Question

3- For each of the following situations, indicate what type of audit report is most appropriate:
a. The auditor lacks independence in fact, but not necessarily in appearance.
b. There is a scope limitation and it is material but the overall financial statements are still presented fairly.
c. The uncorrected misstatements are immaterial.
d. There is a departure from GAAP and it is pervasively material.

( Accounting Auditing)

Answer 1

Here the question relates to Auditor’s Opinion in following situations:

Basically Auditor’s Opinion is governed by the Auditing Standard issued by the Statue or the auditor’s parent body or the international Auditing Standards.

If we summarize the Standards Issued by the ICAI or the International Standard on Auditing Issued by IFAC we can conclude following observations:

A) Standard Issued by Governing Body

Standards Governed for Auditing Opinion by ICAI is:

1) SA 700 Forming an Opinion and Reporting on Financial Statements

2) SA 705 Modifications to the Opinion in the Independent Auditor’s Report

Standards Governed for Auditing Opinion by IFAC is:

1) ISA 700 Forming an Opinion and Reporting on Financial Statements

2) ISA 705 Modifications to the Opinion in the Independent Auditor’s Report

B) Observations:

As such there is no formula based rules given for forming an audit Opinion the auditors are guided by the standard to form an audit opinion based on the situations & their professional judgement.

1. Types of Audit Opinion

Circumstances to issue the above Audit Report

Unmodified opinion/Unqualified Opinion – The opinion expressed by the auditor when the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework

Qualified/Modified Opinion –

(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or

(b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.

Adverse Opinion - The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.

Disclaimer Of Opinion - The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.

Materiality & Pervasive Definition

a) Pervasive : It is a term used, in the context of misstatements, to describe the effects on the financial statements of misstatements or the possible effects on the financial statements of misstatements,

Pervasive effects on the financial statements are those that, in the auditor’s judgment:

(i) Are not confined to specific elements, accounts or items of the financial statements;

(ii) If so confined, represent or could represent a substantial proportion of the financial statements;

(iii) In relation to disclosures, are fundamental to users’ understanding of the financial statements.

b) Materiality : Materiality is the termed in the context of misstatements, to describe the effects on the financial statements

a) Misstatements are considered to be material if they could influence the decisions of users of the financial statements

b) Judgements about materiality are based on surrounding circumstances, including the size and nature of the misstatement

c) Judgements are based on the users’ common needs as a group.

Below are the situations given in the questions

a. The auditor lacks independence in fact, but not necessarily in appearance. – Disclaimer of Opinion
b. There is a scope limitation and it is material but the overall financial statements are still presented fairly.- Qualified/Modified Opinion
c. The uncorrected misstatements are immaterial.- UnQualified/UnModified Opinion
d. There is a departure from GAAP and it is pervasively material.-Adverse Opinion

Explainantion:

For (a) – As Auditor lacks Independence for the user of financial statement the information for the users are both material and pervasive to the financial statements. In this situation Auditor basically cannot provide his opinion as basic requirement to be an auditor.

For(b)- There scope of Limitation it is Material but not pervasive enough for not presenting financial statement fairly

For (c)- misstatements are immaterial i.e they are neither material nor pervasive

For (d)- Departure from GAAP is both material and pervasive to the financial statements and as it is base for preparing financial statement.