The Auditor's Report

Other Matter

'Other matter' paragraphs are used to refer to matters that have not been disclosed in the financial statements that the auditor believes are significant to user understanding. One usage of these paragraphs is where the auditor concludes that there is a material inconsistency between the audited financial statements and the other (unaudited) information contained within the annual report and accounts, as required by ISA 720, The Auditor's Responsibilities Relating to Other Information in Documents Containing Audited Financial Statements.

Application of ISA 701 when a Qualified or Adverse Opinion is issued

-When the auditor issues an adverse opinion it means that the financial statements do not give a true and fair view (or present fairly) because the auditor has concluded that misstatements, individually and in aggregate, are both material and pervasive to the financial statements. -Depending on the significance of the matter(s) which has resulted in the auditor expressing an adverse audit opinion, the auditor might determine that no other matters are KAM. In this situation, the auditor will deal with the matter(s) in accordance with applicable ISAs and include a reference to the Basis for Qualified/Adverse Opinion or the Material Uncertainty Related to Going Concern section(s) in the KAM section of the report as illustrated below.

Determination of KAM

-Areas which were considered to be susceptible to higher risks of material misstatement or which were deemed to be 'significant risks' in accordance with ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment. -Significant auditor judgments in relation to areas of the financial statements that involved significant management judgment. This might include accounting estimates which have been identified by the auditor as having a high degree of estimation uncertainty. -The effect on the audit of significant events or transactions that have taken place during the period.

Effects of new IFRS standards

-New accounting standards may be introduced by the International Accounting Standards Board (such as IFRS 15, Revenue from Contracts with Customers) that will involve a material change of accounting treatment. For example, IFRS 15 requires the application of a new framework in respect of revenue recognition, and hence the implementation of IFRS 15 may give rise to the new accounting requirements becoming a KAM as they will impact on the reporting entity's financial position and performance.

Key Audit Matters

-The objectives of ISA 701 are for the auditor to: determine those matters which are to be regarded as KAM; and communicate those matters in the auditor's report. -Those matters that, in the auditor's professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with those charged with governance.

Reporting in line with ISA 570, Going concern

-Under ISA 570 (Revised), if the use of the going concern basis of accounting is appropriate but a material uncertainty exists and management have included adequate disclosures relating to the material uncertainties the auditor will continue to express an unmodified opinion, but the auditor must include a separate section under the heading 'Material Uncertainty Related to Going Concern' and: -draw attention to the note in the financial statements that discloses the matters giving rise to the material uncertainty, and -state that these events or conditions indicate that a material uncertainty exists which may cast significant doubt on the entity's ability to continue as a going concern and that the auditor's opinion is not modified in respect of the matter. -The section headed 'Material Uncertainty Related to Going Concern' is included immediately after the Basis for Opinion paragraph but before the KAM section. -It should be noted that where the uncertainty is not adequately disclosed in the financial statements the auditor would continue to modify the opinion in line with ISA 705, Modifications to the Opinion in the Independent Auditor's Report. -By their very nature, issues identified relating to going concern are likely to be considered a key audit matter and hence need to be communicated in the auditor's report. Where the auditor has identified conditions which cast doubt over going concern, but audit evidence confirms that no material uncertainty exists, this 'close call' can be disclosed in line with ISA 701. This is because while the auditor may conclude that no material uncertainty exists, they may determine that one, or more, matters relating to this conclusion are key audit matters. Examples include substantial operating losses, available borrowing facilities and possible debt refinancing, or non-compliance with loan agreements and related mitigating factors.

Disclaimer of Opinion issued

A disclaimer of opinion is issued when the auditor is unable to form an opinion on the financial statements. ISA 705 states that when the auditor expresses a disclaimer of opinion then the auditor's report should not include a KAM section.

KAM Emphasis of Matter and Other Matter paragraphs

Emphasis of Matter and Other Matter paragraphs are still retained in ISA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report and the concepts involved have not been overridden by the ISA 701 requirements. The IAASB have noted that in some cases, matters which the auditor considers to be KAM will relate to issues that are presented and/or disclosed in the financial statements. Therefore, communicating these as KAM under ISA 701 will serve as the most useful and meaningful mechanism for highlighting the importance of the matter. Candidates should appreciate that when the auditor communicates matters as KAM, the intention is to provide additional information beyond that which would be included in an Emphasis of Matter paragraph. In recognition of this ISA 706 (Revised) states: The auditor is prohibited from using an Emphasis of Matter paragraph or an Other Matter paragraph when the matter has been determined to be a KAM. To that end, the IAASB has emphasised that the use of an Emphasis of Matter paragraph is not a substitute for a description of individual KAM. If a KAM is also determined to be fundamental to users' understanding, the auditor may present this issue more prominently in the KAM section. Alternatively, the auditor might also include additional information in the KAM description to indicate the importance of the matter. There may be a matter which is not determined to be a KAM, but which, in the auditor's judgement is fundamental to users' understanding and for which an Emphasis of Matter paragraph may be considered necessary

Emphasis of Matter

Emphasis of matter (EOM) is rarely dealt with satisfactorily in an exam. This is mainly because candidates believe that EOM is linked somehow to modifications of the opinion. This is not the case: EOM and modified opinions are totally separate matters. The purpose of an EOM paragraph is to draw the users attention to a matter already disclosed in the financial statements because the auditor believes it is fundamental to their understanding. It is a way of saying to the users: 'you know that note in the financial statements, the one about the uncertainty surrounding the legal dispute? Well us auditors think it's really important, so make sure you've read it!' The usage of EOM paragraphs is described in ISA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report. This identifies three examples of circumstances when the usage of EOM is appropriate: when there is uncertainty about exceptional future events early adoption of new accounting standards and when a major catastrophe has had a major effect on the financial position. Of course, in all of these examples the auditor can only refer back to disclosures already made in the financial statements. If the directors haven't disclosed a matter as required by financial reporting standards, then the auditor may conclude that the financial statements are materially misstated and modify the opinion instead.

Impairment testing on goodwill

IFRS® 3, Business Combinations requires goodwill to be tested for impairment at each reporting date and the annual impairment test may be regarded as a KAM where the carrying amount of goodwill is material. Impairment tests are inherently complex and judgmental and therefore management's assessment process may also be a KAM.

Communicating KAM

Include a description in the auditor's report of: 1) Why the matter was determined to be one of most significance and therefore a key audit matter, and 2) How the matter was addressed in the audit (which may include a description of the auditor's approach, a brief overview of procedures performed with an indication of their outcome and any other key observations in respect of the matter).

Modifications to the opinion

There are two circumstances when the auditor may choose not to issue an unmodified opinion: When the financial statements are not free from material misstatement or When they have been unable to obtain sufficient appropriate evidence. In these circumstances the auditor has to issue a modified version of their opinion. There are three types of modification. Their use depends upon the nature and severity of the matter under consideration. They are: the qualified opinion the adverse opinion the disclaimer of opinion.

Unmodified Opnion

When an auditor is able to satisfactorily conclude that the financial statements are free from material misstatement they express an unmodified opinion. The complete form and content of the unmodified opinion are presented in ISA 700, Forming an Opinion and Reporting on Financial Statements. However, auditors typically use one of two well-known phrases to reflect their conclusion, either: 'The financial statements present fairly, in all material respects...' or 'The financial statements give a true and fair view of...'