By Christel Pretorius CA(SA) (RA) is the Head of Audit and Assurance Quality Management at BDO in South Africa
The auditor’s report is the final audit product that users of financial statements and the general public interact with, and therefore it is important that the auditor’s report accurately reflect the outcome of the audit in accordance with the appropriate standards and requirements
The IRBA Inspections Findings Report 2020 indicated that certain recurring deficiencies have been identified over the past few years. 23% of the inspection deficiencies reported in 2020 relate to financial statement presentations and disclosures. Findings on the auditor’s report form a component of these broader findings.
SAICA has consulted with members representing technical departments from various firms in order to understand the nature of the problems encountered and identify the common mistakes made by audit engagement teams in the preparation and finalisation of auditor’s reports.
Common errors identified
Below are common mistakes made in the preparation of auditor’s reports. Audit engagement teams should take note of these in order to avoid making the same mistakes when drafting auditor’s reports:
Overall layout
- Failure to include the auditor’s report on the appropriate firm letterhead.
- Rolling forward the prior year’s auditor’s report instead of downloading updated illustrative reports from the Independent Regulatory Board for Auditors (IRBA) website. This results in auditors preparing auditor’s reports that are not consistent with the latest illustrative requirements of South African Auditing Practice Statement 3, Illustrative Reports (SAAPS 3 (Revised May 2019)).[1]
References within the audit report
- The use of an incorrect illustrative example (for example separate financial statements only versus both consolidated and company financial results).
- Often the auditor’s report incorrectly refers to consolidated or separate, or both, with inconsistent wording of consolidated versus separate (or both) used within the same auditor’s report.
- Omitting to edit financial statement titles in the auditor’s report in order to align with the naming conventions used in the financial statements issued by the client (for example using Statement of Profit and Loss and Other Comprehensive Income in the auditor’s report instead of Income Statement as used by the client in the financial statements).
- In instances where the entity being audited does not fall under the ambit of legislation and the financial reporting framework needs to be verified (for example charities or non-profit organisations), auditors tend to treat the financial reporting framework and scope of the engagement incorrectly in the auditor’s report.
Independence requirement
- Auditors commonly include incorrect paragraphs relating to the relevant ethical requirements in the auditor’s report. Reference is often made to the previous version of the IRBA Code of Professional Conduct for Registered Auditors which has been superseded by the IRBA Code of Professional Conduct for Registered Auditors (Revised November 2018).
Going concern
- Errors often arise due to the incorrect use of the previous ISA 570, Going Concern, terminology, which is no longer applicable. For example, the heading of the going concern section in the auditor’s report shall be referred to as Material Uncertainty Related to Going Concern as opposed to Emphasis of Matter.
Key Audit Matters (KAMs)
- When KAMs are included, incorrectly omitting the last sentence in the introduction paragraph to the KAM that clarifies whether the KAM applies equally to both the consolidated and separate financial statements or just to one or the other.
- Where the audit team is required to report on KAMs, and the audit team determines that there are no KAMs to report, completely removing the KAM section in the audit report without adding the sentence in the audit report noting that there are no KAMs to report.
- The details in the KAM in the auditor’s report are potentially contradictory with what is reported in the financial statements.
- If there is a material uncertainty related to going concern or modification in the audit report that is a qualified opinion or an adverse opinion, omitting to state in the introductory paragraph of the KAM section in the audit report as follows: ‘In addition to the matter described in the Material Uncertainty Related to Going Concern section, we have determined the matters described below to be Key Audit Matters to be communicated in our report,’ or ‘In addition to the matter described in the Basis for Qualified / Adverse Opinion section, we have determined the matters described below to be Key Audit Matters to be communicated in our report’.
Other Information
- Omitting to include/edit the conclusion in the Other Information paragraph in the opinion with the wording:
- ’If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.’
- The following sections are often incorrectly edited in the Other Information section, depending on when the annual report will be made available:
- ‘… which we obtained prior to the date of this report, and the annual report, which is expected to be made available to us after that date’.
- ‘… and we do not and will not express …’
- ‘If, based on the work we have performed on the other information obtained prior to the date of this auditor’s report …’[2]
Auditor’s Responsibility section
- In the Auditor’s Responsibility section of the auditor’s report, the bullet relating to group audits is often included when it does not apply or excluded whene it should apply.
- Using the incorrect version of the Illustrative SAAPS 3 (Revised May 2019) report whereby changes made in November 2020 are not taken into account: ‘We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied.’
Conclusion
The auditor’s report is the auditor’s main communication tool with the relevant stakeholders, and therefore it is important that the above deficiencies be resolved in order to enhance audit quality. The considerations included in this article can be used by audit engagement teams when assessing whether the auditor’s report is consistent with the applicable requirements such as SAAPS 3 (Revised May 2019).
References
[1] SAAPS 3 (Revised May 2019), as a South African Practice Statement, is included in the definitions of auditing pronouncements in terms of section1 of the Auditing Profession Act (APA), which means that in terms of the Act, auditors are required to comply with it.
[2] ISA 720 (Revised), The Auditor’s Responsibilities Relating to Other Information, paragraph 22 and Illustration 2, An auditor’s report of a listed entity containing an unmodified opinion when the auditor has obtained part of other information prior to the date of the auditor’s report, has not identified a material misstatement of the other information and expects to obtain other information after the date of the auditor’s report.
