Audit and Assurance

BSA 700: The Auditor’s Report on Financial Statements
Prepared By Abdullah-Al- Mamun

The auditor should review and assess the conclusions drawn from the audit evidence as obtained as the basis for the expression of an opinion on the financial statements.

Basic Elements of the Auditor’s Report

The auditor’s report includes the following basic elements ordinarily in the following layout:

a) Title b) Addressee c) Opening or Introductory Paragraph-

i) Identification of the Financial Statements audited ii) A statement of the responsibility of the entity’s management and the responsibility of the auditor.

d) Scope Paragraph (describing the nature of the audit)-

i) A reference to the BSAs or relevant national standards or practices ii) A description of the work the auditor performed.

e) Opinion Paragraph containing-

i) Reference to the financial reporting framework used to prepare the financial statements (including identifying the country of origin of the financial reporting framework when the framework used is not Bangladesh Accounting Standards); and ii) An expression of opinion on the financial statements.

f) Date of the report g) Auditor’s Address and h) Auditor’s Signature.

Title

The auditor’s report should have an appropriate title. It may be appropriate to use the term “Independent Auditor” in the title to distinguish the auditor’s report from the report that might be issued by others such as officers of the entity, the board of directors, or from the reports of other auditors who may not have to abide by the same ethical requirements as the independent auditor.

Addressee

The auditor’s report should be appropriately addressed as required by the circumstances of the engagement and local regulations. The report is ordinarily addressed either to the shareholders or the board of directors of the entity whose financial statements are being audited.

Opening or Introductory Paragraph

The auditor’s report should identify the financial statements of the entity that have been audited, including the date of and period covered by the financial statements.

The report should include a statement that the financial statements are the responsibility of the entity’s management and a statement that the responsibility of the auditor is to express an opinion on the financial statements based on the audit.

An illustration of these matters in an opening (introductory) paragraph is:

“We have audited the accompanying balance sheet of the ABC Company as of December 31, 20XX and the related profit and Loss account cash flows for the year then ended. The Preparation of these financial statements is to express an independent opinion on these financial statements based on our audit.”

Scope Paragraph

The auditor’s report should describe the scope of the audit by stating that the audit was conducted in accordance with BSAs. Scope refers to the auditor’s ability to perform audit procedures deemed necessary in the circumstances. The readers need this as an assurance that the audit has been carried out in accordance with established standards or practices.

The report should include a statement that the audit was planned and performed to obtain reasonable assurance about whether the financial statements are free of material misstatements.

The auditor’s report should describe the audit as including:

a) Examining, on a test basis, evidence to support the financial statement amounts and disclosures; b) Assessing the accounting principles used in the preparation of the financial statements; c) Assessing the significant estimates made by management in the preparation of the financial statements; and d) Evaluating the overall financial statement presentation.

The report should include a statement by the auditor that the audit provides a reasonable basis for the opinion.

An illustration of these matters in a scope paragraph is:

“We conducted our audit in accordance with Bangladesh Standards on Auditing (BSA). Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.”
Opinion Paragraph

The opinion paragraph of the auditor’s report should clearly indicate the financial reporting framework used to prepare the financial statements (including identifying the country of origin of the financial reporting framework when the framework used is not Bangladesh Accounting Standards) and state the auditor’s opinion as to whether the financial statements give a true and fair view (or are presented fairly, in all material respects) in accordance with that financial reporting framework and where appropriate, whether the financial statements comply with statutory requirements.

The financial reporting framework is determined by BSAs with an appropriate consideration of fairness and with due regard to Bangladesh legislation (Company Act 1994, Securities & Exchange Rule 1987, Bank Company Act 1991, Insurance Rules 1958, etc).

In addition to an opinion on the true and fair view (or fair presentation, in all material respects), the auditor’s report may need to include an opinion as to whether the financial statements comply with other requirements specified by relevant statutes or law.

