Do you know the auditor’s report has changed?
What will be the format? And how it looks like?
The Institute of Chartered Accountants of Bangladesh (ICAB) circulate a letter to the members of the Institute that the ICAB has adopted the standards relating to new format of auditor’s report which is effective for audits of financial statements for annual period beginning on or after 01 January 2018.
So, now we have to adopt new audit report for the companies’ year ended December 2018 on forward.
How it will affect the stakeholders of the company?
Normally the audit report what we see till date is one page report. But now it will may vary from three pages to six or more pages.
It’s not the issue.
What will be included in this long audit report?
The opinion, management responsibilities, auditor’s responsibilities and other regulatory requirements remain in the audit report but in more details.
Basis for opinion (not as basis for qualified opinion as we use in past), going concern, other information, key audit matters (KAM) are the new requirements for the audit report.
The ICAB has already circulated sector wise audit report template which provide a guideline how to prepare audit report and arrange a technical discussion for members working in the banking and NBFI sectors.
The new audit report is complex.
But it will narrow down the gap between the auditor and the users of the financial statements.
Now I will discuss step by step the new audit report requirements as per ISA 700 (revised).
Opinion: ISA 700 (revised)
The audit report will start with opinion paragraph.
We all first focus on opinion section of the audit report and this is the reason why company appoint auditor.
But before that audit report has a title where the auditor mentions independent auditor’s report and below that address the appropriate users of the financial statements i.e. independent auditor’s report to the shareholders of the ABC Company Limited.
The main objective of the auditors’ report is to form opinion on the financial statements prepared by the management of the company. To do so, the auditor shall conclude as to whether the auditor has obtained reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error.
The new audit report is a combination of previous audit report’s introductory paragraph and opinion paragraph. But opinion paragraph described in more details.
We are mostly familiar with true and fair view or present fairly, in all material respect. As per ISA 700 (revised), the phrases “present fairly, in all material respects” and “give a true and fair view” are regarded as being equivalent.
So, the auditor’s opinion shall, unless otherwise required by law or regulation, use one of the following phrases, which are regarded as being equivalent:
- In our opinion, the accompanying financial statements present fairly, in all material respects, …. In accordance with the applicable financial reporting framework; or
- In our opinion, the accompanying financial statements give a true and fair view of ….. in accordance with the applicable financial reporting framework.
As I mentioned above, the opinion section of the audit report will consist introductory paragraph of the previous audit report and following are the information which shall include:
- Identify the entity whose financial statements have been audited;
- State that the financial statements have been audited;
- Identify the title of each statement comprising the financial statements;
- Refer to the notes, including the summary of significant accounting policies; and
- Specify the date of, or period covered by, each financial statement comprising the financial statements.
Basis for Opinion: ISA 700 (revised)
This section starts immediately after the opinion section.
Affirmative statement about the auditor’s independence and fulfilment of relevant ethical requirements.
Basis for opinion is not a modified opinion on the financial statements. This section contains the information regarding the conduct of the audit and audit evidence and ethical requirements.
In this section, auditor state the audit was conducted as per ISAs. Guess, you have already known that the ICAB has adopted ISA which are now available in the website of the ICAB.
And the auditor has received sufficient evidence to form the audit opinion.
So, the part relating to the conduct of the audit and audit evidence states that the:
- Audit was conducted in accordance with ISAs as applicable in Bangladesh;
- Refer to the section of the auditor’s report that describes the auditor’s responsibilities under the ISAs; and
- States whether the auditor’s believes that the audit evidence obtained is sufficient and appropriate to provide a basis for the auditor’s opinion.
After stating the above information in the basis for opinion section, an affirmative statement about the auditor’s independence and fulfilment of relevant ethical requirements require to state as per International Ethics Standards Board for Accountant’s Code of Ethics for Professional Accountants adopted by the ICAB.
Are thinking about qualified opinion?
What will be the heading which we have used in past as “basis for qualified opinion” and where it will be placed?
Yes, the modified opinion will also be placed in this section.
Modified opinion shall also be included in this section describing the matter which rise the modification and then the heading will also change to Basis for Qualified Opinion.
