Audit documentation, Audit

report and going concern

Dr. Antonella Russo

AUDIT STRATEGY
An audit strategy outlines the OBJECTIVES of the audit that is to be
performed – like crafting the skeleton of a body. The details are yet to be
filled in
Audit strategy document Purpose
Understanding the entity’s environment Provide details of the industry area that the company is
in along with specific information about the activities
and strategies of the individual client.
Understand the accounting and internal Details of accounting policies of the client and previous
control systems assessments of internal control systems indicating the
expected extent of reliance on those systems.

Risk and materiality The assessment of risk for the client and risk of fraud
and error and the identification of significant audit
areas. The materiality level for audit planning purposes.

Consequent nature, timing and extent of Details of the focus on audit work on specific areas.
audit procedures Detail on the extent of use of audit software and
possible reliance on internal audit.
Co-ordination, supervision and review of Details the extent of involvement of experts, client
audit work locations and staffing requirements for the audit.
 ISA 230
ISA 230 ‘Audit documentation states:
‘The objective of the auditor is to prepare documentation that
provides:
• (a) A sufficient and appropriate record of the basis for the
auditor’s report; and
• (b) Evidence that the audit was planned and performed in
accordance with ISAs (UK and Ireland) and applicable legal
and regulatory requirements.’

They should document

 the nature, timing and extent of the procedures carried out;
 the results of the audit procedures and the evidence
obtained;
and
 significant matters arising during the audit and decisions

reached.
AUDIT DOCUMENTATION
The implications are:
auditors should prepare working papers that are sufficiently
complete and detailed to provide an overall understanding of the
audit process by an experienced auditor
auditors should document in their working papers matters
which are important in supporting their audit opinion, including
records of meetings with clients and third party confirmations.
working papers should record the auditors’ planning, the
nature, timing and extent of the audit procedures performed, and
the conclusions drawn from the audit evidence obtained
AUDIT DOCUMENTATION
The implication are:
working papers should record who performed the work, who
reviewed it and the dates this was carried out
auditors should record in their working papers their reasoning
on all significant matters which require the exercise of
judgement and their conclusions. Where the auditor has
information which is inconsistent with the auditor’s final
conclusions about a particular significant matter the auditor
should document how they dealt with such inconsistency
all information should be either generated by the audit team or
recorded as copies of original documents
DOCUMENTATION
 What is unnecessary:
 The ISA also explains that it is neither necessary nor practicable for
the auditor to document every matter considered, or professional
judgment made, in an audit, although clearly all significant or
material judgements should be documented.
 It is unnecessary for the auditor to document separately (as in a
checklist, for example) compliance with matters for which
compliance is demonstrated by documents included within the audit
file, e.g. the existence of an adequately documented audit plan
demonstrates that the auditor has planned the audit.
 It is unnecessary to include copies of documents tested although the
details may be recorded, nor is it necessary to include draft or
preliminary documentation unless these have been subject to audit
testing
EXTENT OF WORKING PAPERS
• Auditors will use standardised forms and checklists to
improve the efficiency of the audit and will also incorporate
schedules and analyses prepared by the business, providing
these have been properly prepared.
• The extent of working papers is a matter of judgement. A
useful way of deciding what is needed is to consider what
information would be needed to provide another auditor who
had no experience of the client with an understanding of the
work performed and the basis of the decisions reached.
PURPOSE OF WORKING PAPERS
• To evidence the planning of the audit and the design of audit
procedures.
• To control the current year’s work. A record of work done is
essential:
• to record the detailed testing, including compliance and substantive
testing and analytical review;
• to record the conclusions drawn from the audit tests performed;
• to record evidence of review at each stage of the audit testing;
• to enable the audit team to be accountable for its work.
• To assist the members of the audit team responsible for
supervision to direct and supervise the audit work and to
evidence the fact of their reviews.
PURPOSE OF WORKING PAPERS
• To enable evidence to be available in the final overall review stage
of an audit so that it can be considered whether the financial
statements show a true and fair view and comply with statutory
requirements.
• Where, in exceptional circumstances, the auditor has to depart
from the requirements of the ISAs a rationale for that departure
and details of the additional testing performed must be recorded.
• Where the auditor has had, exceptionally, to perform audit work
after the audit report has been signed the papers should record a
full explanation of why this has happened and details of the work
performed.
• To enable an experienced auditor to conduct quality control
reviews and inspections or external inspections as required by any
legal or regulatory requirements.
CONTENT OF WORKING PAPERS
Each audit working paper should contain:

