Audit ReportChapter 19What is Audit Report?A signed written document which present:purpose scope result of the audit. result of audit should include findings, conclusion (opinion), and may include recommendations. Objective: To form an opinion on the financial statements based on an evaluation of the conclusions drawn from the audit evidence obtainedTo express the opinion clearly through a written report that also describes the basis for that opinionAuditors Reporting ResponsibilityTypes of Audit ReportQualified OpinionUnqualified OpinionAdverse OpinionDisclaimer OpinionCan result from a limitation on the scope of the audit or failure to follow generally accepted accounting principles.The financial statements are presented in accordance with generally accepted accounting principles.It is used only when the auditor believes that the overall financial statements are so materially misstated or misleading that they do not present fairly the financial position or results of operations and cash flows in conformity with GAAP.It is issued when the auditor is unableto be satisfied that the overall financialstatements are fairly presented.Unmodified/Unqualified ReportWhen the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. If the auditor:concludes that, based on the audit evidence obtained, the financial statements as a whole are free from material misstatement; oris able to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatementISA 700Parts of the Standard Unqualified Audit Report1. Report title &Addressee2. Introductory paragraph3. Mgts Responsibility for the F/S4. Auditors Responsibility5. Auditors Opinion6. Other Reporting Responsibility7. Name & signature of auditor firm8. Audit report dateISA 700

Modified ReportThe nature of the matter giving rise to the modificationwhether the financial statements are materially misstated or, in the case of an inability to obtain sufficient appropriate audit evidence, may be materially misstated

The auditors judgment about the pervasiveness of the effects or possible effects of the matter on the financial statements.ISA 70511Modified Unqualified Report (with explanatory)Going concern uncertaintySignificant uncertainty Emphasis of matterMatters That Dont Affect the Auditors OpinionISA 705Going ConcernUncertaintyDoubt on the entitys ability to continue as going concernIf uncertainty exists + adequate disclosure, issue Unqualified reportIf there is a significant uncertainty + adequate disclosure, issue Unqualified report.* Not materially MisstatedEmphasis of a MatterUnder certain circumstances, the auditor maywant to emphasize specific matters regardingthe financial statements, even though theauditor intends to express an unqualified opinion.* Not materially Misstated14Going Concern Uncertainty1. Significant recurring operating lossesorworking capital deficiencies2. Inability of the company to pay itsobligations as they come due3. Loss of major customers, the occurrenceof uninsured catastrophes4. Legal proceedings, legislation, that mightjeopardize the entitys ability to operate15Going Concern Uncertainty - DisclosureIdentify principal conditions that caused the going concern uncertaintyDescribe managements plansState that there is a material uncertainty relating to going concern conditions, & entity may not be able to realise its assets/discharge its liabilities in the normal course of business16Going Concern Uncertainty Disclosure exampleAfter opinion paragraph.Without qualifying our opinion, we draw attention to Note X in the financial statements which indicates that the company incurred a net loss of RMXXX during the year ended 31.12.2005 and as of that date, the companys current liabilities exceeded its total assets by RMXXX. These conditions, along with other matters set forth in Note X indicate the existence of a material uncertainty which may cast significant doubt about the companys ability to continue as a going concern.17Significant uncertaintyAfter opinion paragraph.Without qualifying our opinion, we draw attention to Note X to the financial statements. The company is the defendant in a lawsuit alleging infringement of certain patent rights and claiming royalties and punitive damages. The company has filed a counter claim, and preliminary hearings and discovery proceedings on both actions are in progress. The ultimate outcome of the matter cannot presently be determined, and no provision for any liability that may result has been made in the financial statements.18Type of Modified ReportsNature of Matter GivingRise to the Modification Auditors Judgment about the Pervasiveness of theEffects or Possible Effects on the Financial StatementMaterial but NotPervasive Material and Pervasive Financial statements arematerially misstated Qualified opinionAdverse opinion Inability to obtainsufficient appropriate auditevidence Qualified opinionDisclaimer of opinionMaterialityA misstatement in the financial statementscan be considered material if knowledge ofthe misstatement would affect a decisionof a reasonable user of the statements.20Pervasiveness A term used, in the context of misstatements, to describe the effects on the financial statements of misstatements or the possible effects on the financial statements of misstatements, if any, that are undetected due to an inability to obtain sufficient appropriate audit evidence. Pervasive effects on the financial statements are those that, in the auditors judgmentAre not confined to specific elements, accounts or items of the financial statements; If so confined, represent or could represent a substantial proportion of the financial statements; or In relation to disclosures, are fundamental to users understanding of the financial statements. ISA 705Departures from an Unqualified Opinion1. Scope limitation2. Disagreement withaccounting standards22Scope limitation= lack of evidence, unable to obtain information/explanations for audit, unable to perform an audit proceduree.g. cannot perform inventory observation

Disagreement= non-compliance with a/c stds, auditor disagrees with a/c stds/policies selected, method of application, adequacy of disclosureDisclaimer of OpinionIt is issued when the auditor is unableto be satisfied that the overall financialstatements are fairly presented.

