Modified opinion
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Modified opinion
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Modified opinion
Material misstatements or non-compliance and/or lack of sufficient appropriate audit evidence can lead to a modified opinion. The auditor should describe the basis for modification.
Compliance audit
Financial audit
Reporting
Ref: 18.430
Principles
The objective of the auditor is to express clearly an appropriate modified opinion on the annual accounts and the underlying transactions that is necessary:
when the auditor concludes that the annual accounts are not free from
material
misstatement or the
underlying transactions
do not comply in all material respects with the applicable legal and regulatory framework; or
when the auditor is unable to obtain sufficient appropriate
audit evidence
to conclude that the annual accounts are free from
material
misstatement or that the underlying transactions comply in all material respects with the legal and regulatory framework.
Instructions
When a compliance audit is combined with a financial audit, the
opinion on the aspect of compliance
should be clearly separated from the
opinion on the financial statements
.
Types of modified opinion
The decision as to which type of modified opinion is appropriate depends upon:
the
nature of the matter
giving rise to the modification; and
the
auditor’s judgement
about the
pervasiveness
of the effects or possible effects of the matter on the annual accounts or the underlying transactions.
Three types of modified opinions can be summarised as follows:
Nature of matter giving rise to the modification
Material but not pervasive
Material and pervasive
Annual accounts are materially misstated, or underlying transactions do not comply, in all material respects, with the legal and regulatory framework
Qualified opinion
Adverse opinion
Inability to obtain sufficient appropriate audit evidence on which to base the opinion
Qualified opinion
Disclaimer of opinion
Qualified opinion
The auditor should express a
qualified opinion
:
when the auditor has obtained sufficient appropriate audit evidence and concludes that misstatements or instances of non-compliance, individually or in the aggregate, are material, but not pervasive, to the annual accounts or the underlying transactions; or
when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the possible effects on the annual accounts or underlying transactions of undetected misstatements are
material
but not
pervasive
.
Adverse opinion
The 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
pervasive
to the annual accounts or the underlying transactions.
Disclaimer of opinion
The auditor should
disclaim an opinion
on the financial statements when (s)he is unable to obtain sufficient appropriate
audit evidence
on which to base the opinion, and the possible effects on the annual accounts or the underlying transactions of undetected misstatements are both
material
and
pervasive
.
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 evidence
The auditor’s inability to obtain sufficient appropriate
audit evidence
(also referred to as a
limitation on the scope of the audit
) may arise from:
Circumstances beyond the control of the entity
Circumstances relating to the nature or timing of the auditor’s work
Limitations imposed by management
An inability to perform a specific procedure does not constitute a scope limitation if the auditor can obtain sufficient appropriate
audit evidence
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
audit evidence
on which to base an
unmodified opinion
.
If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor should determine the implications should either
qualify the opinion
or
disclaim an opinion
.
Pervasive effects
Pervasive 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
material
level of error, or is prevented from finding sufficient appropriate
audit evidence
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
ISA 705
(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
adverse opinion
.
Basis for modification paragraph
Separate heading
When 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 directly following 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.
Quantification
If 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 information
If 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 information
If 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 evidence
If the modification results from an inability to obtain sufficient appropriate
audit evidence
, the auditor should include in the Basis for Modification paragraph the reasons for that inability.
Other matters requiring modification
Even if the auditor has expressed an
adverse opinion
or
disclaimed an 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 paragraph
When 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 opinion
When the auditor expresses a
qualified 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 opinion
When the auditor expresses an
adverse 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 opinion
When 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 responsibility
In the case of a qualified or adverse opinion
When 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 opinion
When 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 governance
When 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:
the auditor to give notice to those charged with governance of the intended modification(s) and the reasons or circumstances for the modification(s);
the auditor to seek the concurrence of those charged with governance with regard to the facts of the matter(s) giving rise to the expected modification(s), or to confirm matters of disagreement with management as such; and
those charged with governance to have an opportunity, where appropriate, to provide the auditor with further information and explanations in respect of the matter(s) giving rise to the expected modification(s).
Resources
Examples
Modified opinions in ECA’s annual reports
Adverse opinion on the legality and regularity of payments underlying the accounts in the Annual report on the implementation of the budget concerning the financial year 2015.
Qualified opinion on the legality and regularity of payments underlying the accounts in the Annual report on the implementation of the budget concerning the financial year 2018.
Examples of material misstatements of the consolidated accounts
Examples of material instance of non-compliance
Related documents
Standards
ISSAI 200/63-65
ISA 705
Principles
Instructions
Types of modified opinion
Qualified opinion
Adverse opinion
Disclaimer of opinion
Inability to obtain sufficient appropriate audit evidence
Pervasive effects
Basis for modification paragraph
Modification paragraph
Consequential changes to description of auditor’s responsibility
Communication with those charged with governance
Resources
Examples
Last Modified
: 20/04/2023 18:34
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