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Audit reports: keep up!

Paul Merison explains how you can get your head around the recent changes to the audit report that are now examined in F8 and P7

March 2017

During recent years, audit reports have been changing in the real world, and gradually this has resulted in audit standards being changed. From the September 2016 exam sitting these changes ceased to be just a current discussion issue and have hit F8 and P7 in full (note, for P7 UK Stream it remains just a current issue topic until the September 2017 sitting).
Audit reports have a number of issues for students, and always have had:
• Understanding the content of an audit report, given many students will never actually try to read a real one.
• For those who DO read a real one, the problem that some of the content is beyond where an ACCA exam question is likely to go.
• The fact that there are so many possible outcomes for an audit report.
And the problem is that it has now got a bit harder.
Let’s go straight to an example, aimed at showing all the possibilities:

You are the auditor of a listed company, and the audit process is nearing completion. You are discussing the company’s going concern position with the Audit Committee. Describe the potential audit report outcomes that could arise.

My approach for any audit report outcome question is as follows:
1: Have you got all the audit evidence you need?
Well, if we are having a full discussion with the audit committee I guess the answer is yes. If not, the Opinion would be either a Disclaimer, or an “Except for” Qualified Opinion, possibly the former given the lack of evidence relates to going concern, so feels pervasive.
2: How has company accounted for the situation, and is it correct? Two issues here. First, the company either uses the ‘going concern’ basis of preparing the financial statements (FS), or it doesn’t. Second, if using the going concern basis, is there any ‘material uncertainty relating to going concern’ (a MURGC), because if there is the company needs a disclosure note explaining this uncertainty in its FS.
If the company uses the going concern basis, but the auditor thinks the company is not a going concern, the Opinion will be adverse.
If the company uses the going concern basis but there is a MURGC that they fail to disclose in the FS, the Opinion will be either Adverse, or an “Except for” Qualified Opinion, as the missing disclosure represents a breach of IAS 1.
Take a deep breath before reading the next paragraph…
If the company uses the going concern basis, there is a MURGC and they have correctly disclosed it in a FS Note … then the Opinion is unmodified (the FS are not misstated), but the auditor adds their own MURGC paragraph directly under the Basis For Opinion, to draw attention to the FS Note and ensure shareholders are aware of it, and understand that the auditor agrees with its content.
3: Do we need to consider mentioning the issue:
a. in the KAM?
b. in an Emphasis of Matter paragraph?
c. in an Other Matter paragraph?
The company is listed, so the audit report needs a Key Audit Matters (KAM) section, which in simple terms will explain anything discussed at length with the client’s audit committee that is not already mentioned in a modified audit opinion, or as a MURGC (as there is no point repeating ourselves).
So if there is a MURGC in the FS notes, the auditor will already have referred to this either by modifying the Opinion, or by adding a MURGC paragraph below the Basis For Opinion, as described above in point 2.
If there is no MURGC, but going concern remained an issue that caused a detailed discussion with the audit committee, then it will be discussed within the KAM.
An Emphasis of Matter paragraph highlights an important FS disclosure note to the shareholders … as long as the note is not a going concern uncertainty (as this is dealt with by the MURGC paragraph). So Emphasis of Matter is not going to be relevant to going concern issues in an exam question, unlike in the past when it certainly was.
An Other Matter paragraph is used where the unaudited Annual Report content is inconsistent with the audited FS.
So, if the FS are considered correct, but the Annual Report says contradictory things about the going concern status of the company, an Other Matter paragraph would refer to the inconsistency, with the Opinion section remaining unmodified.
Audit reports have changed recently, and the changes are already being examined. Invest some time learning, understanding and practising them.
• Paul Merison is a top tutor at LSBF

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