AUDIT AND ASSURANCE

1. (a) A suitable criteria is the benchmark used to evaluate a subject matter for the purpose
of presentation and disclosure.

Required: Describe three characteristics of a suitable criteria. (6 marks) May 2018 Q5a

1. Relevance

The criteria must be relevant to the subject matter and the intended users’ decision-making
needs. It should provide useful information to assess performance or compliance.

2. Completeness

Suitable criteria must be complete, meaning they should not omit relevant factors that could
affect the subject matter. All aspects necessary for a fair evaluation should be included.

3. Reliability (or Objectivity)

The criteria should allow for consistent measurement or evaluation when used by different
practitioners under similar circumstances. This ensures that conclusions drawn are free from
bias and can be verified.

4. Understandability – clear and not overly complex for users to comprehend.

5. Neutrality – free from bias and does not favor any party.
6. Comparability – allows for comparison across periods or entities.

2. State the opinions you would give in the following situations:

1. Books taken by regulator and not available for audit.

2. Provision for doubtful debts was inadequate, but financial statements gave a true and fair
view.
3. No depreciation provided; directors unwilling to adjust. Provision would reduce profit by
30%.
4. Legal suit by a customer with slim chances of success, but no provisions were made.
November 2017 Q4c

1. Books taken by regulator and not available for audit

Reason:
There is a limitation of scope—the auditor was unable to obtain sufficient and appropriate
audit evidence, and the possible effects are material and pervasive. As the audit cannot be
completed, a disclaimer is appropriate.

2. Provision for doubtful debts was inadequate, but financial statements gave a true and
fair view
Opinion:
Unqualified (Unmodified) Opinion with Emphasis of Matter

Reason:
Though the provision is inadequate, the misstatement is not material enough to affect the true
and fair view. If the issue is disclosed appropriately in the notes, the auditor may include an
emphasis of matter paragraph, but still issue an unmodified opinion.

3. No depreciation provided; directors unwilling to adjust. Provision would reduce profit

by 30%

Opinion:
Qualified Opinion or Adverse Opinion

 Qualified – if material but not pervasive

 Adverse – if material and pervasive

Reason:
Not providing depreciation is a clear departure from accounting standards, significantly
overstating profits. Since the effect is a 30% profit reduction, it is likely material and
pervasive, which justifies an adverse opinion. If it's material but not pervasive, issue a
qualified opinion.

4. Legal suit by a customer with slim chances of success, but no provisions were made

Opinion:
Unqualified (Unmodified) Opinion, possibly with Emphasis of Matter

Reason:
If the legal suit has a low likelihood of resulting in loss, no provision is required under IAS 37.
However, if disclosed properly in the notes, the auditor can still issue an unmodified opinion. If
disclosure is missing or inadequate, a qualified opinion may be warranted due to material
misstatement.

a) Explain the term:

 Emphasis of matter paragraph

May 2017 — Question Five A

An Emphasis of Matter (EOM) paragraph is a paragraph included in the auditor’s report that
refers to a matter already presented or disclosed in the financial statements, which is of such
importance that it is fundamental to users’ understanding of the financial statements.

Key Features:

1. The matter is appropriately disclosed in the financial statements (usually in the notes).
2. The auditor does not modify the audit opinion.
 3. The paragraph is included after the opinion paragraph in the auditor's report.
4. The purpose is to draw users’ attention to an important issue that could significantly
affect how they interpret the financial statements.

Example Scenarios:

 Significant uncertainty due to pending litigation.

 A major natural disaster affecting the company’s operations.
 A note disclosing that the entity is a going concern, but the auditor agrees with the
management's use of the going concern assumption

Discuss five disclosure requirements that should be made in an audit report as specified in the
Companies Act.

May 2017 — Question One A

1. Opinion on Financial Statements

The auditor must clearly state whether the financial statements give a true and fair view of
the company’s financial position and performance in accordance with the relevant financial
reporting framework.

2. Basis for Opinion

The auditor must disclose the basis upon which the audit opinion is formed, including a
statement that the audit was conducted in accordance with International Standards on Auditing
(ISA) and that the auditor is independent of the company.

3. Responsibilities of Directors and Auditors

The report must outline the responsibilities of the directors for the preparation of financial
statements and the auditor’s responsibilities to express an opinion based on the audit.

4. Report on Other Legal and Regulatory Requirements

The auditor must report whether:

 Proper accounting records have been kept.

 The financial statements are in agreement with the records.
 All information and explanations required have been received.
 The company complied with requirements such as directors' remuneration disclosures.

5. Auditor’s Name, Signature, and Date

The audit report must include:

  The name of the auditor or audit firm.
 The signature of the auditor.
 The date of the report.
 The address of the auditor.
These ensure the report is traceable and enforceable.

6. (c) Describe four types of audit opinions that an auditor could issue. May 2016 — Question
Two C

1. Unqualified Opinion (Clean Opinion)

🔹 This is issued when the auditor concludes that the financial statements give a true and fair
view, in all material respects, in accordance with the applicable financial reporting framework.
🔹 It means there are no material misstatements and the auditor has obtained sufficient
appropriate audit evidence.

Example wording:

“In our opinion, the financial statements present fairly, in all material respects…”

2. Qualified Opinion

Issued when the auditor concludes that except for a specific issue (that is material but not
pervasive), the financial statements are fairly presented.
Arises from either a material misstatement or limitation of scope.

Example wording:

“In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion
paragraph…”

3. Adverse Opinion

Given when the auditor determines that misstatements are both material and pervasive, and
the financial statements do not present a true and fair view.
This opinion is very serious and indicates that users should not rely on the financial statements.

Example wording:

“In our opinion, because of the significance of the matters discussed… the financial statements
do not present fairly…”

4. Disclaimer of Opinion
 Issued when the auditor is unable to obtain sufficient appropriate audit evidence, and the
possible effects are both material and pervasive.
The auditor essentially refuses to express an opinion on the financial statements.

Example wording:

“Because of the significance of the matters described… we do not express an opinion on the
financial statements.”

QUESTION 8

(b) During the audit of Bamboo Ltd, you suspect irregularities in the procurement department
based on staff discussions.

Required: Explain six audit steps you would undertake to help arrive at an appropriate audit
opinion. May 2016 — Question One B

1. Conduct Detailed Walkthrough of Procurement Procedures

Understand the procurement process from requisition to payment by walking through actual
transactions. This helps identify any deviations from approved policies or control breakdowns.

