Chartered Accountants Audit Conference Problem Audit Reports charteredaccountants.com.au Andrew Stringer Head of Audit The Institute of Chartered Accountants

Chartered Accountants Audit Conference

Problem Audit Reports

charteredaccountants.com.au

Andrew Stringer

Head of Audit

The Institute of Chartered Accountants in Australia

Heather Watson

Director, Financial Audit Services

The Audit Office of NSW

Problem Audit Reports> The “old” – AUS 702 and AUS 802

> The “new” – ASA 700, ASA 701 and ASA 800

> Problem audit reports –

• Uncertainty in general

• Going concern issues

• Scope limitations

• Emphasis of matter requirements

• Events occurring after balance date affecting audit report

• “Except for” opinions

• Denials of opinion

• Adverse opinions

> Corporations Act breach reporting

Audit reports – the “old”

> AUS 702 – The audit report on a general purpose financial report

> AUS 802 – The audit report on financial information other than a general purpose financial report

Other

> Guidance Note issued July 2003 by the AuASB - issued in Australia knowing that changes being proposed at international level – clearer and more informative – optional – improved structure & wording

> Auditing Guidance Statement – AGS 1028 – “Uncertainty” – now withdrawn

Audit reports – the “old”

AUS 702 and AUS 802 – format of the audit report

> Title, addressee, signature, address & date

> Scope section (AUS 802 included ref to reason for preparation of the special purpose financial report)

> Audit opinion

Audit reports – the “new”

THE AUDIT REPORT

> Old AUS 702 now split into two standards> ASA 700 – The auditor’s report on a general purpose financial report> ASA 701 – Modifications to the auditor’s report

> Split into:A. Emphasis of matterB. Other than unqualified

i. Qualified opinions (old – “except for”)ii. Disclaimers of opinion (old – “inability to form opinion”)iii. Adverse opinions

> Effective for financial reporting periods commencing on or after 1 July 2006


THE AUDIT REPORT

> Old AUS 802 “The Audit Report on Financial Information other than a General Purpose Financial Report”

> Replaced by ASA 800 “The Auditor’s Report on Special Purpose audit Engagements”

> Effective for financial reporting periods commencing on or after 1 July 2006


Terminology used & applicable standard

UnqualifiedOther than Unqualified

Unmodified ASA 700

Modified

ASA 701

Emphasis of Matter

ASA 701

Qualified

ASA 701

Disclaimer

ASA 701

Adverse

ASA 701


MANDATORY REQUIREMENTS - THE AUDIT REPORT NEEDS

1. Title and Addressee

2. Identify entity, what has been audited, and period covered

3. Responsibility of Those Charged with Governance for Financial Report (Directors’ responsibility for the financial report)

4. Auditor’s responsibility (what we used to call the ‘scope’ paragraph)

5. Statement of independence (required for Corporations Act audits – recommended for all others)

6. Audit opinion

Audit reports – the “new” (ASA 700)

6 The auditor’s report shall contain a clear expression of the auditor’s opinion on the financial report

8 Unless required by law or regulation to use different wording, the auditor’s opinion on a general purpose financial report prepared in accordance with a financial reporting framework that is designed to achieve fair presentation shall state whether the financial report “gives a true and fair view” or “presents fairly, in all material respects,” in accordance with the applicable financial reporting framework.

15 The auditor shall evaluate the conclusions drawn from the audit evidence obtained as the basis for forming an opinion on the financial report.


TITLE

23 The auditor’s report shall have a title that clearly indicates that it is the report of an independent auditor

ADDRESSEE

25 The auditor’s report shall be addressed as required by the circumstances of the engagement


INTRODUCTORY PARAGRAPH

27 The introductory paragraph in the auditor’s report shall identify the entity whose financial report has been audited and shall state that the financial report has been audited. The introductory paragraph shall also:

(a) identify the title of each of the financial statements that comprise the financial report;

(b) refer to the summary of significant accounting policies, other explanatory notes and, when appropriate, the directors’ declaration; and

(c) specify the date and period covered by the financial report


THE RESPONSIBILITY OF THOSE CHARGED WITH GOVERNANCE FOR THE FINANCIAL REPORT

33 The auditor’s report shall state that those charged with governance are responsible for the preparation and the fair presentation of the financial report in accordance with the applicable financial reporting framework and that this responsibility includes:

