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Financial statements are usually prepared and presented annually and are directed toward the common information needs of a wide range of users (i.e. "general purpose financial statements"). Many users rely on financial statements as their major source of information because they do not have the power to obtain additional information to meet their specific needs.
Financial statements need to be prepared in accordance with one, or a combination of:
International Financial Reporting Standards (IFRSs)
National Financial Reporting Standards
Any other authoritative and comprehensive financial reporting framework which has been designed for use in financial reporting and is identified in the financial statements, e.g. Companies Acts
Standards on auditing - framework - audit
"Level of assurance - concerns the degree of satisfaction achieved that an assertion (e.g. a financial statement assertion) being made by one party (e.g. management) for use by another (e.g. shareholders) is reliable."
In an audit engagement, the auditor provides a high, but not absolute, level of assurance that the information subject to audit is free of material misstatement. This is expressed positively in the audit report as "reasonable assurance".
In forming the audit opinion, the auditor obtains sufficient appropriate audit evidence to be able to draw conclusions on which to base that opinion.
Standards on auditing - framework - related services
The Framework does not apply to other services provided by auditors such as taxation, consultancy, and financial and accounting advice.
Whereas reviews provide a moderate level of assurance (expressed in the form of negative assurance), agreed-upon procedures and compilation engagements are not intended to express assurance.
Where no assurance is expressed, users have to assess the procedures and findings reported and draw their own conclusions.
ISA 200: "Overall objectives of the independent auditor and the conduct of an audit in accordance with international standards on auditing."
To explain the purpose and scope of an audit of financial statements and the general principles governing the auditor and the conduct of the audit.
The overall objectives of the auditor are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.
Overall objectives - opinion
An auditor's opinion enhances the credibility of financial statements, but the user cannot assume that it is an assurance of future viability nor the efficiency or effectiveness of management.
The following is an extract from a typical auditor's report:
We have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as at December 31, 20X1, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory information.
Management's responsibility for the financial statements Responsibilities
Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's responsibility Compliance with auditing standards
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.
Nature of audit examination - "scope paragraph"
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion Opinion paragraph
In our opinion, the financial statements give a true and fair view of (or "present fairly, in all material respects,") the financial position of ABC Company as of December 31, 20X1, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Financial reporting framework