2. Review Internal Controls Over Procurement

Evaluate whether controls such as segregation of duties, approval limits, supplier vetting, and
tendering procedures are in place and operating effectively.

3. Perform Substantive Testing on Procurement Transactions

Select a sample of purchases and inspect supporting documents (purchase orders, delivery notes,
invoices, and payment vouchers) to confirm:

 Existence
 Proper authorization
 Matching of documents
 Correct classification

4. Compare with Approved Procurement Budgets and Policies

Check whether actual procurement is in line with budgeted amounts and whether deviations were
properly approved. Review compliance with the company’s procurement manual.

5. Interview Key Procurement Staff and Management

Obtain explanations for any anomalies or irregularities. Compare responses across different
individuals for consistency. Also assess their understanding of the procurement policy.

6. Perform Data Analytics and Vendor Analysis

Use analytical procedures to identify unusual trends:

 Frequent purchases from the same supplier

 Round figure payments
 Duplicate payments or orders
 High-value procurements near year-end

Report Irregularities to Those Charged with Governance

QUESTION 9

(b) Natalie Wahito, auditor of JR Ltd, issued a report with a misleading statement about share
purchases. Many investors may rely on it.

Required: Advise three steps Natalie should take upon discovering the misleading statement in
the audit report. May 2015 — Question Five B

1. Notify Management and Those Charged with Governance

Natalie should immediately inform JR Ltd's management and the board or audit committee
about the misleading statement.
She should explain the nature and potential impact of the error and advise on the need to take
corrective action.

2. Consider the Need to Withdraw and Reissue the Report

If the misleading statement is material, Natalie should assess whether it’s necessary to:

 Withdraw the original audit report, and

 Issue a revised audit opinion that corrects the misstatement.
She must follow ISA 560 (Subsequent Events) procedures for events discovered after the
date of the auditor’s report.

3. Communicate with Relevant Authorities or Users

If management refuses to take appropriate action, and the auditor believes users are being
misled:

 She may need to inform regulators (e.g., CMA or ICPAK).

 Where legally permitted, she can also issue a public statement or alert intended users,
especially where the financial impact is significant.
She must also consider her professional duty of confidentiality versus the public
interest.

QUESTION 10

(b) Explain the meaning of the following types of audit opinion and indicate the circumstances
under which each can be issued:
  (i) Qualified opinion
 (ii) Unqualified opinion

(i) Qualified Opinion

Meaning:

A qualified opinion is issued when the auditor concludes that the financial statements are fairly
presented except for a specific issue that is material but not pervasive to the overall financial
statements.

Circumstances When Issued:

A qualified opinion may be issued under two main situations:

1. Material Misstatement — e.g., incorrect accounting treatment of a specific item like

inventory or depreciation.
2. Limitation of Scope — e.g., when the auditor is unable to obtain sufficient evidence on a
certain item due to restricted access or missing records.

Example: “Except for the effects of the understatement of inventory, the financial statements
present fairly…”

(ii) Unqualified Opinion (Clean Opinion)

An unqualified opinion (also called a clean opinion) is issued when the auditor concludes that
the financial statements present a true and fair view, in all material respects, and conform to
the applicable financial reporting framework.

Circumstances When Issued:

This opinion is given when:

 The auditor has obtained sufficient appropriate audit evidence, and

 There are no material misstatements, and
 The financial statements comply with the accounting standards and legal
requirements.

“In our opinion, the financial statements present fairly, in all material respects…”

(c) Discuss FIVE matters that should be included in an unqualified audit report. December 2014
— Question Six A and B
QUESTION 11

(a) Outline four qualities of a good audit report. May 2014 — Question One A

1. Clarity and Simplicity

o The report should be written in clear, simple, and unambiguous language.

o Technical terms should be explained or avoided if possible, especially for users
without an accounting background.

2. Completeness

o It should contain all essential information required by the standards, such as:
 Auditor’s opinion
 Basis for opinion
 Management and auditor responsibilities
 Date, signature, and auditor's address

3. Accuracy

o All figures, names, and statements should be factually correct and consistent
with the audited financial statements.

4. Independence

o The report must be written by an independent auditor, free from bias or undue
influence.

5. Objectivity

o The auditor’s conclusions should be based on sufficient and appropriate audit

evidence, not personal opinions.

6. Compliance with Auditing Standards

o The report must adhere to International Standards on Auditing (ISA) and any
relevant local regulations (like Companies Act in Kenya).

7. Timeliness

o The report should be issued within a reasonable time after the financial period
ends to ensure relevance for decision-making.

8. Consistency

o The format and structure of the report should follow standard practices to ensure
uniformity and ease of understanding across audits.
 9. Relevance

o It should address issues that are material and significant to the users of the
financial statements.

10.Professional Tone

 The report should maintain a formal and professional tone, reflecting the seriousness
and credibility of the audit process.

QUESTION 12

(b) With reference to ISA 700 (Forming an Opinion and Reporting on Financial Statements):

 (i) Highlight ten basic elements of the auditor’s report.

1. Title
o Must be titled "Independent Auditor’s Report" to emphasize the independence
of the auditor.
2. Addressee
o States to whom the report is addressed (e.g., shareholders, board of directors, or
members of the company).
3. Opinion Section
o Clearly states the auditor’s opinion on the financial statements and refers to the
framework used (e.g., IFRS).
o Should indicate whether the financial statements present a true and fair view or
are fairly presented.
4. Basis for Opinion
o A statement that the audit was conducted in accordance with ISAs.
o Confirms auditor's independence and ethical compliance.
o Description of the audit process and whether sufficient audit evidence was
obtained.
5. Key Audit Matters (if applicable)
o Optional for some entities, mandatory for listed/public interest entities.
o Highlights matters of most significance in the audit.
6. Responsibilities of Management and Those Charged with Governance
o Explains the responsibility of management for the preparation and fair
presentation of the financial statements.
o Includes management’s responsibility for internal control and assessing the
going concern assumption.
7. Auditor’s Responsibilities for the Audit of the Financial Statements
o Describes the auditor’s objectives, scope, and approach to the audit.
o Includes reference to the risk of material misstatement, whether due to fraud or
error.
8. Other Reporting Responsibilities (if applicable)
 o Includes requirements under local laws or regulations, e.g., Companies Act
reporting.
9. Signature of the Auditor
o The name of the audit firm or individual auditor, as required.
10. Auditor’s Address

 The location where the auditor operates or is registered.

11. Date of the Auditor’s Report

 The date when the auditor completed the audit and obtained sufficient audit evidence
to support the opinion.

