Question

8. Identify and discuss with examples the basis of modification of auditor’s opinion in the following circumstances according to ISA 705: Qualified opinion Adverse opinion Disclaimer opinion

Answer 1

Qualified Opinion

Included in debtors shown on the balance sheet is an amount of $200,000X due from a debtor which has ceased trading. The Company has no security for this debt. On the basis that no security has been obtained and no cash has been received on the debt, in our opinion the Company should make a full provision for impairment of $200,000, reducing profit before taxation for the year and net assets at 31 December 2017 by that amount.

Adverse Opinion

As explained in note to the financial statements, losses expected to arise on certain long term contracts currently in progress have not been recognised as expenses, as the directors consider that such losses should be off-set against amounts recoverable on other long-term contracts. In our opinion, the expected losses on individual contracts should be recognised as expenses immediately as required by Section 8 of the SME-FRS. If losses had been so recognised the effect would have been to [reduce the profit/increase the loss] before taxation for the year and reduce the gross amounts due from customers at 31 December 2018 by $500,000.  

Disclaimer of Opinion

We were initially appointed auditors on (date) which was subsequent to the end of the Company's financial year. In consequence we were unable to carry out auditing procedures necessary to obtain adequate assurance regarding the quantities and condition of inventories and work in progress, appearing in the balance sheet at $100,000. There were no other satisfactory audit procedures that we could adopt to obtain sufficient evidence regarding the existence of inventories and work in progress. Accordingly, we have not been able to obtain sufficient appropriate audit evidence to provide a basis.