## **Learning Outcomes**

After studying this article, you will be able to identify the main purpose and scope of the external audit report, describe the required form and key contents of the Independent Auditor’s Report, distinguish between unmodified and modified audit opinions, and explain situations where modifications to the opinion are appropriate. You will also understand management and auditor responsibilities as stated in the report.

## **ACCA Foundations in Audit (FAU) Syllabus**

For ACCA Foundations in Audit (FAU), you are required to understand what the Independent Auditor’s Report must contain and when modifications are necessary. Revision should focus on:

- The objective and main purpose of the auditor’s report
- The standard format and core sections of the Independent Auditor’s Report
- What is meant by an unmodified opinion
- The circumstances that may lead to a modified opinion, and the different types of modification (qualified, adverse, disclaimer)
- Responsibilities of management versus those of the auditor in relation to the audit report
- The use of international standards (such as ISA 700, 705) relevant to the report and opinion

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which of the following is always included in an Independent Auditor’s Report?
   a) A summary of audit fees
   b) The auditor’s opinion on the financial statements
   c) A list of all transactions tested by the auditor
   d) The company’s business plan

2. What type of audit opinion should be issued when the auditor concludes the financial statements are true and fair in all material respects?
   a) Qualified opinion
   b) Disclaimer of opinion
   c) Adverse opinion
   d) Unmodified opinion

3. True or false? Management is responsible for preparing the financial statements, but the auditor is responsible for their accuracy.

4. Briefly explain the difference between a qualified opinion and a disclaimer of opinion in the auditor’s report.

## **Introduction**

The audit report is the principal way the auditor communicates the result of the audit with users, typically the shareholders. A clear, structured Independent Auditor’s Report provides an expert, independent opinion on whether the company’s financial statements are presented fairly in all material respects—or if important concerns exist.

Understanding the purpose, structure and content of the audit report is essential for the ACCA FAU exam. This article explains what the report must include, what forms of opinion can be given, and when and how the opinion is modified based on audit findings.

> **Key Term: auditor’s report**
> A formal, written statement issued by the independent auditor to the company’s shareholders or those charged with governance, expressing an opinion on whether the financial statements give a true and fair view (or are presented fairly, in all material respects).

## THE PURPOSE AND SCOPE OF THE AUDITOR’S REPORT

The main objective of the auditor’s report is to communicate the auditor’s independent opinion on whether the financial statements are free from material misstatement and comply with the relevant financial reporting framework (such as IFRS). The report increases the credibility of financial statements for users who are otherwise not involved in their preparation.

Users rely on the fact that the audit has been conducted in accordance with International Standards on Auditing (ISAs) and professional ethics, and that the report will highlight any concerns discovered during the audit.

> **Key Term: unmodified opinion**
> The audit opinion given when the auditor concludes that the financial statements are free from material misstatement and are prepared, in all material respects, in accordance with the applicable financial reporting framework.

## FORM AND CONTENT OF THE INDEPENDENT AUDITOR’S REPORT

The format and contents of the audit report are standardised by ISA 700, ensuring clarity and consistency. The main components include:

- **Title**: Clearly states that it is the report of an independent auditor.
- **Addressee**: Indicates to whom the report is directed (usually shareholders).
- **Opinion paragraph**: States the auditor’s conclusion on the financial statements—whether they give a true and fair view (or are fairly presented), referencing the applicable financial reporting framework.
- **Basis for opinion**: Explains the standards followed (ISAs), and the auditor’s independence. Confirms whether sufficient appropriate audit evidence was obtained.
- **Management’s responsibilities**: Summarises management’s responsibility for preparing the financial statements and maintaining internal controls.
- **Auditor’s responsibilities**: Describes the purpose and approach taken by the auditor, and explicitly mentions that the aim is reasonable assurance—not absolute certainty.
- **Signature, address, and date**: Identifies the audit firm/person, records the address, and specifies the date the report was signed.

> **Key Term: material misstatement**
> An error, omission, or inaccuracy in financial statements (alone or together with others) that could reasonably influence the decisions of users.
>
> **Key Term: reasonable assurance**
> A high level of assurance, but not an absolute guarantee, that the financial statements are free from material misstatement.