 (ii) Distinguish between an “adverse opinion” and a “disclaimer of opinion.”

December 2013 — Question Five B

An adverse opinion is issued when the auditor concludes that the financial statements are
materially misstated and the misstatements are pervasive. i.e overstatement of assets or
revenue, significant non-disclosure of liabilities, non-compliance with accounting standards in a
widespread way. While a disclaimer of opinion is issued when the auditor is unable to obtain
sufficient appropriate audit evidence and the possible effects could be both material and
pervasive. i.e books and records unavailable due to fire, theft, or regulator seizure, management
imposes serious limitations on the audit scope and going concern doubts and no evidence to
assess them.

QUESTION 13

(b) Explain the contents of the main body of an audit report. June 2013 — Question Four B

1. Title

 Should clearly state that it is “Independent Auditor’s Report”

 Emphasizes the auditor’s independence from the entity being audited.

2. Addressee

 Specifies who the report is addressed to (e.g., shareholders, board of directors, or other
stakeholders).

3. Opinion Paragraph
  Contains the auditor’s conclusion on whether the financial statements:
o Give a true and fair view, or
o Are free from material misstatement
 The opinion can be unqualified, qualified, adverse, or disclaimer.

4. Basis for Opinion Paragraph

 Provides a justification for the auditor’s opinion.

 Must state that the audit was conducted in accordance with International Standards on
Auditing (ISAs).
 Confirms that the auditor is independent and has obtained sufficient appropriate audit
evidence.

5. Key Audit Matters (KAM) [if applicable]

 Describes the most significant matters during the audit of listed entities.
 Not required for all audits, mainly used for public interest entities.

6. Responsibilities of Management for the Financial Statements

 States that management is responsible for the preparation and fair presentation of
financial statements.
 Also responsible for internal controls, going concern assumptions, and prevention of
fraud and error.

7. Auditor’s Responsibilities for the Audit of the Financial Statements

 Explains the scope of the audit and what the auditor’s role includes:
o Assessing risks of material misstatement
o Evaluating internal controls
o Making audit judgments

8. Other Reporting Responsibilities (if any)

 Includes any other legal or regulatory requirements relevant to the audit.

9. Signature of Auditor

 Name or firm of the auditor who conducted the audit.

10. Date of the Auditor’s Report

 The date on which the auditor obtained sufficient appropriate audit evidence.

11. Auditor’s Address

 Indicates the physical or registered office of the audit firm.

QUESTION 14

(c) Explain the audit opinion that would be expressed in the following circumstances:

 (i) Going concern problem properly disclosed by directors

 (ii) Important records destroyed by fire before audit completion
 (iii) Directors refuse to sign a representation letter for audit purposes June 2012 —
Question Seven C

(i) Going concern problem properly disclosed by directors

Audit Opinion: Unqualified/Clear Opinion with a Material Uncertainty Related to Going

Concern Paragraph

 Explanation:
Since the going concern issue has been properly disclosed in the financial statements
and notes, the auditor doesn’t need to modify the opinion.
However, they must draw users' attention to this material uncertainty in a separate
paragraph titled "Material Uncertainty Related to Going Concern."

(ii) Important records destroyed by fire before audit completion

Audit Opinion: Qualified Opinion or Disclaimer of Opinion, depending on severity

 If the loss of records affects only part of the audit, and alternative procedures can
partially satisfy the auditor — Qualified Opinion (due to limitation of scope).
 If alternative audit procedures cannot provide sufficient appropriate evidence, and
the missing records are material and pervasive — Disclaimer of Opinion (auditor
unable to obtain sufficient evidence).

(iii) Directors refuse to sign a representation letter for audit purposes

Audit Opinion: Disclaimer of Opinion: A management representation letter is a key piece of

audit evidence. If directors refuse to sign, the auditor cannot obtain sufficient appropriate
audit evidence, which represents a limitation of scope. If the matter is material and pervasive,
the auditor must issue a disclaimer of opinion.

QUESTION 15

(c) Explain why a disclaimer is normally included when issuing a management letter to a client.

Required: Indicate the reasons why such statement might be necessary

(A disclaimer of opinion is a statement issued by the auditor when they are unable to obtain
sufficient appropriate audit evidence to form an opinion on the financial statements and the
possible effects of undetected misstatements could be both material and pervasive.)

1. Clarify That It Is Not an Audit Opinion

o The management letter does not express an opinion on the financial statements or
internal controls.
o The disclaimer emphasizes that the letter is informal and advisory, and separate
from the audit report.
2. Limit Auditor's Liability
o By stating that the letter is not a substitute for a formal audit report, the disclaimer
helps protect the auditor from legal claims based on misunderstandings of the
letter’s purpose.
o It limits the use of the letter to the intended users (usually management and those
charged with governance).
3. Highlight That Only Significant Matters Are Reported
o The disclaimer makes clear that only selected issues were brought to
management’s attention.
o Minor or less significant deficiencies may not be included, and absence of
mention does not mean such issues do not exist.
4. Emphasize Responsibility of Management
o The disclaimer reminds the client that maintaining effective internal controls is
the responsibility of management, not the auditor.
5. Avoid Misinterpretation
o Without a disclaimer, users might wrongly assume the auditor has conducted a
comprehensive review of all internal controls or business risks.
o The disclaimer prevents over-reliance on the management letter as a full
assessment.

Example of a disclaimer:

“This letter is intended solely for the information and use of management and those charged
with governance and is not intended to be, and should not be, used by anyone other than these
specified parties. Our audit was not designed to identify all deficiencies in internal control, and
accordingly, we do not express an opinion on the effectiveness of the entity’s internal control.”

QUESTION 16

a) Explain briefly the circumstances that necessitate the introduction of qualifying remarks in the
auditor's report.

Qualifying remarks refer to modifications made by the auditor in the audit report when the
auditor cannot issue a clean (unqualified) opinion due to certain issues in the financial
statements.
They are formal explanations or reservations added to the audit report to indicate that the
auditor has found material issues that affect part of the financial statements — but not to the
extent that the entire financial report is misleading.

December 2012 Question Four A

1. Limitation in Scope of the Audit

 The auditor is unable to obtain sufficient appropriate audit evidence about a specific
item.
 Example: Inability to verify inventory due to lack of access or incomplete records.

2. Disagreement with Management

 There is a disagreement between the auditor and management regarding:

o The application of accounting policies, or
o The adequacy of disclosures in the financial statements.
 Example: Management refuses to write off a material amount of bad debts.

