpose and Importance of KAM in the Audit report

Communicating key audit matters provides additional information to intended users of the
financial statements to assist them in understanding those matters that, in the auditor's
professional judgment, were of most significance in the audit of the financial statements of the
current period.
KEY Word for KAM

Most significant matters for the CURRENT period that are selected from
the matters communicated with TCWG
1. The auditor to perform the following:
a. Determine the matters which should be described as KAMs
b. Communicate - the KAM to TCWG
c. Communicate - KAM in the Audit Report.
d. Maintain proper documentation as per ISA 230
26

27

2. Features of KAM
a. Matters that were communicated to Board Audit Committee or other BOD members
b. Matters that required significant attention
c. Matters of most significance in audit. (e.g.: Provision for Law suit)
d. Issue pertains to current period only
3. KAM is NOT ………………………(very very important)

 A substitute for disclosures on the financial statements (AFRF)
 A substitute for a modified opinion (ISA 705)
 A substitute for reporting a material uncertainty related to GC (ISA 570)
 A separate opinion on individual matters (ISA 700 – other reporting resp.)
 An implication that matter has not been resolved by the auditor.
4. Types / Examples of matters reported by different auditors as KAM
 Property valuation and impairment

 Goodwill impairment
 Inventory valuation
 Revenue recognition
 Change in accounting policy
 Claims & litigation
 Taxation (deferred and current)
 I.T environment and control deficiencies
 Management override of controls
5. Why KAM in the Audit REPORT………..

(Explain how the auditor determines that whether a matter will be placed as KAM or not)
 High ROMM
 Significantly subjective or Judgmental
 Uncertainty of matter
 Complex issue
 Areas where an expert is required or any consultation was required
 Assessed Significant Risks that required significant audit attention/
27
Significant transactions and events affecting the audit

28

 Change in audit approach during the audit as a result of an unexpected audit evidence
Descriptions of individual Key Audit Matters in the Audit Report - IMP

(Contents of KAM Para in the Audit report)
The description of each key audit matter in the Key Audit Matters section of the auditor's report shall
 Include a reference to the related disclosure(s), if any, in the financial statements;
 State that why the matter was considered to be one of most significance in the audit; and
 Specify how the matter was addressed in the audit
o A brief overview of procedures performed;
o An indication of the outcome of the auditor's procedures; or
o Key observations with respect to the matter,
Placement of KAM in the Audit report

In the case of Listed company + KAM ( Listed co )
(Unmodified opinion)
Key Audit Matters are those matters that, in our professional judgment, were of the significance
in our audit of the financial statements of the current period. These matters were addressed in the
context of our audit of the financial statements as a whole, and in forming our opinion thereon,
and we do not provide a separate opinion on these matters.
[Description of each key audit matter in accordance with ISA 701, which applies to
audit of the financial statements of listed entities….]
In the case of Modification of opinion (Qualified or Adverse opinion)

+ KAM ( Listed co )
Key Audit Matters
Key Audit Matters are those matters that, in our professional judgment, were of the significance
in our audit of the financial statements of the current period. These matters were addressed in the
context of our audit of the financial statements as a whole, and in forming our opinion thereon,
and we do not provide a separate opinion on these matters. IN ADDITION to the matter
described in the Basis for Qualified Opinion section we have determined the matters
described below to be the key audit matter to be communicated in our report.
(Reference to the modification is given in the audit report)
28
[Description of each key audit matter in accordance with ISA 701, which applies to audit of the
financial statements of listed entities….]

29

In the case of Modification of opinion ( Qualified or Adverse opinion)

+ No KAM ( Listed co )
Key Audit Matters
Except for the matter described in the Basis For Adverse Opinion section…… WE have determined
that there are no other key audit matters to communicate in our report.
In the case of Listed company + No KAM

Key Audit Matters
We have determined that there are NO Key audit matters to communicate in our report.
In the case of Un-Listed company + KAM .(same as Above)
In the case of Un-Listed company + No KAM

No heading of KAM Para in the audit report
In the case of Disclaimer of Opinion

No KAM Para in the audit report
Drafting of KAM in the exam answer

29

30

DRAFTING OF THE AUDIT REPORT ANSWER (CA CAF 9 )

