The auditor's report, key audit matters and capstone

Everything in the audit leads to a single document of a page or two. The auditor's report is the only part of the audit that most users ever see, and its wording is closely prescribed so that readers can tell at a glance what kind of opinion is being expressed and what it covers. This final lesson works through the structure of the report, the types of opinion and when each applies, the reporting of key audit matters, emphasis of matter and other paragraphs, and the auditor's responsibilities for other information in the annual report. It ends with a capstone that brings the Fairhaven audit to its conclusion and drafts its report. ACCT-431 extends these topics to review engagements, special-purpose frameworks, group audits and other assurance services, and ACCT-341 builds on the internal control material for accounting information systems.

The structure of the unmodified report

CAS 700 (Revised) prescribes the elements of the auditor's report on general purpose financial statements. The opinion comes first, followed by the basis for opinion, so readers see the conclusion before the explanation.

The date of the report matters. It is no earlier than the date on which the auditor has obtained sufficient appropriate evidence, including evidence that the complete set of statements has been prepared and that those with authority have taken responsibility for them, usually by the board's approval. The auditor's responsibility for subsequent events searching runs to this date.

Types of opinion

The opinion depends on two questions. First, what is the nature of the problem? Either the statements are materially misstated, or the auditor has been unable to obtain sufficient appropriate evidence (a limitation on scope). Second, how pervasive are its effects? An effect is pervasive if it is not confined to specific elements, accounts or items, or if, though confined, it represents a substantial proportion of the statements, or if it concerns disclosures fundamental to users' understanding.

CAS 705 (Revised) governs modifications to the opinion.

# Choosing the type of opinion: the nature of the problem and how pervasive it is
def opinion(problem, material, pervasive):
    if not material:
        return "Unmodified"
    if problem == "misstatement":
        return "Adverse" if pervasive else "Qualified (except for)"
    if problem == "scope limitation":
        return "Disclaimer of opinion" if pervasive else "Qualified (except for)"
    raise ValueError(problem)

cases = [
    ("Uncorrected projected misstatement of 146", "misstatement", False, False),
    ("Inventory write-down of 1,500 refused by management", "misstatement", True, False),
    ("Statements prepared on a going concern basis that is inappropriate", "misstatement", True, True),
    ("Count records destroyed; inventory of 38,500 cannot be verified", "scope limitation", True, True),
    ("One store's inventory of 900 inaccessible after a flood", "scope limitation", True, False),
]
for desc, prob, mat, perv in cases:
    print(f"{desc:<70} -> {opinion(prob, mat, perv)}")

Uncorrected projected misstatement of 146                              -> Unmodified
Inventory write-down of 1,500 refused by management                    -> Qualified (except for)
Statements prepared on a going concern basis that is inappropriate     -> Adverse
Count records destroyed; inventory of 38,500 cannot be verified        -> Disclaimer of opinion
One store's inventory of 900 inaccessible after a flood                -> Qualified (except for)

When the opinion is modified, the basis for opinion section is retitled (for example, Basis for Qualified Opinion) and explains the matter, quantifying its effects where practicable. A disclaimer is unusual: the auditor states that it does not express an opinion, explains why, and omits most of the description of the audit, because describing work that did not produce an opinion could mislead.

Key audit matters

Key audit matters (KAMs) are those matters that, in the auditor's professional judgment, were of most significance in the audit of the current period. They are selected from the matters communicated with those charged with governance, considering areas of higher assessed risk or significant risks, significant judgments about estimates, and significant events or transactions. CAS 701 requires KAMs in the reports of entities listed on a Canadian exchange (other than venture issuers), phased in for periods ending on or after December 15, 2020 for TSX-listed entities and December 15, 2022 for other listed entities (as of October 2026, check the AASB for any extension). For each KAM, the report explains why it was considered most significant and how it was addressed in the audit.

The purpose is transparency: rather than a boilerplate report identical for every company, users see where the auditor focused and why. A KAM is not a modification of the opinion, and it should not be used to disclose information management has not disclosed, though it may lead management to improve its disclosures. For Fairhaven, the team identifies two matters.

• Valuation of inventory: slow-moving styles, a significant risk involving subjective judgments about selling prices and markdowns, addressed by testing the write-down against subsequent sales, evaluating management's assumptions for bias, and testing the data conversion of the new warehouse system.
• Revenue recognition for wholesale sales with return rights: a presumed fraud risk involving judgment about the refund liability, addressed by cut-off testing, confirmations, review of January credit notes and testing of the return-rate assumptions.

