THE AUDITOR’S REPORT ON FINANCIAL STATEMENTS

CONTENTS

Paragraphs
Introduction ....................................................................................... 1-4
Basic Elements of the Auditor’s Report ............................................. 5-26
The Auditor’s Report ......................................................................... 27-28
Modified Reports ............................................................................... 29-40
Circumstances That May Result in Other Than an Unqualified
Opinion ...................................................................................... 41-46
Effective Date .................................................................................... 47

International Standards on Auditing (ISAs) are to be applied in the audit of financial

statements. ISAs are also to be applied, adapted as necessary, to the audit of other
information and to related services.
ISAs contain the basic principles and essential procedures (identified in bold type black
lettering) together with related guidance in the form of explanatory and other material.
The basic principles and essential procedures are to be interpreted in the context of the
explanatory and other material that provide guidance for their application.
To understand and apply the basic principles and essential procedures together with the
related guidance, it is necessary to consider the whole text of the ISA including
explanatory and other material contained in the ISA not just that text which is black
lettered.
In exceptional circumstances, an auditor may judge it necessary to depart from an ISA in
order to more effectively achieve the objective of an audit. When such a situation arises,
the auditor should be prepared to justify the departure.
ISAs need only be applied to material matters.

The Public Sector Perspective (PSP) issued by the Public Sector Committee of the
International Federation of Accountants is set out at the end of an ISA. Where no PSP is
added, the ISA is applicable in all material respects to the public sector.

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Introduction
1. The purpose of this International Standard on Auditing (ISA) is to establish
standards and provide guidance on the form and content of the auditor’s
report issued as a result of an audit performed by an independent auditor of
the financial statements of an entity. Much of the guidance provided can be
adapted to auditor reports on financial information other than financial
statements.
2. The auditor should review and assess the conclusions drawn from the
audit evidence obtained as the basis for the expression of an opinion on
the financial statements.
3. This review and assessment involves considering whether the financial
statements have been prepared in accordance with an acceptable financial
reporting framework1 being either International Accounting Standards
(IASs) or relevant national standards or practices. It may also be necessary
to consider whether the financial statements comply with statutory
requirements.
4. The auditor’s report should contain a clear written expression of opinion
on the financial statements taken as a whole.

Basic Elements of the Auditor’s Report

5. The auditor’s report includes the following basic elements, ordinarily in the
following layout:
(a) title;
(b) addressee;
(c) opening or introductory paragraph
(i) identification of the financial statements audited;
(ii) a statement of the responsibility of the entity’s management and
the responsibility of the auditor;
(d) scope paragraph (describing the nature of an audit)
(i) a reference to the ISAs or relevant national standards or practices;
(ii) a description of the work the auditor performed;
(e) opinion paragraph containing
(i) a reference to the financial reporting framework used to prepare
the financial statements (including identifying the country of

1 The Framework of International Standards on Auditing also identifies another authoritative and
comprehensive financial reporting framework. Reporting in accordance with this third type of framework is
covered in ISA 800, “The Auditor’s Report on Special Purpose Audit Engagements.”

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origin2 of the financial reporting framework when the framework

used is not International Accounting Standards); and
(ii) an expression of opinion on the financial statements;
(f) date of the report;
(g) auditor’s address; and
(h) auditor’s signature.
A measure of uniformity in the form and content of the auditor’s report is
desirable because it helps to promote the reader’s understanding and to
identify unusual circumstances when they occur.

Title
6. The auditor’s report should have an appropriate title. It may be
appropriate to use the term “Independent Auditor” in the title to distinguish
the auditor’s report from reports that might be issued by others, such as by
officers of the entity, the board of directors, or from the reports of other
auditors who may not have to abide by the same ethical requirements as the
independent auditor.

Addressee
7. The auditor’s report should be appropriately addressed as required by
the circumstances of the engagement and local regulations. The report is
ordinarily addressed either to the shareholders or the board of directors of
the entity whose financial statements are being audited.

Opening or Introductory Paragraph

8. The auditor’s report should identify the financial statements of the
entity that have been audited, including the date of and period covered
by the financial statements.
9. The report should include a statement that the financial statements are
the responsibility of the entity’s management3 and a statement that the
responsibility of the auditor is to express an opinion on the financial
statements based on the audit.
10. Financial statements are the representations of management. The
preparation of such statements requires management to make significant
accounting estimates and judgments, as well as to determine the appropriate
accounting principles and methods used in preparation of the financial
statements. This determination will be made in the context of the financial
reporting framework that management chooses, or is required, to use. In

2 In some circumstances it also may be necessary to refer to a particular jurisdiction within the country of
origin to identify clearly the financial reporting framework used.
3 The level of management responsible for the financial statements will vary according to the legal situation in
each country.

