Question

Question 5: Audit report explained International Standard on Auditing (New Zealand) 700 (ISA (NZ) 700) contains the following recommended wording concerning materiality and internal controls for an unmodified audit opinion on financial statements under the heading ‘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 (NZ) 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 . . . . . . As part of an audit in accordance with ISAs (NZ), we exercise professional judgement and maintain professional scepticism throughout the audit. We also….Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control . . .’ AG ISA (NZ) 700, ‘The Auditor-General’s Statement on Forming an Opinion and Reporting on Financial and Non-financial Information’, requires the following wording: ‘. . . Material misstatements are differences or omissions of amounts and disclosures that, in our judgement, are likely to influence readers’ overall understanding of the financial statements and statement of service performance. If we had found material misstatements that were not corrected, we would have referred to them in our opinion. An audit involves carrying out procedures to obtain audit evidence about the amounts and disclosures in the financial statements and statement of service performance. The procedures selected depend on our judgement, including our assessment of risks of material misstatement of the financial statements and statement of service performance, whether due to fraud or error. In making those risk assessments we consider internal control relevant to the preparation of the entity’s financial statements and statement of service performance that fairly reflect the matters to which they relate. We consider internal control in order to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control . . .’  


Required You are in discussion with a friend who has just read two audit reports that they accessed online, one being an NZX-listed entity in which they are looking to invest and the other being their local city council. Your friend says that the audit reports have used identical wording to that set out above per ISA (NZ) 700 and AG ISA (NZ) 700.  
Knowing that you have just completed an auditing course , your friend has asked you to explain some apparent differences in the two audit reports.

(a) Discuss the apparent differences in the wording describing materiality used in the audit report for the NZX-listed entity compared with the audit report for the local city council.

Provide an example of how materiality could be viewed differently by users of both audit reports; and why material misstatements may not be picked up by the auditor.

(b) Discuss why the auditors are not expressing an opinion on internal controls in both entities when understanding internal controls is fundamental to an audit.

(c) Explain why the local city council audit report refers to both financial statements and a statement of service performance, but the NZX-listed entity audit report only refers to financial statements.   

Answer 1

(a) Materiality is differ for different stakeholders. Suppose an expense of 100,000 may not be material in a 10,000,000 total expenses but 100,000 may be material in a 1,000,000. So Materiality is a subjective matter and depends upon the decisions of the auditors who are doing the audit.

Material misstatements may not be picked by the auditor if the misstatements is for the amount which is less than the material limit set by the auditor. Suppose, auditor set a limit of 15,000 as Materiality but there are some journal entries of 8,000 so the auditor will not pick these entries, in this way some misstatements may not be picked.

(b) As the auditor is doing the audit of 2 entities, one being a listed company and the other being local city council, so the internal control will play a very important role in listed company as there are so many controls required in the organisations so that there are minimal chances of fraud.

While in case of local city council, there are very few working and everybody knows each other roles and responsibilities and the misstatements will be of very less amount.

(c) As local city council is a government entity and in audit of government entities, auditor is required to report not only on financial statements but also on the services provided and their performance, also can provide actions to be taken to improve the quality of the services. But in case of listed concerns, auditor has to give opinion on only the financial statements as for service performances board of directors will already be working as they are much more interested in the business of the organisation.