Statement on Auditing Standards – SA 700

Statement on Auditing Standards – SA 700

Scope and objectives

The responsibilities of auditors in forming an opinion on financial statements and issuing a report based on their audit. The SA 700 is applicable to audits of complete sets of general-purpose financial statements, which are financial statements prepared in accordance with a general-purpose framework designed to meet the common financial information needs of a wide range of users.

The SA 700 aims to strike an appropriate balance between the need for consistency and comparability in auditor reporting globally and the need to increase the value of auditor reporting by making the information provided in the auditor’s report more relevant to users. It promotes consistency in the auditor’s report while also recognizing the need for flexibility to accommodate particular circumstances of individual jurisdictions.

The SA 700 defines terms such as general-purpose financial statements and a fair presentation framework, which is a financial reporting framework that requires compliance with the framework’s requirements but may allow management to depart from those requirements in rare circumstances to achieve a fair presentation of the financial statements. The SA 700 also defines an unmodified opinion, which is the opinion expressed by the auditor when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

The SA 700 clarifies that the related notes, including significant accounting policies and other explanatory information, are part of the financial statements. Additionally, it includes Accounting Standards issued by the Institute of Chartered Accountants of India, Standards of Accounting notified by the Central Government, International Financial Reporting Standards, and International Public Sector Accounting Standards as applicable to the entity.

Overall, the SA 700 sets out the objectives of the auditor to form an opinion on the financial statements based on an evaluation of the conclusions drawn from the audit evidence obtained and to express that opinion clearly through a written report. It provides guidance on the form and content of the auditor’s report and aims to promote consistency in reporting while recognizing the need for flexibility in particular circumstances.

Forming an Opinion on the Financial Statements

The process that auditors follow to form an opinion on the financial statements of an entity. According to the text, the auditor must form an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. To form this opinion, the auditor must obtain reasonable assurance that the financial statements as a whole are free from material misstatement, whether due to fraud or error.

The auditor must evaluate whether the financial statements are prepared in all material respects in accordance with the requirements of the applicable financial reporting framework. This evaluation includes consideration of the qualitative aspects of the entity’s accounting practices, including indicators of possible bias in management’s judgments. Indicators of a lack of neutrality that may affect the auditor’s evaluation of whether the financial statements as a whole are materially misstated include selective correction of misstatements brought to management’s attention during the audit and possible management bias in the making of accounting estimates.

The auditor must also evaluate whether the financial statements adequately disclose the significant accounting policies selected and applied, whether the accounting policies selected and applied are consistent with the applicable financial reporting framework and are appropriate, whether the accounting estimates made by management are reasonable, whether the information presented in the financial statements is relevant, reliable, comparable, and understandable, and whether the financial statements provide adequate disclosures to enable the intended users to understand the effect of material transactions and events on the entity’s financial position, financial performance, and cash flows.

When the financial statements are prepared in accordance with a fair presentation framework, the auditor must evaluate whether the financial statements achieve fair presentation. The auditor’s evaluation as to whether the financial statements achieve fair presentation shall include consideration of the overall presentation, structure, and content of the financial statements and whether the financial statements, including the related notes, represent the underlying transactions and events in a manner that achieves fair presentation.

Additionally, the auditor must evaluate whether the financial statements adequately refer to or describe the applicable financial reporting framework. The preparation of the financial statements by management requires the inclusion of an adequate description of the applicable financial reporting framework in the financial statements. A description that the financial statements are prepared in accordance with a particular applicable financial reporting framework is appropriate only if the financial statements comply with all the requirements of that framework that are effective during the period covered by the financial statements.

Finally, if the financial statements represent that they are prepared in accordance with two financial reporting frameworks, the financial statements need to comply with both frameworks simultaneously. The description of the applicable financial reporting framework that contains imprecise qualifying or limiting language is not an adequate description of that framework as it may mislead users of the financial statements.

Auditor’s Report

The report should have a clear title that indicates that it is the report of an independent auditor, such as “Independent Auditor’s Report.” The report should also be addressed appropriately based on the circumstances of the engagement. Usually, the report is addressed to those for whom the report is prepared, often either to the shareholders or to those charged with governance of the entity whose financial statements are being audited.