(a) establishing (previously “designing, implementing”) and maintaining internal controls relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error;

(b) selecting and applying appropriate accounting policies; and

(c) making accounting estimates that are reasonable in the circumstances


AUDITOR’S RESPONSIBILITY

37 The auditor’s report shall state that the responsibility of the auditor is to express an opinion on the financial report based on the audit

39 The auditor’s report shall state that the audit was conducted in accordance with Australian Auditing Standards. The auditor’s report shall also explain that those standards require that the auditor complies with relevant ethical requirements relating to audit engagements and that the auditor plans and performs the audit to obtain reasonable assurance whether the financial report is free from material misstatement



42 The auditor’s report shall describe an audit by stating that:

(a) an audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report;

Audit reports – the “new” (ASA 700)AUDITOR’S RESPONSIBILITY (cont’d)


(b) the procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor shall consider internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. In circumstances when the auditor also has a responsibility to express an opinion on the effectiveness of internal control in conjunction with the audit of the financial report, the auditor shall omit the phrase that the auditor’s consideration of internal control is not for the purpose of expressing an opinion on the effectiveness of internal control; and


AUDITOR’S RESPONSIBILITY (cont’d)


(c) an audit also includes evaluating the appropriateness of the accounting policies used, the reasonableness of accounting estimates made by those charged with governance, as well as the overall presentation of the financial report



43 The auditor’s report shall state that the auditor believes that the audit evidence the auditor has obtained is sufficient and appropriate to provide a basis for the auditor’s opinion.


AUDITOR’S OPINION

44 An unqualified opinion shall be expressed when the auditor concludes that the financial report gives a true and fair view or presents fairly, in all material respects, in accordance with the applicable financial reporting framework.


AUDITOR’S OPINION

45 When expressing an unqualified opinion, the auditor shall include a section headed “Auditor’s Opinion”. The opinion paragraph of the auditor’s report shall state the auditor’s opinion that the financial report gives a true and fair view or presents fairly, in all material respects, in accordance with the applicable financial reporting framework (unless the auditor is required by law or regulation to use different wording for the opinion, in which case the prescribed wording shall be used).


AUDITOR’S OPINION

46 When Australian Accounting Standards are not used as the financial reporting framework, the reference to the financial reporting framework in the wording of the opinion shall identify the jurisdiction or country of origin of the financial reporting framework.


CHANGE EFFECTIVE FOR 30 JUNE 2007 YEAR ENDS ONWARDS

49AWhen an entity, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, has included in the notes to the financial statements, an explicit and unreserved statement of compliance with International Financial Reporting Standards (IFRSs), and the auditor agrees with the entity’s statement of compliance, the auditor shall state that in the auditor’s opinion, the financial report complies with IFRSs.


OTHER REPORTING RESPONSIBILITIES

51 When the auditor addresses other reporting responsibilities within the auditor’s report on the financial report, these other reporting responsibilities shall be included in a separate section in the auditor’s report that follows the opinion paragraph.


AUDITOR’S SIGNATURE

53 The auditor’s report shall be signed in one or more of the name of the audit firm, the name of the audit company or the personal name of the auditor, as appropriate.


DATE OF THE AUDITOR’S REPORT

54 The auditor’s report shall be dated as of the date the auditor signs that report. The auditor shall date the auditor’s report on the financial report no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the opinion on the financial report. Sufficient appropriate audit evidence shall include evidence that the entity’s financial report has been prepared and that those charged with governance have asserted that they have taken responsibility for it.


AUDITOR’S ADDRESS

58 The report shall name the location in the country or jurisdiction where the auditor practices.

OTHER

59 The auditor’s report shall be in writing.


AUDITOR’S REPORT FOR AUDITS CONDUCTED IN ACCORDANCE WITH BOTH AUSTRALIAN AUDITING STANDARDS AND INTERNATIONAL STANDARDS ON AUDITING

62 The auditor may conduct the audit in accordance with both the Australian Auditing Standards and the International Standards on Auditing (“ISAs”) issued by the International Auditing and Assurance Standards Board (“IAASB”). The conformity section explains the relationship of this Auditing Standard with its equivalent ISA issued by the IAASB.

