There are various audit opinions which can be expressed on a set of financial statements.

The auditor needs to consider a number of key matters:

  • Has he received all the information and explanations necessary
  • Has he carried out all the procedures needed to meet applicable auditing standards.
  • Have applicable accounting requirements been used in the preparation of the financial statements.
  • Do the financial statements give a true and fair view.


The Process of forming an audit opinion:

  • Ascertain whether all the evidence reasonably expected to be available has been obtained and has been evaluated.
  • Assess whether the effect of not gaining sufficient and relevant evidence is such that the financial statements could be misleading as a whole or in material part. The former would require a disclaimer of opinion while the latter would require an “except for” opinion.
  • Ascertain whether the financial statements are prepared in accordance with IFRS and generally accepted accounting principles.
  • Assess whether a departure from the accepted accounting principles is required to give a true and fair view and has there been adequate disclosure.
  • Assess whether any unnecessary departure from accounting principles is material or pervasive to the financial statements. A material departure will give an “except for” opinion while a pervasive departure will result in an adverse opinion.
  • Conclude as a whole whether the financial statements give a true and fair view.


Impact of the Auditor’s report on Both Matters of Opinion and Matters of Fact


Matters of opinion

  • Has the company kept proper books of account.
  • Have proper returns sufficient for the purposes of the audit been received by the auditor.
  • Have the accounts been properly prepared and do they show a true and fair view.
  • Does a financial situation exist which would require the convening of a Special Meeting Where group accounts are submitted, have the group accounts been properly prepared in accordance with the companies acts so as to give a true and fair view.


Matters of facts

  • Are the accounts in agreement with the books.
  • Has the auditor obtained all the information and explanations which are necessary for the purposes of the audit.
  • Is the information in the director’s report consistent with the financial statements.


‘Emphasis of matter’ paragraph

An auditor will use an ‘emphasis of matter’ paragraph to highlight a specific matter (when he has issued an unqualified audit report) such as a fundamental uncertainty.


Examples could include questions over the recoverability of a debtor balance or a potential liability such as a fine.

The auditor may feel that there is sufficient disclosure in the accounts and as such there is no need to issue a qualified audit report.  He may however, wish to draw the reader’s attention to this matter and hence the emphasis of matter paragraph.




The communication problem is caused by a number of factors that can be identified as:


• Understandability

Auditing is full of jargon.  There are auditing standards and guidelines and it is a technical art.  There is a language that non-auditors may find difficult to understand.  Communicating the audit opinion in a form that all people can understand can be very difficult.


• Responsibility

As far as the law is concerned the auditors are responsible for certain duties.  In addition, professional standards may apply other duties on the auditor.

Users of the financial statements however, may not have the same perception of what the auditor’s duties are i.e. the expectations gaps.

• Availability

The fact that companies now tend to publish their financial statements on their websites, means that the availability of audit reports to the general public has increased.  Auditors need to consider the risks that this brings.  It is true to say that the fact that the accounts are now available for public scrutiny adds to the perception that the auditor’s report is now addressed to more than just the shareholders.


The standard report

The standard report is designed to eliminate the problems of lack of understandability.


The report contains certain elements:

  • It is clearly addressed to shareholders,
  • There are introductory paragraphs which outline what the report refers to,
  • There are paragraphs outlining the responsibilities of the auditors and the directors,
  • There is an explanation of the basis on which the auditors have come to their conclusions,
  • There is an expression of an opinion.


However, it still includes technical terms and is still a difficult document to fully understand.  It can be argued that the existence of the standard report adds complexity to the situation and that it may be better to have tailored reports to each client’s specific situations.


Its advantages are that it should be easier for users to understand and that it should contain certain elements in common with other audit reports which can be compared like for like.




When financial information is made available electronically, the auditor must ensure that their report is not misrepresented.




The auditing practices board issued a bulletin that recommends that the directors should obtain the consent of the auditor to publish the audit report on a website.  Ideally, the matter should be clarified in the letter of engagement.


The auditor may reserve the right to give consent if they do not like the presentation of the report and the associated financial statements.


They should also ensure that their report is appropriately worded for inclusion on a website.  It should probably contain references to specific financial statements rather than reference to page numbers.




The auditor should carry out the following procedures where their report is to be published electronically.

  • Review the process of deriving the information from the hardcopy accounts.
  • Check that the information is identical to the hardcopy information.
  • Review whether the presentation has been distorted giving a different perspective from the original hardcopy.


The directors are responsible for ensuring that the hardcopy report is not tampered with once it is up on the website.




