Audit and Assurance -

Part 2
HOCHIMINH City Open University
Advance Study Programme 2021
 • The auditor's report on financial
statements
Chapter 19 • Reports to management
Reports
 Syllabus learning outcomes
• Identify and describe the basic elements of the auditor's report.
• Explain unmodified audit opinions in the auditor's report.
• Explain modified audit opinions in the auditor's report.
• Describe the format and content of emphasis of matter and other
matter paragraphs.
• Discuss and provide examples of how the reporting of
significant deficiencies in internal control and recommendations
to overcome those significant deficiencies are provided to
management.
Overview
Opening balances and
Reports
comparatives

Auditor's reports

Standard report Changes to the audit

'unmodified opinion' reports

Unmodified opinions with Modified on matters that do

additional communication affect the auditor's opinion
 Overview continued
Unmodified opinions with Modified on matters that do
additional communication affect the auditor's opinion

Emphasis of matter Other

paragraph matter
'Without qualifying paragraph
our opinion …'
(E.g. 6)

Insufficient or inappropriate
Material misstatement
audit evidence

Material but Material and Material but Material and

not pervasive pervasive not pervasive pervasive
Qualified Disqualified Qualified Adverse
'except for' 'do not express 'except for' '…do not give
(E.g. 4) an opinion' (E.g. 2) a true and fair
(E.g. 5) view'
(E.g. 3)
Chronology of an audit
 The auditor's report on financial statements 1
• At the end of the external audit, the auditor produces a report
which sets out the opinion on the truth and fairness of the
financial statements.
• Are the financial statements prepared, in all material respects,
in accordance with the applicable financial reporting
framework?
• ISA 700 Forming an opinion and reporting on financial
statements
 The auditor's report on financial statements 2
Unmodified opinions
An unmodified opinion is the opinion expressed by the auditor when
the auditor concludes that the financial statements are prepared, in all
material respects, in accordance with the applicable financial reporting
framework.

This is good!
 The auditor's report on financial statements 3
Unmodified opinions

In our opinion, the financial statements present fairly, in all material

respects, (or give a true and fair view of) the financial position of
ABC Company as of December 31, 20X1, and (of) its financial
performance and its cash flows for the year ended in accordance with
International Financial Reporting Standards.
 The auditor's report on financial statements 4
Basic elements of the auditor's report
• Title
• Addressee
• Introductory paragraph
• Management's responsibility for the financial statements
• Auditor's responsibility
• Opinion paragraph
• Other reporting responsibilities
• Auditor's signature
• Date of the auditor's report
• Auditor's address
 The auditor's report on financial statements 5
• But what happens if the auditor cannot issue an
unmodified opinion on the financial statements?
• That is, the auditor cannot say that the financial
statements, present fairly, in all material respects …?
• In this case, the auditor has to issue a modified
opinion on the financial statements.

This is not good!

 The auditor's report on financial statements
Types of modified opinions
• ISA 705 Modifications to the opinion in the
independent auditor's report
• Three possible types of modified opinion:
— Qualified opinion
— Adverse opinion
— Disclaimer of opinion
 The auditor's report on financial statements 7
The type of modified opinion depends on:
• The nature of the matter giving rise to the modification (material
misstatement or lack of sufficient, appropriate audit evidence)
• The auditor's judgement about the pervasiveness of the
effects/possible effects of the matter on the financial statements
 The auditor's report on financial statements 8
Firstly, we need to understand what pervasiveness is.
Pervasiveness describes the effects/possible effects on the
financial statements of misstatements or undetected misstatements
(due to an inability to obtain sufficient appropriate audit evidence).
Three types:
1. Those that are not confined to specific elements, accounts or
items in the financial statements
2. Those that are confined to specific elements, accounts or items
in the financial statements and represent or could represent a
substantial portion of the financial statements
3. Those that relate to disclosures which are fundamental to users'
understanding of the financial statements
 The auditor's report on financial statements 9
A modified opinion is required when:
• The auditor concludes that the financial statements as a
whole are not free from material misstatements or
• The auditor cannot obtain sufficient appropriate
audit evidence to conclude that the financial
statements as a whole are free from material
misstatement.

