ISAs – Summaries and Application Guide ISA 700

ISA 700
FORMING AN OPINION AND
REPORTING ON FINANCIAL
STATEMENTS
LO # LEARNING OBJECTIVE

LO 1 INTRODUCTION
LO 2 ELEMENTS OF AUDITOR’S REPORT
LO 3 SUPPLEMENTARY INFORMATION
LO 4 APPLICABLE FINANCIAL REPORTING FRAMEWORK

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ISAs – Summaries and Application Guide ISA 700

LO 1: INTRODUCTION:
Scope:
ISA 700 deals with audit of General Purpose & Complete Set of Financial Statements.
 If financial statements are Special Purpose, ISA 800 applies.
 If financial statements are not Complete Set (e.g Single F/S or Element), ISA 805 applies.
 If it is summary financial statements, ISA 810 applies.

LO 2: ELEMENTS OF AUDITOR’S REPORT:

Auditor’s Report is always in written form (in hard copy or electronic form), with following
elements:

Title:
The auditor’s report shall have a title that clearly indicates that it is “independent auditor’s report”.
Title is necessary to differentiate auditor’s report from other reports e.g. directors’ report.

Addressee
The auditor’s report shall be addressed as required by law or as appropriate in circumstances.
Report is usually addressed to shareholders or TCWG.

Opinion:
This section shall first state introductory information i.e. auditor has audited, and shall sate entity,
financial statements (identifying title of each statement) and period covered by F/S.

Then, this section shall state auditor’s opinion i.e. whether financial statements have been prepared
in accordance with AFRF and give true and fair view.

Basis for Opinion:

This section shall be presented immediately after Opinion section.
Drafting Example of Unmodified Opinion and Basis of Opinion
Opinion
We have audited the financial statements of ABC Company (the Company), which comprise the
statement of financial position as at December 31, 20X1, and the statement of comprehensive income,
statement of changes in equity and statement of cash flows for the year then ended, and notes to the
financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying financial statements give a true and fair view of the financial position
of the Company as at December 31, 20X1, and of its financial performance and its cash flows for the
year then ended in accordance with International Financial Reporting Standards (IFRSs).

Basis for Opinion

(If auditor expresses modified opinion, nature of misstatement/scope limitation will be explained here)

We conducted our audit in accordance with International Standards on Auditing (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 (the Code) and we have fulfilled our other ethical responsibilities in
accordance with the Code. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.

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Key Audit Matters:

This section will be discussed in detail in ISA 701.

Other Information and Auditor’s Report Thereon:

This section will be discussed in detail in ISA 720.

Responsibilities of Management and TCWG for the Financial Statements:

This section shall describe management’s responsibility for ①Financial Statements, ② Internal
Control and ③Going Concern.

If TCWG are different from management, their responsibility for oversight of financial reporting
process shall also be mentioned.

Auditor’s Responsibilities for the Audit of the Financial Statements:

This section shall state overall objective of the auditor is to obtain reasonable assurance whether
financial statements are free from material misstatements, and to issue report.

This section shall “A further description of the auditor’s responsibilities” i.e.

 Discussion on reasonable assurance, materiality, and scope of audit.
 Responsibility to communicate to communicate planned scope and timing of the audit and
significant audit findings to TCWG.
 Responsibility in case of Listed Audit (to communicate Statement of compliance with ethical
requirements and Key Audit Matters to TCWG).
 Responsibility in case of Group Audit.
(For details refer to Sample Auditor’s Report)

Location of the description of the auditor’s responsibilities

Further description of the auditor’s responsibilities may be included:
(a) Within the body of the auditor’s report, or
(b) As an appendix to the auditor’s report, or
(c) on a website of an appropriate authority, (if expressly permitted by law or regulation) ***.
In case of (b) and (c), reference to the location shall be included in audit report.

*** An appropriate authority could be a national auditing standard setter, regulator or an audit oversight
body. Auditor cannot maintain such a website.

Example: If auditor elects to refer to website of appropriate authority*

Auditor’s Responsibilities for the Audit of the Financial Statements:
Our objectives are to obtain reasonable assurance about ……….

A further description of the auditor’s responsibilities for the audit of the financial statements is located
at [authority’s] website at: [website link].This description forms part of our auditor’s report.

