ICAI Notes: Audit Report | Auditing and Ethics for CA Intermediate PDF Download

 Page 1


    
 
CHAPTER 
8 
 
LEARNING OUTCOMES 
 
 
  
AUDIT REPORT 
 
 
 
After studying this chapter, you would be able to understand: 
? The objectives of the auditor as per SA 700 (Revised), “Forming an Opinion 
and Reporting on Financial Statements.” Also, whether the auditor has 
obtained reasonable assurance. Understand the evaluation by the auditor 
and Qualitative Aspects of the Entity’s Accounting Practices. Elements of 
Auditor’s report. 
? The basics of Standard on Auditing (SA) 705 “Modifications to the 
Opinion in the Independent Auditor’s Report”. 
? The basics of SA 701- “Communicating Key Audit Matters in the 
Independent Auditor’s Report”. 
? The Emphasis of Matter Paragraphs and Other Matter Paragraphs in the 
Independent Auditor’s Report as per SA 706. 
? SA 710 - “Comparative Information- Corresponding figures and 
Comparative financial statements”. 
? The basics of SA 600 – “Using the work of Another Auditor”. 
? SA 299 – “Joint Audit of Financial Statements”. 
? Reporting requirements under the Companies Act, 2013 
? Companies (Auditor’s Report) Order, 2020. 
? Practicality of above concepts by studying through examples and case 
studies.  
© The Institute of Chartered Accountants of India
Page 2


    
 
CHAPTER 
8 
 
LEARNING OUTCOMES 
 
 
  
AUDIT REPORT 
 
 
 
After studying this chapter, you would be able to understand: 
? The objectives of the auditor as per SA 700 (Revised), “Forming an Opinion 
and Reporting on Financial Statements.” Also, whether the auditor has 
obtained reasonable assurance. Understand the evaluation by the auditor 
and Qualitative Aspects of the Entity’s Accounting Practices. Elements of 
Auditor’s report. 
? The basics of Standard on Auditing (SA) 705 “Modifications to the 
Opinion in the Independent Auditor’s Report”. 
? The basics of SA 701- “Communicating Key Audit Matters in the 
Independent Auditor’s Report”. 
? The Emphasis of Matter Paragraphs and Other Matter Paragraphs in the 
Independent Auditor’s Report as per SA 706. 
? SA 710 - “Comparative Information- Corresponding figures and 
Comparative financial statements”. 
? The basics of SA 600 – “Using the work of Another Auditor”. 
? SA 299 – “Joint Audit of Financial Statements”. 
? Reporting requirements under the Companies Act, 2013 
? Companies (Auditor’s Report) Order, 2020. 
? Practicality of above concepts by studying through examples and case 
studies.  
© The Institute of Chartered Accountants of India
 
 
 
 
AUDITING AND ETHICS  
 
8.2 
 
 
 
 
Audit process culminates in formation of opinion by an auditor and expression of 
the same by means of audit report. Audit report, therefore, is the final outcome of 
an audit exercise.  It is the document on which reliance is placed by users of 
financial statements as it contains auditor’s opinion. Audit evidence obtained by 
performing various audit procedures, ultimately, leads to crystallization of opinion 
by auditor contained in audit report. 
Understanding enormous significance of audit report, Sameer was unequivocal in 
his mind regarding some kind of consistency and comparability in reporting. It 
logically led him to next question- What are basic elements of an audit report? How 
does it look like?  Is it necessary for an auditor to prepare audit report using these 
elements? 
A counter question struck his mind in no time. If there is consistency and 
comparability in reporting, how does an auditor report in specific situations?  
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
Page 3


    
 
CHAPTER 
8 
 
LEARNING OUTCOMES 
 
 
  
AUDIT REPORT 
 
 
 
