Part Eleven

Reporting on Financial Statements

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Structure of Seminar

1. Standards of Reporting

2. Types of Audit Opinions

3. Other Reporting Considerations1. Consolidated accounts

2. Comparatives

3. Initial engagements

4. Half-year accounts

4. Summary

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1. Standards of Reporting

• ASA 700 The Auditor’s Report on a General Purpose Financial Report– Form and content of auditor’s report on a

GPFR– Matters to be considered in forming audit

opinion

• The auditor is mainly commenting on whether the GPFR complies with mandatory AASB accounting standards

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The GPFR

• Corporations Act 2001 (s.295) outlines contents of GPFR:

1. The financial statements for the year required by accounting standards, including• An income statement• A balance sheet• A cash flow statement• A statement of changes in equity

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The GPFR

2. Notes to the financial statements, including:• Disclosures required by regulations• Notes required by accounting standards• Any other information necessary to give a

true and fair view (see s.297)

and

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The GPFR

3. The directors’ declaration, that:– The financial statements and notes comply

with accounting standards– The financial statements and notes give a

true and fair view– In the directors’ opinion, there are reasonable

grounds to believe that the company will be able to pay its debts as and when they become due and payable

– In the directors’ opinion, the financial statements and notes are in accordance with the law

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The Accounting Standards• Corporations Act s.334 requires

companies to apply AASB standards• Compatible with international IAS from 1

January 2005• Membership of professional bodies

requires auditors to take all reasonable steps to ensure financial statements comply with accounting standards– Otherwise, a qualified opinion

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The Accounting Standards

• GPFR should present fairly the reporting entity’s financial performance, financial position, and financing and investing– “Present fairly” or “true and fair view”

• Requires the consistent application of accounting standards in the preparation and presentation of statements– Policies over time and for similar items

• Accounting choices governed by relevance, reliability, materiality and substance over form

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Statutory Requirements

• Corporations Act (s.307) – auditor must give opinion on whether– The financial statements are in accordance

with the law, comply with accounting standards and give a true and fair view

– All information, explanation and assistance necessary for the conduct of the audit have been provided

– The financial records have been kept to enable preparation and audit of financial statements

– The records and registers have been kept as required by law

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Statutory Requirements• If financial statements do not give a true

and fair view, auditor must give reasons• If they do not comply with accounting

standards, auditor should quantify the effects of non-compliance

• Auditor’s report must describe any defects/irregularities in statements and any deficiencies in the matters referred to in s.307 (previous slide)

• Review of directors’ declaration– (no additional audit procedures necessary,

covered by audit and completion procedures)

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2. Types of Audit OpinionsUnqualified

(Matters that do not affect the auditor’s opinion)

Other than Unqualified

(Matter that do affect the auditor’s opinion)

Unmodified ‘Clean’ audit opinion

Modified

Emphasis of Matter

Qualified (‘except for’)

Disclaimer (Inability to form an opinion)

Adverse

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Types of Audit Opinions

• UNQUALIFIED (or “clean”)– Most common type– Yes, gives a TFV

• See Figure 5.1, p.200 for an example of an unqualified audit report

• Note sections of report on:– Scope– Audit approach– Auditor’s & directors’ responsibilities– Independence– Additional Independence Declaration

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Types of Audit Opinion

• ASA 701 Modifications to the Auditor’s Report

• Audit reports may be modified by1. An emphasis of matter2. A qualification

• An emphasis of matter is NOT a qualification – can be attached to either an unqualified or qualified report – does not affect the auditor’s opinion

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Types of Audit Opinion

• Emphasis of Matter– To emphasise certain matters disclosed by

management to the reader

• Given for the following:– Significant uncertainty – going concern– Significant uncertainty – other– Additional disclosures with the auditor concurs– Inconsistent other information– Subsequent events resulting in a new auditor’s

report on a revised financial report

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Types of Audit Opinions

• QUALIFICATIONS

– Qualified (true and fair except for…..)

– Adverse (NOT true and fair)

– Disclaimer of opinion (not enough evidence to form opinion)

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Types of Audit Opinion• Circumstances giving rise to qualifications:

– Scope limitation• Material but not extreme → qualified• Extreme → disclaimer of opinion

– Disagreement with those charged with governance

• Material but not extreme → qualified• Extreme → adverse

– Conflict between applicable accounting frameworks

• Material but not extreme → qualified• Extreme → adverse

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3. Other Reporting Considerations

1. CONSOLIDATED ACCOUNTS• Where reporting entity has one or more

controlled entities, more than one audit firm may be involved

• Auditor of controlled entity appointed by parent entity, as majority or controlling shareholder

• Corp Act (s.323) gives auditor of reporting entity right to access accounting records & registers of controlled entities, and require information and explanations from their officers and auditors.

• ASA 600 Using the Work of Another Auditor (see p.580)

• Opinion on consolidated statements remains sole responsibility of principal auditor

• Possibility of scope limitation

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Other Reporting Considerations

2. COMPARATIVES• Amounts or disclosures of one or more

previous periods presented on a comparative basis with those of current period– Qualified previous period report– Subsequent events– Change of auditor– Unaudited previous period financial

statements

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Other Reporting Considerations

3. INITIAL ENGAGEMENTS• ASA Initial Engagements – Opening

Balances – auditor must obtain evidence that:– Opening balances do not contain material

misstatements that affect current period– Previous period’s closing balances have been

correctly brought forward– Accounting policies consistently applied or

changes in policies properly accounted for and disclosed

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Other Reporting Considerations

4. HALF-YEAR STATEMENTS• Choice of audit or review• Review

– Must be performed by company’s auditor

– A lesser level of assurance– Disclaimer of audit opinion because an

audit is not performed– Negative assurance

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Conclusions

• Reporting is the final phase of the audit• Outcome of auditor’s evaluation of

evidence and negotiations with management

• Form & content of report prescribed by ASAs and Corporations Act

• Reports may modified or unmodified and qualified or unqualified, depending on circumstances