ZeePedia buy college essays online


Fundamentals of Auditing

<<< Previous MODIFIED AUDITORíS REPORT
 
img
Fundamentals of Auditing ­ACC 311
VU
Lesson 45
MODIFIED AUDITOR'S REPORT
REPORTS/OPINIONS TREE
STANDARD
MODIFIED
Unqualified
Affect the
Do not affect
Auditor's opinion
auditor's opinion
(Emphasis of the matter)
DEPENDS UPON NATURE
OF CIRCUMSTANCES
LIMITATION ON
DISAGREEMENT
SCOPE OF WORK
WITH MANAGEMENT
Material but not so
Material
Material but
Material &
Material & Pervasive
& Pervasive
not so material
Pervasive
and Pervasive
Adverse opinion
Qualified
Disclaimer of opinion
Qualified
(Financial statement
Opinion
(we do not express an
opinion
do not give a true
(Except for)
opinion on the financial
(Except for)
and fair view)
statements)
MODIFICATIONS TO THE AUDITOR'S REPORT
(Effective for auditor's reports dated on or after December 31, 2006).
Here we shall discuss the circumstances when the independent auditor's report should be modified
and the form and the content of the modifications to the auditor's report in those circumstances.
The wording of auditor's report is modified in the following situations:
Matters that Do Affect the Auditor's Opinion
Qualified opinion,
Disclaimer of opinion, or
Adverse opinion.
Matters that Do Not Affect the Auditor's Opinion
Emphasis of matter
MATTERS THAT DO AFFECT THE AUDITOR'S OPINION
An auditor may not be able to express an unqualified opinion when either of the following
circumstances exists and, in the auditor's judgment, the effect of the matter is or may be material to
the financial statements:
(a)
There is a limitation on the scope of the auditor's work; or
146
img
Fundamentals of Auditing ­ACC 311
VU
(b)
There is a disagreement with management regarding the acceptability of the accounting
policies selected, the method of their application or the adequacy of financial statement
disclosures.
Limitation on Scope
(a)
Imposed by the entity
A limitation on the scope of the auditor's work may sometimes be imposed by the entity (for
example, when the terms of the engagement specify that the auditor will not carry out an audit
procedure that the auditor believes is necessary). However, when the limitation in the terms of a
proposed engagement is such that the auditor believes the need to express a disclaimer of opinion
exists; the auditor would ordinarily not accept such a limited engagement as an audit engagement,
unless required by statute. Also, a statutory auditor would not accept such an audit engagement when
the limitation infringes on the auditor's statutory duties.
(b)
Imposed by circumstances
A scope limitation may be imposed by circumstances (for example, when the timing of the auditor's
appointment is such that the auditor is unable to observe the counting of physical inventories). It may
also arise when, in the opinion of the auditor, the entity's accounting records are inadequate or when
the auditor is unable to carry out an audit procedure believed to be desirable. In these circumstances,
the auditor would attempt to carry out reasonable alternative procedures to obtain sufficient
appropriate audit evidence to support an unqualified opinion.
When there is a limitation on the scope of the auditor's work that requires expression of a qualified
opinion or a disclaimer of opinion, the auditor's report should describe the limitation and indicate the
possible adjustments to the financial statements that might have been determined to be necessary had
the limitation not existed.
A qualified opinion should be expressed when the auditor concludes that an unqualified opinion
cannot be expressed but that the effect of any limitation on scope is not so material and pervasive as
to require a disclaimer of opinion. A qualified opinion should be expressed as being `except for' the
effects of the matter to which the qualification relates.
A disclaimer of opinion should be expressed when the possible effect of a limitation on scope is so
material and pervasive that the auditor has not been able to obtain sufficient appropriate audit
evidence and accordingly is unable to express an opinion on the financial statements.
Whenever the auditor expresses an opinion that is other than unqualified, a clear description of all the
substantive reasons should be included in the report and, unless impracticable, a quantification of the
possible effect(s) on the financial statements. Ordinarily, this information would be set out in a
separate paragraph preceding the opinion or disclaimer of opinion on the financial statements and
may include a reference to a more extensive discussion, if any, in a note to the financial statements.
Illustrations of these matters are set out below.
Limitation on Scope--Qualified Opinion
We have audited........................
Management is responsible .............................
Our responsibility is to express an opinion on these financial statements based o our audit. Except as
discussed in the following paragraph, we conducted our audit in accordance with
.................................
