Audit Completion and Reporting (Advanced)

The auditor must accumulate all misstatements identified during the audit (other than those that are clearly trivial) and evaluate their effect on the audit opinion.

Types of misstatement:

• Factual misstatements: Errors about which there is no doubt — clearly incorrect amounts (e.g., an invoice posted to the wrong period, a calculation error)
• Judgemental misstatements: Differences arising from management's judgements on estimates or accounting policies that the auditor considers unreasonable (e.g., an insufficiently conservative provision)
• Projected misstatements: The auditor's best estimate of misstatements in the entire population, projected from misstatements found in a sample

Process:

1. Accumulate all misstatements above the clearly trivial threshold on a summary of unadjusted differences
2. Communicate all misstatements to management and request that they be corrected
3. If management refuses to correct some misstatements: evaluate whether the aggregate of uncorrected misstatements is material (individually or in combination). Consider both the quantitative amount and the qualitative nature (e.g., does the misstatement affect compliance with a loan covenant? does it turn a profit into a loss? does it affect a trend?)
4. Obtain written representations from management that uncorrected misstatements are immaterial (individually and in aggregate)
5. If the aggregate is material: the auditor must modify the opinion (qualified or adverse)

Communicate to TCWG (ISA 260): The auditor communicates uncorrected misstatements to TCWG and explains the effect on the audit opinion. TCWG may then direct management to make the corrections.

Before forming the opinion, the auditor performs several completion procedures:

1. Subsequent events review (ISA 560): Perform procedures up to the date of the audit report to identify events that may require adjustment or disclosure. Review post-year-end transactions, read the latest management accounts, inquire of management about developments, review board minutes.

2. Management representations (ISA 580): Obtain the signed management representation letter. Dated the same date as the audit report. Confirms: FS responsibility, completeness of information, all transactions recorded, specific representations on key matters. Refusal to provide = scope limitation.

3. Overall analytical review (ISA 520): A "stand back" review of the financial statements as a whole. Do the final financial statements make sense in the context of the auditor's understanding of the entity? Any unexpected relationships or fluctuations at this stage require investigation before the opinion is formed.

4. Written summary of significant matters: The engagement partner reviews a summary of all significant findings, unresolved matters, and misstatements. Evaluates whether the audit has been performed in accordance with ISAs and whether sufficient appropriate evidence has been obtained.

5. Engagement quality review (if applicable): For PIE audits and other engagements requiring an EQR (ISQM 2), the EQR must be completed before the audit report is dated.

6. Evaluate going concern (ISA 570): Final evaluation of management's going concern assessment and the adequacy of disclosures.

ISA 700 (Revised) requires the auditor to form an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

Unmodified opinion: Expressed when the auditor concludes that the FS are prepared, in all material respects, in accordance with the framework. For a true and fair view framework (UK): "the financial statements give a true and fair view."

Structure of the audit report (ISA 700 enhanced format):

1. Title: "Independent Auditor's Report"
2. Addressee: Usually "to the members of [Company name]"
3. Opinion section (FIRST — moved to the top under the enhanced format):
   • States what has been audited (the financial statements and which statements)
   • States the opinion: "In our opinion, the financial statements give a true and fair view of the state of the company's affairs as at [date] and of its profit/loss for the year then ended, and have been properly prepared in accordance with [framework]"
4. Basis for Opinion: States the audit was conducted in accordance with ISAs (UK), the auditor is independent, and the evidence obtained is sufficient and appropriate
5. Material Uncertainty Related to Going Concern (if applicable — ISA 570)
6. Key Audit Matters (ISA 701 — for listed entities)
7. Other Information (ISA 720 — the auditor's responsibilities regarding the directors' report, strategic report, etc.)
8. Responsibilities of management and TCWG: For preparing the FS and for assessing going concern
9. Auditor's Responsibilities: To obtain reasonable assurance, explanation of materiality, description of the audit process
10. Report on other legal and regulatory requirements: Matters required by the Companies Act (e.g., consistency of directors' report, adequacy of accounting records)
11. Name of engagement partner (for listed entities)
12. Auditor's signature, address, and date

Key audit matters are those matters that, in the auditor's professional judgement, were of most significance in the audit of the current period's financial statements.

Who must report KAMs? ISA 701 is mandatory for audits of listed entities. For non-listed entities, KAMs may be included voluntarily or as required by law/regulation.

How are KAMs determined?

KAMs are selected from matters communicated with TCWG. The auditor considers:

• Areas of higher assessed risk of material misstatement (significant risks)
• Areas involving significant management judgement (accounting estimates with high estimation uncertainty)
• Significant events or transactions during the period that affected the audit

KAMs typically include matters such as: revenue recognition (especially complex arrangements), goodwill impairment, valuation of financial instruments, major provisions and contingencies, significant acquisitions, going concern assessment.

