CHAPTER 5

COMPLETION OF AUDIT
(PART 3 – REPORTING)
LEARNING OBJECTIVE 3 & 4

(3) To know the standard contents of an unmodified auditor's report

(4) To know when an auditor's report should be modified

INTRODUCTION

• Auditors are required to report to those charged with governance on

various matters arising from the audit
• This report will be ‘private’ as compared to audit report, which is a
published document
• Those charged with governance = a term used to describe the role of
persons entrusted with the supervision, control & direction of an entity
• Who are they?
INTRODUCTION (CONT)

• Matters to be communicated?
1. The auditor’s responsibilities
2. Planned audit scope and timing
3. Significant findings from the audit (internal control deficiency)
4. Auditor independence (for listed company in UK)
COMMUNICATING DEFICIENCIES IN INTERNAL
CONTROL
• Specific requirements for communicating the deficiencies in the IC:
Determine whether deficiencies in IC have been identified
Determine whether those deficiencies are significant
Significant deficiencies shall be communicated in writing to those charged
with governance
Written communication should include the description of deficiencies and
their potential effects/consequences
(Auditor need to understand the business cycle, for e.g sales, HR/payroll, etc)
AUDITOR’S REPORT

• Auditors’ reports are important to users of financial statements because they

inform users of the auditor’s opinion as to whether or not the financial
statements are fairly stated
• Four (4) types of auditor’s reports:
1. Unqualified report (standard)
2. Unqualified report with explanatory paragraph or modified wordings
3. Qualified report
4. Adverse or Disclaimer report
AUDITOR’S OPINION

• In all cases, auditor must provide an opinion on the financial statements in the
audit report. The opinion could be:
 An unmodified opinion = the auditor is satisfied that the evidence obtained is
sufficient and appropriate and supports the view presented in the financial
statements prepared by the company's management
 A modified opinion = the auditor is either not satisfied with the sufficiency or
appropriateness of the evidence that has been obtained, compared with what could
reasonably be expected, or has issues with the content of the financial statements
AUDITOR’S OPINION (CONT)

• The opinions open to the auditor are therefore to issue:

1. An unmodified auditor's report
2. A modified auditor's report with an unmodified audit opinion
3. A modified auditor's report with a modified audit opinion, which
can be a qualified opinion (except for), an adverse opinion or
disclaimer of opinion
UNMODIFIED AUDITOR’S REPORT
(STANDARD UNQUALIFIED REPORT)
• The main components of an unqualified report:
1. Report title (include the word ‘independent’)
2. Report address (to shareholders or board of directors)
3. Introductory paragraph (list of FS that are audited, management’s role, etc)
4. Scope paragraph (factual statements about the audit works)
5. Opinion paragraph (auditor’s opinion on FS)
6. Name of CPA firm & its address (the audit firm)
7. Audit report date (normally last day of audit field work)
MODIFIED AUDITOR’S REPORT

• In certain cases, an unqualified audit report on the FS is issued BUT the

wording deviates from the standard unqualified report
• The case meets the criteria of a complete audit with satisfactory results
and evidence that FS are fairly presented, BUT auditors believe that it is
important to provide additional information (explanatory para)
• Unlike qualified, adverse or disclaimer report – auditors either has not
performed a satisfactory audit, not satisfied that FS are fairly presented or
auditors are not independent
 Modified reports

Matters which DO NOT affect audit opinion

Matters which DO affect audit opinion (qualified/modified opinion)
(unqualified/unmodified opinion)

Material Inability to obtain sufficient

Qualified ‘except
misstatement appropriate evidence (potential
for’ (material
(material and effects are material and pervasive)
misstatement but
pervasive)
not pervasive)

Emphasis of Matter
(Explanatory Para) Adverse
Disclaimer
 Modified reports

Matters which DO NOT affect audit opinion (unmodified

Matters which DO affect audit opinion (modified opinion)
opinion)