An illustration of these matters in an opinion paragraph is:

“In our opinion, the financial statements give a true and fair view (or present fairly, in all material respects) of the financial position of the company as of December 31, 20XX and of the results of its operations and its cash flows for the year then ended in accordance with Bangladesh Accounting Standards.”

Date of Report

The auditor should date the report as of the completion date of the audit.

Since the auditor’s responsibility is to report on the financial statements as prepared by management, the auditor should not date the report earlier than the date on which the financial statements are signed or approved by management.

Auditor’s Address

The report should name a specific location, which is ordinarily the city where the auditor maintains the office that has responsibility for the audit.

Auditor’s Signature

The report should be signed in the name of the audit firm. The auditor’s report is ordinarily signed in the name of the firm because the firm assumes responsibility for the audit.

The Auditor’s Report

A. Unqualified Report B. Modified Reports

A. Unqualified Report

An unqualified opinion should be expressed when the auditor concludes that the financial statements give a true and fair view (or presented fairly, in all material respects) in accordance with the identified financial reporting framework.

An unqualified opinion also indicates implicitly that any changes in accounting principles or in the method of their application and the effects thereof, have been properly determined and disclosed in the financial statements.

B. Modified Reports

An auditor’s report is considered to be modified in the following situations:

Matters That Do Not Affect the Auditor’s Opinion

(a) Emphasis of Matter

Matters That Affect the Auditor’s Opinion

(b) Qualified Opinion
(c) Disclaimer of Opinion
(d) Adverse Opinion

Matters That Do Not Affect the Auditor’s Opinion

In certain circumstances, an auditor’s report may be modified by adding an emphasis of matter paragraph to highlight a matter affecting the financial statements which is included in a note to the financial statements that more extensively discuss the matter.

The auditor should modify the auditor’s report by adding a paragraph to highlight a material matter regarding a going concern problem.

The auditor should consider modifying the auditor’s report by adding a paragraph if there is a significant uncertainty (other than a going concern problem), the resolution of which is dependent upon future events and which may affect the financial statements. An uncertainty is a matter whose outcome depends on future actions or events not under the direct control of the entity but that may affect the financial statements.

An illustration of an emphasis of matter paragraph for a significant uncertainty in an auditor’s report follows:

“In our opinion ……..(remaining words are same as illustrated in the Appendix of BSA 700). Without qualifying our opinion, we draw attention to Note X to the financial statements. The company is the defendant in a lawsuit alleging infringement of certain patent rights and claiming royalties and punitive damages. The company has filed a counter action and preliminary hearings and discovery proceedings on both actions are in progress. The ultimate outcome of the matter cannot presently be determined and no provision for any liability that may result has been made in the financial statements.” (This is an illustration of an emphasis of matter paragraph relating to going concern).

Matters That Affect the Auditor’s Opinion

An auditor may not be able to express an unqualified opinion when either of the following circumstances exists and, in the auditor’s judgment, the effect of the matter is or may be material to the financial statements:

a) There is a limitation on the scope of the auditor’s work

These circumstances could lead to a qualified opinion or a disclaimer of opinion.

b) There is a disagreement with management regarding the acceptability of the accounting policies selected, the method of their application or the adequacy of financial statement disclosures.

These circumstances could lead to a qualified opinion or an adverse opinion.

A qualified opinion should be expressed when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with management or limitation on scope is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion. A qualified opinion should be expressed as being “except for” the effects of the matter to which the qualification relates.

A disclaimer of opinion should be expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and accordingly is unable to express an opinion on the financial statements.

An adverse opinion should be expressed when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements.

Whenever the auditor expresses an opinion that is other than unqualified, a clear description of all the substantive reasons should be included in the report and unless impracticable, a qualification of the possible effect(s) on the financial statements.

Circumstances That May Result in Other Than an Unqualified Opinion

Limitation on Scope

A limitation on the scope of the auditor’s work may sometimes be imposed by the entity (for example, when the terms of the engagement specify that the auditor will not carry out an audit procedure that the auditor believes is necessary). When the limitations in the terms of a proposed engagement is such that the auditor believes the need to express a disclaimer opinion exists, the auditor would ordinarily not accept such a limited engagement as an audit engagement, unless required by statute. Also, a statutory auditor would not accept such an audit engagement when the limitation infringes on the auditor’s statutory duties.