3. Uncertainty

 There is a material uncertainty (e.g., ongoing litigation or going concern issues) that is
not appropriately disclosed in the financial statements.

4. Inadequate Disclosure

 The financial statements lack important disclosures required by the applicable financial
reporting framework, and the omission is material.

QUESTION 17

a) Explain four reasons which would compel an auditor to give an opinion that though a
company's accounts comply with all disclosure requirements, they do not portray a true and fair
view of the company's state of affairs.
May 2012 Question Seven C

1. Misleading Accounting Treatments (Substance Over Form Ignored)

o Transactions are structured legally to meet disclosure requirements but hide the
economic reality.
o Example: A sale-and-leaseback arrangement that looks like a sale but, in
substance, is a financing transaction.

2. Aggressive Accounting Estimates or Judgments

o Management uses unrealistic estimates (e.g., overly optimistic asset valuations

or revenue recognition) that distort the financial position.
 o Example: Recognizing revenue before it is earned.

3. Over-reliance on Legal Compliance

o The company discloses all items as required by law or standards, but the
arrangement of items, narrative, or classification is misleading.
o Example: Grouping non-operating income with operating income to inflate
profits.

4. Inappropriate Application of Accounting Policies

o The company applies acceptable accounting policies, but in an inappropriate

context or inconsistently, resulting in a misleading view.
o Example: Changing depreciation method without reasonable justification to
reduce expenses.

5. Omission of Key Non-Financial Information

o While all required financial disclosures are made, important contextual or

explanatory information is left out, leading users to the wrong conclusions.
o Example: Not disclosing a major lawsuit that affects going concern, even though
not yet required under a strict interpretation of the standards.

6. Window Dressing or Creative Accounting

o Management manipulates timing of transactions to inflate performance while

still staying within disclosure requirements.
o Example: Delaying expenses or bringing forward income inappropriately.

QUESTION 18

In the context of an auditor’s report:

a) Identify the matters included in the following:
i. Introductory paragraph.
ii. Statement of the auditor's responsibility.

(i) Introductory Paragraph – Matters Included:

The introductory paragraph of the auditor’s report provides essential background information.
It typically includes:

1. Identification of the Entity

o Name of the company being audited.
2. Identification of the Financial Statements Audited
 o Titles of the financial statements (e.g. statement of financial position, income
statement, cash flow statement, etc.).
3. Period Covered by the Financial Statements
o The financial year or period under audit.
4. Management’s Responsibility for the Financial Statements (Sometimes presented as a
separate section, depending on format)
o A general statement that the financial statements are the responsibility of the
entity’s management.

(ii) Statement of the Auditor’s Responsibility

This section explains what the auditor is expected to do and the scope of the audit. It includes:

1. Responsibility to Express an Opinion

o States that the auditor's responsibility is to express an opinion on the financial
statements based on the audit.
2. Conducted in Accordance with ISAs
o Confirms that the audit was conducted in accordance with International
Standards on Auditing (ISAs) or other relevant standards.
3. Description of the Audit Process
o A brief explanation that the audit involves:
 Performing procedures to obtain audit evidence,
 Assessing the risk of material misstatement,
 Evaluating the appropriateness of accounting policies,
 Assessing the reasonableness of estimates, and
 Evaluating the overall presentation of the financial statements.
4. Consideration of Internal Control (To the Extent Needed for Audit)
o States that internal control is considered only for audit planning, not for the
purpose of expressing an opinion on its effectiveness.

Key paragraphs in an auditor’s report and what each contains:

1. Title

 Matter included: Clearly states the report is from an independent auditor

 Example: “Independent Auditor’s Report”

2. Addressee

 Matter included: States to whom the report is addressed (e.g., shareholders or those
charged with governance)

3. Opinion Paragraph

 Matter included:
o A clear statement of the auditor’s opinion on whether the financial statements
give a true and fair view (or are presented fairly)
 o Identification of the financial reporting framework used (e.g., IFRS or national
GAAP)
o The financial statements covered, including the title of each statement and the
period

4. Basis for Opinion Paragraph

 Matter included:
o A statement that the audit was conducted in accordance with ISAs
o A reference to the auditor’s ethical responsibilities
o A statement that the auditor believes the audit evidence obtained is sufficient and
appropriate
o Description of any modifications, if applicable

5. Key Audit Matters (KAM) Paragraph (for listed entities)

 Matter included:
o Description of matters of most significance in the audit
o Explanation of why the matters were considered significant and how they were
addressed

6. Responsibilities of Management Paragraph

 Matter included:
o Management’s responsibility for the preparation and fair presentation of the
financial statements
o Their responsibility for internal controls
o Their assessment of the company’s going concern assumption

7. Auditor’s Responsibilities Paragraph

 Matter included:
o Description of the auditor’s role in obtaining reasonable assurance
o Explanation of the audit process (risk assessment, understanding internal
controls, evaluating accounting policies)
o Statement about ethical compliance and independence

8. Other Information Paragraph (if applicable, e.g., annual report content not
audited)

 Matter included:
o Identification of other information (e.g., Director’s Report)
o Auditor’s responsibilities relating to that information
o Statement on whether the auditor found any material inconsistencies

9. Report on Other Legal and Regulatory Requirements (where required)

  Matter included:
o Reference to additional responsibilities imposed by law or regulation (e.g.,
Companies Act compliance)
o Comments required by national standards

10. Name and Signature of Auditor

 Matter included:
o Name of the audit firm and partner (as required)
o Signature of the auditor

11. Auditor’s Address

 Matter included:
o Location of the audit firm

12. Date of the Auditor’s Report

 Matter included:
o The date on which the auditor completed the audit — no earlier than when
sufficient audit evidence was obtained

b) Briefly explain the circumstances that could give rise to disagreements between the
management and auditor.
May 2011 Question Five

QUESTION 19

a) Explain three types of qualified audit opinions and the circumstances in which each type of
opinion is issued by the auditor.
November 2010 Question Five A

1. Qualified Opinion

A qualified opinion is issued when the auditor identifies a material misstatement or a

limitation in scope, but concludes that the effect is not pervasive to the financial statements.

Circumstances:

 The auditor disagrees with management on a specific accounting treatment, or

 The auditor is unable to obtain sufficient appropriate audit evidence for a particular
item.

Example Situations:
  Inventory was not physically verified, and the auditor cannot confirm the balance.
 A company did not follow a required accounting standard for a single class of assets.

Wording Used:

"In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion
paragraph..."

