Modified Audit Opinions

Reasons for modifying the opinion

There are two reasons why an auditor would be unable to give an unmodified audit opinion:

• they conclude that the financial statements as a whole are not free from material misstatements; or
• they have been unable to obtain sufficient appropriate evidence to conclude that the financial statements as a whole are free from material misstatement.

Materiality and pervasiveness

If the auditor comes to either of the above conclusions they must then consider how significant the matter is. If the matter is considered immaterial then it should not affect the wording of the opinion and a 'present fairly' or 'true and fair' wording may be used.

However, if the auditor concludes that the matter is material they must modify the wording of their opinion. If, in addition to being material, the auditor considers the matter to be pervasive to the financial statements, then this must also be incorporated into the audit opinion (as shown below). Pervasive means that the matter is:

• not confined to specific elements of the financial statements;
• if confined represents a substantial proportion of the financial statements; or
• is fundamental to users understanding of the financial statements.

Wording a modified opinion

The affects on the wording of the opinion can be summarised as follows:

When the auditor modifies their opinion they have to include a 'Basis for Modification Paragraph' in the audit report that describes the matter giving rise to the modification. This paragraph should be placed before the opinion paragraph.

With a qualified opinion the auditor is basically stating that whilst there are, or maybe, material misstatements, they are confined to a specific element of the financial statements but the remainder may be relied upon. Accordingly the opinion usually states that "except for the matters described in the basis for modification paragraph, the financial statements present fairly (or give a true and fair view of) ............."

If the auditor concludes that the matter is pervasive they are claiming that the financial statements may not be relied upon in any part. Accordingly:

• if they give an adverse opinion they will state that the financial statements "do not present fairly (or give a true and fair view of).........."
• if they give a disclaimer they will state that they "do not express an opinion on the financial statements."

Illustration of a qualified opinion

Example of wording where the auditor concludes that the financial statements contain a material, but not pervasive, misstatement:

Basis for Qualified Opinion

As discussed in Note X to the financial statements, no depreciation has been provided in the financial statements which practice, in our opinion, is not in accordance with International Financial Reporting Standards. The provision for the year ended 31 December, 20X9, should be $xxx based on the straight-line method of depreciation using annual rates of 5% for the building and 20% for the equipment. Accordingly, the non-current assets should be reduced by accumulated depreciation of $xxx and the loss for the year and accumulated deficit should be increased by $xxx and $xxx, respectively.

Opinion

In our opinion, except for the effect on the financial statements of the matter referred to in the Basis for Qualified Opinion paragraph, the financial statements present fairly in all material respects (or give a true and fair view of) the financial position ...................(remainder of wording as per an unmodified report).

Illustration of a qualified opinion

Example where the auditor concludes that they have been unable to gather sufficient appropriate evidence and the possible effects are deemed to be material but not pervasive.

Basis for Qualified Opinion

We did not observe the counting of the physical inventories as at 31 December 20X9, since that date was prior to our appointment as auditor to the company. Owing to the nature of the company's records, we were unable to satisfy ourselves as to inventory quantities by other audit procedures.

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 (or give a true and fair view of) the financial position............

Illustration of an adverse opinion

Example where the auditor concludes that the financial statements are materially and pervasively misstated:

Basis for Adverse Opinion

As explained in Note X, the company has recognised a number of assets acquired under a lease and the associated liabilities at a fair value of $xxx, accounting for the leases as a finance leases. The fair value of these assets represent 80% of total assets. Under International Financial Reporting Standards the leases should have been classified as operating leases. The companies records indicate that had the leases been correctly accounted for as operating leases....[explanation of the various effects on the amounts presented in the financial statements].

Adverse Opinion

In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion paragraph , the financial statements do not present fairly (or give a true and fair view of) the financial position.......

Illustration of a disclaimer of opinion

Example where the auditor concludes that they have been unable to gather sufficient appropriate evidence and the possible effects are deemed to be both material and pervasive.

Basis for Disclaimer of Opinion

A new computerised payroll system was introduced in October 20X1, that has caused significant errors in the payroll records, amounts paid to employees, and taxation paid in the year. At the date of our audit report, management was still in the process of identifying and quantifying the volume and amount of errors, and rectifying and correcting the system and errors that have arisen. We were unable to confirm or verify by alternative means the payroll expense of $xxx, included in the income statement for the year ended 31 December 20X1, and associated liabilities of $xxx owed to the tax authorities and affected employees in the statement of financial position as at 31 December 20X1.

As a result, we were unable to determine whether any adjustments to the financial statements might have been necessary in respect of recorded or unrecorded liabilities or expenses, and the associated elements of the statement of changes in equity and cash flow statement.

Disclaimer of Opinion

Because of the significance of the matter described in the Basis of Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the financial statements.

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