63 The auditor’s report shall refer to the audit having been conducted in accordance with the Australian Auditing Standards and ISAs only when the auditor has complied fully with all of the Auditing Standards and ISAs relevant to the audit.


UNAUDITED SUPPLEMENTARY INFORMATION PRESENTED WITH AN AUDITED FINANCIAL REPORT

64 The auditor shall be satisfied that any supplementary information presented together with the financial report that is not covered by the auditor’s opinion is clearly differentiated from the audited financial report.

67 If the auditor concludes that the entity’s presentation of any unaudited supplementary information does not differentiate it sufficiently from the audited financial report, the auditor shall explain in the auditor’s report that that information has not been audited.


WORDING FOR 30 JUNE 2007 YEAR ENDS ONWARDS (where there is a statement of compliance with IFRS)

Directors’ Responsibility for the Financial ReportThe directors of the company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. [In note XX, the Directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that compliance with the Australian equivalents to International Financial Reporting Standards (IFRSs) ensures that the financial report, comprising the financial statements and notes, complies with IFRSs. ]


WORDING FOR 30 JUNE 2007 YEAR ENDS ONWARDS (where there is a statement of compliance with IFRS)

Auditor’s OpinionIn our opinion:(a) the financial report of [name of entity] is in accordance with theCorporations Act 2001, including:

(i) giving a true and fair view of the [company/registered scheme/disclosing entity]’s financial position as at 30 June 20XX and of its performance for the year ended on that date;

and(ii) complying with Australian Accounting Standards (including the

Australian Accounting Interpretations) and the Corporations Regulations 2001; and

(b) the financial report also complies with International FinancialReporting Standards as disclosed in Note XX.

Special Purpose Audit Engagements – (ASA 800)

ASA 800 “The Auditor’s Report on Special Purpose Audit Engagements” applies to four audit engagements:

> Financial reports prepared in accordance with a comprehensive alternative basis of accounting

> Components of financial reports

> Compliance with contractual agreements

> Summarised financial reports.

Special Purpose Financial Reports – (ASA 800)> Financial reports designed to meet the needs of specific users

> Financial reports prepared in accordance with an alternative comprehensive basis of accounting are often referred to as ‘special purpose financial reports’

> Financial reports prepared in accordance with all recognition and measurement requirements (but not the disclosure requirements) of accounting standards are special purpose

> Auditor’s report must identify the basis of accounting applied

> Auditor reports on whether financial report is prepared in accordance with the basis of accounting

Special Purpose Financial Reports – (ASA 800)WORDING FOR SPECIAL PURPOSE FINANCIAL REPORT OPINIONS

“We have audited the accompanying financial report, being a special purpose financial report…”

“Those charged with governance …have determined that the accounting policies described in Note 1 are appropriate to meet the financial reporting requirements…”

“No opinion is expressed as to whether the accounting policies used, as described in Note 1, are appropriate to meet the needs of the members.”

“In our opinion, the financial report presents fairly…in accordance with the accounting policies described in Note 1…”

Components of a financial report – (ASA 800)> Engagement may be undertaken in conjunction with an audit of an

entity’s financial report, or as a separate engagement

> Components include a single financial statement (e.g. balance sheet), an account balance or line item from a financial report (e.g. accounts receivable)

> Auditor’s report must identify the basis of accounting

> “In our opinion, the schedule of accounts receivable…presents fairly the accounts receivable of the entity as of [date] in accordance with the Australian Accounting Standards that are relevant to the preparation and presentation of the schedule of accounts receivable”

Compliance with contractual agreements – (ASA 800)> ASA 800 only addresses contractual agreements when the overall

aspects of compliance relate to accounting and financial matters (otherwise consider ASAE 3000 “Assurance Engagements other than Audits or Reviews of Historical Financial Information”)

> Auditor’s opinion relates to compliance with particular provisions of the agreement

> “In our opinion, the entity was, in all material respects, in compliance with the accounting and financial reporting matters of the agreement”

Summarised financial report – (ASA 800)

> A financial report summarising the annual audited financial report – not a concise financial report prepared in accordance with AASB 1039 “Concise Financial Reports”

> Auditor cannot report on a summarised financial report unless they have also reported on the “full” financial report

> Auditor reports on whether the summarised financial report is consistent with the audited financial report

> “In our opinion, the information…is, in all material respects, consistent with the financial report from which it was derived”

Other ASA 800 considerations

> Many prescribed auditor’s reports do not comply with auditing standards

> An audit engagement does not provide sufficient assurance to “certify” that information is correct

13. When requested to report in a prescribed format, the auditor shall consider the substance and wording of the prescribed report and, when necessary, shall make appropriate changes to conform to the requirements of this Auditing Standard

> The basic elements of an ASA 800 auditor’s report are similar to those required by ASA 700. Refer to paragraph 9 for basic elements and appendices of ASA 800 for templates

Corporations Act Requirements – Part 2M.3

These could be ASA 700 or ASA 800 engagements.

