SA 700 Forming an Opinion and Reporting on Financial Statements

SA 700 Forming an Opinion and Reporting on Financial Statements has to be followed by all independent auditors to report on the correctness of Historical Financial Statements of a Company.

 Introduction

SA 700 deals with the responsibility of the auditor in forming his/her opinion on financial statements. This standard also deals with content and form of the auditor’s report that is issued as an outcome of the audit of the financial statements. This revised standard is effective for auditing of the financial statements beginning April 1st, 2017.

Objectives Of The Standard

The objectives of an auditor include: 1. Forming an opinion on financial statements that are based on the evaluation of conclusions which are drawn from audit evidence obtained 2. Expressing clearly such opinion via a written audit report

How to Form an Opinion on Financial Statements?

1. An auditor should form his/her opinion on such whether financial statements are prepared and presented, keeping in mind all the material respects, as per financial reporting frameworks as applicable
2. In forming his/her opinion, the auditor should determine as to whether he/she has gathered reasonable assurance whether financial statements overall are free of any material misstatement, whether due to error or fraud. 
   Such conclusion should take into consideration
   • The conclusion of the auditor, as per SA 330, whether adequate appropriate audit evidence is obtained
   • The conclusion of the auditor, as per SA 450, whether the incorrect misstatements are material, in aggregate or individually
   • The evaluations as required by points 3-6 of the standard as mentioned below
3. An auditor must assess whether the financial statements are prepared and reported, in all the required material respects, as per the requirements of the relevant financial reporting framework. Such assessment must include consideration of qualitative aspects of accounting practices of the entity, which include indicators of potential bias in judgments of the management
4. Particularly, the auditor should do an assessment whether considering the requirements of relevant financial reporting frameworks:
   • That such financial statements appropriately disclose the important accounting policies that are selected and subsequently applied
   • That the accounting policies which are selected and subsequently applied are in conformity with the relevant financial reporting framework
   • That the accounting estimates which are made by management are rational
   • That the information presented in financial statements is reliable, relevant, understandable and comparable
   • That such financial statements present sufficient disclosures allowing the users of the financial statements to properly understand the impact of material events and transactions on the information that is conveyed in financial statements
   • That the terminologies used in financial statements, including the title of every financial statement, is apt
5. The evaluation of the auditor as to whether financial statements provide a true and fair presentation must include the consideration of:
   • The overall structure, presentation, and content of financial statements 
      AND
   • Whether such financial statements, including related notes, exhibit underlying events and transactions in a manner which achieves a fair presentation.
6. Whether the financial statement refers to or describe the applicable financial reporting framework.

Forms of Opinion

An auditor should express his/her unmodified opinion when he/she concludes that such financial statements are prepared and presented, in all the required material respects, as per the relevant financial reporting framework. But, the auditor should modify his/her opinion in his/her report as per SA 705 in case:

1. The auditor concludes that, as per the audit evidence obtained by him/her, financial statements all together aren’t free of material misstatement, 

or 

2. The auditor is not able to obtain adequate appropriate audit evidence for concluding that the financial statements as a whole are free from material misstatement.

In case the financial statements prepared as per the requirements of the fair presentation framework isn’t been able to achieve a fair presentation, the auditor should discuss it with the management and, based on the requirements of relevant financial reporting framework and how such matter is resolved, should determine whether it necessitates the modification of the opinion in his/her report as per SA 705 (Revised).

When financial statements are prepared and presented as per compliance framework, evaluation as to whether such financial statements have achieved fair presentation is not required to be done by the auditor.

However, in case of extremely rare scenarios where the auditor determines that the financial statements are misleading, he/she should discuss the same with management and, based on how such matter is resolved, should decide whether, and how, to bring it in his/her report.

Auditor’s Report

1. Title
2. Addressee
3. Auditor’s Opinion
4. Basis of Opinion
5. Going Concern
6. Key Audit Matters
7. Management responsibilities for the Financial Statements
8. Responsibilities for the Financial Statements
9. Responsibilities of the Auditor for Audit of the Financial Statements
10. Other Reporting Responsibilities
11. Signature of the Auditor
12. Place of Signature
13. Date of the Auditor’s Report

1. Title: The report of the auditor should have a title which clearly specifies that it’s a report pertaining to an independent auditor.

