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PrinciplesThe objective of the auditor is to express clearly an appropriate modified opinion on the annual accounts and the underlying transactions that is necessary:
InstructionsWhen a compliance audit is combined with a financial audit, the [link title="opinion%20on%20the%20aspect%20of%20compliance" link="%2Faware%2FCA%2FPages%2FReporting%2FForming-and-opinion-in-compliance-audit.aspx" /] should be clearly separated from the[link title="opinion%20on%20the%20financial%20statements" link="%2Faware%2FFA%2FPages%2FReporting%2FForming-an-opinion-in-financial-audit.aspx" /] .Types of modified opinionThe decision as to which type of modified opinion is appropriate depends upon:
Three types of modified opinions can be summarised as follows:
Qualified opinionThe auditor should express a qualified opinion:
Adverse opinionThe auditor should express an adverse opinion when (s)he has obtained sufficient appropriate audit evidence and concludes that misstatements or instances of non-compliance that are material individually or in the aggregate are [link title="pervasive" link="%23Pervasive-effects" /] to the annual accounts or the underlying transactions.Disclaimer of opinionThe auditor should disclaim an opinion on the financial statements when (s)he is unable to obtain sufficient appropriate [link title="audit%20evidence" link="%2Faware%2FGAP%2FPages%2FAudit-evidence.aspx" /] on which to base the opinion, and the possible effects on the annual accounts or the underlying transactions of undetected misstatements are both[link title="material" link="%2Faware%2FGAP%2FPages%2FCA-FA%2FPlanning%2FMateriality.aspx" /] and[link title="pervasive" link="%23Pervasive-effects" /] . In extremely rare cases involving multiple uncertainties, the auditor, despite having obtained sufficient appropriate audit evidence regarding each of the uncertainties, might conclude that it is not possible to form an opinion and should thus disclaim an opinion.Inability to obtain sufficient appropriate audit evidenceThe auditor’s inability to obtain sufficient appropriate [link title="audit%20evidence" link="%2Faware%2FGAP%2FPages%2FAudit-evidence.aspx" /] (also referred to as a limitation on the scope of the audit) may arise from:
An inability to perform a specific procedure does not constitute a scope limitation if the auditor can obtain sufficient appropriate [link title="audit%20evidence" link="%2Faware%2FGAP%2FPages%2FAudit-evidence.aspx" /] by performing alternative procedures. Limitations imposed by management may have other implications for the audit, e.g. for the auditor’s assessment of fraud risks. These legal bases give ECA the power to request and obtain sufficient appropriate audit evidence and do not afford much opportunity for auditee management to impose a limitation on ECA’s audit. In the rare event that, during the engagement, the auditor becomes aware that management has imposed a limitation on the scope of the audit which the auditor considers likely to result in the need to express a qualified opinion or to disclaim an opinion, the auditor should request the removal of the limitation. If management refuses the auditor’s request to remove a limitation that management has imposed on the scope of the audit, the auditor should communicate the matter with those charged with governance. When a limitation on the scope of the audit imposed by management is not removed, the auditor should determine whether it is ossible to perform alternative procedures to obtain sufficient appropriate[link title="audit%20evidence" link="%2Faware%2FGAP%2FPages%2FAudit-evidence.aspx" /] on which to base an[link title="unmodified%20opinion" link="%2Faware%2FGAP%2FPages%2FCA-FA%2FReporting%2FUnmodified-opinion.aspx" /] . If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor should determine the implications should either[link title="qualify%20the%20opinion" link="%23Qualified-opinion" /] or[link title="disclaim%20an%20opinion" link="%23Disclaimer-of-opinion" /] .Pervasive effectsPervasive effects are those that, in the auditor’s judgement, are not confined to specific elements, accounts or items of the financial statements (i.e. they are spread throughout the accounts or transactions tested), or, if they are so confined, they represent or could represent a substantial proportion of the financial statements, or relate to disclosures which are fundamental to users’ understanding of the financial statements. In the Statement of Assurance ECA only presents audit opinions at the overall level of the underlying transactions recorded in the accounts, not at that of the individual chapters of MFF headings. Determining whether errors are pervasive is also done at the level of the overall opinion. Where the auditor finds a [link title="material" link="%2Faware%2FGAP%2FPages%2FCA-FA%2FPlanning%2FMateriality.aspx" /] level of error, or is prevented from finding sufficient appropriate[link title="audit%20evidence" link="%2Faware%2FGAP%2FPages%2FAudit-evidence.aspx" /] for a material part of the balance sheet, revenue, or expenditure, (s)he must determine the impact on the audit opinion. This requires the auditor to determine whether the errors, or the absence of audit evidence, are pervasive or not. In doing so, the auditor applies the guidance contained in[link new-window