A scope limitation may be imposed by circumstances, for example, when the timing of the auditor’s appointment is such that the auditor is unable to observe the counting of physical inventories. It may also arise when, in the opinion of the auditor, the entity’s accounting records are inadequate or when the auditor is unable to carry out an audit procedure believed to be desirable. In these circumstances, the auditor would attempt to carry out reasonable alternative procedures to obtain sufficient appropriate audit evidence to support an unqualified opinion.

When there is a limitation on the scope of the auditor’s work that requires expression of a qualified opinion or a disclaimer of opinion, the auditor’s report should describe the limitation and indicate the possible adjustments to the financial statements that might been determined to be necessary had the limitation not existed.

Illustrations:

Limitations on scope-Qualified opinion

“We have audited ……..(remaining words are same as illustrated in the Appendix of BSA 700). Except as the following paragraph, we conducted our audit in accordance with ……..(remaining words are same as illustrated in the Appendix of BSA 700).

We did not observed the counting of the physical inventories as of December 31, 20XX, since that date was prior to the time we were initially engaged as auditors for the company. Owing to the nature of the company’s records, we were unable to satisfy ourselves as to inventory quantities by other audit procedures.

In our opinion, except for the effect of such adjustments, if any, as might have been determined to be necessary had we been able to satisfy ourselves as to physical inventory quantities, the financial statements give a true and ……..(remaining words are same as illustrated in the Appendix of BSA 700).”

Limitations on scope-Disclaimer of opinion

“We were engaged to audit the accompanying balance sheet of the ABC company as of December 31, 20XX and the related profit and loss account and cash flows for the year then ended. These financial statements are the responsibility of the company’s management. (Omit the sentence stating the responsibility of the auditor).

(The paragraph discussing the scope of the audit would either be omitted or amended according to the circumstances).

(Add a paragraph discussing the scope limitation as follows:)

We were not able to observe all physical inventories and confirm accounts receivable due to limitations places on the scope of our work by the company.

Because of the significance of the matters discussed in the preceding paragraph, we do not express an opinion on the financial statements.”

Disagreement with management

The auditor may disagree with management about matters such as the acceptability of accounting policies selected, the method of their application, or the adequacy of disclosures in the financial statements. If such disagreements are material to the financial statements, the auditor should express a qualified or an adverse opinion.

Illustrations:

Disagreement on Accounting Policies-Inappropriate Accounting Method-Qualified Opinion

“We have audited ……..(remaining words are same as illustrated in the Appendix of BSA 700). We conducted our audit in accordance with ……..(remaining words are same as illustrated in the Appendix of BSA 700).

As discussed in Note X to the financial statements, no depreciation has been provided in the financial statements which practice, in our opinion, is not in accordance with Bangladesh Accounting Standards. The provision for the year ended December 31, 20XX, should be XXX based on the straight-line method of depreciation using annual rates of 5% for the building and 20% for the equipment. Accordingly, the fixed assets should be reduced by accumulated depreciation of XXX and the loss for the year and accumulated deficit should be increased by XXX and XXX respectively.

In our opinion, except for the effect on the financial statements of the matter referred to in the preceding paragraph, the financial statements give a true and ……..(remaining words are same as illustrated in the Appendix of BSA 700).”

Disagreement on Accounting Policies-Inadequate Disclosure-Qualified Opinion

“We have audited ……..(remaining words are same as illustrated in the Appendix of BSA 700).

We conducted our audit in accordance with ……..(remaining words are same as illustrated in the Appendix of BSA 700).

On January 31, 20XX, the company issued debentures in the amount of XXX for the purpose of financing plant expansion. The debenture agreement restricts the payment of future cash dividends to earnings after December 31, 20XX. In our opinion, disclosure of this information is required by ……

In our opinion, except for the omission of the information included in the previous paragraph, the financial statements give a true and ……..(remaining words are same as illustrated in the Appendix of BSA 700).”