After studying this chapter, you would be able to understand: 
? The objectives of the auditor as per SA 700 (Revised), “Forming an Opinion 
and Reporting on Financial Statements.” Also, whether the auditor has 
obtained reasonable assurance. Understand the evaluation by the auditor 
and Qualitative Aspects of the Entity’s Accounting Practices. Elements of 
Auditor’s report. 
? The basics of Standard on Auditing (SA) 705 “Modifications to the 
Opinion in the Independent Auditor’s Report”. 
? The basics of SA 701- “Communicating Key Audit Matters in the 
Independent Auditor’s Report”. 
? The Emphasis of Matter Paragraphs and Other Matter Paragraphs in the 
Independent Auditor’s Report as per SA 706. 
? SA 710 - “Comparative Information- Corresponding figures and 
Comparative financial statements”. 
? The basics of SA 600 – “Using the work of Another Auditor”. 
? SA 299 – “Joint Audit of Financial Statements”. 
? Reporting requirements under the Companies Act, 2013 
? Companies (Auditor’s Report) Order, 2020. 
? Practicality of above concepts by studying through examples and case 
studies.  
© The Institute of Chartered Accountants of India
 
 
 
 
AUDITING AND ETHICS  
 
8.2 
 
 
 
 
Audit process culminates in formation of opinion by an auditor and expression of 
the same by means of audit report. Audit report, therefore, is the final outcome of 
an audit exercise.  It is the document on which reliance is placed by users of 
financial statements as it contains auditor’s opinion. Audit evidence obtained by 
performing various audit procedures, ultimately, leads to crystallization of opinion 
by auditor contained in audit report. 
Understanding enormous significance of audit report, Sameer was unequivocal in 
his mind regarding some kind of consistency and comparability in reporting. It 
logically led him to next question- What are basic elements of an audit report? How 
does it look like?  Is it necessary for an auditor to prepare audit report using these 
elements? 
A counter question struck his mind in no time. If there is consistency and 
comparability in reporting, how does an auditor report in specific situations?  
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
AUDIT REPORT 
 
 8.3 
Shouldn’t there be flexibility in reporting in particular situations?  How do auditors 
do that?  If an auditor wants to highlight some matters which are necessary to 
understanding of users of financial statements, how the same can be ensured? 
And what about those issues which were identified as significant issues during the 
audit? Can such issues and manner of addressing such issues be reported? What 
kind of audit procedures were performed on those significant matters? There must 
be some sort of reporting mechanism for these issues.  In absence of such type of 
flexibility in reporting, audit report can become too mechanical. He was mulling 
deeply. 
What if auditor wants to express a modified opinion? What are different types of it 
and under what circumstances different types of modified opinion can be given by 
auditor? Does auditor have to state basis for such an opinion compulsorily? These 
were probing thoughts criss-crossing his mind. 
He was also considering about reporting requirements if some matters are 
specifically required to be reported in accordance with law.  Particularly, in case of 
companies, are there some specific matters? How reporting is to be made by 
auditor in respect of such matters? 
Amidst this maze of thoughts, Shekhar called him to inform that, audit of company 
his team was doing, is now over and audit report has been issued. Wanting to know 
about outcome, he was asked by Shekhar to go to website of the company and go 
through audit report himself. 
INTRODUCTION 
Management is responsible for the preparation of the ?nancial statements. 
Management also accepts responsibility for necessary internal controls to enable 
the preparation of ?nancial statements that are free from material misstatement, 
whether due to fraud or error. 
The purpose of an audit is to enhance the degree of con?dence of intended users 
of the ?nancial statements. The aforesaid purpose is achieved by the expression of 
an independent reporting by the auditor as to whether the ?nancial statements 
exhibit a true and fair view of the a?airs of the entity. 
Thus, an audit report is an opinion drawn on the entity’s ?nancial statements to 
make sure that the records are true and fair representation of the transactions they 
© The Institute of Chartered Accountants of India
Page 4


    
 
CHAPTER 
8 
 
LEARNING OUTCOMES 
 
 
  
AUDIT REPORT 
 
 
 