Going Concern: ISA 570 (revised)
Going concern is very important for the users of the financial statements.
And the revised ISA 700 also emphasised this going concern and it should have a separate heading if the uncertainty related to going concern arise or the disclosure is not appropriately communicated in the financial statement to the intended users.
In this section, auditor will describe the respective responsibilities of management and auditor of the company. Increase focus on close call requiring auditor to evaluate the adequacy of disclosures in close call situations.
A separate section shall be included under Material Uncertainty Related to Going Concern, if a material uncertainly exists and is adequately disclosed instead of Emphasis of Matter.
Emphasis of Matter and Other Matter according to ISA 706 (Revised) depends on the nature of the information to be communicated and the auditor’s judgement as to the relative significance of such information for intended users.
Key Audit Matters (KAM): ISA 701 (new)
This is the new requirement in the audit report.
What is KAM?
There is a new ISA 701 where it is discussed. You may read the ISA more for better understanding.
In this section, auditor explain the matters which are most significant in the current year audit including explanation of why it is significant and how it is addressed during the audit period.
The auditor is mandatorily required to communicate KAM in the auditor’s report for listed entities, non-listed entities may voluntarily present in the audit report. But if required by law or regulations or auditor decides for a particular audit then include in that particular audit.
KAM do not constitute a modification of the report or the opinion. They are a part of the standard unmodified report which may vary company to company. And it does not include matters which have resulted in a modified opinion.
KAM is prohibited for a disclaimer of opinion but required for a qualified or adverse opinion.
Other Information: ISA 720 (revised)
This section is also new requirement in the audit report.
It deals with the auditor’s responsibilities relating other information other than financial statements and the auditor’s report included in the entity’s annual report.
This section explain the management and auditor’s responsibilities in relation thereto and if applicable report on any material misstatements of the other information.
It is also to be clearly stated that the auditor’s opinion on the financial statements does not cover the other information and that the auditor does not express any form of assurance conclusion thereon.
Management responsibilities for the financial statements: ISA 700 (revised)
This section is familiar to you but it will include more descriptions.
This section of the auditor’s report shall describe the respective responsibilities of those in the organization that are responsible for:
- The preparation of the financial statements and for such internal control as they determine necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; and
- Oversight of the financial reporting process, where those responsible for oversight are different from those in (a).
The description of responsibilities for the financial statements in the auditor’s report shall refer to “the preparation and fair presentation of these financial statements” or “the preparation of financial statements that give a true and fair view”, as appropriate in the circumstances.
This section will also explain the responsibilities of the auditor and management including the work perform by the auditor and identification of other information. Broadly explain the concept of a risk based audit as well as clarify the meaning of certain audit technical terms.
Auditor’s responsibilities for the financial statements: ISA 700 (revised)
This section is also familiar to you and will require more description as per revised ISA 700.
Hope, the following description will help to narrow the gap between auditors’ and the users of the financial statements.
The auditor’s report shall state that:
- The objective of the audit are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatements, whether due to fraud or error; and issue an auditor’s report that includes an 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 misstatements when it exists; and
- 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.
The auditor’s report shall further state that as part of an audit in accordance with ISAs, the auditor exercise professional judgement and maintains professional scepticism throughout the planning and performance of the audit.
And describe the following responsibilities of auditor’s approach to address the auditor’s responsibilities in relation to specific matters including fraud, internal control, accounting policies and estimates, evaluation the overall presentation, structure and content of the financial statements and disclosures, group audits, and communicating with those charged with governance; and if applicable, the identification and communication of KAM.
Furthermore, the auditor’s report shall include a description of the auditor’s responsibilities relating to going concern.
Engagement Partner Name: ISA 700 (revised)
This requirement is also new in the auditor’s report.
In the past, the auditor signed above the firm’s name. Now the engagement partner’s name shall be mentioned below the signature of the engagement partner of the audited entity.
But, engagement partner’s name shall be included in the auditor’s report on financial statements of listed entities unless, in rare circumstances, such disclosure is reasonably expected to lead to a significant personal security threat.
It is not applicable for other than listed entities. This article is developed based on ISAs related with auditor’s report. If any confused arise or you require further explanations then please go through the original ISAs.