MODIFIED AUDITOR’S REPORT

<< AUDITOR’S REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIALSTATEMENTS

Fundamentals of Auditing ACC 311

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

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Fundamentals of Auditing ACC 311

(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.)

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Fundamentals of Auditing ACC 311

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.

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Fundamentals of Auditing ACC 311

"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."

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