2. Adverse Opinion

An adverse opinion is issued when the auditor concludes that misstatements are both material
and pervasive, and the financial statements do not present a true and fair view.

Circumstances:

 There is a significant and widespread disagreement with management over accounting

policies or disclosures.
 The misstatements affect many areas of the financial statements.

Example Situations:

 The company fails to consolidate subsidiaries that it controls.

 Management overstates assets and revenue across multiple areas.

Wording Used:

"In our opinion, because of the significance of the matters described in the Basis for Adverse
Opinion paragraph, the financial statements do not present fairly..."

3. Disclaimer of Opinion

A disclaimer of opinion is issued when the auditor is unable to obtain sufficient appropriate
audit evidence and concludes that the possible effects could be both material and pervasive.

Circumstances:

1. Significant Scope Limitation:

o Management refused to allow access to key accounting records and documents
related to major transactions, including sales and inventory.
2. Incomplete Records:
o The company lost its accounting records due to a fire, and no backup was
available.
o The auditor could not confirm cash balances or verify inventory quantities.
3. Going Concern Uncertainty:
o There is a pending legal case that could significantly impact the company’s
ability to continue as a going concern.
o Management did not provide adequate information or evidence on how they
plan to address the situation.
Example Situations:

 The auditor cannot verify revenue due to missing documentation.

 A company is under investigation, and the auditor cannot access key records.

4. Unqualified Opinion (Clean Opinion)

 The auditor concludes that the financial statements are free from material
misstatement and comply with the applicable financial reporting framework.

Circumstances:

 No material misstatements found.

 No scope limitations.
 Adequate and appropriate audit evidence obtained.

Situations

 All transactions were recorded accurately and supported by documentation.

 Financial statements were prepared using appropriate accounting policies.
 Management was cooperative and gave full access to records and personnel.
 No instances of fraud, error, or non-compliance were identified.
 Disclosures in the financial statements were adequate and complete.
 Auditor obtained sufficient appropriate audit evidence to support conclusions.

Key Phrase Used:

“In our opinion, the financial statements give a true and fair view...”

QUESTION 20

b) Explain the nature of the audit report that an auditor would issue in a situation of inherent
uncertainty.
November 2010 Question Seven B

(Uncertainty in Audit – Explained

In audit and assurance, uncertainty refers to situations where there is doubt about future
events or outcomes that can materially affect the financial statements, but whose outcome
cannot be known at the time of the audit.

Types of Uncertainty in Audit

1. Inherent Uncertainty
A condition where the outcome depends on future events not under the entity’s or auditor’s
control.

Examples of Inherent Uncertainty:

 A pending lawsuit with an uncertain outcome. Outcome of a legal case
 Doubt about the recoverability of a large receivable from a financially distressed
customer.
 Uncertainty over the going concern status of the entity.
 Tax disputes awaiting resolution by authorities.

2. Measurement Uncertainty
o Arises when items in the financial statements require significant estimation, and
actual results may differ.
o Example: Estimating the fair value of an investment in an illiquid market.
3. Uncertainty Due to Lack of Evidence
o Occurs when the auditor cannot obtain sufficient appropriate audit evidence
due to limited access to information or records.

Common Examples of Audit Uncertainties

 Pending lawsuits or regulatory investigations.

 Recoverability of a material loan or receivable.
 Valuation of complex financial instruments.
 Going concern doubts due to financial distress.
 Outcome of a tax dispute with revenue authorities.

Auditor’s Responsibilities Regarding Uncertainty

1. Assess the Adequacy of Management’s Disclosures

o The auditor must evaluate whether the uncertainty is properly disclosed in the
financial statements.
2. Evaluate the Impact on the Auditor’s Opinion
o If uncertainty is adequately disclosed and not pervasive, the auditor may issue
an unqualified opinion with an Emphasis of Matter paragraph.
o If the uncertainty is not disclosed or the auditor is unable to gather sufficient
evidence, the auditor may issue a qualified opinion or a disclaimer of opinion,
depending on materiality and pervasiveness.)

Nature of Audit Report Depends on Two Key Factors:

1. Is the uncertainty adequately disclosed by management?
2. Is the potential effect of the uncertainty material and/or pervasive?

Possible Types of Audit Opinions in Cases of Inherent Uncertainty:

🔸 (a) Unqualified Opinion (with Emphasis of Matter)
 Used when:
o The uncertainty is properly disclosed in the financial statements.
o The auditor believes the financial statements are not misstated.
 Auditor’s Action:
 o Adds an “Emphasis of Matter” paragraph to highlight the disclosed
uncertainty.
 Example:
“We draw attention to Note X in the financial statements, which describes the
uncertainty related to the outcome of the pending litigation...”
🔸 (b) Qualified Opinion
 Used when:
o The uncertainty is material, and
o Either it is not adequately disclosed, or
o The auditor is unable to obtain sufficient evidence, but the potential effects are
not pervasive.
 Example:
“Except for the possible effects of the matter described in the Basis for Qualified Opinion
paragraph...”
🔸 (c) Disclaimer of Opinion
 Used when:
o The uncertainty is both material and pervasive, and
o The auditor cannot obtain sufficient appropriate audit evidence, and
o The auditor cannot form an opinion.
 Example:
“Because of the significance of the matter described in the Basis for Disclaimer of
Opinion paragraph, we do not express an opinion on the financial statements.”

QUESTION 21

a) A final and overall review of audit evidence and the financial statements of a client by the
engagement partner who has the ultimate responsibility for committing the audit firm, when
signing the audit report is an important event in the audit process.
Required:
Indicate the matters that the engagement partner considers during such a review.

Matters that the engagement partners could consider during final and overall review of audit
evidence

1. Sufficiency and Appropriateness of Audit Evidence

 Has sufficient appropriate audit evidence been obtained to support the audit opinion?
 Have all material items and significant risks been adequately addressed?

2. Compliance with Applicable Financial Reporting Framework

 Are the financial statements prepared in accordance with the relevant framework (e.g.,
IFRS, IAS, or local GAAP)?
 Are the accounting policies applied consistently and appropriately?

3. Disclosure and Presentation

  Are all material disclosures included and clear?
 Are the financial statements fairly presented and not misleading?
 Do the financial statements comply with statutory and regulatory requirements?

4. Materiality and Misstatements

 Have all material misstatements been corrected?

 If any uncorrected misstatements remain, are they clearly documented, and is their
impact on the audit opinion assessed?

