The Independent Auditor's Report for ACCA Audit and Assurance

What this chapter covers

The Independent Auditor's Report: topics in the order to study them

1. 1Purpose and Structure of the Auditor's ReportYou need the layout of the report and its sections first, as every later topic changes one part of it.
2. 2Unmodified and Modified Audit OpinionsThis sets out the four opinions and what each means, which is the base for all judgement questions.
3. 3Material Misstatement vs Inability to Obtain EvidenceThis gives the decision rule that links the cause of the problem to the opinion you choose.
4. 4Going Concern and Material Uncertainty in the ReportIt applies the opinion rules to a common scenario and shows when the opinion is unmodified, qualified or adverse.
5. 5Key Audit MattersOnce the opinion is clear, you can learn the extra communication required for listed entities and sometimes given for other entities, which does not change the opinion.
6. 6Emphasis of Matter and Other Matter ParagraphsThese paragraphs are easily confused with modifications and KAMs, so study them after the main opinions are secure.
7. 7Other Information and Auditor's Report ResponsibilitiesThis completes the report with the auditor's duty to read other information and the responsibilities sections.

How to prepare The Independent Auditor's Report

1. Learn the headings of an unmodified report in order, and note what each section tells the reader.
2. Build a one-page grid of the four opinions: unmodified, qualified, adverse and disclaimer. For each, note the cause (misstatement or lack of evidence) and whether the effect is material or pervasive.
3. Practise scenarios by asking three questions in order: is there a misstatement or a limit on evidence, is it material, is it pervasive. Then name the opinion.
4. Separate paragraphs that modify the opinion from those that do not. List what triggers a KAM, an emphasis of matter and an other matter paragraph, and where each sits in the report.
5. Work through going concern cases: adequate disclosure, inadequate disclosure, and going concern basis inappropriate. Match each to the correct report.
6. Answer past objective test cases under time, then write one full constructed response answer that names the opinion, gives the reason and explains the effect on the report.
7. Finish by reading a real-style report and ticking each required element, including the other information section.

Common mistakes in The Independent Auditor's Report

• Confusing a qualified opinion with an adverse opinion or a disclaimer.

  Fix: Always test materiality first, then pervasiveness. Then match the cause to the opinion using your grid.

• Choosing 'adverse' when the problem is lack of evidence.

  Fix: Ask whether the auditor disagrees with the figures or simply cannot verify them. Disagreement leads to qualified or adverse; no evidence leads to qualified or disclaimer.

• Treating emphasis of matter or key audit matters as a modification.

  Fix: Remember that these paragraphs never change the opinion. Only a material misstatement or an inability to get evidence does.

• Handling going concern with one fixed answer.

  Fix: Work through the three cases: adequate disclosure, inadequate disclosure and an inappropriate going concern basis. Each leads to a different report.

• Writing vague written answers such as 'the report will be modified'.

  Fix: Name the exact opinion, give the reason in one sentence, and state what the basis for opinion section must explain.

• Ignoring the sections of the report that are not the opinion.

  Fix: Learn the full structure and the auditor's duty to read other information, and report if it is materially inconsistent.

Last-day revision: The Independent Auditor's Report

• ✓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.

The Independent Auditor's Report in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

• ACCA Strategic ProfessionalAuditor's reports
• CA IntermediateAudit Report
• CS ProfessionalForming an Opinion and Reporting
• CMA IntermediateAudit Report and Reporting under CARO