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TYE NSTIUTE oF OF BANGLADESH Chapter 13 Reporting Introduction Learning outcomes Syllabus links Examination context Chapter study guidance Learning topics 1. Communication with those charged with governance 2 Unmodified auditor's reports 3. Modified auditor's reports 4 Special considerations Summary Further question practice Technical reference Self-test questions Answers to Interactive questions Answers to Self-test questions ICAB 2024 Learning outcomes Concluding and reporting on engagements Students will be able to conclude and report on assurance engagements in accordance with the terms of the engagements and appropriate standards. + Draft suitable extracts for an assurance report (including any report to the management issued as part of the engagement) in relation to a specified organisation on the basis of given information, including in the extracts (where appropriate) statements of facts, their potential effects, and recommendations for action relevant to the needs and nature of the organisation being reported upon + Advise on reports to be issued to those responsible for governance in accordance with standards, legislation, regulation and codes of corporate governance + Explain the elements (both explicit and implicit) of the auditor's report issued in accordance with the International Standards on Auditing and statutory requirements and recommend the nature of an audit opinion to be given in such a report + Draft suitable extracts for an auditor's report (and any report to the management issued as part of the engagement) in relation to a specified organisation on the basis of given information, including in the extracts (where appropriate) statements of facts, their potential effects, and recommendations for action relevant to the needs and nature of the organisation being reported upon Syllabus links The basic unmodified auditor's report was introduced in Assurance. Examination context This is an important area for the exam. Auditor's reports feature regularly in exams. Chapter study guidance Use this schedule and your study timetable to plan the dates on which you will complete your study of this chapter. ae | Audit and Assurance ICAB 2024 3 If you work in This is another The material in 5,6,7,8 practice, you are ital topic,so you this topicis more likely to be need to work crucial for your involved in through this exam and is very carrying out section very likely to be tested disclosure carefully. at some point. checklists on the financial statements (as discussed in the previous chapter) ‘than drafting the auditor's report. However, you should be aware when a modified auditor's report mightbe required, so that you can highlight ‘that fact to senior audit staff members. 4 Auditors may Read through this This topic is not also audit section carefully. highly financial examinable, but statements could crop upin prepared in line ashortform with frameworks other question. than IFRS, or may audit an incomplete set of financial statements. Once you have worked through this guidance, you will be ready to attempt the further question practice included at the end of this chapter. ae | Audit and Assurance ICAB 2024 1,Communication with those charged with governance (a) Section overview + Auditors are required to report privately to those charged with governance on various matters arising from the audit. « Relevant matters include: - auditor's responsibilities in relation to the audit of financial statements - planned scope and timing of the audit - significant findings from the audit - auditorindependence « Matters may be communicated orally or in writing. « They should be recorded in audit working papers. Various auditing standards require auditors to report certain audit matters arising to those charged with governance. This report will be ‘private’ and just for the attention of those charged with governance, as opposed to the auditor's report, which is a published document. The requirements in relation to this private reporting are found in the main in ISA 260, Communication with those Charged with Governance which deals with the auditor's responsibility to communicate with those charged with governance in an audit of financial statements. ISA 265, Communicating Deficiencies in Internal Control to Those Charged with Governance and Management specifically requires the auditor to communicate any significant deficiencies in internal control encountered during the course of their audit work. Whether a deficiency is significant is a matter of professional judgement for the auditor. Matters to consider will include the likelihood of material misstatements and potential losses or fraud. 