The audit opinion: what it should cover
An audit is an independent examination of an organisation’s financial statements and other accounting records to enable an auditor to express an opinion on whether the statements and records are a ‘true and fair’ reflection of the organisation’s financial position, performance and cashflows.
As part of their audit, auditors must give an opinion on the financial statements in accordance with Generally Accepted Accounting Practice (GAAP). This audit opinion is a formal statement by the auditor that expresses their view on whether the financial statements give a true and fair view, in all material respects, of the organisation’s financial position, performance and cashflows.
The purpose of this report is to critically analyse the audit opinion given by the auditors in relation to the statutory requirements for an audit opinion in Australia. In particular, this report will focus on whether the audit opinion meets all the requirements of ASA 700 and ASA 701.
2. Purpose and scope of the audit
The purpose of an audit is to provide assurance that an organisation’s financial statements and other accounting records are a ‘true and fair’ reflection of its financial position, performance and cashflows. This assurance is provided through an independent examination of the financial statements and records by a qualified auditor.
The scope of an audit is determined by the auditor, taking into account the nature of the organisation being audited, the auditor’s professional judgement and relevant legal and regulatory requirements. The scope of an audit will typically include:
– Reviewing the appropriateness of accounting policies used
– Considering whether the accounting estimates made by management are reasonable
– Testing selected transactions and balances to confirm that they have been recorded correctly in the financial statements
– Evaluating internal controls
– Obtaining sufficient evidence to be able to form an opinion on whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. <br />3. The audit opinion
The audit opinion is a formal statement by the auditor expressing their view on whether the financial statements give a true and fair view, in all material respects, of an organisation’s financial position, performance and cashflows.
In Australia, there are two types of audit opinions that can be issued by auditors: unqualified opinions and qualified opinions. An unqualified opinion is an unqualified expression of satisfaction by the auditor that the financial statements give a true and fair view. A qualified opinion is a less favourable expression of opinion which indicates that there are material limitations in the scope of the audit or that there are material misstatements in the financial statements. Qualified opinions are further subdivided into two types: <br />4. The audit opinion: what it should cover <br />An audit opinion should cover four main areas: <br />· Compliance with GAAP – this includes whether the financial statements comply with generally accepted accounting principles. <br />· Going concern – this refers to whether the auditor believes that the organisation can continue operating for the foreseeable future. <br />· Consistency – this refers to whether the accounting policies used in the preparation of the financial statements are consistent with those used in the previous year. <br />· Sufficient appropriate evidence – this refers to whether the auditor has obtained sufficient and appropriate evidence to support their opinion. <br />5. The audit opinion: what it should not cover <br />There are certain matters that an audit opinion should not cover, including: <br />· The effectiveness of an organisation’s internal controls – this is outside the scope of an audit. <br />· The accuracy of management’s estimates – these are based on management’s judgement and are therefore not subject to audit. <br />· Future events – these cannot be predicted with any certainty and are therefore not covered by an audit opinion. <br />6. Conclusions
The audit opinion given by the auditors does not meet all the audit requirements in accordance with ASA 700 and ASA 701. In particular, the opinion does not cover all four main areas that should be addressed in an audit opinion.
While the opinion does cover compliance with GAAP and going concern, it does not address the issue of consistency or provide sufficient appropriate evidence to support the opinion given.
As such, the auditor’s opinion is not a true and fair reflection of the organisation’s financial position, performance and cashflows.
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