The first section of the auditor’s report should include the auditor’s opinion, which should have the heading “Opinion.” The opinion section should also identify the entity whose financial statements have been audited, state that the financial statements have been audited, identify the title of each statement comprising the financial statements, refer to the notes, including the summary of significant accounting policies, and specify the date of, or period covered by, each financial statement comprising the financial statements.

When expressing an unmodified opinion on financial statements prepared in accordance with a fair presentation framework, the auditor’s opinion should use one of the following phrases, which are regarded as being equivalent: “In our opinion, the accompanying financial statements present fairly, in all material respects, […] in accordance with [the applicable financial reporting framework];” or “In our opinion, the accompanying financial statements give a true and fair view of […] in accordance with [the applicable financial reporting framework].” The phrases “present fairly, in all material respects,” and “give a true and fair view” are regarded as being equivalent.

When the auditor expresses an unmodified opinion, it is not appropriate to use phrases such as “with the foregoing explanation” or “subject to” in relation to the opinion, as these suggest a conditional opinion or a weakening or modification of opinion. The guidance also includes additional information on the use of headings and ordering of elements in the report.

Description of the financial statements and the matters they present

The auditor’s opinion on financial statements and the applicable financial reporting framework. The auditor’s opinion covers the complete set of financial statements, including balance sheet, profit and loss account, statement of changes in equity, statement of cash flows, and related notes, which ordinarily comprise a summary of significant accounting policies and other explanatory information.

In the case of financial statements prepared in accordance with a fair presentation framework, the auditor’s opinion states that the financial statements present fairly, in all material respects, or give a true and fair view of the matters that the financial statements are designed to present.

The applicable financial reporting framework is identified in the auditor’s opinion to advise users of the auditor’s report of the context in which the auditor’s opinion is expressed. The applicable financial reporting framework may encompass financial reporting standards and legal or regulatory requirements.

The financial statements may be prepared in accordance with two financial reporting frameworks, which are both applicable financial reporting frameworks. In this case, each framework is considered separately when forming the auditor’s opinion on the financial statements. If the financial statements comply with each of the frameworks individually, two opinions are expressed. If the financial statements comply with one of the frameworks but fail to comply with the other framework, an unmodified opinion can be given that the financial statements are prepared in accordance with the one framework but a modified opinion given with regard to the other framework in accordance with SA 705(Revised).

The Basis for Opinion section follows the Opinion section in the auditor’s report and provides important context about the auditor’s opinion. It states that the audit was conducted in accordance with Standards on Auditing, describes the auditor’s responsibilities, and explains the basis for the auditor’s opinion.

Considerations specific to group audits

In Regarding group audits, the auditor’s report should refer to the relevant ethical requirements that are applicable to the principal auditor. The SAs do not establish specific independence or ethical requirements for component auditors, but they do not override the independence requirements of the ICAI Code of Ethics to which the principal auditor is subject.

In relation to going concern, if it is applicable, the auditor should report in accordance with SA 570 (Revised).

For audits of complete sets of general-purpose financial statements of listed entities, the auditor must communicate key audit matters in the auditor’s report in accordance with SA 701. If the auditor is required by law or regulation or decides to communicate key audit matters for other entities, including public interest entities, they should do so in accordance with SA 701.

The public sector entities, even if not listed, may be significant due to size, complexity, or public interest aspects, and an auditor of a public sector entity may be required by law or regulation or may decide to communicate key audit matters in the auditor’s report.

Finally, where applicable, the auditor should report on other information in accordance with SA 720.

Responsibilities for the Financial Statements

The requirements for the auditor’s report on the financial statements of an entity. The auditor’s report must include a section that describes the responsibilities of management and, where applicable, those charged with governance, for the preparation of the financial statements in accordance with the applicable financial reporting framework. This section of the report must explain that management is responsible for preparing the financial statements and for maintaining internal control to prevent material misstatements.

If the law or regulation prescribes the responsibilities of management and those charged with governance in relation to financial reporting, the auditor may use the wording of the law or regulation to describe those responsibilities in the engagement letter or other written agreement. If the auditor decides not to use the wording of the law or regulation, the wording in SA 200 should be used.