23When effect is material/pervasive.Auditor unable to obtain evidence to form an opinion on the FS.Cannot give an opinion

Adverse OpinionIt is used only when the auditor believesthat the overall financial statements areso materially misstated or misleading thatthey do not present fairly the financialposition or results of operations and cashflows in conformity with accounting standards.24When effect is material/pervasive.Non-compliance affects the overall FS.Auditor is of the opinion that the FS are not true & fair.

Levels of MaterialityAmounts are immaterial.Amounts are material but do not overshadowthe financial statements as a whole.Amounts are so material or so pervasive thatoverall fairness of the statements is in question.25Level of MaterialityType of OpinionLimitation of ScopeDisagreement with Non-complianceImmaterialUnqualifiedUnqualifiedMaterialQualified (except for)Qualified (except for)Extremely Material/pervasiveDisclaimerAdverseRelationship of Materiality to Type of OpinionMaterialityLevelSignificance in Terms ofReasonable Users DecisionsType ofOpinionUsers decisions are unlikelyto be affected.ImmaterialUnqualifiedUsers decisions are likelyto be affected.MaterialQualifiedUsers decisions are likelyto be significantly affected.HighlymaterialDisclaimeror adverse27Scope Limitation (Material) Qualified opinionIntroductory paragraph

Except as discussed in the following paragraph, we conducted our audit in accordance with ... (scope paragraph)

We did not observe the counting of the physical inventories as of 31 December 2005, since that date was prior to the time we were initially engaged as auditors for the Company. Owing to the nature of the Companys records, we were unable to satisfy ourselves as to inventory quantities by other audit procedures.

In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to satisfy ourselves as to physical inventory quantities, the financial statements give a true and ... (opinion paragraph).28Scope Limitation (material & pervasive) DisclaimerWe were engaged to audit the accompanying balance sheet of the ABC Company as of 31 December 2005, and the related statements of income and cash flows for the year then ended. These financial statements are the responsibility of the Companys management.(Omit the sentence stating the responsibility of the auditor).

(The paragraph discussing the scope of the audit would either be omitted or amended according to the circumstances.)

(Add a paragraph discussing the scope limitation as follows:)We were not able to observe all physical inventories and confirm accounts receivable due to limitations placed on the scope of our work by the Company. Because of the significance of the matters discussed in the preceding paragraph, we do not express an opinion on the financial statements.29Disagreement (Inappropriate Acc Method)-Qualified opinionWe have audited ... (introductory paragraph).

We conducted our audit in accordance with ... (scope paragraph).

As discussed in Note X to the financial statements, no depreciation has been provided in the financial statements which practice, in our opinion, is not in accordance with the Malaysian Financial Reporting Standards. The provision for the year ended 31 December 2005, should be xxx based on the straight-line method of depreciation using annual rates of 5% for the building and 20% for the equipment. Accordingly, the fixed assets should be reduced by accumulated depreciation of xxx and the loss for the year and accumulated deficit should be increased by xxx and xxx, respectively.

In our opinion, except for the effect on the financial statements of the matter referred to in the preceding paragraph, the financial statements give a true and ... (opinion paragraph).30Disagreement (Inadequate Disclosure) AdverseWe have audited ... (introductory paragraph).

We conducted our audit in accordance with ... (scope paragraph).

(Paragraph(s) discussing the disagreement).

In our opinion, because of the effects of the matters discussed in the preceding paragraph(s), the financial statements do not give a true and fair view of (or do not present fairly) the financial position of the Company as of 31 December 2005, and of the results of its operations and its cash flows for the year then ended in accordance with Malaysian Financial Reporting Standards.31Auditors Decision ProcessDetermine whether any condition existsrequiring a departure from a standardunqualified report.Decide the materiality for each condition.Decide the appropriate type of report.Write the audit report.32THANK YOUAllah Knows Best