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Seminar 2 Part 3 - Coggle Diagram
Seminar 2 Part 3
LO 12.5 Circumstances giving rise to a modified opinion
auditor’s opinion should be modified when
the auditor concludes, based on the audit evidence obtained, that the financial report is not free from material misstatements
the auditor is unable to obtain sufficient appropriate evidence to conclude that the financial report is free of material misstatements
However, before issuing a modified opinion the auditor should take all reasonable steps to overcome the issues giving rise to the material misstatements (commonly referred to as
disagreements with management
), or the issues causing the auditor to be unable to obtain sufficient appropriate evidence (commonly referred to as
limitations on scope
).
Material misstatements
may arise in relation to:
the appropriateness of the selected accounting policies
the application of those accounting policies
With regard to the application of the selected accounting policies, material misstatements may arise where management has not applied the accounting policies selected in accordance with the relevant reporting framework, or has not applied the policies consistently between periods or between similar transactions and events. Material misstatements may also arise where accounting policies have been misapplied, resulting in unintentional errors in application
With regard to the appropriateness of the accounting policies that have been selected by management, material misstatements may arise where the policies selected are not consistent with the applicable financial reporting framework, or where they fail to fairly present the underlying transactions and events in the financial report
the appropriateness or adequacy of disclosures in the financial report
It is also possible for material misstatements to occur where an entity has changed its selection of significant accounting policies but has failed to adequately explain and disclose this change
Inability to obtain sufficient appropriate audit evidence
may arise due to:
circumstances beyond the control of the entity (e.g. where the entity’s accounting records and supporting documentation are destroyed by fire)
circumstances related to the nature or timing of the auditor’s work (e.g. where the auditor is appointed after the balance date and is therefore unable to observe the counting of inventory on the balance date)
A limitation on the performance of a particular procedure does not necessarily constitute a limitation on the scope of the audit if the auditor is able to obtain sufficient appropriate evidence by performing alternative procedures. For example, although the auditor may be unable to attend the inventory stocktake, alternative procedures such as the inspection of documentation of the subsequent sale of inventory items on hand at stocktake date may provide sufficient appropriate evidence about the existence and condition (valuation and allocation) of the inventory.
limitations imposed by the entity (for example, where management requests that the auditor not undertake a particular procedure).
Where a limitation in the terms of an engagement is imposed by the entity, and the auditor concludes that the possible effect of undetected misstatements on the financial report is material but not pervasive, the auditor should issue a qualified opinion. If the limitation is such that the auditor is unable to form an opinion (that is, where the potential effect is material and pervasive), the auditor should issue a disclaimer of opinion, and consider whether they should withdraw from future audit engagements with that entity.
An auditor should not accept an audit engagement where the client imposes a limitation on scope that the auditor believes will result in their having to issue a disclaimer of opinion
The effect of materiality on the audit modification
a primary factor when considering whether to modify an auditor’s opinion, or determining what sort of modification to apply, is the degree of materiality of the subject matter giving rise to the modification. One critical aspect of this is the dollar magnitude of the effects, or potential effects, of the matter on the financial report.
However, materiality
does not depend entirely on dollar magnitude
. The auditor also
needs to consider the nature
of the matter when making judgments regarding materiality.
A departure from an accounting standard need not be noted in the auditor’s report where it relates to an item of financial information that is not material.
However, modifications may arise if there is a legal requirement to disclose specific items irrespective of their dollar magnitude. As outlined earlier, these include, for listed companies, the requirement to disclose specified directors’ and executive fees and audit fees.
If not disclosed, such items will normally give rise to a qualified opinion. For a matter to be considered pervasive, it must be of such magnitude, or be so fundamental, as to affect the overall usefulness of the financial report taken as a whole.
LO 12.6 Comparative information and other information in the annual report
The audit of comparative information
Most entities disclose information from previous periods for comparison purposes. Such comparative information is an integral part of the current period’s financial report.
Two broad approaches
Corresponding figures approach
comprise comparative information which, while an important part of the financial report, is intended to be read only in relation to the amounts and other disclosures relating to the current period
For corresponding figures, the auditor’s opinion on the financial report refers to the current period only
Comparative financial reports approach
comprise comparative information where amounts and other disclosures are included for comparison with the current period and are referred to in the auditor’s report.
For comparative financial reports, the auditor’s opinion refers to each period for which the financial report is presented.
Auditor’s responsibilities for other information in an annual report
An auditor who concludes that the other information causes a material inconsistency should ask the client to revise it. If the client will not, the auditor has the following options:
revise the auditor’s report and consider including in the auditor’s report an Other Matter paragraph describing the material inconsistency
withhold the use of the auditor’s report in the annual report
withdraw from the engagement, if possible under the laws and regulations governing the audit