[600]* Auditors' reports on financial statements

[600]*Auditors’ reports on financial statements

(Issued May 1993)

Contents

Paragraphs

Introduction 1–7

Definitions 8–13

Basic elements of the auditors’ report 14–19

Statements of responsibility and basis of opinion 20–29

Expression of opinion 30–37

Compliance with relevant accounting requirements 38–51

Fundamental uncertainty 54–67

Limitation of audit scope 68–73

Date and signature of the auditors’ report 76–84

Compliance with International Standards on Auditing 85

Effective date 86

Note on legal requirements applicable to companies i–xii

Appendix 1 – Forming an opinion on financial statements

Appendix 2 – Examples of auditors’ reports on financial statements

Appendix 3 – Statement of directors’ responsibilities

* Editor’s note: Paragraph 72 has been superseded by SAS 601 Imposed limitation of audit scope.Notes (iii)–(v) of the ‘Note on legal requirements applicable to companies’ and Example 6 of Appendix 2 aresuperseded by Bulletin 1999/6 The auditors’ statement on the summary financial statement.

Examples 1, 2 and 3 of Appendix 2 are superseded by Bulletin 2001/2 Revisions to the wording of auditors’report on financial statements and the interim review report:

271

Auditors’ reports on financial statements

Statements of Auditing Standards (‘SASs’) are to be read in the light of ‘The scope andauthority of APB pronouncements’. In particular, they contain basic principles andessential procedures (‘Auditing Standards’), indicated by paragraphs in bold type,with which auditors are required to comply in the conduct of any audit. SASs alsoinclude explanatory and other material which is designed to assist auditors ininterpreting and applying Auditing Standards. The definitions in the Glossary of termsare to be applied in the interpretation of SASs.

Introduction

1The purpose of this Statement of Auditing Standards is to establish standards andprovide guidance on the form and content of auditors’ reports issued as a result of anaudit of the financial statements of an entity (‘the reporting entity’). Much of theguidance provided can be adapted to auditors’ reports on financial information otherthan financial statements.

2Auditors’ reports on financial statements should contain a clear expression ofopinion, based on review and assessment of the conclusions drawn from evidenceobtained in the course of the audit. (SAS 600.1)

3An appreciation of the interrelationship between the responsibilities of those whoprepare financial statements and those who audit them is also necessary to achievean understanding of the nature and context of the opinion expressed by the auditors.Readers need to be aware that it is the directors (or equivalent persons) of thereporting entity and not the auditors who determine the accounting policies fol-lowed. Auditors’ reports therefore also set out the respective responsibilities ofdirectors and auditors.

4It will aid communication with the reader if the auditors’ report is placed before thefinancial statements and, where the directors set out their responsibilities them-selves, if this description is immediately before the auditors’ report.

5The requirements of the SAS are intended to achieve informative reporting byauditors within the reporting obligations current at its date of issue. Furtherdevelopments may in the future alter the matters on which auditors are required toreport or the manner in which they are required to report: such changes will bereflected in amendments to the requirements in this SAS when appropriate.

Nature of assurance provided

6The view given in financial statements is derived from a combination of fact andjudgement, and consequently cannot be characterised as either ‘absolute’ or ‘cor-rect’. When reporting on financial statements, therefore, auditors provide a level ofassurance which is reasonable in that context but, equally, cannot be absolute.Consequently it is important that the reader of financial statements is made aware ofthe context in which the auditors’ report is given.

273

Applicability

7 This SAS applies to all reports issued by auditors which express an opinion in termsof whether financial statements give a true and fair view, or where statutory or otherspecific requirements prescribe the use of a term such as ‘presents fairly’ or ‘properlyprepared in accordance with’.

Definitions

8 The following definitions apply in interpreting the requirements of this SAS.

9 Financial statements: The balance sheet, profit and loss account (or other form ofincome statement), statements of cash flows and total recognised gains and losses,notes and other statements and explanatory material, all of which are identified inthe auditors’ report as being the financial statements.

10 Directors: The directors of a company, the partners, proprietors or trustees of otherforms of enterprise or equivalent persons responsible for the reporting entity’saffairs, including the preparation of its financial statements.

11 Material: A matter is material if its omission or misstatement would reasonablyinfluence the decisions of a user of the financial statements.

Materiality may be considered in the context of the financial statements as a whole,any individual primary statement within the financial statements or individual itemsincluded in them.

12 Inherent uncertainty: An uncertainty whose resolution is dependent upon uncertainfuture events outside the control of the reporting entity’s directors at the date thefinancial statements are approved.

13 Fundamental uncertainty: An inherent uncertainty is fundamental when the magni-tude of its potential impact is so great that, without clear disclosure of the nature andimplications of the uncertainty, the view given by the financial statements would beseriously misleading.

The magnitude of an inherent uncertainty’s potential impact is judged by referenceto the risk that the estimate included in financial statements may be subject tochange the range of possible outcomes, and the consequences of those outcomes onthe view shown in the financial statements.

Basic elements of the auditors’ report

14 Auditors’ reports on financial statements should include the following matters:

(a) a title identifying the person or persons to whom the report is addressed; (b) an introductory paragraph identifying the financial statements audited; (c) separate sections, appropriately headed, dealing with

(i) respective responsibilities of directors (or equivalent persons) andauditors,

(ii) the basis of the auditors’ opinion,

274

APB Statements of Auditing Standards

(iii) the auditors’ opinion on the financial statements;(d) the manuscript or printed signature of the auditors; and (e) the date of the auditors’ report. (SAS 600.2)

15The use of a standard format for auditors’ reports on financial statements assists thereader to follow the report’s contents. The section headings indicate to the readerthe nature of the matters contained in the section concerned: for example, where aqualified opinion is expressed, the heading ‘Qualified opinion’ may be used.

16Auditors draft each section of their report on financial statements to reflect therequirements which apply to the particular audit engagement. However, the use ofcommon language in auditors’ reports assists the reader’s understanding. Accord-ingly, Appendix 2 includes examples of auditors’ reports on financial statements toillustrate wording which meets the Auditing Standards contained in this SAS.

Title and addressee

17An appropriate title is used to distinguish clearly the auditors’ report from otherinformation relating to the reporting entity with which it may be published.

18The auditors’ report on the financial statements of a company is addressed to itsmembers (normally the shareholders) because the audit is undertaken on theirbehalf. The auditors’ report on financial statements of other types of reporting entityis addressed to the appropriate person or persons, as defined by statute or by theterms of the individual engagement.

Identification of financial statements

19The purpose of the introductory section of the auditors’ report, identifying thefinancial statements that have been audited, is to ensure that there is no ambiguityregarding the information to which the auditors’ opinion relates. The introductorysection may refer to the accounting convention and accounting policies which havebeen followed in preparing the financial statements.