### Example Structure of an Unmodified Auditor’s Report

- Opinion
- Basis for Opinion
- Responsibilities of Management and Those Charged with Governance
- Auditor’s Responsibilities for the Audit of the Financial Statements
- (Signature, Address, Date)

### **Worked Example 1.1**

A company’s directors present financial statements to shareholders. You, as the external auditor, complete a full audit in accordance with ISAs. No material misstatements or scope restrictions arise. What type of opinion is issued, and how is this presented in the report?

> **Answer:**
>
> - An unmodified opinion is issued, stating the financial statements give a true and fair view (or are fairly presented, in all material respects).
> - The report must contain the standard sections: Opinion, Basis for Opinion, management and auditor responsibilities, as per ISA 700.

### MODIFICATIONS TO THE AUDIT OPINION

An unmodified opinion is appropriate when the auditor is satisfied that the financial statements are true and fair and free from material misstatements. If, however, material issues are identified, the auditor must decide whether to modify the opinion.

Modified opinions fall into three categories:

- **Qualified opinion**: Issued when there is a material misstatement, or when the auditor cannot obtain sufficient appropriate evidence, but the matter is not pervasive.
- **Adverse opinion**: Issued when misstatements are both material and pervasive, causing the financial statements as a whole not to show a true and fair view.
- **Disclaimer of opinion**: Issued when the auditor cannot obtain enough evidence and the possible effects are material and pervasive, making it impossible to form an opinion.

> **Key Term: modified opinion**
> An audit opinion that is other than unmodified – that is, qualified, adverse, or disclaimer of opinion—due to identified material issues or limitations.

### **Worked Example 1.2**

You are auditing DEF Ltd. During the audit, several errors are found that materially overstate inventory. Management refuses to adjust the figures. What type of opinion should you give, and what must be included in your report?

> **Answer:**
>
> - A qualified opinion should be issued if the misstatement is material but not pervasive; an adverse opinion if the misstatement is so significant it affects the financial statements as a whole.
> - The report must clearly state the reasons for modification in a section titled "Basis for Qualified Opinion" or "Basis for Adverse Opinion," quantifying the effects where possible.

### **Worked Example 1.3**

During the audit of GHI Co, you were not allowed access to verify a significant overseas subsidiary, and no suitable alternative evidence could be obtained. The subsidiary accounts for a large portion of GHI’s profit. What opinion should the auditor issue?

> **Answer:**
>
> - If the effect of the scope limitation is material and pervasive, the auditor should issue a disclaimer of opinion.
> - The report will state in the “Basis for Disclaimer of Opinion” section that sufficient evidence could not be obtained and that no opinion can be given for the statements as a whole.

### **Exam Warning**

A common mistake is to assume every audit issue requires a qualification. The audit opinion is only modified if matters are material to users’ decisions. Immateral errors must not affect the wording of the report.

## MANAGEMENT VS. AUDITOR RESPONSIBILITIES IN THE REPORT

The auditor’s report must make it clear that:

- Management is responsible for preparing financial statements and implementing adequate internal control systems.
- The auditor is responsible for forming and expressing an independent opinion on those financial statements.
- The auditor plans and performs procedures to obtain reasonable, not absolute, assurance.

> **Key Term: management’s responsibility**
> The duty of directors and management to prepare financial statements in line with the applicable framework and to maintain appropriate internal controls.
>
> **Key Term: auditor’s responsibility**
> The auditor’s obligation to obtain sufficient evidence and to express an opinion on the truth and fairness of the financial statements.

### **Revision Tip**

When preparing for the FAU exam, always write out the standard sections of the auditor’s report from memory. Practise recognising situations which require a modified opinion.

## **Summary**

The Independent Auditor’s Report communicates the auditor’s conclusion on a company’s financial statements. It is carefully structured to include: an opinion paragraph, basis for opinion, statements of responsibilities, and identification details. Unmodified opinions indicate true and fair financial statements. Material issues require modifications—qualified, adverse, or disclaimer opinions. Understanding when each type of opinion is appropriate is essential for audit exam success.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define the purpose and audience of the Independent Auditor’s Report
- List and describe each of the required sections of the auditor’s report as per ISA 700
- Distinguish between unmodified and modified audit opinions (qualified, adverse, disclaimer)
- State when each type of modified opinion is required
- Identify the stated responsibilities of management versus the auditor as included in the report

## **Key Terms and Concepts**

- auditor’s report
- unmodified opinion
- material misstatement
- reasonable assurance
- modified opinion
- management’s responsibility
- auditor’s responsibility

Purpose and scope of an audit - Form and content of the Independent Auditor’s Report