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Lesson#45
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MODIFIED AUDITORS REPORT
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MODIFIED AUDITOR’S REPORT
REPORTS/OPINIONS TREE
STANDARD MODIFIED
Unqualified
Affect the Do not affect
Auditor’s opinion auditor’s opinion
(Emphasis of the matter)
DEPENDS UPON NATURE
OF CIRCUMSTANCES
LIMITATION ON DISAGREEMENT
SCOPE OF WORK WITH MANAGEMENT
Material but not so Material Material but Material &
Material & Pervasive & Pervasive not so material Pervasive
and Pervasive
Adverse opinion
Qualified Disclaimer of opinion Qualified (Financial statement
Opinion (we do not express an opinion do not give a true
(Except for) opinion on the financial (Except for) and fair
view)
statements)
MODIFICATIONS TO THE AUDITOR’S REPORT
(Effective for auditor’s reports dated on or after December 31,
2006).
Here we shall discuss the circumstances when the independent
auditor’s report should be modified
and the form and the content of the modifications to the
auditor’s report in those circumstances.
The wording of auditor’s report is modified in the following
situations:
Matters that Do Affect the Auditor’s Opinion
• Qualified opinion,
• Disclaimer of opinion,
or
• Adverse opinion.
Matters that Do Not Affect the Auditor’s Opinion
• Emphasis of matter
MATTERS THAT DO AFFECT THE AUDITOR’S OPINION
An auditor may not be able to express an unqualified opinion
when either of the following
circumstances exists and, in the auditor’s judgment, the effect
of the matter is or may be material to
the financial statements:
(a) There is a limitation on the scope of the auditor’s work; or
page
147
(b) There is a disagreement with management regarding the
acceptability of the accounting
policies selected, the method of their application or the
adequacy of financial statement
disclosures.
Limitation on Scope
(a) Imposed by the entity
A limitation on the scope of the auditor’s work may sometimes be
imposed by the entity (for
example, when the terms of the engagement specify that the
auditor will not carry out an audit
procedure that the auditor believes is necessary). However, when
the limitation in the terms of a
proposed engagement is such that the auditor believes the need
to express a disclaimer of opinion
exists; the auditor would ordinarily not accept such a limited
engagement as an audit engagement,
unless required by statute. Also, a statutory auditor would not
accept such an audit engagement when
the limitation infringes on the auditor’s statutory duties.
(b) Imposed by circumstances
A scope limitation may be imposed by circumstances (for example,
when the timing of the auditor’s
appointment is such that the auditor is unable to observe the
counting of physical inventories). It may
also arise when, in the opinion of the auditor, the entity’s
accounting records are inadequate or when
the auditor is unable to carry out an audit procedure believed
to be desirable. In these circumstances,
the auditor would attempt to carry out reasonable alternative
procedures to obtain sufficient
appropriate audit evidence to support an unqualified opinion.
When there is a limitation on the scope of the auditor’s work
that requires expression of a qualified
opinion or a disclaimer of opinion, the auditor’s report should
describe the limitation and indicate the
possible adjustments to the financial statements that might have
been determined to be necessary had
the limitation not existed.
A qualified opinion
should be expressed when the auditor concludes that an unqualified opinion
cannot be expressed but that the effect of any limitation on
scope is not so material and pervasive as
to require a disclaimer of opinion. A qualified opinion should
be expressed as being ‘except for’ the
effects of the matter to which the qualification relates.
A disclaimer of opinion
should be expressed when the possible effect of a
limitation on scope is so
material and pervasive that the auditor has not been able to
obtain sufficient appropriate audit
evidence and accordingly is unable to express an opinion on the
financial statements.
Whenever the auditor expresses an opinion that is other than
unqualified, a clear description of all the
substantive reasons should be included in the report and, unless
impracticable, a quantification of the
possible effect(s) on the financial statements. Ordinarily, this
information would be set out in a
separate paragraph preceding the opinion or disclaimer of
opinion on the financial statements and
may include a reference to a more extensive discussion, if any,
in a note to the financial statements.
Illustrations of these matters are set out below.
Limitation on Scope—Qualified Opinion
We have audited……………………
Management is responsible ………………………..
Our responsibility is to express an opinion on these financial
statements based o our audit. Except as
discussed in the following paragraph, we conducted our audit in
accordance with
……………………………
We did not observe the counting of the physical inventories as
of December 31, 20X1, since that date
was prior to the time we were initially engaged as auditors for
the Company. Owing to the nature of
the Company’s records, we were unable to satisfy ourselves as to
inventory quantities by other audit
procedures.
In our opinion, except for the effects of such adjustments, if
any, as might have been determined to
be necessary had we been able to satisfy ourselves as to
physical inventory quantities, the financial
statements give a true and fair view of ... (remaining words are
the same as illustrated in the opinion
paragraph)
Limitation on Scope—Disclaimer of Opinion
We were not able to observe all physical inventories and confirm
accounts receivable due to
limitations placed on the scope of our work by the Company.)
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148
Because of the significance of the matters discussed in the
preceding paragraph, we do not express an
opinion on the financial statements.”
Disagreement with Management
The auditor may disagree with management about matters such as
the acceptability of accounting
policies selected, the method of their application, or the
adequacy of disclosures in the financial
statements. If such disagreements are material to the financial
statements, the auditor should express a
qualified or an adverse opinion.