Emphasis of matter, other matter and other information

An emphasis of matter paragraph draws users' attention to a matter properly presented or disclosed in the statements that is fundamental to their understanding, such as a significant subsequent event or a major catastrophe. An other matter paragraph refers to something not presented in the statements that is relevant to users' understanding of the audit or the auditor's responsibilities, such as the fact that the prior period was audited by another auditor. Neither modifies the opinion. When a material uncertainty about going concern is adequately disclosed, CAS 570 requires a separate section, not an emphasis of matter paragraph.

Other information is the financial and non-financial information, other than the statements and the auditor's report, included in the entity's annual report, such as the MD&A. Under CAS 720 (Revised), the auditor reads the other information, considers whether it is materially inconsistent with the statements or the auditor's knowledge, and reports on it in a separate section of the report. If the auditor concludes there is an uncorrected material misstatement of the other information, it says so.

The audit of internal control in a Canadian context

A Canadian listed company's auditor's report contains no opinion on internal control. When a Canadian company is also an SEC registrant subject to Section 404(b), its auditor issues a separate or combined report on internal control under PCAOB standards for its US filings. Students who plan to work with cross-listed clients will meet both frameworks.

Capstone: completing the Fairhaven audit

It is February 2027. The team has finished its procedures, management has agreed to the corrections described in lesson 11, and the engagement partner is preparing for the audit committee meeting. The program below posts the agreed adjustments to the draft figures and reassesses materiality and the debt covenant.

# Capstone: Fairhaven's audited figures after the corrections agreed with management (thousands of dollars)
draft = {"revenue": 184_000, "pretax": 12_600, "receivables_net": 21_400 - 650, "inventory": 38_500,
         "payables": 17_800, "equity": 64_400, "debt": 46_000}
tax_rate = 0.27
adj = [  # (description, revenue, pretax, receivables_net, inventory, payables)
    ("Revenue cut-off", -307, -123, -307, 184, 0),
    ("Unrecorded purchases and utilities", 0, -359, 0, 0, 359),
    ("Receivables items found in sample", -25, -25, -25, 0, 0),
    ("Allowance increase", 0, -254, -254, 0, 0),
    ("Inventory write-down increase", 0, -133, 0, -133, 0),
]
final = dict(draft)
for d, rev, pt, ar, inv, ap in adj:
    final["revenue"] += rev; final["pretax"] += pt; final["receivables_net"] += ar
    final["inventory"] += inv; final["payables"] += ap
after_tax = sum(a[2] for a in adj) * (1 - tax_rate)
final["equity"] = round(draft["equity"] + after_tax)
for k in draft:
    print(f"{k:<18}{draft[k]:>10,}{final[k]:>10,}{final[k] - draft[k]:>+9,}")
print(f"Debt to equity after corrections: {final['debt'] / final['equity']:.3f} (covenant 0.75)")
print(f"Materiality reassessed at 5% of final income before tax: {0.05 * final['pretax']:.0f}")
print("Remaining uncorrected misstatement: 146 (projected), below reassessed materiality")

revenue              184,000   183,668     -332
pretax                12,600    11,706     -894
receivables_net       20,750    20,164     -586
inventory             38,500    38,551      +51
payables              17,800    18,159     +359
equity                64,400    63,747     -653
debt                  46,000    46,000       +0
Debt to equity after corrections: 0.722 (covenant 0.75)
Materiality reassessed at 5% of final income before tax: 585
Remaining uncorrected misstatement: 146 (projected), below reassessed materiality

The corrections reduce income before tax from 12,600 to 11,706. Receivables, net of the allowance, fall by 586, inventory rises slightly because the cut-off correction puts back the cost of goods not yet shipped and is offset by the larger write-down, and payables rise by 359. Equity falls by about 650 after tax, and debt to equity rises to about 0.72, still inside the 0.75 covenant. Reassessed materiality, at 5 per cent of final income, is about 585; the remaining projected misstatement of 146 is well below it, and below performance materiality, so it can be left uncorrected.

With all matters resolved, the remaining uncorrected misstatement immaterial, the representation letter signed and the engagement quality reviewer's concurrence obtained, the opinion is unmodified. The report is dated on the day the board approves the statements, and the engagement partner signs it for the firm.