title="ISA%20705" link="https%3a%2f%2fwww.ifac.org%2fsystem%2ffiles%2fpublications%2ffiles%2fIAASB-2020-Handbook-Volume-1.pdf%23INTERNATIONAL%2520STANDARD%2520ON%2520AUDITING%2520705%2520(REVISED)" icon="file-pdf-o" /] (extending this guidance to apply to issues of legality and regularity, in accordance with ECA’s wider mandate). Where errors are material and pervasive, the auditor presents an[link title="adverse%20opinion" link="%23Adverse-opinion" /] .Basis for modification paragraphSeparate headingWhen the auditor modifies the opinion on the annual accounts or underlying transactions, (s)he should include a paragraph in the auditor’s report that provides a description of the matter giving rise to the modification. The primary basis for a modified opinion is clearly specified errors identified during the audit. The auditor should place this paragraph immediately before the opinion paragraph in the auditor’s report and use the heading "Basis for Qualified Opinion," "Basis for Adverse Opinion," or "Basis for Disclaimer of Opinion," as appropriate. QuantificationIf a material misstatement of the annual accounts or error in the underlying transactions relates to specific amounts, the auditor should include in the Basis for Modification paragraph a description and quantification of the effects of the misstatement or error, unless impracticable. If it is not practicable to quantify the effects, the auditor should state as much in the Basis for modification paragraph. Disclosure of informationIf there is a material misstatement of the annual accounts that relates to narrative disclosures, the auditor should include in the Basis for Modification paragraph an explanation of how the disclosures are misstated. Non-disclosure of informationIf there is a material misstatement of the annual accounts or the underlying transactions that relates to the non-disclosure of information that is required to be disclosed, the auditor should discuss the matter with those charged with governance, describe in the Basis for Modification paragraph the nature of the omitted information and, unless prohibited by law or regulation, include the omitted disclosures, provided it is practicable to do so and the auditor has obtained sufficient appropriate audit evidence about the omitted information. Lack of audit evidenceIf the modification results from an inability to obtain sufficient appropriate [link title="audit%20evidence" link="%2Faware%2FGAP%2FPages%2FAudit-evidence.aspx" /] , the auditor should include in the Basis for Modification paragraph the reasons for that inability.Other matters requiring modificationEven if the auditor has expressed an [link title="adverse%20opinion" link="%23Adverse-opinion" /] or[link title="disclaimed%20an%20opinion" link="%23Disclaimer-of-opinion" /] on the annual accounts or the underlying transactions, the auditor should describe in the Basis for Modification paragraph the reasons for any other matters that would have required a modification to the opinion, and the effects thereof.Modification paragraphWhen the auditor modifies the audit opinion, the auditor should use the heading “Qualified Opinion", “Adverse Opinion" or “Disclaimer of Opinion" as appropriate, for the opinion paragraph. Expressing a qualified opinionWhen the auditor expresses a [link title="qualified%20opinion" link="%23Qualified-opinion" /] , (s)he should formulate the opinion along the following lines: A qualified opinion on the reliability of the annual accounts: “In our opinion, except for the effects of the matter(s) described in the Basis for Qualified Opinion paragraph, the [consolidated annual accounts] of [the auditee] present fairly, in all material respects, the financial position of [the auditee] as of [the date] and the results of their operations and cash flows for the year then ended, in accordance with the provisions of [the applicable financial reporting framework]." A qualified opinion on the legality and regularity of the underlying transactions: In our opinion, except for the effects of the matter(s) described in the Basis for Qualified Opinion paragraph, [the transactions underlying the consolidated annual accounts] of [the auditee] for the [period] are legal and regular in all material respects." When the modification arises from an inability to obtain sufficient appropriate audit evidence, the auditor should use the corresponding phrase “except for the possible effects of the matter(s) ..." for the modified opinion.Expressing an adverse opinionWhen the auditor expresses an [link title="adverse%20opinion" link="%23Adverse-opinion" /] , the auditor should formulate the opinion as follows: An adverse opinion on the reliability of the annual accounts: “In our opinion, because of the significance of the matter(s) described in the Basis for Adverse Opinion paragraph, the [consolidated annual accounts] of [the auditee] do not present fairly, in all material respects, the financial position of [the auditee] as of [the date] and the results of their operations and cash flows for the year then ended, in accordance with the provisions of [the applicable financial reporting framework]." An adverse opinion on the legality and regularity of underlying transactions: “In our opinion, because of the significance of the matter(s) described in the Basis for Adverse Opinion paragraph on the legality and regularity of [the transactions underlying the annual accounts] paragraph, [the transactions underlying the annual