1.1 Appropriate persons @ Those charged with governance: Is the term used to describe the role of persons entrusted with the supervision, control and direction of the entity. Those charged with governance ordinarily are accountable for ensuring that the entity achieves its objectives, financial reporting and reporting to interested parties. Those charged with governance include management only when it performs such functions. Those charged with governance include the directors (executive and non-executive) of a company and the members of an audit committee where one exists. For other types of entity, those charged with governance usually include equivalent persons such as the partners, proprietors, committee of management or trustees. The auditors may communicate with the whole board, the supervisory board or the audit committee depending on the governance structure of the organisation. The auditor should ensure that those charged with governance are provided with a copy of the audit engagement letter on a timely basis. + Other deficiencies shall be communicated to management if the auditor considers them important enough to warrant management attention. + Written communication shall include a description of the deficiencies and their potential effects, and sufficient information to understand the context of the communication. + The written communication shall include sufficient information to enable those charged with governance and management to understand the context, in particular: - The purpose of the audit was for the auditor to express an opinion on the financial statements. - The audit included consideration of internal controls relevant to the preparation of financial statements, in order to design audit procedures, not in order to express an opinion on those controls. - The matters being reported are limited to those deficiencies that the auditor has identified during the audit that merit being reported to those charged with governance. The standard gives examples of matters that the auditor may consider in determining whether deficiencies are significant. These examples include: + the likelihood of the deficiencies leading to material misstatements + the susceptibility to loss or fraud + the financial statement amounts + the volume of activity + the importance of the controls to the financial reporting process 1.3 How? Matters may be communicated orally or in writing, but they should be recorded in the audit working papers, however discussed. Certain matters must, however, be communicated in writing, for example significant deficiencies in internal controls. Auditors should make clear that the audit is not designed to identify all relevant matters connected with governance and they should have regard to local laws and regulations, and local guidance on confidentiality when communicating with management. 1.4 Attributes for effective communication to those charged with governance The communication should have the following attributes: + Timing: It should be sufficiently prompt to enable those charged with governance to take appropriate action, for example, items relating to the financial statements should be reported before the financial statements are approved. + Extent, form and frequency: Should be appropriate. What is appropriate will depend on the size of the entity and the way in which those charged with governance operate. + Expectations: It should fulfil the expectations of the auditors and those charged with governance, and therefore, the nature of the communication should be agreed early in the audit process, for example, in the letter of engagement, so that misunderstandings are minimised. + Management comments: Should be included where they are relevant and will aid the understanding of those charged with governance. + Previous year’s points: Should be repeated if no action has been taken and the auditors believe that they are still relevant. If there are no new points to be made, the auditors should make that point. + Disclaimer: Should be included so that third parties do not seek to rely on the information given within the report. ICAB 2024 Reporting Effective communication is a two-way process between auditors and those charged with governance. Communication received from the client should be documented and responded to appropriately. (2) Interactive question 1: Mouse and Ratty Ltd You are currently undertaking an assurance engagement for Mouse and Ratty Ltd, a large firm of PR consultants in Leeds. During the course of the work you have found a number of issues on which you need to report. These can be summarised as follows: (1) You have found a total of CU18,000 of unauthorised expenditure on IT equipment. Any IT expenditure in excess of CU150 has to be authorised by a director. (2) The IT expenditure for the year is 65% in excess of budget. There does not appear to have been an investment project which was not budgeted for. There seems to be little reason for the rise. (3) Large sums for travelling expenses are not being authorised when in excess of nightly limits set. Four executives spent a total of CU25,000 in excess of nightly limits throughout the year. (4) When examining work in progress, it became clear that there were sums which have been therefor more than six months without being billed. These total CU56,000. There appears to be no explanation for this. (5) When overtime forms are submitted, any amounts of more than three hours per month need to be authorised. This is rarely done. The company paid out CU180,000 in unauthorised overtime. (6) There are no controls over non-chargeable time. The proportion of non-chargeable time for individual executives varies from 5% to 34%. Requirement Identify the following: (1) The internal control deficiencies arising from the above (2) The risks to which each identified deficiency exposes the company (3) Actions that the company should take to mitigate those risks See Answer at the end of this chapter. 1.5 Sustainability impact The degree to which climate-related risks require changes to the company’s accounting policies, estimates and disclosures may be significant enough to warrant formal communication with those charged with governance, especially if the disclosure requirements necessitate changes to reporting and disclosure mechanisms. 