Audit Report and Certificates
This domain tests audit reporting under SAs 700, 701, 705, 706, 570 and 720: opinion types, basis for opinion, going concern, emphasis of matter, other matter, key audit matters, and the distinction between a report and a certificate.
Core rules
- An unmodified opinion states that the financial statements give a true and fair view.
- A modified opinion is qualified, adverse or a disclaimer, depending on whether the matter is material and whether it is pervasive.
- SA 570 requires evaluation of going concern and disclosure of material uncertainty.
- SA 706 permits emphasis of matter and other matter paragraphs; these do not modify the opinion.
- SA 701 requires key audit matters for listed companies; they are selected from matters communicated with those charged with governance.
- An audit report expresses an opinion; a certificate is a formal assertion on specific facts.
Worked example
Inventory represents 40% of total assets, but records are destroyed and the auditor cannot obtain evidence by alternative procedures. The possible effect is material and pervasive, so the auditor issues a disclaimer of opinion. If the affected inventory were only 8% of assets and alternative procedures provided sufficient evidence, an unmodified opinion could still be appropriate.
Traps
Using “subject to” without quantifying the effect; treating an emphasis of matter paragraph as a qualification; and including key audit matters in every report.
Exam focus
Choosing the correct opinion and drafting the basis for opinion.