types-of-audit-opinions.pdf

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TYPES OF AUDIT OPINIONS - Financial Auditing - Business Writing Services

Types of audit opinions

1. Unqualified opinion2. Qualified opinion3. Disclaimer of opinion4. Adverse opinion

1. Unqualified opinion

When the auditor is satisfied in all material respects that enables him to express the requiredopinion on the financial statements without any reservations. This is sometimes called a cleanopinion. This is expressed when the auditor concludes that the financial statements give a true

and fair view in accordance with the relevant financial reporting framework.

Emphasis of matter report:

There are occasions when the auditor has no reservations as to the financial statements butwhere there exists an unusual event, condition or accounting policy, he feels that unless the

readers attention was drawn to the unusual matter the reader may not reach a properunderstanding of the financial position and results. In such circumstances the auditor shouldexpress an unqualified opinion but also include an extra paragraph called on Emphasis ofmatter paragraph to draw the readers attention to the unusual matter.

The addition of such an emphasis of matters paragraph does not lead to a qualification of theaudit opinion but is intended to enable the reader to obtain a better understanding. To avoid thisbeing understood as a qualification the emphasis of matter should be included after the opinion

paragraph and should contain the phrase without qualifying our opinion above

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Practical examples of emphasis of matter

1. An unusual condition would include distraction of assets after the balance sheet date butthe company remains a going concern.

2. The company being insolvent on the face of its own balance sheet but the auditor hasletters of support which he is satisfied can be fulfilled by the other party. Thus he will accept theappropriateness of the going concern assumption. Unusual events could include changes inlegislation that could have a material impact on the entitys business subsequent to the balancesheet date. Unusual accounting policies that may lead to an emphasis of matter would usuallyinvolve those matters not covered by any accounting standard such as accounting foragricultural produce or livestock

3. Inherent uncertainties that may call for emphasis of matter would include contingencies atthe balance sheet date which have not been resolved as at the date of signing the auditorsreport.

4. They could also include negotiations for financing which have not been finalized by thedate of signing the auditors report.

Qualifications in audit reports

When the auditor has reservations on any matter that is considered material to the financialstatements he may introduce qualifying remarks in his audit report. The auditors reservationscould arise out of the following;

1. There is a limitation on the scope of his work;2. There is a disagreement with management3. There is a significant uncertainty affecting the financial statements, the resolution of which

is dependent upon future events.

1. Qualified audit opinion (except for opinion)

This is expressed when the auditor concludes that an unqualified opinion cannot be expressed

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but that the effect of any disagreement with management or limitation on scope is not somaterial and pervasive as to require an adverse opinion or disclaimer of opinion. A qualifiedreport implies that all other aspects of the financial statements are okay except for the effects ofthe matter to which the qualification relates.

1. Disclaimer of opinion

This is issued when the possible effect of a limitation on scope or uncertainty is so material andpervasive that the auditor has not been able to obtain sufficient appropriate audit evidence andas a result he is unable to express an opinion on the financial statements. A disclaimer ofopinion implies that the auditor is unable to form an opinion because sufficient audit evidencecould not be obtained.

1. Adverse opinion

This is expressed when the effects of a disagreement is so material and pervasive to thefinancial statements that the auditor concludes that a qualification of the report is not adequateto disclose the misleading or incomplete nature of the financial statements. The auditor statesthat due to the nature of the disagreement in his opinion the financial statements do not show atrue and fair view.

Limitation of scope

If for any reason the auditor is unable to receive all the information and explanation he deemsnecessary for the purposes of his audit then there has been a limitation in the scope of his work.It means that the auditor is unable to conclude objectively.

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This could arise due to the following circumstances:

1. Refusal by management to allow the auditor to examine certain documents or records.

2. If the auditor is denied the opportunity to carry out an auditing procedure he considersimportant and he cannot conclude through alternative procedures, then there is a limitation ofscope.

3. Destruction of accounting records or documents through fire or other disaster meaningthat such records are not available to be examined by the auditor.