Statements of responsibility and basis of opinion

20(a) Auditors should distinguish between their responsibilities and those of thedirectors by including in their report: (i) a statement that the financial statements are the responsibility of the

reporting entity’s directors;(ii) a reference to a description of those responsibilities when set out elsewhere

in the financial statements or accompanying information; and(iii) a statement that the auditors’ responsibility is to express an opinion on the

financial statements.(b) Where the financial statements or accompanying information (for example the

directors’ report) do not include an adequate description of directors’ relevantresponsibilities, the auditors’ report should include a description of thoseresponsibilities. (SAS 600.3)

21The matters to be included in the description of the directors’ responsibilities reflectsthe specific requirements applicable to the reporting entity. A description of the

Auditors’ reports on financial statements SAS 600

275

responsibilities of a company’s directors is normally considered adequate when itincludes the following points: (a) company law requires directors to prepare financial statements for each finan-

cial year which give a true and fair view of the company’s (or group’s) state ofaffairs at the end of the year and profit or loss for the year then ended;

(b) in preparing those financial statements, the directors are required to: ● select suitable accounting policies and then apply them on a consistent

basis, making judgments and estimates that are prudent and reasonable; ● (large companies only1) state whether applicable accounting standards

have been followed, subject to any material departures disclosed andexplained in the financial statements;

● (where no separate statement on going concern is made by the directors)prepare the financial statements on the going concern basis unless it is notappropriate to presume that the company will continue in business;

(c) the directors are responsible for keeping proper accounting records, for safe-guarding the assets of the company (or group) and for taking reasonable stepsfor the prevention and detection of fraud and other irregularities.

These points may be adapted for different requirements applicable to differentcategories of reporting entity, for example to reflect special legal requirementsrelating to small companies, insurance companies or banks, or specific requirementsapplicable to a non-corporate entity.

22 In the case of reporting entities other than companies, auditors assess the adequacyof the description by reference to statutory or any other specific requirements withwhich the reporting entity’s directors are required to comply.

23 Illustrative wording of a description of the directors’ responsibilities, which may beincluded in auditors’ reports on company financial statements where the directors’statement is inadequate, is shown in Appendix 3. Auditors’ reports on the financialstatements of other reporting entities provide equivalent details, reflecting appro-priate legal and regulatory requirements when necessary to do so.

24 Auditors should explain the basis of their opinion by including in their report:

(a) a statement as to their compliance or otherwise with Auditing Standards,together with the reasons for any departure therefrom;

(b) a statement that the audit process includes: (i) examining, on a test basis, evidence relevant to the amounts and

disclosures in the financial statements,(ii) assessing the significant estimates and judgements made by the reporting

entity’s directors in preparing the financial statements,(iii) considering whether the accounting policies are appropriate to the

reporting entity’s circumstances, consistently applied and adequatelydisclosed;

(c) a statement that they planned and performed the audit so as to obtainreasonable assurance that the financial statements are free from materialmisstatement, whether caused by fraud or other irregularity or error, and thatthey have evaluated the overall presentation of the financial statements. (SAS600.4)

1 ‘Large’ in this context means those companies which fall outside the categories of small and medium-sizedcompanies as defined in the Companies Act 1985.

276


25A reference to compliance with Auditing Standards is necessary in order to provideassurance that the audit has been carried out in accordance with establishedstandards.

26In some exceptional circumstances, a departure from Auditing Standards may beappropriate to fulfil the objectives of a specific audit more effectively. If this is thecase, the auditors explain the reasons for that departure in their report. Other thanin such exceptional and justifiable circumstances, a departure from an AuditingStandard is a limitation on the scope of work undertaken by the auditors. In suchcircumstances the auditors assess whether a qualified opinion or disclaimer ofopinion is required, as set out in SAS 600.7.

27In certain circumstances, auditors are required by statute to follow other compara-ble standards, such as the Code of Audit Practice for Local Authorities and theNational Health Service in England and Wales or the requirements of the ScottishAccounts Commission. Where this is the case, auditors refer to these standards.

28In some circumstances, auditors may be required to report whether the financialstatements have been properly prepared in accordance with regulations or otherrequirements, but are not required to report on whether they give a true and fairview. Where the special circumstances of the reporting entity require or permit theadoption of policies or accounting bases which would not normally permit a true andfair view to be given, auditors would refer to those circumstances in the paragraphsdealing with the respective responsibilities of directors and auditors (unless thematter is included in a separate statement given by the directors) and may drawattention to them in the basis of opinion section of the report.

29Auditors may wish to include additional comment in this part of their report tohighlight matters which they regard as relevant to a proper understanding of thebasis of their opinion.

Expression of opinion

30An auditors’ report should contain a clear expression of opinion on the financialstatements and on any further matters required by statute or other requirementsapplicable to the particular engagement. (SAS 600.5)

31An auditors’ report may include an unqualified opinion or qualified opinion. Thecircumstances giving rise to each type of opinion are set out below and examplereports illustrating each form of opinion are contained in Appendix 2.

Unqualified opinions

32An unqualified opinion on financial statements is expressed when in the auditors’judgement they give a true and fair view (where relevant) and have been prepared inaccordance with relevant accounting or other requirements. This judgement entailsconcluding whether inter alia:

● the financial statements have been prepared using appropriate accountingpolicies, which have been consistently applied;


277

● the financial statements have been prepared in accordance with relevantlegislation, regulations or applicable accounting standards (and that any depar-tures are justified and adequately explained in the financial statements); and

● there is adequate disclosure of all information relevant to the proper under-standing of the financial statements.

Qualified opinions

33 A qualified opinion is issued when either of the following circumstances exist:

(a) there is a limitation on the scope of the auditors’ examination (see SAS 600.7);or

(b) the auditors disagree with the treatment or disclosure of a matter in the financialstatements (see SAS 600.8);

and, in the auditors’ judgment, the effect of the matter is or may be material to thefinancial statements and therefore those statements may not or do not give a trueand fair view of the matters on which the auditors are required to report or do notcomply with relevant accounting or other requirements.

Adverse opinions

34 An adverse opinion is issued when the effect of a disagreement is so material orpervasive that the auditors conclude that the financial statements are seriouslymisleading (see SAS 600.8). An adverse opinion is expressed by stating that thefinancial statements do not give a true and fair view.

35 When the auditors conclude that the effect of a disagreement is not so significant asto require an adverse opinion, they express an opinion that is qualified by stating thatthe financial statements give a true and fair view except for the effects of the mattergiving rise to the disagreement.

Disclaimers of opinion

36 A disclaimer of opinion is expressed when the possible effect of a limitation on scopeis so material or pervasive that the auditors have not been able to obtain sufficientevidence to support, and accordingly are unable to express, an opinion on thefinancial statements (see SAS 600.7).

37 Where the auditors conclude that the possible effect of the limitation is not sosignificant as to require a disclaimer, they issue an opinion that is qualified by statingthat the financial statements give a true and fair view except for the effects of anyadjustments that might have been found necessary had the limitation not affectedthe evidence available to them.

Compliance with relevant accounting requirements

38 The auditors’ opinion is expressed in the context of the particular accountingrequirements applicable to the financial statements concerned and normallyincludes, in addition to an opinion on the view given by the financial statements, an

278


opinion on whether or not those requirements have been followed. For example, anauditors’ report on the financial statements of a company incorporated in GreatBritain includes the words ‘. . . and have been properly prepared in accordance withthe Companies Act 1985’.

39Save in exceptional circumstances, compliance with accounting standards is neces-sary to give a true and fair view.

40Financial statements are normally required to contain particulars of any materialdeparture from an accounting standard which applies to the reporting entity,together with the financial effects of the departure unless this would be impractica-ble or misleading in the context of giving a true and fair view.

