Chapter 6: Section 4 - 4.2

Question 1

Considering that in some cases, the standard report with unmodified opinion may not be appropriate, what are the 3 situations that can come of the auditors’ reports?

Answer 1

1. Unmodified opinions
2. Modified audit report with unmodified opinion
3. Modified audit opinions

Question 2

What is an unmodified opinion?

Answer 2

Standard opinion = ‘true and fair view’ or ‘presents fairly’

Question 3

What does a modified audit report with unmodified opinion mean?

Answer 3

Emphasis of matter

‘Without modifying our opinion we draw attention to …’

Multiple significant uncertainties

Disclaimer of opinion ‘do not express an opinion’

Question 4

What causes a modified audit opinion?

Answer 4

1. Insufficient/inappropriate audit evidence
2. Material misstatement

Question 5

What are the 2 situations under insufficient/inappropriate audit evidence?

Answer 5

a) material but not pervasive

b) material and pervasive

Question 6

What is the opinion if insufficient/inappropriate audit evidence is material but not pervasive and what should be added as a result?

Answer 6

Qualified opinion
‘except for’

Question 7

What is the opinion if the insufficient/inappropriate evidence is material and pervasive and what should be added to the report?

Answer 7

Disclaimer of opinion
‘do not express an opinion’

Question 8

What are the 2 situations under material misstatement?

Answer 8

1. Material but not pervasive
2. Material and pervasive

Question 9

What will the opinion be if the material misstatement is material but not pervasive and what should be added?

Answer 9

Qualified opinion
‘except for’

Question 10

What will the opinion be if the material misstatement is material and pervasive and what should be added?

Answer 10

Adverse opinion
‘do not give a true and fair view’

Question 11

What does ISA 706 (revised) talk about?

Answer 11

Emphasis of Matter paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report

Question 12

In the auditor’s report, what may it be necessary to do?

Answer 12

Draw users’ attention to matters appropriately presented and disclosed within the financial statements that are of such importance they are fundamental to users’ understanding of either the financial statements themselves or the rest of the audit itself (including the auditor’s responsibilities and their report)

Question 13

Define ‘emphasis of matter paragraph’

Answer 13

Draws users’ attention to issues within the financial statements that they need to see in order to understand them properly

Question 14

What are examples of matters that would warrant the use of this paragraph? (4)

Answer 14

1) Significant uncertainties relating to future outcomes of exceptional litigation or regulatory action

2) Significant subsequent event that occurs between the date of the financial statements and the date of the auditor’s report

3) Early application of a new accounting standard that has a material effect on the financial statements

4) A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position

Question 15

Where should the emphasis of matter paragraph be added in the audit report and what should this include?

Answer 15

After the opinion paragraph, using the heading ‘ Emphasis of Matter’ including full details of the matter and the location within the financial statements that explains the issue further

Question 16

What does the emphasis of matter paragraph state about the auditor’s opinion?

Answer 16

Auditor’ opinion is not modified in respect of this matter

Question 17

When must the use of a paragraph stating the auditors opinion is not modified in respect of this matter only occur?

Answer 17

Use of such a paragraph must only occur if the matter in question has already been adequately treated and disclosed in the financial statements and the auditor is in agreement with this (ISA 706)

Question 18

What is ISA 705 (revised) about?

Answer 18

Modifications to the Opinion in the Independent Auditor’s Report.

Question 19

How many types of modified opinions are there that the auditor can issue and what do they depend on?

Answer 19

3 types
Depending on the nature of the matter giving rise to the modification and the pervasiveness of that matter on the financial statements

Question 20

What are the 3 types of modified opinion that the auditor can issue?

Answer 20

1. Qualified opinion
2. Adverse opinion
3. Disclaimer of opinion

Question 21

Define qualified opinion.

Answer 21

Where a matter that is material but not pervasive is identified by the auditor (‘except for’)

Question 22

Define adverse opinion.

Answer 22

Where the misstatement is both material and pervasive, leading the auditor to conclude that the financial statements ‘do not show a true and fair view’

Question 23

Define disclaimer of opinion.

Answer 23

Where the shortage of evidence is both material and pervasive, leading the auditor to not give an opinion

Question 24

How can the types of modifications of opinions be summarised?

Answer 24

By considering the judgements required by the auditor in 2 key respects - NATURE of the matter giving rise to the modification and auditor’s judgement about the PERVASIVENESS of the effects or possible effects on the financial statements

Question 25

What type of modified opinion will be issues by the auditor where the nature = financial statements are materially misstated (disagreement) and effect is material but not pervasive?

Answer 25

Qualified opinion ('except for..')

Question 26

What type of modified opinion will be given where the nature of the matter is that the financial statements are materially misstated (disagreement) and the effect is material and pervasive?

Answer 26

Adverse opinion ('the financial statements do not give a true and fair view ...')

Question 27

What type of modified opinion will be given where the nature of the matter is the inability to obtain sufficient appropriate audit evidence (limitation in scope) and the effect is material but not pervasive?

Answer 27

Qualified opinion ('except for ...')

Question 28

What type of modified opinion will be given where the nature of the matter is the inability to obtain sufficient appropriate audit evidence (limitation in scope) and the effect is material and pervasive?

Answer 28

Disclaimer of opinion ('we do not express an opinion ...')

Question 29

Earlier we learnt 'material and pervasive' definitions, what are their definitions (3 points) in the context of selecting the most appropriate opinion, depending on its significance?

Answer 29

1. Are not confined to specific elements, accounts or items of the financial statements 2. If so confined, represent or could represent a substantial proportion of the financial statements 3. In relation to disclosures, are fundamental to users' understanding of the financial statements (ISA 705)

Question 30

What do the circumstances leading to a modification due to material misstatement use?

Answer 30

The assessments of materiality already prepared during the audit

Question 31

What are the 3, according to ISA 705: para. 6, circumstances leading to a modification due to material misstatement?

Answer 31

1. Appropriateness of selected accounting policies (either inconsistent with the applicable financial reporting framework or those that do not lead to fair presentation) 2. Application of selected accounting policies (either through inconsistency or error) 3. Appropriateness or adequacy of disclosures in the financial statements

Question 32

What are the 3 circumstances leading to a modification due to being unable to obtain sufficient appropriate audit evidence, according to ISA 705: para. 6?

Answer 32

1. Circumstances beyond the entity's control (e.g., loss of records in a fire) 2. Circumstances relating to the nature or timing of the auditor's work (e.g., the auditor being appointed after the date of the inventory count) 3. Limitations on the scope of the audit imposed by management (such as management denying access to third parties for external confirmations)