ISA 700 (Revised) is a fundamental International Standard on Auditing that dictates the auditor's responsibilities for forming an opinion on financial statements and outlines the form and content of the auditor's report. It is a cornerstone standard that ensures consistency and clarity in how auditors communicate their findings to the users of financial statements.
Purpose and Scope of ISA 700 (Revised)
The primary objective of ISA 700 is to establish clear requirements for auditors to:
- Form an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework (e.g., IFRS, US GAAP).
- Express that opinion clearly through a written report.
This standard is crucial because the auditor's opinion lends credibility to the financial statements, influencing investment decisions, lending approvals, and other stakeholder judgments. It is essential that ISA 700 be understood in conjunction with ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing, which sets out the overarching principles governing an audit.
Key Elements of the Auditor's Report
ISA 700 prescribes a structured format for the auditor's report to ensure that all critical information is consistently presented. While the exact wording may vary, the core components typically include:
- Title: Clearly states "Independent Auditor's Report."
- Addressee: Identifies the party to whom the report is addressed, typically shareholders or those charged with governance.
- Auditor's Opinion: The most critical section, explicitly stating the auditor's conclusion on the financial statements.
- Basis for Opinion: Explains the framework under which the audit was conducted (e.g., International Standards on Auditing) and confirms the auditor's independence and ethical responsibilities.
- Going Concern: (If applicable, as per ISA 570) Discusses material uncertainties related to the entity's ability to continue as a going concern.
- Key Audit Matters (KAM): For audits of listed entities, this section describes matters that, in the auditor's professional judgment, were of most significance in the audit. This enhances the relevance of the auditor's report.
- Responsibilities for the Financial Statements: Outlines the management's responsibility for preparing the financial statements and for internal control.
- Auditor's Responsibilities for the Audit of the Financial Statements: Details the auditor's objectives and scope, including obtaining reasonable assurance, identifying and assessing risks, and communicating with those charged with governance.
- Other Reporting Responsibilities: Any additional reporting requirements specific to the jurisdiction or engagement.
- Signature of the Auditor: The name of the audit firm and the engagement partner.
- Auditor's Address: The location where the audit firm practices.
- Date of the Auditor's Report: The date on which the auditor has obtained sufficient appropriate audit evidence.
Types of Audit Opinions
ISA 700 distinguishes between different types of opinions an auditor can express, depending on the findings of the audit.
| Type of Opinion | Description | Practical Insight |
|---|---|---|
| Unmodified (Clean) Opinion | Issued when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. No material misstatements were found. | This is the most desirable outcome, indicating high reliability of the financial statements to users. |
| Modified Opinion | Issued when the auditor concludes that the financial statements are materially misstated, or when the auditor is unable to obtain sufficient appropriate audit evidence to form an opinion. | Alerts users to specific issues that might affect their understanding or reliance on the financial statements. |
| Qualified Opinion | Issued when the auditor concludes that misstatements are material but not pervasive to the financial statements, or when sufficient appropriate audit evidence cannot be obtained but the potential effects are not pervasive. | Implies that most of the financial statements are reliable, but a specific area is either misstated or could not be fully audited. |
| Adverse Opinion | Issued when the auditor concludes that the financial statements are materially misstated and the effects are pervasive to the financial statements. | A very serious opinion, indicating that the financial statements are not fairly presented and should not be relied upon by users for decision-making. |
| Disclaimer of Opinion | Issued when the auditor is unable to obtain sufficient appropriate audit evidence on which to base an opinion, and the potential effects of undetected misstatements on the financial statements could be both material and pervasive. | This occurs when the auditor cannot form an opinion, often due to significant scope limitations. Users are informed that no opinion can be expressed. |
Importance and Impact
ISA 700 plays a vital role in maintaining the integrity and trustworthiness of financial reporting globally. By standardizing the auditor's report, it:
- Enhances comparability: Users can easily compare auditor reports across different entities and jurisdictions.
- Increases transparency: Provides clear communication regarding the audit process and the auditor's findings.
- Strengthens accountability: Holds auditors responsible for their professional judgment and the quality of their work.
- Facilitates decision-making: Provides a reliable basis for investors, creditors, and other stakeholders to make informed economic decisions.
The ongoing relevance of ISA 700 (Revised) lies in its ability to adapt to evolving financial reporting environments and enhance the informative value of the audit report.