After studying this chapter, you would be able to understand: 
? The objectives of the auditor as per SA 700 (Revised), “Forming an Opinion 
and Reporting on Financial Statements.” Also, whether the auditor has 
obtained reasonable assurance. Understand the evaluation by the auditor 
and Qualitative Aspects of the Entity’s Accounting Practices. Elements of 
Auditor’s report. 
? The basics of Standard on Auditing (SA) 705 “Modifications to the 
Opinion in the Independent Auditor’s Report”. 
? The basics of SA 701- “Communicating Key Audit Matters in the 
Independent Auditor’s Report”. 
? The Emphasis of Matter Paragraphs and Other Matter Paragraphs in the 
Independent Auditor’s Report as per SA 706. 
? SA 710 - “Comparative Information- Corresponding figures and 
Comparative financial statements”. 
? The basics of SA 600 – “Using the work of Another Auditor”. 
? SA 299 – “Joint Audit of Financial Statements”. 
? Reporting requirements under the Companies Act, 2013 
? Companies (Auditor’s Report) Order, 2020. 
? Practicality of above concepts by studying through examples and case 
studies.  
© The Institute of Chartered Accountants of India
 
 
 
 
AUDITING AND ETHICS  
 
8.2 
 
 
 
 
Audit process culminates in formation of opinion by an auditor and expression of 
the same by means of audit report. Audit report, therefore, is the final outcome of 
an audit exercise.  It is the document on which reliance is placed by users of 
financial statements as it contains auditor’s opinion. Audit evidence obtained by 
performing various audit procedures, ultimately, leads to crystallization of opinion 
by auditor contained in audit report. 
Understanding enormous significance of audit report, Sameer was unequivocal in 
his mind regarding some kind of consistency and comparability in reporting. It 
logically led him to next question- What are basic elements of an audit report? How 
does it look like?  Is it necessary for an auditor to prepare audit report using these 
elements? 
A counter question struck his mind in no time. If there is consistency and 
comparability in reporting, how does an auditor report in specific situations?  
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
AUDIT REPORT 
 
 8.3 
Shouldn’t there be flexibility in reporting in particular situations?  How do auditors 
do that?  If an auditor wants to highlight some matters which are necessary to 
understanding of users of financial statements, how the same can be ensured? 
And what about those issues which were identified as significant issues during the 
audit? Can such issues and manner of addressing such issues be reported? What 
kind of audit procedures were performed on those significant matters? There must 
be some sort of reporting mechanism for these issues.  In absence of such type of 
flexibility in reporting, audit report can become too mechanical. He was mulling 
deeply. 
What if auditor wants to express a modified opinion? What are different types of it 
and under what circumstances different types of modified opinion can be given by 
auditor? Does auditor have to state basis for such an opinion compulsorily? These 
were probing thoughts criss-crossing his mind. 
He was also considering about reporting requirements if some matters are 
specifically required to be reported in accordance with law.  Particularly, in case of 
companies, are there some specific matters? How reporting is to be made by 
auditor in respect of such matters? 
Amidst this maze of thoughts, Shekhar called him to inform that, audit of company 
his team was doing, is now over and audit report has been issued. Wanting to know 
about outcome, he was asked by Shekhar to go to website of the company and go 
through audit report himself. 
INTRODUCTION 
Management is responsible for the preparation of the ?nancial statements. 
Management also accepts responsibility for necessary internal controls to enable 
the preparation of ?nancial statements that are free from material misstatement, 
whether due to fraud or error. 
The purpose of an audit is to enhance the degree of con?dence of intended users 
of the ?nancial statements. The aforesaid purpose is achieved by the expression of 
an independent reporting by the auditor as to whether the ?nancial statements 
exhibit a true and fair view of the a?airs of the entity. 
Thus, an audit report is an opinion drawn on the entity’s ?nancial statements to 
make sure that the records are true and fair representation of the transactions they 
© The Institute of Chartered Accountants of India
 
 
 
 
AUDITING AND ETHICS  
 
8.4 
claim to represent. This involves considering whether the ?nancial statements have 
been prepared in accordance with an acceptable ?nancial reporting framework 
applicable to the entity under audit. It is also necessary to consider whether the 
?nancial statements comply with the relevant statutory requirements. The main 
users of audit report are shareholders, members and all other stakeholders of the 
company. 
1. FORMING AN OPINION AND REPORTING ON  
FINANCIAL STATEMENTS  
SA 700 (Revised)- “Forming an Opinion and Reporting on Financial Statements”, 
deals with the auditor’s responsibility to form an opinion on the financial 
statements. It also deals with the form and content of the auditor’s report issued 
as a result of an audit of financial statements. 
The requirements of this SA are aimed at addressing an appropriate balance 
between the need for consistency and comparability in auditor reporting globally 
and the need to increase the value of auditor reporting by making the information 
provided in the auditor’s report more relevant to users. This SA promotes 
consistency in the auditor’s report, but recognizes the need for flexibility to 
accommodate particular circumstances of individual jurisdictions. Consistency in 
the auditor’s report, when the audit has been conducted in accordance with SAs, 
promotes credibility in the global marketplace by making more readily identifiable 
those audits that have been conducted in accordance with globally recognized 
standards. It also helps to promote the user’s understanding and to identify unusual 
circumstances when they occur. 
1.1 Objective of the Auditor  
The objectives of the auditor as per SA 700 (Revised) are: 
  