 The name of the client, the accounting period and the

assertion, transactions or balance being tested.
 Objective of the test to be carried out.
 Details of the work done, i.e. details of the sample
transactions tested or the substantive tests undertaken.
 The outcome of the tests.
 The conclusions that can be drawn.
 The initials or name of the person carrying out the test
and the reviewer.
 Date of test and date of review.

Auditors will use standardised forms and checklists to improve the

efficiency of the audit and will also incorporate schedules and
analyses prepared by the business, providing these have been
properly prepared.
AUDIT REPORT
 The ISA 700 “The Auditor’s Report on Financial Statements”
provides the framework for the audit report which is in the
form of an opinion on the financial statements of the company:
 “The auditor should review and assess the conclusions drawn
from the audit evidence obtained as the basis for the expression
of an opinion on the financial statements. This review and
assessment involves considering whether the financial
statements have been prepared in accordance with an
acceptable financial reporting framework being either
International Accounting Standards. (IASs) or relevant
national standards or practices.”.
AUDIT REPORT
 It may also be necessary to consider whether the financial
statements comply with statutory requirements. The auditor’s
report should contain a clear written expression of opinion on
the financial statements taken as a whole.
 The ISA 700 establishes the basic components of the audit
report:
 Title,
 Addressee
 Opening or introductory paragraph
 Scope paragraph
 Opinion paragraph containing
 Date of the report
 Auditor’s address
 Auditor’s signature
INCLUDED IN THE AUDIT REPORT

Title The auditor’s report should have an

appropriate title, in order to distinguish
the auditor’s report from reports that
might be issued by others.

Addressee The report is ordinarily addressed either

to the shareholders or the board of
directors of the entity whose financial
statements are being audited.
INCLUDED IN AUDIT REPORT
Opening or Identification of the financial
introductory statements audited.
paragraph

A statement of the
responsibility of the entity’s
management and the
responsibility of the audit.
THE AUDIT REPORT MANAGEMENT
RESPONSIBILITY AND AUDITOR RESPONSIBILITY

• A description of the responsibility of management for

the preparation of the
financial statements.
• A description of the auditor’s responsibility to
express an opinion on the financial statements and the
scope of the audit, that includes:
• A reference to International Standards on Auditing and
the law or regulation
• A description of an audit in accordance with those
standards.
INCLUDED IN THE AUDIT REPORT OPINION
AND SIGNATURES
 An opinion paragraph containing an expression
of opinion on the financial statements and a reference to the
applicable financial reporting framework used to prepare
the financial statements (including identifying the
jurisdiction of origin of the financial reporting framework
that is not International Financial Reporting Standards or
International Public Sector Accounting Standards.
 The auditor’s signature.
 The date of the auditor’s report.
 The auditor’s address.
INCLUDED IN AUDIT REPORT

Scope A reference to the ISAs or relevant

paragraph national standards or practices.
The report should include a
statement that the audit was
planned and performed to obtain
reasonable assurance about
whether the financial statements
are free of material misstatement.
INCLUDED IN AUDIT REPORT
Opinion The opinion paragraph of the auditor’s report
paragraph should clearly indicate the financial reporting
containing framework used to prepare the financial
statements (including identifying the country
of origin of the financial reporting framework
when the framework used is not International
Accounting Standards) and state the auditor’s
opinion as to whether the financial
statements give a true and fair view (or are
presented fairly, in all material respects,) in
accordance with that financial reporting
framework and, where appropriate, whether
the financial statements comply with
statutory requirements.
INCLUDED IN AUDIT REPORT
Date of the report The report should indicate the date.
Auditor’s address The report should name a specific
location, which is ordinarily the city
where the auditor maintains the
office that has responsibility for the
audit.