2. Unmodified auditor's reports (C2) Section overview | + The report per ISA 700 contains a number of standard elements. + Auditors also report by exception on a number of legal matters. + With regard to listed companies, the auditor's report will also refer to the review of the corporate governance statement required by the BSEC Corporate Governance Code. oe | Audit and Assurance ICAB 2024 2.1.1. Sustainability impact Climate-related risks that could give rise to material misstatements which (if uncorrected) may relate to: + Appropriateness or adequacy of disclosures. For example, the entity may not have appropriately disclosed the effect of climate-related risks. + Application of the entity's accounting policies. For example, inappropriate recognition and measurement of assets due to the effect of climate-related risks. The auditor would also need to consider the implications of non-compliance with any relevant laws or regulations (such as the Companies Act requirements for climate-related risks and any other information). The degree to which climate-related risks require auditor attention may result in determining such a matter to be a key audit matter which may be affected by significant climate-related auditor judgments or specific climate-related events or transactions. ee | Audit and Assurance ICAB 2024 2.2 The main components of an auditor's report as required by ISA 700 Title I Addressee Auditor's opinion Basis for opinion Going concern Key audit matters Other information Responsibilities of management for the financial statements Auditor's responsibilities for the audit of the financial statements Opinion on other matters such as specific statutory requirements, eg, on whether the Director's Report and the Strategic Report are consistent with the financial statements Matters on which the auditor is required to report on by exception Name of engagement partner Signature of engagement partner Auditor's address Date of the report Figure 13.1: Overview: unmodified report 2.2.4 2.2.5 2.2.6 + True: information is factual and conforms with reality, not false. In addition, the information conforms with required standards and law. The accounts have been correctly extracted from the books and records. + Fair: information is free from discrimination and bias in compliance with expected standards and rules. The accounts should reflect the commercial substance of the company’s underlying transactions. ISA 700 requires the opinion paragraph to state clearly that the financial statements ‘give a true and fair view’. The financial reporting framework All financial statements are prepared in accordance with a financial reporting framework. This may be in accordance with International Reporting Standards, or the standards used in other jurisdictions. The Companies Act 1994 embraces ‘applicable accounting standards’ and the framework reference is usually have been prepared in accordance with the requirements of the Companies Act 1994. Basis for opinion This provides important context for the auditor's opinion. It should therefore identi + that ISAs have been followed + thatthe auditor is independent + the ethical framework under which the auditor operates Going concern Auditor's reports must always include a section on going concern. The precise details are tailored to the engagement in question. For reports with unmodified opinions, the section is headed ‘Conclusions relating to Going Concern’ (ISA _570 ), and effectively summarises the auditor's conclusions in relation to going concern. Key audit matters (KAMs) These are matters that the auditor considers to be of most significance during the audit. A brief description of each KAM should follow. 2.2.7 Concluding, recommending and communicat The KAMs are part of the unmodified auditor's report for listed company audits, but they are specific to the audit in question. Although the standard ISA 700 auditor's report must therefore be ‘modified’ (or tailored) for the specific audit, this does not mean that it is a report with a modified opinion. Respective responsibilities of directors and auditors There is usually a statement of directors’ responsibilities towards the financial statements, included either in the directors’ report or as a separate statement. A cross reference is therefore made in auditor's reports. There is also a statement of the auditors’ responsibilities, emphasising that the auditor reports on the truth and fairness of the financial statements. The statement of auditor's responsibilities should include a statement about extent to which the auditor considers the audit capable of detecting irregularities (eg, non-compliance with laws and regulations), including fraud. ICAB 2024 Reporting [RLY 2.2.8 Other responsibilities In some jurisdictions the auditor reports on other matters as required by relevant legislation. The auditor is required to express an opinion as to whether the information in the directors’ report is consistent with the financial statements. The auditor is also required to report on whether the strategic report is consistent with the financial statements. All companies are required to produce a strategic report. Auditors are also required to identify the matters that are required by the Companies Act 1994 to be reported on by exception. 