Requirements of company law

41In the context of financial reporting by companies, directors are required by law toprepare annual accounts which consist of a balance sheet and profit and loss accounttogether with accompanying notes and which give a true and fair view of the state ofaffairs of the company (or group) at the end of the financial year and of the profit orloss of the company (or group) for that year. Company law requires the auditors tostate whether in their opinion the company’s annual accounts give such a view.

42There is no specific legal requirement that companies should comply with account-ing standards. However, legislation in the UK gives specific recognition toaccounting standards and requires large companies to state in their financial state-ments whether those statements have been prepared in accordance with suchstandards and to give particulars of any material departure and the reasons for it –paragraph 36A of Schedule 4 to the Companies Act 1985.

43It is likely that a Court would infer from this requirement, taken together with otherchanges introduced into UK company law by the Companies Act 1989, that financialstatements which meet the Act’s requirements will follow rather than depart fromaccounting standards, and that any departure would be regarded as sufficientlyabnormal to require justification. Therefore, in general, compliance with accountingstandards is necessary to meet the requirement of company law that the directorsprepare annual accounts which give a true and fair view of a company’s (or group’s)state of affairs and profit or loss.

Primary statements

44Accounting standards contained in Financial Reporting Standards require, in cer-tain circumstances, further ‘primary statements’ in addition to the balance sheet andprofit and loss account. It follows from the principle stated in the last paragraph that,where required by an accounting standard, these further primary statements arenormally necessary in order that the annual accounts give a true and fair view, asrequired in the United Kingdom by the Companies Act 1985 or the Companies(Northern Ireland) Order 1986 and, in the Republic of Ireland, the Companies Acts1963 to 1990. The annual accounts, including the additional primary statementsrequired by accounting standards, are referred to by the term ‘financial statements’.


279

45 Accordingly, reference in an auditors’ opinion on a company’s financial statementsto the primary statements required by accounting standards is unnecessary. It mayalso be misleading to the reader of the auditors’ report, in that it may appear todetract from the role of the additional primary statements in supporting theinformation contained in company’s balance sheet and profit or loss account so as togive a true and fair view as required by the law.

46 Auditors may be requested to report separately on one or more primary statements.When making such a separate report, they need to ensure that in doing so noimpression is given that the primary statement(s) referred to is other than integral tothe financial statements as a whole and that it is clear to a reader that the primarystatement is necessary to give a true and fair view of the state of affairs and profit orloss for statutory purposes.

Non-compliance with accounting standards

47 When the auditors conclude that the financial statements of a company do notcomply with accounting standards, they assess:

(a) whether there are sound reasons for the departure; (b) whether adequate disclosure has been made concerning the departure from

accounting standards; (c) whether the departure is such that the financial statements do not give a true

and fair view of the state of affairs and profit or loss.

In normal cases, a departure from accounting standards will result in the issue of aqualified or adverse opinion on the view given by the financial statements.

48 Where no explanation is given for a departure from accounting standards, itsabsence may of itself impair the ability of the financial statements to give a true andfair view of the company’s state of affairs and profit or loss. When auditors concludethat this is so, a qualified or adverse opinion on the view given by the financialstatements is appropriate, in addition to a reference (where appropriate) to the non-compliance with the specific requirement of company law referred to in paragraph42 above.

Small companies – Great Britain and Northern Ireland

49 Directors of companies which fall within the category of small companies as definedby company legislation in the UK may draw up financial statements taking advan-tage of a number of exemptions from the full requirements of company law.2

Financial statements prepared using these exemptions are nevertheless required togive a true and fair view, and the legislation further specifically provides that theyshall not be deemed not to do so by reason only of the fact that advantage has beentaken of the exemptions.

50 Auditors reporting on the financial statements of a small company prepared usingthese exemptions are permitted (but not required) to report in terms which omitreference to whether a true and fair view is given, referring only to the properpreparation of those statements in accordance with the requirements of company

2 Set out in Schedule 8 to the Companies Act 1985, as inserted by SI 1992 No 2452.

280


law applicable to small companies. However, their legal obligation to considerwhether the financial statements give a true and fair view as required by companylaw remains unchanged. The requirement for a clear expression of opinion (con-tained in SAS 600.5) is therefore best met by referring to the true and fair view,except for particular circumstances in which the auditors consider it impossible to doso.

51Illustrative wording for an auditors’ report on financial statements of a small companytaking advantage of the exemptions is given in Example 5 of Appendix 2.

Further matters required by statute or other regulations

52Further opinions or information to be included in the auditors’ report may bedetermined by specific statutory requirements applicable to the reporting entity, or,in some circumstances, by the terms of the auditors’ engagement. Such matters maybe required to be dealt with by a positive statement in the auditors’ report or only byexception. For example, in the Republic of Ireland auditors are required to statewhether, in their opinion, proper books of account have been kept, whereascompany legislation in the United Kingdom requires auditors to report only when acompany has not maintained proper accounting records.

53Where further opinions are required by statute or other regulation, matters whichresult in qualification of such an opinion may also result in a qualification of theauditors’ opinion on the financial statements: for example, if proper accountingrecords have not been maintained and as a result it proves impracticable for theauditors to obtain sufficient evidence concerning material matters in the financialstatements, their report indicates that the scope of their examination was limited andincludes a qualified opinion or disclaimer of opinion on the financial statementsarising from that limitation, as required by SAS 600.7.

Fundamental uncertainty

54(a) In forming their opinion on financial statements, auditors should considerwhether the view given by the financial statements could be affected byinherent uncertainties which, in their opinion, are fundamental.

(b) When an inherent uncertainty exists which (i) in the auditors’ opinion is fundamental, and(ii) is adequately accounted for and disclosed in the financial statements, the

auditors should include an explanatory paragraph referring to thefundamental uncertainty in the section of their report setting out the basisof their opinion.

(c) When adding an explanatory paragraph, auditors should use words whichclearly indicate that their opinion on the financial statements is not qualified inrespect of its contents. (SAS 600.6)

Inherent uncertainties

55Inherent uncertainties about the outcome of future events frequently affect, to somedegree, a wide range of components of the financial statements at the date they areapproved. It is not possible for the directors to remove the uncertainties by obtaining


281

more information at the date they approve the financial statements: the statementscan reflect only the working assumptions of directors as to their financial outcomeand, where material, describe the circumstances giving rise to the uncertainties andtheir potential financial effect.

56 In forming an opinion, auditors take into account the adequacy of the accountingtreatment, estimates and disclosures of inherent uncertainties in the light of evi-dence available at the date they express that opinion.

57 Auditors recognise that, in preparing financial statements, directors are required toanalyse relevant existing conditions, including uncertainties about future events andtheir effect on financial statements. An audit includes assessment of whether there issufficient evidence to support the directors’ analysis and resulting estimates anddisclosures given in the financial statements. Usually auditors are able to obtainsufficient evidence concerning the directors’ assessment of the outcome of inherentuncertainties by considering various types of evidence, including the historicalexperience of the reporting entity.

