AA - Chapter 6 - Audit Opinions: Unmodified/Modified

Oct 17, 2024

Audit Opinions: Unmodified/Modified

Types of Audit Reports

1. Basic/Clean Audit Report

  • Indicates financial statements show a true and fair view.
  • No going concern, emphasis on matter, or other matters problems.

2. Modified Audit Report

  • Changes made to the report or opinion.
  • Difference between modifying the report and modifying the opinion.

Modifications That Do Not Affect Auditor’s Opinion

  • Additions to the audit report without criticising financial statements.
  • Financial statements remain true and fair.

Emphasis of Matter

  • Draws attention to specific notes already disclosed in financial statements.
  • Example: "We draw attention to Note 27 to the financial statements, which describes the effects of a fire in the Company's warehouse. Our opinion is not modified in respect of this matter."
  • This paragraph comes directly after the basis of opinion paragraph

Other Matters

  • Refers to matters not disclosed in financial statements.
  • Example: Discrepancy between director’s report and financial statement figures.
  • This paragraph comes directly after the Kay Audit Matters paragraph (where applicable)

Modifications Affecting the Auditor’s Opinion

1. Qualified Opinion

  • Indicates an issue with an isolated part of financial statements.
  • "Except for" phrase used.
  • Example Qualified Opinion (Extract): "We have audited ... In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion section of our report, the financial statements present fairly, in all material respects ..."
  • (1) Basis for Qualified Opinion (Extract): "We were unable to obtain sufficient appropriate evidence about the carrying amount of inventories because we were unable to attend the count of physical inventories at 31 December 20X1. Consequently, we were unable to determine whether any adjustments to this amount was necessary."
  • (2) Basis for Qualified Opinion (extract): "The Company's property, plant and equipment is carried in the statement of financial position at $xxx. Management has not depreciated ... which constitutes a departure from IFRSs. The Company's records indicate that had management depreciated ..., the company would have recognised depreciation of $xxx in the statement of profit or loss ... The carrying amount... in the statement of financial position would have been reduced by the same amount ...".

2. Disclaimer of Opinion

  • No opinion given due to insufficient evidence.
  • Unable to confirm if financial statements are true and fair.
  • Example Disclaimer of Opinion (extract): "We were engaged to audit ... We do not express an opinion on the accompanying financial statements. Because of the significance of the matter described in the Basis for Disclaimer of Opinion section of our report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these financial statements."
  • Basis for Disclaimer of Opinion (extract): "We were not appointed as auditors of the Company until [date] and thus did not observe the physical inventory counts at the beginning and end of the year ... In addition, the introduction of a new computerised system in [date] resulted in numerous errors in accounts receivable. As at the date of this report ...

3. Adverse Opinion

  • Financial statements are materially incorrect and unreliable.
  • Error is pervasive, affecting the entire financial statement.
  • Example: Adverse Opinion (extract) "We have audited ... In our opinion, because of the significance of the matter described in the Basis for Adverse Opinion section of our report, the accompanying financial statements do not present fairly..."
  • Basis for Adverse Opinion (extract): "The Company's financing arrangements expired ... and is considering filing for bankruptcy ... a material uncertainty exists ... The financial statements do not adequately disclose this fact ..."

Material Uncertainty and Going Concern

  • Emphasise circumstances affecting company’s ability to continue.
  • Assessment of going concern by directors, audited by auditors.
  • Warning signs:
    • Negative cash flows,
    • Inability to pay suppliers,
    • Loss of key staff or key customers, etc.
  • Example: "We draw attention to Note 6 in the financial statements, which indicates that the Company incurred a net loss of ZZZ during the year ended December 31, 20X1 and, as of that date, the Company's current liabilities exceeded its total assets by YYY. As stated in Note 6, these events or conditions, along with other matters as set forth in Note 6, indicate that a material uncertainty exists that may cast significant doubt on the Company's ability to continue as a going concern. Our opinion is not modified in respect of this matter."

Consequences of Non-Disclosure

  • If not disclosed, financial statements may not show a true and fair view.
  • Potential for adverse opinion if pervasive.

Conclusion

  • Importance of understanding different types of audit reports.
  • Different opinions reflect varying levels of issues and evidence in financial statements.