We did not observe the counting of the physical inventories as of December 31, 20X1, since that date
was prior to the time we were initially engaged as auditors for the Company. Owing to the nature of
the Company's records, we were unable to satisfy ourselves as to inventory quantities by other audit
procedures.
In our opinion, except for the effects of such adjustments, if any, as might have been determined to
be necessary had we been able to satisfy ourselves as to physical inventory quantities, the financial
statements give a true and fair view of ... (remaining words are the same as illustrated in the opinion
paragraph)
Limitation on Scope--Disclaimer of Opinion
We were not able to observe all physical inventories and confirm accounts receivable due to
limitations placed on the scope of our work by the Company.)
147
img
Fundamentals of Auditing ­ACC 311
VU
Because of the significance of the matters discussed in the preceding paragraph, we do not express an
opinion on the financial statements."
Disagreement with Management
The auditor may disagree with management about matters such as the acceptability of accounting
policies selected, the method of their application, or the adequacy of disclosures in the financial
statements. If such disagreements are material to the financial statements, the auditor should express a
qualified or an adverse opinion.
A qualified opinion should be expressed when the auditor concludes that an unqualified opinion
cannot be expressed but that the effect of any disagreement with management is not so material and
pervasive as to require an adverse opinion. A qualified opinion should be expressed as being `except
for' the effects of the matter to which the qualification relates.
An adverse opinion should be expressed when the effect of a disagreement is so material and
pervasive to the financial statements that the auditor concludes that a qualification of the report is not
adequate to disclose the misleading or incomplete nature of the financial statements.
Illustrations of these matters are set out below.
Disagreement on Accounting Policies--Qualified Opinion
We have audited........................
Management is responsible .............................
Our responsibility is to express an opinion on these financial statements based o our audit. Except as
discussed in the following paragraph, we conducted our audit in accordance with
.................................
As discussed in Note (Ref no.) to the financial statements, no depreciation has been provided in the
financial statements which practice, in our opinion, is not in accordance with International Financial
Reporting Standards. The provision for the year ended December 31, 2007, should be Rs.___ based
on the straight-line method of depreciation using annual rates of x% for the building and y% for the
equipment. Accordingly, the fixed assets should be reduced by accumulated depreciation of Rs. __
and the loss for the year and accumulated deficit should be increased by Rs.__ and Rs.__, respectively.
In our opinion, except for the effect on the financial statements of the matter referred to in the
preceding paragraph, the financial statements give a true and fair view of ... (remaining words are the
same as illustrated in the opinion paragraph)
Disagreement on Accounting Policies--Inadequate Disclosure--Adverse Opinion
"We have audited ... (remaining words are the same as illustrated in the introductory paragraph
Management is responsible for ... (remaining words are the same as illustrated in the management's
responsibility paragraph ­
Our responsibility is to ... (remaining words are the same as illustrated in the auditor's responsibility
paragraphs)­
(Paragraph(s) discussing the disagreement.)
In our opinion, because of the effects of the matters discussed in the preceding paragraph(s), the
financial statements do not give a true and fair view of (or `do not present fairly, in all material
respects,') the financial position of ABC Company as of December 31, 2007, and of its financial
performance and its cash flows for the year then ended in accordance with International Financial
Reporting Standards."
MATTERS THAT DO NOT AFFECT THE AUDITOR'S OPINION
In certain circumstances, an auditor's report may be modified by adding an emphasis of matter
paragraph to highlight a matter affecting the financial statements which is included in a note to the
financial statements that more extensively discusses the matter.
The addition of such an emphasis of matter paragraph does not affect the auditor's opinion. The
paragraph would preferably be included after the paragraph containing the auditor's opinion but
before the section on any other reporting responsibilities, if any. The emphasis of matter paragraph
would ordinarily refer to the fact that the auditor's opinion is not qualified in this respect.
For example:
The auditor should modify the auditor's report by adding a paragraph to highlight a material matter
regarding a going concern problem.
148
img
Fundamentals of Auditing ­ACC 311
VU
"Without qualifying our opinion, we draw attention to Note (Ref no) in the financial statements
which indicates that the Company incurred a net loss of Rs.__ during the year ended December 31,
2007 and, as of that date, the Company's current liabilities exceeded its total assets by Rs.__. These
conditions, along with other matters as set forth in Note (Ref no), indicate the existence of a material
uncertainty which may cast significant doubt about the Company's ability to continue as a going
concern."