Auditor’s signature. The report should be signed in the

name of the audit firm, the personal
name of the auditor or both, as
appropriate. The auditor’s report is
ordinarily signed in the name of the
firm because the firm assumes
responsibility for the audit
 THE REPORT MUST BE
DATED
The auditor shall date the report no earlier than the date
on which the auditor has obtained sufficient appropriate
audit evidence on which to base the auditor’s opinion
on the financial statements including evidence that: (a)
all the statements that comprise the financial
statements, including the related notes, have been
prepared; and (b) those with recognised authority have
asserted that they have taken responsibility for those
financial statements.
THE OPINION EXPRESSED IN THE AUDITOR’S
REPORT MAY BE ONE OF FOUR TYPES:

Unmodified
(unqualified),
Three Modified Opinions:

qualified, Q U A D

adverse or
disclaimer of
opinion
UNQUALIFIED AUDIT OPINION – ALSO CALLED
UNMODIFIED OPINION
 Unmodified (unqualified) opinion – 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.
 Most common type of audit report.
 Called ‘clean opinion’.
 Used for more than 90 per cent of all audit reports.
 Other audit reports are referred to as ‘modified opinion
(adverse opinion, disclaimer of opinion and qualified
opinion).
EVALUATION OF THE COMPLIANCE TO THE REPORTING
FRAMEWORK INCLUDE CONSIDERATION OF THESE
QUALITATIVE ASPECTS
• Whether the financial statements adequately disclose the significant
accounting policies selected and they are consistent and appropriate.
• Accounting estimates made by management are reasonable.
• Information presented in the financial statements is relevant, reliable,
comparable and understandable.
• Disclosures to enable the intended users to understand the effect of material
transactions and events on the information conveyed in the financial
statements.
• Terminology used in the financial statements, including the title
of each financial statement, is appropriate.
• Whether the financial statements achieve fair presentation. If they are
prepared in accordance with a fair presentation framework.
 AUDITOR’S QUALIFIED OPINION
The auditor will express a qualified opinion when:
•having obtained sufficient appropriate audit evidence, he
concludes that misstatements, individually or in the aggregate,
are material, but not pervasive, to the financial statements; or
•the auditor is unable to obtain sufficient appropriate audit
evidence on which to base the opinion, but the auditor
concludes that the possible effects on the financial statements
of undetected misstatements,
if any, could be material but not pervasive.
AUDITOR’S ADVERSE OPINION (ISA 705)
The auditor shall express an adverse opinion when the
auditor, having obtained sufficient appropriate audit
evidence, concludes that misstatements, individually
or in the aggregate, are both material and pervasive to
the financial statements.
AUDITOR’S DISCLAIMER OF OPINION (ISA 705)

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.

or interaction of multiple
uncertainties on F/S
BASIS FOR MODIFICATION PARAGRAPH

When the auditor modifies the opinion on the financial

statements, the auditor shall, in addition to the specific
elements required by ISA 700, include a paragraph in the
auditor’s report that provides a description of the matter
giving rise to the modification. The auditor shall place
this paragraph immediately before the opinion paragraph
in the auditor’s report and use the heading ‘Basis for
Qualified Opinion’, ‘Basis for Adverse Opinion’ or
‘Basis for Disclaimer of Opinion’, as appropriate.
WHEN THE AUDITOR INCLUDES AN EMPHASIS OF MATTER
PARAGRAPH IN THE AUDITOR’S REPORT, THE AUDITOR
SHALL:

a. include it immediately after the Opinion paragraph in the

auditor’s report;
b. use the heading ‘Emphasis of Matter’;
c. include in the paragraph a clear reference to the matter
being emphasised and to where relevant disclosures that
fully describe the matter can be found in the financial
statements;
d. indicate that the auditor’s opinion is not modified
in respect of the matter emphasised.
AN AUDITOR MIGHT WRITE AN EMPHASIS OF
A MATTER PARAGRAPH:

 If there is a significant uncertainty which may affect the

financial statements, the resolution of which is dependent upon
future events.
 Examples of uncertainties that might be emphasised include:
• the existence of related party transactions;
• important accounting matters occurring subsequent to the balance
sheet date;
• matters affecting the comparability of financial statements with
those of previous years (e.g. change in accounting methods);
• litigation, long-term contracts, recoverability of asset values, losses
on discontinued operations.
 To highlight a material matter regarding a going concern
problem.
GOING CONCERN

