ACCA Applied Skills · Audit and Assurance

The Independent Auditor's Report: formula sheet

Full chapter guide

Key formulas

Order of the ISA 700 report (unmodified): Title → Addressee → Opinion → Basis for Opinion → Material uncertainty related to going concern (only if one exists) → Key audit matters (listed entities) → Other information → Responsibilities of management/those charged with governance → Auditor's responsibilities → Other reporting responsibilities → Signature, address, date; Learn this as a sequence. The opinion section comes before the basis for opinion. Some sections apply only in certain cases.
Title: Title must clearly show it is an independent auditor's report; The word 'independent' must appear.
Opinion section content: Identify the entity → state the statements audited and their dates → refer to the summary of significant accounting policies and notes → give the opinion on true and fair view or fair presentation under the framework; Use the exact wording for the framework in the question.
Basis for opinion content: Audit conducted under ISAs + reference to auditor's responsibilities section + independence and ethical requirements met + sufficient appropriate evidence obtained; Use these four points as a checklist when you write or review a basis for opinion section.
Date of report: The report date is no earlier than the date on which sufficient appropriate evidence is obtained and those with recognised authority have asserted responsibility for the financial statements; The date cannot be before approval of the financial statements.
Unmodified opinion: No material misstatement + sufficient appropriate evidence obtained = unmodified; Wording is that the statements give a true and fair view (or present fairly, in all material respects).
Material misstatement, not pervasive: Material, not pervasive → Qualified opinion ('except for'); The rest of the statements are fairly stated.
Material misstatement, pervasive: Material and pervasive → Adverse opinion; Statements as a whole do not give a true and fair view.
Inability to obtain evidence, not pervasive: Possible effects material, not pervasive → Qualified opinion ('except for possible adjustments'); Evidence limit, so the wording refers to possible effects.
Inability to obtain evidence, pervasive: Possible effects material and pervasive → Disclaimer of opinion; The auditor does not express an opinion.
Pervasive effects: Pervasive = not confined to specific items, or a substantial proportion of the statements, or fundamental to users' understanding of disclosures; Use these three tests in your answer.
Report layout when modified: Opinion section (headed by type) → Basis for Opinion section giving the reasons; For a disclaimer, the opinion section states that the auditor does not express an opinion.
Opinion matrix: material misstatement: Material, not pervasive → Qualified (except for). Material and pervasive → Adverse.; Use when the financial statements are wrong and the auditor has the evidence to show it.
Opinion matrix: inability to obtain evidence: Possible effects material, not pervasive → Qualified (except for possible effects). Material and pervasive → Disclaimer of opinion.; Use when the auditor could not obtain sufficient appropriate evidence.
Opinion heading wording: Qualified Opinion | Adverse Opinion | Disclaimer of Opinion; The heading changes. The unmodified heading is simply 'Opinion'.
Basis paragraph heading: Basis for Qualified Opinion | Basis for Adverse Opinion | Basis for Disclaimer of Opinion; Place it immediately after the opinion paragraph. Describe the matter and quantify the effect if practicable.
Qualified opinion wording (misstatement): In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion section, the financial statements give a true and fair view...; Use 'except for the effects of'. For a limitation use 'except for the possible effects of'.
Adverse opinion wording: In our opinion, because of the significance of the matter described in the Basis for Adverse Opinion section, the financial statements do not give a true and fair view...; Used for a material and pervasive misstatement.
Disclaimer wording: We do not express an opinion on the financial statements... because of the significance of the matter described in the Basis for Disclaimer of Opinion section, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.; Used for a limitation that is material and pervasive.
Scope of ISA 701: KAMs required: listed entities (or where law requires, or the auditor chooses); Not required for an unlisted entity unless the auditor decides to include them or law requires.
Selection funnel: Matters communicated to those charged with governance → matters needing significant auditor attention → matters of most significance = KAMs; Judgement decides how many. There is no fixed number.
Description of each KAM: Why it was of most significance + how addressed in the audit + reference to related disclosure; Put under the heading Key Audit Matters, with a standard lead-in statement that these were not a separate opinion.
Matters not reported as KAMs: Modified opinion basis or material uncertainty over going concern → reported in its own section, not in the KAM section; You may refer to them in the KAM section.
KAM versus emphasis of matter: KAM: audit focus, chosen by auditor. EOM: disclosed matter fundamental to understanding.; EOM does not change the opinion. Neither is a substitute for a modified opinion.
Emphasis of matter test: EOM = matter appropriately disclosed in the financial statements + fundamental to users' understanding; Both conditions must be met. If the disclosure is inadequate, modify the opinion instead.
Other matter test: OM = matter NOT disclosed in the financial statements + relevant to users' understanding of the audit, auditor's responsibilities or report; Use only when not prohibited by law or regulation.
Effect on opinion: EOM or OM paragraph → opinion unchanged; The paragraph should say the opinion is not modified in respect of the matter.
Content of an EOM paragraph: Clear reference to the matter + reference to the note disclosing it + statement that opinion is not modified; Do not put new information about the entity in the paragraph. That is management's job.
Placement: EOM: within the report, with an 'Emphasis of Matter' heading. OM: within the report, with an 'Other Matter' heading; Both are separate from the opinion and basis for opinion sections.
Going concern basis appropriate, no material uncertainty: No going concern reference in the report; unmodified opinion; The auditor still has responsibilities, but there is nothing extra to report.
Material uncertainty, adequately disclosed: Unmodified opinion + section 'Material Uncertainty Related to Going Concern'; The section refers to the note and says the opinion is not modified for this matter.
Material uncertainty, inadequate disclosure: Qualified ('except for') or adverse opinion; Qualified if the effect is material but not pervasive. Adverse if it is material and pervasive. Include a Basis for Qualified or Adverse Opinion section.
Going concern basis inappropriate: Adverse opinion; Applies when management has used the going concern basis but the auditor concludes it is inappropriate.
Management unwilling to make or extend assessment: Possible effects material but not pervasive: qualified opinion. Material and pervasive: disclaimer of opinion (scope limitation); The auditor asks management to make or extend the assessment period. Refusal is a limitation on scope.
Section placement: Material Uncertainty Related to Going Concern section has its own heading, typically after Basis for Opinion and before Key Audit Matters as in the ISA 570 illustrations; The exact position is not mandatory. Matters on going concern are by nature key audit matters but are reported in the material uncertainty section, not under Key Audit Matters.

