Audit Theory and Practice: Analysis of Amended Audit Standards UK

This essay provides a comprehensive overview of audit theory and practice, focusing on the nature and content of audit reports, including qualified, unqualified, adverse, and disclaimer opinions. It details the essential components of an audit report, such as the title, address, scope, introductory paragraph, opinion, signature, place, and date. The essay further examines the amended audit reporting standards in the UK, particularly the impact of revisions to IAS 701 and related standards by the FRC, emphasizing increased transparency and auditor responsibilities. It also discusses the effects of these changes on UK SMEs following GAAP and the modifications to revenue recognition processes. The conclusion highlights the enhanced transparency and benefits for investors resulting from the amended audit report format, promoting relevance, credibility, and improved communication between auditors and governance bodies. Desklib is a great platform to find similar solved assignments and study tools.

Running head: AUDIT THEORY AND PRACTICE
Audit Theory and Practice
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AUDIT THEORY AND PRACTICE
Introduction
An audit report could be defined as the investigation of financial statements on the
part of an auditor acting as independent evaluator. After analysing the financial statements,
management accounts and other accounts or related reports for arriving at an inference
whether the business organisation has represented its performance in an unbiased and true
manner. Hence, reporting needs to be conducted by following appropriate auditing standards
prevalent in the nation. The current essay would emphasise on audit theory and practice
where the nature and the content of the audit report would be discussed. An auditor needs to
be alert on the changes of the accounting standard, as they bear the accountability of
incorporating changes into their reporting process. Finally, this report would include
identification of impact of the amended audit standard, which is the “International Standards
on Auditing (ISA) UK”.
Nature of audit reports:
Audit reports generally contain the following types of audit opinions:
Qualified opinion:
An opinion provided in a qualified audit report is identical to an unqualified opinion;
however, it is not possible for the auditing body to provide an unqualified opinion owing to a
number of reasons. One such reason might be that the auditor does not have considerable
evidence that the organisation has not prepared its financial statements by following IFRS;
however, the degree of impact is low (Tsipouridou and Spathis 2014).
Unqualified opinion:

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AUDIT THEORY AND PRACTICE
The unqualified opinion refers to the best possible outcome of audit. This indicates
towards two best possible opinions (Suwanda 2015). This means the auditor finds the report,
which confirms to IFRS and these are mentioned as follows:
1. The representation of the financial statements is made by fully adhering to the
principles laid down in UK IFRS
2. The information disclosed in the financial statements is true and fair.
Adverse opinion:
An auditor provides an adverse opinion when the probable impact of a disagreement
with management is so pervasive and material to the financial statements that the auditor
infers that a qualification of the audit report is not sufficient in disclosing the incomplete
nature of the financial statements. This has been identified as the adverse opinion of the
auditor, as the audited statements are not complying with norms mentioned in IFRS (Newton
et al. 2015).
Disclaimer opinion:
This type of opinion is issued by the auditors at the time they are unable to provide a
complete opinion. The reason might be due to lack of adequately maintained financial records
or there is lack of support from the management. For example, an auditor might not have the
chance of fulfilling tasks vital to the audit process like observation of operating procedures or
review of specific procedures.
Contents of the audit report
 Title of report
 Address
 Scope

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AUDIT THEORY AND PRACTICE
 Opening or introductory paragraph
 Opening paragraph
 Signature
 Place of signature
 Date of the report
Title of report: The title of the report consists as auditor’s report or cost auditor’s report. This
enables the reader to identify the report as the auditor’s report. This helps in distinguish it
from the other reports such as director’s report, accounts report etc.
Address: The address refers to the person to whom the audit report to be forwarded. The audit
report has been submitted to the person who appoints the auditor. The example of a statutory
audit is addressed to the shareholders of the company.
Scope: The paragraph should indicate the scope of the audit report and as well as the nature
and the scope of the work performed by the auditor. The audit report should indicate towards
the work, as per the audit standard mentioned in IFRS. This should be made through
assessing the accounting standard and at the evidence of financial statement of the company.
Along with that the audit report also provides a reasonable basis of auditor’s opinion (Bédard,
Gonthier-Besacier and Schatt 2014).
Opening and introductory paragraph: This has been formed based on identification of two
elements. This implies the financial statement audit and identification of the responsibility of
management and auditor.
1. Financial statement audit refers to the identification of the financial statement by the
name of company and financial statement covered within the period (Cheng et al.
2014).