Auditors may issue special reports on summary financial statements, revised financial statements and distributions following an audit qualification.


Summarised financial statements


These may be prepared by management in order to inform user groups such as shareholders or bankers of the company’s financial position and the results of its operations.

The auditor should not report on these summarised financial statements unless he has expressed an audit opinion on the financial statements from which the summary information is derived.


Distributions following an audit qualification


Distributions in certain jurisdictions e.g. Rwanda and Ireland such as dividends can only be made out of accumulated realised profits less accumulated realised losses.  A modified audit report may state whether the subject matter of the qualification is material in determining whether a dividend can be paid.


Revised accounts


The revision of accounts may be undertaken by a revision by replacement or a revision by supplementary note.

In both case the accounts should be prepared and then approved by management as at the original date of the accounts.  The extent of any revision is limited to that resulting from facts which were known at the original date of approval.


The auditor has no duty to search for any further evidence which may affect the accounts to which the report relates.  However, if such a matter comes to his attention, he should discuss any appropriate revision with management.  If the latter is unwilling to revise the accounts, then the auditor should consider taking legal advice.



The auditor should follow specific procedures such as:

  • Review the original audit plan and the extent to which additional audit evidence is required.
  • Reassess any matters of judgment involved in the original audit.
  • Obtain evidence specific to the revised amounts.
  • Review the period after the date on which the original accounts were approved.
  • Review the revised accounts, in light of the conclusions drawn from other audit evidence obtained, to give the auditor a reasonable basis for his opinion on the accounts.
  • Consider any legal consequences of the revision.




Auditors report relevant audit matters to management and will often produce a management letter detailing control weaknesses observed during an audit.


The auditor should communicate matters of governance interest arising from the audit of financial statements with those charged with governance of an entity.


The scope is limited to those matters that specifically come to the auditor’s attention during the course of his audit.  He is not responsible for designing specific tests and procedures to identify matters of governance.


The auditor should determine the relevant persons who are charged with governance and with whom audit matters of governance interest are communicated.


To avoid misunderstandings, the engagement letter should explain that the auditor will only communicate matters that come to their attention as a result of the performance of the audit.


The engagement letter may describe the form which the communication will take, identify the relevant persons to whom the communication should go and identify any specific matters of governance which have been agreed to be communicated.


The auditor should consider matters of governance that arise from the audit of the financial statements and communicate them to those charged with governance.

Such matters would include:

  • The general approach or scope of the audit,
  • Selection of and changes in significant accounting policies,
  • The potential effect of any significant risks and exposures,
  • Significant audit adjustments,

Material uncertainties that

  • may affect the going concern basis,
  • Significant disagreements with management,
  • Expected modifications to the audit report,
  • Other matters such as weaknesses in internal controls or fraud involving management,
  • Other matters mentioned in the letter of engagement.



The auditor should consider audit matters of governance on a timely basis.

He should have regard to local laws and regulations when communicating to management.



Question 9.1


You are the audit partner in charge of WB Ltd.  The company is developing a website and its directors wish to provide full access to the audited financial statements.  What are the issues that are likely to concern you?


Question 9.2


Webup Ltd has an operational website on which customers are trading.  It was developed and installed by an outside firm but will be maintained solely by the IT manager of Webup.  There is no external maintenance agreement in place.  The cost of the website development was substantial and it made quite a dent in the profit and loss account figures.  Webup has an arrangement with a couple of other companies to have free advertising on each others’ websites.  This is not reflected in the financial statements.

During the audit what evidence would you seek in relation to the above information and are there any implications for your audit report.


Question 9.3


You are the audit senior on High Street Fashions (HSF) Ltd.  The company owns a chain of upmarket clothing stores and also has a manufacturing facility doing its own brand.  Its own brand accounts for 50% of sales and inventory.  Profits for the year have improved to RWF7m from RWF3m last year and the balance sheet is healthy at RWF23m up from RWF15m last year.


The stores are revalued every year with a couple this year achieving sharp increases due to a booming property market.  In addition, a number of stores had refits.  The increase in assets due to the refits and revaluations is RWF10m.   Its manufacturing facility is not revalued.


The company’s stock is RWF1.6m and is valued at the lower of cost or net realisable value.  The cost is derived after deducting a suitable margin from the selling price.


Exchanges and refunds are common in the stores as none of them has suitable fitting/changing rooms.  HSF does not make any provision in the accounts for any refunds.


Discuss the implications on the audit report of the above points.


Question 9.4


What are the types of audit opinions that can be given on an audit report?

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