1)Explanation of the Issue / Matter
 What has happened in the scenario– reproduce here (including the amount)
 Refer to relevant IFRS/ IAS where possible or else mention the word relevant financial
reporting framework
 Does the case/issue pertains to M.M or Inability
 If M.M ….mention the example
 If Inability … mention the example
 In the case of M.M plz mention that if the adjustment is not done than what will be the
impact on the F/S
i.e Profit will be over stated or under stated OR
Asset will be overvalued or under valued
2)Calculation of Materiality
 Calculate materiality based on the variables given in the question…. E.g. Profit before Tax
or Revenue
 Show the complete working of materiality (XX/XX)
 In case of any assumption, please mention the same
 Do not mention the opinion here just mention that the issue is material or not with respect
to PBT/Revenue or total assets
3)Audit Procedures / Audit Tests

 Only mention when question asks to do so OR depending upon the number of
marks
 State the procedures in bullet points only i.e short but complete procedure
 Link the audit procedures with the given scenario (where possible)
4)Impact on the Audit Report / Audit Opinion

 Drafting as per class lecture
 Summarize the drafting as per the number of marks
 Please mention the basis paragraph and its placement in the report as per the
modification
 Do not draft the complete opinion paragraph…just mention the key words from the
opinion para. (Unless question specifically requires to do so)
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31

Determination of Materiality Level

31

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KnS School of Business Studies

Expected Questions on ‘Audit Report’

Prepared by M.Sajid Kapadia (ACA,FCCA,APFA)

KnS School of Business Studies

Example of an Unmodified Opinion

Report on the Audit of the Financial Statements

( 2nd Para – This is opinion on the F/S)

Basis for Opinion para (This is standard para)

Prepared by M.Sajid Kapadia (ACA,FCCA,APFA)

KnS School of Business Studies

Other Information (ISA 720)

Responsibilities of Management and Those Charged with Governance

(To be covered in ISA 570)

Auditor’s Responsibilities for the Audit of the Financial Statements

misstatement when it exists.

KnS School of Business Studies

3. Evaluate the appropriateness of accounting policies used and the reasonableness of

( to be covered under ISA 570)

(in the case of Listed company)

Prepared by M.Sajid Kapadia (ACA,FCCA,APFA)

KnS School of Business Studies

(in the case of Listed company)

Name of Engagement Partner

Date of Audit Report

Prepared by M.Sajid Kapadia (ACA,FCCA,APFA)

KnS School of Business Studies

Contents of an Audit Report (ISA 700 Revised)

Shortcut to REM contents

Addressee The address will be determined by the law or regulation,

Prepared by M.Sajid Kapadia (ACA,FCCA,APFA)

KnS School of Business Studies

 The financial statements present fairly, in all

Finally, the auditor must state that they believe the

 A statement that the auditor’s opinion does not

 A description of auditor’s responsibilities for

Prepared by M.Sajid Kapadia (ACA,FCCA,APFA)

KnS School of Business Studies

 The preparation of financial statement in

 The implementation of such internal control as

 The assessment of the entity’s ability to continue

Auditor's responsibilities for the

The report must also:

Prepared by M.Sajid Kapadia (ACA,FCCA,APFA)

KnS School of Business Studies

Auditor’s Address The location where the auditor practices must be

Prepared by M.Sajid Kapadia (ACA,FCCA,APFA)

KnS School of Business Studies

2. Modified Opinion (Covered under ISA 705)

Core elements of an Audit Report (as per ISA 700 Revised)

Shortcut is TOK-BRAND (there are 13 contents)

(Already covered in previous handout )

When auditor MODIFY’s the AUDIT opinion…….

Prepared by M.Sajid Kapadia (ACA,FCCA,APFA)

KnS School of Business Studies

3.In relation to disclosures, are fundamental to users’ understanding of the financial

PERVASIVENESS……………………………………………….( bohat ala !!!)

KnS School of Business Studies

Material Misstatement = Material but not Pervasive

Drafting of QUALIFIED OPINION

In the case of Material Misstatement…………….

In the case of Inability to obtain S.A.A.E

Prepared by M.Sajid Kapadia (ACA,FCCA,APFA)