The unmodified auditor's report (ISA 700)

The directors of a company sign the statements on 12 March. The auditor reads the final draft, checks that the evidence is enough and that errors are corrected or immaterial, and then signs a report that says the statements give a true and fair view. That report, in its standard form, is read by shareholders, banks and regulators in minutes.

They look for the opinion first, but every part of the report has a job, from the title that shows the auditor is independent to the date that tells the reader how far the auditor looked at later events.

This topic covers what an unmodified report is, how the auditor reaches the opinion, the elements of the report in ISA 700 in order, fair presentation and compliance frameworks, the going concern paragraph, the responsibilities sections, signature and date, and a sample report. The previous topic covered the expectation gap, and the next covers key audit matters and reports prescribed by law.

Key terms in plain English

Syllabus check

This topic is in syllabus area C, audit evidence, completion and reporting (25% of marks). It covers:

• the unmodified auditor's report (ISA 700)
• the elements and form of the audit report
• forming the audit opinion

CAMA 2020 and the audit report

The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.

The rules in more depth

What an unmodified report is

An unmodified auditor's report contains an opinion that is not modified in any way, either by changing the opinion to a qualified opinion, an adverse opinion or a disclaimer of opinion, or by adding an emphasis of matter or other matter paragraph after the opinion.

ISA 700 requires the auditor to give an unmodified opinion when the auditor concludes that the statements have been prepared, in all material respects, under the applicable financial reporting framework. If the framework is a fair presentation framework, the report states whether the statements "give a true and fair view" or "present fairly" the position and results.

An unmodified opinion gives a high level of assurance that a professional, independent examination has not found material misstatements.

Reaching the audit opinion

To reach the opinion the auditor evaluates whether:

• sufficient appropriate audit evidence has been obtained on whether the statements are free from material misstatement;
• uncorrected misstatements are material, individually or in aggregate;
• the statements have been prepared under the applicable framework, and for a fair presentation framework, whether they give a true and fair view, and in particular whether they adequately refer to or describe the framework and adequately disclose significant accounting policies;
• the significant accounting policies are appropriate and consistent with the framework;
• accounting estimates are reasonable;
• the information is relevant, reliable, comparable and understandable;
• the statements give adequate disclosures; and
• the terminology used is appropriate.

Basic elements of the report

The objectives of ISA 700 are for the auditor to form an opinion on the statements based on the evaluation of the conclusions drawn from the evidence, and to express the opinion clearly in a written report that also describes the basis for the opinion. The report has these elements:

1. Title
2. Addressee
3. Auditor's opinion
4. Basis for opinion
5. Going concern: material uncertainty (if applicable)
6. Key audit matters (if applicable)
7. Other information (if applicable)
8. Responsibilities for the financial statements
9. Auditor's responsibilities for the audit of the financial statements
10. Other reporting responsibilities (if applicable)
11. Name of the engagement partner (if applicable)
12. Auditor's signature
13. Auditor's address
14. Date of the auditor's report

Title

The report must have a title that clearly shows that it is the report of an independent auditor. This distinguishes it from reports by others, such as internal auditors, who are not bound by the same ethical rules and independence requirements.

Addressee

The report is addressed as required by national law and the circumstances of the engagement. It is usually addressed to the shareholders of the entity, or to its board of directors. In Nigeria, a company's auditor reports to the members.

Auditor's opinion

The first section has the heading "Opinion". It must:

• identify the entity whose statements were audited;
• state that the statements have been audited;
• identify the title of each statement in the financial statements;
• refer to the notes, including the summary of significant accounting policies; and
• specify the date or period covered by each statement.

For a fair presentation framework, an unmodified opinion is given when the auditor concludes that the statements give a true and fair view, or present fairly, in all material respects, under the framework. For a compliance framework, an unmodified opinion is given when the statements have been prepared, in all material respects, under the framework.

This can lead to a two-part opinion, for example on whether the statements give a true and fair view under accounting standards and whether they have been properly prepared under the company law. Where IFRS is not the framework, the wording identifies the country of the framework.

Basis for opinion

The "Basis for Opinion" section must:

• state that the audit was conducted under International Standards on Auditing;
• refer to the section of the report that describes the auditor's responsibilities under the ISAs;
• state that the auditor is independent of the entity under the relevant ethical requirements and has met the other ethical responsibilities under them, identifying the country of origin of the ethical requirements or referring to the IESBA Code; and
• state whether the auditor believes that the evidence obtained is sufficient and appropriate to provide a basis for the opinion.

Going concern: material uncertainty

If the going concern basis is appropriate but a material uncertainty exists, and the auditor considers that adequate disclosure of it has been made in the statements, the auditor gives an unmodified opinion and includes a section headed "Material Uncertainty Related to Going Concern".

It must draw attention to the note that describes the uncertainty; state that these events or conditions show that a material uncertainty exists that may cast significant doubt on the entity's ability to continue as a going concern; and state that the opinion is not modified in respect of the matter. This section replaced the former use of an emphasis of matter paragraph for this purpose. It is covered in the later topic on going concern.

Key audit matters and other information

For listed entities, and for other audits where law requires or the auditor decides voluntarily to communicate them, the auditor communicates key audit matters under ISA 701. Where the auditor has obtained, or expects to obtain, other information as defined in ISA 720, such as the directors' report, the auditor includes an "Other Information" section.

Responsibilities for the financial statements

This section describes the responsibilities of those who prepare the statements.