> Duty to form an opinion whether financial report:

• Complies with accounting standards

• Gives a true and fair view

• Any additional information was necessary to give a true and fair view

> Whether auditor given all info, explanations and assistance necessary for conduct of audit

> Whether entity kept financial records sufficient to enable financial report to be prepared and audited

> Whether entity kept other records and registers as required by Act

Corporations Act Requirements – Part 2M.3

> Auditor must report to members

> If don’t comply with accounting standards, auditor must, to the extent practicable, quantify the effect of non-compliance. If this not practicable, report must say why

> Audit report must describe any defect or irregularity in the financial report

> Audit report must include any statements or disclosures required by the auditing standards

> Include a statement of auditor’s opinion on whether the inclusion of any additional information the entity included to give a true and fair view, was necessary to give a true and fair view

Corporations Act Requirements – Part 2M.3Auditor’s independence declaration

Auditor must give the directors of the company, registered scheme or disclosing entity: (a) a written declaration that, to the best of the auditor’s knowledge

and belief, there have been: (i) no contraventions of the auditor independence requirements of

the Act in relation to the audit or review; and (ii) no contraventions of any applicable code of professional

conduct in relation to the audit or review; or (b) a written declaration that, to the best of the individual auditor’s

knowledge and belief, the only contraventions of: (i) the auditor independence requirements of the Act in relation to

the audit or review; or (ii) any applicable code of professional conduct in relation to the

audit or review, are those contraventions details of which are set out in the

declaration.

Corporations Act – Breach Reporting

Does an audit qualification for non-compliance with accounting standards require notification to ASIC under Section 311 of the Corporations Act?

A: Yes, a notification to ASIC would usually be required in these circumstances

Under Section 311(1)(a) of the Corporations Act, an auditor is required to notify ASIC if the auditor has reasonable grounds to suspect a contravention of the Act and they believe that the contravention is either significant or, if not significant, cannot be adequately dealt with by inclusion in the audit report or by bringing it to the attention of the directors


Section 311 of the Corporations Act> Auditor has to notify ASIC in writing within 28 days of becoming

aware:i. Have reasonable grounds to suspect a contravention of the

Actii. Or an attempt to unduly influence, coerce manipulate or

mislead a person involved in conduct of auditIF

> The contravention is significant, OR> The contravention is not significant and the auditor believes it has

not or will not be adequately dealt with by comment in the audit report or bringing to the attention of directors


ASIC – Regulatory Guide 34 (re-issued December 2007)(previously Practice Note 34) clarifies auditor’s obligations

> Guidance to help auditors comply with S311 (and S601HG – AFS licensees) reporting obligations

> What considered to be significant contraventions

> Suspected contraventions that are unlikely to be significant include:

• Isolated relatively minor failure to assist auditor• Entity’s failure to lodge accounts where required (NB – however

if the failure continues – auditor should notify ASIC)

Audit report wording

Is this wording acceptable?

In our opinion, except for our inability to form an opinion on (the nature of the uncertainty), the financial report presents fairly in accordance with . . .


Generally “No”

> Cannot qualify your way out of doing audit work

> You must do enough audit work to be able to form an opinion

> However, it may be acceptable if uncertainty relates to a disagreement with management or scope limitation

> The uncertainty could possible result in an “emphasis of matter”• where effect of matter not capable of reasonable estimation• potential for matter to affect financial report not so remote as to

make its disclosure irrelevant


THE AUDIT REPORT – WHAT’S WRONG WITH THIS?

I have examined the records of ABC Pty Ltd for the year ended 30 June 2006.

For most of the year the accounts were properly maintained however three times during the year clients were paid money in excess of funds held in the trust and the money was outstanding for some weeks. This is unacceptable without Principal’s funds being held in the account to cover such overpayments.