58 Forming an opinion on the adequacy of the accounting treatment of inherentuncertainties involves consideration of:

● the appropriateness of accounting policies dealing with uncertain matters; ● the reasonableness of the estimates included in the financial statements in

respect of inherent uncertainties; and ● the adequacy of disclosure.

59 Auditors distinguish between circumstances in which an unqualified opinion isappropriate and those in which a qualification or disclaimer of opinion is requireddue to a limitation on the scope of their work. An inherent uncertainty can beexpected to be resolved at a future date, at which time sufficient evidence concerningits outcome would be expected to become available. When evidence does or did exist(or reasonably could be expected to exist) but that evidence is not available to theauditors, the scope of their work is limited and a qualification or disclaimer ofopinion is appropriate.

60 Where auditors conclude that the accounting policies followed lead to materialmisstatements in the financial statements, or that the estimates included in thefinancial statements are materially misstated, or that disclosures relating to theuncertainty are inadequate, a qualified or adverse opinion is required by SAS 600.8.

Fundamental uncertainties

61 In some circumstances the degree of uncertainty about the outcome of a future eventand its potential impact on the view given by the financial statements may be verygreat. Where resolution of an inherent uncertainty could affect the view given by thefinancial statements to the degree that the auditors conclude that it is to be regardedas fundamental, they include an explanatory paragraph when setting out the basis oftheir opinion describing the matter giving rise to the fundamental uncertainty and itspossible effects on the financial statements, including (where practicable) quantifica-tion. Where it is not possible to quantify the potential effects of the resolution of theuncertainty, the auditors include a statement to that effect. Reference may be madeto notes in the financial statements but such a reference is not a substitute for

282


sufficient description of the fundamental uncertainty so that a reader can appreciatethe principal points at issue and their implications.

62Communication with the reader is enhanced by the use of an appropriate sub-heading differentiating the explanatory paragraph from other matters included inthe section describing the basis of the auditors’ opinion.

63In determining whether an inherent uncertainty is fundamental, auditors consider:

(a) the risk that the estimate included in financial statements may be subject tochange;

(b) the range of possible outcomes; and (c) the consequences of those outcomes on the view shown in the financial

statements.

64Inherent uncertainties are regarded as fundamental when they involve a significantlevel of concern about the validity of the going concern basis or other matters whosepotential effect on the financial statements is unusually great. A common example ofa fundamental uncertainty is the outcome of major litigation.

Opinions expressed

65An unqualified opinion indicates that the auditors consider that appropriate esti-mates and disclosures relating to fundamental uncertainties are made in the financialstatements. It remains unqualified notwithstanding the inclusion of an explanatoryparagraph describing a fundamental uncertainty. The explanatory paragraph isincluded as part of the basis for the auditors’ opinion so as to make clear that itdescribes a matter which the auditors have taken into account in forming theiropinion, but that it does not qualify that opinion.

66When the auditors conclude that the estimate of the outcome of a fundamentaluncertainty is materially misstated or that the disclosure relating to it inadequate,they issue a qualified opinion.

67A disclaimer of opinion is issued by auditors as a result of an inherent uncertaintywhich in their opinion is fundamental only when a limitation of the scope of theirwork directly affects their assessment of the adequacy of its accounting treatmentand disclosure.

Limitation of audit scope 68When there has been a limitation on the scope of the auditors’ work that prevents

them from obtaining sufficient evidence to express an unqualified opinion:

(a) the auditors’ report should include a description of the factors leading to thelimitation in the opinion section of their report;

(b) the auditors should issue a disclaimer of opinion when the possible effect of alimitation on scope is so material or pervasive that they are unable to express anopinion on the financial statements;

(c) a qualified opinion should be issued when the effect of the limitation is not somaterial or pervasive as to require a disclaimer, and the wording of the opinionshould indicate that it is qualified as to the possible adjustments to the financialstatements that might have been determined to be necessary had the limitationnot existed. (SAS 600.7)


283

69 In considering whether a limitation results in a lack of evidence necessary to form anopinion, auditors assess:

(a) the quantity and type of evidence which may reasonably be expected to beavailable to support the particular figure or disclosure in the financial state-ments; and

(b) the possible effect on the financial statements of the matter for which insuffi-cient evidence is available. When the possible effect is, in the opinion of theauditors, material to the financial statements, there will be insufficient evidenceto support an unqualified opinion.

70 Inherent uncertainties do not arise from, or give rise to, a limitation on the auditors’work and are considered under SAS 600.6.

71 A description of the factors leading to a limitation enables the reader to understandthe reasons for the limitation and to distinguish between:

(a) limitations imposed on the auditors (for example, where not all the accountingrecords are made available to the auditors or where the directors prevent aparticular procedure considered necessary by the auditors from being carriedout); and

(b) limitations outside the control of the auditors or the directors (for example,when the timing of the auditors’ appointment is such that attendance at theentity’s stock-take is not possible and there is no alternative form of evidenceregarding the existence of stock).

72 * When the proposed terms of an audit engagement include a limitation on the scopeof the auditors’ work such that they believe the need to issue a disclaimer exists, theywould normally not accept such a limited engagement as an audit engagement,unless required by statute to do so.

73 Where a scope limitation is imposed by circumstances, auditors would normallyattempt to carry out reasonable alternative procedures to obtain sufficient auditevidence to support an unqualified opinion.

Disagreement on accounting treatment or disclosure

74 Where the auditors disagree with the accounting treatment or disclosure of a matterin the financial statements, and in the auditors’ opinion the effect of thatdisagreement is material to the financial statements:

(a) the auditors should include in the opinion section of their report: (i) a description of all substantive factors giving rise to the disagreement;(ii) their implications for the financial statements;(iii) whenever practicable, a quantification of the effect on the financial

statements;(b) when the auditors conclude that the effect of the matter giving rise to

disagreement is so material or pervasive that the financial statements areseriously misleading, they should issue an adverse opinion;

(c) in the case of other material disagreements, the auditors should issue a qualifiedopinion indicating that it is expressed except for the effects of the matter givingrise to the disagreement. (SAS 600.8)

* Editor’s note: Paragraph 72 has been superseded by SAS 601 Imposed limitation of audit scope.

284


75An auditors’ report including a qualified opinion arising from disagreement includesa description of the reasons for qualification and the effects on the financialstatements. Whilst reference may be made to relevant notes in the financial state-ments, such reference is not a substitute for sufficient description of thecircumstances in the auditors’ report so that a reader can appreciate the principalpoints at issue and their implications for an understanding of the financial state-ments.

Date and signature of the auditors’ report

76(a) Auditors should not express an opinion on financial statements until thosestatements and all other financial information contained in a report of which theaudited financial statements form a part have been approved by the directors, andthe auditors have considered all necessary available evidence.

(b) The date of an auditors’ report on a reporting entity’s financial statements is thedate on which the auditors signed their report expressing an opinion on thosestatements. (SAS 600.9)

77The report may be signed in the name of the auditors’ firm, the personal name ofauditor, or both, as appropriate. The signature is normally that of the firm becausethe firm as a whole assumes responsibility for the audit. To assist identification, thereport normally includes the location of the auditors’ office. Where appropriate,their status as registered auditors is also stated.

Date of the auditors’ report

78Dating the auditors’ report informs the reader that the auditors have considered theeffect on the financial statements of events or transactions of which they are awarewhich occurred up to that date.