accounts] for the [period] are materially affected by error."Expressing a disclaimer of opinionWhen the auditor disclaims an opinion due to an inability to obtain sufficient appropriate audit evidence, the auditor should formulate the opinion as follows: A disclaimer of opinion on the reliability of the annual accounts: “Because of the significance of the matter(s) described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion and, accordingly, we do not express an opinion on the consolidated annual accounts." A disclaimer of opinion on the legality and regularity of the underlying transactions: “Because of the significance of the matter(s) described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion and, accordingly, we do not express an opinion on the underlying transactions." Consequential changes to description of auditor’s responsibilityIn the case of a qualified or adverse opinionWhen the auditor expresses a qualified or adverse opinion, (s)he should amend the description of the auditor’s responsibility to state that (s)he believes that the audit evidence (s)he has obtained is sufficient and appropriate to provide a basis for his/her modified audit opinion. In the case of a disclaimer of opinionWhen the auditor disclaims an opinion due to an inability to obtain sufficient appropriate audit evidence, (s)he should amend the introductory paragraph of the Statement of Assurance to state that (s)he was engaged to audit the annual accounts or underlying transactions. The auditor should also amend the description of the auditor’s responsibility and the description of the scope of the audit to state only the following: “Our responsibility is to express an opinion on the consolidated annual accounts (or the underlying transactions) based on conducting the audit in accordance with International Standards on Auditing. Because of the matter(s) described in the Basis for Disclaimer of Opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion." Communication with those charged with governanceWhen the auditor expects to modify the opinion in the Statement of Assurance, (s)he should communicate with those charged with governance the circumstances that lead to the expected modification and the proposed wording of the modification. Communicating with those charged with governance the circumstances that lead to an expected modification to the auditor’s opinion and the proposed wording of the modification enables:
ResourcesExamplesModified opinions in ECA’s annual reports[link new-window title="Adverse%20opinion%20on%20the%20legality%20and%20regularity%20of%20payments%20underlying%20the%20accounts%20in%20the%20Annual%20report%20on%20the%20implementation%20of%20the%20budget%20concerning%20the%20financial%20year%202015." link="https%3A%2F%2Fwww.eca.europa.eu%2Flists%2Fecadocuments%2Fannualreports-2015%2Fannualreports-2015-en.pdf%23page%3D13" icon="external-link" /] [link new-window title="Qualified%20opinion%20on%20the%20legality%20and%20regularity%20of%20payments%20underlying%20the%20accounts%20in%20the%20Annual%20report%20on%20the%20implementation%20of%20the%20budget%20concerning%20the%20financial%20year%202018." link="https%3A%2F%2Fwww.eca.europa.eu%2FLists%2FECADocuments%2Fannualreports-2018%2Fannualreports-2018_EN.pdf%23page%3D12" icon="external-link" /] [toggles] [toggle title="Examples%20of%20material%20misstatements%20of%20the%20consolidated%20accounts"] A material misstatement of the consolidated annual accounts may arise in relation to the: Appropriateness of the selected accounting policies, i.e. they
Application of the selected accounting policies, i.e. inconsistent application and unintentional misstatements in application. Appropriateness or adequacy of disclosures in the consolidated annual accounts, i.e.
[/toggle]
[toggle title="Examples%20of%20material%20instance%20of%20non-compliance"] A material instance of non-compliance of the transactions underlying the annual accounts (an error or deviation) may arise in relation to: The appropriateness of the compliance processes and policies, i.e. :
The application of rules, regulations and policies, i.e.
[/toggle] [/toggles] [/toc-this] When should an auditor express a qualified opinion?. 29 If the auditor concludes that a matter involving a risk or an uncertainty is not adequately disclosed in the financial statements in conformity with generally accepted accounting principles, the auditor should express a qualified or an adverse opinion. .
What is an example of a qualified opinion?Qualified opinion due to material misstatement
For example, the client's inventories were not at the lower of cost and net realizable value, and the client's management was not willing to write down the value of inventories to net realizable value. In this case, auditors need to qualify this matter in the audit report.
What is qualified opinion?A qualified opinion indicates that there was either a scope limitation, an issue discovered in the audit of the financials that were not pervasive, or an inadequate footnote disclosure. A qualified opinion is an auditor's opinion that the financials are fairly presented, with the exception of a specified area.
What are the 4 types of audit opinions?An adverse audit opinion can damage a company's status.. Unqualified opinion-clean report.. Qualified opinion-qualified report.. Disclaimer of opinion-disclaimer report.. Adverse opinion-adverse audit report.. |