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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
[link title="material" link="%2Faware%2FGAP%2FPages%2FCA-FA%2FPlanning%2FMateriality.aspx" /]
misstatement or the [link title="underlying%20transactions" link="%2Faware%2FCA%2FPages%2FConcepts%2FUnderlying-transactions.aspx" /]
do not comply in all material respects with the applicable legal and regulatory framework; or
- when the auditor is unable to obtain sufficient appropriate
[link title="audit%20evidence" link="%2Faware%2FGAP%2FPages%2FAudit-evidence.aspx" /]
to conclude that the annual accounts are free from [link title="material" link="%2Faware%2FGAP%2FPages%2FCA-FA%2FPlanning%2FMateriality.aspx" /]
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 [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 opinion
The decision as to which type of modified opinion is appropriate depends upon:
Three types of modified opinions can be summarised as follows:
|
Nature of matter giving rise to the modification
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Material but not pervasive
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Material and pervasive
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Annual accounts are materially misstated, or underlying transactions do not comply, in all material respects, with the legal and regulatory framework
|
Qualified opinion
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Adverse opinion
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|
Inability to obtain sufficient appropriate audit evidence on which to base the opinion
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Qualified opinion
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Disclaimer of opinion
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Qualified opinion
The auditor should express a qualified opinion:
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 [link title="pervasive" link="%23Pervasive-effects" /]
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 [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 evidence
The 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:
- 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 [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 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 [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 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 [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 modification
Even 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 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 [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 opinion
When 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 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
[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" /]
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A material misstatement of the consolidated annual accounts may arise in relation to the:
Appropriateness of the selected accounting policies, i.e. they
- are inconsistent with the applicable financial reporting framework;
- are inappropriate in the circumstances; or
- result in the annual accounts not representing the underlying transactions and events in a manner that achieves fair presentation. Financial reporting frameworks often contain requirements for the accounting for, and disclosure of, changes in accounting policies. Where the entity has changed its selection of significant accounting policies, a material misstatement of the financial statements may arise when the entity has not complied with these requirements;
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.
- all required disclosures are not included;
- disclosures in the consolidated annual accounts are not presented in accordance with the applicable financial reporting framework; or
- the consolidated annual accounts do not provide the disclosures necessary to achieve fair presentation.
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[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. :
- they are not consistent with the applicable legal and regulatory framework;
- they are not appropriate in the circumstances; or
- they result in the transactions underlying the annual accounts not complying in all material aspects with the legal and regulatory framework.
The application of rules, regulations and policies, i.e.
- inconsistent application whether in terms of required timeframe or similar transactions and events;
- incorrect method of application, or when there is disagreement with management about the underlying facts and circumstances to which the rules, etc., are applied; or
- when the entity has not complied with new requirements following a change in rules, etc.
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