Walking a client's board through the audit report
How a firm can explain each section of the auditor's report and the type of opinion to a client's board, with the questions directors usually ask.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Most directors read the first paragraph of the auditor's report, see the words "present fairly" or "true and fair", and turn the page. A few read every section and come back with questions the partner was not expecting. Both groups benefit from a short walk-through, because the report is the one document in the annual statements that the firm writes, and it says more than directors usually realise.
For audit firms in South Africa, Nigeria and Kenya, explaining the report is part of the relationship with the board, and an opportunity to make sure that what the report says is understood before it goes to shareholders, lenders and regulators. This article sets out how to do it, section by section.
Unmodified or modified
Start with the bottom line. ICAEW explains that auditors must give either an unmodified opinion, commonly called a "clean" opinion, where the financial statements give a true and fair view, or a modified opinion. ICAEW's explanation is written from a UK perspective, but the same split between unmodified and modified opinions runs through ISA 700 and ISA 705.
ICAEW explains that a modified opinion can arise from an error, a disagreement over a matter, or a lack of sufficient audit evidence, and that how material or pervasive the effect is determines the type of modification. For a board, the four outcomes can be put simply:
| Opinion | What it tells readers |
|---|---|
| Unmodified | The statements give a true and fair view |
| Qualified | They do, except for a specific matter |
| Adverse | They do not, because a misstatement is material and pervasive |
| Disclaimer | The auditor could not get enough evidence to form an opinion |
The opinion, basis and responsibilities sections
The IAASB states that ISA 700 (Revised) deals with the form and content of the auditor's report on financial statements. For a walk-through, the main sections can be explained in a sentence each:
- Opinion. The conclusion, stated first so readers see it immediately.
- Basis for opinion. That the audit was done under the ISAs, that the firm is independent and has met its ethical responsibilities, and that the evidence obtained is sufficient and appropriate.
- Responsibilities of the directors. That the directors prepare the statements and are responsible for the internal control needed to do so, and for assessing going concern.
- Responsibilities of the auditor. That the auditor's aim is reasonable assurance, not absolute certainty, and what the audit involved.
Directors are sometimes surprised by the responsibilities section. It is worth pausing on: the statements are theirs, not the auditor's.
Key audit matters and other paragraphs
As quoted by ACCA, ISA 701 defines key audit matters as those matters that, in the auditor's professional judgement, were of most significance in the audit of the current period's statements, selected from matters communicated with those charged with governance.
Where the report includes them, explain that they are not criticisms or hidden qualifications. They tell readers where the audit concentrated its effort and why. Directors should not be surprised by any of them, because each will already have been discussed with the board. Our article on selecting key audit matters covers how the firm chooses them.
ICAEW explains that emphasis of matter paragraphs do not change the opinion; they draw readers' attention to a matter the auditor considers important to understanding the statements, such as a significant uncertainty already disclosed in the notes.
What a modification really means
If the opinion is modified, the walk-through matters most. Explain:
- the specific matter, in plain terms;
- whether it arises from a misstatement or from a lack of evidence;
- why it is material, and whether it is pervasive;
- what would need to change for it not to recur next year.
Avoid euphemism. Directors who misunderstand a qualification may describe it to lenders as a technicality, which can damage their credibility when the lender reads the report. Our article on modified audit opinions explains each type in more depth.
The preview link for comments before signing
In Achekam, the engagement team drafts the report on standard ISA 700, 705, 706 and 701 wording for unmodified, qualified, adverse or disclaimer opinions. Default wording is South African, and Nigerian and Kenyan packs supply their own. Approval is refused while any [bracketed] placeholder remains, and only the engagement partner approves.
Before signing, the partner can send the client a read-and-comment preview link to the report. The client opens it without signing in; the link expires and can be revoked. Sending it a few days before the board meeting lets directors read the report in their own time and arrive with questions, rather than meeting it for the first time on the table. After approval, the partner can send the report for e-signature and record it as issued.
Make the status clear in the covering note: the preview is a draft for discussion, the wording may still change, and it should not go beyond the board.
Questions directors usually ask
"Does a clean opinion mean there is no fraud?" No. The audit gives reasonable assurance that the statements as a whole are free from material misstatement. It is not designed to find every error or fraud.
"Why are key audit matters in our report? Did we do something wrong?" No. They show where the audit focused; they are not findings against the company.
"Can we change the wording?" The directors can comment on factual accuracy. The opinion and the auditor's judgements are the firm's.
"What does the bank look at?" Usually the opinion first, then any modification, material uncertainty or emphasis of matter.
The IAASB's page on ISA 700 (Revised) gives access to the standard on the form and content of the auditor's report, the reference behind every section described here.
Offer every board a short walk-through of the report at the meeting where the statements are approved. A short explanation in the boardroom costs far less than a misunderstanding that reaches a lender.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