The trust has only been used in relation to transactions for client funds that have been received and require disbursement on behalf of clients.


Terminology used & applicable standard

UnqualifiedOther than Unqualified

Unmodified ASA 700

Modified

ASA 701

Emphasis of Matter

ASA 701

Qualified

ASA 701

Disclaimer

ASA 701

Adverse

ASA 701

Circumstances for modification – the “old”

Circumstances

Type of modification

Material but not extreme Extreme*

Scope limitation “Except for”Inability to form

opinion

Disagreement with management (including inherent uncertainty not adequately disclosed)

“Except for” Adverse

Conflict between applicable financial reporting frameworks

“Except for” Adverse

* Extreme – where effects or possible effects are so material that auditor is unable to obtain sufficient appropriate audit evidence, or where an unqualified opinion is inadequate to disclose the misleading or incomplete nature of financial report

Circumstances for modification – the “new”

Circumstances

Type of modification

Material but not extreme Extreme*

Scope limitation Qualified Disclaimer

Disagreement with those charged with governance

Qualified Adverse

Conflict between applicable financial reporting frameworks

Qualified Adverse

* Extreme – where effects or possible effects are so material that auditor is unable to obtain sufficient appropriate audit evidence, or where an unqualified opinion is inadequate to disclose the misleading or incomplete nature of financial report

Circumstances for modification – the “old”

Circumstances Type of Modification

Inherent uncertainty (going concern or other) that is adequately disclosed

Unqualified opinion with emphasis of matter

Additional disclosures with which the auditor concursUnqualified opinion with

emphasis of matter

Accompanying information is inconsistent with audited financial report


Subsequent event creates new conditions which did not exist at reporting date and which render going concern basis inappropriate, and this is adequately disclosed


Subsequent event results in a new audit report on a revised financial report


Circumstances for modification – the “new”

Circumstances Type of Modification

Significant uncertainty – going concern Emphasis of matter

Significant uncertainty – other Emphasis of matter

Additional disclosures with which the auditor concurs Emphasis of matter

Inconsistent other information Emphasis of matter

Subsequent event resulting in a new auditor’s report on a revised financial report

Emphasis of matter

Modified Audit reports (ASA 701)

SIGNIFICANT UNCERTAINTY – GOING CONCERN

9 The auditor shall modify the auditor’s report by adding a paragraph to highlight a significant uncertainty regarding a going concern problem.

SIGNIFICANT UNCERTAINTY – OTHER

11 The auditor shall modify the auditor’s report by adding a paragraph if there is a significant uncertainty (other than a significant uncertainty regarding a going concern problem), the resolution of which is dependent upon future events and which may materially affect the financial report.

Modified Audit reports (ASA 701)ADDITIONAL DISCLOSURES

15 When an unqualified opinion is expressed in the rare circumstances described in paragraph 34, the auditor’s report shall include an emphasis of matter section headed "Application of Australian Accounting Standard AASB ..." which:

(a) draws attention to the additional disclosures;

(b) states that in the auditor's opinion application of the particular Accounting Standard has, in this instance, resulted in the financial report being potentially misleading;

(c) states the specific reasons why the auditor believes the additional disclosures are necessary to ensure the financial report as a whole is not misleading (the auditor's reasons are to be stated in the auditor’s report itself rather than only by reference to the reasons included in the financial report); and

(d) states that, in the auditor's opinion, the additional disclosures are relevant and reliable in meeting the objectives of the financial report.


INCONSISTENT OTHER INFORMATION

17 When information in a document containing the audited financial report is materially inconsistent with that financial report, the auditor’s report shall include an emphasis of matter section describing the material inconsistency.


SUBSEQUENT EVENTS RESULTING IN A NEW AUDITOR’S REPORT ON A REVISED FINANCIAL REPORT

19 When a financial report and the auditor’s report thereon have been issued, and a fact is discovered that leads those charged with governance to prepare a revised financial report, the new auditor’s report on the revised financial report shall include an emphasis of matter paragraph. That paragraph shall refer to a note to the financial statements that more extensively discusses the reason for the revision of the previously issued financial report, and to the earlier report issued by the auditor.


