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Standard on Auditing 700 (Revised)Standard on Auditing 705
Presented by: Khushroo B. PanthakyAssurance Head and Western Region Practice Leader
Walker, Chandiok & Co.Chartered Accountants
At: 26th Regional Conference of WIRC of ICAINCPA, Mumbai, 16 December 2011
Agenda
• Standard on Auditing 700 (Revised) on Forming an
Opinion and Reporting on Financial Statements
• Standard on Auditing 705 on Modifications to the Opinion
in the Independent Auditor’s Report
Standard on Auditing (SA) 700 (Revised)
Forming an Opinion and Reporting on Financial Statements
Introduction
• Earlier known as SA 700 (AAS 28), “ The Auditor’s Report on Financial
Statements”
• Deals with auditor’s responsibility to form an opinion on the financial
statements (FS)
• Deals with form and content of the auditor’s report issued on General
Purpose FS
• Promotes consistency in the auditor’s report which enables global
acceptance of the auditor’s report
• Consistency also helps promote user’s understanding and identify
unusual circumstances when they occur
• Effective for audits of FS for periods beginning on or after April 1, 2011
Objectives of the Auditor
• Form an opinion on the FS based on an evaluation of the conclusions drawn from the audit evidence obtained
• Express clearly the above opinion through a written report that also
describes the basis for the opinion
Key Definitions
• General Purpose FS – includes Balance Sheet, Statement of Profit and
Loss, Cash Flow Statement (where applicable) and statements and
explanatory notes which form part thereof, issued for the use of various stakeholders, Government and their agencies and the public
• General purpose framework – A financial reporting framework
designed to meet the common financial information needs of a wide range of users. The financial reporting framework may be a fair
presentation framework or a compliance framework
• Unmodified opinion – The opinion expressed by the auditor when the
auditor concludes that the FS are prepared, in all material respects, in accordance with the applicable financial reporting framework
Key Definitions
• Fair presentation framework - A financial reporting framework that
requires compliance with the requirements of the framework and
acknowledges that:
(i) To achieve explicitly or implicitly the fair presentation of thefinancial statements, it may be necessary for management to
provide disclosures beyond those specifically required by the
framework; or
(ii) It may be explicitly necessary for management to depart from arequirement of the framework to achieve fair presentation of the
financial statements. Such departures are expected to be
necessary only in extremely rare circumstances
Key Definitions
• Compliance framework - A financial reporting framework that requires
compliance with the requirements of the framework, but does not containthe acknowledgements in (i) or (ii) above
• Reference to “Financial Reporting Standards” in this SA means the
Accounting Standards promulgated by the Accounting StandardsBoard (ASB) of the ICAI or Accounting Standards, notified by the Central
Government by publishing the same as the Companies (Accounting
Standards) Rules, 2006, or the Accounting Standards for Local Bodiespromulgated by the Committee on Accounting Standards for Local Bodies
(CASLB) of the ICAI, as may be applicable
Forming an opinion on the Financial Statements
• Opinion on whether the FS are prepared, in all material respects, in
accordance with the applicable financial reporting framework
• The auditor shall conclude as to whether he has obtained reasonableassurance about whether the FS as a whole are free from materialmisstatement, whether due to fraud or error. That conclusion shall take
into account:
(a) The auditor’s conclusion whether sufficient appropriate auditevidence has been obtained
(b) The auditor’s conclusion, whether uncorrected misstatementsare material, individually or in aggregate; and
(c) The required evaluations (summarised in subsequent slides)
Forming an opinion on the Financial Statements
The auditor shall EVALUATE
• whether the FS are prepared, in all material
respects, in accordance with the requirements
of the applicable financial reporting framework
• qualitative aspects of the entity’s accountingpractices, including indicators of possible biasin management’s judgments
Forming an opinion on the Financial Statements
The auditor shall also evaluate whether, in view of the requirements of the
applicable financial reporting framework:
(a) The FS adequately disclose the significant accounting policiesselected and applied
(b) The accounting policies selected and applied are consistent with the applicable financial reporting framework and are
appropriate
(c) The accounting estimates made by management are reasonable
Forming an opinion on the Financial Statements
(d) The information presented in the FS is relevant, reliable, comparable and understandable
(e) The FS provide adequate disclosures to enable the intended users
to understand the effect of material transactions and events on
the information conveyed in the FS; and
(f) The terminology used in the FS, including the title of each FS, is appropriate
Forming an opinion on the Financial Statements
In accordance with the fair presentation framework,the auditor shall evaluate whether the FS achieve
fair presentation, including consideration of:
a) The overall presentation, structure and content of the FS; and
b) Whether the FS, including the related notes,
represent the underlying transactions and
events in a manner that achieves fair presentation
The auditor shall also evaluate whether the FS adequately refer to or describe
the applicable financial reporting framework
Form of Opinion
Unmodified OpinionWhen the auditor concludes that the FS are prepared, in all material
respects, in accordance with the applicable financial reporting framework
Form of Opinion