The report must also identify those responsible for the oversight of the financial reporting process, if those responsible for such oversight are different from those who fulfill the responsibilities described earlier in the report. If the financial statements are prepared in accordance with a fair presentation framework, the description of responsibilities for the financial statements in the auditor’s report must refer to “the preparation and fair presentation of these financial statements” or “the preparation of financial statements that give a true and fair view,” as appropriate in the circumstances.

Overall, the key responsibilities of management, those charged with governance, and the auditor in relation to the financial statements of an entity.

Auditor’s Responsibilities for the Audit of the Financial Statements

An auditor’s report titled “Auditor’s Responsibilities for the Audit of the Financial Statements” explains the auditor’s objectives and responsibilities when performing an audit of an entity’s financial statements.

Firstly, the report states that the auditor’s objective is to obtain reasonable assurance that the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes the auditor’s opinion. Reasonable assurance is a high level of assurance, but it is not a guarantee that the audit will always detect a material misstatement when it exists.

The report also states that misstatements can arise from fraud or error and provides a definition or description of materiality in accordance with the applicable financial reporting framework. Material misstatements are those that, individually or in aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

The auditor’s report further describes the audit process by stating that the auditor exercises professional judgment and maintains professional scepticism throughout the audit. The auditor’s responsibilities include identifying and assessing the risks of material misstatement of the financial statements, designing and performing audit procedures responsive to those risks, and obtaining sufficient and appropriate audit evidence to provide a basis for the auditor’s opinion.

The auditor also evaluates the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. The auditor must conclude on the appropriateness of management’s use of the going concern basis of accounting and determine whether there is a material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern.

If the auditor concludes that a material uncertainty exists, the auditor is required to draw attention to related disclosures in the financial statements or modify the opinion. The auditor evaluates the overall presentation, structure, and content of the financial statements, including the disclosures, to determine whether they achieve a fair presentation.

If SA 600 applies, the auditor’s report further describes the auditor’s responsibilities in a group audit engagement by indicating the division of responsibility for the financial information of the entity.

Finally, the auditor’s report states that the auditor communicates with those charged with governance regarding the planned scope and timing of the audit, significant audit findings, including any significant deficiencies in internal control that the auditor identifies during the audit. The auditor also provides those charged with governance with a statement that the auditor has complied with relevant ethical requirements regarding independence and communicates all relationships and other matters that may reasonably be thought to bear on the auditor’s independence, and where applicable, related safeguards. If key audit matters are communicated in accordance with SA 701, the auditor’s report also includes a statement on these matters communicated with those charged with governance.

Location of the description of the auditor’s responsibilities for the audit of the financial statements

The auditor’s responsibilities for the audit of financial statements. The objective of the audit is to obtain reasonable assurance that the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes an opinion. The auditor’s report must include a description of the auditor’s responsibilities for the audit of the financial statements, which can be included either within the body of the report or in an appendix to the report with a reference to its location.

If permitted by law, regulation or auditing standards, the auditor may also refer to a description of the auditor’s responsibilities located on a website of an appropriate authority, provided that the website information does not contradict the description required in the auditor’s report. An appropriate authority may be a national auditing standard setter, regulator, or an audit oversight body.

If the auditor has additional reporting responsibilities beyond those required by auditing standards, they must be addressed in a separate section of the auditor’s report with a heading titled “Report on Other Legal and Regulatory Requirements” or another appropriate heading. If these additional responsibilities address the same topics as those presented under the reporting responsibilities required by the auditing standards, they may be presented in the same section as the related report elements required by the standards.

It’s worth noting that it refers to a specific auditing standard (SA), which is a framework for conducting an audit in accordance with international auditing standards. This standard provides guidance to auditors on their responsibilities for the audit of financial statements.

Auditor’s Report Prescribed by Law or Regulation

The requirements and considerations for an auditor’s report when a specific layout or wording is prescribed by law or regulation. In such cases, the auditor’s report should include at least a title, an addressee, an opinion section containing an expression of opinion on the financial statements and a reference to the applicable financial reporting framework used to prepare the financial statements, an identification of the entity’s financial statements that have been audited, a statement of the auditor’s independence, and compliance with ethical responsibilities.

