Question

a) What are the types of independent reports for the external auditors

b) state how each influence analysis of financial statements with examples ( 8 Marks)

nb. Please seperate a and b

Answer 1

a) As per SA 705 MODIFICATION TO THE OPINION IN THE INDEPENDENT AUDITORS REPORT.

Nature of matter giving rise to the modification

Auditor's judgement about the pervasiveness of the effect or possible effects on the financial statements

Financial statements Are materially misstated	Qualified opinion	Adverse opinion
In ability to obtain Sufficient appropriate Audit evidence	Qualified opinion.	Disclaimer of opinion

1. Qualified opinion:

The auditor shall express a qualified opinion when :

• The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate are materiobut not pervasive,to the financial statements or
• 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.

2. Adverse opinion:

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

3. Disclaimer of opinion:

• The auditor shall disclaim an opinion in extremely rare circumstances.

b) Financial analysis is carried out for the purpose of obtaining material and relevant information necessary for ascertaining the financial strength and weaknesses of an enterprise and is necessary to analze the data decpited inthe financial statements. The main tools are ratio analysis and cash flow and funds flow analysis.

The basis of financial analysis, planning and decesion making is financial statements which mainly consists of balence sheet and profit and loss Account. The profit and loss Account shows the operating activities of the concern and the balence sheet depicts the balance value of the acquired assets and liabilities at a particular point of time.

However the above statement do not disclose all the necessary and relevant information. For the purpose of obtaining the material and relevant information necessary for ascertaining the financial strength and weaknesses of an enterprise, it is necessary to analze the data decpited in the financial statement. The financial manager has certain analytical tools which help in financial analysis and planning. The main tools are ratio analysis and cash flow analysis.