Audit reports are changing, and the first examples of the revised format are beginning to appear within published reports and accounts. For private companies, the changes are the first significant revision of reporting practice since SAS 600, The Auditors' Report on Financial Statements, was published in 1993. In respect of listed companies, the revised reports reflect an ongoing development of reporting practice that has previously resulted in several extensions and modifications to the SAS 600 form of report. Report formats have now come a very long way from the pre SAS 600 six-line presentation of an opinion and some page references.

The Auditing Practices Board (APB) published the revised formats earlier this year in two Bulletins, 2001/1, The Electronic Publication of Auditors' Reports, and 2001/2, Revisions to the Wording of Auditors' Reports on Financial Statements and the Interim Review Report.

Bulletin 2001/2 revises the presentation of audit reports to reflect developments in thinking as regards those reports' purpose since SAS 600 was published. Bulletin 2001/1 provides guidance on the presentation of the auditors' report when the report and the annual financial statements are included on a company's website or are distributed to shareholders electronically. This is a fast-developing area, and already many companies are using websites as a cost-effective way to communicate with both existing and potential investors.

The revised formats are presented in Panels 1 and 2. They are mandatory for accounting periods commencing after 22 December 2000, but earlier adoption is encouraged.

We give in Panel 2 only an extract from the report for a listed company, since the 'basis of opinion' and 'opinion' paragraphs are identical to those in the unlisted company report.

The changes in report presentation that Bulletin 2001/2 makes arise from a desire to improve communication and understanding. Therefore the Bulletin is the latest example of an attempt to address the 'expectations gap' between auditors and users of financial statements. A problem arises because the report is growing in length and detail, and is becoming more difficult for users to under-stand. Cynical users might also take the view that the expanded report, containing extensive descriptions of the auditors' responsibilities, is so full of caveats and disclaimers that the opinion itself is both lost in the detail and devalued. The main reasons for the changes are as follows.

Improving cross-border communication. The International Forum for Accountancy Development (IFAD) has recommended that auditors' reports on financial statements should clearly identify the national financial reporting framework that the preparers of the financial statements have used, and the auditing standards that are applicable to the auditors. The APB has adopted this recommendation and suggests that all references in auditors' reports to 'accounting standards' and 'auditing standards' should be prefixed by 'United Kingdom'.

Describing auditors as 'independent'. The APB considers it appropriate to use the term 'independent auditor' in the title of the auditors' report, the better to distinguish that report from others that might be issued by, for example, officers of the entity, the board of directors, or internal auditors who may not have to abide by the ethical guidance that applies to independent auditors.

Description of auditors' responsibilities. In Bulletin 1999/5, which made revisions to the format of audit reports of listed companies, the APB expressed the view that users of annual reports will find it difficult to understand the scope of the auditors' involvement in the absence of a clear statement of responsibilities towards the whole annual report. As a result, the APB recommended that listed companies' auditors should include a description of their responsibilities within their report on the financial statements. In Bulletin 2001/2, this recommendation is extended to auditors' reports on unlisted entities' financial statements.

When financial statements are presented via electronic media, the audit report should be presented in the same way as the report presented on a paper set of accounts, and the formats presented under Bulletin 2001/2.

The APB has pointed out that it is not always possible to use page numbers to identify particular parts of financial information on a web-site (usually when HTML presentation is used). Where this is the case, the auditors' report should specify the location and description of the information that has been audited in another way.

The APB has also developed some footnotes to the audit report concerning the integrity of the website on which the information is presented, and the governing law under which the financial statements were prepared and circulated (see Panel 3). This guidance is important because electronic presentation opens up a wider reader-base for the financial information, and a potentially wider base of investors. Therefore, wider access might present issues in other jurisdictions where users rely on the auditors' report. A new problem also arises because of the risk of change or omission when original paper-based reports are transferred to electronic media.

The two new Bulletins revise the audit reports presented on limited companies. However, many other organisations receive audit reports presented in forms consistent with SAS 600's requirements. Best practice, as confirmed by para 17, Bulletin 2001/2, suggests that these reports should be revised to bring them into line with the Bulletins. The APB has, to date, issued no other amended formats, even though their pronouncements contain more than 100 examples of unqualified, qualified and special reports that potentially need to be revised. Firms could undertake this task, but official guidance is both preferable and more cost effective.