4. Being appointed auditor after the year-end with the result that certain evidence will not becollected.

Effect of a limitation in scope on the auditors opinion

If the possible effect of a limitation on scope of an audit is material but not fundamental to thefinancial statements the auditor issues a qualified opinion (except for opinion)

If the possible effect of a limitation on scope of an audit is of fundamental importance that theauditor is unable to express an opinion on the financial statements, the auditor issues adisclaimer of opinion as mentioned above.

When there is a limitation on the scope of the auditors work that requires the expression of aqualified opinion or disclaimer of opinion, the auditor should describe the nature of the limitationin his report and indicate the possible adjustments to the financial statements that might havebeen determined to be necessary, had the limitation not existed.

Inherent Uncertainties

Inherent uncertainties result from circumstances in which it is not possible for the auditor toreach any objective conclusion as to the outcome of a situation due to the circumstancesthemselves rather than a limitation on scope of the audit. Such uncertainties are only resolvedthrough the passage of time e.g. to wait for the outcome of a litigation however time is a greatconstraint and Financial Statements must be prepared within the required time. The auditorshould form an opinion on the adequacy of the accounting treatment of such inherentuncertainty. This will involve consideration of:

- The appropriateness of any accounting policies adopted by management in treating the

effect of such uncertainties.- The reasonableness of the estimates included in the Financial Statements.

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- The adequacy of disclosure.

Some inherent uncertainties are fundamental. These are uncertainties where the degree ofuncertainty and its potential impact on the view given by the financial statements may be verygreat. In determining whether an inherent uncertainty is fundamental the auditors consider:

- The risk of the estimate included in the Balance Sheet may be subject to change.- The range of possible outcomes.- The consequences of those outcomes on the view given by the financial statements.

Inherent uncertainties are considered as fundamental when they involve a significant level ofconcern about the validity of the going concern basis or other matters whose potential effect onthe Financial Statements is unusually great.

Disagreement

Under disagreement the auditor is able to conclude objectively. He has received all theinformation and explanations he considers necessary for the purpose of the audit. But his

conclusion is at variance with the position adopted by management or the view given by theaccounts.

Circumstances giving rise to disagreements include:

1. Application of inappropriate accounting policies by management;2. They can disagree on amounts and facts included in the financial statements. E.g. the

auditor might feel that the amount provided for as a contingent loss arising from a legal suitagainst the company is too low.3. They can disagree on interpretation of an accounting standard or even legislation.4. Disagree as to the manner or extent of disclosure of facts or amounts in the financial

statements.5. They can disagree on the mode of the disclosure of information.

Where the auditor disagrees with the accounting treatment or disclosure of a matter in the

financial statements and in the auditors opinion the effect of that disagreement is material to thefinancial statements, the auditor should;

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1. Include in his report a description of all the factors giving rise to the disagreement;2. The implications of such factors on the financial statements;3. A quantification of the effect on the financial statements.

Effects of disagreements on the audit opinion

When the auditor concludes that the effect of the matter-giving rise to the disagreement is sofundamental that the financial statements are misleading the auditor should issue an adverseopinion.

If the nature of the disagreement is material but not fundamental the auditor should issue aqualified opinion indicating that all other aspects of the financial statements are okay except forthe matter giving rise to the disagreement.

Material but not pervasive

Auditors may not include qualifying remarks in their audit reports unless the matter is material.Material but not pervasive means that the reservation that the auditor has is material in thecontext of a segment of the financial statements but not the financial statements taken as awhole.

Material and pervasive

A matter becomes material and pervasive when it is material in the context of the financialstatements taken as a whole. A limitation of scope becomes pervasive when it makes thefinancial statements misleading for decision-making purposes or of little information of value fordecision-making purposes. A disagreement becomes pervasive when it makes the financialstatements taken as a whole to be totally misleading.

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Qualification matrix

This summarises the forms qualification issued by the auditor under different circumstances.

Nature of circumstance Material but not significant Fundamental

Limitationon scope/uncertainty Qualified opinion (except for opinion) Disclaimer of opinion

Disagreement Qualified opinion (except for opinion) Adverse opinion

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