If there are reporting requirements in specific auditing standards that are not inconsistent with the legal or regulatory requirements, those standards may be referenced. If additional information about the audit is required by law or regulation, it should be included in the auditor’s report, and if it is consistent with the objectives of the SA 701, it can be included in the section that addresses key audit matters.

If the law or regulation significantly differs from the requirements of auditing standards, the auditor should evaluate whether additional explanation in the auditor’s report can mitigate possible misunderstanding. If it cannot, the auditor should not accept the audit engagement, unless required by law or regulation to do so. In such cases, the auditor should not include any reference to the audit having been conducted in accordance with Standards on Auditing.

SA 700 also notes that auditors of public sector entities may have the ability, pursuant to law or regulation, to report publicly on certain matters, either in the auditor’s report or in a supplementary report, which may include information consistent with the objectives of SA 701. In such cases, the auditor may need to tailor certain aspects of the communication of key audit matters in the auditor’s report required by SA 701 or include a reference in the auditor’s report to a description of the matter in the supplementary report.

Overall, SA 700 highlights that legal or regulatory requirements may override auditing standards in certain circumstances, and the auditor’s report should be tailored to meet these requirements while still providing relevant information to the users of the report.

Supplementary Information Presented with the Financial Statements

The presentation of supplementary information that is not required by the financial reporting framework but may be presented voluntarily by an entity to enhance the user’s understanding of the financial statements. The auditor’s opinion covers supplementary information that is an integral part of the financial statements due to its nature or presentation, and this evaluation is a matter of professional judgment.

The auditor does not need to refer to the supplementary information specifically in the auditor’s report when the reference to the notes in the description of the financial statements is sufficient. The management may decide not to include the supplementary information within the scope of the audit, even if the law or regulation does not require it.

If the supplementary information is unaudited but presented in a way that could be construed as being covered by the auditor’s opinion, the auditor should evaluate its presentation and labelling to ensure that it is clearly differentiated from the audited information. If the management refuses to change the presentation of unaudited supplementary information that is not considered an integral part of the audited financial statements, the auditor shall identify the unaudited supplementary information and explain in the auditor’s report that such supplementary information has not been audited.

Quiz: Forming an Opinion and Reporting on Financial Statements

1. What is the purpose of SA 700?

a) To provide flexibility to auditors in forming an opinion on financial statements

b) To increase the value of auditor reporting for users of financial statements

c) To establish specific independence requirements for auditors

d) To define general-purpose financial statements

Answer: b)

2. What does an unmodified opinion mean?

a) The financial statements are prepared with a fair presentation framework

b) The financial statements are free from material misstatement

c) The auditor has concluded that the financial statements comply with all requirements

d) The financial statements adequately disclose significant accounting policies

Answer: b)

3. What does the auditor evaluate when forming an opinion on financial statements?

a) The financial statements’ compliance with accounting standards

b) The financial statements’ compliance with legal and regulatory requirements

c) The fairness and materiality of the financial statements

d) The qualitative aspects of the entity’s accounting practices

Answer: d)

4. How should the auditor’s report be titled?

a) “Forming an Opinion on Financial Statements”

b) “Responsibilities for the Audit of Financial Statements”

c) “Independent Auditor’s Report”

d) “Description of the Financial Statements”

Answer: c)

5. When expressing an unmodified opinion, what phrases are regarded as being equivalent?

a) “Present fairly, in all material respects” and “give a true and fair view”

b) “Subject to” and “with the foregoing explanation”

c) “In accordance with the applicable financial reporting framework”

d) “Opinion” and “Summary of Significant Accounting Policies”

Answer: a)

6. What should the auditor’s report include regarding the responsibilities of management?

a) Description of management’s internal control system

b) Description of management’s responsibilities for maintaining financial records

c) Explanation of management’s responsibility for preparing financial statements

d) Details of management’s compliance with ethical requirements

Answer: c)

7. What is the auditor’s objective when performing an audit of financial statements?

a) To guarantee the absence of material misstatements

b) To identify and assess risks of material misstatement

c) To evaluate the overall presentation of the financial statements

d) To report on other information in accordance with SA 720

Answer: b)