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contrast, the auditor’s responsibility is to audit these financial statements in

order to express an opinion thereon.
11. An illustration of these matters in an opening (introductory) paragraph is:
“We have audited the accompanying4 balance sheet of the ABC
Company as of December 31, 20X1, and the related statements of income
and cash flows for the year then ended. These financial statements are
the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audit.”

Scope Paragraph
12. The auditor’s report should describe the scope of the audit by stating
that the audit was conducted in accordance with ISAs or in accordance
with relevant national standards or practices as appropriate. “Scope”
refers to the auditor’s ability to perform audit procedures deemed necessary
in the circumstances. The reader needs this as an assurance that the audit
has been carried out in accordance with established standards or practices.
Unless otherwise stated, the auditing standards or practices followed are
presumed to be those of the country indicated by the auditor’s address.
13. The report should include a statement that the audit was planned and
performed to obtain reasonable assurance about whether the financial
statements are free of material misstatement.
14. The auditor’s report should describe the audit as including:
(a) examining, on a test basis, evidence to support the financial
statement amounts and disclosures;
(b) assessing the accounting principles used in the preparation of the
financial statements;
(c) assessing the significant estimates made by management in the
preparation of the financial statements; and
(d) evaluating the overall financial statement presentation.
15. The report should include a statement by the auditor that the audit
provides a reasonable basis for the opinion.
16. An illustration of these matters in a scope paragraph is:
“We conducted our audit in accordance with International Standards on
Auditing (or refer to relevant national standards or practices). Those
Standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as

4 The reference can be by page numbers.

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evaluating the overall financial statement presentation. We believe that

our audit provides a reasonable basis for our opinion.”

Opinion Paragraph
17. The opinion paragraph of the auditor’s report should clearly indicate
the financial reporting framework used to prepare the financial
statements (including identifying the country of origin of the financial
reporting framework when the framework used is not International
Accounting Standards) and state the auditor’s opinion as to whether the
financial statements give a true and fair view (or are presented fairly, in
all material respects,) in accordance with that financial reporting
framework and, where appropriate, whether the financial statements
comply with statutory requirements.
18. The terms used to express the auditor’s opinion are “give a true and fair
view” or “present fairly, in all material respects,” and are equivalent. Both
terms indicate, amongst other things, that the auditor considers only those
matters that are material to the financial statements.
19. The financial reporting framework is determined by IASs, rules issued by
recognized standard setting bodies, and the development of general practice
within a country, with an appropriate consideration of fairness and with due
regard to local legislation. To advise the reader of the context in which the
auditor’s opinion is expressed, the auditor’s opinion indicates the framework
upon which the financial statements are based. The auditor refers to the
financial reporting framework in such terms as:
“…in accordance with International Accounting Standards (or [title of
financial reporting framework with reference to the country of
origin])….”
This designation will help the user to better understand which financial
reporting framework was used in preparing the financial statements. When
reporting on financial statements that are prepared specifically for use in
another country, the auditor considers whether appropriate disclosure has
been made in the financial statements about the financial reporting
framework that has been used.
20. In addition to an opinion on the true and fair view (or fair presentation, in
all material respects,), the auditor’s report may need to include an opinion as
to whether the financial statements comply with other requirements specified
by relevant statutes or law.
21. An illustration of these matters in an opinion paragraph is:
“In our opinion, the financial statements give a true and fair view of (or
‘present fairly, in all material respects,’) the financial position of the
Company as of December 31, 20X1, and of the results of its operations
and its cash flows for the year then ended in accordance with
International Accounting Standards (or [title of financial reporting

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framework with reference to the country of origin5]) (and comply with

...6).”
22. [Paragraph deleted by revision to ISA 700 effective for audits of financial
statements for periods ending on or after September 30 2002.]

Date of Report
23. The auditor should date the report as of the completion date of the audit.
This informs the reader that the auditor has considered the effect on the
financial statements and on the report of events and transactions of which
the auditor became aware and that occurred up to that date.
24. Since the auditor’s responsibility is to report on the financial statements
as prepared and presented by management, the auditor should not date
the report earlier than the date on which the financial statements are
signed or approved by management.