2.2.9 Name and signature of engagement partner This may seem obvious, but it is all to do with emphasising who has responsibility for what. ISAs requires that where the auditor is a firm, the report must be signed by the ‘ statutory auditor’ in their own name, for and on behalf of the auditor. Prior to this, reports were signed in the name of the firm. In most cases the statutory auditor will be the engagement partner. 2.2.10 Address Again this is to ensure that there is no doubt who is responsible for the report. ISA 700 requires the report to name the location in the jurisdiction where the auditor practises. 2.2.11 Date The date of the report should be the date when the auditor has obtained sufficient appropriate evidence to support the opinion. It should not be earlier than the date when management approves the financial statements. @ Context example: auditor's report An example of a complete auditor's report is given below. INDEPENDENT AUDITOR'S REPORT To the Shareholders of ABC Company [or Other Appropriate Addressee] Report on the Audit of the Financial Statements Opinion We have audited the financial statements of ABC Company (the Company), which comprise the statement of financial position as at December 31, 20X1, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.. In our opinion, the accompanying financial statements present fairly, in all material respects, (or give a true and fair view of) the financial position of the Company as at December 31, 20X1, and (of) its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs). ee | Audit and Assurance ICAB 2024 Paragraph 41(b) of this ISA explains that the shaded material below can be located in an Appendix to the auditor's report. Paragraph 41(c) explains that when law, regulation or national auditing standards expressly permit, reference can be made to a website of an appropriate authority that contains the description of the auditor's responsibilities, rather than including this material in the auditor's report, provided that the description on the website addresses, and is not inconsistent with, the description of the auditor's responsibilities below. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: ¢ Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. ¢ Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. e Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. * Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Company to cease to continue as a going concern. e Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Audit and Assurance ICAB 2024 Report on Other Legal and Regulatory Requirements [The form and content of this section of the auditor's report would vary depending on the nature of the auditor's other reporting responsibilities prescribed by local law, regulation or national auditing standards. The matters addressed by other law, regulation or national auditing standards (referred to as “other reporting responsibilities”) shall be addressed within this section unless the other reporting responsibilities address the same topics as those presented under the reporting responsibilities required by the ISAs as part of the Report on the Audit of the Financial Statements section. The reporting of other reporting responsibilities that address the same topics as those required by the ISAs may be combined (i.e., included in the Report on the Audit of the Financial Statements section under the appropriate subheadings) provided that the wording in the auditor's report clearly differentiates the other reporting responsibilities from the reporting that is required by the ISAs where such a difference exists. The engagement partner on the audit resulting in this independent auditor's report is [name]. [Signature in the name of the audit firm, the personal name of the auditor, or both, as appropriate for the particular jurisdiction] [Auditor Address] [Date] 2.2.12 Corporate Governance Code Publicly traded companies are required to include a Corporate Governance Statement in their annual report. If this is not included, the auditor must report by exception. 2.2.13 Real auditor's reports Familiarity with real auditor's reports will help you with reporting questions in the exam so you should try to read as many real-life examples as possible. 2.3 ISA 720, The Auditor's Responsibilities Relating to Other Information The audited financial statements are likely to be published in the annual report, which may also include other information. This is defined in the standard as financial and non-financial information, other than the audited financial statements, that is included in the entity's annual reports. Examples of other information would include: * management report, management commentary, or operating and financial review or similar reports by those charged with governance (for example, a directors’ report) + Chair's statement * corporate governance statement + internal control and risk assessment reports ISA 720 requires the auditor to read the other information. If it is materially inconsistent with the financial statements then this could indicate that there is a material misstatement in the financial statements themselves. Modified repo: Matters which do not Matters which do affect audit opinion affect audit opinion (unmodified opinion) (modified opinion) Emphasis of matter Material misstatement |<4 Qualified > Inability to obtain ‘Except for’ sufficient appropriate evidence Other matters