ISA 700 (Revised)
Forming an Opinion and Reporting on Financial Statements
1Objective and scope
ISA 700 (Revised) deals with the auditor's responsibility to form an opinion on the financial statements, and with the form and content of the auditor's report issued as a result of an audit. ISA 701 deals with key audit matters, ISA 705 and ISA 706 with modifications and additional paragraphs, and ISA 570 with the going concern section; the group of reporting standards is applied together. The standard promotes consistency and comparability in auditor reporting across jurisdictions, so that the report is recognisable and its assurance understood, while the 2015 revision introduced the opinion first, the basis for opinion section, a description of the auditor's responsibilities and, for listed entities, key audit matters and the name of the engagement partner.
The objectives are 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.
2Key definitions
3Requirements
Forming the opinion
The auditor forms an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable framework. To do so the auditor concludes whether reasonable assurance has been obtained that the statements as a whole are free from material misstatement, taking into account whether sufficient appropriate evidence has been obtained (ISA 330), whether uncorrected misstatements are material individually or in aggregate (ISA 450), and the evaluations below.
- Evaluate whether the financial statements are prepared in all material respects in accordance with the framework, including consideration of the qualitative aspects of the entity's accounting practices and indicators of possible bias in management's judgements.
- Evaluate in particular whether: the statements adequately disclose the significant accounting policies selected and applied; the policies are consistent with the framework and appropriate; the accounting estimates are reasonable; the information presented is relevant, reliable, comparable and understandable; the disclosures enable users to understand the effect of material transactions and events; and the terminology used, including the title of each statement, is appropriate.
- For a fair presentation framework, also evaluate whether the statements achieve fair presentation, considering the overall presentation, structure and content, and whether the statements including the notes represent the underlying transactions and events in a manner that achieves fair presentation.
- Evaluate whether the statements adequately refer to or describe the applicable framework.
- Express an unmodified opinion when the auditor concludes the statements are prepared in all material respects in accordance with the framework; modify the opinion under ISA 705 when the auditor concludes they are not free from material misstatement, or when sufficient appropriate evidence could not be obtained. Where a fair presentation framework's statements do not achieve fair presentation, discuss the matter with management and, depending on the framework and the resolution, determine whether to modify the opinion.
The elements of the auditor's report
| Element | Content |
|---|---|
| Title | 'Independent Auditor's Report', which affirms that the auditor has met the relevant ethical requirements regarding independence. |
| Addressee | As required by the engagement or by law: for a company, the members (shareholders) under the Companies Act. |
| Opinion | The first section, headed 'Opinion': identifies the entity, states that the financial statements have been audited, identifies the title of each statement, refers to the notes including the summary of significant accounting policies, specifies the date of or period covered by each statement, and expresses the opinion using the fair presentation or compliance wording and identifying the framework (and, where relevant, the jurisdiction of origin of the framework and the law it is applied under). |
| Basis for opinion | States that the audit was conducted in accordance with ISAs, refers to the section of the report describing the auditor's responsibilities, states that the auditor is independent of the entity in accordance with the relevant ethical requirements (the IESBA Code and the ICPAK Code in Kenya) and has fulfilled the other ethical responsibilities, and states whether the auditor believes the evidence obtained is sufficient and appropriate to provide a basis for the opinion. |
| Going concern | Where applicable, a 'Material Uncertainty Related to Going Concern' section under ISA 570; under the 2024 revision of ISA 570, a going concern section in every report. |
| Key audit matters | For listed entities, and where required by law or regulation or chosen by the auditor, a section under ISA 701. |
| Other information | Where the entity has other information, a section under ISA 720 (Revised). |
| Responsibilities of management and those charged with governance | Management's responsibility for preparing the financial statements in accordance with the framework and for such internal control as it determines is necessary; for assessing the ability to continue as a going concern, disclosing going concern matters and using the going concern basis unless management intends to liquidate or cease operations or has no realistic alternative; and the responsibility of those charged with governance for overseeing the financial reporting process. |