Auditor’s Address
25. The report should name a specific location, which is ordinarily the city
where the auditor maintains the office that has responsibility for the
audit.

Auditor’s Signature
26. The report should be signed in the name of the audit firm, the personal
name of the auditor or both, as appropriate. The auditor’s report is
ordinarily signed in the name of the firm because the firm assumes
responsibility for the audit.

The Auditor’s Report

27. An unqualified opinion should be expressed when the auditor concludes
that the financial statements give a true and fair view (or are presented
fairly, in all material respects,) in accordance with the identified
financial reporting framework. An unqualified opinion also indicates
implicitly that any changes in accounting principles or in the method of their
application, and the effects thereof, have been properly determined and
disclosed in the financial statements.
28. The following is an illustration of the entire auditor’s report incorporating
the basic elements set forth and illustrated above. This report illustrates the
expression of an unqualified opinion.
“AUDITOR’S REPORT
(APPROPRIATE ADDRESSEE)

5 See footnote 2.

6 Refer to relevant statutes or law.

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We have audited the accompanying7 balance sheet of the ABC

Company as of December 31, 20X1, and the related statements of
income, and cash flows for the year then ended. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with International Standards on
Auditing (or refer to relevant national standards or practices). Those
Standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements give a true and fair view of (or
‘present fairly, in all material respects,’) the financial position of the
Company as of December 31, 20X1, and of the results of its operations
and its cash flows for the year then ended in accordance with
International Accounting Standards (or [title of financial reporting
framework with reference to the country of origin8]) (and comply with
...9 ).
AUDITOR
Date
Address”

Modified Reports
29. An auditor’s report is considered to be modified in the following situations:
Matters That Do Not Affect the Auditor’s Opinion
(a) emphasis of matter
Matters That Do Affect the Auditor’s Opinion
(a) qualified opinion,
(b) disclaimer of opinion, or
(c) adverse opinion.
Uniformity in the form and content of each type of modified report will
further the user’s understanding of such reports. Accordingly, this ISA

7 See footnote 4.

8 See footnote 2.

9 See footnote 6

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includes suggested wording to express an unqualified opinion as well as

examples of modifying phrases for use when issuing modified reports.

Matters That Do Not Affect the Auditor’s Opinion

30. In certain circumstances, an auditor’s report may be modified by adding an
emphasis of matter paragraph to highlight a matter affecting the financial
statements which is included in a note to the financial statements that more
extensively discusses the matter. The addition of such an emphasis of matter
paragraph does not affect the auditor’s opinion. The paragraph would
preferably be included after the opinion paragraph and would ordinarily
refer to the fact that the auditor’s opinion is not qualified in this respect.
31. The auditor should modify the auditor’s report by adding a paragraph
to highlight a material matter regarding a going concern problem.
32. The auditor should consider modifying the auditor’s report by adding a
paragraph if there is a significant uncertainty (other than a going
concern problem), the resolution of which is dependent upon future
events and which may affect the financial statements. An uncertainty is a
matter whose outcome depends on future actions or events not under the
direct control of the entity but that may affect the financial statements.
33. An illustration of an emphasis of matter paragraph for a significant
uncertainty in an auditor’s report follows:
“In our opinion ... (remaining words are the same as illustrated in the
opinion paragraph—paragraph 28 above).
Without qualifying our opinion we draw attention to Note X to the
financial statements. The Company is the defendant in a lawsuit
alleging infringement of certain patent rights and claiming royalties
and punitive damages. The Company has filed a counter action, and
preliminary hearings and discovery proceedings on both actions are in
progress. The ultimate outcome of the matter cannot presently be
determined, and no provision for any liability that may result has been
made in the financial statements.”
(An illustration of an emphasis of matter paragraph relating to going
concern is set out in ISA 570, “Going Concern.”)
34. The addition of a paragraph emphasizing a going concern problem or
significant uncertainty is ordinarily adequate to meet the auditor’s reporting
responsibilities regarding such matters. However, in extreme cases, such as
situations involving multiple uncertainties that are significant to the
financial statements, the auditor may consider it appropriate to express a
disclaimer of opinion instead of adding an emphasis of matter paragraph.
35. In addition to the use of an emphasis of matter paragraph for matters that
affect the financial statements, the auditor may also modify the auditor’s
report by using an emphasis of matter paragraph, preferably after the
opinion paragraph, to report on matters other than those affecting the
financial statements. For example, if an amendment to other information in
a document containing audited financial statements is necessary and the

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entity refuses to make the amendment, the auditor would consider including
in the auditor’s report an emphasis of matter paragraph describing the
material inconsistency. An emphasis of matter paragraph may also be used
when there are additional statutory reporting responsibilities.