A qualified opinion
should be expressed when the auditor concludes that an unqualified opinion
cannot be expressed but that the effect of any disagreement with
management is not so material and
pervasive as to require an adverse opinion. A qualified opinion
should be expressed as being ‘except
for’ the effects of the matter to which the qualification
relates.
An adverse opinion
should be expressed when the effect of a disagreement is so material and
pervasive to the financial statements that the auditor concludes
that a qualification of the report is not
adequate to disclose the misleading or incomplete nature of the
financial statements.
Illustrations of these matters are set out below.
Disagreement on Accounting Policies—Qualified Opinion
We have audited……………………
Management is responsible ………………………..
Our responsibility is to express an opinion on these financial
statements based o our audit. Except as
discussed in the following paragraph, we conducted our audit in
accordance with
……………………………
As discussed in Note (Ref no.) to the financial statements, no
depreciation has been provided in the
financial statements which practice, in our opinion, is not in
accordance with International Financial
Reporting Standards. The provision for the year ended December
31, 2007, should be Rs.___ based
on the straight-line method of depreciation using annual rates
of x% for the building and y% for the
equipment. Accordingly, the fixed assets should be reduced by
accumulated depreciation of Rs. __
and the loss for the year and accumulated deficit should be
increased by Rs.__ and Rs.__, respectively.
In our opinion, except for the effect on the financial
statements of the matter referred to in the
preceding paragraph, the financial statements give a true and
fair view of ... (remaining words are the
same as illustrated in the opinion paragraph)
Disagreement on Accounting Policies—Inadequate
Disclosure—Adverse Opinion
“We have audited ... (remaining words are the same as
illustrated in the introductory paragraph
Management is responsible for … (remaining words are the same as
illustrated in the management’s
responsibility paragraph –
Our responsibility is to … (remaining words are the same as
illustrated in the auditor’s responsibility
paragraphs)–
(Paragraph(s) discussing the disagreement.)
In our opinion, because of the effects of the matters discussed
in the preceding paragraph(s), the
financial statements do not give a true and fair view of (or ‘do
not present fairly, in all material
respects,’) the financial position of ABC Company as of December
31, 2007, and of its financial
performance and its cash flows for the year then ended in
accordance with International Financial
Reporting Standards.”
MATTERS THAT DO NOT AFFECT THE AUDITOR’S OPINION
In certain circumstances, an auditor’s report may be modified by
adding an emphasis of matter
paragraph to highlight a matter affecting the financial
statements which is included in a note to the
financial statements that more extensively discusses the matter.
The addition of such an emphasis of matter paragraph does not
affect the auditor’s opinion. The
paragraph would preferably be included after the paragraph
containing the auditor’s opinion but
before the section on any other reporting responsibilities, if
any. The emphasis of matter paragraph
would ordinarily refer to the fact that the auditor’s opinion is
not qualified in this respect.
For example:
The auditor should modify the auditor’s report by adding a
paragraph to highlight a material matter
regarding a going
concern problem.
page
149
“Without qualifying our opinion, we draw attention to Note (Ref
no) in the financial statements
which indicates that the Company incurred a net loss of Rs.__
during the year ended December 31,
2007 and, as of that date, the Company’s current liabilities
exceeded its total assets by Rs.__. These
conditions, along with other matters as set forth in Note (Ref
no), indicate the existence of a material
uncertainty which may cast significant doubt about the Company’s
ability to continue as a going
concern.”
The auditor should consider modifying the auditor’s report by
adding a paragraph if there is a
significant uncertainty (other than a going concern problem),
the resolution of which is dependent
upon future events and which may affect the financial
statements. An uncertainty is a matter whose
outcome depends on future actions or events not under the direct
control of the entity but that may
affect the financial statements.
An illustration of an emphasis of matter paragraph for a
significant uncertainty
in an auditor’s
report follows:
“Without qualifying our opinion we draw attention to Note X to
the financial statements. The
Company is the defendant in a lawsuit alleging infringement of
certain patent rights and claiming
royalties and punitive damages. The Company has filed a counter
action, and preliminary hearings and
discovery proceedings on both actions are in progress. The
ultimate outcome of the matter cannot
presently be determined, and no provision for any liability that
may result has been made in the
financial statements.”
The addition of a paragraph emphasizing a going concern problem
or significant uncertainty is
ordinarily adequate to meet the auditor’s reporting
responsibilities regarding such matters. However,
in extreme cases, such as situations involving multiple
uncertainties that are significant to the financial
statements, the auditor may consider it appropriate to express a
disclaimer of opinion instead of
adding an emphasis of matter paragraph.
In addition to the use of an emphasis of matter paragraph for
matters that affect the financial
statements, the auditor may also modify the auditor’s report by
using an emphasis of matter
paragraph, preferably after the paragraph containing the
auditor’s opinion but before the section on
any other reporting responsibilities, if any, to report on
matters other than those affecting the
financial statements. For example, if an
amendment to other information
in a document containing
audited financial statements is necessary and the entity refuses
to make the amendment, the auditor
would consider including in the auditor’s report an emphasis of
matter paragraph describing the
material inconsistency.
“Without qualifying our opinion we draw attention to the fact
that the figures of dividend proposed
and earning per share appearing in the director’s report being
part of annual report are incorrect and
in conflict with those disclosed in financial statements. The
matter has been brought to the notice of the management but no corrective action has been taken by them in this
regard.”
<<<<<<<<<< THE END >>>>>>>>>>
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