ISA 700 – Forming an Opinion and Reporting on Financial Statements

3 Forming an opinion

The auditor’s opinion on general purpose financial statements is if they are they prepared, in all material respects, in accordance with applicable financial reporting framework.

But before auditor is able to express an opinion, he is required to gather sufficient appropriate audit evidence as only sufficient appropriate audit evidence reduces the audit risk to an acceptably low level.

Audit risk is considered to have reduced to an appropriate level if auditor has obtained reasonable assurance that financial statements are free from material misstatements.

To conclude that reasonable assurance has been obtained, auditor shall consider:

1. If sufficient appropriate audit evidence has been obtained
2. Whether uncorrected misstatements are material individually or in aggregate and appropriate steps have been taken
3. The results of evaluation in which auditor is required to evaluate:
   1. Whether financial statements are prepared in accordance with applicable financial reporting framework by evaluating if:
      1. Significant policies selected and applied are adequately disclosed
      2. Accounting policies so selected and applied are consistent framework’s requirements
      3. Managements’ estimates are reasonable
      4. Financial statements fulfill qualitative requirements i.e. relevance, reliability, understandability, comparability etc.
      5. Adequate disclosures accompany financial statements so that user can understand the effects of material transactions
      6. Terminology used, including title of financial statements is appropriate
   2. Appropriateness of financial statements considering:
      1. The qualitative aspects of entity’s accounting process
      2. Probability of distortion in financial statements due to management’s bias
   3. Whether applicable financial reporting framework has been appropriately referred to or described.

4 Forms of opinion

The auditor shall express an unmodified opinion if:

Auditor concludes that financial statements are prepared, in all material respects, in accordance with applicable financial reporting framework.

Or in other words:

Financial statements are giving true and fair view of the business.

The auditor shall give modified opinion if:

1. Audit evidence obtained makes auditor conclude that financial statements are not free from material misstatements; or
2. Auditor is unable to obtain sufficient appropriate audit evidence whether financial statements are free from material misstatements. For modified opinion auditor is required to follow guidelines of ISA 705.