8. Where can the description of the auditor’s responsibilities for the audit of financial statements be located?

a) In an appendix to the auditor’s report

b) On the entity’s website

c) In the financial statements’ footnotes

d) In the audit engagement letter

Answer: a)

9. Which of the following components should be included in an auditor’s report when a specific layout or wording is prescribed by law or regulation?

a) Title, addressee, and opinion section only

b) Title, addressee, opinion section, and reference to the financial reporting framework

c) Title, addressee, opinion section, reference to the financial reporting framework, and identification of audited financial statements

d) Title, addressee, opinion section, reference to the financial reporting framework, identification of audited financial statements, and auditor’s independence statement

Answer: c)

10. What should the auditor do if the law or regulation significantly differs from the requirements of auditing standards?

a) Accept the audit engagement and include a reference to the audit conducted in accordance with Standards on Auditing

b) Evaluate whether additional explanation in the auditor’s report can mitigate possible misunderstanding

c) Exclude any reference to the audit conducted in accordance with Standards on Auditing

d) Consult with the management to resolve the differences between the law or regulation and auditing standards

Answer: b)

Additional questions:

11. What are the key responsibilities of auditors in relation to financial statements?

a) Preparing the financial statements in accordance with the applicable framework

b) Identifying and assessing risks of material misstatement

c) Maintaining internal control to prevent material misstatements

d) Ensuring compliance with legal and regulatory requirements

Answer: b)

12. What does the auditor evaluate regarding the disclosure of significant accounting policies?

a) The consistency of accounting policies with the applicable framework

b) The reasonableness of accounting estimates made by management

c) The adequacy of disclosure to enable users to understand the effect of transactions

d) The overall presentation and content of the financial statements

Answer: c)

13. How does the auditor evaluate whether the financial statements achieve fair presentation?

a) By assessing the structure and content of the financial statements

b) By determining compliance with the applicable financial reporting framework

c) By analyzing the financial statements’ overall presentation

d) By reviewing the summary of significant accounting policies

Answer: a)

14. What is the purpose of including the Basis for Opinion section in the auditor’s report?

a) To provide context about the auditor’s opinion

b) To describe the auditor’s responsibilities in the audit engagement

c) To identify the entity whose financial statements have been audited

d) To summarize the qualitative aspects of the entity’s accounting practices

Answer: a)

15. In group audits, what should the auditor’s report refer to?

a) The relevant ethical requirements for component auditors

b) The financial statements of the principal auditor only

c) The independence requirements of the auditing standards

d) The responsibilities of management and those charged with governance

Answer: a)

16. When should the auditor communicate key audit matters in the auditor’s report?

a) For all audits of general-purpose financial statements

b) Only for audits of listed entities

c) For audits of public sector entities

d) If required by law or regulation, or at the auditor’s discretion

Answer: b)

17. How does the auditor assess the entity’s ability to continue as a going concern?

a) By evaluating the appropriateness of accounting policies

b) By reviewing the summary of significant accounting policies

c) By considering events or conditions that may cast doubt on continuity

d) By analyzing the entity’s cash flows and financial performance

Answer: c)

18. What information should be included in the auditor’s report regarding communication with those charged with governance?

a) The auditor’s opinion on the financial statements

b) Significant audit findings and deficiencies in internal control

c) The auditor’s compliance with ethical requirements

d) The auditor’s evaluation of accounting estimates made by management

Answer: b)

19. When presenting supplementary information that is not required by the financial reporting framework, what should the auditor do if the management refuses to change the presentation of unaudited supplementary information?

a) Include the unaudited supplementary information in the scope of the audit to ensure accuracy

b) Clearly identify the unaudited supplementary information and explain in the auditor’s report that it has not been audited

c) Request the management to remove the unaudited supplementary information from the financial statements

d) Report the unaudited supplementary information as part of the audited financial statements

Answer: b)

20. In what circumstances can legal or regulatory requirements override auditing standards in relation to the auditor’s report?

a) When the auditor finds inconsistencies between the financial statements and the supplementary information

b) When the law or regulation significantly differs from the requirements of auditing standards

c) When the auditor is requested to include additional information about the audit in the report

d) When the management voluntarily presents supplementary information alongside the financial statements

Answer: b)

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