Matters That Do Affect the Auditor’s Opinion

36. An auditor may not be able to express an unqualified opinion when either of
the following circumstances exist and, in the auditor’s judgment, the effect
of the matter is or may be material to the financial statements:
(a) there is a limitation on the scope of the auditor’s work; or
(b) there is a disagreement with management regarding the acceptability of
the accounting policies selected, the method of their application or the
adequacy of financial statement disclosures.
The circumstances described in (a) could lead to a qualified opinion or a
disclaimer of opinion. The circumstances described in (b) could lead to a
qualified opinion or an adverse opinion. These circumstances are discussed
more fully in paragraphs 41–46.
37. A qualified opinion should be expressed when the auditor concludes that
an unqualified opinion cannot be expressed but that the effect of any
disagreement with management, or limitation on scope is not so material
and pervasive as to require an adverse opinion or a disclaimer of
opinion. A qualified opinion should be expressed as being ‘except for’
the effects of the matter to which the qualification relates.
38. A disclaimer of opinion should be expressed when the possible effect of a
limitation on scope is so material and pervasive that the auditor has not
been able to obtain sufficient appropriate audit evidence and
accordingly is unable to express an opinion on the financial statements.
39. An adverse opinion should be expressed when the effect of a
disagreement is so material and pervasive to the financial statements
that the auditor concludes that a qualification of the report is not
adequate to disclose the misleading or incomplete nature of the financial
statements.
40. Whenever the auditor expresses an opinion that is other than
unqualified, a clear description of all the substantive reasons should be
included in the report and, unless impracticable, a quantification of the
possible effect(s) on the financial statements. Ordinarily, this information
would be set out in a separate paragraph preceding the opinion or disclaimer
of opinion and may include a reference to a more extensive discussion, if
any, in a note to the financial statements.

Circumstances That May Result in Other Than an Unqualified Opinion

Limitation on Scope
41. A limitation on the scope of the auditor’s work may sometimes be imposed
by the entity (for example, when the terms of the engagement specify that
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the auditor will not carry out an audit procedure that the auditor believes is
necessary). However, when the limitation in the terms of a proposed
engagement is such that the auditor believes the need to express a disclaimer
of opinion exists, the auditor would ordinarily not accept such a limited
engagement as an audit engagement, unless required by statute. Also, a
statutory auditor would not accept such an audit engagement when the
limitation infringes on the auditor’s statutory duties.
42. A scope limitation may be imposed by circumstances (for example, when the
timing of the auditor’s appointment is such that the auditor is unable to
observe the counting of physical inventories). It may also arise when, in the
opinion of the auditor, the entity’s accounting records are inadequate or
when the auditor is unable to carry out an audit procedure believed to be
desirable. In these circumstances, the auditor would attempt to carry out
reasonable alternative procedures to obtain sufficient appropriate audit
evidence to support an unqualified opinion.
43. When there is a limitation on the scope of the auditor’s work that
requires expression of a qualified opinion or a disclaimer of opinion, the
auditor’s report should describe the limitation and indicate the possible
adjustments to the financial statements that might have been determined
to be necessary had the limitation not existed.
44. Illustrations of these matters are set out below.

Limitation on Scope—Qualified Opinion

“We have audited ... (remaining words are the same as illustrated in the
introductory paragraph—paragraph 28 above).
Except as discussed in the following paragraph, we conducted our audit
in accordance with ... (remaining words are the same as illustrated in the
scope paragraph—paragraph 28 above).
We did not observe the counting of the physical inventories as of
December 31, 20X1, since that date was prior to the time we were
initially engaged as auditors for the Company. Owing to the nature of
the Company’s records, we were unable to satisfy ourselves as to
inventory quantities by other audit procedures.
In our opinion, except for the effects of such adjustments, if any, as
might have been determined to be necessary had we been able to satisfy
ourselves as to physical inventory quantities, the financial statements
give a true and ... (remaining words are the same as illustrated in the
opinion paragraph—paragraph 28 above).”

Limitation on Scope—Disclaimer of Opinion

“We were engaged to audit the accompanying balance sheet of the
ABC Company as of December 31, 20X1, and the related statements of
income and cash flows for the year then ended. These financial
statements are the responsibility of the Company’s management. (Omit
the sentence stating the responsibility of the auditor).

