ISA 700 (Revised) deals with the auditor’s responsibility to ‘form an opinion‘ on the Financial Statements.
ISA 700
Forming an Opinion & Reporting
on Financial Statements
A definitive guide to the International Standard on Auditing that governs how independent auditors evaluate evidence, reach an opinion, and communicate findings to stakeholders.
What Is ISA 700?
ISA 700, titled Forming an Opinion and Reporting on Financial Statements, is the International Standard on Auditing issued by the International Auditing and Assurance Standards Board (IAASB). It establishes the auditor’s responsibilities when forming an overall opinion on whether financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.
The standard was significantly revised in 2015 (effective for audits of financial statements for periods ending on or after 15 December 2016) to enhance the communicative value of the auditor’s report and increase transparency. The revised ISA 700 introduced a more prominent presentation of the auditor’s opinion, mandatory going concern disclosures, and for listed entities, the requirement to communicate Key Audit Matters under ISA 701.
Standard Number
ISA 700 (Revised 2015), part of the IAASB Handbook of International Standards on Auditing and Quality Control.
Issuing Body
International Auditing and Assurance Standards Board (IAASB), an independent standard-setting body under IFAC.
Effective Date
Audits of financial statements for periods ending on or after 15 December 2016.
Primary Focus
Forming the audit opinion and structuring the independent auditor’s report to stakeholders.
Objective & Scope of ISA 700
The objective of ISA 700 is to establish standards and provide guidance on the form and content of the auditor’s report issued as a result of an audit of financial statements. The standard applies to all audits of a complete set of general-purpose financial statements, irrespective of whether they are prepared under IFRS, national GAAP, or another applicable framework.
The auditor shall form an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. – ISA 700, Paragraph 10
ISA 700 works in conjunction with other ISAs, particularly ISA 705 (Modifications to the Opinion), ISA 706 (Emphasis of Matter and Other Matter Paragraphs), and ISA 701 (Communicating Key Audit Matters) to form a comprehensive reporting framework. When the conditions in ISA 705 are met, the auditor modifies the opinion accordingly.
Who Does ISA 700 Apply To?
ISA 700 applies to all audits conducted under ISAs, regardless of the size, sector, or nature of the entity being audited. This encompasses listed companies, public interest entities, small and medium enterprises (SMEs), and non-profit organisations where a statutory or voluntary audit is performed under ISA requirements.
Key Requirements
ISA 700 imposes a set of clearly defined requirements on the auditor before, during, and after the opinion-forming process.
Evaluate Audit Evidence
The auditor must evaluate whether sufficient, appropriate audit evidence has been obtained to reduce audit risk to an acceptably low level. This evaluation underpins the entire opinion-forming process.
Assess the Financial Reporting Framework
Determine whether the financial statements have been prepared in accordance with the requirements of the applicable financial reporting framework, including adequate disclosure of significant accounting policies.
Consider Qualitative Aspects of Accounting Practices
Evaluate qualitative aspects of the entity’s accounting policies, including indicators of possible management bias, aggressive accounting, and the appropriateness of management estimates.
Form the Opinion
Based on all evidence gathered and assessments made, the auditor forms either an unmodified or modified opinion (adverse, disclaimer, or qualified) on the financial statements taken as a whole.
Prepare the Auditor’s Report
Draft the independent auditor’s report in writing, adhering to the prescribed structure under ISA 700, including all required elements in the correct order for listed entities.
⚠️ Critical Evaluation Checklist
- Do the financial statements adequately disclose the significant accounting policies selected?
- Are the accounting estimates made by management reasonable?
- Is the information presented in the financial statements relevant, reliable, comparable, and understandable?
- Does the financial reporting framework provide adequate disclosures to enable users to understand the effect of material transactions?
- Is the overall presentation of the financial statements consistent with the auditor’s understanding of the entity?
Auditor Responsibilities Under ISA 700
ISA 700 places clearly defined and non-delegable responsibilities on the auditor throughout the engagement. These responsibilities extend beyond simply collecting evidence, they encompass professional judgement, ethical compliance, and transparent communication with those who rely on the financial statements.
Core Responsibilities of the Auditor
Under ISA 700, the auditor bears primary responsibility for forming and expressing an opinion on the financial statements as a whole. This is distinct from management’s responsibility for preparing those statements. The auditor must make clear in the report that these are separate and non-overlapping obligations.
Professional Judgement
The auditor must exercise professional judgement throughout the audit, from assessing risks and designing procedures to evaluating evidence and forming the final opinion.
Professional Scepticism
The auditor must maintain an attitude of professional scepticism, questioning management representations and remaining alert to evidence that contradicts assertions made in the financial statements.
Compliance with ISAs
The auditor is required to conduct the audit in accordance with all applicable ISAs and confirm this in the Basis for Opinion paragraph of the auditor’s report.
Independence
The auditor must comply with relevant ethical requirements, including those governing independence, as set out by the IESBA Code of Ethics for Professional Accountants.
