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Jan 20, 2016
Presentation on Audit opinion
Classification of Audit opinion in light of International Standards on Auditing (ISA)
1Classification of Audit opinionWe can classify audit reports in number of ways but usually audit reports are classified n TWO broad categories which are then further classified as follows:Unmodified audit reportUnmodified report with unmodified opinionModified audit reportUnmodified opinionModified report with unqualified opinion AND emphasis of matter paragraph and/or other matter paragraphQualified opinionQualified opinion (qualified report)Adverse opinion (adverse report)Disclaimer of opinion (disclaimer report)
2Classification of Audit opinionUnmodified audit reportWhen auditor on the basis of examination and the evidence obtained expresses his opinion thatfinancial statements of the entity are prepared in all material respects in accordance with applicable financial reporting frameworkorfinancial statements give true and fair viewthan such audit report or auditors report is calledunmodified or unqualified report.
Unmodified opinionThe opinion expressed by the auditor when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. GLOSSARY OF TERMS of ISA (ISA 700, paragraphs 3536, deal with the phrases used to express this opinion in the case of a fair presentation framework and a compliance framework respectively.)ISA 700describes the contents and format of the unmodified report in detail.
3Classification of Audit opinionModified audit reportAuditors report is said to be modified if the contents of the unmodified report as stated under ISA 700 are changed:
either because of the addition of emphasis of matter paragraph or other matters paragraph where opinion is still unmodified (modified report with unmodified opinion)or because of the modified opinion i.e. (modified report with modified opinion):Qualified opinionAdverse opinionDisclaimer of opinion
GLOSSARY OF TERMS of ISA Modified opinionA qualified opinion, an adverse opinion or a disclaimer of opinion.4Classification of Audit opinionIt is important to understand that audit report is not always modified because of the modified opinion. In simple words audit reports with modified opinion are always modified audit reports BUT modified audit reports are not always with modified opinion.
Modified report with unmodified opinion
5Classification of Audit opinionModified report with unmodified opinionThis is called modified report because the contents of the unmodified report are modified as additional paragraph(s) is (are) added. Additional paragraphs can be either or both of the following:Emphasis of matter paragraphOther matter paragraph
Emphasis of Matter ParagraphAuditor includes an emphasis of matter paragraph (EMP) when auditor considers that it is necessary to draw the attention of users of financial statements to the matter that isalready disclosed or reported in the financial statementsand understanding of the specified matter is important inunderstanding of the financial statements. EMP is included after the opinion paragraph in the audit report. However you must be clear that inclusion of EMP DOES NOT mean that auditors opinion is modified.
GLOSSARY OF TERMS of ISA Emphasis of Matter paragraphA paragraph included in the auditors report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditors judgment, is of such importance that it is fundamental to users understanding of the financial statements.6Classification of Audit opinionOther Matter ParagraphAuditor includes an other matter paragraph (OMP) when auditor considers that it is necessary to communicate a matterother than those that are presented or disclosed in the financial statementsand in auditors judgment understanding that matter is vital for usersunderstanding of the audit, the auditors responsibilities or the auditors reportand this is not prohibited by law or regulation. OMP is included after opinion paragraph and any EMP in the auditors report or somewhere else in the auditors report if the content of the Other Matter paragraph is relevant to the Other Reporting Responsibilities section.
7Classification of Audit opinionModified report with modified opinionAuditor modify his opinion when he concludes that it will not be appropriate to express an unmodified/unqualified opinion. Auditor reaches such conclusion when:The auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement; orThe auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.
The modification to the audit opinion is determined by the auditor by applying his professional judgment on the circumstances at hand. He may modify his opinion to express a qualified opinion, an adverse opinion or a disclaimer.
8Classification of Audit opinionQualified opinionAudit report containing a qualified opinion is also calledqualified report.
Auditor expresses a qualified opinion when:The auditor,having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, arematerial, but not pervasive, to the financial statements; orThe auditor isunable to obtain sufficient appropriate audit evidenceon which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could bematerial but not pervasive.
What is Pervasive?9Classification of Audit opinionAdverse opinionAudit report containing an adverse opinion is also calledadverse report.The auditor shall express an adverse opinion when the auditor, havingobtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, areboth material and pervasive to the financial statements.
What is Pervasive?10Classification of Audit opinionDisclaimerAudit report containing a disclaimer of opinion is also calleddisclaimer report
The auditor shall disclaim an opinion when the auditor isunable to obtain sufficient appropriate audit evidenceon which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could beboth material and pervasive.
What is Pervasive?11Classification of Audit opinionThe table below illustrates how the auditors judgment about the nature of the matter giving rise to the modification, and the pervasiveness of its effects or possible effects on the financial statements, affects the type of opinion to be expressed.
What is Pervasive?Nature of Matter Giving Rise to the Modification Auditors Judgment about the Pervasiveness of the Effects or Possible Effects on the Financial StatementsMaterial but Not Pervasive Material and Pervasive Financial statements are materially misstated Qualified opinion
Inability to obtain sufficient appropriate audit evidence Qualified opinion
Disclaimer of opinion
13Thanks for you patience hearing!Questions? / Open DiscussionBy: S. A. Pasha14