Questions and answers
Drafting unmodified audit reports can be challenging, but some of the most common pitfalls can be easily avoided, explains John Selwood.
Q. I recently drafted a special auditor’s report on small company abbreviated accounts for filing at Companies House. The audit report on the full accounts included an emphasis of matter paragraph and when I looked at the Companies Act 2006 (CA 2006), it only requires qualified opinions to be included in the special auditor’s reports on abbreviated accounts. An emphasis of matter is not a qualification so it should not be included. Is this correct?
A. This is an area that appears to be catching out many auditors. You are correct in saying that CA 2006 requires only qualified audit reports to be repeated as part of the special auditor’s report on abbreviated accounts. It is worth pointing out that this language is a little behind the times and that auditors should take this to mean “modified”.
Also, ISA (UK and Ireland) 706 "Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report" does not consider an emphasis of matter paragraph to be a modification to the audit opinion, so some auditors do not repeat the added emphasis paragraph in the special auditor’s report. However, this is addressed in APB Bulletin 2008/04 "The special Auditor’s Report on Abbreviated Accounts in the United Kingdom", which suggests that an emphasis of matter paragraph should be referred to in the special auditor’s report on abbreviated accounts.
More specifically, para 42 of the guidance states: “In particular, when the auditor’s report under section 495 of CA 2006 is unqualified but contains an emphasis of matter paragraph, the APB considers that it is necessary for the auditor to include such a paragraph (together with any further material necessary to understand it) in the special auditor’s report.”
Q. When auditing an entity that was audit exempt in the previous accounting period, what audit opinion should I give?
A. Of course this varies according to the audit evidence you have obtained. Assuming that you have been able to audit the opening balances then an unmodified opinion is appropriate if it is justified by your audit work.
However, what some auditors miss is the requirement in ISA 710 "Corresponding Figures and Comparative Financial Statements", to include in the audit report a statement that the prior period was not subject to audit. This is another matter paragraph and would usually appear after the opinion paragraph, but in practice auditors often include it elsewhere – for instance, above the Bannerman clarification language.
Neither the ISAs nor APB guidance provide an example of the wording, but I might use words such as:
“In the previous accounting period the directors of the company took advantage of audit exemption under s477 of the Companies Act. Therefore the prior period financial statements were not subject to audit.
Q. My firm’s accounts preparation software includes a paragraph in the audit report that refers to the Ethical Standards – Provisions Available for Small Entities (ES PASE). Should this be included in the audit report of all small entities?
A. Absolutely not! This has been a recurring question since the ES PASE was first introduced and caused (and continues to cause) confusion to many auditors.
The ES PASE does require disclosure in the accounts and an extra paragraph in the audit report, but only when one of its exemptions is used. Namely:
- there is no informed management (and in practice there nearly
- always is informed management);
- the cooling-off period for partners joining an audit client has been dis-applied; or
- the auditor has represented their audit client at tax tribunals.
The ES PASE audit paragraph is required in these circumstances and no other. Specifically, it is not required if the ES PASE alternates are applied, being the relief from external reviews when there are certain fee-dependency issues and there being no requirement to apply safeguards where there are self-review threats resulting for the provision of non-audit services.
John Selwood is a member of the faculty’s Practitioner Services Committee
This article first appeared in the December 2012/January 2013 edition of Audit & Beyond, the magazine from the ICAEW Audit and Assurance Faculty.