5. Resolution of Significant Issues

 Were all significant audit issues, including those raised by the audit team,
appropriately resolved?
 Have all differences of opinion been documented and resolved?

6. Going Concern Assessment

 Has the client’s ability to continue as a going concern been thoroughly evaluated?
 Are appropriate disclosures made if there is any uncertainty?

7. Communication with Those Charged with Governance

 Were key audit matters and significant findings communicated to the board or audit
committee as required?
 Are management representations appropriately documented?

8. Compliance with Auditing Standards and Firm Policies

 Was the audit conducted in compliance with International Standards on Auditing

(ISAs)?
 Did the team follow the firm’s quality control procedures, including supervisory
reviews?

9. Audit Documentation

 Is the audit file complete, clear, and well-organized?

 Can a reviewer understand the work performed, the evidence obtained, and the
conclusions reached?

10. Final Audit Opinion

 What type of audit opinion is appropriate (unqualified, qualified, adverse, or disclaimer)?

 Is the auditor’s report properly drafted, including the correct wording for the opinion,
basis, and any additional paragraphs (e.g., Emphasis of Matter)?
b) Outline the consequences of an unqualified audit report to a company.

1. Enhanced Credibility and Trust

 Investors, creditors, and stakeholders gain confidence in the financial statements.

 Promotes trust in the company’s financial management and internal controls.

2. Easier Access to Financing

 Banks and other lenders are more willing to offer loans or credit.
 May lead to better loan terms, such as lower interest rates.

3. Improved Public Image and Reputation

 A clean opinion signals good governance, strong internal controls, and financial
health.
 Attracts investors, business partners, and new customers.

4. Positive Impact on Share Price

 For listed companies, an unqualified audit opinion may lead to increased investor
confidence, potentially raising the market value of shares.

5. Compliance with Legal and Regulatory Requirements

 Satisfies requirements by regulators, stock exchanges, and tax authorities.

 Helps avoid penalties or investigations arising from poor financial reporting.

6. Stronger Negotiating Position

 Helpful during mergers, acquisitions, or tendering processes, where accurate and

trustworthy financial records are crucial.

7. Internal Benefits

 Reinforces to management and staff that internal controls are effective and financial
practices are sound.
 Encourages a culture of compliance and accountability within the organization.

c) State and explain the audit opinion that would be expressed in the following circumstances:
i. Failure by the directors of a company to apply an accounting standard.
ii. Where the directors of a company did not permit the auditor to carry out debtors'
circularization.
iii. Where a company’s motor vehicle was not disclosed in the books of account of the company.
June 2010 Question Six

i. Failure by the directors of a company to apply an accounting standard

  Audit Opinion:
Qualified opinion or Adverse opinion, depending on materiality and pervasiveness.
 Explanation:
Failure to apply an accounting standard results in non-compliance with the financial
reporting framework.
o If the effect is material but not pervasive, the auditor issues a qualified opinion.
o If the effect is material and pervasive, the auditor issues an adverse opinion.

Example: If directors fail to apply IFRS 16 (Leases) and this misstates liabilities and expenses
significantly across the financial statements, it may lead to an adverse opinion.

ii. Where the directors did not permit the auditor to carry out debtors'
circularization

 Audit Opinion:
Disclaimer of opinion or Qualified opinion, depending on the significance of the
limitation.
 Explanation:
This is a limitation of scope — the auditor was restricted from obtaining sufficient
appropriate audit evidence.
o If the limitation is material but not pervasive, issue a qualified opinion.
o If material and pervasive, issue a disclaimer of opinion.

Example: If accounts receivable is a significant portion of the balance sheet and alternative
procedures are not possible, the auditor will issue a disclaimer.

iii. A company’s motor vehicle was not disclosed in the books of account

 Audit Opinion:
Qualified opinion or Adverse opinion, depending on size and impact of the omission.
 Explanation:
This is a material misstatement by omission.
o If the motor vehicle is material but not pervasive, issue a qualified opinion.
o If the omission is material and pervasive, and it affects users' understanding of
the financial position, issue an adverse opinion.

Example: If the vehicle is a major asset and was intentionally omitted, it may also raise concerns
about fraud, leading to an adverse opinion.

QUESTION 22

b) With respect to an auditor’s report, distinguish between the following sets of terms:
i. Disclaimer of opinion and adverse opinion.
ii. Unqualified opinion and qualified opinion.

i. Disclaimer of Opinion vs. Adverse Opinion

Aspect Disclaimer of Opinion Adverse Opinion

 Meaning The auditor is unable to form an The auditor concludes that the
opinion on the financial statements financial statements are materially
due to lack of sufficient appropriate misstated and the misstatements are
audit evidence. pervasive.
Reason Due to a limitation of scope (e.g. The auditor obtains sufficient
records unavailable, client restrictions), evidence, but it reveals that the
the auditor cannot obtain sufficient financial statements are not true and
audit evidence. fair.
Conclusion No opinion can be expressed. A negative opinion is expressed — the
financial statements do not present a
true and fair view.
Wording “We do not express an opinion…” “In our opinion, the financial
statements do not present fairly…”

ii. Unqualified opinion and qualified opinion.

Aspect Unqualified Opinion (Clean Opinion) Qualified Opinion

Meaning The financial statements are true and The financial statements are mostly
fair, and comply with the applicable true and fair, except for a specific
reporting framework. material issue.
Reason No material misstatements or audit A material misstatement exists, or
limitations identified. there’s a limitation of scope, but it is
not pervasive.
Conclusion Auditor expresses full confidence in the Auditor expresses partial confidence,
statements. with exceptions.
Wording “In our opinion, the financial “In our opinion, except for the matter
statements present fairly…” described… the financial statements
present fairly…”

c) Briefly describe three circumstances in which an auditor would be required to include and
emphasize a separate paragraph in his audit report.
August 2009 Question Six B and C

Circumstances Requiring an Emphasis of Matter Paragraph

1. Significant Uncertainty
o There is an inherent or significant uncertainty (e.g. pending litigation, regulatory
investigation, or tax dispute) that may affect future financial outcomes.
o Example: A court case whose outcome could materially affect the financial
position.
2. Going Concern Uncertainty
o Where the company’s ability to continue as a going concern is in significant
doubt, but adequate disclosure has been made in the notes to the financial
statements.
o Example: A company facing liquidity problems but with disclosures that satisfy
ISA 570.
 3. Early Application of a New Accounting Standard
o The entity applies a new accounting standard before its mandatory effective
date, and it has a material effect on the financial statements.
4. Catastrophic Events
o Events like natural disasters, pandemics, or civil unrest that have a material
impact on the financial statements and are properly disclosed.
o Example: A company’s factory was destroyed by fire and the loss is adequately
disclosed.
5. Major Subsequent Events
o Significant events that occur after the reporting period but before the financial
statements are authorized for issue, which require disclosure.

