CHAPTER 25

MODIFICATIONS TO THE
INDEPENDENT AUDITOR’S REPORT

Questions and Answers:

1. What are the major reasons for changing the standard unmodified report?

Answer:

Major reasons for departure from the standard unqualified report

1. Disagreement with management regarding the acceptability of the
accounting policies selected, the method of their application or the
adequacy of financial statement disclosure.
2. Limitation on scope of the audit (resulting in a lack of evidence).
3. Using extra paragraph(s) to emphasize significant matters.
4. Different opinion on prior year comparative statements.
5. Relying on the work and reports of other independent auditors.
6. Required supplementary data omitted or departs from guidelines.
7. “Other information” inconsistent with financial statements or contains
material misstatement of fact.
8. Auditor is not independent.

2. What is the most important distinction between the auditor’s opinion on

financial statements and an auditor’s disclaimer of opinion?

Answer:

Students may identify more than one description of the “most important”
distinction between an opinion and a disclaimer. All the following are valid,
although (a) is intended to be the “Most Important:”
a. An opinion (unqualified, qualified or adverse) is an explicit statement of
the auditor’s conclusion(s), while a disclaimer is an (empty) assertion of
“no conclusion.”
b. An (unqualified) opinion is the highest level of assurance, while a
disclaimer is the lowest level (no assurance).
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c. An opinion requires evidence as a basis, while a disclaimer results from
lack of evidence.
d. Auditors must be independent to give an opinion, while a disclaimer can
result from a CPA’s lack of independence.

3. Define material scope restriction. Must a material scope restriction always

lead to a modification of the audit opinion?

Answer:

A material scope restriction occurs when the auditor is unable to gather

sufficient competent evidence to support an unqualified opinion on the
financial statements. Scope restrictions may be client-imposed or they may
result from other circumstances, e.g., appointment of the auditor after the
client’s physical inventory has been taken. A material scope restriction
need not result in a modification of the auditor’s opinion provided the
auditor can obtain satisfaction by alternate means.

4. Is reference in an audit report to work performed by another auditor a scope

qualification? Explain.

Answer:

The principal auditor’s reference in his report to another auditor is not a

qualification in scope. The reference only shows the divided responsibility
for the audit work.

5. If an auditor is not independent with respect to a client, what type of

opinion must be issued? Why?

Answer:

When an auditor is not independent with respect to a client, a disclaimer of

opinion must be rendered. The disclaimer must be issued because the
statements cannot be audited in accordance with auditing standards. (An
]’reviewed financial statements. An accountant can give a compilation –
disclaimer – report on compiled unaudited financial statements).

6. Why might an auditor decide to disclaim an opinion?

 Modifications to the Independent Auditor’s Report 25-3
Answer:

The auditor may decide to disclaim an opinion when confronted by a

material scope limitation that precludes gathering sufficient evidence to
support an opinion as to overall fairness of financial presentation. The
auditor may also disclaim an opinion if his/her name is associated with
financial statements for which an audit was not intended (e.g., compilations
and reviews), or if the auditor is not independent.

7. Does an audit opinion extend to the “other information”?

Answer:

The audit opinion does not extend to the other information, and therefore,
the opinion is not affected by omission or inconsistency or incorrect
supplemental information.

8. What steps should the auditor follow upon learning of a change in

accounting principle?

Answer:

Upon learning of a change in accounting principle, the auditor should first

determine the materiality and appropriateness of the change. If material
and the auditor agree with the client’s justification for the change, an
explanatory paragraph should be added following the opinion paragraph.
The paragraph will refer to the footnote describing the change. If the
change is not properly accounted for or is inadequately disclosed, the
auditor should consider issuing a qualified or adverse opinion.

Multiple Choice Questions and Answers:

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Cases

1.
Independent Auditor’s Report

To the shareholders and board of directors of Magaling Fabrics, Inc.:

We have audited the accompanying statement of financial positions of

Magaling Fabrics, Inc. as of December 31, 2016 and 2015 and the related
statements of comprehensiveincome, retained earnings, and cash flows for
the years then ended. These financial statements are the responsibility of
the company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with auditing standards. Those

standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in

all material respects, the financial position of Magaling Fabrics, Inc. as of
December 31, 2016 and 2015 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.

Ayos Na, CPA

March 2, 2017
 Modifications to the Independent Auditor’s Report 25-5
2. 1. F, L 5. B, I
2. B, I 6. B, I
3. B, Q 7. E, J
4. A, J

3. A. 1, 7c.
B. 2, 7a.
C. 4.
D. 1.
E. 6.
F. 5.
G. 2 (Note: The change in principle should be described in the descriptive
paragraph following the scope paragraph.)
H. 3, 7c.
I. 2, 7b.
J. 3, 7d.
K. 6. (given the materiality of property, plant, and equipment)
L. 1, 7e.
M. 1, 7b and 7e.
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