The report formats as presented do not work well for private companies preparing relatively short financial statements with limited accompanying information, consisting of little more than a statutory directors' report. The opening paragraph refers to the contents of the financial statements by name, not by the traditional page reference. This presentation is clearly influenced by the problems of electronic reporting and distinguishing audited material within a listed company's very detailed annual report. An alternative (and acceptable) approach for an unlisted company is shown in Panel 4. This format restores page references and explicitly refers to the directors' report as the sole surround information.

The revised reports have received little attention since their publication in January, and it appears that few audit firms have implemented the formats early. The long implementation means that the reasons for the changes may be quickly forgotten, and that practitioners may also fail to apply the reports for their December 2001 year-ends. Despite their length and detail, these reports are an important development, and they deserve both early adoption and greater attention.

David Chitty is technical partner at Chantrey Vellacott DFK, and the author of Preparing Audit Reports, published by ABG Professional Information.

Independent Auditors' Report to the Shareholders of XYZ Limited

We have audited the financial statements of (name of entity) for the year ended … which comprise [state the primary financial statements such as the Profit and Loss Account, the Balance Sheet, the Cash Flow Statement, the Statement of Total Recognised Gains and Losses] and the related notes. These financial statements have been prepared under the historical cost convention [as modified by the revaluation of certain fixed assets] and the accounting policies set out therein.

Respective responsibilities of directors and auditors The directors' responsibilities for preparing the Annual Report and the financial statements in accordance with applicable law and United Kingdom Accounting Standards are set out in the Statement of Directors' Responsibilities.

Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and United Kingdom Auditing Standards.

We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Directors' Report is not consistent with the financial statements, if the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors' remuneration and transactions with the company is not disclosed.

We read other information contained in the Annual Report, and consider whether it is consistent with the audited financial statements. This other information comprises only [the Directors' Report, the Chairman's Statement and the Operating and Financial Review]. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

Basis of audit opinion

We conducted our audit in accordance with United Kingdom Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the company's circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

Opinion In our opinion the financial statements give a true and fair view of the state of the [group's and the] company's affairs as at … and of [the group's] [its] profit [loss] for the year then ended, and have been properly prepared in accordance with the Companies Act 1985.

Registered auditors

Address Date

Independent Auditors' Report to the Shareholders of XYZ Plc (Extracts)

We have audited the financial statements of (name of entity) for the year ended … which comprise [state the primary financial statements such as the Profit and Loss Account, the Balance Sheet, the Cash Flow Statement, the Statement of Total Recognised Gains and Losses] and the related notes. These financial statements have been prepared under the historical cost convention [as modified by the revaluation of certain fixed assets] and the accounting policies set out therein.

Respective responsibilities of directors and auditors The directors' responsibilities for preparing the Annual Report and the financial statements in accordance with applicable law and United Kingdom Accounting Standards are set out in the Statement of Directors' Responsibilities.

Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements, United Kingdom Auditing Standards and the Listing Rules of the Financial Services Authority.

We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Directors' Report is not consistent with the financial statements, if the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding directors' remuneration and transactions with the company [and other members of the group] is not disclosed.

We review whether the Corporate Governance Statement reflects the company's compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules, and we report if it does not. We are not required to consider whether the board's statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the [company's] [group's] corporate governance procedures or its risk and control procedures.

We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. This other information comprises only [the Directors' Report, the Chairman's Statement, the Operating and Financial Review and the Corporate Governance Statement]. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

1. The maintenance and integrity of the XYZ plc website is the directors' responsibility; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

We have audited the financial statements of XYZ Limited for the year ended 31 December 2001 which are set out on pages . . . to . . . These financial statements have been prepared under the historical cost convention [as modified by the revaluation of certain fixed assets] and the accounting policies set out therein.

Respective responsibilities of directors and auditors As described in the Statement of Directors' Responsibilities, the company's directors are responsible for preparing the financial statements in accordance with applicable law and UK Accounting Standards.

Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and UK Auditing Standards.

We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the Directors' Report is not consistent with the financial statements, if the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors' remuneration and transactions with the company is not disclosed.

We read the Directors' Report and consider the implications for our report if we become aware of any apparent misstatements within it.