Audit reporting – Ensuring an effective and accurate opinion

Audit reporting on financial statements plays a pivotal role in maintaining the transparency, credibility and reliability of financial information within organisations. Such opinions, issued by independent auditors, follow a thorough examination of the records held by entities in their books of accounts, and express the auditor’s opinion as to whether the financial statements have been prepared in accordance with the applicable financial reporting framework.

As stated by ISA 700 (Revised), Forming an opinion and reporting on financial statements, an audit is carried out for two main reasons:

• To form an opinion on the financial statements based on the evaluation of the conclusions drawn from the audit evidence; and
• To express clearly that opinion through a written report

ISA 700 deals with the auditor’s responsibility to form an opinion on the financial statements as well as the form and content of the audit report issued, as a result of an audit of financial statements. The opinion expressed by the auditor is one upon which stakeholders base their economic decisions. Failure to express the correct audit opinion may result in stakeholders basing their decisions on conclusions which are not representative of the true position of the company in question. This may also have detrimental repercussions on the auditor which could include, among other things, reputational damage, legal and regulatory consequences, loss of clients and sanctions.  The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated is termed as audit risk.

In line with this, it is imperative that the procedures performed by auditors follow all relevant regulations, specifically the International Standards on Auditing.

The opinion expressed by an auditor may be modified or unmodified. While an unmodified opinion informs the reader that the financial statements have been prepared in accordance with the applicable financial reporting framework, a modified opinion indicates otherwise and arises through either a material misstatement in the financial statements or the inability to obtain sufficient appropriate audit evidence. Depending on the outcome and pervasiveness of the matter, the auditor will then assess which modified opinion should be given, be it a qualified opinion, an adverse opinion or a disclaimer of opinion.

The procedures carried out at the initial stages of the audit are crucial to the final conclusions drawn and must ensure that audit risk is reduced to an acceptably low level.

The revised ISA 315 standard provides guidance on how auditors should design and perform their risk assessment procedures in identifying and assessing the risks of material misstatement, at both the financial statement and assertion levels. Furthermore, such risk assessment procedures need to provide an appropriate basis for the procedures performed following such assessment, the procedures of which are to be designed in line with ISA 330 The auditor’s response to assessed risks.  

The assessment of significant risks in line with ISA 315 (Revised), along with the use of the five inherent risk factors, will also assist the auditor to understand where best to address audit attention, given such risks lie on the upper end of the spectrum and are therefore more susceptible to a material misstatement occurring due to their likelihood and/or magnitude.

The assumed significant risks, such as the risk of fraud in revenue recognition, management override of controls and certain related party balances, assist the auditor to address specific areas in the audit that are more susceptible to a material misstatement, and accordingly, should not be overlooked. Naturally, the identification and assessment of risks at the audit’s initial stages may also bring to light additional significant risks that the auditor needs to address.

Materiality is another key factor that plays a pivotal role in our audits given it assists the auditor to focus on areas that could potentially affect the decisions of users relying on financial information. Failure to assess materiality in the correct way could result in an inefficient audit, due to over-testing, or insufficient testing and evidence obtained, thereby increasing the possibility of an inappropriate audit opinion issued by the auditor. It is imperative that materiality is assessed at both the planning and completion stages of the audit.

While this article highlights important factors that should be addressed in our audits to minimise audit risk, there are several other factors that require consideration in our audits. The execution of an audit in line with the required International Standards on Auditing will ensure a more efficient and effective audit is carried out, while also ensuring that audit risk is reduced to an acceptably low level.

While audit reporting aims to provide stakeholders with transparent, accountable and reliable information, it is not without challenges. Complex accounting standards, evolving business models and increased regulatory scrutiny all present ongoing challenges for auditors. Additionally, the emergence of new technologies and data analytics tools is transforming the way we carry out our audits, requiring auditors to adapt their methodologies and approaches.

As businesses continue to evolve in a rapidly changing environment, auditors must remain vigilant and adaptable in fulfilling their responsibility to provide assurance that financial information is both accurate and reliable.

ZD Academy will be hosting a CPE session focusing on Audit reporting – Ensuring an effective and accurate opinion, which will cover:

• Components within an audit report
• A run through ISA 705 and ISA 706 with practical case studies of the different modified opinions and additional communication required
• Material uncertainty and going concern in line with ISA 570
• Acceptance and continuance considerations arising from modified opinions

Stay tuned on https://zdacademy.com/courses/ for further details on this upcoming event.

Should you require further information in relation to audit reporting, please get in touch with John Debattista on jd@zampadebattista.com or Janis Hyzler on jh@zampadebattista.com.

Please note that this article is being published for information purposes only. As such, it does not constitute or should not be interpreted or construed as legal advice or guidance. Zampa Debattista does not accept responsibility or liability for any damages arising as a result of using this information as legal advice or guidance.