Types of Audit Report: Modified/Unmodified - ACCA Audit and Assurance (AA)

Summary

This lecture from Open Tuition discusses various types of audit reports, focusing on the differences between a basic, unmodified report and a modified one. It explains the significance of 'emphasis of matter' paragraphs, which draw attention to important notes without criticizing the financial statements. The lecture also delves into modified opinions, including qualified, disclaimer, and adverse opinions, and the circumstances under which each is used. It highlights the importance of material misstatements and insufficient evidence in shaping an auditor's opinion, and provides examples to illustrate these concepts.

Takeaways

• 📊 An audit report can be a 'basic order report' with no issues, showing a true and fair view of the financial statements.
• 🔄 A 'modified report' is used when there are issues that need to be highlighted but do not change the auditor's opinion on the financial statements.
• ⚠️ 'Emphasis of Matter' is used to draw attention to significant matters in the financial statements that have been properly disclosed.
• ❗️ 'Material Uncertainty' is highlighted when there's doubt about the company's ability to continue as a going concern, affecting the audit report.
• 🚫 A 'Qualified Opinion' is given when there's a material misstatement in the financial statements that can be isolated.
• ⛔️ A 'Disclaimer of Opinion' is used when the auditor cannot obtain sufficient evidence to form an opinion on the financial statements.
• 🚨 An 'Adverse Opinion' is the most severe, indicating that the financial statements are so materially misstated that they do not show a true and fair view.
• 🔍 Auditors must assess whether a misstatement is 'material' and 'pervasive', which determines the type of opinion they can give.
• 📋 The audit report includes a 'Basis of Opinion' section where the reasons for any modifications to the opinion are explained.
• 📝 Financial statements should be prepared on a 'going concern' basis unless there's no realistic prospect of the company's survival.

Q & A

What is the purpose of an emphasis of matter paragraph in an auditor's report?

An emphasis of matter paragraph in an auditor's report is used to draw readers' attention to a specific matter that is already properly and clearly disclosed in the financial statements. It is not a criticism of the financial statements but serves as a flag to highlight the importance of a particular note or item.

What is the difference between an emphasis of matter and a modified opinion in an audit report?

An emphasis of matter does not affect the auditor's opinion and is used to highlight a significant aspect of the financial statements that has been properly disclosed. A modified opinion, on the other hand, indicates that the auditor is not willing to express an unqualified opinion on the financial statements due to issues such as material misstatements, uncertainty about going concern, or other significant problems.

What are the three types of modified audit opinions discussed in the script?

The three types of modified audit opinions discussed are a qualified opinion, a disclaimer of opinion, and an adverse opinion. A qualified opinion indicates a specific issue with the financial statements, a disclaimer of opinion indicates the auditor cannot form an opinion due to lack of sufficient evidence, and an adverse opinion indicates the financial statements are so materially misstated that they do not present a true and fair view.

Why might an auditor include a going concern emphasis of matter paragraph in their report?

An auditor might include a going concern emphasis of matter paragraph if there is substantial doubt about the company's ability to continue as a going concern. This could be due to factors such as negative cash flows, inability to secure financing, or legislative changes that may impact the company's operations.

What are the signs that might indicate a company is facing going concern issues?

Signs that a company may be facing going concern issues include negative operating cash flows, inability to pay suppliers, delayed payments, operating losses, lack of agreement on borrowing facilities, loss of key staff or customers, changes in technology or market trends, legislative changes affecting the business, and non-compliance with regulations.

What is the difference between a disclaimer of opinion and an adverse opinion in an audit report?

A disclaimer of opinion occurs when the auditor is unable to obtain sufficient appropriate audit evidence, and thus cannot express an opinion on the financial statements. An adverse opinion is given when the financial statements are so materially misstated that they do not present a true and fair view, indicating a fundamental problem with the financial statements.

How does the size of a misstatement affect the type of audit opinion given?

The size of a misstatement affects the type of audit opinion given because if the misstatement is material and pervasive, it affects the overall reliability of the financial statements, leading to a disclaimer of opinion or an adverse opinion. If the misstatement is material but can be isolated, it may result in a qualified opinion.

What is the significance of a qualified opinion in an audit report?

A qualified opinion in an audit report indicates that the financial statements are generally in accordance with the applicable financial reporting framework, but there is a specific issue that the auditor has identified which, while material, does not pervasively affect the financial statements. It allows the auditor to express a reservation while still providing some level of assurance.

What is the role of the directors in assessing going concern?

The directors are responsible for assessing the company's ability to continue as a going concern. They must evaluate the company's financial position and future prospects over a period of at least 12 months from the balance sheet date and disclose any material uncertainties in the financial statements.

Why might an auditor use a 'special paragraph drawing attention to going concern issue' in their report?

An auditor might use a 'special paragraph drawing attention to going concern issue' when there is a significant uncertainty related to the company's ability to continue as a going concern that has been disclosed in the financial statements. This paragraph serves as an additional warning to readers about the potential risks to the company's future operations.