79The auditors are not in a position to form their opinion until the financial statements(and any other financial information contained in a report of which the auditedfinancial statements form a part) have been approved by the directors and theauditors have completed their assessment of all the evidence they consider necessaryfor the opinion or opinions to be given in their report. This assessment includesevents occurring up to the date the opinion is expressed. Auditors therefore plan theconduct of audits to take account of the need to ensure, before expressing an opinionon financial statements, that the directors have approved the financial statementsand any accompanying financial information and that the auditors have completed asufficient review of post balance sheet events.

80The date of the auditors’ report is, therefore, the date on which, following:

(a) receipt of the financial statements and accompanying documents in the formapproved by the directors for release;

(b) review of all documents which they are required to consider in addition to thefinancial statements (for example the directors’ report, chairman’s statement orother review of an entity’s affairs which will accompany the financial state-ments); and


285

(c) completion of all procedures necessary to form an opinion on the financialstatements (and any other opinions required by law or regulation) including areview of post balance sheet events

the auditors sign (in manuscript) their report expressing an opinion on the financialstatements for distribution with those statements.

81 The form of the financial statements and other financial information approved bythe directors, and considered by the auditors when signing a report expressing theiropinion, may be in the form of final drafts from which printed documents will beprepared. Subsequent production of printed copies of the financial statements andauditors’ report does not constitute the creation of a new document. Copies of thereport produced for circulation to shareholders or others may therefore reproduce aprinted version of the auditors’ signature showing the date of actual signature.

82 Before signing a report expressing their opinion after consideration of final drafts ofthe financial statements and other accompanying documents, auditors will need toconsider whether the form of draft documents is sufficiently clear for them to assessthe overall financial statement presentation. When the auditors conclude that this isnot the case, it will be necessary for them to defer signing their report until it ispossible for them to do so.

83 If the date on which the auditors sign their report is later than that on which thedirectors approved the financial statements, the auditors take such steps as areappropriate

(a) to obtain assurance that the directors would have approved the financialstatements on that later date (for example, by obtaining confirmation fromspecified individual members of the board to whom authority has been dele-gated for this purpose); and

(b) to ensure that their procedures for reviewing subsequent events cover theperiod up to that date.

Registrar of companies

84 The copy of the auditors’ report which is delivered to the registrar of companies isrequired to state the name of the auditors and be signed by them. Where the auditorssign their report in a form from which a final printed version is produced, they maysign copies for identification purposes in order to provide the registrar with appro-priately signed copies. No further active procedures need be followed at that laterdate.

Compliance with International Standards on Auditing

85 Compliance with this SAS ensures compliance in all material respects with Inter-national Standard on Auditing 700 ‘The Auditor’s Report on Financial Statements’.

286


Effective date

86Auditors are required to comply with the requirements of this SAS in respect ofaudits of financial statements for financial periods ending on or after 30 September1993. Adoption of the requirements when reporting on financial statements foraccounting periods ending before that date is encouraged.

Note on legal requirements applicable to companies

iReference should be made to the legislation itself for an understanding of therelevant points of law. This section lists only the main sections of the relevant Actscontaining provisions in relation to auditors’ reports on financial statements.

Legal requirements in Great Britain

References are to the Companies Act 1985 as amended by the Companies Act 1989.

iiThe main sections of the Companies Act containing provisions relating to auditors’reports on financial statements are as follows:

section 235 auditors to report to the members of the company on anyfinancial statements of the company laid before it in generalmeeting

section 236 signature of auditors’ reports section 237 auditors to report to members in certain circumstances section 246 exemptions for small and medium-sized companies section 251 summary financial statements

Summary financial statements*

iiiIn the UK, listed companies may send a summary financial statement to share-holders and debenture holders in place of the full report and accounts. Suchsummary financial statements are required to include a statement from the com-pany’s auditors confirming that the summary financial statement is consistent withthe full financial statements, but need not include the auditors’ report on thefinancial statements, unless this is qualified.

ivIn order to ensure that recipients of a summary financial statement are aware thatfurther information is contained in the full report, it is appropriate for auditors toextend the information given in their report on a summary financial statement so asto draw attention to the fact that the auditors’ report includes information on theresponsibilities of directors and auditors, on the basis of the auditors’ opinion and,where considered appropriate, to draw attention to fundamental uncertainties.

vGuidance on the work to be undertaken before issuing such a statement is containedin the Auditing Guideline ‘Auditors’ reports on summary financial statements’.Illustrative wording for an auditors’ statement on a summary financial statement isshown in example 6 of Appendix 2 to this SAS. This example supersedes theexample contained in the Auditing Guideline.

* Editor’s note: Notes (iii)–(v) are superseded by Bulletin 1999/6 The auditors’ statement on the summaryfinancial statement.


287

Significance of qualified opinions

vi The term ‘qualified’ in relation to auditors’ reports has a particular meaning incompany law. For example, the term is defined for the purposes of Part VII of theCompanies Act 1985 (accounts and audit) in section 262 of the Act as meaning

‘that the report does not state the auditors’ unqualified opinion that theaccounts have been properly prepared in accordance with this Act or, in thecase of an undertaking not required to prepare accounts in accordance with thisAct, under any corresponding legislation under which it is required to prepareaccounts.’

vii The issue of a qualified report has significance for a number of other provisions incompany law. The principal examples are:

● re-registration of a private company as public – section 43.

Section 46 defines ‘unqualified’ for the purposes of section 43 as ‘stating withoutmaterial qualification the auditors’ opinion that the balance sheet has beenproperly prepared in accordance with this Act’. A qualification is materialunless the auditors state in their report that the matter giving rise to thequalification is not material for the purpose of determining (by reference to thecompany’s balance sheet) whether at the balance sheet date the amount of thecompany’s net assets was not less than the aggregate of its called up sharecapital and undistributable reserves.

● requirements for last annual accounts when these form the relevant accountsfor determining the legality of a proposed distribution – section 271.

Section 271(3) provides that, in this circumstance, the auditors must have madetheir report on the annual accounts before the directors and shareholdersdetermine whether a dividend may be paid.

A company may not pay a dividend based on financial statements which receivea qualified report from its auditors unless the auditors make a further reportstating whether or not the matter giving rise to the qualification is material toassessing the legality of the dividend. The auditors are not, however, required to‘approve’ the dividend or comment on whether its payment is prudent.

viii A number of other uses, outside company law, are made of auditors’ reports onfinancial statements. These include:

● the Banking Act 1987 (in the UK); ● the requirements of regulators of investments businesses; and ● the requirements to be met before a listing on the London Stock Exchange may

be obtained.

Legal requirements in Northern Ireland

ix The legal requirements in Northern Ireland are contained in the Companies (North-ern Ireland) Order 1986 (as amended) and are very similar to those in Great Britain.References in the Order which correspond to the legal references in paragraph iiabove are as follows:

section 243section 244section 245section 256section 259.

288


Legal requirements in the Republic of Ireland

xThe legal requirements in the Republic of Ireland are contained in the CompaniesActs, 1963 to 1990.

xiThe main sections of the Act that govern the duties of auditors are as follows:

Companies Act 1990 section 193 auditors’ report and right of access to books and of attendance

and audience at general meetings section 194 duty of auditors if proper books of account are not kept

Companies (Amendment) Act 1986 section 15 consideration by auditors of consistency of directors’ report

with company’s accounts section 18 provision in relation to documents delivered to registrar of

companies.