| Auditor's responsibilities for the audit | The objectives (reasonable assurance, a report including the opinion), a statement that reasonable assurance is a high level but not a guarantee that an ISA audit will always detect a material misstatement, the definition of materiality, the exercise of professional judgement and scepticism, and a description of the auditor's responsibilities: identifying and assessing risks and designing responses, the higher risk of not detecting fraud, understanding internal control (without expressing an opinion on its effectiveness), evaluating accounting policies and estimates, concluding on going concern and the effect on the report, evaluating overall presentation, and, for a group, obtaining evidence on the components. It also describes communication with those charged with governance and, for listed entities, the independence statement and the determination of key audit matters. This description may be placed in an appendix or, where law or regulation permits, by reference to a website of an appropriate authority. |
| Other reporting responsibilities | Where the auditor addresses other reporting responsibilities in addition to those under the ISAs (the Companies Act requirements on proper books, agreement of the statements with the records, and information from the directors' report), in a separate section headed 'Report on Other Legal and Regulatory Requirements'. |
| Name of the engagement partner | For audits of listed entities, unless disclosure is reasonably expected to lead to a significant personal security threat. |
| Signature, address, date | Signature of the firm, the auditor, or both, as required in the jurisdiction (in Kenya the firm's name and the signing partner's practising certificate number); the location where the auditor practises; and the date, no earlier than the date the auditor obtained sufficient appropriate evidence, including evidence that all the statements comprising the financial statements have been prepared and those with recognised authority have asserted that they have taken responsibility for them. |
Reports prescribed by law or regulation, and supplementary information
- If law or regulation prescribes a specific layout or wording, the report refers to the ISAs only if it includes, at a minimum, each of the elements above; where prescribed wording is so different that it could mislead, the auditor may add explanation or, if that is not permitted, must not refer to the ISAs.
- Where the audit is conducted under both ISAs and national standards, the report may refer to both only if there is no conflict that would lead the auditor to form a different opinion or omit an Emphasis of Matter or Other Matter paragraph.
- Supplementary information presented with the audited financial statements: the auditor evaluates whether it is clearly differentiated from the audited statements; if it is an integral part of them because of its nature or presentation, it is covered by the opinion; if not differentiated, the auditor asks management to change how it is presented, and if management refuses, explains in the report that the information is not covered by the opinion.
4Documentation and reporting
ISA 700 is the reporting standard, so its output is the report itself, in writing, in the order and with the headings above, dated and signed. The audit file holds the completion memorandum recording the conclusions on sufficiency of evidence, on uncorrected misstatements, on the qualitative evaluation of the financial statements, and on fair presentation, the review of the final financial statements against the file, the evidence of approval by those with recognised authority (the signed directors' approval), the engagement partner's stand-back under ISA 220, the engagement quality review where required, and the signed representation letter. The circumstances affecting the form and content of the report are communicated to those charged with governance under ISA 260 before the report is issued.
The Kenyan company report, in order
Independent Auditor's Report to the Members of XYZ Limited. Report on the Audit of the Financial Statements: Opinion; Basis for Opinion; Key Audit Matters (listed); Other Information; Responsibilities of the Directors for the Financial Statements; Auditor's Responsibilities for the Audit of the Financial Statements.
Report on Other Legal and Regulatory Requirements: the Companies Act 2015 statements that in the auditor's opinion the information in the directors' report is consistent with the financial statements, and any matter the Act requires to be reported by exception.
The engagement partner responsible for the audit resulting in this report is CPA [name], practising certificate number P/No. [number]. Signed for and on behalf of [Firm], Certified Public Accountants, Nairobi, [date].
5Examinable focus
What KASNEB tests
'List and explain the elements of an unmodified auditor's report' appears constantly, and the marker wants the elements in order with the content of each; a variant gives a badly drafted report and asks the candidate to identify the deficiencies (wrong addressee, opinion not first, no basis for opinion section, no reference to ISAs or independence, unsigned, dated before approval). Know the two forms of opinion wording (fair presentation versus compliance framework), the matters the auditor evaluates in forming the opinion, the dating rule, and the additional elements for listed entities (key audit matters, engagement partner's name). Reporting under the Companies Act 2015 (the report on other legal and regulatory requirements) is a Kenyan specific worth a mark or two.