Disagreement on Accounting Policies-Inadequate Disclosure-Adverse Opinion

“We have audited ……..(remaining words are same as illustrated in the Appendix of BSA 700).

We conducted our audit in accordance with ……..(remaining words are same as illustrated in the Appendix of BSA 700).

(Paragraph(s) discussing the disagreement).

In our opinion, because of the effects of the matters discussed in the preceding paragraph(s), the financial statements do not give a true and fair view (or do not present fairly) of the financial position of the company as of December 31, 20XX, and of the results of its operations and its cash flows for the year then ended in accordance with Bangladesh Accounting Standards (and do not comply with ...).”

Specimens of Auditor’s Report (BSA 700)

Appendix-I : Unqualified Auditor’s Report for an unlisted company (other than a bank or insurance company).
Appendix-II : Unqualified Auditor’s Report for a listed company (other than a bank or insurance company).
Appendix-III : Unqualified Auditor’s Report for an listed banking company.
Appendix-IV : Unqualified Auditor’s Report for an listed insurance company.
Appendix-V : Auditor’s Report-Modified Opinion.
Appendix-VI : Qualified Auditor’s Report-Limitation on Scope.
Appendix-VII : Qualified Auditor’s Report-Disclaimer of Opinion.
Appendix-VIII : Qualified Auditor’s Report-Adverse Opinion.

Linkage of Other BSAs with BSA 700

Scope Limitation

▪ If management refuses to give the auditor permission to communicate with the entity’s lawyers, this would be a scope limitation and should ordinarily lead to a qualified or a disclaimer of opinion. (Para 25 of BSA 501).

▪ Where a lawyer refuses to respond in an appropriate manner and the auditor is unable to obtain sufficient appropriate audit evidence by applying alternative procedures, the auditor would consider whether there is a scope limitation, which may lead to a qualified or a disclaimer of opinion. (Para 25 of BSA 501).

▪ If the auditor does not accept the validity of management’s request not to seek external confirmation and the auditor is prevented from carrying out the confirmations, there has been a limitation on the scope of the auditor’s work and the auditor should consider the possible impact on the auditor’s report. (Para 26 of BSA 505).

▪ If, after performing audit procedures, the auditor is unable to obtain sufficient appropriate audit evidence concerning opening balances, the auditor’s report should include:

a. A qualified opinion; b. A disclaimer of opinion; or c. In those jurisdictions where it is permitted, an opinion which is qualified or disclaimed regarding the results of operations and unqualified regarding financial position. (Para 11 of BSA 510).

▪ If the entity’s prior period auditor’s report was modified, the auditor would consider the effect thereof on the current period’s financial statements. If there was a scope limitation, such as one due to the inability to determine opening inventory in the prior period, the auditor may not need to qualify or disclaim the current period’s audit opinion. However, if a modification regarding the prior period’s financial statements remains relevant and material to the current period’s financial statements, the auditor should modify the current auditor’s report accordingly. (Para 14 of BSA 510).

▪ If uncertainty associated with an item, or the lack of objective data may make it incapable of reasonable estimation, in which the auditor needs to consider whether the auditor’s report needs modification to comply with BSA 700, “The Auditor’s Report on Financial Statements.” (Para 7 of BSA 540).

▪ If the auditor is unable to obtain sufficient appropriate audit evidence concerning related parties and transactions with such parties or concludes that their disclosure in the financial statements is not adequate, the auditor should modify the auditor’s report appropriately. (Para 16 of BSA 550).

▪ If adequate disclosure is made in the financial statements, the auditor should express an unqualified opinion but modify the auditor’s report by adding an emphasis of matter paragraph that highlights the existence of a material uncertainty relating to the event or condition that may cast significant doubt on the entity’s ability to continue a going concern and draws attention to the note in the financial statements that discloses the matters. In Extreme cases, such as situations involving multiple material uncertainties that are significant to the financial statements, the auditor may consider it appropriate to express a disclaimer of opinion instead of adding an emphasis of matter paragraph (Para 33 of BSA 570).