2. Addressee: The auditor’s report should be addressed, as appropriate, depending on the conditions of the engagement.

3. Auditor’s Opinion: The first part of the auditor’s report should provide his/her opinion, and should have heading “Opinion.” The Opinion part of auditor’s report should also: 
 

• Identify entities whose financial statements are audited
• State that audit of financial statements has been completed
• Classify title of each statement comprising financial statements
• Refer to the notes, including the summary of crucial accounting policies
• State the period covered by or date of, each of the financial statement comprising financial statements

4. Basis of Opinion: The report of the auditor should have a section, immediately following Opinion section, with heading “Basis for Opinion”, which states that:

• The audit was performed as per Standards on Auditing
• Refers to the section of the report of the auditor which describes responsibilities of the auditor under the SAs
• Includes the statement that an auditor is independent of an entity in as per the applicable ethical requirements with respect to the audit, and has fulfilled other ethical responsibilities pertaining to the auditor in as per these requirements
• States that whether an auditor believes that audit evidence which he/she has obtained is appropriate and adequate to provide a basis for his/her opinion

5. Going Concern: Wherever applicable, the auditor should report as per SA 570 (Revised)

6. Key Audit Matters: For audits of the complete sets of general purpose financial statements of a listed entity(s), the auditor should communicate the key audit matters in his/her report as per SA 701.

7. Management responsibilities for the Financial Statements: The auditor’s report should have a section with the heading “Responsibilities of Management for the Financial Statements.” The report of the auditor should use the term which is appropriate with respect to the legal framework relevant to such entity and isn’t required to specifically refer to “management”.

This section of auditor’s report should define the responsibilities of the management for:

• Preparing financial statements as per relevant financial reporting framework, and for such internal controls as per the discretion of the management as deemed necessary for enabling the preparation and presentation of financial statements which are free from any material misstatements, irrespective of error or fraud.
• Evaluating the ability of the entity to continue as the going concern and whether the basis of the use of going concern is apt for accounting and disclosing, in case applicable, the matters related to going concern

8. Responsibilities of the Auditor for Audit of the Financial Statements: The auditor’s report should have a section with heading ‘Auditor’s Responsibilities for the Audit of the Financial Statements.’ This particular section of auditor’s report should:

A.  Prescribe the objectives of an auditor are to:

• Acquire reasonable assurance whether financial statements altogether are free from any material misstatement, irrespective of error or fraud
• Issue the auditor’s report which includes auditor’s opinion

B. Prescribe that a reasonable assurance refers to the high level of assurance, however, it isn’t a guarantee that the audit conducted as per SAs would always identify material misstatements when it subsists; and,

C.  Mention that the misstatements could arise from error or fraud, and either

• State that error or fraud are considered material in the case, either individually or in aggregate, they might be expected to reasonably influence economic decisions of the intended users on basis of such financial statements
• Give a definition of materiality as per the relevant financial reporting framework

9. The responsibilities of the auditor for the audit of financial statements section of his/her report also should:

A. Provide that he/she communicates with the person(s) charged with governance regarding, the intended scope and timing of such audit and noteworthy audit findings (if any), together with any significant flaws in the internal control which he/she identifies during the execution of such audit

B. Provide that the auditor offers person(s) charged with governance a statement that he/she has adhered to applicable ethical requirements with respect to independence and bring it to their notice all relationships and various other matters which could have a bearing on auditor’s independence

C.  With respect to audits of financial statements of entities where key audit matters have been communicated as per SA 701, mention that, from the matters communicated with person(s) charged with governance, he/she concludes those matters which were of crucial nature in audit of financial statements of current period and are hence, the key audit matters

10. Other Reporting Responsibilities: In case an auditor addresses other responsibilities of reporting nature in his/her report on financial statements which are in addition to his/her responsibilities under SAs, such other reporting responsibilities should be provided separately as a section in his/her report with the heading titled ‘Report on Other Legal and Regulatory Requirements’. This includes reporting requirements as required under:

• CARO 2016 – Auditors of companies not falling under the specified list therein is required to report on compliance with certain matters laid there-under
• IFC report – Auditors of companies not falling under the notified exemption list under Section 143(3)(i) have to now report on the establishment & functioning of Internal Financial Controls in every Company (Internal Financial Controls)

11. Signature of the Auditor: The auditor’s report should be signed. The auditor’s report should be signed by an auditor in his personal name. Where a firm is appointed as auditors, the auditor report should be signed in the personal name of auditors and in name of such audit firm. The proprietor/partner signing such report is also required to mention their membership number as assigned by ICAI (Institute of Chartered Accountants of India). They’re also required to include the registration number of the auditing firm, where applicable, as provided by the ICAI, in audit reports which are signed by them.

12. Place of Signature: The auditor’s report should mention the particular location, that is usually the city where audit report is signed.

13. Date of the Auditor’s Report: The auditor’s report should be dated not prior to the date on which auditor has gained adequate and appropriate audit evidence based on which the auditor’s opinion on financial statements, together with evidence that:

• All statements which comprise financial statements, together with the related notes, are prepared
• Those with recognized authority have declared that they have taken due responsibility for such financial statements