Auditor's reports
Section B of the AAA exam always includes a question mainly on completion and reporting, and a common form asks you to critically appraise a draft auditor's report that a junior or a colleague has prepared. To earn those marks you need two things: a firm grasp of the decision that leads to the opinion, and an exact knowledge of what each section of the report is for, so that you can see when a matter is in the wrong place. The AA notes taught the elements of the report and the four opinions. This lesson works at AAA level: justifying the opinion, critiquing the report, choosing between key audit matters and emphasis of matter, the public interest entity amendments, group reports and other information.
Forming and justifying the opinion
ISA 700 (Revised) Forming an Opinion and Reporting on Financial Statements requires the auditor to conclude whether reasonable assurance has been obtained that the statements as a whole are free from material misstatement. Justify any opinion with four steps, in this order, each in a sentence or two:
- The nature of the matter. A misstatement (the statements are wrong under a named standard) or an inability to obtain sufficient appropriate evidence (the auditor cannot tell).
- Materiality. The amount as a percentage of profit before income taxes, revenue or total assets, plus any reason it is material by nature. Include uncorrected misstatements in aggregate.
- Pervasiveness. Is the effect confined to specific elements and not a substantial proportion of the statements? Or is it widespread, a substantial proportion, or fundamental to users' understanding?
- The opinion and the changes to the report.
| Nature | Material, not pervasive | Material and pervasive |
|---|---|---|
| Material misstatement | Qualified ("except for") | Adverse |
| Unable to obtain sufficient appropriate evidence | Qualified ("except for") | Disclaimer of opinion |
When the question asks you to assess a proposed opinion, run the same steps on the facts and compare: a proposed adverse opinion for a 6% misstatement in one balance fails at step 3; a proposed qualification for a limitation covering half the assets fails at step 3 the other way.
The unmodified report: what a critique checks
| Section | What must be right |
|---|---|
| Title and addressee | "Independent Auditor's Report", usually to the shareholders |
| Opinion | First; names the entity, statements and period; uses the framework's terms (true and fair view, or presents fairly) |
| Basis for Opinion | Immediately after the opinion; the audit followed ISAs; independence and other ethical responsibilities were met (see the amendments below); the evidence is sufficient and appropriate |
| Going Concern, or Material Uncertainty Related to Going Concern | As ISA 570 (Revised 2024) requires (lesson E1) |
| Key Audit Matters | Required for listed entities; why each matter was significant and how the audit addressed it |
| Other Information | What was read and what was found |
| Responsibilities of management and those charged with governance; Auditor's Responsibilities | Including going concern, internal control and the nature of an audit |
| Engagement partner | Named for listed entities |
| Signature, address, date | Dated no earlier than when sufficient appropriate evidence, including evidence that the statements were approved, was obtained |
The public interest entity amendments
The IESBA's revisions to the definitions of listed entity and public interest entity require a firm to disclose publicly when it has applied the stricter independence requirements for public interest entities in an audit. The IAASB's narrow scope amendments to ISA 700 (Revised) and ISA 260 (Revised) (issued in 2023, effective for audits of periods beginning on or after 15 December 2024), which are examinable at AAA, make the auditor's report the place for that disclosure:
- ISA 700 (Revised): where the relevant ethical requirements call for this disclosure, the Basis for Opinion section states that the auditor applied the independence requirements for public interest entities.
- ISA 260 (Revised): the auditor communicates to those charged with governance the relevant ethical requirements it applied, including any independence requirements specific to public interest entities.
A further set of IAASB amendments, published in 2025 and effective for audits of periods beginning on or after 15 December 2026, replaces "listed entity" with "publicly traded entity" in the ISAs' extra requirements, including key audit matters, naming the engagement partner, the going concern descriptions and engagement quality reviews. In an exam answer, a listed company falls within these requirements either way.