How are KAMs communicated in the audit report?

A separate section headed "Key Audit Matters" containing, for each KAM:

• A description of why the matter is significant and was considered a KAM
• A reference to the related disclosure(s) in the financial statements
• A description of how the matter was addressed in the audit (the procedures performed and/or the outcome)

KAMs are NOT:

• A substitute for a modified opinion (if there is a material misstatement, the opinion must be modified — it cannot be addressed by a KAM alone)
• A substitute for the going concern section (material uncertainties have their own required section)
• A way to disclose information that the entity has not disclosed (the auditor should not use KAMs to provide new information that is not in the FS)

The auditor modifies the opinion when the FS are materially misstated, or when sufficient appropriate evidence cannot be obtained.

Decision framework:

"Pervasive" means: The matter is not confined to specific elements — it affects the FS as a whole, or could potentially affect a substantial proportion of the FS, or fundamentally undermines the user's understanding. Examples: going concern basis is inappropriate (affects all balances), records have been destroyed (affects everything), management refuses all written representations (fundamental limitation).

Report structure for modified opinions:

• The Opinion section is modified — headed "Qualified Opinion", "Adverse Opinion", or "Disclaimer of Opinion"
• A "Basis for [Qualified/Adverse/Disclaimer of] Opinion" section is included immediately after the Opinion section, describing the matter and its effect (quantified where practicable for disagreements)
• For a disclaimer: the Auditor's Responsibilities section is modified to state that the auditor was NOT able to obtain sufficient evidence, and the audit was not conducted in accordance with ISAs to the extent required

Emphasis of Matter (EOM) paragraph:

• Used when the auditor considers it necessary to draw users' attention to a matter presented or disclosed in the FS that is fundamental to users' understanding of the FS
• The opinion is NOT modified — the FS are fairly presented, but the auditor wants to highlight a particularly important disclosure
• Placed in a separate paragraph headed "Emphasis of Matter" after the Basis for Opinion section
• States that the opinion is not modified in respect of this matter
• Examples: A significant uncertainty (other than going concern), application of a new standard with a material effect, a major post-balance sheet event properly disclosed, an early adoption of a standard
• Note: Going concern material uncertainties have their own required section (not an EOM under ISA 570 Revised)

Other Matter paragraph:

• Used to draw attention to a matter that is NOT presented or disclosed in the FS but is relevant to users' understanding of the audit, the auditor's responsibilities, or the auditor's report
• Placed after the Basis for Opinion and any EOM paragraph
• Examples: The prior period's FS were audited by a different auditor, the prior period's FS were not audited, a restriction on distribution of the audit report

ISA 260 — Communication with Those Charged with Governance (TCWG):

The auditor must communicate the following matters to TCWG on a timely basis:

• The auditor's responsibilities under ISAs (including the scope and timing of the audit)
• The planned scope and timing of the audit (the overall strategy)
• Significant findings from the audit: significant qualitative aspects of accounting policies (including estimates), significant difficulties encountered, significant matters discussed with management, uncorrected misstatements, expected modifications to the opinion, key audit matters
• Auditor independence: relationships and other matters that might affect independence, safeguards applied, fees (total fees, split between audit and non-audit services)
• Any fraud or suspected fraud involving management or employees with significant roles in internal controls
• Non-compliance with laws and regulations

TCWG is usually the audit committee for listed companies, or the board of directors for smaller entities.

ISA 265 — Communicating Deficiencies in Internal Control:

• The auditor must communicate significant deficiencies in internal control identified during the audit to TCWG — in writing, on a timely basis
• The auditor may also communicate other deficiencies (non-significant) to management — at the auditor's discretion
• A significant deficiency is one that merits the attention of TCWG — it is a deficiency (or combination of deficiencies) that the auditor considers sufficiently important. It does not mean a material weakness has been found — the auditor is highlighting a control that should be improved.
• The communication should include: a description of the deficiency, an explanation of its potential effects, and sufficient information for TCWG to understand the context. It should NOT include recommendations for specific corrective action (although this is sometimes included in practice in a "management letter").

ISA 720 — The Auditor's Responsibilities Relating to Other Information:

• "Other information" = documents containing the audited FS that include additional information — typically: the directors' report, strategic report, chairman's statement, corporate governance statement, financial highlights
• The auditor must read the other information and consider whether it is materially inconsistent with the FS or the auditor's knowledge obtained during the audit
• If a material inconsistency or misstatement of fact is identified: discuss with management. If unresolved: consider implications for the audit report (include a statement in the "Other Information" section of the report, or modify the opinion if the FS are affected)
• The auditor does NOT "audit" or "express an opinion" on the other information — they state in the report that they have read it and whether they have identified any material inconsistencies
• Under the Companies Act 2006, the auditor must also report by exception if the directors' report is NOT consistent with the FS