QUESTION 24

a) Briefly explain the meaning of the following terms in relation to audit reports:
i. Except for opinion
ii. Disclaimer of opinion

i. "Except for" Opinion (Also known as a Qualified Opinion)

 This is issued when the auditor concludes that the financial statements are fairly
presented, except for the effects of a specific matter that is material but not
pervasive.
 The issue may arise due to:
o A material misstatement, or
o A limitation in the scope of the audit.
 The auditor’s report includes a statement such as:

“In our opinion, except for the effects of the matter described in the Basis for Qualified
Opinion paragraph, the financial statements present fairly…”

 Example: A company fails to write down obsolete inventory, and the misstatement is
material but limited to inventory only.

ii. Disclaimer of Opinion

 A disclaimer of opinion is issued when the auditor is unable to obtain sufficient

appropriate audit evidence, and the possible effects of undetected misstatements are
both material and pervasive.
 It means the auditor does not express an opinion on the financial statements.
 The auditor’s report includes wording like:

“We do not express an opinion on the financial statements…”

 Example: The auditor is denied access to key accounting records, and alternative
procedures cannot be performed.
b) Sh.6,048,000 out of total assets of Sh.19,200,000. This stock figure was obtained by a
physical count as at 31 October 2004, and valuation by reference to purchase invoices and
manufacturing cost estimates.
Required:
With reference to each of the matters listed below, state the work you would do to conclude
whether the amount attributed to stock is fairly stated:
i. Quantities
ii. Identification of stock items
iii. Condition of stock items
iv. Cut-off procedures
v. Valuation of stock
May 2005 Question One C and D

i. Quantities

Objective: Ensure that the quantity of inventory recorded is accurate.

Audit Work:

 Attend the stock count (if conducted after year-end, perform roll-back procedures to
confirm year-end balances).
 Observe and verify counting procedures during the physical inventory count.
 Test count selected inventory items and compare with inventory sheets.
 Review reconciliation between physical count records and general ledger.
 Check for completeness — ensure all locations/items were included.

ii. Identification of Stock Items

Objective: Ensure that stock is correctly described and recorded.

Audit Work:

 Verify labeling or coding of items to ensure accurate description and traceability.

 Review stock records, bin cards, or inventory management system for accuracy.
 Match stock items with purchase invoices, production records, and sales documents.
 Test a sample of recorded items against physical stock to confirm correct identification.

iii. Condition of Stock Items

Objective: Ensure the stock is in saleable or usable condition.

Audit Work:

 Inspect items for damage, obsolescence, or deterioration.

 Inquire from management about slow-moving or obsolete inventory.
 Review inventory aging reports.
 Confirm whether any stock is held for repair, disposal, or return.
 Assess whether provisions or write-downs are needed for obsolete items.
iv. Cut-off Procedures

Objective: Ensure inventory transactions are recorded in the correct accounting period.

Audit Work:

 Review goods received notes (GRNs) and goods dispatched notes (GDNs) around
year-end.
 Inspect sales invoices and purchase invoices close to year-end.
 Check whether stock in transit is properly recorded.
 Confirm that stock movements near year-end are included/excluded appropriately based
on FOB/FOC terms.

v. Valuation of Stock

Objective: Ensure inventory is valued at the lower of cost and net realizable value in
accordance with IAS 2.

Audit Work:

 Re-perform calculations based on cost formulas (FIFO, weighted average, etc.).

 Examine purchase invoices, cost build-up, or manufacturing cost sheets to verify cost
basis.
 Compare carrying amounts with selling prices to test for net realizable value.
 Review price trends and inventory turnover ratios.
 Assess any need for provisions or write-downs for slow-moving or obsolete stock.

QUESTION 25

b) You are the auditors of Mount Elgon Ltd. You are carrying out a review of the accounts for
the financial year ended 31 October 2004 with a view of signing the audit report. During this
review, you have noted the following matters:

1. No depreciation has been provided on plant and machinery for the financial year ended
31 October 2004. This is because the directors of Mount Elgon Ltd. feel that the value of
the plant and machinery is in excess of the amount at which it is stated in the financial
statement.
2. Some sections of the company’s stocktaking records were accidentally destroyed.
Consequently, the value attributed to stocks as at 31 October 2004 is only estimated by
the directors of Mount Elgon Ltd.

Required:
i. What would be your audit opinion with regard to the matter referred to in (1) above?
ii. Draft an audit report expressing your specific reservations with regard to (2) above
November 2004 Question Seven B
(i) Audit Opinion for Matter (1): No Depreciation Provided

Issue:
No depreciation has been charged on plant and machinery, despite the asset being used. The
directors argue that the asset’s value exceeds the carrying amount.

Audit Evaluation:

 IAS 16 (Property, Plant and Equipment) requires that depreciation be charged

systematically over the asset’s useful life, regardless of whether the asset’s fair value is
higher than its carrying amount.
 Failure to charge depreciation results in non-compliance with accounting standards
and overstatement of assets and profits.

Conclusion:
This is a material misstatement due to non-compliance with IAS 16. If the impact is not
pervasive, you would issue a Qualified Opinion.

Qualified Opinion Wording (for matter 1):

Basis for Qualified Opinion

The company has not provided depreciation on its plant and machinery for the year ended 31
October 2004. This is not in accordance with International Accounting Standard 16 – Property,
Plant and Equipment, which requires that assets be depreciated over their useful lives. Had
depreciation been provided, the carrying amount of plant and machinery would have been lower,
and the net profit correspondingly reduced.

Qualified Opinion
In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion
paragraph, the financial statements present fairly, in all material respects, the financial position
of Mount Elgon Ltd. as at 31 October 2004, and its financial performance and its cash flows for
the year then ended in accordance with International Financial Reporting Standards.

(ii) Audit Report Draft with Specific Reservation – Matter (2): Stock Records
Destroyed

Issue:
Some stock records were destroyed. Stock value as at 31 October 2004 is based on
management estimates, with no sufficient appropriate audit evidence to verify inventory
valuation.

Audit Evaluation:

 This represents a limitation of scope.