Modified Opinion (SA 705) – Under what circumstances
When the auditor concludes that, based on audit evidence obtained, the FS as a whole are ‘not free’ from material misstatement; or
Is unable to obtain sufficient appropriate audit evidence to conclude
that the FS as a whole are free from material misstatement
Form of Opinion
Modified Opinion (SA 705)• If FS do not achieve fair presentation, the auditor shall discuss the matter
with management and, accordingly determine the need for modified opinion
• When the FS are prepared using the compliance framework, evaluation of fair presentation is not required. However, if under extremely rare
circumstances, the auditor concludes that such FS are misleading, the
auditor shall discuss the matter with management and accordingly
communicate it in the auditor’s report
Auditor’s report
• Shall be in writing
• Shall have a title clearly indicating report of an independent auditor
• Shall be addressed as required by the circumstances of the
engagement
• The introductory paragraph in the report shall:
(a) Identify the entity whose FS have been audited;
(b) State that the FS have been audited;
(c) Identify the title of each statement that comprises the FS;
(d) Refer to the summary of significant accounting policies and other
explanatory information; and
(e) Specify the date or period covered by each statement comprising
the FS.
Auditor’s report – Management’s Responsibility section
• The auditor’s report need not refer specifically to “management”, but
shall use the term that is appropriate in the context of the legal and/or
regulatory framework applicable to the entity. In case of some entities, the
appropriate reference may be to Those Charged With Governance (TCWG)
• The auditor’s report shall include a section with the heading Management’s[or other appropriate term] Responsibility for the Financial Statements”
• Management’s responsibility for the preparation of the FS is described in the
terms of the audit engagement. The description shall include an explanation
that management is responsible for the preparation of the FS
• This responsibility includes the design, implementation and maintenanceof internal control relevant to the preparation of FS that are free from
material misstatement, whether due to fraud or error
Auditor’s report – Management’s Responsibility section
• Where the FS are prepared in accordance with a fair presentation
framework, the explanation of management’s responsibility for the FS
shall refer to “the preparation and fair presentation of these FS”
Auditor’s report – Auditor’s Responsibility section
• The auditor’s report shall include a section with the heading “Auditor’sResponsibility”
• It shall state that the responsibility of the auditor is to express anopinion on the FS based on the audit
• It shall state that the audit was conducted in accordance with Standardson Auditing issued by the ICAI. It shall also explain that those
Standards require that the auditor comply with ethical requirements and
that the auditor planned and perform the audit to obtain reasonable
assurance about whether the FS are free from material misstatement
Auditor’s report – Auditor’s Responsibility section
• It shall describe an audit by stating that:
a) An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the FS;
b) The procedures selected depend on the auditor’s judgment,including the assessment of the risks of material misstatement of the
FS, whether due to fraud or error
c) In making those risk assessments, the auditor considers internal
control relevant to the entity’s preparation of the FS in order todesign audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on theeffectiveness of the entity’s internal control
Auditor’s report – Auditor’s Responsibility section
d. In circumstances when the auditor also has a responsibility to
express an opinion on the effectiveness of internal control in
conjunction with the audit of the FS, the auditor shall omit thephrase that the auditor’s consideration of internal control is not for
the purpose of expressing an opinion on the effectiveness of internal
control; and
e. An audit also includes evaluating the appropriateness of theaccounting policies used and the reasonableness of accountingestimates made by management, as well as the overallpresentation of the FS
Auditor’s report– Auditor’s Responsibility section
• Where the FS are prepared in accordance with a fair presentation
framework, the description of the audit in the auditor’s report shall refer to
“the entity’s preparation and fair presentation of the FS”
• It shall state whether the auditor believes that the audit evidence obtained
is sufficient and appropriate to provide a basis for the auditor’s opinion
Auditor’s opinion
• The auditor’s report shall include a section with the heading “Opinion”
• When expressing an unmodified opinion on FS prepared in accordance
with a fair presentation framework, the auditor’s opinion shall, unless
otherwise required by law or regulation, use one of the following phrases,
which are regarded as being equivalent:
a) The FS present fairly, in all material respects, in accordance with
[the applicable financial reporting framework]; or
b) The FS give a true and fair view of ------- in accordance with [the
applicable financial reporting framework]
• When expressing an unmodified opinion on FS prepared in accordance
with a compliance framework, the auditor’s opinion shall be that the FS
are prepared, in all material respects, in accordance with [the applicable
financial reporting framework]
Auditor’s opinion
When the applicable financial reporting framework
encompasses financial reporting standards and
legal or regulatory requirements, the framework is
identified in such terms as “………..the
information required by the Companies Act, 1956, in
the manner so required and (give a true and fair
view) in conformity with the accounting principles
generally accepted in India”.