 The ISA 570 “Going Concern” states that the

auditor has the responsibility to obtain sufficient
and appropriate audit evidence about the
appropriateness of the management’s use of the
going concern assumption in the preparation and
the presentation of the financial statements.
 Under the going concern assumption, an entity is
viewed as continuing in business for the
foreseeable future.
GOING CONCERN

 General purpose financial statements are prepared

on a going concern basis, unless management
either intends to liquidate the entity or to cease
operations, or has no realistic alternative but to do
so.
 When the use of the going concern assumption is
appropriate, assets and liabilities are recorded on
the basis that the entity will be able to realize its
assets and discharge its liabilities in the normal
course of business
GOING CONCERN
 The auditor when forming an opinion as to whether
financial statements give the true and fair view should
consider the entity’s ability to continue as a going concern.
The auditor has gathered sufficient evidence to satisfy
themselves that the going concern basis is appropriate. The
auditor should adopt some possible procedures in order to
obtain the evidence of the compliance with the going
concern assumption:
 Analyzing and discussing cash flow, profit and other
relevant forecasts with management.
 Analyzing and discussing the entity’s latest available
interim financial statements.
GOING CONCERN
 The auditor should adopt some possible procedures in order
to obtain the evidence of the compliance with the going
concern assumption:
 Reading the terms of debentures and loan agreements and
determining whether any have been breached.
 Reading minutes of the meetings of shareholders, those
charged with governance and relevant committees for
reference to financing difficulties.
 Inquiring of the entity’s legal counsel regarding the
existence of litigation and claims and the reasonableness of
management’s assessments of their outcome and the
estimate of their financial implications.
GOING CONCERN
 The auditor should adopt some possible procedures in order to
obtain the evidence of the compliance with the going concern
assumption:
 Confirming the existence, legality and enforceability of
arrangements to provide or maintain financial support with
related and third parties.
 Evaluating the entity’s plans to deal with unfilled customer
orders.
 Performing audit procedures regarding subsequent events.

 Confirming the existence, terms and adequacy of borrowing

facilities.
 Obtaining and reviewing reports of regulatory actions.

 Determining the adequacy of support for any planned disposals

of assets.
THE GOING CONCERN DISCLOSURE
SHOULD:
ISA 570
 describe the principal conditions that raise doubt;
 state that there are doubts about going concern; therefore
the entity may be unable to realise its assets and
discharge its liabilities in the normal course of business;
 state that the financial statements do not include any
adjustments relating to the recoverability and
classification of recorded asset amounts or to amounts
and classification of liabilities that may
be necessary should the entity be unable to continue as a
going concern.
CIRCUMSTANCES THAT MAY RESULT IN OTHER
THAN AN UNMODIFIED OPINION

1. A limitation in scope
2. The auditor’s judgement about the pervasiveness
of the effects or possible effects of the matter
on the financial statements.
The circumstances described in 1 – scope limitation –
could lead to a modified opinion
or a disclaimer of opinion. The circumstances
described in 2 – disagreement with
management – could lead to a modified opinion
or an adverse opinion.
LIMITATION ON SCOPE

 Scopelimitations arise when the auditors are

unable for any reason to obtain the information
and explanations considered necessary for the
audit
 limited by the inability to carry out a procedure
the auditors consider necessary
 the absence of proper accounting records
 The audit report should describe the limitation.
MODIFICATION OF OPINION RESULTS FROM
DISAGREEMENT WITH MANAGEMENT ON

 the acceptability of the accounting policies

selected;
 the method of policy application, including the
adequacy of valuations and disclosures in the
financial statements; or
 the compliance of the financial statements with
relevant regulations and statutory requirements.
UNCERTAINTIES LEADING TO QUALIFICATION
OF OPINIONS

Certain uncertainties may lead to an auditor’s report

containing a qualification of opinion in many countries.
These uncertainties include:
•material uncertainties;
•lack of consistency;

•independence of auditor;

•reports in reference to an expert;

•fraud.