Material Qualified ‘except Inability to obtain sufficient

misstatement for’ (material appropriate evidence (potential
(and pervasive) misstatement but effects are material and pervasive)
not pervasive)

Emphasis of Matter
(Explanatory Para) Adverse
Disclaimer
UNMODIFIED OPINION WITH MODIFIED REPORT
(EXPLANATORY PARAGRAPH)
1. An uncertainty relating to the future outcome of exceptional litigation or
regulatory actions
2. Substantial doubt about going concern
3. Early application of a new accounting standard that has a material effect on the
financial statements
4. Emphasis of a matter
5. Reports involving other auditors
6. A major catastrophe that has a significant effect on the entity’s financial position
SUBSTANTIAL DOUBT ABOUT GOING CONCERN

• Significant recurring operating losses or working capital

deficiencies.
• Inability of the company to pay its obligations as they come due.
• Loss of major customers, the occurrence of uninsured catastrophes.
• Legal proceedings, legislation that might jeopardize the entity’s
ability to operate.
UNMODIFIED OPINION WITH MODIFIED REPORT
(EXPLANATORY PARAGRAPH) - CONT
• An auditor should add an ‘emphasis of matter’ or ‘other matters’ paragraph to the
auditor’s report where they considers it necessary to draw users’ attention to a matter
or matters presented/disclosed in the FS
• ISA 706 requires the additional para to be included immediately after the opinion on the
FS para and shall :
 Use the respective headings
 Include a clear reference to the matter being emphasized
 Indicate that the auditor’s opinion is not modified in respect of the issue being dealt
with
MODIFIED OPINION WITH MODIFIED REPORT

QUALIFIED OPINION (except for)

The auditor shall modify the opinion in the auditor’s report when:
(a) The auditor concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement (e.g:
disagreement with management about (i) accounting policy, (ii) accounting
treatment or (iii) disclosure in the FS); or
(b) The auditor is unable to obtain sufficient appropriate audit evidence to
conclude that the financial statements as a whole are free from material
misstatement (e.g: limitation on scope of the audit)
MODIFIED OPINION WITH MODIFIED REPORT
(CONT)
ADVERSE OPINION
 The auditor shall express an adverse opinion when the auditor, having obtained sufficient
appropriate audit evidence, concludes that misstatements, individually or in the aggregate,
are both material and pervasive to the financial statements.
DISCLAIMER OF OPINION
 The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient
appropriate audit evidence on which to base the opinion, and the auditor concludes that
the possible effects on the financial statements of undetected misstatements, if any, could be
both material and pervasive
 Modified reports

Matters which DO NOT affect audit opinion (unmodified

Matters which DO affect audit opinion (modified opinion)
opinion)

Material Qualified ‘except Inability to obtain sufficient

misstatement for’ (material appropriate evidence (potential
(and pervasive) misstatement but effects are material and pervasive)
not pervasive)

Emphasis of Matter
(Explanatory Para) Adverse
Disclaimer
MODIFIED OPINION WITH MODIFIED REPORT
(CONT)
• The term 'pervasive' is defined in ISA (UK) 705 as something that affects the financial
statements as a whole or a substantial part of them, and which is fundamental to the
users' understanding of the financial statements
• Therefore, the type of modified opinion expressed will depend on the circumstances and
the effect of any actual or potential misstatements on the financial statements.
[Misstatements that are material but not pervasive will lead to an 'except for' qualified
opinion, whereas if the misstatements are deemed to be pervasive the opinion will be
adverse or will be disclaimed]
 MODIFIED OPINION – A SUMMARY

Auditor's Judgement about the Pervasiveness of the

Effects or Possible Effects on the Financial Statements

Nature of matter giving Material but not pervasive Material and Pervasive
rise to the modification

Financial statements are Qualified opinion (‘except Adverse opinion

materially misstated for’)
Inability to obtain sufficient Qualified opinion (‘except Disclaimer of opinion
appropriate audit evidence for’)

NOTE: Remember, that if an error or a lack of evidence is immaterial, the audit opinion will not be modified at all.