How Acca F8 And P7 Students Should Deal With Changes In Audit Report ? Article By Paul Merison
Paul Merison (LSBF Lecturer) explains how you can get your head around the recent changes in audit report that are now examined in Acca F8 and Acca P7 Exam
During recent years, there have been changes in audit reports 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 Financial Statements.
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 material uncertainty relating to going concern that they fail to disclose in the Financial Statements, 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 material uncertainty relating to going concern and they have correctly disclosed it in a Financial Statements Note … then the Opinion is unmodified (the Financial Statements are not misstated), but the auditor adds their own material uncertainty relating to going concern paragraph directly under the Basis For Opinion, to draw attention to the Financial Statements 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:
- in the Key Audit Matters (KAM)?
- in an Emphasis of Matter paragraph?
- 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 material uncertainty relating to going concern (as there is no
point repeating ourselves).
So if there is a material uncertainty relating to going concern in the Financial Statements notes, the auditor will already have referred to this either by modifying the Opinion, or by adding a material uncertainty relating to going concern paragraph below the Basis For Opinion, as described above in point 2.
If there is no material uncertainty relating to going concern, but going concern remained an issue that caused a detailed discussion with the audit committee, then it will be discussed within the Key Audit Matters.
An Emphasis of Matter paragraph highlights an important Financial Statements disclosure note to the shareholders … as long as the note is not a going concern uncertainty (as this is dealt with by the material uncertainty relating to going concern 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 un audited Annual Report content is inconsistent with the audited Financial Statements.So, if the Financial Statements 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 practicing them.
Paul Merison is a top tutor at LSBF
Article Changes In Audit Report Was Originally Published By PQ Magazine