In all cases an opinion on the financial statements will need to be included.

The opinion may be:

• An unmodified opinion: the auditor is satisfied that the evidence obtained is sufficient and appropriate and
supports the view presented in the financial statements prepared by the company’s management.
• A modified opinion: the auditor is either not satisfied with the sufficiency or appropriateness of the evidence
that has been obtained, compared with what could reasonably be expected, or has issues with the content of
the financial statements.
Emphasis of matter paragraphs and other matter paragraphs
The auditor should add an ‘emphasis of matter’ paragraph to the auditor’s report where the auditor considers it
necessary to draw users’ attention to a matter or matters presented or disclosed in the financial statements that
are of such importance that they are fundamental to users’ understanding of the financial statements.
The auditor should add an ‘other matters’ paragraph to the auditor’s report where the auditor considers it
necessary to draw users’ attention to any matter or matters other than those presented or disclosed in the financial
statements that are relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s
report.

Worked example: Qualified ‘except for’ opinion – material misstatement

An auditor is in disagreement with management regarding an accounting treatment. The details are as follows.
• Included in the debtors shown on the balance sheet is an amount of CUY which is the subject of litigation and
against which no provision has been made. The auditor considers that a full provision of CUY should have
been made.
For purposes of this auditor’s report, the following circumstances are assumed:
• Audit of a complete set of financial statements of a listed entity using a fair presentation framework. The audit is
not a group audit (i.e., ISA 60011 does not apply).
• The financial statements are prepared by management of the entity in accordance with IFRSs (a general purpose
framework).
• The terms of the audit engagement reflect the description of management’s responsibility for the financial
statements in ISA 210.
Requirement
Set out the opinion on the financial statements that the auditor should make in this instance.

Solution:
Qualified Opinion

In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion section of our
report, the accompanying financial statements present fairly, in all material respects,

Basis for Qualified Opinion

Included in the debtors shown on the balance sheet is an amount of CUY due from a company which has ceased
trading. XYZ Limited has no security for this debt. In our opinion the company is unlikely to receive any payment
and full provision of CUY should have been made. Accordingly, debtors should be reduced by CUY, deferred tax
liability should be reduced by CUX and profit for the year and retained earnings should be reduced by CUZ.

Worked example: Qualified ‘except for’ opinion – inability to obtain sufficient appropriate
audit evidence
An auditor was unable to observe a stock count because they were not engaged by the company at the time the
count took place. The details are as follows.
• The evidence available to the auditor was limited because they did not observe the counting of the physical
stock as at 31 December 20X1, since that date was prior to the time the auditor was initially engaged as
auditor for the company. Owing to the nature of the company’s records, the auditor was unable to satisfy
themselves as to stock quantities by other audit procedures.
For purposes of this auditor’s report, the following circumstances are assumed:

Audit of a complete set of consolidated financial statements of an entity other than a listed entity using a fair
presentation framework. The audit is a group audit of an entity with subsidiaries (i.e., ISA 600 applies).
• The consolidated financial statements are prepared by management of the entity in accordance with IFRSs (a
general purpose framework).
• The terms of the audit engagement reflect the description of management’s responsibility for the consolidated
financial statements in ISA 210.

Requirement
Set out the audit opinion on financial statements that the auditor should make in this instance.
Solution
• The limitation in audit scope causes the auditor to issue a modified opinion – except for any adjustments that
might have been found necessary had they been able to obtain sufficient evidence concerning stock.
• The inability to obtain sufficient appropriate audit evidence was determined by the auditor not to be so
material and pervasive as to require a disclaimer of opinion.

Qualified Opinion

In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion section of
our report, the accompanying consolidated financial statements present fairly, in all material respects,

Basis for Qualified Opinion

With respect to stock having a carrying amount of CUX the audit evidence available to us was limited because we
did not observe the counting of the physical stock as at 31 December 20X1, since that date was prior to our
appointment as auditor of the company. Owing to the nature of the company’s records, we were unable to obtain
sufficient appropriate audit evidence regarding the stock quantities by using other audit procedures.

