An auditor’s report is considered to be modified when it includes:
1. Matters That Do Not Affect the Auditor’s Opinion
• emphasis of matter
2. Matters That Do Affect the Auditor’s Opinion
• qualified opinion
• disclaimer of opinion
• adverse opinion
Uniformity in the form and content of each type of modified report will enhance the user’s understanding of such reports. Accordingly, this AAS includes suggested wordings to express an unqualified opinion as well as examples of modifying phrases for use when issuing modified reports.
Matters That Do Not Affect the Auditor’s Opinion: In certain circumstances, an auditor’s report may be modified 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 preceding the opinion paragraph and would ordinarily refer to the fact that the auditor’s opinion is not qualified in this respect. The auditor should modify the auditor’s report adding a paragraph to highlight a material matter regarding a going concern problem where the going concern question is not resolved and adequate disclosures have been made in the financial statements. The auditor should consider modifying the auditor’s report adding a paragraph if there is a significant uncertainty (other than 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. The addition of a paragraph emphasising 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.
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:
- there is a limitation on the scope of the auditor’s work; or
- 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.
The circumstances described in 1. could lead to a qualified opinion or a disclaimer of opinion. The circumstances described in 2. could lead to a qualified opinion 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, or limitation on scope is not so material and pervasive as to require a disclaimer of opinion. A qualified opinion should be expressed as being ‘subject to’ or ‘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 is, accordingly, unable to express an opinion on the financial statements. 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.
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), individually and in aggregate, on the financial statements should be mentioned in the auditor’s report. In circumstances where it is not practicable to quantify the effect of modifications made in the audit report accurately, the auditor may do so on the basis of estimates made the management after carrying out such audit tests as are possible and clearly indicate the fact that the figures are based on management estimates. Ordinarily, this information would be set out in a separate paragraph preceding the opinion or disclaimer of opinion and may include a reference to a more extensive discussion, if any, in a note to the financial statements.