It must explain that management is responsible for:

• preparing the statements under the applicable framework
• such internal control as management decides is necessary to enable the preparation of statements free from material misstatement, whether from fraud or error
• assessing the entity's ability to continue as a going concern, whether the going concern basis is appropriate and the adequacy of related disclosures

It says that those charged with governance are responsible for overseeing the financial reporting process.

Auditor's responsibilities for the audit

This section must state that the auditor's objectives are to obtain reasonable assurance about whether the statements as a whole are free from material misstatement, whether from fraud or error, and to issue a report that includes the opinion.

It states that reasonable assurance is a high level of assurance, but not a guarantee that an audit under the ISAs will always detect a material misstatement; that misstatements can arise from fraud or error; and describes materiality, in that misstatements are material if they could reasonably be expected, individually or together, to influence the economic decisions of users.

It states that the auditor exercises professional judgement and maintains professional scepticism throughout. It describes the auditor's responsibilities, in the body of the report, in an appendix or, where permitted, by reference to a website of an appropriate authority. The description lists that the auditor:

• identifies and assesses the risks of material misstatement, designs and performs procedures that respond, and obtains sufficient appropriate evidence. The risk of not detecting a fraud is higher than for an error, because fraud may involve collusion, forgery, intentional omissions, misrepresentations or override of internal control;
• obtains an understanding of internal control relevant to the audit, not to give an opinion on its effectiveness;
• evaluates the appropriateness of accounting policies and the reasonableness of estimates and disclosures;
• concludes on the appropriateness of management's use of the going concern basis and whether a material uncertainty exists, with the note that future events may cause the entity to cease to be a going concern;
• evaluates the overall presentation, structure and content of the statements, and whether they represent the underlying transactions fairly; and
• communicates with those charged with governance about the planned scope and timing, significant findings including significant control deficiencies, and independence, with a statement that the auditor has complied with ethical requirements.

Where key audit matters are given, the report says that from the matters communicated with those charged with governance the auditor determines those of most significance in the audit and describes them, unless law prevents public disclosure or, in extremely rare cases, the adverse consequences would outweigh the public interest benefit.

Other reporting responsibilities

In some countries the auditor has additional reporting duties, for example to report certain matters or to report on the adequacy of accounting records. These go in a separate section after the opinion, headed "Report on Other Legal and Regulatory Requirements".

Engagement partner, signature, address and date

• Engagement partner. For listed entities, the report names the engagement partner, unless, in rare cases, this is expected to lead to a significant personal security threat.
• Signature. In the name of the firm, the personal name of the auditor, or both. It is usually in the firm's name, because the firm takes responsibility.
• Address. A specific location, usually the city of the office responsible for the audit.
• Date. No earlier than the date on which the auditor has obtained sufficient appropriate evidence for the opinion, and not earlier than the date on which the directors approved the statements. The date tells the reader that the auditor has considered events after the year end up to that date.

A sample unmodified report

The standard report reads, in outline: Independent Auditor's Report to the Shareholders of ABC Company. Opinion: we have audited the statements of ABC Company, which comprise the statement of financial position at 31 December 20X6 and the statement of comprehensive income, the statement of changes in equity and the statement of cash flows for the year then ended, and the notes, including a summary of significant accounting policies.

In our opinion the statements give a true and fair view of the financial position at that date and of the financial performance and cash flows for the year, under IFRS.

Basis for opinion:

• we conducted our audit under ISAs
• our responsibilities are described in the section below
• we are independent of the Company under the IESBA Code and the relevant ethical requirements and have met our other ethical responsibilities
• we believe the evidence is sufficient and appropriate

Key audit matters, other information, responsibilities of management and those charged with governance, and the auditor's responsibilities as above. Signature, address and date.

Fair presentation and compliance frameworks

A fair presentation framework requires compliance with its rules and acknowledges that, to achieve fair presentation, management may need to give more disclosure than the rules require or, in rare cases, depart from a requirement. IFRS is a fair presentation framework. A compliance framework requires only compliance with its rules. The distinction changes the wording of the opinion, but not the auditor's work on evidence.

Dating and events after the report

Because the date of the report marks how far the auditor has looked for later events, the auditor has responsibilities for events up to that date, and, if facts become known after the date but before the statements are issued, must discuss them with management and consider whether the statements need amendment.

After the statements are issued, the auditor has no duty to make further enquiries, but if the auditor learns of a fact that would have changed the report, the auditor considers what action to take, including advising management and seeking legal advice.

Worked examples

1. The title must show that the report is that of an independent auditor.
2. It should read "Independent Auditor's Report".

1. The report cannot be dated earlier than the approval of the statements.
2. The date must be on or after 18 March, when the evidence is complete.

1. The opinion is unmodified.
2. The report includes a separate section on material uncertainty related to going concern.

1. The opinion must identify each statement that is part of the financial statements.
2. The cash flow statement should be added.

How to score full marks

• List the elements in order.
• Explain the content of opinion, basis for opinion and responsibilities.
• State the rules on date and signature.
• Say that a material uncertainty does not modify the opinion.

Common mistakes in the exam

• Placing the basis for opinion before the opinion.
• Saying reasonable assurance is a guarantee.
• Using an emphasis of matter paragraph for a going concern uncertainty.
• Forgetting independence in the basis for opinion.

Quick revision

• Title, addressee, opinion, basis, going concern, KAM, other information, responsibilities, other reporting, partner, signature, address, date.
• Reasonable assurance, not a guarantee.
• Date: not before the evidence is complete or directors approve.

Practice questions

Questions 1 to 10 are multiple choice. Questions 11 to 13 are written. Try each before opening the answer.

Model answers

Spotted a mistake? Tell us and we will check it.