Other Reporting Responsibilities
• If the auditor addresses other reporting responsibilitiesin the auditor’s report in addition to the responsibility
under the SAs, these shall be in a separate section inthe auditor’s report and sub-titled “Report on Other
Legal and Regulatory Requirements,” or otherwise as
appropriate to the content of the section
• The “Report on Other Legal and Regulatory
Requirements” shall follow the “Report on the Financial
Statements.”
• The separate section helps clearly distinguish them
from the auditor’s responsibility under the SAs
Other Requirements on Auditor’s report
• The auditor’s report shall be signed in the personal name with
membership number and the name of the audit firm with registration
number
• The auditor’s report shall be dated no earlier than the date on which the
auditor has obtained sufficient appropriate audit evidence on which to
base the auditor’s opinion on the FS, including evidence that:
a) All the statements that comprise the FS, including the related notes,
have been prepared; and
b) Those with the recognised authority have asserted that they have
taken responsibility for those FS.
• The auditor’s report shall name specific location, which is ordinarily the
city where the audit report is signed
Auditor’s report for audits conducted in accordance with SA and ISA
In addition to compliance with SAs, the auditor may have complied withthe International Standards on Auditing (ISAs). In such circumstances,
the auditor’s report may refer to ISAs in addition to the SAs, but the auditor
shall do so only if:
a) There is no conflict between the requirements in SAs and those in
ISAs that would lead the auditor (i) to form a different opinion, or (ii)
not to include an Emphasis of Matter paragraph that, in the
particular circumstances, is required by ISAs; and
b) The auditor’s report includes, at a minimum, each of the elementsset out in the previous slide when the auditor uses the layout or
wording specified by the SAs. Reference to law or regulation shall
be read as reference to the SAs. The auditor’s report shall thereby
identify such SAs.
Reference to more than one Financial Reporting Framework
• In some cases, the FS may represent that they are prepared in
accordance with two financial reporting frameworks (e.g., the national
framework and IFRS). This may be because management is required or
has chosen to prepare the FS in accordance with both frameworks
• Such description is appropriate only if the FS comply with each of the
frameworks individually and simultaneously without any need forreconciling statements
Material Modifications vis-à-vis ISA 700 – ‘Forming
an Opinion and Reporting on Financial Statements’
• Financial Reporting Standards for ISA 700 constitutes IFRS whereas for
SA 700, it represents Accounting Standards promulgated by the
Accounting Standards Board (ASB) of ICAI or notified by the Central
Government as part of Companies (Accounting Standards) Rules, 2006
• ISA 700 states that the auditor’s report shall name the location in thejurisdiction where the auditor practices. The requirement of mentioning
the auditor’s address has been replaced with the place of signature,
which is the name of the specific location, ordinarily the city where the audit
report is signed
• ISA 700 explains who is eligible for signing the auditor’s report in different
situations. In India, audit report is signed in the personal name of theauditor and in the name of the audit firm. The partner/proprietor signing
the audit report also needs to mention the firm registration number,
wherever applicable, and the membership number assigned by ICAI
Standard on Auditing (SA) 705
Modifications to the Opinion in the Independent Auditor’s Report
Introduction
• This SA deals with the auditor’s responsibility to issue an appropriate
report in circumstances when, in forming an opinion in accordance with SA
700 (Revised), a modification to the auditor’s opinion is necessary
• This SA establishes three types of modified opinions, namely, a
qualified opinion, an adverse opinion, and a disclaimer of opinion. The
decision on type of modified opinion depends upon:
a) The nature of the matter giving rise to the modification, i.e., whether the
FS are materially misstated or, in the case of an inability to obtain
sufficient appropriate audit evidence, may be materially misstated;
b) The auditor’s judgment about the pervasiveness of the effects or
possible effects of the matter on the FS
• This SA is effective for audits of FS beginning on or after April 1, 2011
Objective
A modified opinion on the FS is necessary when:
a) The auditor concludes, based on the audit evidence obtained, that
the FS as a whole are not free from material misstatement; or
b) The auditor is unable to obtain sufficient appropriate auditevidence to conclude that the FS as a whole are free from material
misstatement.
