Presentation on
Audit opinion
Classification of Audit opinion in light of International Standards on Auditing (ISA)
Classification of Audit opinion
We 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 report
1. Unmodified report with unmodified opinion
• Modified audit report• Unmodified opinion
1. Modified report with unqualified opinion AND emphasis of matter paragraph and/or other matter paragraph
• Qualified opinion1. Qualified opinion (qualified report)2. Adverse opinion (adverse report)3. Disclaimer of opinion (disclaimer report)
Classification of Audit opinion
Unmodified audit reportWhen auditor on the basis of examination and the evidence obtained expresses his opinion that financial statements of the entity are prepared in all material respects in accordance with applicable financial reporting framework or financial statements give true and fair view than such audit report or auditor’s report is called unmodified or unqualified report.
“Unmodified opinion—The 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 35–36, deal with the phrases used to express this opinion in the case of a fair presentation framework and a compliance framework respectively.)
ISA 700 describes the contents and format of the unmodified report in detail.
Classification of Audit opinion
Modified audit reportAuditor’s 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 opinion• Adverse opinion• Disclaimer of opinion
GLOSSARY OF TERMS of ISA
“Modified opinion—A qualified opinion, an adverse opinion or a disclaimer of opinion.”
Classification of Audit opinion
It 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
Classification 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 paragraph• Other 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 is already disclosed or reported in the financial statements and understanding of the specified matter is important in understanding 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 auditor’s opinion is modified.
GLOSSARY OF TERMS of ISA
“Emphasis of Matter paragraph—A paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements.”
Classification of Audit opinionOther Matter ParagraphAuditor includes an other matter paragraph (OMP) when auditor considers that it is necessary to communicate a matter other than those that are presented or disclosed in the financial statements and in auditor’s judgment understanding that matter is vital for users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report and this is not prohibited by law or regulation.
OMP is included after opinion paragraph and any EMP in the auditor’s report or somewhere else in the auditor’s report if the content of the Other Matter paragraph is relevant to the Other Reporting Responsibilities section.
Classification 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; or
• The 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.
Classification of Audit opinionQualified opinionAudit report containing a qualified opinion is also called qualified report.
Auditor expresses a qualified opinion when:• The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or• The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.
What is Pervasive?
Classification of Audit opinionAdverse opinionAudit report containing an adverse opinion is also called adverse report.The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.
What is Pervasive?
Classification of Audit opinion
Disclaimer
Audit report containing a disclaimer of opinion is also called disclaimer report
The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.
What is Pervasive?
Classification of Audit opinion
Para 5 Definition of ISA 705 MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT defines
“Pervasive – A term used, in the context of misstatements, to describe the effects on the financial statements of misstatements or the possible effects on the financial statements of misstatements, if any, that are undetected due to an inability to obtain sufficient appropriate audit evidence. Pervasive effects on the financial statements are those that, in the auditor’s judgment:
(i) Are not confined to specific elements, accounts or items of the financial statements; (ii) If so confined, represent or could represent a substantial proportion of the financial statements; or (iii) In relation to disclosures, are fundamental to users’ understanding of the financial statements. ”
Classification of Audit opinion
The table below illustrates how the auditor’s 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
Auditor’s Judgment about the Pervasiveness of the Effects or Possible Effects on the Financial Statements
Material but Not Pervasive
Material and Pervasive
Financial statements are materially misstated
Qualified opinion Adverse opinion
Inability to obtain sufficient appropriate audit evidence
Qualified opinion Disclaimer of opinion
Thanks for you patience hearing!
Questions? / Open Discussion
By: S. A. Pasha
