ISA 700, or the International Standard on Auditing 700, is a widely recognized standard issued by the International Auditing and Assurance Standards Board (IAASB) that sets out the requirements for the auditor’s report on financial statements. The purpose of the auditor’s report is to provide assurance to users of the financial statements that the statements are prepared in accordance with the applicable financial reporting framework and are free from material misstatements.

 

Definitions:

Auditor’s Report:

It is a formal written communication that expresses the auditor’s opinion on the financial statements. The report is addressed to the shareholders or members of the entity being audited and provides assurance on the reliability of the financial statements.

Financial Statements:

These are the reports prepared by an entity to present its financial position, financial performance, and cash flows. They typically include the balance sheet, income statement, statement of changes in equity, and cash flow statement.

Material Misstatement:

This refers to an error, omission, or misrepresentation in the financial statements that could potentially influence the decisions of the users of the financial statements.

 

key Elements

The key elements of ISA 700 are:

1. Opinion on Financial Statements: The auditor must express a clear opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.
2. Basis for Opinion: This includes the auditor’s assertion that the audit was conducted in accordance with International Standards on Auditing and that the auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for the opinion.
3. Going Concern: The auditor must evaluate whether there is material uncertainty about the entity’s ability to continue as a going concern and disclose any such issues in the auditor’s report.
4. Key Audit Matters: These are those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with those charged with governance.
5. Other Information: The auditor’s consideration of other information included in documents containing audited financial statements, such as a director’s report or management’s discussion and analysis, and how it relates to the financial statements.
6. Auditor’s Responsibilities and the Scope of the Audit: The auditor’s report must include a section that describes the responsibilities of the auditor for the audit of the financial statements and a summary of the scope of the audit, providing a basis for the auditor’s opinion.
7. Management’s Responsibilities: The report must state that management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework, including the design, implementation, and maintenance of internal control relevant to the preparation of financial statements that are free from material misstatement.
8. Form and Content: The report should be written in a manner that is clear and understandable, avoiding the use of technical jargon that may not be understood by the users of the auditor’s report.
9. Signature, Tenure, and Location: The report should be signed (which can be a firm’s name, the personal name of the auditor, or both), state the tenure of the auditor in connection with the audited entity, and the location where the auditor’s report has been issued.
10. Reporting on Comparative Information: When comparative information is presented in the financial statements, the auditor must also express an opinion on the comparative information.
11. Other Reporting Responsibilities: If there are additional responsibilities to report on the financial statements, these should be addressed in a separate section in the auditor’s report.

Explanations:

ISA 700 requires the auditor’s report to be in writing and include a clear expression of the auditor’s opinion on the financial statements. The report should state whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

The auditor’s report should also include a description of the responsibilities of the auditor and management. The responsibilities of management include preparing the financial statements in accordance with the applicable financial reporting framework and maintaining internal controls. The responsibilities of the auditor include conducting the audit in accordance with the International Standards on Auditing (ISAs) and obtaining sufficient appropriate audit evidence to support the auditor’s opinion.

ISA 700 requires the auditor’s report to include a statement regarding the auditor’s independence. Independence is a fundamental principle of auditing, and it ensures that the auditor is free from any conflicts of interest that could compromise their objectivity and integrity in forming their opinion on the financial statements.

The auditor’s report should also include a description of the audit procedures performed by the auditor, including the nature, timing, and extent of the procedures. This provides transparency to users of the financial statements about the work performed by the auditor in obtaining audit evidence.

Finally, the auditor’s report should include a statement about the auditor’s opinion on the financial statements. The auditor may express an unqualified opinion, a qualified opinion, an adverse opinion, or a disclaimer of opinion, depending on the circumstances of the audit.

 

Examples:

1. Unqualified Opinion:

“In our opinion, the financial statements present fairly, in all material respects, the financial position of XYZ Company as of December 31, 20XX, and the results of its operations and its cash flows for the year then ended, in accordance with International Financial Reporting Standards (IFRS).”

1. Qualified Opinion:

“In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion section of our report, the financial statements present fairly, in all material respects, the financial position of ABC Corporation as of December 31, 20XX, and the results of its operations and its cash flows for the year then ended, in accordance with Generally Accepted Accounting Principles (GAAP).”

1. Adverse Opinion:

“Because of the significance of the matters described in the Basis for Adverse Opinion section of our report, the financial statements do not present fairly, in all material respects, the financial position of DEF Limited as of December 31, 20XX, and the results of its operations and its cash flows for the year then ended, in accordance with the International Financial Reporting Standards (IFRS).”

1. Disclaimer of Opinion:

“We were unable to obtain sufficient appropriate audit evidence regarding the valuation of the investment in GHI Company as of December 31, 20XX, and the effects on the financial statements could be material but are uncertain. Because of the limitations in our audit procedures, we are unable to express an opinion on the financial statements of JKL Corporation for the year ended December 31, 20XX.”

 

Case Studies:

1. Case Study 1:

XYZ Corporation is a publicly listed company that operates in the manufacturing industry. The auditor conducted an audit of the financial statements of XYZ Corporation for the year ended December 31, 20XX, in accordance with ISA 700. The auditor obtained sufficient appropriate audit evidence and concluded that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. The auditor issued an unqualified opinion in the auditor’s report, expressing assurance on the reliability of the financial statements.

1. Case Study 2:

ABC Corporation is a private company that operates in the retail industry. During the audit of the financial statements for the year ended December 31, 20XX, the auditor identified a material misstatement in the valuation of inventory due to errors in the counting procedures. The auditor discussed the matter with management and obtained additional audit evidence to correct the misstatement. However, the auditor could not obtain sufficient appropriate audit evidence to conclude that the financial statements are presented fairly, in all material respects. As a result, the auditor issued a qualified opinion in the auditor’s report, disclosing the nature and impact of the misstatement.

1. Case Study 3:

DEF Limited is a construction company that is facing financial difficulties and has significant doubts about its ability to continue as a going concern. The auditor performed extensive audit procedures to assess the going concern assumption and concluded that DEF Limited’s financial statements do not present fairly, in all material respects, due to the uncertainty about its ability to continue as a going concern. The auditor issued an adverse opinion in the auditor’s report, highlighting the basis for the adverse opinion and the impact on the financial statements.

1. Case Study 4:

GHI Corporation is a start-up technology company that has complex transactions and significant related-party transactions. The auditor encountered difficulties in obtaining sufficient appropriate audit evidence to support the valuation of the investment in a related party and the related-party transactions. The auditor was unable to obtain satisfactory explanations and evidence from management, and as a result, the auditor was unable to form an opinion on the financial statements. The auditor issued a disclaimer of opinion in the auditor’s report, disclosing the limitations in the audit procedures and the reasons for the disclaimer.

Conclusion

ISA 700 provides guidance on the auditor’s report on financial statements and requires the auditor to express an opinion on the reliability of the financial statements. The auditor’s report should include definitions, explanations, examples, and case studies to provide transparency and assurance to the users of the financial statements. It is important for auditors to understand and comply with ISA 700 to ensure the quality and credibility of their audit work.