MATTERS THAT DO AFFECT THE AUDITOR’S OPINION

22 A qualified opinion shall be expressed when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with those charged with governance, a conflict between applicable financial reporting frameworks or limitation on scope is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion. A qualified opinion shall be expressed as being “except for” the effects of the matter to which the qualification relates.

The opinion paragraph shall be headed “Qualified Auditor’s Opinion”.



23 A disclaimer of opinion shall be expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and accordingly is unable to express an opinion on the financial report. The opinion paragraph shall be headed “Disclaimer of Auditor’s Opinion”.



24 An adverse opinion shall be expressed when the effect of a disagreement or a conflict between applicable financial reporting frameworks is so material and pervasive to the financial report that the auditor concludes that a qualification of the auditor’s report is not adequate to disclose the misleading or incomplete nature of the financial report. The opinion paragraph shall be headed “Adverse Auditor’s Opinion”.



25 Whenever the auditor expresses an opinion that is other than unqualified, a clear description of all the substantive reasons shall be included in the auditor’s report and, unless impracticable, a quantification of the possible effect(s) on the financial report. If the effects or possible effects are incapable of being measured reliably, a statement to that effect and the reasons therefore shall be included in the basis for modification paragraph of the auditor’s report.



27 When a major component of the financial report has been omitted, or is fundamentally misstated and the auditor is unable to generate the required information necessary to fully detail the financial effect of the matter, the auditor’s report shall include a statement indicating that the financial effect of the omission has not been detailed and the reasons therefore.


CIRCUMSTANCES THAT MAY RESULT IN OTHER THAN AN UNQUALIFIED OPINION

Limitation on Scope

31 When there is a limitation on the scope of the auditor’s work that requires expression of a qualified opinion or a disclaimer of opinion, the auditor’s report shall describe the limitation and indicate the possible adjustments to the financial report that might have been determined to be necessary had the limitation not existed.



Disagreement with those Charged with Governance

33 If disagreements between the auditor and those charged with governance about the acceptability, selection, application or adequacy of disclosures in the financial report are material to the financial report, the auditor shall express a qualified or an adverse opinion.

Modified Audit reports (ASA 701)CIRCUMSTANCES THAT MAY RESULT IN OTHER THAN AN UNQUALIFIED

OPINION

Disagreement with those Charged with Governance

34 When the financial report has been prepared in accordance with Australian Accounting Standards but additional disclosures have been made in the financial report on the basis that, or which imply that, application of a particular Accounting Standard has resulted in the financial report being potentially misleading, a qualified opinion shall be expressed in relation to the additional disclosures, unless the auditor is of the opinion that:

(a) it is likely, in the absence of the additional disclosures, that users would be misled when making evaluations or decisions about the allocation of scarce resources; and

(b) the additional disclosures contain all, and only, relevant and reliable information, and are presented in such a manner as to ensure the financial report as a whole is comparable and understandable in meeting the objectives of the financial report. When these circumstances exist, the auditor shall apply the mandatory requirements in paragraph 15.



Conflict Between Applicable Financial Reporting Frameworks

35 When the application of accounting policies required or allowed by relevant statutory and other requirements has not resulted in a fair presentation in accordance with Australian Accounting Standards:

(a) an unmodified opinion shall be expressed with respect to presentation in accordance with relevant statutory and other requirements; and

(b) a qualified or adverse opinion shall be expressed with respect to presentation in accordance with Australian Accounting Standards as appropriate.



Conflict Between Applicable Financial Reporting Frameworks

36 When the accounting policies applied are contrary to those required by relevant statutory and other requirements, the auditor’s opinion shall be modified with respect to presentation in accordance with those requirements, whether or not the auditor's opinion with respect to presentation in accordance with Australian Accounting Standards is modified.

Going concern – considerations (ASA 570)

Does initial risk assessment

indicate that the probability of

going concern problems

arising is low?

Do results of other audit

procedures support initial risk

assessment?

Issue an unmodified audit

report (para 35)

Express qualified opinion

(inadequate disclosure) (para

36)

Express unqualified opinion.

Add emphasis of matter

(para 39)

Express qualified or adverse

opinion (inadequate

disclosure) (para 41)

Express adverse opinion

(going concern basis

inappropriate (para 43)

Have mitigating circumstances

been adequately disclosed?

Is there adequate disclosure of

the significant uncertainty?

