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Workshop on the forming of Audit Opinions

Requirements of the key ISSAIs relevant to reaching and forming an opinion on the financial

statements

Wieslaw KurzycaAdvisor to the President of NIK, Poland

Ankara, 26-27 October 2016

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Requirements of the key ISSAIs for an opinion on the financial statements

• Audit opinion concept, structure and content

• Basics of planning: understanding entity, materiality, risk assessment, response to risk

• Evaluation of misstatements and non-compliance with authorities

• Forming opinion(s), modification of opinion(s)

• Possible challenges to audit opinion

CONTENTS:

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EU Requirements of the key ISSAIs for an opinion on the financial statements:

audit opinion concept

• By expressing audit opinion you provide assurance:• That financial statements are true and fair• That underlying transactions and other

actions related to fund raising and spending are in compliance with authorities

BY SAYING SOMETHING

YOU DO SOMETHING:

• It is limited by the adopted confidence level• It is limited by materiality• It is limited by results of risk assessment

AUDIT ASSURANCE

IS NOT ABSOLUTE:

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• On financial statements:• We have audited the financial statements of

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 flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.

• 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 (IFRSs).

EXAMPLE OF

AUDIT OPINION:

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• On compliance with authorities:• Based on the audit work performed, we

found that [the audited entity's subject matter] is in compliance, in all material respects, with [the applied criteria].

EXAMPLE OF

AUDIT OPINION:

• (…) We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

BASIS FOR

OPINION:

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• On financial statements (second paragraph):

• 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, 20X1, and (of) its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs).

EXAMPLE OF

MODIFIED AUDIT

OPINION:

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• 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.

BASIS for MODIFIE

D OPINION:

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• We need to know an entity to be audited

• We need to know the audit subject matter

• We need to establish materiality• We need to know what may go

wrong (risk)• We need to know where

something may go wrong (assertion)

• We need to respond to risks at assertion level

• We need to obtain, evaluate, and present evidence

BASIC REQUIREMENT

S

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EU To know an entity to be audited

• Corresponding ISSAI: 1315

• Entity’s objectives and strategies• Nature of entity’s operations• External factors or decisions

influencing entity’s operations• Entity’s organisational structure• Essential operations processes,

including budget process

UNDERSTANDING OF THE ENTITY

(PRELIMINARY RISK

ASSESSMENT)

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EU To know an entity to be audited, cont.

• Corresponding ISSAI: 1315

• Entity’s culture of honesty and ethical behaviour

• Internal control foundations at the entity

• Key internal controls related to financial and compliance objectives of the entity, including budgetary controls

UNDERSTANDING OF THE ENTITY’S CONTROL

ENVIRONMENT (PRELIMINARY

RISK ASSESSMENT)

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EU To know the audit subject matter

• Corresponding ISSAI: 1315

• Entity’s accounting policies and accounting system

• Former financial statements, including budget execution statement

• Financial rules and regulations, including procurement rules and regulations

UNDERSTANDING OF THE ENTITY’S CONTROL

ENVIRONMENT (PRELIMINARY

RISK ASSESSMENT)

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EU Establishing materiality

• Corresponding ISSAI: 1320• Materiality concept: relation to economic

and other decisions of the management and those charged with governance

• Quantitative materiality: based on the size of misstatement• Materiality for the FS as a whole• Materiality at a lower level• Performance materiality• Materiality for subordinate components

(ISSAI 1600) • Trivial level of errors (ISSAI 1500)

• Qualitative materiality: based on nature of irregularity

• Combination of both Qs• Reassessment of materiality

MATERIALITY

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EU To know what may go wrong

• Corresponding ISSAI: 1315• Identification of risks within fund

management processes• Assertions related to identified

risks• Risks related to computerised

accounting systems• Recognition of internal controls

designed, implemented and functioning to mitigate identified risks

RISK ASSESSMENT

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EU To know what may go wrong

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EU To know what may go wrong

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To respond to risks at financial statements level (ISSAI 1330)

• Corresponding ISSAI: 1330• Maintain professional scepticism• Assign experienced staff or

external experts• Provide careful supervision• Be watchful of unpredictable

events• Conduct test of control at interim

date• Conduct substantive audit

procedures at year-end

RESPONSE TO

RISK AT FS LEVEL

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To respond to risks at assertion level(ISSAI 1330)

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To obtain, evaluate, and present evidence

• Corresponding ISSAI: 1450 and 1500

• Findings > exceptions > misstatements and/or non-compliance

• Requirements for evidence: sufficient appropriate

• Reliability of evidence: source and nature

• Conclusions against materiality• Lack of evidence: limitation on the

scope of the audit• Communication of exceptions to

management and, if required, to those charged with governance

EVALUATION OF MISSTATEMEN

TS

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Forming opinion(s)

• Corresponding ISSAI: 1700, 1705• Fair presentation vs. compliance

framework of financial reporting• Unmodified opinion• Types of modified opinion:

• Qualified opinion• Adverse opinion• Disclaimer of opinion

AUDIT

OPINION

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Forming opinion(s), contd.

AUDIT OPINION

Nature of Matter Giving Rise to the Modification

Auditor’s Judgment about the Pervasiveness of the Effects or Possible Effects on the Financial Statements

Material but Not Pervasive

Material and Pervasive

Financial statements are materially misstate

Qualified opinion

Adverse opinion

Non-compliance is of material nature

Qualified opinion

Adverse opinion

Inability to obtain sufficient appropriate audit evidence

Qualified opinion

Disclaimer of opinion

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Possible challenge to audit opinion(s)

• Corresponding ISSAI: 1705, 1220• Communication with those charged

with governance:• give notice to the intended

modifications, stating reasons and seeking concurrence with the facts giving rise to the modification(s), or to confirm disagreement with management

• give opportunity to provide further information and explanations

• Internal quality assurance process:• through engagement quality

control review

AUDIT

OPINION

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Questions

Any questions?