Definitions
• Pervasive – A term used to describe the effects on the FS of
misstatements or the possible effects on the FS of misstatements, if any,
that are undetected due to an inability to obtain sufficient appropriateaudit evidence. Pervasive effects on the FS are those that, in the
auditor’s judgment:
a) Are not confined to specific elements, accounts or items of the FS;
b) If so confined, represent or could represent a substantial proportion
of the FS; or
c) In relation to disclosures, are fundamental to users’ understanding
of the FS
• Modified opinion – A qualified opinion, an adverse opinion or a
disclaimer of opinion
Types of Modified Opinions
Qualified OpinionThe auditor shall express a qualified opinion when:
a) The auditor, having obtained sufficient appropriate audit evidence,
concludes that misstatements, individually or in the aggregate, arematerial, but not pervasive, to the FS; or
b) The auditor even though unable to obtain sufficient appropriate audit
evidence concludes that the possible effects on the FS of undetected
misstatements, if any, could be material but not pervasive
Adverse OpinionThe auditor shall express an adverse opinion when the auditor, having
obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are both, material andpervasive to the Financial Statements
Types of Modified Opinions
Disclaimer of Opinion
• The auditor shall disclaim an opinion when the auditor is unable to obtainsufficient appropriate audit evidence on which to base the opinion, and
the auditor concludes that the possible effects on the FS of undetected
misstatements, if any, could be both material and pervasive
• The auditor shall disclaim an opinion when, in extremely rare
circumstances involving multiple uncertainties, the auditor concludes
that, notwithstanding having obtained sufficient appropriate audit evidence
regarding each of the individual uncertainties, it is not possible to form an
opinion on the FS due to the potential interaction of the uncertaintiesand their possible cumulative effect on the FS
Management imposed limitation after engagement acceptance
• If, after accepting the engagement, the auditor becomes aware of
management imposed limitation on the scope of the audit which is
likely to result in a qualified opinion or disclaimer of opinion, the auditor
shall request that management remove the limitation
• If management refuses to do so, the auditor shall communicate thematter to TCWG and determine whether it is possible to perform
alternative procedures to obtain sufficient appropriate audit evidence
Management imposed limitation after engagement acceptance
• If the auditor is unable to obtain sufficient appropriate audit evidence, the
auditor shall determine the implications as follows:
a) If the possible effects on the FS of undetected misstatements, could bematerial but not pervasive, the auditor shall qualify the opinion; or
b) If the possible effects on the FS of undetected misstatements, could beboth material and pervasive such that a qualification of the opinion
would be inadequate to communicate the gravity of the situation, the
auditor shall:
i) Resign from the audit, where practicable and not prohibited by law or
regulation; or
ii) If resignation from the audit before issuing the auditor’s report is not
practicable (for eg public sector entities) or possible, disclaim anopinion on the FS
Form and content of Modified Audit Report
• When the auditor modifies the opinion, he shall, include a paragraph in the
auditor’s report that provides a description of the matter giving rise to the
modification
• The auditor shall place this paragraph immediately before the opinionparagraph in the auditor’s report and use the heading “Basis for Qualified
Opinion”, “Basis for Adverse Opinion”, or “Basis for Disclaimer of Opinion”,
as appropriate
• If there is a material misstatement of the FS that relates to specific amounts
in the FS, the auditor shall include in the basis for modification paragraph, a
description and quantification of the financial effects of the
misstatement, unless impracticable.