Do modified audit procedures

indicate a reasonable

expectation the entity will

continue as a going concern?

Is it highly improbable the

entity will continue as a going

concern?

Y Y

Y

Y

Y

Y

N N

N

N

N

N

Some examples – emphasis of matter

> Audit report worded as normal

> Additional paragraph:

Significant Uncertainty Regarding Litigation

Without qualifying our opinion, as discussed in Note x to the financial statements, the company is a defendant in a lawsuit alleging infringement of certain patent rights and claiming royalties and punitive damages. The company has filed a counter action and preliminary hearings and discovery proceedings on both actions are in progress. The ultimate outcome of the matter cannot be currently determined, and no provision has been made in the financial statements for any liability that may result.

Some examples – going concern

Included with the accounting policy notes.

Going concern

The financial report has been prepared on a going concern basis, which contemplates continuity of normal business activities, the realisation of assets and the settlement of liabilities in the ordinary course of business.

The company incurred a loss from ordinary activities after income tax of $xxxx (2006: $xxxx) and net operating cash outflows of $xxxx (2006: outflow of $xxxx), for the year ended 30 June 2007, and has equity of $xxxx (2006: $xxxx) as at 30 June 2007. The Directors nevertheless believe that it is appropriate to prepare the consolidated financial statements on a going concern basis for the following reasons:

Some examples – going concern (cont’d)Included with the accounting policy notes.

Going concern

At 30 June 2007, the entity had a cash balance of $xxxxxxx and net current assets of $xxxxxxx;

Since 30 June 2007, the entity has continued with strategies to reduce cash usage commenced at the start of the 2007 financial year;

The entity prepares revenue and cash flow forecasts which are reviewed and updated monthly. Based on these forecasts, the company is expected to generate sufficient cash flow to ensure that there are sufficient funds available to pay debts as they fall due.

The ability of the company to continue to pay its debts as and when they fall due is dependent upon the continuing financial support of its principal shareholder and the ability to generate sufficient cash flows in the future.

Audit report – emphasis of matter

> Audit report worded as normal

> Additional paragraph:

Material Uncertainty Regarding Continuation as a Going Concern

Without qualifying our opinion, we draw attention to Note X in the financial report which indicates that the company incurred a net loss of $xxxx and had net operating cash outflows of $xxxx for the year ended 30 June 2007. As of that date the company’s equity amounted to $xxxx. These conditions, along with other matters as set forth in Note X, indicate the existence of a material uncertainty which may cast significant doubt about the company’s ability to continue as a going concern.

Case study – going concern

The entity has incurred losses and has negative working capital and negative equity. However, the financial report has been prepared on a going concern basis.

Management has well documented plans and budgets that indicate the entity will be profitable in the following years. In addition, the parent entity has provided written confirmation that it will provide ongoing financial support as required.

What is the impact on the auditor’s report?

Case study – going concern

The entity has incurred losses and has negative working capital and negative equity. However, the financial report has been prepared on a going concern basis.

Management has well documented plans and budgets that indicate the entity will be profitable in the following years.

What is the impact on the auditor’s report?

Some examplesScope Limitation

Basis for Qualified Auditor’s Opinion

We did not observe the counting of physical inventories as of 30 June 2006, since that date was prior to our appointment as auditors for the company. The nature of the company’s records are such that we were unable to satisfy ourselves as to inventory quantities by alternate audit procedures.

Qualified Auditor’s Opinion

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 report of [name of entity] is in accordance with the Corporations Act 2001, including:

(a) giving a true and fair view of the company’s financial position as at 30 June 2006 and of its performance for the year ended on that date; and

(b) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001.



Credit card sales form the majority of the company’s sales. Cash sales are nevertheless a significant proportion of the company’s sales revenue and the company has no controls over this form of revenue until its initial entry in the accounting records upon banking. Accordingly, as the evidence available to us regarding revenue from this source was limited, our audit procedures with respect to cash sales were restricted to the amounts recorded in the financial records upon banking. We are therefore unable to express an opinion whether sales revenue is complete.


In our opinion, except for the effect on the financial report of such adjustments, if any, as might have been required had the limitation on our audit procedures referred to in the qualification paragraph not existed, the financial report of ABC Pty Limited is in accordance with:



The company’s operations of XYZ division have resulted in significant and continued losses. As required by AASB 136 “Impairment of Assets” the company has measured the value in use of the assets associated with XYZ division totalling $xxxx and determined that they are not impaired.