Significance of qualified opinions

xiiSection 9(11) of the Companies (Amendment) Act 1983 equates to section 46 of theCompanies Act 1985 in Great Britain and section 49(3) and (4) of the Companies(Amendment) Act 1983 correspond to section 271 of the Companies Act 1985 inGreat Britain.

Appendix 1 – Forming an opinion on financialstatements

1This appendix sets out in the form of a flowchart the steps involved in forming anopinion as to whether a set of financial statements presents a true and fair view of thereporting entity’s state of affairs and profit or loss. The flowchart is intended toprovide guidance to readers in understanding the Statement of Auditing Standards.It does not form part of the Standards themselves.

2The flowchart is drawn up on the basis that the directors make no further amendmentsto the financial statements following the audit. In practice, directors may makeamendments in response to comments by the auditors: any amendment of the financialstatements (for example, to provide additional disclosure in order to give a true andfair view) would require auditors to begin the sequence of questions afresh.

3In applying the logic in the flowchart, auditors may find it necessary to address thequestions for discrete sections of the financial statements as well as for the financialstatements as a whole.

4The principal matters which auditors consider in forming an opinion may beexpressed in three questions:

(1) have they completed all procedures necessary to meet Auditing Standards andto obtain all the information and explanations necessary for their audit? Thisquestion is considered in paragraphs 68 to 73 of the SAS.


289

(2) have the financial statements been prepared in accordance with the applicableaccounting requirements? This question is considered in paragraphs 38 to 51 ofthe SAS.The flowchart refers to these requirements as GAAP (generally acceptedaccounting practice) as a convenient shorthand to indicate those accountingrequirements which apply in the case of the particular financial statementsconcerned. In the case of a company subject to company legislation in GreatBritain, this will normally mean that the financial statements have been pre-pared in accordance with Schedule 4 and (if appropriate) 4A to the CompaniesAct 1985 – sections 226(3) and 227(4) – and with applicable accountingstandards.As a starting point, compliance with applicable accounting requirements islikely to result in financial statements giving a true and fair view. However,compliance alone may be insufficient in a particular instance. Section 226(4)and (5) and section 227(5) and (6) therefore require directors of a company toprovide additional information or even depart from the rules in order to give atrue and fair view.Similarly, a breach of the rules, whether by omission or substitution of analternative accounting treatment, may mean that a true and fair view is notgiven, but departures from the rules are needed in some specific cases so that atrue and fair view can be given.Hence the third question:

(3) do the financial statements, as prepared by the directors, give a true and fairview?

Appendix 2 – Examples of auditors’ reports onfinancial statements

Unqualified opinions

1 Company incorporated in Great Britain 2 Company incorporated in the Republic of Ireland 3 Company incorporated in Northern Ireland 4 Explanatory paragraph dealing with a fundamental uncertainty 5 Company incorporated in Great Britain using exemptions available for small

companies 6 Opinion on a summary financial statement

Qualified opinions

7 Disagreement 8 Limitation on the auditors’ work 9 Disclaimer of opinion 10 Adverse opinion 11 Qualified opinion and explanatory paragraph dealing with a fundamental

uncertainty 12 Omission of primary statement

290


Has all evidence,reasonably expected to beavailable, been obtainedand evaluated?

Is the effect of the disagree-ment so material orpervasive that the financialstatements as a whole aremisleading?

Do the financial statements,including note disclosures aboutfundamental uncertainties, givea true and fair view?

Are the financialstatements preparedin accordance withGAAP?

Is departure needed togive a true and fairview?

Are financialstatements affectedby fundamentaluncertainties

Do financial statementsgive a true and fair view?

Is disclosure of thedeparture adequate?

UNQUALIFIED OPINIONSee examples 1–3

QUALIFIED OPINIONEXCEPT FOR LIMITATIONSee example 8

QUALIFIED OPINION —EXCEPT FOR DISAGREEMENTSee example 7

UNQUALIFIED OPINIONWITH EXPLANATORYPARAGRAPH See example 4

QUALIFIED OPINION— ADVERSE OPINIONSee example 10

QUALIFIED DISCLAIMERSee example 9

Is the possible effect somaterial or pervasive tothe financial statementsthat they could, as awhole, be misleading?

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

No

No

No

No

No

No

No

Questions concerning limitation and disagreement are presumed to involve matters considered to be material.

No

No

Auditors’ reports on financial statem

ents SAS 600

291

Example 1 Unqualified opinion: company incorporated in Great Britain*

AUDITORS’ REPORT TO THE SHAREHOLDERS OF XYZ PLC

We have audited the financial statements on pages . . . to . . . which have beenprepared under the historical cost convention3 [as modified by the revaluation ofcertain fixed assets] and the accounting policies set out on page . . . .

Respective responsibilities of directors and auditors

As described on page . . . the company’s directors are responsible for the preparationof financial statements. It is our responsibility to form an independent opinion,based on our audit, on those statements and to report our opinion to you.

Basis of opinion

We conducted our audit in accordance with Auditing Standards issued by theAuditing Practices Board. An audit includes examination, on a test basis, ofevidence relevant to the amounts and disclosures in the financial statements. It alsoincludes an assessment of the significant estimates and judgements made by thedirectors in the preparation of the financial statements, and of whether the account-ing policies are appropriate to the company’s circumstances, consistently appliedand adequately disclosed.

We planned and performed our audit so as to obtain all the information andexplanations which we considered necessary in order to provide us with sufficientevidence to give reasonable assurance that the financial statements are free frommaterial misstatement, whether caused by fraud or other irregularity or error. Informing our opinion we also evaluated the overall adequacy of the presentation ofinformation in the financial statements.

Opinion

In our opinion the financial statements give a true and fair view of the state of thecompany’s affairs as at 31 December 19.. and of its profit [loss] for the year thenended and have been properly prepared in accordance with the Companies Act1985.

Registered auditors Address

Date

3 A reference to the convention draws attention to the fact that the values reflected in the financial statements arenot current but historical and, where appropriate, to the fact that there is a mixture of past and recent values.

* Editor’s note: Example 1 is superseded by Bulletin 2001/2 Revisions to the wording of auditors’ reports onfinancial statements and the interim review report.

292


Example 2 Unqualified opinion: company incorporated in the Republic ofIreland*


We have audited the financial statements on pages . . . to . . . which have beenprepared under the historical cost convention [as modified by the revaluation ofcertain fixed assets] and the accounting policies set out on page . . . .

Respective responsibilities of directors and auditors As described on page . . . the company’s directors are responsible for the preparationof financial statements. It is our responsibility to form an independent opinion,based on our audit, on those statements and to report our opinion to you.

Basis of opinion We conducted our audit in accordance with Auditing Standards issued by theAuditing Practices Board. An audit includes examination, on a test basis, ofevidence relevant to the amounts and disclosures in the financial statements. It alsoincludes an assessment of the significant estimates and judgements made by thedirectors in the preparation of the financial statements, and of whether the account-ing policies are appropriate to the company’s circumstances, consistently appliedand adequately disclosed.