It is very important that you understand this. The

following slides show examples of the different types
of modified opinion.
 The auditor's report on financial statements 10
Qualified opinion due to material misstatement
Basis for qualified opinion
The company's inventories are carried in the statement of financial
position at xxx. Management has not stated inventories at the lower of
cost and net realisable value but has stated them solely at cost, which
constitutes a departure from International Financial Reporting Standards.
The company's records indicate that had management stated the
inventories at the lower of cost and net realisable value, an amount of xxx
would have been required to write the inventories down to their net
realisable 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.
 The auditor's report on financial statements 11
Qualified opinion due to material misstatement continued

Qualified Opinion
In our opinion, except for the effects of the matter described in the Basis
for Qualified Opinion paragraph, the financial statements present fairly,
in all material respects, (or give a true and fair view of) the financial
position of ABC 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.
 The auditor's report on financial statements 12
Adverse opinion due to material misstatement with a pervasive
effect

Basis for adverse opinion

The company has included houses built for re-sale (including related
land) at a cost of $X as non-current assets and depreciated them at a
rate of X%, resulting in depreciation of $X. Under International
Financial Reporting Standards, these should have been included as
inventory in the financial statements and no depreciation should
have been provided in respect of these. The carrying value of the
houses represent 90% of the company's total assets and the
company's records indicate that …[explanation of the effect on
amounts presented in the financial statements].
 The auditor's report on financial statements 13
Adverse opinion due to material misstatement with a pervasive
effect continued

Adverse Opinion
In our opinion, because of the significance of the matter discussed in
the Basis for Adverse Opinion paragraph, the financial statements do
not present fairly (or do not give a true and fair view of) the financial
position of ABC 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.
 The auditor's report on financial statements 14

Qualified opinion due to inability to obtain sufficient appropriate

audit evidence

Basis for Qualified Opinion

With respect to inventory having a carrying amount of $X the audit
evidence available to us was limited because we did not observe
physical inventory as at 31 December 20X1, since that date was prior
to our appointment as auditor of the company. Owing to the nature of
the company's records, we were unable to obtain sufficient appropriate
audit evidence regarding the inventory quantities by using other audit
procedures.
 The auditor's report on financial statements 15

Qualified opinion due to inability to obtain sufficient appropriate audit

evidence continued

Qualified Opinion
In our opinion, except for the possible effects of the matter described in
the Basis for Qualified Opinion paragraph, the financial statements
present fairly, in all material respects, (or give a true and fair view of)
the financial position of ABC 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.
 The auditor's report on financial statements 16

Disclaimer of opinion due to inability to obtain sufficient appropriate

audit evidence about multiple elements of the financial statements

Basis for Disclaimer of Opinion

We were not appointed as auditors of the company until after December 31,
20X1 and 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 31,
20X0 and 20X1 which are stated in the statement of financial position at
xxx and xxx, respectively. In addition, the introduction of a new
computerised accounts receivable system in September 20X1 resulted in
numerous errors in accounts receivable.
 The auditor's report on financial statements 13

Disclaimer of opinion due to inability to obtain sufficient appropriate

audit evidence about multiple elements of the financial statements
continued

Basis for Disclaimer of Opinion (continued)

As of the date of our audit report, management was still in the process of
rectifying 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 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 elements making
up the statement of profit or loss, statement of changes in equity and cash
flow statement.
 The auditor's report on financial statements 14

Disclaimer of opinion due to inability to obtain sufficient

appropriate audit evidence about multiple elements of the
financial statements continued

Disclaimer of Opinion
Because of the significance of the matters described in the Basis for
Disclaimer of Opinion paragraph, we have not been able to obtain
sufficient appropriate audit evidence to provide a basis for an audit
opinion. Accordingly, we do not express an opinion on the financial
statements.
 The auditor's report on financial statements 15

Summary table
Nature of Material but not Material and pervasive
circumstances pervasive
Financial statement are QUALIFIED OPINION ADVERSE OPINION
materially misstated

Auditor unable to obtain QUALIFIED OPINION DISCLAIMER

sufficient appropriate OPINION
audit evidence
The auditor's report on financial statements 16
 Question: Modified opinions
Consider the following three situations and decide
whether a modified opinion is required or not. If you
decide a modified opinion is necessary, explain what
sort of modified opinion would be most appropriate.