The auditor should consider modifying the auditor's report by adding a paragraph if there is a
significant uncertainty (other than a going concern problem), the resolution of which is dependent
upon future events and which may affect the financial statements. An uncertainty is a matter whose
outcome depends on future actions or events not under the direct control of the entity but that may
affect the financial statements.
An illustration of an emphasis of matter paragraph for a significant uncertainty in an auditor's
report follows:
"Without qualifying our opinion we draw attention to Note X to the financial statements. The
Company is the defendant in a lawsuit alleging infringement of certain patent rights and claiming
royalties and punitive damages. The Company has filed a counter action, and preliminary hearings and
discovery proceedings on both actions are in progress. The ultimate outcome of the matter cannot
presently be determined, and no provision for any liability that may result has been made in the
financial statements."
The addition of a paragraph emphasizing a going concern problem or significant uncertainty is
ordinarily adequate to meet the auditor's reporting responsibilities regarding such matters. However,
in extreme cases, such as situations involving multiple uncertainties that are significant to the financial
statements, the auditor may consider it appropriate to express a disclaimer of opinion instead of
adding an emphasis of matter paragraph.
In addition to the use of an emphasis of matter paragraph for matters that affect the financial
statements, the auditor may also modify the auditor's report by using an emphasis of matter
paragraph, preferably after the paragraph containing the auditor's opinion but before the section on
any other reporting responsibilities, if any, to report on matters other than those affecting the
financial statements. For example, if an amendment to other information in a document containing
audited financial statements is necessary and the entity refuses to make the amendment, the auditor
would consider including in the auditor's report an emphasis of matter paragraph describing the
material inconsistency.
"Without qualifying our opinion we draw attention to the fact that the figures of dividend proposed
and earning per share appearing in the director's report being part of annual report are incorrect and
in conflict with those disclosed in financial statements. The matter has been brought to the notice of
the management but no corrective action has been taken by them in this regard."
149
Table of Contents:
  1. AN INTRODUCTION
  2. AUDITORSí REPORT
  3. Advantages and Disadvantages of Auditing
  4. OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
  5. What is Reasonable Assurance
  6. LEGAL CONSIDERATION REGARDING AUDITING
  7. Appointment, Duties, Rights and Liabilities of Auditor
  8. LIABILITIES OF AN AUDITOR
  9. BOOKS OF ACCOUNT & FINANCIAL STATEMENTS
  10. Contents of Balance Sheet
  11. ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
  12. Business Operations
  13. Risk Assessment Procedures & Sources of Information
  14. Measurement and Review of the Entityís Financial Performance
  15. Definition & Components of Internal Control
  16. Auditing ASSIGNMENT
  17. Benefits of Internal Control to the entity
  18. Flow Charts and Internal Control Questionnaires
  19. Construction of an ICQ
  20. Audit evidence through Audit Procedures
  21. SUBSTANTIVE PROCEDURES
  22. Concept of Audit Evidence
  23. SUFFICIENT APPROPRIATE AUDIT EVIDENCE AND TESTING THE SALES SYSTEM
  24. Control Procedures over Sales and Debtors
  25. Control Procedures over Purchases and Payables
  26. TESTING THE PURCHASES SYSTEM
  27. TESTING THE PAYROLL SYSTEM
  28. TESTING THE CASH SYSTEM
  29. Controls over Banking of Receipts
  30. Control Procedures over Inventory
  31. TESTING THE NON-CURRENT ASSETS
  32. VERIFICATION APPROACH OF AUDIT
  33. VERIFICATION OF ASSETS
  34. LETTER OF REPRESENTATION VERIFICATION OF LIABILITIES
  35. VERIFICATION OF EQUITY
  36. VERIFICATION OF BANK BALANCES
  37. VERIFICATION OF STOCK-IN-TRADE AND STORE & SPARES
  38. AUDIT SAMPLING
  39. STATISTICAL SAMPLING
  40. CONSIDERING THE WORK OF INTERNAL AUDITING
  41. AUDIT PLANNING
  42. PLANNING AN AUDIT OF FINANCIAL STATEMENTS
  43. Audits of Small Entities
  44. AUDITORíS REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIALSTATEMENTS
  45. MODIFIED AUDITORíS REPORT