Quick revision

An unmodified opinion says the financial statements give a true and fair view in all material respects.
A modified opinion is needed when there is a material misstatement or the auditor cannot obtain sufficient appropriate evidence.
Material but not pervasive gives a qualified opinion ('except for').
Material and pervasive misstatement gives an adverse opinion.
Material and pervasive inability to obtain evidence gives a disclaimer of opinion.
Material but not pervasive inability to obtain evidence gives a qualified opinion.
Key audit matters are matters of most significance in the audit; they are required for listed entities (ISA 701), may be included for other entities where law requires it or by choice, and do not modify the opinion.
An emphasis of matter refers to a matter already properly disclosed that is fundamental to understanding; it does not modify the opinion.
An other matter paragraph refers to a matter not presented in the financial statements that is relevant to users' understanding of the audit or report.
A material uncertainty over going concern that is adequately disclosed gives an unmodified opinion with a separate section on it.
If a material uncertainty is not adequately disclosed, the opinion is qualified or adverse; if the going concern basis is inappropriate, the opinion is adverse.
The auditor must read other information and report if it is materially inconsistent or misstated.

Common mistakes

Putting the basis for opinion before the opinion. Fix: Remember that ISA 700 puts the opinion first so users see the conclusion immediately.
Saying the auditor prepares the financial statements. Fix: Management prepares and is responsible for the statements. The auditor only expresses an opinion on them.
Giving an adverse opinion for a pervasive limitation, or a disclaimer for a pervasive misstatement. Fix: Link them: misstatement leads to adverse, lack of evidence leads to disclaimer. Always name the problem type first.
Treating any large number as pervasive. Fix: Apply the three pervasiveness tests. An item can be very material yet confined to one balance, giving a qualified opinion.
Giving a disclaimer when the auditor simply disagrees with management. Fix: A disclaimer only follows a limitation. A serious disagreement that is pervasive gives an adverse opinion.
Treating any limitation as a qualified or disclaimer without checking for alternative procedures. Fix: State whether alternative procedures (for example, later counts or sales after the year end) could give sufficient evidence. Only if they cannot is there a limitation.
Confusing KAMs with emphasis of matter paragraphs. Fix: Remember KAMs show where the audit effort went and are chosen by the auditor. An emphasis of matter points to a disclosure already in the financial statements that is fundamental to understanding.
Saying KAMs are required for every audit. Fix: State that ISA 701 requires KAMs for listed entities. For others they are optional or required only by law.
Using an EOM paragraph when the disclosure is missing or inadequate. Fix: An EOM only works if the matter is properly disclosed. Otherwise modify the opinion for material misstatement.
Saying an EOM paragraph modifies the opinion. Fix: State that the opinion is unmodified. The paragraph is additional and does not change the opinion type.

Exam tips

Learn the order of the report. Many objective questions test sequence or a missing section.
In Section C, give a purpose for each element, not just its name. This earns more marks.
When you critique a draft report, go through it section by section so you do not miss a point. Date, addressee and order are the usual traps.
Keep management's responsibility and the auditor's responsibility separate. Use the phrase 'reasonable assurance'.
Objective questions are all or nothing. Read every option for exact wording on framework, independence and date.
Always classify first: disagreement or limitation. Many wrong answers come from skipping this step.
In calculation-based scenarios, compute the item as a percentage of profit and total assets. Then compare with the materiality given before choosing the opinion.
In written answers, use the words 'material' and 'pervasive' explicitly and give a one-line reason for each. Markers look for these words.