• If it is not practicable to quantify the financial effects, the auditor shall stateso in the basis for modification paragraph
Opinion paragraph in Modified Audit Report
• When the auditor modifies the audit opinion, he shall use the heading“Qualified Opinion”, “Adverse Opinion”, or “Disclaimer of Opinion”, as
appropriate, for the opinion paragraph
• When the auditor expresses a qualified opinion due to a material
misstatement in the FS, the auditor shall state in the opinion paragraph that,
except for the effects of the matter(s) described in the Basis for Qualified
Opinion paragraph:
a) The FS present fairly, in all material respects in accordance with the
applicable financial reporting framework when reporting in accordance
with a fair presentation framework; or
b) The FS have been prepared, in all material respects, in accordance
with the applicable financial reporting framework when reporting in
accordance with a compliance framework
Opinion paragraph in Modified Audit Report
• When the modification arises from an inability to obtain sufficient
appropriate audit evidence, the auditor shall use the corresponding phrase
“except for the possible effects of the matter(s)...” for the modified
opinion
• When the auditor expresses an adverse opinion, he shall state in the
opinion paragraph that, because of the significance of the matter(s)described in the Basis for Adverse Opinion paragraph:
a) The FS do not present fairly in accordance with the applicable
financial reporting framework, when reporting is in accordance with a
fair presentation framework; or
b) The FS have not been prepared, in all material respects, in
accordance with the applicable financial reporting framework when
reporting is in accordance with a compliance framework
Description of Auditor’s responsibility – Modified Opinion
• In a qualified or adverse opinion, the auditor shall amend the descriptionof the auditor’s responsibility to state that the auditor believes that the
audit evidence obtained is sufficient and appropriate to provide a basis for
the auditor’s modified audit opinion
• In a disclaimer of opinion, the auditor shall amend the introductoryparagraph of the auditor’s report to state that the auditor was engaged to
audit the FS. The auditor shall also amend the description of the auditor’s
responsibility and the scope of the audit to state only the following: “Our
responsibility is to express an opinion on the FS based on conducting the
audit in accordance with SAs issued by the ICAI. Because of the matter(s)
described in the Basis for Disclaimer of Opinion paragraph, however, we
were not able to obtain sufficient appropriate audit evidence to provide a
basis for an audit opinion”
Communication with Those Charged With Governance (TCWG)
• When the auditor expects to modify the opinion in the auditor’s report, the
auditor shall communicate with TCWG the circumstances that led to the
expected modification and the proposed wording of the modification
• The auditor should seek the concurrence of TCWG regarding the facts of
the matter(s) giving rise to the expected modification(s), or to confirmmatters of disagreement with management as such; and
• TCWG to have an opportunity, where appropriate, to provide the auditorwith further information and explanations in respect of the matter(s)
giving rise to the expected modification(s)
Summary on Modified Opinions – a snapshot
Nature of the Mattergiving rise to theModification
Auditor’s Judgment about the
Pervasiveness of the Effects; or Possible Effects on the FS
Material but Not
Pervasive
Material and Pervasive
FS are materially
misstated
Qualified opinion Adverse opinion
Inability to obtain
sufficient appropriate
audit evidence
Qualified opinion Disclaimer of opinion
Material Misstatement
A material misstatement of the FS may arise in relation to:
a) The appropriateness of the selected accounting policies;
b) The application of the selected accounting policies; or
c) The appropriateness or adequacy of disclosures in the FS
Material modifications vis-à-vis ISA 705, “Modifications to the Opinion in the Independent Auditor’s Report
ISA 705 requires the auditor to include in the basis for modification paragraph,
a description and quantification of the financial effect of themisstatement. Since the said paragraph covers only the effect of the
individual quantification of the misstatement on the FS, that paragraph hasbeen changed also to include the effect of the aggregate quantificationsof the misstatements on the FS
Consultation process
• It is important to consult and seek the views from
technical experts within the firm OR from other peers in
the profession in circumstances where a modified report
is proposed to be issued, particularly when the modified
opinion may reveal a thin line to decide between a
qualified or a disclaimer or an adverse opinion
• Consulting is also one of the mandatory requirements
under SQC 1 and therefore needs to be religiously
adhered to
Thank you very much for a patient listening