▪ If management is unwilling to make or extend its assessment when requested to do so by the auditor, the auditor should consider the need to modify the auditor’s report as a result of the limitation on the scope of the auditor’s work. If management is unwilling to do so, it is not the auditor’s responsibility to rectify the lack of analysis by management, and a modified report may be appropriate because it may not be possible for the auditor to obtain sufficient appropriate audit evidence regarding the use of going concern assumption in the preparation of the financial statements. (Para 37 of BSA 570).

▪ When there is a significant delay in the signature or approval of the financial statements by management after the balance sheet date, the auditor considers the reason for the delay. When the delay could be related to events or conditions relating to the going concern assessment, the auditor considers the need to perform additional audit procedures as well as the effect on the auditor’s conclusion regarding existence of a material uncertainty. (Para 39 of BSA 570).

▪ If management refuses to provide a representation that the auditor considers necessary, this constitutes a scope limitation and the auditor should express a qualified or a disclaimer of opinion. (Para 15 of BSA 580).

▪ When the principal auditor concludes that the work of the other auditor can not be used and the principal auditor has not been able to perform sufficient additional procedures regarding the financial information of the component audited by the other auditor, the principal auditor should express a qualified or disclaimer of opinion because there is a limitation in the scope of the audit. (Para 16 of BSA 600).

▪ If the auditor is precluded by the entity from obtaining sufficient appropriate audit evidence to evaluate whether non compliance that may be material to the financial statements, has, or is likely to have occurred, the auditor should express a qualified opinion or a disclaimer of opinion on the financial statements on the basis of a limitation on the scope of the audit. (Para 36 of BSA 250).

▪ If the auditor is unable to determine whether non compliance has occurred because of limitations imposed by the circumstances rather than by the entity, the auditor should consider the effect on the auditor’s report. (Para 37 of BSA 250).

▪ If the auditor has not obtained sufficient appropriate audit evidence as to a material financial statement assertion, the auditor should attend to obtain further audit evidence. If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor should express a qualified opinion or a disclaimer of opinion. (Para 72 of BSA 330).

Disagreement with Management

▪ If the opening balances contain misstatements which could materially affect the current period’s financial statements, the auditor would inform management and after having management’s authorization, the predecessor auditor, if any. If the effect of the misstatement is not properly accounted for and adequately disclosed, the auditor should express a qualified opinion or an adverse opinion as appropriate. (Para 12 of BSA 510).

▪ If the current period’s accounting policies have not been consistently applied in relation to opening balances and if the change has not been properly accounted for and adequately disclosed, the auditor should express a qualified opinion or an adverse opinion as appropriate. (Para 13 of BSA 510).

▪ The auditor would consider whether individual differences (between the auditor’s estimate of the amount supported by the available audit evidence and the estimated amount included in the financial statements), which have been accepted as reasonable, are biased in one direction, so that on a cumulative basis, they may have a material effect on the financial statements. In such circumstances, the auditor would evaluate the accounting estimate taken as a whole and consider the appropriation in issuing an unqualified audit report. (Para 27 of BSA 540).

▪ When, after the date of the auditor’s report but before the financial statements are issued, the auditor becomes aware of a fact which may materially affect the financial statements, the auditor should consider whether the financial statements need amendment, should discuss the matter with management and should take the action appropriate in the circumstances. (Para 9 of BSA 560).

▪ When management amends the financial statements, the auditor would carry out the procedures necessary in the circumstances and would provide management with a new report on the amended financial statements. The new auditor’s report would be dated not earlier than the date the amended financial statements are signed or approved. (Para 10 of BSA 560).

▪ When management does not amend the financial statements in the circumstances where the auditor believes they need to be amended and the auditor’s report has not been released to the entity, the auditor should express a qualified opinion or an adverse opinion. (Para 11of BSA 560).