Additional information
Net assets: $250,000
Revenue: $455,000
 Question: Modified opinions (cont'd)
Situation 1
A major customer has gone bankrupt shortly after the year-end. At the year-end,
$25,500 was owing from this customer but the directors will not amend the
financial statements as a result of the customer becoming bankrupt.
Situation 2
An accrual worth $1,560, representing an amount due to a new supplier, has been
omitted from the year-end statement of financial position in error. No other errors
on accruals or trade payables have been found.
Situation 3
A small fire at head office has resulted in the loss of some records, most of which
relate to inventory. Inventory is one of the biggest figures in the statement of
financial position at year-end.
 Approach: Modified opinions
You have been provided with some information about net assets and
revenue in this question. You must use it to assess whether the issues
in the question are material or not as this will directly impact the effect
on the auditor's opinion.
In an exam question, if you are provided with figures for net
assets/revenue/profit before tax etc, you must ensure you use them – it
is not enough to say that something is material without comparing it to
the information you have been given in the question.
The first thing to do, therefore, is a quick calculation to see whether
the issue is material or not.
 Answer: Modified opinions
Situation 1: Major customer going bankrupt
1. A major customer going bankrupt after the year-end is
indicative of an adjusting event. In this case, it would seem
unlikely that the balance owing will be recovered.
2. $25,500 represents 10.2% of net assets and 5.6% of
revenue so it is a material amount.
3. As the directors are refusing to amend the financial
statements, this would constitute a material misstatement
as they should write the balance off.
4. The impact on the auditor's opinion would therefore be a
qualified opinion ('except for') due to material
misstatement.
 Answer: Modified opinions (cont'd)
Situation 2: Accrual omitted
1. An accrual worth $1,560 has been omitted from the
accruals balance on the statement of financial position
but no other errors have been found by the auditor,
suggesting this is a one-off.
2. $1,560 represents 0.62% of net assets and 0.34% of
revenue so it is clearly not material.
3. Although the amount is not material, it should be
added to the schedule of uncorrected misstatements
which in total, may represent a material amount which
may lead to the financial statements requiring
amendment.
 Answer: Modified opinions (cont'd)
Situation 3: Fire destroying inventory records
1. A fire has destroyed inventory records and inventory is
a material balance.
2. Unless the auditors can obtain the evidence relating to
the destroyed records from elsewhere, it is likely that
this will have an impact on the auditor's opinion.
3. The auditor's opinion will probably be modified due to
the inability to obtain sufficient appropriate audit
evidence. Without further information, we cannot say
whether the opinion will be qualified ('except for') or a
disclaimer of opinion.
 The auditor's report on financial statements 16

• The next few slides are going to discuss situations where

the opinion is not modified (ie the financial statements
show a true and fair view) BUT the report itself is
modified.
• This can be because the report includes an emphasis of
matter paragraph or an other matter paragraph.
• ISA 706 Emphasis of matter paragraphs and other matter
paragraphs in the independent auditor's report
• It is important that you understand that although an
opinion may be unmodified, the report will be modified by
the inclusion of an emphasis of matter paragraph or other
matter paragraph.
• So you can have a modified report with a modified opinion
or you can have a modified report but an unmodified
opinion (due to an emphasis of matter paragraph or an
other matter paragraph).
 The auditor's report on financial statements 17

Emphasis of matter paragraphs

Refers to a matter appropriately presented or disclosed in
the financial statements that, in the auditor's judgement, is
of such importance that it is fundamental to users'
understanding of the financial statements.

Examples
• Uncertainty relating to future outcome of exceptional
litigation or regulatory action
• Early application of a new accounting standard that has a
pervasive effect on the financial statements
• Major catastrophe that has had/continues to have a
significant effect on the entity's financial position
 The auditor's report on financial statements 18

What is the content of an emphasis of matter

paragraph?
• Comes immediately after the opinion paragraph
• Clear reference to matter being emphasised
• Location of relevant disclosures in the financial
statements
• Must state that the auditor's opinion is not modified
in respect of the matter being emphasised
 The auditor's report on financial statements 19

Example emphasis of matter paragraph

Emphasis of Matter
We draw attention to Note X to the financial statements
which describes the uncertainty related to the outcome
of the lawsuit filed against the company by XYZ
Company. Our opinion is not qualified in respect of this
matter.
 The auditor's report on financial statements 20

Other matter paragraphs

Refers to a matter other than those presented or
disclosed in the financial statements that, in the
auditor's judgement, is relevant to users' understanding
of the audit, the auditor's responsibilities or the
auditor's report.