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AUDIT THEORY AND PRACTICE
2. The audit report should state the responsibility of auditor towards making opinion for
the management duty.
Opinion paragraph: This paragraph consistsof the financial reporting framework through
following the accounting principle. This states the representation of the financial statement
and the information shared into the financial statements are true and fair.
Signature: The audit report should be provided with the auditor’s signature and also in the
name of audit firm.
Place of signature: The audit report should mention the place where the audit report has been
signed by the auditor.
Date of report: The date of signing of the audit report should be mentioned. This helps in
identifying the effective date of financial statement and also the occurrence of the event and
transaction.
Amended audit reporting standard in UK
With the revision into the accounting principles under IAS, the FRC has implemented
their revised auditing standard on the UK companies. The issuance of the revised auditing
standard IAS 701 has been done based on the revision of the IAS 700 (Iasplus.com 2019).
This includes the revision of the standard stated on the Independent Auditor’s report on
financial statement. This has helped the audit system to bring more transparency into the
representation of the financial position.
At the time of revising the FRC regulation, the auditors bear the following
responsibilities:
1. To provide an over view of the scope of audit, showing how this addressed the risk
and materiality considerations.

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AUDIT THEORY AND PRACTICE
2. Describing the risk that is having greatest effect on overall audit strategy, allocation of
resources of audit and directing the effort of the engagement team.
3. Providing an explanation by auditor on application of the concept of materiality in
planning and performing the audit.
Following the IAS paragraph 19A, the audit report needs to provide a clear discloser
of risk and other information and that disclosers need to voluntary comply with the UK
corporate governance code (Frc.org.uk 2019).
Amended accounting standards Implementation Explanation
IAS 701 Communication with the key audit matters
into the independent auditor’s report.
IAS 705r Modifying the opinion under the
independent auditor’s report.
IAS 570r Going concern
IAS 720r The responsibility of auditor relating to
other information.
ISA 260r Communication with those changed with
governance.
ISA 706r Emphasising on matter paragraphs and other
matter paragraphs in the independent
auditor’s report.
Table 1: Amended audit standard in IAS
(Source: Iasplus.com 2019)

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AUDIT THEORY AND PRACTICE
This has been recognized that the some of the UK SMEs have been following the
GAAP (Kaya and Koch 2015). Since the amendment has been recognized in the UK GAAP
as well, here the changes have been made into the revenue recognition process where the
financial reporting standard has been modified to the 102 from the FRS 5. The criteria have
been made based on the triennial review of 2017. Here, the loan exemptions from directors
and shareholders to small entities have been permitted. The difference has been identified
into the “Gift aid”.
Impact of new audit report format
The amended audit report format has enhanced the audit transparency. This has
helped the auditors to reduce the loopholes into the audit process. This has been identified
that with the adoption of the 701 the management has reduced the misconduct into the audit
report. From the auditor’s point of view the amendment of the audit independence has helped
the auditors to work more freely and utilizing their capability to maintain the public interest
into their audit report. However, it has been recognised that the changes into the regulatory
system have not significantly affected the investors, since the investors’ reaction has not been
affected to the release of auditors, audit fee or audit quality. Furthermore the variation in the
expanded report content has not affected these outcomes as well. However, the increase in the
report transparency has provided little incremental information to the investors (Council
2015).
The new directive and regulation in audit has created impact on the statutory audit
system. The newly formed directive applies on the statutory audit of annual and consolidated
financial statement. While on the other hand the regulatory audit applies on the statutory
audit of the listed companies such as insurance providers, banks and financial institutions.

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AUDIT THEORY AND PRACTICE
The modified audit report has enhanced the benefit for the investors into many phases (Borg
et al. 2015).
The significant entities into the newly formatted audit report have helped to bring the
relevance and credibility into the information. Further the benefit has been recognized into
the comparability where the information has provided a better compression option for the
investors and other stakeholders. The new report has helped to integrate more robust dialogue
between auditors and the changes with the governance. The enhancement into the
communication into the audit process has helped the new audit format to be able to bring
more quality into audit report (Carcello and Li 2013).
Conclusion
Based on the above discussion, it could be stated that an audit is a process of
reviewing books of account while at the same time formulating an audit report is a process of
representing financial condition of a company. With the changes into the accounting principle
the auditor changes their audit criteria. Finally, adequate emphasis has been placed on the
amendment of the audit standard in the UK and the impact of the changes has been identified
through understanding their effect on the investors.

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References
Bédard, J., Gonthier-Besacier, N. and Schatt, A., 2014, January. Costs and benefits of
reporting Key Audit Matters in the audit report: The French experience. In International
Symposium on Audit Research. Available at: http://documents. escdijon.
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Borg, J.J., Tanti, A., Kouvelas, D., Lungu, C., Pirozynski, M., Serracino-Inglott, A. and
Aislaitner, G., 2015. European Union pharmacovigilance capabilities: potential for the new
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Iasplus.com., 2019. FRC clarification statement in relation to ISA (UK and Ireland) 700
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Newton, N.J., Persellin, J.S., Wang, D. and Wilkins, M.S., 2015. Internal control opinion
shopping and audit market competition. The Accounting Review, 91(2), pp.603-623.
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Get Unqualified Opinion (WTP) of Audit Board of the Republic of Indonesia
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