Adverse Disclaimer Going concern Figure 13.3: Overview: modified reports Modifications to the auditor's report are covered in two ISAs : + ISA 705, Modifications to the Opinion in the Independent Auditor's Report. Key points relate to the positioning of the ‘Basis for Qualified/Adverse/Disclaimer of Opinion’ section after the opinion section, and the omission of the ‘Key Audit Matters’ section when disclaiming an opinion, unless this is required by law or regulation. + ISA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report. Revisions relate to Key Audit Matters (as required by ISA 701) in particular the Emphasis of Matter paragraph should not be used as a substitute for a description of a Key Audit Matter, and also the positioning of the Emphasis of Matter and Other Matter paragraphs. In this section we shall be using the term ‘modified report’. The ISAs that deal with auditor's reports do not use this term, but it is useful for distinguishing those reports that contain an emphasis of matter paragraph or another matter paragraph. There are separate ISAs for matters in auditor's reports that do not modify the opinion (ISA 706) and those that do (ISA 705). For your examination you need to be able to follow the logic of Figure 13.3 above and consider the impact of scenarios given in a question on the form of the auditor's report and the type of audit opinion. The type of modified opinion expressed will depend on the circumstances and the effect of any actual or potential misstatements on the financial statements. Misstatements that are material but not pervasive will lead to an ‘except for’ qualified opinion, whereas if the misstatements are deemed to be pervasive the opinion will be adverse or will be disclaimed. The term ‘pervasive’ is defined in ISA 705 as something that affects the financial statements as a whole or a substantial part of them, and which is fundamental to the users’ understanding of the financial statements. This is discussed further in section 4.2. 3.1 Emphasis of matter paragraphs and other matter paragraphs The auditor should add an ‘emphasis of matter’ paragraph to the auditor's report where the auditor considers it necessary to draw users’ attention to a matter or matters presented or disclosed in the financial statements that are of such importance that they are fundamental to users’ understanding of the financial statements. The auditor should add an ‘other matter’ paragraph to the auditor's report where the auditor considers it necessary to draw users’ attention to any matter or matters other than those presented or disclosed in the financial statements that are relevant to users’ understanding of the audit, the auditor's responsibilities or the auditor's report. According to ISA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report the emphasis of matter paragraph should be included immediately after the opinion on the financial statements paragraph and shall: + use the heading ‘Emphasis of Matter’ + include a clear reference to the matter being emphasised and to where relevant disclosures can be found in the financial statements + indicate that the auditor's opinion is not modified in respect of the issue dealt with Similarly, an ‘other matter paragraph’ should be included immediately after the opinion of the financial statements paragraph and any Emphasis of Matter paragraph or elsewhere in the auditor's report if the content of the Other Matter paragraph is relevant to the Other Reporting Responsibilities section. If the auditor expects to include and Emphasis of Matter or Other Matter paragraph in the auditor's report, the auditor shall communicate with those charged with governance regarding this expectation and the proposed wording of the paragraph. ISAs gives the following examples of circumstances where an Emphasis of Matter paragraph could be included: + Anuncertainty relating to the future outcome of exceptional litigation or regulatory action + Asignificant subsequent event that occurs between the date of the financial statements and the date of the auditor's report + Early application of a new accounting standard that has a material effect on the financial statements + Amajor catastrophe that has had a significant effect on the entity's financial position The standard makes it clear that an Emphasis of Matter paragraph is not a substitute for a modified opinion or for reporting a material uncertainty relating to going concern. Examples of where an auditor's report could include an ‘other matter’ paragraph are: + where the prior period financial statements were audited by another auditor + where the prior period financial statements were not audited Worked example: Modified report - unmodified opinion - emphasis of matter A firm being audited is awaiting the outcome of a lawsuit and as a result itis not possible to quantify the effect this will have on the financial statements. The details are as follows: + A lawsuit alleges that the company has infringed certain patent rights and claims royalties and punitive damages. The company has filed a counter action, and preliminary hearings and discovery proceedings on both actions are in progress. + The ultimate outcome of the matter cannot presently be determined, and no provision for any liability that may result has been made in the financial statements. + The company makes relevant disclosures in the financial statements. Audit and Assurance ICAB 2024 