To form an opinion on the ?nancial statements based on an 
evaluation of the conclusions drawn from the audit evidence 
obtained; and
To express clearly that opinion through a written report.
© The Institute of Chartered Accountants of India
Page 5


    
 
CHAPTER 
8 
 
LEARNING OUTCOMES 
 
 
  
AUDIT REPORT 
 
 
 
After studying this chapter, you would be able to understand: 
? The objectives of the auditor as per SA 700 (Revised), “Forming an Opinion 
and Reporting on Financial Statements.” Also, whether the auditor has 
obtained reasonable assurance. Understand the evaluation by the auditor 
and Qualitative Aspects of the Entity’s Accounting Practices. Elements of 
Auditor’s report. 
? The basics of Standard on Auditing (SA) 705 “Modifications to the 
Opinion in the Independent Auditor’s Report”. 
? The basics of SA 701- “Communicating Key Audit Matters in the 
Independent Auditor’s Report”. 
? The Emphasis of Matter Paragraphs and Other Matter Paragraphs in the 
Independent Auditor’s Report as per SA 706. 
? SA 710 - “Comparative Information- Corresponding figures and 
Comparative financial statements”. 
? The basics of SA 600 – “Using the work of Another Auditor”. 
? SA 299 – “Joint Audit of Financial Statements”. 
? Reporting requirements under the Companies Act, 2013 
? Companies (Auditor’s Report) Order, 2020. 
? Practicality of above concepts by studying through examples and case 
studies.  
© The Institute of Chartered Accountants of India
 
 
 
 
AUDITING AND ETHICS  
 
8.2 
 
 
 
 
Audit process culminates in formation of opinion by an auditor and expression of 
the same by means of audit report. Audit report, therefore, is the final outcome of 
an audit exercise.  It is the document on which reliance is placed by users of 
financial statements as it contains auditor’s opinion. Audit evidence obtained by 
performing various audit procedures, ultimately, leads to crystallization of opinion 
by auditor contained in audit report. 
Understanding enormous significance of audit report, Sameer was unequivocal in 
his mind regarding some kind of consistency and comparability in reporting. It 
logically led him to next question- What are basic elements of an audit report? How 
does it look like?  Is it necessary for an auditor to prepare audit report using these 
elements? 
A counter question struck his mind in no time. If there is consistency and 
comparability in reporting, how does an auditor report in specific situations?  
CHAPTER OVERVIEW 
© The Institute of Chartered Accountants of India
 
 
AUDIT REPORT 
 
 8.3 
Shouldn’t there be flexibility in reporting in particular situations?  How do auditors 
do that?  If an auditor wants to highlight some matters which are necessary to 
understanding of users of financial statements, how the same can be ensured? 
And what about those issues which were identified as significant issues during the 
audit? Can such issues and manner of addressing such issues be reported? What 
kind of audit procedures were performed on those significant matters? There must 
be some sort of reporting mechanism for these issues.  In absence of such type of 
flexibility in reporting, audit report can become too mechanical. He was mulling 
deeply. 
What if auditor wants to express a modified opinion? What are different types of it 
and under what circumstances different types of modified opinion can be given by 
auditor? Does auditor have to state basis for such an opinion compulsorily? These 
were probing thoughts criss-crossing his mind. 
He was also considering about reporting requirements if some matters are 
specifically required to be reported in accordance with law.  Particularly, in case of 
companies, are there some specific matters? How reporting is to be made by 
auditor in respect of such matters? 
Amidst this maze of thoughts, Shekhar called him to inform that, audit of company 
his team was doing, is now over and audit report has been issued. Wanting to know 
about outcome, he was asked by Shekhar to go to website of the company and go 
through audit report himself. 
INTRODUCTION 
Management is responsible for the preparation of the ?nancial statements. 
Management also accepts responsibility for necessary internal controls to enable 
the preparation of ?nancial statements that are free from material misstatement, 
whether due to fraud or error. 
The purpose of an audit is to enhance the degree of con?dence of intended users 
of the ?nancial statements. The aforesaid purpose is achieved by the expression of 
an independent reporting by the auditor as to whether the ?nancial statements 
exhibit a true and fair view of the a?airs of the entity. 
Thus, an audit report is an opinion drawn on the entity’s ?nancial statements to 
make sure that the records are true and fair representation of the transactions they 
© The Institute of Chartered Accountants of India
 