Example
• Prior period financial statements not audited
 The auditor's report on financial statements 21

What is the content of an other matter paragraph?

• Comes immediately after the opinion paragraph and
any emphasis of matter paragraph
• Other matter not required to be presented and
disclosed in the financial statements
• Does not include information that the auditor is
prohibited from providing by law and regulations or
other standards, or information required to be
provided by management
 The auditor's report on financial statements 22

Certain ISAs contain requirements for emphasis of

matter or other matter paragraphs in specific
circumstances.
Emphasis of matter paragraph Other matter paragraph
ISA 210 Agreeing the terms of audit ISA 560 Subsequent events
engagements
ISA 560 Subsequent events ISA 710 Comparative information –
corresponding figures and comparative
financial statements
ISA 570 Going concern ISA 720 The auditor's responsibilities relating
to other information in documents containing
audited financial statements
ISA 800 (outside the scope of F8)
 Exam link 1
• Emphasis of matter paragraphs and other matter
paragraphs seem to be a difficult area for students.
• Remember that there are specific circumstances
when these paragraphs are used.
• Students tend to suggest they need to be used
when they are not appropriate at all!
• Emphasis of matter paragraphs and other matter
paragraphs could be examined in section A as a
multiple choice question as seen in the specimen
exam.
 Exam link 2
• Auditor's reports are a common source of confusion for
students.
• However, they are highly likely to be tested as this is a
key syllabus area.
• The current F8 examiner has examined auditor's
reports in every sitting so far.
• The specimen exam contains a section B question
worth eight marks on audit reports in a scenario
context.
• The best way to improve your confidence in this area is
to practise as many past exam questions or exam-
standard questions as you can.
Question: Specimen exam (Sec A, question 9)
An emphasis of matter paragraph is used in an audit report to draw
attention to a matter affecting the financial statements.
Which TWO of the following are correct in relation to an Emphasis
of Matter Paragraph in the Auditor's Report?
1 It is used when there is a significant uncertainty.
2 It constitutes a qualified audit opinion.
3 The audit report is referred to as an unmodified report.
4 The matter is deemed to be fundamental to the users
understanding of the financial statements.
A 1 and 2
B 1 and 4
C 1 and 3
D 2 and 4
 Answer: Specimen exam (Sec A, question 9)
B 1 and 4

Having an emphasis of matter paragraph in an auditor's report does not

mean that the audit opinion is qualified. It does, however, mean the
auditor's report is modified.
Emphasis of matter paragraphs are used to refer to a matter
appropriately presented or disclosed in the financial statements that, in
the auditor's judgement, is of such importance that it is fundamental to
users' understanding of the financial statements.
 The auditor's report on financial statements 23

We now look at other information in documents

containing audited financial statements.
ISA 720 The auditor's responsibilities relating to other
information in documents containing audited financial
statements
Other information is financial and non-financial
information, other than the financial statements and the
auditor's report, which is included, either by law,
regulation or custom, in a document containing audited
financial statements.
 The auditor's report on financial statements 24

Examples of other information

• A report by management or those charged with gover
nance on operations
• Financial summaries or highlights
• Employment data
• Planned capital expenditures
• Financial ratios
• Names of officers and directors
• Selected quarterly data
 The auditor's report on financial statements 25

So what are the auditor's responsibilities for other

information?
They must read the other information to identify any
material inconsistencies.

An inconsistency means the other information

contradicts the information contained in the audited
financial statements.
A material inconsistency may raise doubt about the
audit conclusions drawn from audit evidence previously
obtained and possibly also the basis for the auditor's
opinion on the financial statements.
 The auditor's report on financial statements 26

Material inconsistency found

Amendment required in Action to take if management refuses
Financial statements • Modified opinion
Other information • Communicate to those charged with
governance and
• Emphasis of matter paragraph OR
• Withhold auditor's report OR
• Withdraw from engagement
 The auditor's report on financial statements 27

Material misstatements of fact

A misstatement of fact is when the other information th
at is unrelated tomatters appearing in the audited
financial statements is incorrectly stated or presented. A
material misstatement of fact may undermine the
credibility of the document containing audited financial
statements.
 The auditor's report on financial statements 28