 If alternative procedures cannot be performed to obtain audit evidence, and the stock is
material but not pervasive, a Qualified Opinion is appropriate.
 If the stock is material and pervasive, then a Disclaimer of Opinion is issued.
Let’s assume in this case that the limitation is material but not pervasive.

Draft Wording for Qualified Opinion Due to Limitation of Scope (for matter 2):

Basis for Qualified Opinion

We were unable to obtain sufficient appropriate audit evidence concerning the valuation of
inventories as at 31 October 2004, which are stated at Sh. X in the financial statements. The
company’s stock records were partially destroyed, and we were unable to carry out alternative
procedures to verify the accuracy of the estimated inventory figures provided by management.

Qualified Opinion
In our opinion, except for the possible effects of the matter described in the Basis for Qualified
Opinion paragraph, the financial statements present fairly, in all material respects, the financial
position of Mount Elgon Ltd. as at 31 October 2004, and its financial performance and its cash
flows for the year then ended in accordance with International Financial Reporting Standards.

INDEPENDENT AUDITOR’S REPORT

TO THE MEMBERS OF MOUNT ELGON LTD.

Report on the Audit of the Financial Statements

We have audited the financial statements of Mount Elgon Ltd. for the year ended 31 October
2004, which comprise the balance sheet, the income statement, statement of changes in equity,
and cash flow statement, together with the notes, including a summary of significant accounting
policies.

Management’s Responsibility for the Financial Statements

The directors are responsible for the preparation and fair presentation of these financial
statements in accordance with International Financial Reporting Standards (IFRSs) and for such
internal control as management determines is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We
conducted our audit in accordance with International Standards on Auditing. Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from material misstatement.

Basis for Qualified Opinion

1. Depreciation on Plant and Machinery

The company has not provided depreciation on plant and machinery for the year ended 31
October 2004. In our opinion, this is not in accordance with International Accounting
Standard (IAS) 16, which requires that depreciation be systematically allocated over the
useful life of the asset. The effect of this is to overstate the carrying amount of plant and
 machinery, understate depreciation expense, and overstate profit for the year. We are
unable to quantify the misstatement as no depreciation calculations were provided.
2. Limitation of Scope – Inventory Valuation
Certain sections of the company’s stocktaking records were destroyed. As a result, the
value of inventory as at 31 October 2004 has been estimated by the directors. We were
unable to obtain sufficient appropriate audit evidence to verify the existence and
valuation of inventory due to this limitation. Consequently, we could not determine
whether any adjustments to the stated inventory balance of Sh. X are necessary.

Qualified Opinion

In our opinion, except for the possible effects of the matters described in the Basis for
Qualified Opinion paragraph, the financial statements present fairly, in all material respects,
the financial position of Mount Elgon Ltd. as at 31 October 2004, and of its financial
performance and cash flows for the year then ended in accordance with International Financial
Reporting Standards.

Report on Other Legal and Regulatory Requirements

As required by the Companies Act, we have obtained all the information and explanations which,
to the best of our knowledge and belief, were necessary for the purpose of our audit.

Gyene Timothy Alaka

Certified Public Accountants
G.A Consult anting
29/07/2025
gyenea@yahoo.co.uk

QUESTION 26

a) What is the purpose of an audit report?

b) List six contents of an unqualified audit report
c) Identify and briefly explain four situations under which an auditor would consider
qualification of an audit report
d) Explain the meaning of the following terms in relation to audit reports:
i. Limitation in the scope of the audit
ii. Emphasis of matter
June 2004 Question Seven

The purpose of an audit report is to:

1. To Provide an Independent Opinion

The primary purpose is to express the auditor’s independent opinion on whether the financial
statements are prepared, in all material respects, in accordance with the applicable financial
reporting framework (e.g., IFRS, GAAP).
2. To Enhance Credibility of Financial Statements

An audit report increases stakeholders' confidence in the financial statements by confirming

that they have been reviewed by a competent and independent professional.

3. To Fulfill Legal and Regulatory Requirements

Many laws and regulations require companies to have their financial statements audited and
presented along with an audit report. This promotes transparency and accountability.

4. To Communicate Key Findings

The report communicates significant findings, such as:

 Material misstatements
 Uncertainties (e.g., going concern doubts)
 Key audit matters
 Limitations of scope (if any)

5. To Support Decision-Making

Investors, creditors, regulators, and other users of financial statements rely on the audit report to
make informed decisions about investing, lending, or regulatory action.

(b) Six Contents of an Unqualified (Clean) Audit Report

An unqualified audit report (also called a clean opinion) includes the following key elements
in accordance with ISA 700:

1. Title – e.g., “Independent Auditor’s Report”

2. Addressee – To whom the report is directed (e.g., shareholders)
3. Opinion Paragraph – States the auditor’s opinion on the financial statements
4. Basis for Opinion Paragraph – Explanation of how the audit was conducted, including
compliance with ISAs
5. Responsibilities of Management – Description of management's responsibility for the
financial statements
6. Auditor’s Responsibilities – Description of the auditor’s responsibility for expressing an
opinion

Others include: the auditor’s signature, audit firm address, date of report, and other legal or
regulatory reporting responsibilities.

(c) Four Situations Where an Auditor May Qualify an Audit Report

An auditor may consider qualifying the audit opinion when:

1. Disagreement with Management

o E.g., Failure to apply an accounting standard or incorrect valuation of assets.
 2. Limitation in Scope of Audit
o E.g., Inability to verify inventory due to destroyed stock records.
3. Inadequate Disclosure
o E.g., Financial statements lack required disclosures for contingent liabilities or
related party transactions.
4. Uncertainty
o E.g., Significant doubt exists about the going concern assumption that is not
adequately disclosed.

The type of qualification (Qualified Opinion, Adverse Opinion, or Disclaimer of Opinion)

depends on the materiality and pervasiveness of the issue.

(d) Meaning of the Following Terms in Audit Reports

i. Limitation in the Scope of the Audit

This refers to a situation where the auditor is unable to obtain sufficient appropriate audit
evidence to form a basis for an opinion.
Examples:

 Records are missing or incomplete.

 Management denies access to key information or people.
Depending on the impact, this may lead to a qualified opinion or disclaimer of opinion.

ii. Emphasis of Matter

An Emphasis of Matter paragraph is used to draw users’ attention to a matter already

properly disclosed in the financial statements that is fundamental to understanding them.
It does not modify the auditor’s opinion.
Examples include:

 Significant uncertainties (e.g., pending legal case).

 Early adoption of a new accounting standard.
 Going concern issues with adequate disclosure.