 
 
 
AUDITING AND ETHICS  
 
8.4 
claim to represent. This involves considering whether the ?nancial statements have 
been prepared in accordance with an acceptable ?nancial reporting framework 
applicable to the entity under audit. It is also necessary to consider whether the 
?nancial statements comply with the relevant statutory requirements. The main 
users of audit report are shareholders, members and all other stakeholders of the 
company. 
1. FORMING AN OPINION AND REPORTING ON  
FINANCIAL STATEMENTS  
SA 700 (Revised)- “Forming an Opinion and Reporting on Financial Statements”, 
deals with the auditor’s responsibility to form an opinion on the financial 
statements. It also deals with the form and content of the auditor’s report issued 
as a result of an audit of financial statements. 
The requirements of this SA are aimed at addressing an appropriate balance 
between the need for consistency and comparability in auditor reporting globally 
and the need to increase the value of auditor reporting by making the information 
provided in the auditor’s report more relevant to users. This SA promotes 
consistency in the auditor’s report, but recognizes the need for flexibility to 
accommodate particular circumstances of individual jurisdictions. Consistency in 
the auditor’s report, when the audit has been conducted in accordance with SAs, 
promotes credibility in the global marketplace by making more readily identifiable 
those audits that have been conducted in accordance with globally recognized 
standards. It also helps to promote the user’s understanding and to identify unusual 
circumstances when they occur. 
1.1 Objective of the Auditor  
The objectives of the auditor as per SA 700 (Revised) are: 
  
To form an opinion on the ?nancial statements based on an 
evaluation of the conclusions drawn from the audit evidence 
obtained; and
To express clearly that opinion through a written report.
© The Institute of Chartered Accountants of India
 
 
AUDIT REPORT 
 
 8.5 
1.2 To Form Opinion – Auditor to Obtain Reasonable 
 Assurance 
The auditor shall form an opinion on whether the ?nancial statements are prepared, in 
all material respects, in accordance with the applicable ?nancial reporting framework. 
In order to form that opinion, the auditor shall conclude as to whether the auditor has 
obtained reasonable assurance about whether the ?nancial statements as a whole 
are free from material misstatement, whether due to fraud or error. 
That conclusion shall take into account: 
(a) Whether su?cient appropriate audit evidence has been obtained; 
(b) Whether uncorrected misstatements are material, individually or in 
aggregate; 
(c) The evaluations. 
1.3 Evaluations by the Auditor 
The auditor shall evaluate whether the ?nancial statements are prepared in 
accordance with the requirements of the applicable ?nancial reporting framework. 
This evaluation shall include consideration of the qualitative aspects of the entity’s 
accounting practices, including indicators of possible bias in management’s 
judgements. 
1.3.1 Qualitative Aspects of the Entity’s Accounting Practices 
1. Management makes a number of judgements about the amounts and 
disclosures in the ?nancial statements. 
2. SA 260 (Revised) contains a discussion of the qualitative aspects of 
accounting practices. 
3. In considering the qualitative aspects of the entity’s accounting practices, the 
auditor may become aware of possible bias in management’s judgements. 
The auditor may conclude that the cumulative effect of lack of neutrality, 
together with the effect of uncorrected misstatements, causes the ?nancial 
statements as a whole to be materially misstated. Indicators of a lack of 
neutrality include the following: 
© The Institute of Chartered Accountants of India