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UK Private Sector Entity (issued 1 December 2010)

Scope of an Audit of Financial Statements of Private Sector 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:

  1. obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error; and
  2. 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:
  1. all ISAs (UK and Ireland) that are relevant to the audit; and
  2. 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:
  1. the auditor’s view about significant qualitative aspects of the entity’s accounting practices, including accounting policies, accounting estimates and financial statement disclosures;
  2. significant difficulties encountered during the audit; and
  3. 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:
  1. sufficient appropriate audit evidence has been obtained;
  2. uncorrected misstatements are material, individually or in aggregate;
  3. [the financial statements, including the related notes, give a true and fair view]1; and
  4. 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:
  1. the financial statements adequately refer to or describe the relevant financial reporting framework;
  2. the financial statements adequately disclose the significant accounting policies selected and applied;
  3. the accounting policies selected and applied are consistent with the applicable financial reporting framework, and are appropriate in the circumstances;
  4. accounting estimates are reasonable;
  5. the information presented in the financial statements is relevant, reliable comparable and understandable;
  6. 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
  7. 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:
  1. the auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement; or
  2. 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:
  1. misstatements, individually or in the aggregate, are material but not pervasive to the financial statements; or
  2. 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:
  1. 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
  2. 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.
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