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HMRC internal manual

Enquiry Manual

Examining Accounts: Accountants and Auditors: What is an Audit?

An audit is the independent examination of, and expression of opinion on the financial statements of an enterprise by an appointed auditor. The responsibility for preparing the financial statements rests with the company’s directors, who may employ an accountant to draw them up. The auditor is responsible for reporting on those statements.

The conduct of the audit is prescribed by International Standards on Auditing (ISAs) which set out the basic principles and essential procedures and related guidance with which all auditors are expected to comply. ISAs (UK and Ireland) apply to all audits of financial statements for periods commencing on or after 15 December 2004. The full wording of the ISAs can be found on the Auditing Practices Board (APB) website. (

In December 2004 the APB issued ISA700 to establish standards and provide guidance on the form and content of the auditor’s report issued as a result of an audit performed by an independent auditor of an entity’s financial statements.

Content of report

An auditors’ report should include

  1. title
  2. addressee
  3. an opening/introductory paragraph identifying the financial statements audited and a statement of the responsibility of the entity’s management and the responsibilities of the auditor
  4. scope paragraph a reference to the ISAs or relevant national standards or practices and a description of the work performed
  5. opinion paragraph containing a reference to the financial reporting framework used to prepare the financial statements and an expression of opinion on the financial statements
  6. the date of the auditors’ report.
  7. auditor’s address
  8. auditor’s signature

Expressions of opinion

Auditors are required to state whether the financial statements give a `true and fair’ view or that they are ‘presented fairly in all material respects.’ An unqualified opinion will be expressed where the auditor concludes that the financial statements give a true and fair view/present fairly. Auditors may also give a modified opinion. An auditor’s report is considered to be modified in the following situations:

Matters that do not affect the Auditor’s Opinion

  1. Emphasis of matter

Matters that do affect the Auditor’s Opinion

  1. Qualified opinion
  2. Disclaimer of opinion i.e. unable to express an opinion at all or
  3. Adverse opinion - i.e. the financial statements are seriously misleading.

An emphasis of matter would lead the auditor to give an explanatory paragraph. The opinion is not qualified.

The other reports which do affect the Auditor’s opinion may have arisen as a result of

  1. a limitation of scope or
  2. disagreement with management regarding the acceptability of the accounting policies selected, the method of their application or the adequacy of financial statement disclosures.

The circumstances described in a) could lead to a qualified opinion or a disclaimer of opinion. The circumstances in b) could lead to a qualified opinion or an adverse opinion.

Detection of fraud

Auditors must include in their reports a statement that they have planned and performed the audit so as to obtain reasonable assurance that the financial statements are free from material mis-statements, whether these are caused by fraud or other irregularity or error, and that they have evaluated the overall adequacy of the presentation of information in the financial statements.


ISA320 refers to a matter being material if its omission or mis-statement would reasonably influence the decisions of a user of the financial statements. Materiality may be considered in the context of the financial statements as a whole, or an individual item. For example, an amount which might be considered material for a medium sized company might not be considered material for a larger company. An amount which is not material in the context of purchases might be material in the context of travelling expenses. For further information about materiality in the context of financial statements see the HMRC Compliance Accountants Website.