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ISAs – Summaries and Application Guide ISA 700

Other Reporting Responsibilities:

If auditor is required by law to report on additional matters, then auditor’s report will have two
separate sections:
1. “Report on the Audit of the Financial Statements”, and
2. “Report on Other Legal and Regulatory Requirements”. (such matters can be reported either
explicitly or by exception)

In Pakistan, statutory auditor reports on following Other Legal and Regulatory Requirements:
 Whether proper books of accounts have been kept as required by Companies Act.
 Whether financial statements are drawn up conformity with the Companies Act and are in agreement with the
books of account and returns.
 Whether investments made, expenditure incurred and guarantees extended during the year were for the
purpose of the Company’s business.
 Whether Zakat deductible at source, was deducted by the company and deposited in the Central Zakat Fund

Signature:
Audit report shall be signed in the name of audit firm, or in the personal name of auditor or both as
appropriate in local jurisdiction.

Local laws may also allow electronic signature.

Name:
For listed entities, ISAs require to include name of engagement partner, unless there is significant
personal security threat to engagement team members or their close relatives. However, a threat of
legal liability or sanction does not justify omission of name.

Local regulations may specify additional requirements e.g. to include license number.

Date of the Auditor’s Report:

The date of audit report should not be earlier than the date on which auditor obtains sufficient
appropriate evidence on which his report is based (including evidence that financial statement
have been approved by appropriate authority i.e. BOD). However, final approval by shareholders to
issue financial statements publicly is not necessary in this regard.

Date also indicates that auditor has considered the effect of subsequent events on financial
statements upto that date.

Auditor’s Address:
The auditor’s report shall state the location (usually city name) where the auditor practices.

Auditor’s Report Prescribed by Law or Regulation

If auditor’s report is prescribed by law or regulation, auditor shall refer to ISAs only if audit report includes
minimum elements required by ISAs.

Audit conducted in accordance with Both “ISAs” and “National Standards on Auditing”
Audit report shall state compliance with both standards only if:
 Audit report includes minimum elements required by ISAs. (ISA 700.50)
 Jurisdiction of national standards is identified.
 Both standards reach same opinion,
 EOM/OM Paragraph is included in report (if required by ISAs), and
If there is a conflict in above requirements, auditor shall refer only to one standard (whichever is complied).

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ISAs – Summaries and Application Guide ISA 700

Order of Elements
ISAs do not require ordering of elements of audit report, except for Opinion (first) and Basis for
Opinion (after opinion) Sections. However, ISAs require use of specific headings.

LO 3: SUPPLEMENTARY INFORMATION:
Definition:
Supplementary information is the additional information which is not required by AFRF but is
presented with financial statements.

Examples:
1. Extent of compliance with another framework, or
2. Reconciliation between profits of two frameworks.

Auditor’s Responsibilities:
1. If supplementary information is clearly differentiated, it shall not be audited, and shall be
treated as “Other Information”.
2. If supplementary information becomes integral part of financial statements (to its nature or
presentation):
a. it shall be audited, or
b. auditor shall state in audit report that it is not audited.

How to differentiate supplementary information:

 By Removing cross reference with financial statements.
 By placing it outside financial statements (e.g. as Appendix), or
 By placing it at end of the required notes and labeling it “unaudited”.

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LO 4: APPLICABLE FINANCIAL REPORTING FRAMEWORK (AFRF):

Applicable Financial Reporting Framework:

AFRF means basis on which management has prepared financial statements. It should be
adequately described in financial statements.

Variations in AFRF:

Situation Requirement
 Compliance with an AFRF can only be stated if all requirements of that framework
are met.
Use of a particular AFRF
 Partial compliance is not allowed e.g. “Financial statements are in substantial
compliance with IFRS” is not allowed as it is qualifying or limiting language.
Both (i.e. Financial Reporting framework and Additional requirements by law) are
If financial reporting standards are considered AFRF provided they do not conflict e.g.
Supplemented by Law or Regulation. “The financial statements give true and fair view …. in accordance with IFRS and the
requirements of Companies Act of Jurisdiction X.”
Financial statements are prepared in
accordance with One framework, and
Disclosure regarding extent of compliance with another framework is considered
disclose in notes extent of compliance
Supplementary Information.
with another framework
(e.g. IFRS + Tax basis).
Such description is appropriate only if all requirements of each framework are met
separately, without any reconciling statement.
Financial statements are prepared in
In such case, two opinions are expressed in the audit report:
accordance with Two frameworks
 Separately or in a single sentence e.g. “The financial statements give true and
(e.g. IFRS and National Framework)
fair view …. in accordance with IFRS and Accounting Principles generally
accepted in Jurisdiction X.”
 One opinion may be unmodified and other may be modified (e.g. adverse).