The requirements of an independent auditor in forming an opinion on the audited financial statements

ISA 700 states that the objectives of the auditor (independent auditor) are :

1. To form an opinion on the financial statements based on an evaluation of the conclusions drawn from the audit evidence obtained; and
2. To express clearly that opinion through a written report that also describes the basis for that opinion

In this ISA, the meaning of financial statements is a complete set of general purpose financial statements, including the related notes, which ordinarily comprise a summary of significant accounting policies and other explanatory information.

Regarding the financial statements, the auditor (independent auditor) shall form an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

As stated in para. 11 of ISA 700, in order to form that opinion, the auditor shall conclude as to whether the auditor has obtained reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. That conclusion shall take into account :

1. The auditor’s conclusion, in accordance with ISA 330, whether sufficient appropriate audit evidence has been obtained;
2. The auditor’s conclusion, in accordance with ISA 450, whether uncorrected misstatements are material, individually or in aggregate; and
3. The evaluations required by paragraphs 12-15.

Then, para. 12 states that the auditor shall evaluate whether the financial statements are prepared, in all material respects, in accordance with the requirements of the applicable financial reporting framework. This evaluation shall include consideration of the qualitative aspects of the entity’s accounting practices, including indicators of possible bias in management’s judgments.

Following, para. 13 states that in particular, the auditor shall evaluate whether, in view of the requirements of the applicable financial reporting framework :

1. The financial statements adequately disclose the significant accounting policies selected and applied;
2. The accounting policies selected and applied are consistent with the applicable financial reporting framework and are appropriate;
3. The accounting estimates made by management are reasonable;
4. The information presented in the financial statements is relevant, reliable, comparable, and understandable;
5. The financial statements provide adequate disclosures to enable the intended users to understand the effect of material transactions and events on the information conveyed in the financial statements; and
6. The terminology used in the financial statements, including the title of each financial statement, is appropriate.

Further, para. 14 of ISA 700 prescribes that when the financial statements are prepared in accordance with a fair presentation framework, the evaluation required by paragraphs 12-13 shall also include whether the financial statements achieve fair presentation. The auditor’s evaluation as to whether the financial statements achieve fair presentation shall include consideration of :

1. The overall presentation, structure and content of the financial statements; and
2. Whether the financial statements, including the related notes, represent the underlying transactions and events in a manner that achieves fair presentation.

While, para. 15 requires the auditor to evaluate whether the financial statements adequately refer to or describe the applicable financial reporting framework (Hrd).