Key audit matters, emphasis of matter and other matter
ISA 701 Communicating Key Audit Matters in the Independent Auditor's Report applies to listed entities and wherever the auditor is required, or decides, to communicate key audit matters (KAMs). The auditor selects, from the matters communicated with those charged with governance, those that required significant auditor attention (higher assessed risks and significant risks, significant judgements on estimates, significant events in the period), and from those, the matters of most significance. For each KAM the report explains why it was one of the most significant matters, how the audit addressed it, and refers to any related disclosure.
ISA 706 (Revised) Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report provides the other two paragraphs.
| Question | If yes |
|---|---|
| Does the matter cause a modified opinion? | Describe it in the Basis for Qualified, Adverse or Disclaimer of Opinion section; if KAMs are reported, the KAM section only cross-refers to it |
| Is it a material uncertainty related to going concern? | Its own Material Uncertainty section; the KAM section only cross-refers to it |
| Is it a KAM (for an entity where KAMs are reported)? | Key Audit Matters section; an emphasis of matter is not used for a KAM |
| Is it properly disclosed and fundamental to users' understanding of the statements? | Emphasis of Matter paragraph, referring to the note and stating that the opinion is not modified |
| Is it not in the statements, but relevant to users' understanding of the audit, the auditor's responsibilities or the report? | Other Matter paragraph |
Typical emphasis of matter subjects: an exceptional uncertainty over litigation or regulatory action, a major catastrophe, a significant subsequent event, or financial statements prepared on a basis other than going concern. Typical other matter subjects: comparatives audited by a predecessor or unaudited, a restriction on the report's distribution, or reporting on more than one set of statements. Neither paragraph can fix a misstatement; using one for a matter that should modify the opinion is a serious error.
Actions after a modified opinion
A modified opinion is not the end of the auditor's work. The auditor:
- communicates to those charged with governance, before the report is issued, the circumstances leading to the modification and the proposed wording (ISA 705 (Revised));
- keeps trying to resolve the matter: management can still correct the misstatement or lift a limitation;
- considers what the matter says about management's integrity, fraud or non-compliance, and the reliability of representations;
- for a limitation imposed by management, considers withdrawing where law permits, and takes legal advice;
- considers any duty to report to a regulator (for example for a bank or a listed company);
- plans for next year: an unresolved matter affects the corresponding figures (ISA 710), and the engagement may need a higher risk assessment or reconsideration of continuance;
- prepares for questions at the general meeting, and involves the engagement quality reviewer and the firm's consultation process for significant modifications.
Group reports when a component opinion is modified
When a component's own auditor's report is modified, the group auditor asks whether the matter matters to the group.
| Situation | Effect on the group report |
|---|---|
| The component misstatement is corrected in the consolidation | No modification |
| It is not material to the group statements | No modification |
| It is material to the group and not corrected | Qualified, or adverse if pervasive to the group |
| The component limitation is material to the group | Qualified, or a disclaimer if pervasive to the group |
| The component has a material uncertainty over going concern | Consider whether it creates a material uncertainty for the group, for example if the group depends on that component |
The group report never blames or refers to the component auditor; the group auditor takes responsibility for the group opinion.
Other information and the integrated report
Under ISA 720 (Revised) The Auditor's Responsibilities Relating to Other Information, if the auditor finds an apparent material inconsistency or a material misstatement of the other information (for example, an integrated report claims revenue growth of 12% when the statements show 7%), it discusses the matter with management and decides which document is wrong.
- The financial statements are wrong, and management will not correct them: modify the opinion under ISA 705 (Revised).
- The other information is wrong, and management will not correct it: communicate with those charged with governance; if still uncorrected, describe the uncorrected material misstatement in the Other Information section (the opinion on the statements is not modified for this), or withdraw where law permits, and consider legal advice.
- Other information received after the report date is materially misstated and uncorrected: communicate with those charged with governance and take appropriate action, such as legal advice, raising it at the general meeting, or informing a regulator.