Responsibilities in the Auditor’s Report
ISA 700 requires the auditor’s report to include a dedicated section describing the auditor’s responsibilities. This section must explain, at minimum, the following points to users of the financial statements:
Objective of the Audit
To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error and to issue an auditor’s report that includes the auditor’s opinion.
Reasonable Assurance
Reasonable assurance is a high level of assurance but is not absolute. The auditor must communicate clearly that an audit conducted under ISAs may not detect all misstatements, particularly those arising from collusion or deliberate concealment.
Risk Assessment Procedures
The auditor must describe how they identified and assessed risks of material misstatement and designed audit procedures responsive to those risks, including consideration of internal controls relevant to the preparation of the financial statements.
Evaluation of Accounting Policies and Estimates
The auditor evaluates the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management, including an assessment of any indicators of management bias.
Overall Presentation
The auditor concludes on the overall presentation, structure, and content of the financial statements, including the disclosures and whether they represent the underlying transactions and events in a manner that achieves fair presentation.
Communication with Those Charged with Governance
The auditor is responsible for communicating significant findings, including significant deficiencies in internal control and matters relating to going concern to those charged with governance in accordance with ISA 260.
🔖 Key Distinction: Auditor vs. Management Responsibilities
- Management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework, and for such internal control as management determines is necessary.
- The auditor is responsible for expressing an independent opinion on those financial statements based on the audit conducted under ISAs, not for preparing them or guaranteeing their accuracy.
- ISA 700 requires the auditor’s report to make this distinction explicit, ensuring readers understand the separate roles and cannot confuse the auditor’s opinion with a certification of absolute accuracy.
Types of Audit Opinion Under ISA 700
ISA 700 focuses primarily on the unmodified opinion, but it must be read alongside ISA 705 (Revised), which governs modifications to the opinion. Together, they define four possible opinion types:
| Audit Opinion Types | Governing Standard | Basis | Status |
|---|---|---|---|
| Unmodified (Clean) | ISA 700 | Financial statements give a true and fair view in all material respects; no material misstatements; sufficient evidence obtained. | Clean |
| Qualified | ISA 705 | Material but not pervasive misstatement, OR auditor unable to obtain sufficient evidence (but limitation not pervasive). | Modified |
| Adverse | ISA 705 | Misstatements are both material and pervasive, financial statements do not give a true and fair view. | Modified |
| Disclaimer of Opinion | ISA 705 | Auditor is unable to obtain sufficient appropriate evidence and possible effects are material and pervasive. | Modified |
The unmodified opinion (the most common outcome), signals to users that the financial statements present a faithful picture of the entity’s financial position and performance. The wording used in the opinion paragraph must conform to the exact language prescribed by ISA 700 to avoid ambiguity.
ISA 700 Audit Report Format: Required Elements
One of ISA 700’s most significant contributions is prescribing the precise structure of the independent auditor’s report. For audits of listed entities, the revised standard mandates that the opinion section appears first, before the Basis for Opinion. This “opinion-first” structure ensures that primary users see the most critical information immediately.
Title
Must include the word “Independent” to make clear it is an independent audit, e.g., “Independent Auditor’s Report to the Members of [Entity Name].”
Addressee
Addressed to the appropriate party as required by circumstances, typically shareholders or those charged with governance.
Opinion Section (Listed: Appears First)
States the auditor’s conclusion clearly. Identifies the entity and financial statements audited. For non-listed entities, this may appear after the introductory paragraph.
Basis for Opinion
States the audit was conducted in accordance with ISAs, confirms auditor independence, and declares that sufficient appropriate audit evidence was obtained.
Going Concern (if applicable)
Where relevant events or conditions are identified, the auditor must include a separate section discussing going concern uncertainties or how the conclusion was reached.
Key Audit Matters (Listed entities – ISA 701)
Describes the matters that required the most significant auditor judgement. Only mandatory for listed entities but increasingly adopted voluntarily.
Responsibilities for Financial Statements
Explains management’s responsibility for preparation of the financial statements and those charged with governance’s oversight responsibilities.
Auditor’s Responsibilities
Describes what an audit involves; exercise of professional judgement, obtaining sufficient evidence, evaluating accounting policies and estimates, and assessing the overall presentation.
Other Reporting Responsibilities
Where laws or regulations require reporting on matters beyond the financial statements (e.g., directors’ remuneration reports), these are addressed here.
Signature, Date & Location
The report must be signed in the name of the audit firm, the personal name of the auditor, or both. The date must be no earlier than the date on which the auditor has obtained sufficient appropriate evidence.
ISA 700 Audit Report Example
To illustrate how ISA 700 works in practice, consider the following realistic scenario of an independent auditor’s report issued for a listed manufacturing company, Alpha Manufacturing PLC, for the year ended 31 December 2024. The example below walks through each required element as it would appear in a compliant ISA 700 report.
Scenario Background
Alpha Manufacturing PLC is a listed company that prepares its consolidated financial statements under IFRS. The audit has been completed with no material misstatements identified. The auditor has obtained sufficient appropriate audit evidence and is in a position to issue an unmodified opinion. One Key Audit Matter has been identified: the valuation of goodwill arising from a prior-year acquisition.
