Question

The IAASB recently revised its standards related to audit reporting. ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements, requires the auditor’s report to include the following paragraphs under the headings “Basis for Opinion” and “Auditor’s Responsibilities for the Audit of the Financial Statements”:

Basis for Opinion

We conducted our audit in accordance with ISAs. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in [the home country] and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our Objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

a. How does the information in the preceding paragraphs compare to the information in the Basis for Opinion and Auditor’s Responsibility sections in the standard unmodified opinion audit report example for a nonpublic company shown in Figure 3-1
b. How does the information in the preceding paragraphs compare to the information in the Basis for Opinion section in the standard unmodified opinion audit report example for a public company shown in Figure 3-3
c. Discuss which of the three audit reports, in your opinion, provides greater auditor communications to users of the financial statements.

Answer 1

a.

There are a number of differences between the ISA 700 auditor’s report and the unmodified opinion audit report for nonpublic entities.

1. The ISA report notes that the audit was conducted in accordance with ISA standards rather than U.S. GAAS.

2. The ISA report includes a sentence explicitly stating that the auditor is independent and that the auditor has complied with the IESBA Code. The only reference to independence in the report in Figure 3-1 is in the report title.

3. The unmodified opinion audit report for nonpublic entities includes a description of what the audit entails, including the auditor’s consideration of internal control over financial reporting, accounting policies, accounting estimates, and the overall presentation of the financial statements. That report also explicitly notes that the auditor is not providing an opinion on internal control. The ISA report does not include similar disclosures.

4. While both reports acknowledge that the auditor obtains reasonable assurance, the ISA report provides additional information that emphasizes that reasonable assurance is not a guarantee.

5. While the wording differs between the two reports, both the ISA report and the unmodified opinion audit report for nonpublic entities recognize that the audit entails the performance of procedures to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Both reports also include a statement containing the auditor’s conclusion that the audit evidence obtained provides a basis for the opinion issued.

b.

There are a number of differences between the ISA 700 auditor’s report and the standard unmodified opinion audit report for public companies.

1. The ISA report notes that the audit was conducted in accordance with ISA standards rather than PCAOB auditing standards.

2. The ISA report includes a sentence explicitly stating that the auditor is independent and that the auditor has complied with the IESBA Code. The audit report for public companies does not have the same disclosure.

3. The unmodified opinion audit report for public companies includes a brief description of what the audit entails, including the examination of evidence on a test basis and the assessment of accounting principles used and significant estimates made by management, and the overall financial statement presentation. The ISA report does not include similar disclosures.

4. While both reports acknowledge that the auditor obtains reasonable assurance, the ISA reports provides additional information about that including emphasis that reasonable assurance is not a guarantee.

5. While the wording differs between the two reports, both the ISA report and the unmodified opinion audit report for public companies recognize that the audit entails the performance of procedures to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Both reports also include a statement containing the auditor’s conclusion that the audit evidence obtained provides a basis for the opinion issued.

c.

The ISA report’s discussion about the importance of auditor independence provides more explicit emphasis on the independence of the auditor, which may be a helpful reminder to users of the financial statements. Additionally, the expanded discussion about the concept of reasonable assurance helps emphasize the fact that the audit is not a guarantee that all material misstatements will be detected. In contrast, the ISA report provides little information about the audit process and that lack of disclosure may lead to lack of user understanding about key aspects of the audit process and what the auditor has and has not done.