▪ When the auditor’s report has been released to the entity, the auditor would notify those persons ultimately responsible for the overall direction of the entity not to issue financial statements and the auditor’s report thereon to third parties. If the financial statements are subsequently released, the auditor needs to take action to prevent reliance on the auditor’s report. The action taken will depend on the auditor’s legal rights and obligations and the recommendations of the auditor’s lawyers. (Para 12 of BSA 560).

▪ When, after the financial statements have been issued, the auditor becomes aware of a fact which existed at the date of the auditor’s report and which, if known at that date, may have caused the auditor to modify the auditor’s report, the auditor should consider whether the financial statements need revision, should discuss the matter with management and should take the action appropriate in the circumstances. (Para 14 of BSA 560).

▪ When management revises the financial statements, the auditor would carry out the audit procedures necessary in the circumstances, would review the steps taken by management to ensure that anyone in receipt of the previously issued financial statements together with the auditor’s report thereon is informed of the situation and would issue a new report on the revised financial statements. (Para 15 of BSA 560).

▪ The new auditor’s report should include an emphasis of a matter paragraph referring to a note to the financial statements that more extensively discusses the reason for the revision of the previously issued financial statements and to the earlier report issued by the auditor. The new auditor’s report would be dated not earlier than the date the revised financial statements are approved. (Para 16 of BSA 560).

▪ It may be necessary to revise the financial statements and issue a new auditor’s report when issue of the financial statements for the following period is imminent provided appropriate disclosures are to be made in such statements. (Para 18 of BSA 560). ▪ If adequate disclosure is not made in the financial statements, the auditor should express a qualified or adverse opinion, as appropriate. The report should include specific reference to the fact that there is a material uncertainty that may cast significant doubt about the entity’s ability to continue as a going concern. (Para 34 of BSA 570).

▪ If, in the auditor’s judgment, the entity will not be able to continue as a going concern, the auditor should express an adverse opinion if the financial statements have been prepared on a going concern basis. If the auditor’s judgment is that the entity will not be able to continue as a going concern, the auditor concludes, regardless of weather or not disclosure has been made, that the going concern assumption used in the preparation of the financial statements is inappropriate and expresses an adverse opinion. (Para 35 of BSA 570).

▪ If on the basis of the additional procedures carried out and the information obtained the auditor determines the alternative basis is appropriate, the auditor can issue an unqualified opinion if there is adequate disclosure but may require an emphasis of matter in the auditor’s report to draw the user’s attention to that basis. (Para 36 of BSA 570).

▪ If the other auditor issues or intends to issue, a modified auditor’s report, the principal auditor would consider whether the subject of the modification is of such a nature and significance, in relation to the financial statements of the entity on which the principal auditor is reporting, that a modification of the principal auditor’s report is required. (Para 17 of BSA 600).

▪ When issuing an unmodified/unqualified auditor’s report, the auditor should not refer to the work of an expert. Such reference might be misunderstood to be a qualification of the auditor’s report or a division of responsibility, neither of which is intended. (Para 16 of BSA 620).

▪ If, as a result of the work of an expert, the auditor decides to issue a modified auditor’s report, in some circumstances it may be appropriate, in explaining the nature of the modification, to refer to or describe the work of the expert (including the identity of the expert and the extent of the expert’s involvement). In these circumstances, the auditor would obtain the permission of the expert before making such a reference. If permission is refused and the auditor believes a reference is necessary, the auditor may need to seek legal advice. (Para 17 of BSA 620).

▪ If the auditor concludes that the non compliance of laws and regulations has a material effect on the financial statements, and has not been properly reflected in the financial statements, the auditor should express a qualified or an adverse opinion. (Para 35 of BSA 250).

▪ If management refuses to adjust the financial statements and the results of extended audit procedures do not enable the auditor to conclude that the aggregate of uncorrected misstatements is not material, the auditor should consider the appropriate modification to the auditor’s report in accordance with BSA 700, “The Auditor’s Report on Financial Statements.” (Para 15 of BSA 320).