Audit Report and Opinions

The Auditor's Report

Purpose of an Audit

• According to ISA (NZ) 200.4, the purpose of an audit is to enhance confidence in corporate reporting integrity for stakeholders.
• This is achieved through an independent and objective opinion by the auditor.
• The auditor assesses whether financial statements are presented fairly and give a true and fair view, in all material respects, according to the applicable financial reporting framework.
• The auditor reports usually to the governing body or members, as defined in the engagement letter.
• For companies under the Companies Act 1993, the report is mainly for the company’s shareholders.

Contents of the Auditor's Report

• A typical auditor's report structure is outlined in Fig. 11.1.
• ISA (NZ) 700 outlines the minimum requirements for the auditor's report:
  • A title that indicates it is the report of an independent auditor.
  • Addressee, as per the engagement circumstances.
  • An auditor's opinion section includes:
    • Identification of the entity whose financial statements were audited.
    • A statement that the financial statements have been audited.
    • Identification of each statement comprising the financial statements.
    • Reference to the notes, including accounting policies.
    • Specification of the date or period covered by each financial statement.
  • A basis for opinion section directly following the auditor’s opinion section that:
    • States the audit was conducted according to International Standards on Auditing (New Zealand).
    • Refers to the section describing the auditor’s responsibilities under ISAs (NZ).
    • Includes a statement of independence from the entity, according to relevant ethical requirements, referencing the jurisdiction of origin or the IESBA Code.
    • States whether the audit evidence is sufficient and appropriate for the auditor’s opinion (ISA [NZ] 700.8).
  • Going concern considerations, where applicable.
  • Key audit matters (KAMs) that were most important during the audit.
  • Other information, where applicable.
  • Responsibilities for the financial statements typically lie with those charged with governance or management.
  • An auditor’s responsibilities section states the objectives of the audit, noting that reasonable assurance is a high level of assurance.
  • An other reporting responsibilities section, where applicable.
  • Name of the engagement partner.
  • Signature of the auditor.
  • Auditor’s address.
  • Date of the auditor’s report.

Types of Auditor's Opinions

• Auditors can choose from four types of opinions:
  • Standard Unmodified Opinion: Issued when the auditor concludes the financial statements are free from material misstatement.
  • Modified Opinions (ISA (NZ) 705.2):
    • Qualified Opinion: Issued when misstatements are material but not pervasive, or when the auditor can't obtain sufficient evidence but believes the impact of undetected misstatements would be material but not pervasive.
    • Adverse Opinion: Issued when misstatements are both material and pervasive.
    • Disclaimer of Opinion: Issued when the auditor can't obtain sufficient evidence and believes the potential impact of undetected misstatements could be both material and pervasive.
• The appropriate modified opinion depends on:
  • The nature of the matter causing the modification (material misstatement or inability to obtain sufficient evidence).
  • The auditor’s judgement about the pervasiveness of the effects on the financial statements.

Modified Opinions Table

Auditor’s judgement about the pervasiveness of the effects or possible effects on the financial statements:

Types of Potential Misstatement

• Auditors identify risk factors connected to assertions likely to be misstated.
• The auditor considers the effect of undetected or uncorrected misstatements on the financial statements:
  • Material but not pervasive.
  • Pervasive but not material.
  • Both material and pervasive.
• ISA (NZ) 450.6 defines a misstatement as a difference between the reported amount, classification, presentation, or disclosure of a financial statement item and what is required by the applicable financial reporting framework.
• According to ISA (NZ) 705, a material misstatement may arise in relation to:
  • The appropriateness of accounting policies.
  • The application of accounting policies.
  • The appropriateness or adequacy of disclosures.
• ISA (NZ) 450.A1 describes how misstatements may result from:
  • Inaccurate data gathering or processing.
  • Omission of amounts or disclosures.
  • Incorrect accounting estimates from overlooked or misinterpreted facts.
  • Unreasonable management judgements or inappropriate accounting policies.
  • Inappropriate classification, aggregation, or disaggregation of information.
• Misstatements can arise from error or fraud.
• ISA (NZ) 450 requires auditors to communicate identified misstatements to management and request corrections.
• If management refuses to correct misstatements, the auditor discusses the reasons and evaluates the implications when assessing if the financial statements are free from material misstatement.

Materiality and Pervasiveness

• Materiality threshold: the dividing line between material and immaterial information.
• Materiality: Information that, if omitted, misstated, or not disclosed separately, could adversely affect decisions about resource allocation.
• A transaction, event, or misstatement is material if it has a major impact on the financial, reputational, going concern, and/or economic and legal aspects of an entity.
• A misstatement is material if it may cause users to reach wrong conclusions.
• Pervasiveness: Describes the scope of the effect of a misstatement (ISA (NZ) 705.5):
  • Not confined to specific elements, accounts, or items.
  • If confined, represents a substantial proportion of the financial statements.
  • Fundamental to users’ understanding of the financial statements in relation to disclosures.

How Misstatements Affect the Auditor's Opinion

• An audit examines accounting information to express an independent opinion on whether it reflects the entity's financial position.
• The audit opinion is the output of the audit process presented in the audit report.
• Auditors choose from four opinion types:
  • Standard Unmodified Opinion: Issued when financial statements are free from material misstatement; form and content are in ISA (NZ) 700.
  • Modified Opinions (ISA (NZ) 705.2):
    • Qualified Opinion: Misstatements are material but not pervasive, or the auditor lacks sufficient evidence but believes undetected misstatements would be material but not pervasive.
    • Adverse Opinion: Misstatements are both material and pervasive.
    • Disclaimer of Opinion: The auditor cannot obtain sufficient evidence and believes potential undetected misstatements could be both material and pervasive.

Impacts on Type of Opinion Expressed

Auditor’s judgement about the pervasiveness of the effects or possible effects on the financial statements: