Former Statements of Scope of audit
Published: 25 September 2023
1 minute read
Background
Paragraph 16 of ISA (UK and Ireland) 700 allows an auditor's report to cross refer to a "Statement of the Scope of an Audit" that is maintained on the FRC's website.
On 26 March 2009 two such "Statements of the Scope of an Audit" were posted to the APB's website. One applied to publicly traded companies and the other applied to non-publicly traded companies for auditor's reports of financial statements of companies incorporated in the United Kingdom for periods beginning on or after 6 April 2008 and ending on or after 5 April 2009.
On 1 December 2010 these two statements were superseded by a single "Statement of the Scope of an Audit" which can be used for auditor's reports of financial statements of all UK private sector entities for periods ended on or after 15 December 2010.
On 12 October 2012 a statement applicable to Irish entities was posted to the FRC's website.
Former scope for UK non-publicly traded companies
A UK Non Publicly Traded Company (issued 26 March 2009)
Scope of an audit of the financial statements of a United Kingdom publicly non-traded1 company or group:
This statement may be cross referred to from auditor’s reports that are effective for accounting periods commencing on or after 6 April 2008 and ending on or after 5 April 2009. If the auditor’s report is required to be read out, only the shaded paragraph is to be regarded as forming part of the auditor’s report for that purpose.
1. The scope of an audit of financial statements arising from the requirements of company law:
The Companies Act 2006 (CA 2006) requires the auditor to make a report to the company’s members that must state clearly whether, in the auditor’s opinion, the financial statements:
- give a true and fair view:
- in the case of an individual balance sheet, of the state of affairs of the company as at the end of the financial year;
- in the case of an individual profit and loss account, of the profit or loss of the company for the financial year; and
- in the case of group accounts, of the state of affairs as at the end of the financial year and of the profit or loss for the financial year of the undertakings included in the consolidation as a whole, so far as concerns members of the company;
- have been properly prepared in accordance with the relevant financial reporting framework2;
- have been prepared in accordance with the requirements of CA 2006.
CA 2006 further requires the auditor’s report on the financial statements to be either unqualified or qualified and to include a reference to any matters to which the auditor wishes to draw attention by way of emphasis without qualifying the report. Requirements of International Standards on Auditing (ISAs) (UK and Ireland) regarding qualified reports, unqualified reports and “emphasis of matter paragraphs” are discussed further in the next part of this statement.
2. The scope of an audit of financial statements arising from the requirements of ISAs (UK and Ireland)
Overall objective
In conducting an audit of financial statements, the overall objectives of the auditor are to:
- obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error; and
- report on the financial statements and communicate, as required by ISAs (UK and Ireland), the auditor’s findings.
Compliance with ISAs (UK and Ireland) and APB’s Ethical Standards for Auditors
The auditor is required to comply with:
- all ISAs (UK and Ireland) that are relevant to the audit; and
- APB’s Ethical Standards for Auditors.
ISAs (UK and Ireland) require the auditor to plan and perform an audit with professional scepticism recognizing that circumstances may exist that cause the financial statements to be materially misstated.
ISAs (UK and Ireland) and the Ethical Standards for Auditors contain basic principles and essential procedures together with related guidance. The nature of these Standards requires an auditor to exercise professional judgment in applying them.
Some ISAs (UK and Ireland) address the core aspects of the audit process such as:
- Planning.
- Understanding the company and its environment (including internal controls).
- Assessing the risks of material misstatement.
- Responding to assessed risks.
Other ISAs (UK and Ireland) establish requirements in relation to those areas of the auditor’s work where it is particularly important that the views of auditors and users of financial statements, regarding the nature and extent of work to be performed, are aligned. Such areas include:
- Going concern.
- The auditor’s responsibility to consider fraud in an audit of financial statements.
- Consideration of laws and regulations in an audit of financial statements.
Scope of an audit of financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the [group’s and the parent] company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements.
Other information in the Annual Report
If the financial statements are included in a document (such as an Annual Report) that contains surround information, other than the Directors’ Report, an auditor is required to read all financial and non-financial information included in the document and consider whether such “other information” is consistent with the audited financial statements. The auditor considers the implications for its report if it becomes aware of any material inconsistencies with the financial statements or any apparent material misstatements in the other information.
Communicating with those charged with governance
The auditor is required to communicate its significant findings arising from the audit with those charged with governance. Those charged with governance are the persons (usually the directors) with responsibility for overseeing the strategic direction of the company and obligations relating to the accountability of the company.
Significant findings from the audit include:
- the auditor’s view about significant qualitative aspects of the entity’s accounting practices, including accounting policies, accounting estimates and financial statement disclosures;
- significant difficulties encountered during the audit; and
- material weaknesses in internal control identified during the audit.
Reporting on the financial statements
The auditor’s report is required to contain a clear expression of opinion on the financial statements taken as a whole.
To form an opinion on the financial statements the auditor concludes as to whether:
- sufficient appropriate audit evidence has been obtained;
- uncorrected misstatements are material, individually or in aggregate;
- the financial statements, including the related notes, give a true and fair view; and
- the financial statements are prepared, in all material respects, in accordance with the requirements of the relevant financial reporting framework, including the requirements of applicable law.
In particular an audit involves evaluating whether:
- the financial statements adequately refer to or describe the relevant financial reporting framework;
- the financial statements adequately disclose the significant accounting policies selected and applied;
- the accounting policies selected and applied are consistent with the applicable financial reporting framework, and are appropriate in the circumstances;
- accounting estimates are reasonable;
- the information presented in the financial statements is relevant, reliable comparable and understandable;
- the financial statements provide adequate disclosures to enable the intended users to understand the effect of material transactions and events on the information conveyed in the financial statements; and
- the terminology used in the financial statements, including the title of each financial statement, is appropriate.
Expressing an unqualified opinion
An unqualified opinion is expressed when the auditor is able to conclude that the financial statements comply with the applicable financial reporting framework (including applicable law) and give a true and fair view.
Qualifying the auditor’s opinion
An auditor expresses a qualified opinion when either of the following circumstances exists and, in the auditor’s judgment, the effect of the matter is or may be material to the financial statements:
there is a limitation on the scope of the auditor’s work that has prevented the auditor from obtaining sufficient appropriate audit evidence; or
there is a disagreement regarding the acceptability of the accounting policies selected, the method of their application or the adequacy of financial statement disclosures.
The circumstances in (a) could lead to either a qualified opinion or a disclaimer of opinion whereas those in (b) could lead to either a qualified opinion or an adverse opinion.
Emphasising certain matters without qualifying the opinion
In certain circumstances an auditor’s report includes an emphasis of matter paragraph to highlight a matter affecting the financial statements. An emphasis of matter paragraph does not affect the auditor’s opinion. The auditor is required to consider adding an emphasis of matter paragraph where there is a significant uncertainty the resolution of which is dependent upon future events and which may affect the financial statements. However, the auditor is required to add an emphasis of matter paragraph to highlight a material uncertainty relating to an event or condition that may cast significant doubt on the entity’s ability to continue as a going concern.
Communicating “other matters”
If the auditor considers it necessary to communicate a matter other than those that are presented or disclosed in the financial statements that, in the auditor’s judgment is relevant to users’ understanding of the audit, the auditor’s responsibility or the auditor’s report, the auditor does so in a paragraph in the auditor’s report with the heading “Other Matter” or other appropriate heading.
3. Other legal and regulatory requirements
Requirements of ISA (UK and Ireland) 700 (Revised)
The auditor is required to address other legal and regulatory requirements relating to the auditor’s report in a separate section of the auditor’s report following the opinion on the financial statements. If the auditor is required to report on certain matters by exception the auditor should describe its responsibilities under the heading “Matters on which we are required to report by exception” and to incorporate a suitable conclusion in respect of such matters.
Requirements of CA 2006
CA 2006 establishes the following duties for auditors of non-publicly traded companies to which reference is, or may be, required in the auditor’s report.
Directors’ report
The auditor is required to report its opinion as to whether the information given in the directors’ report (including, where required, the business review) for the financial year for which the financial statements are prepared is consistent with those financial statements.
Duty to report on certain matters by exception
If the auditor is of the opinion:
- that adequate accounting records have not been kept, or that returns adequate for the audit have not been received from branches not visited by the auditor; or
- that the company’s individual accounts are not in agreement with the accounting records and returns, the auditor is required to state that fact in the auditor’s report, or
- certain disclosures of directors' remuneration specified by law are not made.
If the auditor fails to obtain all the information and explanations which, to the best of the auditor’s knowledge and belief, are necessary for the purposes of the audit, the auditor is required to state that fact in its report.
If the directors of the company have prepared accounts and report in accordance with the small companies regime and in the auditor’s opinion they were not entitled so to do, the auditor is required to state that fact in the auditor’s report.
Duty of the auditor to include certain particulars, which have been omitted from the financial statements, in the auditor’s report
The auditor is required to include in the auditor’s report, so far as it is reasonably able to do so, a statement giving the required particulars, if the requirements concerning the disclosure of directors’ benefits: remuneration, pensions and compensation for loss of office are not complied with in the accounts.
1 A non-publicly traded company is one which, neither has securities that are admitted to trading on a regulated market, in any Member State in the European Union; nor is a quoted company as defined by the Companies Act 2006.
2 The report will identify the relevant financial reporting framework.
Former scope for UK Private Sector Entity
Scope of an Audit of Financial Statements of Private Sector Entities arising from the requirements of ISAs (UK and Ireland)
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the [entity’s] circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements.
Overall Objective
The overall objectives of the auditor are to:
- obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error; and
- report on the financial statements and communicate, as required by ISAs (UK and Ireland), the auditor’s findings.
Compliance with ISAs (UK and Ireland) and APB's Ethical Standards
The auditor is required to comply with:
- >all ISAs (UK and Ireland) that are relevant to the audit; and
- APB’s Ethical Standards.
ISAs (UK and Ireland):
- Require the auditor to plan and perform an audit with professional scepticism recognising that circumstances may exist that cause the financial statements to be materially misstated.
- Require the auditor to exercise professional judgment in planning and performing an audit.
- Contain requirements which the auditor must comply with unless a particular ISA (UK and Ireland) or a requirement of an ISA (UK and Ireland) is not relevant.
Some ISAs (UK and Ireland) address the core aspects of the audit process such as:
- Planning the audit.
- Understanding the entity and its environment (including its internal controls).
- Identifying and assessing the risks of material misstatement.
- Responding to assessed risks.
Other ISAs (UK and Ireland) establish requirements in relation to those areas of the auditor’s work where it is particularly important that the views of the auditor and users of financial statements regarding the nature and extent of work to be performed are aligned. Such areas include:
- Going concern.
- The auditor’s responsibility to consider fraud.
- Consideration of laws and regulations.
Other information in documents containing audited financial statements
The auditor is required to read all financial and non-financial information, (other information), included in the document containing the audited financial statements and to consider whether such other information is consistent with the audited financial statements. The auditor considers the implications for its report if it becomes aware of any material inconsistencies with the financial statements or any apparent material misstatements in the other information.
Communicating with those charged with governance
The auditor is required to communicate its significant findings arising from the audit with those charged with governance. Those charged with governance are the persons with responsibility for overseeing the strategic direction of the entity and obligations relating to the accountability of the entity. This includes overseeing the financial reporting process.
Significant findings from the audit include:
- the auditor’s view about significant qualitative aspects of the entity’s accounting practices, including accounting policies, accounting estimates and financial statement disclosures;
- significant difficulties encountered during the audit; and
- material weaknesses in internal control identified during the audit.
Reporting on the financial statements
The auditor’s report is required to contain a clear expression of opinion on the financial statements taken as a whole.
To form an opinion on the financial statements the auditor concludes as to whether:
- sufficient appropriate audit evidence has been obtained;
- uncorrected misstatements are material, individually or in aggregate;
- [the financial statements, including the related notes, give a true and fair view]1; and
- the financial statements are prepared, in all material respects, in accordance with the requirements of the relevant financial reporting framework, including the requirements of applicable law.
- In particular an audit involves evaluating whether:
- the financial statements adequately refer to or describe the relevant financial reporting framework;
- the financial statements adequately disclose the significant accounting policies selected and applied;
- the accounting policies selected and applied are consistent with the applicable financial reporting framework, and are appropriate in the circumstances;
- accounting estimates are reasonable;
- the information presented in the financial statements is relevant, reliable comparable and understandable;
- the financial statements provide adequate disclosures to enable the intended users to understand the effect of material transactions and events on the information conveyed in the financial statements; and
- the terminology used in the financial statements, including the title of each financial statement is appropriate.
Unqualified opinions
An unqualified opinion is expressed when the auditor is able to conclude that the financial statements [give a true and fair view and]2 comply in all material respects with the relevant financial reporting framework (including applicable law).
Modified opinions
The auditor modifies the opinion when either:
- the auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement; or
- the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.
The auditor expresses a qualified opinion when either:
- misstatements, individually or in the aggregate, are material but not pervasive to the financial statements; or
- the possible effect of undetected misstatements, arising from an ability to obtain sufficient appropriate audit evidence, could be material but not pervasive.
The auditor disclaims an opinion when:
- the possible effect of undetected misstatements, arising from an inability to obtain sufficient appropriate audit evidence, could be both material and pervasive to the financial statements; and
- in extremely rare circumstances involving multiple uncertainties, the auditor concludes that notwithstanding having obtained sufficient appropriate audit evidence regarding each of the individual uncertainties, it is not possible to form an opinion on the financial statements due to the potential interaction of the uncertainties and their possible cumulative effect on the financial statements.
Emphasising certain matters without qualifying the opinion
In certain circumstances an auditor’s report includes an emphasis of matter paragraph to highlight a matter fundamental to the user’s understanding of the financial statements. An emphasis of matter paragraph does not affect the auditor’s opinion. The auditor is required to consider adding an emphasis of matter paragraph where there is a significant uncertainty the resolution of which is dependent upon future events and which may affect the financial statements. The auditor is required to add an emphasis of matter paragraph to highlight a material uncertainty relating to an event or condition that may cast significant doubt on the entity’s ability to continue as a going concern.
Communicating "other matters"
If the auditor considers it necessary to communicate a matter other than those that are presented or disclosed in the financial statements that, in the auditor’s judgment is relevant to user’s understanding of the audit, the auditor’s responsibility or the auditor’s report, the auditor does so in a paragraph in the auditor’s report with the heading “Other Matter” or other appropriate heading.
Other Legal and Regulatory Requirements
The auditor is required to address other legal and regulatory requirements relating to the auditor’s report in a separate section of the auditor’s report following the opinion on the financial statements.
1 This conclusion is required only with respect to financial statements which have been prepared in accordance with a true and fair framework (examples are, International Financial Reporting Standards as adopted by the European Union and UK GAAP).
2 Only applicable with respect to “true and fair” frameworks.
Former scope for UK publicly traded companies
A UK Publicly Traded Company1 (issued 26 March 2009)
Scope of an audit of the financial statements of a United Kingdom publicly traded company or group:
This statement may be cross referred to from auditor’s reports that are effective for accounting periods commencing on or after 6 April 2008 and ending on or after 5 April 2009. If the auditor’s report is required to be read out, only the shaded paragraph is to be regarded as forming part of the auditor’s report for that purpose.
1. The scope of an audit of financial statements arising from the requirements of company law:
The Companies Act 2006 (CA 2006) requires the auditor to make a report to the company’s members that must state clearly whether, in the auditor’s opinion, the financial statements:
- give a true and fair view:
- in the case of an individual balance sheet, of the state of affairs of the company as at the end of the financial year;
- in the case of an individual profit and loss account, of the profit or loss of the company for the financial year; and
- in the case of group accounts, of the state of affairs as at the end of the financial year and of the profit or loss for the financial year of the undertakings included in the consolidation as a whole, so far as concerns members of the company;
- have been properly prepared in accordance with the relevant financial reporting framework2;
- have been prepared in accordance with the requirements of CA 2006 and, in the case of the consolidated accounts of publicly traded companies, the requirements of Article 4 of the IAS Regulation3.
CA 2006 further requires the auditor’s report on the financial statements to be either unqualified or qualified and to include a reference to any matters to which the auditor wishes to draw attention by way of emphasis without qualifying the report. Requirements of International Standards on Auditing (ISAs) (UK and Ireland) regarding qualified reports, unqualified reports and “emphasis of matter paragraphs” are discussed further in the next part of this statement.
2. The scope of an audit of financial statements arising from the requirements of ISAs (UK and Ireland)
Overall objective
In conducting an audit of financial statements, the overall objectives of the auditor are to:
- obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error; and
- report on the financial statements and communicate, as required by ISAs (UK and Ireland), the auditor’s findings.
Compliance with ISAs (UK and Ireland) and APB’s Ethical Standards for Auditors
The auditor is required to comply with:
- all ISAs (UK and Ireland) that are relevant to the audit; and
- APB’s Ethical Standards for Auditors.
ISAs (UK and Ireland) require the auditor to plan and perform an audit with professional scepticism recognizing that circumstances may exist that cause the financial statements to be materially misstated.
ISAs (UK and Ireland) and the Ethical Standards for Auditors contain basic principles and essential procedures together with related guidance. The nature of these Standards requires an auditor to exercise professional judgment in applying them.
Some ISAs (UK and Ireland) address the core aspects of the audit process such as:
- Planning.
- Understanding the company and its environment (including internal controls).
- Assessing the risks of material misstatement.
- Responding to assessed risks.
Other ISAs (UK and Ireland) establish requirements in relation to those areas of the auditor’s work where it is particularly important that the views of auditors and users of financial statements, regarding the nature and extent of work to be performed, are aligned. Such areas include:
- Going concern.
- The auditor’s responsibility to consider fraud in an audit of financial statements.
- Consideration of laws and regulations in an audit of financial statements.
Scope of an audit of financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the [group’s and the parent] company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements.
Other information in the Annual Report
An auditor is required to read all financial and non-financial information included in the Annual Report and consider whether such “other information” is consistent with the audited financial statements. The auditor considers the implications for its report if it becomes aware of any material inconsistencies with the financial statements or any apparent material misstatements in the other information.
Communicating with those charged with governance
The auditor is required to communicate its significant findings arising from the audit with those charged with governance. Those charged with governance are the persons (usually the directors) with responsibility for overseeing the strategic direction of the company and obligations relating to the accountability of the company.
Significant findings from the audit include:
- the auditor’s view about significant qualitative aspects of the entity’s accounting practices, including accounting policies, accounting estimates and financial statement disclosures;
- significant difficulties encountered during the audit; and
- material weaknesses in internal control identified during the audit.
Reporting on the financial statements
The auditor’s report is required to contain a clear expression of opinion on the financial statements taken as a whole.
To form an opinion on the financial statements the auditor concludes as to whether:
- sufficient appropriate audit evidence has been obtained;
- uncorrected misstatements are material, individually or in aggregate;
- the financial statements, including the related notes, give a true and fair view; and
- the financial statements are prepared, in all material respects, in accordance with the requirements of the relevant financial reporting framework, including the requirements of applicable law.
In particular an audit involves evaluating whether:
- the financial statements adequately refer to or describe the relevant financial reporting framework;
- the financial statements adequately disclose the significant accounting policies selected and applied;
- the accounting policies selected and applied are consistent with the applicable financial reporting framework, and are appropriate in the circumstances;
- accounting estimates are reasonable;
- the information presented in the financial statements is relevant, reliable comparable and understandable;
- the financial statements provide adequate disclosures to enable the intended users to understand the effect of material transactions and events on the information conveyed in the financial statements; and
- the terminology used in the financial statements, including the title of each financial statement, is appropriate.
Expressing an unqualified opinion
An unqualified opinion is expressed when the auditor is able to conclude that the financial statements comply with the applicable financial reporting framework (including applicable law) and give a true and fair view.
Qualifying the auditor’s opinion
An auditor expresses a qualified opinion when either of the following circumstances exists and, in the auditor’s judgment, the effect of the matter is or may be material to the financial statements:
there is a limitation on the scope of the auditor’s work that has prevented the auditor from obtaining sufficient appropriate audit evidence; or
there is a disagreement regarding the acceptability of the accounting policies selected, the method of their application or the adequacy of financial statement disclosures.
The circumstances in (a) could lead to either a qualified opinion or a disclaimer of opinion whereas those in (b) could lead to either a qualified opinion or an adverse opinion.
Emphasising certain matters without qualifying the opinion
In certain circumstances an auditor’s report includes an emphasis of matter paragraph to highlight a matter affecting the financial statements. An emphasis of matter paragraph does not affect the auditor’s opinion. The auditor is required to consider adding an emphasis of matter paragraph where there is a significant uncertainty the resolution of which is dependent upon future events and which may affect the financial statements. However, the auditor is required to add an emphasis of matter paragraph to highlight a material uncertainty relating to an event or condition that may cast significant doubt on the entity’s ability to continue as a going concern.
Communicating “other matters”
If the auditor considers it necessary to communicate a matter other than those that are presented or disclosed in the financial statements that, in the auditor’s judgment is relevant to users’ understanding of the audit, the auditor’s responsibility or the auditor’s report, the auditor does so in a paragraph in the auditor’s report with the heading “Other Matter” or other appropriate heading.
3. Other legal and regulatory requirements
Requirements of ISA (UK and Ireland) 700 (Revised)
The auditor is required to address other legal and regulatory requirements relating to the auditor’s report in a separate section of the auditor’s report following the opinion on the financial statements. If the auditor is required to report on certain matters by exception the auditor should describe its responsibilities under the heading “Matters on which we are required to report by exception” and to incorporate a suitable conclusion in respect of such matters.
Requirements of CA 2006
CA 2006 establishes the following duties for auditors to which reference is, or may be, required in the auditor’s report.
Directors’ report
The auditor is required to report its opinion as to whether the information given in the directors’ report (including the business review) for the financial year for which the financial statements are prepared is consistent with those financial statements.
Directors’ remuneration report (Applies to those publicly traded companies that also meet the definition of quoted company in the Companies Act 2006)
If the company is a quoted company4 the auditor is required to report whether the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the requirements of CA 2006.
Duty to report on certain matters by exception
If the auditor is of the opinion:
- that adequate accounting records have not been kept, or that returns adequate for the audit have not been received from branches not visited by the auditor; or
- that the company’s individual accounts are not in agreement with the accounting records and returns; or
- in the case of a quoted company, that the part of the Directors’ Remuneration Report to be audited is not in agreement with the accounting records and returns, or
- certain disclosures of directors' remuneration specified by law are not made.
the auditor is required to state that fact in the auditor’s report.
If the auditor fails to obtain all the information and explanations which, to the best of the auditor’s knowledge and belief, are necessary for the purposes of the audit, the auditor is required to state that fact in its report.
Duty of the auditor to include certain particulars, which have been omitted from the financial statements, in the auditor’s report
The auditor is required to include in the auditor’s report, so far as it is reasonably able to do so, a statement giving the required particulars, if:
- the requirements concerning the disclosure of directors’ benefits: remuneration, pensions and compensation for loss of office are not complied with in the accounts; or
- in the case of a quoted company, the requirements as to information forming the part of the Directors’ Remuneration Report to be audited are not complied with in that report,
Corporate Governance (Applies to listed companies only)
The Listing Rules of the Financial Services Authority (the FSA) require listed companies5 to ensure that their auditor reviews each of the following statements required by the Listing Rules, before the annual report is published:
- the directors’ statement in relation to going concern;
- the parts of the statement by the directors that relate to the following provisions of the Combined Code:
- C1.1 (The directors should explain their responsibility for preparing the financial statements and there should be a statement about their reporting responsibilities);
- C2.1 (The Board should conduct a review of the effectiveness of the group’s system of internal controls); and
- C3.1 to C3.7 (Various matters relating to Audit Committees and Auditors)
If, based on its review, the auditor disagrees with the statement by the directors on going concern or concludes that the Corporate Governance Statement does not appropriately reflect the company’s compliance with the nine provisions of the Combined Code the auditor reports that under the heading “Other matter” in its report.
However, the auditor is not required to consider whether the directors’ statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the group’s corporate governance procedures or its risk and control procedures.
1 A publicly traded company is one which has securities that are admitted to trading on a regulated market, in any Member State in the European Union.
2 The report will identify the relevant financial reporting framework.
3 Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards.
4 A quoted company is a company whose equity share capital –
(a) has been included in the official list in accordance with the provisions of Part 6 of the Financial Services and Markets Act 2000 (c. 8), or
(b) is officially listed in an EEA state, or
(c) is admitted to dealing on either the New York Stock Exchange or the exchange known as NASDAQ.
5 A listed company is a company that has any class of its securities admitted to the Official List maintained by the FSA in accordance with section 74 of the Financial Services and Markets Act 2000.
Irish Entity (issued 12 October 2012)
Scope of an Audit of Financial Statements of Irish Entities arising from the requirements of ISAs (UK and Ireland)
Overview
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the [entity’s] circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements.
Overall objective
The overall objectives of the auditor are to:
- obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error; and
- report on the financial statements and communicate, as required by ISAs (UK and Ireland), the auditor’s findings.
Compliance with ISAs (UK and Ireland) and APB’s Ethical Standards
The auditor is required to comply with:
- all ISAs (UK and Ireland) that are relevant to the audit; and
- APB’s Ethical Standards for Auditors.
ISAs (UK and Ireland):
- Require the auditor to plan and perform an audit with professional scepticism recognising that circumstances may exist that cause the financial statements to be materially misstated.
- Require the auditor to exercise professional judgment in planning and performing an audit.
- Contain requirements which the auditor must comply with unless a particular ISA (UK and Ireland) or a requirement of an ISA (UK and Ireland) is not relevant.
Some ISAs (UK and Ireland) address the core aspects of the audit process such as:
- Planning the audit.
- Understanding the entity and its environment (including its internal controls).
- Identifying and assessing the risks of material misstatement.
- Responding to assessed risks.
Other ISAs (UK and Ireland) establish requirements in relation to those areas of the auditor’s work where it is particularly important that the views of the auditor and users of financial statements regarding the nature and extent of work to be performed are aligned. Such areas include:
- Going concern.
- The auditor’s responsibility to consider fraud.
- Consideration of laws and regulations.
Other information in documents containing audited financial statements
The auditor is required to read all financial and non-financial information, (other information), included in the document containing the audited financial statements and to consider whether such other information is consistent with the audited financial statements. The auditor considers the implications for its report if it becomes aware of any material inconsistencies with the financial statements or any apparent material misstatements in the other information.
