International Standard on Auditing (ISA) 700: The Art of Forming and Reporting Audit Opinions

One of the most responsibility tasks assigned to an auditor in auditing practice is to express his or her view or opinion concerning financial statements of an entity. In performing this task, International Standard on Auditing, ISA 700, guides auditors in forming opinions and reporting on financial statements. Whether one is an auditor, a professional in finance, or a stakeholder, understanding the basics of ISA 700 forms a basis for appreciating the import and reliability of audit reports.

What is ISA 700?

ISA 700, "Forming an Opinion and Reporting on Financial Statements," prescribes the framework that allows auditors to have a view whether the financial statements are presented in all material respects in conformity with the going concern basis of accounting. It also addresses the form and content of the auditor's report that conveys that opinion.

Key Elements of ISA 700

Forming an Opinion: Central to ISA 700 are the requirements and guidance that it imposes on auditors regarding the formation of an opinion over the financial statements. In this respect, the auditor should conclude whether or not the financial statement reflects a true and fair view or is fairly presented, in all material respects in relation to the applicable financial reporting framework. This involves considering whether standards have been complied with and whether the statements are free from material misstatements.

Structure of the Auditor's Report ISA 700 provides a format for an auditor's report to be clear, consistent, and understandable. A standard report is composed of the following components:

• Title - indicating that it is the independent auditor's report;
• Addressee - for whom the report is targeted, usually the shareholders or board of directors;
• Opinion - the most important element, where the auditor gives her view about the financial statements.
• Basis for Opinion: Explains the basis for the opinion, including the standards followed and sufficiency and appropriateness of the audit evidence obtained.
• Key Audit Matters, if applicable: Emphasizes significant area(s) of the audit which required special attention.
• Management's Responsibility: Sets out the management's responsibilities for the preparation of the financial statements.
• Auditor's Responsibilities: Sets out the auditor's responsibilities in conducting the audit of emphasizing ethical requirements and the nature of an audit.

Types of Audit Opinion:

ISA 700 classifies the form of opinions an auditor can render on the financial statements: Unqualified or Unmodified Opinion: This opinion states that the financial statements are free from material misstatement and present a true and fair view. Qualified Opinion: When the financial statements are substantially correct, but certain areas of concern do not present in conformation with an appropriate framework.

Adverse Opinion: The auditor gives an adverse opinion when, in his judgment, the financial statements do not present a fair view of the true picture.

Disclaimer of Opinion: This arises when the auditor cannot obtain sufficient appropriate audit evidence on which to base an opinion or where the limiting conditions are so severe that the auditor cannot express an opinion on the financial statements.

Communication with Stakeholders:

ISA 700 ensures that what the auditor does or finds out in the process actually gets communicated to the stakeholders. A well-organized and clearly expressed auditor's report strengthens confidence among investors, regulators, and other stakeholders by providing assurance on the reliability of financial statements.

Importance of ISA 700 in Auditing

ISA 700 plays a very vital role in audits, in that it makes audit reports transparent, consistent, and clear. In an environment where financial decisions are based on how correct and reliable the financial statements are, ISA 700 tries to bridge the information gap between management of an entity and its stakeholders.

Using ISA 700, auditors can guarantee that their reports not only are informative but have reached some sort of standardization among entities and states, thus making the audit reports more comparable and reliable. This is very critical in today's world, when the economy has become more integrated and the investors and stakeholders take decisions based on audit reports made in different countries.

Conclusion

ISA 700 is much more than a requirement; ISA 700 deals with ensuring the integrity and transparency of financial reporting. The mastery of ISA 700 by an auditor means the production of high-quality audit reports that conform to international standards, hence instilling confidence among stakeholders.

With the ever-evolving world of finance, the requirement for a clear, consistent, and well-substantiated audit opinion is much more paramount. Whether you prepare, audit, or use financial statements, understanding ISA 700 is key to appreciating the role audit reports play in maintaining trust and credibility of financial information.