Material misstatement of fact found

Initial actions to take Action to take if management
refuses to amend other
information
• Discuss with management • Inform those charged with
• If still relevant, ask governance
management to consult an • Appropriate further action eg
independent third party (eg consulting auditor's lawyer
lawyer) and consider advice
 The auditor's report on financial statements 29

The next few slides relate to opening balances and comparative information.
This is outside the scope of the F8 syllabus but has been included for
information only.
 The auditor's report on financial statements 30

Opening balances
Opening balances are those account balances that exist at
the beginning of the period. They are based on the closing
balances of the prior period and reflect the effects of
transactions of prior periods and accounting policies applied
in the prior period. They also include matters requiring
disclosure that existed at the beginning of the period, such as
contingencies and commitments.
Initial audit engagements are those in which the financial
statements for the prior period were not audited or where
they were audited by a different auditor.
ISA 510 Initial engagements – opening balances
 The auditor's report on financial statements 31

Opening balances for initial audit engagements

The auditor has to get sufficient appropriate audit
evidence about whether:
• Opening balances contain misstatements that
materially affect the current period's financial
statements and
• Appropriate accounting policies are consistently
applied or changes have been properly accounted for
and adequately presented and disclosed.
 The auditor's report on financial statements 32

Impact on the auditor's report

• If lack of sufficient appropriate audit evidence, the
auditor's opinion will be modified: qualified or
disclaimer of opinion.
• If opening balances contain misstatements that could
materially affect the current period's financial
statements or accounting policies not consistently
applied or accounted for, the auditor's opinion will be
modified: qualified or adverse opinion.
 The auditor's report on financial statements 33

Comparative information
Comparative information is amounts and disclosures
included in the financial statements in respect of one or
more prior periods in accordance with the applicable
financial reporting framework.

Presentation of comparative information

• Corresponding figures OR
• Comparative financial statements

ISA 710 Comparative information – corresponding figures

and comparative financial statements
 The auditor's report on financial statements 34

Corresponding figures
Amounts and other disclosures for the prior period are
included as an integral part of the current period
financial statements, and are intended to be read only in
relation to the amounts and other disclosures relating to
the current period.

Comparative financial statements

Amounts and other disclosures for the prior period are i
ncluded for comparison with the financial statements of
the current period but, if audited, are referred to in the
auditor's report.
 The auditor's report on financial statements 35

Point to note!

Corresponding figures
The auditor's opinion refers to the current period only.

Comparative financial statements

The auditor's opinion refers to each period for which
financial statements are presented.
Question: Specimen exam (Sec B, question 3b)
You are the audit manager of Villa & Co and you are currently
reviewing the audit files for several of your clients for which
the audit fieldwork is complete. The audit seniors have raised
the following issues:
Czech Co
Czech Co is a pharmaceutical company and has incurred
research expenditure of $2.1m and development expenditure
of $3.2m during the year, this has all been capitalised as an
intangible asset. Profit before tax is $26.3m.
Dawson Co
Dawson Co's computerised wages program is backed up daily,
however for a period of two months the wages records and the
back-ups have been corrupted, and therefore cannot be
accessed. Wages and salaries for these two months are $1.1m.
Profit before tax is $10m.
Question: Specimen exam (Sec B, question 3b) cont'd

Required:
For each of the clients above:
(i) Discuss the issue, including an assessment of
whether it is material; and
(4 marks)
(ii) Describe the impact on the audit report if the
issue remains unresolved.
(4 marks)
 Answer: Specimen exam (Sec B, question 3b)

Czech Co
IAS 38 Intangible Assets states that research expenditure must always be
expensed. Development expenditure can only be capitalised if it meets certain
criteria.
Czech has incorrectly capitalised $2.1m of research expenditure. This
represents 7.9% of profit before tax and is therefore material.
The development costs capitalised of $3.2m represent 12.2% of profit before
tax and are also material. If these do not meet the criteria for capitalisation,
they should be expensed.
If the directors refuse to expense the research costs, the auditor's opinion will
be modified with a qualified opinion as the issue is material but not pervasive.
This will also apply if the development costs have been incorrectly capitalised.
 Answer: Specimen exam (Sec B, question 3b) cont'd