Worked example
Kaduna Agro Plc (a fictional listed company) has a year end of 31 December 20X6, profit before income taxes of $12.0 million and total assets of $150.0 million. The audit found:
- A receivable of $2.4 million from a customer that went into liquidation in December 20X6 has not been written off; no recovery is expected. The directors refuse to adjust.
- A major claim against the company, with a very uncertain outcome, is fully disclosed in note 21. The team regards it as one of the most significant matters in the audit.
- A material uncertainty related to going concern is adequately disclosed in note 2.
- A subsidiary, Zaria Seeds Co, is audited by another firm.
A junior has drafted the following extract.
Adverse Opinion. In our opinion, except for the matter described below, the financial statements give a true and fair view of the financial position of the company at 31 December 20X6.
Emphasis of Matter: trade receivables. We draw attention to trade receivables, which include $2.4 million due from a customer in liquidation. Our opinion is not modified in respect of this matter.
Emphasis of Matter: going concern. We draw attention to note 2, which describes events that may cast doubt on the company's future.
Key Audit Matters. Valuation of receivables: we were unable to agree with the directors' assessment of the receivable described above.
Other Matter. The claim described in note 21 has an uncertain outcome. We relied on the auditors of Zaria Seeds Co, who are responsible for its figures.
The report is signed by the firm, with no partner named, and dated 1 March 20X7; the directors approve the statements on 10 March 20X7.
The critique.
| Point | Problem | Correction |
|---|---|---|
| The opinion | $2.4m is 20% of profit before income taxes and 1.6% of total assets: material, but confined to receivables and profit, so not pervasive. "Adverse" contradicts the "except for" wording | Qualified Opinion, with "except for" wording |
| The receivable in an emphasis of matter | An emphasis of matter is for properly disclosed matters; this is a misstatement | Describe and quantify it in a Basis for Qualified Opinion section, placed immediately after the opinion |
| The receivable as a KAM | A matter giving rise to a modified opinion is not described as a KAM | Cross-refer from the KAM section to the Basis for Qualified Opinion section |
| Going concern as an emphasis of matter | ISA 570 (Revised 2024) requires its own section; for a listed entity it must also describe how the auditor evaluated management's assessment | A Material Uncertainty Related to Going Concern section referring to note 2, stating that a material uncertainty exists, that the opinion is not modified for it, and describing the auditor's evaluation |
| The claim as an other matter | It is in the statements, so an other matter paragraph is wrong; and the team judged it one of the most significant matters | A KAM explaining why it was significant, how the audit addressed it (legal confirmations, review of correspondence, evaluation of the disclosure), with a reference to note 21 |
| Reliance on Zaria's auditors | The group auditor may not refer to a component auditor unless law requires it, and cannot share responsibility | Delete the reference |
| No engagement partner named | Required for listed entities | Name the engagement partner |
| Dated before approval | A report cannot be dated before the statements are approved | Date it no earlier than 10 March 20X7, with subsequent events work updated to that date |
| Basis for Opinion statements | Missing the statements on ISAs, independence (including, where required, that the public interest entity independence requirements were applied) and sufficient appropriate evidence | Add them |
A corrected opening, written as a marker expects:
Qualified Opinion. We have audited the financial statements of Kaduna Agro Plc for the year ended 31 December 20X6. In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion section of our report, the financial statements give a true and fair view of the financial position of the company at 31 December 20X6, and of its financial performance and cash flows for the year then ended, in accordance with IFRS Accounting Standards.
Basis for Qualified Opinion. Trade receivables include $2.4 million due from a customer that entered liquidation before the year end, from which no recovery is expected. IFRS 9 Financial Instruments requires the expected credit loss on this receivable to be recognised. Had it been recognised, trade receivables and profit for the year would each have been $2.4 million lower. We conducted our audit in accordance with International Standards on Auditing. We are independent of the company in accordance with the ethical requirements relevant to our audit, including the independence requirements applicable to public interest entities, and we have fulfilled our other ethical responsibilities. We believe the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion.