A major factor in the company’s calculation of the value in use is the expected cash inflows from the disposal of the asset. The company has been unable to provide us with adequate documentation to support its estimate of the amount that is expected to be realised from the sale of XYZ division.

Consequently we are unable to satisfy ourselves as to whether the assets included in the financial report associated with XYZ division $xxxx are carried at no more than their recoverable amount.


In our opinion, except for the effect on the financial report of such adjustments, if any, as might have been required had the limitation on our audit procedures referred to in the qualification paragraph not existed, the financial report of ABC Pty Limited

is in accordance with:

Case study – new clients

The entity is a new client of the firm for the year ended 30 June 2008. In previous years, the financial report was not audited. The auditor has been unable to obtain audit sufficient appropriate audit evidence on comparative information.

What is the impact on the auditor’s report for 30 June 2008?

What is the impact on the auditor’s report for 30 June 2009?

Some examplesDisclaimer of Opinion

Basis for Disclaimer of Auditor’s Opinion

As noted in Note X to the financial statements, a fire at the company’s computer centre destroyed many of the accounting and statutory records. The fire occurred prior to the completion of our audit. As the remaining accounting and statutory records are not adequate to permit the application of necessary audit procedures, we are unable to obtain all the information and explanations we require in order to form an opinion on the financial report.


Disclaimer of Auditor’s Opinion

In our opinion, because of the existence of the limitation on the scope of our work, as described in the preceding paragraph, and the effects of such adjustments, if any, as might have been determined to be necessary had the limitation not existed, we are unable to and do not express an opinion as to whether the financial report of [name of company] is in accordance with the Corporations Act 2001, including:

(a) giving a true and fair view of the company’s financial position as at 30 June 20XX and of its performance for the year ended on that date; and



Report on Other Legal and Regulatory Requirements

Due to the matter described in the Basis for Disclaimer of Auditor’s Opinion paragraph, we have not been given all information, explanation and assistance necessary for the conduct of the audit; and we are unable to determine whether the company has kept:

(a) financial records sufficient to enable the financial report to be prepared and audited; and

(b) other records and registers as required by the Corporations Act 2001.

Some examplesAdverse Opinion

Basis for Adverse Auditor’s Opinion

Included in the financial report as a non-current asset is the company's investment in [subsidiary company], recorded at a cost of $XXX. The company has not presented a consolidated financial report which combines the financial report of [subsidiary company] with that of [parent entity]. A consolidated financial report is required by Australian Accounting Standard AASB 127 Consolidated and Separate Financial Statements because [parent entity] has the capacity to dominate [subsidiary company's] decision making in relation to its financial and operating policies. In our opinion, the presentation of a consolidated financial report is fundamental to a proper appreciation of [parent entity's] financial position, the results of its operations and its cash flows.

Had a consolidated financial report been presented, it would disclose a different financial position, different results of operations and different cash flows of the [parent entity]. The financial effect of this matter has not been detailed in this report as it is not the purpose of an independent auditor’s report to present financial information of this nature.

Some examplesAdverse Opinion

Adverse Auditor’s Opinion

In our opinion, because of the effects of the matter discussed in the preceding paragraphs, the financial report of [name of company] is not in accordance with the Corporations Act 2001, including:

(a) giving a true and fair view of the company’s and consolidated entity’s financial position as at 30 June 20XX and of their performance for the year ended on that date; and


Case study – prior period error

The entity was qualified in the previous year. A loan portfolio held by the entity did not accord with the measurement requirements of accounting standards. This was due to inadequacies in the accounting systems.

In the current year, the entity improved its accounting systems and was able to correctly apply AASB 139. They were able to quantify the prior period error and restated comparatives in accordance with accounting standards.

What is the impact on the current year auditor’s report?

Case study – prior period error

The entity was qualified in the previous year. Equity financial instruments held by the entity were carried at management’s estimations of fair value. In the auditor’s opinion, these estimations did not meet the requirements of accounting standards.

In the current year, the equity instruments were still carried at management’s estimation of fair value. However, the auditor’s opinion is that the current year estimations are in accordance with accounting standards.

What is the impact on the current year auditor’s report?

Thank you for your attention

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