Worked example: Disclaimer of opinion

An auditor was unable to observe all physical stock and confirm trade debtors during an audit. The details are as
follows.
• The evidence available to the auditor was limited because the auditor was not able to observe all physical
stock and confirm trade debtors due to limitations placed on the scope of the auditor’s work by the directors
of the company.
For purposes of this auditor’s report, the following circumstances are assumed:
• Audit of a complete set of consolidated financial statements of an entity other than a listed entity using a fair
presentation framework. The audit is a group audit of an entity with subsidiaries (i.e., ISA 600 applies).
• The consolidated financial statements are prepared by management of the entity in accordance with IFRSs (a
general purpose framework).
• The terms of the audit engagement reflect the description of management’s responsibility for the consolidated
financial statements in ISA 210.
Requirement
Set out the opinion that the auditor should make in this instance.

Solution
The auditor has been unable to form a view on the financial statements and issues a modified opinion disclaiming
the view given by the financial statements.

Disclaimer of Opinion

We do not express an opinion on the accompanying consolidated financial statements of the Group. Because of the
significance of the matter described in the Basis for Disclaimer of Opinion section of our report, we have not been
able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these consolidated
financial statements.

Basis for Disclaimer of Opinion

The audit evidence available to us was limited because we were unable to observe the counting of physical stock
having a carrying amount of CUX and send confirmation letters to trade debtors having a carrying amount of CUY
due to limitations placed on the scope of our work by the directors of the company. As a result of this we have
been unable to obtain sufficient appropriate audit evidence concerning both stock and trade debtors.

Worked example: Adverse opinion

A company being audited has made no provision for losses expected to arise on certain long-term contracts. The
details are as follows.
• No provision has been made for losses expected to arise on certain long-term contracts currently in progress,
as the directors consider that such losses should be off-set against amounts recoverable on other long-term
contracts.
For purposes of this auditor’s report, the following circumstances are assumed:
• Audit of a complete set of consolidated financial statements of a listed entity using a fair presentation framework.
The audit is a group audit of an entity with subsidiaries (i.e., ISA 600 applies).
• The consolidated financial statements are prepared by management of the entity in accordance with IFRSs (a
general purpose framework).

The terms of the audit engagement reflect the description of management’s responsibility for the consolidated
financial statements in ISA 210.
Requirement
Set out the opinion that the auditor should make in this instance.
Solution
• In the auditor’s opinion, provision should be made for foreseeable losses on individual contracts as required
by (specify accounting standards).
• The auditor issues an adverse opinion due to the failure to provide losses and quantifies the impact on the
profit for the year, the contract work in progress and deferred tax liability at the year end.

Adverse Opinion

In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion section of our
report, the accompanying consolidated financial statements do not present fairly (or do not give a true and fair
view of) the consolidated financial position of the Group as at December 31, 20X1, and (of) its consolidated
financial performance and its consolidated cash flows for the year then ended in accordance with International
Financial Reporting Standards (IFRSs).

Basis for Adverse opinion

As more fully explained in note x to the consolidated financial statements no provision has been made for losses
expected to arise on certain long-term contracts currently in progress, as the directors consider that such losses
should be off-set against amounts recoverable on other long-term contracts. In our opinion, provision should be
made for foreseeable losses on individual contracts as required by (specify accounting standards). If losses had
been so recognised the effect would have been to reduce the carrying amount of contract work in progress by
CUX, the deferred tax liability by CUY and the profit for the year and retained earnings at 31 December 20X1 by
CUZ.

Interactive question 4: Modified auditor’s report [Difficulty level: standard]

An auditor is considering possible modification of his auditor’s report on the financial statements of three separate
companies.
(1) Watkins Ltd is being sued by a customer for material damages. Legal opinion is divided as to the outcome of
(2) Pope Ltd suffered a flood at its head office and a significant number of accounting records have been
destroyed.
(3) Tilden Ltd has included an allowance for receivables of CU100,000 in the year end accounts. Obviously the
provision cannot be estimated with complete accuracy but the reporting partner believes it should be
materially higher.
Recommend, giving reasons, whether the opinion should be modified in each case.
the case, and all relevant information has been included in the notes.