Before issuing the report, the auditor communicates the qualification and its wording to the audit committee.
Common mistakes
- Naming the opinion before deciding whether the matter is a misstatement or a lack of evidence, and whether it is pervasive.
- Using an emphasis of matter or a KAM to deal with a misstatement.
- Reporting a going concern material uncertainty as an emphasis of matter, or forgetting the description of the auditor's evaluation for a listed entity.
- Putting a KAM in an emphasis of matter paragraph, or a matter that is in the statements in an other matter paragraph.
- Critiquing only the opinion and missing the date, the partner's name, the order of sections and the independence statements.
- Modifying the opinion on the statements because the other information is wrong.
Exam technique
For a critique, go through the draft section by section and, for each problem, write three things: what is wrong, why (the ISA and the facts, with the materiality calculation), and what the report should say instead. A table does this efficiently. Start with the opinion, because an error there usually drives other errors. Do not rewrite the whole report unless asked; a corrected extract of the opinion and its basis is usually enough.
Study with AI
I am studying ACCA Advanced Audit and Assurance (AAA-INT), sub-area E3: auditor's
reports. Write a draft auditor's report extract for a fictional listed company in $
that contains six errors, mixing a wrong opinion type, a misused emphasis of matter,
a misplaced key audit matter, going concern reporting and a dating error. Give me
profit before income taxes and total assets. Ask me to critique it, then mark my
critique against the errors you planted and show the corrected extract.AI assistants can confuse the purposes of key audit matters, emphasis of matter and other matter paragraphs: check every answer against these notes before you rely on it.
Lecturer's note: Every section of the auditor's report answers one question, and a matter belongs only where its question is. Is it wrong? The basis for the modified opinion. Will the company survive? The going concern section. What did the auditor worry about most? Key audit matters. What should readers not miss in the notes? Emphasis of matter. What else should they know about the audit? Other matter. A critique is simply checking each matter against its question.
Key points
- Justify every opinion in four steps: the nature of the matter, materiality (including aggregated uncorrected misstatements), pervasiveness, then the opinion and the report changes.
- Check a report's order, headings, independence statements, going concern section, KAMs, partner's name and date; a report cannot be dated before the statements are approved.
- The PIE amendments to ISA 700 (Revised) and ISA 260 (Revised) require the report to state when public interest entity independence requirements were applied, and those charged with governance to be told which requirements applied; later amendments move the listed-entity requirements to publicly traded entities from periods beginning on or after 15 December 2026.
- KAMs are for the most significant matters in the audit; an emphasis of matter is for a properly disclosed fundamental matter that is not a KAM; an other matter paragraph is for something not in the statements; none replaces a modified opinion or the going concern sections.
- After a modified opinion, communicate with those charged with governance, consider integrity, regulators, withdrawal and next year; for groups, judge a component's modification by its effect on the group; for other information, modify the opinion only if the statements are wrong.
Quick check
- Profit before income taxes is $8.0 million and total assets $90.0 million. Inventory is overstated by $560,000 and the directors refuse to adjust. What opinion is appropriate?
- For a listed company, the team regards a properly disclosed regulatory investigation as one of the most significant matters in the audit. Where is it reported?
- A subsidiary's auditor has qualified its opinion for a $300,000 misstatement. Group materiality is $1.5 million and the misstatement is not corrected on consolidation. What is the effect on the group report?
Answers
- $560,000 is 7% of profit before income taxes (0.6% of total assets): material, but confined to inventory and cost of sales, so not pervasive. A qualified ("except for") opinion due to material misstatement.
- In the Key Audit Matters section, explaining why it was significant and how the audit addressed it, with a reference to the disclosure note. An emphasis of matter is not used for a matter reported as a KAM.
- $300,000 is below group materiality of $1.5 million, so on its own it does not modify the group opinion, though it is included in the group's aggregate of uncorrected misstatements.