hello in this lecture we are going to recap the audit report which is very important in the AA syllabus primarily remember that the audit report is now quite a long document it comprises the audit opinion and some extra paragraphs extra paragraphs would include things like the title the name of the audit firm and so on but also some other things which are very relevant again when the user of the audit report is trying to assess what's been happening the company and in its accounts we're going to start by recapping the audit opinion and first of all remember two types of audit opinion if a company receives an unmodified opinion it will be very pleased. it means the auditor has been able to do an audit because there was enough evidence there and it means the auditor is happy with the view given with the financial statements. on the other hand if the company receives a modified audit opinion that then means of course that the auditor is in some way unhappy. there are two circumstances in which opinions may be modified one of them is if the auditor has not been able to obtain enough evidence and the other one is if the financial statements are materially misstated. inability to obtain evidence would mean for example a lack of accounting records um or refusal to cooperate perhaps not providing a letter of representation. material misstatement is self-explanatory it's that the numbers in the accounts are maturity wrong or perhaps the disclosures again other descriptions. remember that there are two levels of modification if something is merely material then the opinion is said to be qualified it's in the same way as when you go to a doctor and you say how am I doctor and the doctor might say you are very well except for the fact you perhaps need to lose a couple of kilo so they're actually giving an opinion and saying except for something like inventory or whatever everything is fine. if on the other hand there are serious problems the modification is said to be pervasive hence with the material misstatement the auditor would give an adverse opinion which means that the financial statements are not true and fair in the auditor's View, or if they've been unable to get the evidence that issue a disclaimer of opinion they do not form an opinion because they have not been able to do an audit. almost as if you went to the dentist the dentist said open wide and you refuse. to the definitions of material and pervasive again in the there are no numerical definitions in the international standard on auditing so everything down here is down to judgment but material might be for example five percent of the profit pervasive might be something that would turn the profit into a loss so that would therefore be very very rare, so there's a recap of modified opinions. as we said though the audit report is the opinion plus extra paragraphs. so let's recap what those additional paragraphs are. this slide shows the most important three. the first one material uncertainty relating to going concern so perhaps there was again a worldwide pandemic 2019 for a couple of years again that would of course big worries in the hospitality industry, hotels, restaurants and so on, so it doesn't mean the accounts uh that the company will not continue but there are significant concerns about whether it will be able to, if the company has adequately disclosed that in the financial statements then I would insert an additional paragraph called material uncertainty relating to going concern highlighting that issue and referring to the user the to the relevant note in the financial statements. the second one key audit matters is only required by companies that are quoted on a stock exchange it's an extremely useful disclosure in the audit report where the auditor is able to suggest which were the main areas of audit risk perhaps in a retail company that sells food and clothes if the clothes are not selling very well they auditor might highlight that as an area of risk also areas of significant judgment so think about how many judgments we make in the financial statement depreciation and Provisions and debts that may not be paid and so on these can be highlighted in this paragraph it helps to narrow again the gap between what the auditor does and what the user thinks the auditor does, which again they call the expectation Gap. the final paragraph which is very important is other information the financial statements will be issued alongside other documents whether in hard or soft copy a directors or Chairman's report, environmental report governance report um again plus pictures of everyone who matters in the company so photographs if there is some conflict between what the accounts say and the rest of the annual report it'll be highlighted in the other information paragraph for example if the financial statements show a profit of five but somewhere in the chair report it says the profit is eight there's an inconsistency if the accounts are right the chair report is wrong it'll be highlighted in other information. the other two paragraphs that I'd mention are less significant these days one is called emphasis of matter and the other one is other matter. emphasis of matter as it says here is something that has been disclosed in the accounts that is regarded as fundamental to users understanding it doesn't cover going concern because that's got its own paragraph, therefore it becomes difficult to think of examples I suppose examples would be something like the early adoption of a new accounting standard or maybe again some significant legal claim that's very big but nevertheless not big enough to impact ongoing concern. other matter again less significant again but this is something which the auditor regards as relevant to the user's understanding not mentioned in the accounts that might be used again whether it's for example a change of audit firm. let's look back again just for a moment, audit opinion plus additional paragraphs. Audit opinion unmodified versus modified.modified is the bad one, two reasons for modification, you can't get the evidence and material misstatement. and then the other three key paragraphs remember, material uncertainty relating to going concern perhaps post-pandemic, key audit matters listed companies only, and other information a disagreement between the accounts the financial statements and the rest of the annual report. that's it for our recap of the audit report