Opinion In our opinion the financial statements give a true and fair view of the state of thecompany’s affairs as at 31 December 19.. and of its profit [loss] for the year thenended and have been properly prepared in accordance with the Companies Acts1963 to 1990.

We have obtained all the information and explanations we consider necessary forthe purposes of our audit. In our opinion, proper books of account have been keptby the company. The financial statements are in agreement with the books ofaccount.

In our opinion, the information given in the directors’ report on pages . . . to . . . isconsistent with the financial statements.

The net assets of the company, as stated in the balance sheet on page . . ., are morethan half of the amount of its called-up share capital and, in our opinion, on thatbasis there did not exist at (date) a financial situation which, under section 40(1) ofthe Companies (Amendment) Act 1983, would require the convening of an extraor-dinary general meeting of the company.


Date



293

Example 3 Company incorporated in Northern Ireland*





Basis of opinion



Opinion

In our opinion the financial statements give a true and fair view of the state of thecompany’s affairs as at 31 December 19.. and of its profit [loss] for the year thenended and have been properly prepared in accordance with the Companies (North-ern Ireland) Order 1986.


Date


294


Example 4 Unqualified opinion with explanatory paragraph describing afundamental uncertainty





Basis of opinion




In forming our opinion, we have considered the adequacy of the disclosures made inthe financial statements concerning the possible outcome to litigation against BLimited, a subsidiary undertaking of the company, for an alleged breach of environ-mental regulations. The future settlement of this litigation could result in additionalliabilities and the closure of B Limited’s business, whose net assets included in theconsolidated balance sheet total £... and whose profit before tax for the year is £...Details of the circumstances relating to this fundamental uncertainty are describedin note 00. Our opinion is not qualified in this respect.

Opinion

In our opinion the financial statements give a true and fair view of the state of affairsof the company and of the group as at 31 December 19.. and of the group’s profit[loss] for the year then ended and have been properly prepared in accordance withthe Companies Act 1985.


Date


295

Example 5 Company incorporated in Great Britain, using accountingexemptions available for small companies

AUDITORS’ REPORT TO THE SHAREHOLDERS OF XYZ LTD




Basis of opinion



Opinion

In our opinion the financial statements give a true and fair view of the state of thecompany’s affairs as at 31 December 19.. and of its profit [loss] for the year thenended7 and have been properly prepared in accordance with the provisions of theCompanies Act 1985 applicable to small companies.


Date

7 When reporting on the financial statements of a small company which takes advantage of the exemptionsavailable under Schedule 8 to the Companies Act 1985 (as inserted by SI 1992 No. 2452; now superseded by SI1997 No 220), auditors may consider that, were it not for paragraph 14(1) of the schedule, a true and fair viewis not given because of the use of some or all of these exemptions. In such circumstances, they may give the formof report allowed by paragraph 14(3) of Schedule 8, as follows:

‘In our opinion, the financial statements have been properly prepared in accordance with theprovisions of the Companies Act 1985 applicable to small companies’.

When the auditors consider that a true and fair view is not given for other reasons, they should qualify theiropinion as required by the Auditing Standards contained in this SAS.

296


Example 6 Auditors’ statement on a summary financial statement*

AUDITORS’ STATEMENT TO THE SHAREHOLDERS OF XYZ PLC

We have audited the summary financial statement set out above/on page . . . .


The summary financial statement is the responsibility of the directors. Our responsi-bility is to report to you our opinion as to whether the statement is consistent withthe full financial statements and directors’ report.

Basis of opinion

We conducted our audit in accordance with Auditing Standards issued by theAuditing Practices Board. The audit of a summary financial statement comprises anassessment of whether the statement contains all information necessary to ensureconsistency with the full financial statements and directors’ report and of whetherthe detailed information required by law has been properly extracted from thosedocuments and included in the summary statement.

Our report on the company’s full financial statements includes information on theresponsibilities of directors and auditors relating to the preparation and audit offinancial statements and on the basis of our opinion on the financial statements.

Opinion

In our opinion the summary financial statement above/on page . . . is consistent withthe full financial statements and directors’ report of XYZ plc for the year ended . . .and complies with the requirements of the Companies Act 1985, and regulationsmade thereunder, applicable to summary financial statements.


Date

Example paragraphs for inclusion in the basis of opinion section where applicable:

(1) Referring to a fundamental uncertainty:Our report on the group’s full financial statements included an explanatoryparagraph concerning a fundamental uncertainty arising from the outcome ofpossible litigation against B Ltd, a subsidiary undertaking of the company, foran alleged breach of environmental regulations. Details of the circumstancesrelating to this fundamental uncertainty are described in note . . . of thesummary financial statement. Our opinion on the full financial statements is notqualified in this respect.

(2) Referring to a qualified opinion:Our opinion on the company’s full financial statements was qualified as a resultof a disagreement with the accounting treatment of the company’s leased assets.Details of the circumstances giving rise to that opinion are set out in note . . . ofthe summary financial statement.

* Editor’s note: Example 6 is superseded by Bulletin 1999/6 The auditors’ statement on the summary financialstatement.


297

Example 7 Qualified opinion: disagreement





Basis of opinion


We planned and performed our audit so as to obtain all the information andexplanations which we considered necessary in order to provide us with sufficientevidence to give reasonable assurance as to whether the financial statements are freefrom material misstatement, whether caused by fraud or other irregularity or error.In forming our opinion we also evaluated the overall adequacy of the presentation ofinformation in the financial statements.

Qualified opinion arising from disagreement about accounting treatment

Included in the debtors shown on the balance sheet is an amount of £Y due from acompany which has ceased trading. XYZ plc has no security for this debt. In ouropinion the company is unlikely to receive any payment and full provision of £Yshould have been made, reducing profit before tax and net assets by that amount.

Except for the absence of this provision, in our opinion the financial statements givea true and fair view of the state of the company’s affairs as at 31 December 19.. andof its profit [loss] for the year then ended and have been properly prepared inaccordance with the Companies Act 1985.


Date

298


Example 8 Qualified opinion: limitation on the auditors’ work





Basis of opinion

We conducted our audit in accordance with Auditing Standards issued by theAuditing Practices Board, except that the scope of our work was limited as explainedbelow.

An audit includes examination, on a test basis, of evidence relevant to the amountsand disclosures in the financial statements. It also includes an assessment of thesignificant estimates and judgements made by the directors in the preparation of thefinancial statements, and of whether the accounting policies are appropriate to thecompany’s circumstances, consistently applied and adequately disclosed.

We planned our audit so as to obtain all the information and explanations which weconsidered necessary in order to provide us with sufficient evidence to give reason-able assurance that the financial statements are free from material misstatement,whether caused by fraud or other irregularity or error. However, the evidenceavailable to us was limited because £... of the company’s recorded turnover com-prises cash sales, over which there was no system of control on which we could relyfor the purpose of our audit. There were no other satisfactory audit procedures thatwe could adopt to confirm that cash sales were properly recorded.

In forming our opinion we also evaluated the overall adequacy of the presentation ofinformation in the financial statements.

