REPORTING – THE NEW AUDITOR’S REPORT

Presentation by:

CPA Francis K. Langat

Sirikwa Hotel, EldoretFriday, 16th March 2018

Uphold public interest

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What are your expectations?

Presentation Outline

What motivated changes in an Auditors Report? Understanding the provisions and expectations of

the Standards: ISA 701 – Communicating Key Audit Matters in the

Independent Auditor’s Report. ISA 700 – Forming an opinion and reporting on FS ISA 705 – Modifications to the opinion in the

Independent Auditor’s Report. ISA 570 – Going Concern IAS 520 – Analytical Procedures

Reasons for Change

Greater investor demands for enhanced report.

Share holder interest on key concerns

Enlightened users of FS

Feedback from Professionals and uptake by

standards body- through a structured process.

New Auditor’s Report Structure The report will contain the following sections:1. After the Heading, the Auditor’s opinion is given

at the beginning.2. Basis for Opinion Paragraph. An affirmation

statement of auditors independence is also given.3. Description of Key Audit Matters(KAM).4. Explanation for responsibilities of management

and those charged with governance.5. Description of auditor’s responsibilities.

ISA 701: Communicating Key Audit Matters (KAM)

Definition of Key Audit Matters – are those

matters that in the auditor’s professional

judgment, were of most significance in the

audit of Financial Statements (FS) of the

current period.

KAM are selected from matters communicated

with those charged with Governance.

Issues to Note

From the definition the following are critical;

a. Professional judgment

b. Most significance

c. Current period

d. Communication.

Requirements of the Standard

The standard in Paragraph 8 requires that the

auditor in considering areas of “most

significance” will take into account;

I. Areas of significant risks

II. Areas of significant difficulty during the audit

III. Circumstances that required significant

modification of planned approach to the audit

Report Section on KAM

The determined KAM are communicated in a

separate section of the Audit’s Report.

The section of the report shall state that “ the

auditor’s opinion on the FS is NOTmodified with

respect to any of the KAM and that the auditor

does not express an opinion on these individual

matters”.

Report Section on KAM Cont’d

The KAM section of the report shall include;

Explanations for why each is a KAM and theireffect on the audit,

How it was addressed in the audit, Procedures performed, outcome and any key

observations. A cross reference to the related disclosure(s), if

any, in the FS.

Reasons for not including KAM

Paragraph 11 of the standard indicates;

A matter giving rise;

to a qualified or adverse opinion (ISA 705), or

existence of a material uncertainty related to events

or conditions that may cast significant doubt on

entity’s ability to continue as Going Concern (ISA

570) are KAM by nature. However, the Auditor Shall;

Reasons for not including KAM cont’d Report on these matter(s) in accordance with

applicable standard . Do NOT describe these matter(s) in KAM section

of the auditor’s report. Include a reference to the Basis for Qualified or

Adverse Opinion or the Going Concern Section(s)in the Introductory language of the KAM Section.

KAM is prohibited for a Disclaimer of Opinionsituations.

Examples of KAMs

Key Audit Matters may include; Areas of complexity and significant management

judgment which may affect the audit and report. Critical events/transactions of significant effect on

FS Accounting estimates and respective disclosures Circumstances that posed challenges in the

execution of the audit. Situations by the auditor that led to consultation

with others (auditors or experts).

Are KAMs mandatory?

Must we have KAMs in an Audit Report?

Are KAMs mandatory?

No!However;

The Audit Report must contain the KAM(s) section and a statement indicating there were No KAMs.

ISA 700:

ISA 700: FORMING AN OPINION AND

REPORTING ON FINANCIAL STATEMENTS

ISA 700: Forming an Opinion and Reporting on FS

This revision came into effect on 17th June, 2016

It’s the auditor’s responsibility to form an opinionon FS based on conclusions drawn from auditevidence.

The opinion must be clear and concise in a writtenReport.

The standard should be read in conjunction withISA 200 – overall objectives of the independentauditor and the conduct of an Audit in accordancewith ISA.

ISA 700: Forming an Opinion and Reporting on FS To form an opinion the auditor must be satisfied

that: S/He has obtained reasonable assurance as to

whether FS as a whole are free from materialmisstatements, due to error or fraud.

Sufficient appropriate evidence audit evidencewas obtained.

FS were prepared in accordance with relevantstandards and necessary disclosures are made.

Types of Opinions

1. Unmodified / Unqualified Opinion2. Modified Opinion – ISA 705

a) Qualified Opinion – Misstatements are materialbut not pervasive to the FS.

b) Adverse Opinion – Misstatements are materialand pervasive.

c) Disclaimer of Opinion – Inability to obtainappropriate sufficient audit evidence to base anopinion.

ISA 705

ISA 705 – MODIFICATIONS TO THE OPINION

IN THE INDEPENDENT AUDITOR’S REPORT

Circumstances of Modification

The auditor SHALL modify the opinion in theauditors report when:

1. The auditor concludes that, based on auditevidence obtained, the FS as a whole are NOTfree from material misstatement.

2. The auditor is unable to obtain sufficientappropriate audit evidence to conclude that FS asa whole are free from material misstatements.

Illustrative table of modified Opinions

Nature of matter giving rise to the modification

Auditor's judgment about thepervasiveness of the effects orpossible effects on the FinancialStatements

Material but Not pervasive

Material and Pervasive

Financial Statements are materially misstated

Qualified Opinion Adverse Opinion

Inability to obtain sufficient appropriate audit evidence

Qualified Opinion Disclaimer

ISA 570

ISA 570 – GOING CONCERN(GC)

ISA 570: SCOPE

The standard deals with the auditorsresponsibilities in the audit of FSs relating togoing concern and implications for the auditor’sreport.

Under Going Concern basis accounting, the FS areprepared on the assumption that the entity is agoing concern and will continue its operations forthe foreseeable future.

Assessment of Entity's ability as GC

Management may be required to make a specificassessment of the entity’s ability to continue as aGoing Concern.

The auditor’s responsibilities are to obtainsufficient appropriate audit evidence regarding,and conclude on, the appropriateness ofmanagement’s use of the Going Concern basis ofaccounting in the preparation of FS, and toconclude, based on them, whether a materialuncertainty exists.

ISA 520

ISA 520 – ANALYTICAL PROCEDURES

Definition

ISA 520 – analytical procedures meansevaluations of financial information throughanalysis of possible (plausible) relationshipsbetween financial and non-financial data.

Examples of Analytical procedures1. Comparing information with prior years.2. Examining budget performances and forecasts.3. Benchmarking to the industry performance.

ISA 520 -Scope

Deals with auditor’s analytical procedures assubstantive procedures (Substantive analyticalprocedures).

It also deals with auditor’s responsibility toperform analytical procedures that assists informing an opinion.

Suitability of Analytical Procedures (AP)

AP Applies in situations of large volume ofinformation.

Where available data is credible. Level of risk of material misstatement is low. Where tests of details are also performed on the

same data/assertion. Where controls over preparation of information

are functional and assures of completeness,accuracy and validity.

THE END

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