THE AUDIT REPORT
LEARNING OBJECTIVES
1. FORMAL AUDIT REPORT
2. THE UNMODIFIED AUDIT REPORT
3. THE MODIFIED AUDIT REPORT
4. EMPHASIS OF MATTER PARAGRAPH
1. FORMAL AUDIT REPORT
Title: Independent Auditor’s Report
Addressee: entity
Introductory Paragraph: Financial statements
Management’s Responsibility for the Financial Statements: preparation of F/S with IFRS and free from material misstatement whether due to fraud or error, responsibility for internal control, making accounting policy and estimate.
Auditor’s Responsibility: express an opinion, in accordance with ISA, design audit procedure to obtain audit evidence
Opinion: unmodified opinion, unmodified opinion with emphasis of matter paragraph, modified opinion.
Auditor’s signature: name of firm
Date of the auditor’s report: completion date of the audit
Auditor’s address:
2. THE UNMODIFIED AUDIT REPORT
The unmodified audit report provides assurance that independent examination of the accounts has to discovered any unadjusted material misstatements and that the financial statements give a true and fair view.
Opinion:
In our opinion, the financial statements give a true or fair view of ( or ‘present fairly, in all material aspects’) the financial position of ABC Company as of December 31 20×1, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.
3. THE MODIFIED AUDIT REPORT
| Reason for modification | Material | Material & Pervasive |
| Inability to obtain sufficient appropriate evidence
The auditor is unable to obtain sufficient appropriate evidence e.g. a lack of accounting records lost or destroyed, or a lack of adequate information and explanations from directors |
Qualified opinion
( ‘Except for’) |
The auditor is unable to form an opinion and does not know whether the financial statements give a true and fair view. This gives rise to a ‘Disclaimer of opinion’ |
| Material misstatement in the financial statements
The auditor identifies a material misstatement in the financial statements, such as the non-provision of a doubtful debt. |
Qualified opinion
( ‘Except for’) |
The financial statements do not give a true and fair view.
This gives rise to an ‘Adverse opinion’ |
Material problem is with one or more specific items in the financial statements (e.g. inventory or revenue), but the remaining items comply with the true and fair view criteria.
Example- qualified opinion relating to a material misstatement:
Included in the trade receivables shown in the statement of financial position is an amount of $Y due from a company which has ceased trading. XYZ has no security for this debt. In our opinion the company is unlikely to receive any payment and full provision of $Y should have been made, reducing profit before and net assets by that amount.
In our opinion, except for the effect on the financial statements for the matter referred to in the previous paragraph, the financial statements give a true and fair view of the financial position of XYZ as at December 31 20X1, and of its financial performance and its cash flow for the year then ended in accordance with International Accounting Standards.
Material problem is with one or more specific items in the financial statements (e.g. inventory or revenue), but the remaining items comply with the true and fair view criteria.
Example- qualified opinion relating to a material misstatement:
Included in the trade receivables shown in the statement of financial position is an amount of $Y due from a company which has ceased trading. XYZ has no security for this debt. In our opinion the company is unlikely to receive any payment and full provision of $Y should have been made, reducing profit before and net assets by that amount.
In our opinion, except for the effect on the financial statements for the matter referred to in the previous paragraph, the financial statements give a true and fair view of the financial position of XYZ as at December 31 20X1, and of its financial performance and its cash flow for the year then ended in accordance with International Accounting Standards.
Example- adverse opinion relating to a pervasive misstatement:
As more fully explained in note…no provision has been made for losses expected to arise on certain long-term contracts currently in progress, as the directors consider that such losses should be offset against amounts recoverable on other construction contracts. In our opinion, provision should be made for foreseeable losses on individual contracts as required by International Accounting Standard 11. If losses has been so recognized the effect would have been to reduce the profit before and after tax for the year and the contract work in progress at December 31 20X1 by $.
In our opinion , because of the effect of the matter discussed in the preceding paragraph, the financial statements do not give a true and fair view of the financial position of XYZ as at December 31 20X1,and of its financial performance and its cash flows for the year then ended in accordance with International Accounting Standards.
Example- qualified opinion relating to an inability to obtain sufficient appropriate evidence:
Auditor’s responsibility
…………………………………………………………………………………………….
We don not observe the accounting of the physical inventories as of December 31 20X1,since that date was prior to the time we were initially engaged as auditors for company. Owing to the nature of the company’s records, we wee unable to satisfy ourselves as to inventory quantities by other auditor procedures.
Qualified opinion
In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary has we been able to satisfy ourselves as to physical inventory qualities, the financial statements give a true and fair view….
Example- disclaimer of opinion relating to an inability to obtain sufficient appropriate evidence:
Omit the sentence stating the responsibility of the auditors
Add a paragraph discussing the scope limitation, for example as follows:
We were not able to observe all physical inventories and confirm the accounts receivable due to limitations placed on the scope of our work by the company.
Because of the significance of the matters discussed in the preceding paragraph, we do not express an opinion on the financial statements.
4. EMPHASIS OF MATTER PARAGRAPH
A fundamental uncertainty relates to an uncertain future event. If they are adequately disclosed in the notes to the financial statements, the auditors need not modify the audit opinion.
Opinion
As normal ( unmodified opinion)
Emphasis of matter- possible outcome of a lawsuit
In forming our opinion, we have considered the adequacy of the disclosures made in the financial statements concerning the possible outcome to litigation against B Limited, a subsidiary undertaking of the company, for an alleged breach of environmental regulations. The future settlement of this litigation could result in additional liabilities and the closure of B Limited’s business, whose net assets included in the consolidated statement of financial position total $…and whose profit before tax for the year is $… Details of the circumstances relating to this emphasis of matter are described in note… Our opinion is not qualified in this respect.
Source:
- Kaplan, FAU
- Phnom Penh HR