📄 Independent Auditor’s Report – Illustrative Example (ISA 700 Compliant)
- To the Shareholders of Alpha Manufacturing PLC
Opinion (Appears First – Listed Entity)
We have audited the consolidated financial statements of Alpha Manufacturing PLC, which comprise the consolidated statement of financial position as at 31 December 2024, and the consolidated statements of profit or loss, changes in equity, and cash flows for the year then ended, and notes to the financial statements, including material accounting policy information. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Alpha Manufacturing PLC as at 31 December 2024, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities section of our report. We are independent of the Company in accordance with the IESBA Code of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matter – Goodwill Impairment Assessment
Why significant: Goodwill of £42.3 million arising from the 2022 acquisition of Beta Components Ltd represents a material balance. Management’s annual impairment assessment involves significant judgement, including assumptions about discount rates, revenue growth forecasts, and terminal values.
How we addressed it: We challenged management’s assumptions by benchmarking discount rates against independent market data, assessing the historical accuracy of management’s forecasts, and performing independent sensitivity analyses. We found the assumptions to be within a supportable range.
Going Concern
Management has prepared the financial statements on the going concern basis. Based on our audit procedures including reviewing cash flow forecasts, financing facilities, and covenant compliance, we have not identified any material uncertainty that may cast significant doubt on the company’s ability to continue as a going concern for a period of at least 12 months from the date of this report.
Responsibilities of Management
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, 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 Responsibilities
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists.
Signature, Date & Location
XYZ Audit LLP, Registered Auditors
Signed: [Partner Name], Senior Statutory Auditor
Date: 15 March 2025 (not earlier than the date sufficient evidence was obtained)
Location: London, United Kingdom
What This Audit Report Example Demonstrates
This illustrative report shows all ten required elements of ISA 700 in action. The opinion appears at the top, as required for listed entities, followed by the basis for that opinion. The Key Audit Matter section adds transparency by explaining where the auditor focused most heavily. The going concern section provides assurance on continuity, and the responsibilities sections clearly delineate the separate roles of management and the auditor. Together, these elements fulfil ISA 700’s core objective: a clear, informative, and credible communication to the shareholders and other users of the financial statements.
Key Audit Matters and ISA 700
While Key Audit Matters are formally governed by ISA 701, ISA 700 integrates their position within the overall report structure. KAMs represent those matters that, in the auditor’s professional judgement, were of most significance in the audit of the current period’s financial statements. They are selected from matters communicated with those charged with governance.
Selection Criteria
Areas of higher assessed risk, significant judgements relating to areas of management estimation, and the effect of significant events during the period.
Description Requirements
Each KAM must describe why the matter was considered significant, how it was addressed in the audit, and provide a reference to related financial statement disclosures.
When Mandatory
Required for listed entities. Regulators and audit committees increasingly encourage or require KAMs for public interest entities and large unlisted companies.
Common examples of KAMs in practice include: impairment of goodwill, revenue recognition for complex contracts, valuation of financial instruments at fair value, pension liability assumptions, and tax provisions and uncertain tax positions.
Frequently Asked Questions
What is the main purpose of ISA 700?
ISA 700 establishes the auditor’s responsibilities to form an opinion on whether financial statements are prepared in all material respects in accordance with the applicable financial reporting framework, and to express that opinion clearly in a written auditor’s report with the correct structure and content.
What changed in the revised ISA 700 (2015)?
The 2015 revision significantly enhanced transparency and communicative value. Key changes include: the opinion section now appears at the top of the report for listed entities; a new Going Concern section is required; auditors must describe their responsibilities in greater detail; and ISA 701 was introduced alongside ISA 700 to require Key Audit Matters for listed entities.
What is an unmodified audit opinion under ISA 700?
An unmodified (or “clean”) opinion is issued when the auditor concludes that the financial statements give a true and fair view or present fairly, in all material respects the financial position, performance, and cash flows of the entity in accordance with the applicable financial reporting framework, and no material misstatements have been found.
When should an auditor issue a modified opinion?
Under ISA 705, a modified opinion is issued when the auditor concludes that the financial statements as a whole are materially misstated, or when the auditor is unable to obtain sufficient appropriate audit evidence. The type of modification (qualified, adverse, or disclaimer) depends on the nature and pervasiveness of the issue.
Does ISA 700 apply to small and medium-sized entities?
Yes. ISA 700 applies to all audits conducted under ISAs, regardless of entity size. However, the IAASB provides supplementary guidance for SME audits, and some requirements (such as communicating Key Audit Matters under ISA 701) are mandatory only for listed entities, not SMEs.
What is the significance of the audit report date under ISA 700?
The audit report must not be dated earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the opinion, including evidence that all statements comprising the financial statements have been prepared and that management has asserted their responsibility for those statements. The date is a critical indicator of the scope of the auditor’s responsibilities for subsequent events.
(Qualified) Chartered Accountant – ICAP
Master of Commerce – HEC, Pakistan
Bachelor of Accounting (Honours) – AeU, Malaysia