Qualified opinion arising from limitation in audit scope

Except for any adjustments that might have been found to be necessary had we beenable to obtain sufficient evidence concerning cash sales, in our opinion the financialstatements give a true and fair view of the state of the company’s affairs as at 31December 19.. and of its profit [loss] for the year then ended and have been properlyprepared in accordance with the Companies Act 1985.

In respect alone of the limitation on our work relating to cash sales:

● we have not obtained all the information and explanations that we considerednecessary for the purpose of our audit; and

● we were unable to determine whether proper accounting records had beenmaintained.


Date


299

Example 9 Disclaimer of opinion



Respective responsibilities of directors and auditors As described on page . . . the company’s directors are responsible for the preparationof financial statements. It is our responsibility to form an independent opinion,based on our audit, on those statements and to report our opinion to you.

Basis of opinion We conducted our audit in accordance with Auditing Standards issued by theAuditing Practices Board, except that the scope of our work was limited as explainedbelow.

An audit includes examination, on a test basis, of evidence relevant to the amountsand disclosures in the financial statements. It also includes an assessment of thesignificant estimates and judgements made by the directors in the preparation of thefinancial statements, and of whether the accounting policies are appropriate to thecompany’s circumstances, consistently applied and adequately disclosed.

We planned our audit so as to obtain all the information and explanations which weconsidered necessary in order to provide us with sufficient evidence to give reason-able assurance that the financial statements are free from material misstatement,whether caused by fraud or other irregularity or error. However, the evidenceavailable to us was limited because we were appointed auditors on (date) and inconsequence we were unable to carry out auditing procedures necessary to obtainadequate assurance regarding the quantities and condition of stock and work inprogress, appearing in the balance sheet at £... Any adjustment to this figure wouldhave a consequential significant effect on the profit for the year.

In forming our opinion we also evaluated the overall adequacy of the presentation ofinformation in the financial statements.

Opinion: disclaimer on view given by financial statements Because of the possible effect of the limitation in evidence available to us, we areunable to form an opinion as to whether the financial statements give a true and fairview of the state of the company’s affairs as at 31 December 19.. or of its profit [loss]for the year then ended. In all other respects, in our opinion the financial statementshave been properly prepared in accordance with the Companies Act 1985.

In respect alone of the limitation on our work relating to stock and work-in-progress:

● we have not obtained all the information and explanations that we considerednecessary for the purpose of our audit; and

● we were unable to determine whether proper accounting records had beenmaintained.


Date

300


Example 10 Adverse opinion





Basis of opinion



Adverse opinion

As more fully explained in note . . . no provision has been made for losses expectedto arise on certain long-term contracts currently in progress, as the directors considerthat such losses should be offset against amounts recoverable on other long-termcontracts. In our opinion, provision should be made for foreseeable losses onindividual contracts as required by Statement of Standard Accounting Practice 9. Iflosses had been so recognised the effect would have been to reduce the profit beforeand after tax for the year and the contract work in progress at 31 December 19.. by£...

In view of the effect of the failure to provide for the losses referred to above, in ouropinion the financial statements do not give a true and fair view of the state of thecompany’s affairs as at 31 December 19.. and of its profit [loss] for the year thenended. In all other respects, in our opinion the financial statements have beenproperly prepared in accordance with the Companies Act 1985.


Date


301

Example 11 Qualified opinion and fundamental uncertainty





Basis of opinion




In forming our opinion, we have considered the adequacy of the disclosures made inthe financial statements concerning the possible outcome of negotiations for addi-tional finance being made available to replace an existing loan of £... which isrepayable on 30 April 19.. The financial statements have been prepared on a goingconcern basis, the validity of which depends upon future funding being available.The financial statements do not include any adjustments that would result from afailure to obtain funding. Details of the circumstances relating to this fundamentaluncertainty are described in note . . . Our opinion is not qualified in this respect.

Qualified opinion arising from disagreement about accounting treatment

The company leases plant and equipment which have been accounted for in thefinancial statements as operating leases. In our opinion, these leases should beaccounted for as finance leases as required by Statement of Standard AccountingPractice 21. If this accounting treatment were followed, the finance leases would bereflected in the company’s balance sheet at £X and the profit for the year would havebeen reduced by £Y. The financial statements do not include an explanation for thisdeparture from an applicable accounting standard as required by the Companies Act1985.

Except for the failure to account for the leases referred to above as required bySSAP 21, in our opinion the financial statements give a true and fair view of the state

302


of the company’s affairs as at 31 December 19.. and of its profit [loss] for the yearthen ended and have been properly prepared in accordance with the Companies Act1985.


Date


303

Example 12 Qualified opinion: disagreement arising from omission of aprimary statement required by Financial Reporting Standards





Basis of opinion



Qualified opinion arising from omission of cash flow statement

As explained in note . . . the financial statements do not contain a statement of cashflows as required by Financial Reporting Standard 1. Net cash flows for the yearended 19.. amounted to £... and in our opinion information about the company’s cashflows is necessary for a proper understanding of the company’s state of affairs andprofit [loss].

Except for the failure to provide information about the company’s cash flows, in ouropinion the financial statements give a true and fair view of the state of thecompany’s affairs as at 31 December 19.. and of its profit [loss] for the year thenended and have been properly prepared in accordance with the Companies Act19858.


Date

8 Omission of a primary statement normally results in the issue of an opinion qualified as to the effect on theview given by the financial statements and the compliance with the Companies Act’s other specificrequirements, because the Act requires additional information to be included in financial statements whennecessary to give a true and fair view.

304


Appendix 3 – Statement of directors’ responsibilities

Example wording of a description of the directors’ responsibilities for inclusion in acompany’s financial statements.

Company law requires the directors to prepare financial statements for eachfinancial year which give a true and fair view of the state of affairs of thecompany and of the profit or loss of the company for that period. In preparingthose financial statements, the directors are required to

● select suitable accounting policies and then apply them consistently; ● make judgements and estimates that are reasonable and prudent; ● state whether applicable accounting standards have been followed, subject

to any material departures disclosed and explained in the financial state-ments;9

● prepare the financial statements on the going concern basis unless it isinappropriate to presume that the company will continue in business.10

The directors are responsible for keeping proper accounting records whichdisclose with reasonable accuracy at any time the financial position of thecompany and to enable them to ensure that the financial statements complywith the Companies Act 1985. They are also responsible for safeguarding theassets of the company and hence for taking reasonable steps for the preventionand detection of fraud and other irregularities.

9 Large companies only.

10 If no separate statement on going concern is made by the directors.


305

NOTICE TO READERS

© The Accountancy Foundation Limited

This document has been obtained from the website of The Accountancy Foundation Limited and its subsidiary companies (The Review Board Limited, The Auditing Practices Board Limited, The Ethics Standards Board Limited, The Investigation and Discipline Board Limited). Use of the website is subject to the WEBSITE TERMS OF USE, which may be viewed at http://www.accountancyfoundation.com/terms. Readers should be aware that, although The Accountancy Foundation Limited and its subsidiary companies seek to ensure the accuracy of information on the website, no guarantee or warranty is given or implied that such information is free from error or suitable for any given purpose: the published hard copy of the document alone constitutes the definitive text.

http://www.accountancyfoundation.com/terms

[600]* Auditors' reports on financial statements

Documents

Transcript of [600]* Auditors' reports on financial statements