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(The paragraph discussing the scope of the audit would either be

omitted or amended according to the circumstances.)
(Add a paragraph discussing the scope limitation as follows:)
We were not able to observe all physical inventories and confirm
accounts receivable due to limitations placed on the scope of our work
by the Company.
Because of the significance of the matters discussed in the preceding
paragraph, we do not express an opinion on the financial statements.”

Disagreement with Management

45. The auditor may disagree with management about matters such as the
acceptability of accounting policies selected, the method of their application,
or the adequacy of disclosures in the financial statements. If such
disagreements are material to the financial statements, the auditor
should express a qualified or an adverse opinion.
46. Illustrations of these matters are set out below.

Disagreement on Accounting Policies-Inappropriate Accounting

Method—Qualified Opinion
“We have audited ... (remaining words are the same as illustrated in
the introductory paragraph—paragraph 28 above).
We conducted our audit in accordance with ... (remaining words are
the same as illustrated in the scope paragraph—paragraph 28 above).
As discussed in Note X to the financial statements, no depreciation has
been provided in the financial statements which practice, in our
opinion, is not in accordance with International Accounting Standards.
The provision for the year ended December 31, 20X1, should be xxx
based on the straight-line method of depreciation using annual rates of
5% for the building and 20% for the equipment. Accordingly, the fixed
assets should be reduced by accumulated depreciation of xxx and the
loss for the year and accumulated deficit should be increased by xxx
and xxx, respectively.
In our opinion, except for the effect on the financial statements of the
matter referred to in the preceding paragraph, the financial statements
give a true and ... (remaining words are the same as illustrated in the
opinion paragraph—paragraph 28 above).”

Disagreement on Accounting Policies—Inadequate Disclosure—

Qualified Opinion
“We have audited ... (remaining words are the same as illustrated in
the introductory paragraph—paragraph 28 above).
We conducted our audit in accordance with ... (remaining words are
the same as illustrated in the scope paragraph—paragraph 28 above).

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On January 15, 20X2, the Company issued debentures in the amount of

xxx for the purpose of financing plant expansion. The debenture
agreement restricts the payment of future cash dividends to earnings
after December 31, 19X1. In our opinion, disclosure of this information
is required by ...10 .
In our opinion, except for the omission of the information included in
the preceding paragraph, the financial statements give a true and ...
(remaining words are the same as illustrated in the opinion
paragraph—paragraph 28 above).”

Disagreement on Accounting Policies—Inadequate Disclosure—

Adverse Opinion
“We have audited ... (remaining words are the same as illustrated in
the introductory paragraph—paragraph 28 above).
We conducted our audit in accordance with ... (remaining words are
the same as illustrated in the scope paragraph—paragraph 28 above).
(Paragraph(s) discussing the disagreement).
In our opinion, because of the effects of the matters discussed in the
preceding paragraph(s), the financial statements do not give a true and
fair view of (or do not ‘present fairly’) the financial position of the
Company as of December 20, 19X1, and of the results of its operations
and its cash flows for the year then ended in accordance with
International Accounting Standards (or [title of financial reporting
framework with reference to the country of origin11]) (and do not
comply with ...12).”

Effective Date
47. This revised standard is effective for audits of financial statements for
periods ending on or after September 30, 2002. Earlier application is
encouraged.

Public Sector Perspective

1. While the basic principles contained in this ISA apply to the audit of
financial statements in the public sector, the legislation giving rise to the
audit mandate may specify the nature, content and form of the auditor’s
report.
2. This ISA does not address the form and content of the auditor’s report in
circumstances where financial statements are prepared in conformity with a

10 See footnote 6.

11 See footnote 2.

12 See footnote 6.

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disclosed basis of accounting, whether mandated by legislation or ministerial

(or other) directive, and that basis results in financial statements which are
misleading.
3. Paragraph 17 of this standard requires the auditor to indicate clearly the
financial reporting framework used to prepare the financial statements.
Where a public sector entity has adopted International Public Sector
Accounting Standards as the financial reporting framework, the auditor
should clearly state that fact in the audit opinion. For example:
“In our opinion, the financial statements present fairly, in all material
respects, the financial position of the [public sector entity] as of
December 31, 20X1 and of its financial performance and its cash flows
for the year then ended in accordance with International Public Sector
Accounting Standards.”

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