Dawson Co
The wages costs of $1.1m for the two months in question represent
11% of profit before tax and are therefore material.
The auditors should seek alternative audit procedures to verify the wage
costs for the two months.
If the auditors cannot obtain sufficient appropriate audit evidence for
the wages cost then the audit opinion will be qualified 'except for' as
this is a material but not pervasive issue.
 Question: June 2013 question 5c
Panda Co manufactures chemicals and has a factory
and four offsite storage locations for finished goods.
Panda Co's year end was 30 April 20X3. The final audit
is almost complete and the financial statements and
audit report are due to be signed next week. Revenue
for the year is $55 million and profit before taxation is
$5.6 million.
The following two events have occurred subsequent
to the year end. No amendments or disclosures have
been made in the financial statements.
 Question: June 2013 question 5c (cont'd)
Event 1 – Defective chemicals
Panda Co undertakes extensive quality control checks
prior to despatch of any chemicals. Testing on 3 May
20X3 found that a batch of chemicals produced in
April was defective. The cost of this batch was $0.85
million. In its current condition it can be sold at a
scrap value of $0.1 million. The costs of correcting the
defect are too significant for Panda Co's management
to consider this an alternative option.
 Question: June 2013 question 5c (cont'd)

Event 2 – Explosion
An explosion occurred at the smallest of the four
offsite storage locations on 20 May 20X3. This
resulted in some damage to inventory and property,
plant and equipment. Panda Co's management have
investigated the cause of the explosion and believe
that they are unlikely to be able to claim on their
insurance. Management of Panda Co has estimated
that the value of damaged inventory and property,
plant and equipment was $0.9 million and it now has
no scrap value.
 Question: June 2013 question 5c (cont'd)
The directors do not wish to make any amendments or
disclosures to the financial statements for the explosion
(event 2).
Required:
Explain the impact on the audit report should this issue
remain unresolved. (3
marks)

[This question is a continuation of the question we looked

at in Chapter 18.]
 Approach: June 2013 question 5c
The question specifically relates only to the explosion
so you must not refer to event 1 (defective
chemicals).
There are three marks available so make sure you
discuss materiality and the exact impact on the
auditor's report – it is not enough to say the report or
opinion will be modified. You need to explain the
basis of any modification.
 Answer: June 2013 question 5c
The directors should make disclosure in the financial
statements about the explosion and the effect on
inventory and property, plant and equipment as the
amount involved is material and affects the value of
opening inventory and property, plant and equipment
in the following financial year.
If the directors refuse to make the disclosure, then
the auditors would modify the opinion on the
financial statements on the basis of a material
misstatement. The opinion would be 'except for' as
the matter is material but unlikely to be pervasive.
 Reports to management 1
• The report to management is a by-product of the external
audit.
• It may also be known as a management letter, letter of
weakness, or letter on internal control.
• The purpose of a report to management is to set out
significant deficiencies in internal control, the implications
of those deficiencies, and possible recommendations to
mitigate the deficiencies.
• A report to management may be sent after both the
interim audit and the final audit visits.
• Such reports are for internal use and are not in the public
domain.
• ISA 265 Communicating deficiencies in internal control to
those charged with governance and management
 Reports to management 2
Drafting the report to management
• Do not include language which conflicts with the opinion
in the auditor's report.
• State the accounting and internal control system were
considered only to the extent necessary to determine
auditing procedures to report on the financial statements,
and not to determine the adequacy of internal control for
management purposes or to provide assurances on the
accounting and internal control system.
• State it discusses only deficiencies in internal control
which have come to the auditor's attention as a result of
the audit and that other deficiencies in internal control
may exist.
• Include a statement that the report is provided for use
only by management (or another specific named party).
 Exam link 1
• Questions on the report to management are highly
likely to come up in a scenario context and we looked
at these in detail in Chapter 10.
• In such questions, do not include a covering letter
unless you are specifically asked for one.
• Always set your answer out in a tabular format so that
you can link the deficiencies with the implications and
suggested recommendations.
• Reports to management could also be tested in a
knowledge-based requirement on reporting to those
charged with governance, focussing on ISAs 260 and
265.
 Exam link 2
If you are asked for a covering letter, make sure it
includes:
• An address and date
• A short introduction explaining the purpose and
content of the report to management
• A closing paragraph that states the report only sets out
those significant deficiencies identified during the audit
and that more extensive procedures on internal control
may have resulted in more deficiencies being identified
• A statement that the report is solely for management's
use