Drafting the audit report in uncertain times

The COVID-19 pandemic has highlighted a range of reporting issues, all of which ultimately result in the same issue – what are the implications for the audit report, if any? 

The issues for the auditor to consider when drafting the audit report broadly fall into two areas: 

• Has the entity correctly accounted for and disclosed any financial reporting issues arising from the pandemic in its accounts? 

• Does the auditor have sufficient, appropriate audit evidence that enables them to form a conclusion on whether the accounts have been properly prepared and present a true and fair view? 

If the answer to either of these questions is ‘no’ and the issues involved are material, then the auditor will need to qualify their opinion. Should the issues be considered pervasive then it could result in adverse opinion being issued if the accounts have not been properly prepared, or a disclaimer of opinion if there is a lack of audit evidence to determine whether the accounts are free of material misstatement or not. 

One area where these two issues often combine is going concern. The auditor will need to be comfortable that the evidence is strong enough to support the continued use of the going concern basis of accounting if it is being adopted, and also that any material uncertainties related to going concern have been adequately disclosed in the accounts. The presence of any disclosed material uncertainties will require the audit report to be modified to make reference to them. If any material uncertainties related to going concern are not adequately disclosed in the financial statements then this would result in the need to issue a qualified audit opinion, or possibly even an adverse opinion if considered pervasive. 

Even where everything appears to be in order the auditor may still wish to refer to going concern issues in their report by way of an emphasis of matter paragraph, such is its importance in understanding an entity’s financial performance and position. 

How Mercia can help 

For many auditors issuing a modified audit report will be a rare occurrence and the ability to discuss the issues involved with a fellow practitioner will help allay any fears that the format of the proposed audit report is incorrect or doesn’t comply with ISA requirements in some other way. Indeed, having some form of independent review whenever a modified report is being contemplated is a common feature of many firm’s approach to quality control, to ensure that they have been correctly drafted. 

For sole practitioners that don’t have any ability to consult internally, or for larger firms that require greater comfort on the approach that is proposed, our technical support service has the expert knowledge and experience to be able to provide you with the assurance you need that the audit reports you produce are compliant with ISA requirements. 

For more details of the technical support Mercia can provide see here.