ISA 700 (Revised) DEALS with the auditor’s responsibility to FORM an opinion on the Financial Statements.
What Is ISA 700?
ISA 700, titled Forming an Opinion and Reporting on Financial Statements, is the cornerstone 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
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?
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:
| Opinion Type | 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, 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.
Audit Report Structure: 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 i.e. 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.
Key Audit Matters (KAMs)
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