How an auditor would determine whether financial statements are fairly stated?
Audit procedures are used by auditors to determine the quality of the financial information being provided by their clients, resulting in the expression of an auditor’s opinion. The exact procedures used will vary by client, depending on the nature of the business and the audit assertions that the auditors want to prove. Several general classifications of audit procedures are noted below. A complete set of audit procedures is needed before the auditor has enough information to decide whether a client's financial statements fairly represent its financial results, financial position, and cash flows. Show
Classification TestingAudit procedures are used to determine whether the valuations at which assets and liabilities are recorded in a client's books are correct. For example, one procedure would be to check market pricing data to see if the ending values of marketable securities are correct. The auditor’s objectives are to obtain reasonable assurance about whether 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 is not a guarantee that an audit conducted in accordance with International Standards on Auditing (UK) (ISAs (UK)) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs (UK), the auditor exercises professional judgment and maintains professional scepticism throughout the audit. The auditor also:
The auditor communicates with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that the auditor identifies during the audit. For listed entities and public interest entities, the auditor also provides those charged with governance with a statement that the auditor has complied with relevant ethical requirements regarding independence, including the FRC’s Ethical Standard, and communicates with them all relationships and other matters that may reasonably be thought to bear on the auditor’s independence, and where applicable, related safeguards. Where the auditor is required to report on key audit matters, from the matters communicated with those charged with governance, the auditor determines those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. The auditor describes these matters in the auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, the auditor determines that a matter should not be communicated in the auditor’s report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. For public interest entities, other listed entities, entities that are required, and those that choose voluntarily, to report on how they have applied the UK Corporate Governance Code, and other entities subject to the governance requirements of The Companies (Miscellaneous Reporting) Regulations 2018, the auditor is required to include in the auditor’s report an explanation of how the auditor evaluated management's assessment of the entity's ability to continue as a going concern and, where relevant, key observations arising with respect to that evaluation. Reporting on the financial statementsThe auditor’s report is required to contain a clear expression of opinion on the financial statements taken as a whole. To form an opinion on the financial statements the auditor concludes as to whether:
When the financial statements are prepared in accordance with a fair presentation framework, the auditor also evaluates whether the financial statements achieve fair presentation (i.e gives true and fair view) including consideration of:
Unmodified opinionsAn unmodified opinion is expressed when the auditor is able to conclude that the financial statements give a true and fair view 1 and comply in all material respects with the applicable financial reporting framework.Modified opinionsThe auditor modifies the opinion when either:
The auditor disclaims an opinion when either:
Emphasising certain matters without modifying the opinionIn certain circumstances an auditor’s report includes an emphasis of matter paragraph to draw attention to a matter presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements. An emphasis of matter paragraph does not modify the auditor’s opinion.Communicating "other matters"If the auditor considers it necessary to communicate a matter other than those that are presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report, the auditor does so in a separate section in the auditor’s report with the heading “Other Matter” or other appropriate heading.Other information included in the annual reportThe auditor is required to read all financial and non-financial information (other information) included in the annual report and to identify whether the other information is materially inconsistent with the financial statements or the auditor’s knowledge obtained in the audit or otherwise appears to be materially misstated. If the auditor identifies material inconsistencies or apparent material misstatements, the auditor determines whether there is a material misstatement in the financial statements or a material misstatement of the other information. Where the auditor concludes that there is an uncorrected material misstatement of the other information, the auditor is required to report this in the auditor’s report. When financial statements are presented fairly they are?Consequently, using the term "present fairly" means that the financial statements attached to the auditor's report give a reasonable view of the financial results, financial position, and cash flows of the reporting entity.
When the financial statements are fairly stated but the auditor?When the financial statements are fairly stated but the auditor concludes there is substantial doubt whether the client can continue in existence, the auditor should issue a(n)(1) adverse opinion.
What factors should an auditor consider in determining whether financial statements are presented fairly in conformity with applicable financial reporting standards?The auditor's opinion that financial statements present fairly an entity's financial position, results of operations, and cash flows in conformity with generally accepted accounting principles should be based on his or her judgment as to whether (a) the accounting principles selected and applied have general acceptance ...
Which type of audit opinion indicates that the financial statements have been fairly presented?An unqualified opinion is an independent auditor's judgment that a company's financial statements are fairly and appropriately presented, without any identified exceptions, and in compliance with generally accepted accounting principles (GAAP).
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