Communicating with those charged with governance
The auditor is required to communicate its significant findings arising from the audit with those charged with governance. Those charged with governance are the persons with responsibility for overseeing the strategic direction of the entity and obligations relating to the accountability of the entity. This includes overseeing the financial reporting process.
Significant findings from the audit include:
- the auditor’s view about significant qualitative aspects of the entity’s accounting practices, including accounting policies, accounting estimates and financial statement disclosures;
- significant difficulties encountered during the audit; and
- material weaknesses in internal control identified during the audit.
Reporting on the financial statements
The auditor’s report is required to contain a clear expression of opinion on the financial statements taken as a whole.
To form an opinion on the financial statements the auditor concludes as to whether:
- sufficient appropriate audit evidence has been obtained;
- uncorrected misstatements are material, individually or in aggregate;
- [the financial statements, including the related notes, give a true and fair view in accordance with the requirements of the relevant financial reporting framework] 1; and
- the financial statements are properly prepared in accordance with the requirements of applicable law.
In particular an audit involves evaluating whether:
- the financial statements adequately refer to or describe the relevant financial reporting framework;
- the financial statements adequately disclose the significant accounting policies selected and applied;
- the accounting policies selected and applied are consistent with the applicable financial reporting framework, and are appropriate in the circumstances;
- accounting estimates are reasonable;
- the information presented in the financial statements is relevant, reliable comparable and understandable;
- the financial statements provide adequate disclosures to enable the intended users to understand the effect of material transactions and events on the information conveyed in the financial statements; and
- the terminology used in the financial statements, including the title of each financial statement is appropriate.
Unqualified opinions
An unqualified opinion is expressed when the auditor is able to conclude that the financial statements [give a true and fair view in accordance with the relevant financial reporting framework and]2 have been properly prepared in accordance with the requirements of applicable law.
Modified opinions
The auditor modifies the opinion when either:
- the auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement; or
- the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.
The auditor expresses a qualified opinion when either:
- misstatements, individually or in the aggregate, are material but not pervasive to the financial statements; or
- the possible effect of undetected misstatements, arising from an ability to obtain sufficient appropriate audit evidence, could be material but not pervasive.
The auditor expresses an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.
The auditor disclaims an opinion when:
- the possible effect of undetected misstatements, arising from an inability to obtain sufficient appropriate audit evidence, could be both material and pervasive to the financial statements; and
- in extremely rare circumstances involving multiple uncertainties, the auditor concludes that notwithstanding having obtained sufficient appropriate audit evidence regarding each of the individual uncertainties, it is not possible to form an opinion on the financial statements due to the potential interaction of the uncertainties and their possible cumulative effect on the financial statements.
Emphasising certain matters without qualifying the opinion
In certain circumstances an auditor’s report includes an emphasis of matter paragraph to highlight a matter fundamental to the user’s understanding of the financial statements. An emphasis of matter paragraph does not affect the auditor’s opinion. The auditor is required to consider adding an emphasis of matter paragraph where there is a significant uncertainty the resolution of which is dependent upon future events and which may affect the financial statements. The auditor is required to add an emphasis of matter paragraph to highlight a material uncertainty relating to an event or condition that may cast significant doubt on the entity’s ability to continue as a going concern.
Communicating “other matters”
If the auditor considers it necessary to communicate a matter other than those that are presented or disclosed in the financial statements that, in the auditor’s judgment is relevant to user’s understanding of the audit, the auditor’s responsibility or the auditor’s report, the auditor does so in a paragraph in the auditor’s report with the heading “Other Matter” or other appropriate heading.
Other Legal and Regulatory Requirements
The auditor is required to address other legal and regulatory requirements relating to the auditor’s report in a separate section of the auditor’s report following the opinion on the financial statements.
1 This conclusion is required only with respect to financial statements which have been prepared in accordance with a true and fair framework (examples are, International Financial Reporting Standards as adopted by the European Union and Generally Accepted Accounting Practice in Ireland (Irish GAAP)).
2 Only applicable with respect to “true and fair” frameworks.