Audit report modification is when auditors need to change/modify their audit opinion. The audit report can only be changed/modified in line with the accounting standard.
Generally, auditors modify/change audit opinion when they find,
- Financial statement contain material misstatement.
- The financial statement has not been prepared in line with the applicable framework.
The audit report is a matter of reputation for the companies. If the auditor report is not clean, it can bring problems for the business. For instance, banks might withdraw financing, regulators might impose a penalty, and leasing company might recover their leased vehicles from the company. It’s because the financial record of the company does not remain credible, especially in cases of adverse and disclaimer of opinion.
Basis of opinion
We understand that auditors obtain knowledge of the business, assess the risk of material misstatement, design audit procedures, collect audit evidence, form audit opinion, and issue an audit report.
However, if collected audit evidence is not sufficient and appropriate, or there is some non-compliance, auditors need to modify audit opinion.
Depending on the severity of misstatement/non-compliance, auditors need to modify audit opinion in line with ISA 705. As per this accounting standard, there can be three types of the audit report modification as follows.
- Qualified audit report
- Adverse audit report
- Disclaimer of opinion
Qualified audit report
The qualified audit report is issued under the following circumstances,
| Factors | Impact |
| Misstatement in the financial statement | Material |
| Area of financial statement effected | Account balance/transaction |
| Example | Accounts receivables are overs stated by 40% |
Audit report qualifications opening balances examples.
if auditors are not able to obtain sufficient and appropriate audit evidence on last year balances, they need to qualify audit opinion for the opening balances. This qualification can be made under scope limitation.
Example
Auditor state in their report that,
Nothing has come to the attention that causes us to believe financial statement contains material financial statement. However, we could not obtain sufficient and appropriate audit evidence for opening balance, and our report is modified in this regard.
On the other hand, if auditors have obtained sufficient and appropriate audit evidence for opening balance, the audit report is not modified, and the fact is disclosed in the other matter paragraph as follows.
”The financial statement of the previous year was audited by (auditor name), who expressed an unqualified audit opinion”.
Adverse audit report
The adverse audit report is issued in the following circumstances.
| Factors | Impact |
| Misstatement in the financial statement | Material and pervasive |
| Area of financial statement effected | Entire financial statement |
| Example | The financial statement was not prepared following the applicable financial reporting framework. |
Disclaimer audit report
Disclaimer of opinion is when auditors are not able to access the required accounting record/support/evidence. In simple words, auditors are not able to cover their risk as management is not allowing them to access accounting-related data. Such a situation is called scope limitation.
Further, auditors estimate that there could be material and pervasive misstatement in the financial statement as they have not been able to perform audit procedures and obtain audit evidence.
| Factors | Impact |
| Misstatement in the financial statement | Material and pervasive due to scope limitation |
| Area of financial statement effected | Entire financial statement |
| Example | Management is not able to provide supporting documents for changes in material account balances. |
It’s important to note that scope limitations can be intentional/unintentional.
Difference between audit report modification and audit opinion modification
Sometimes auditors do not modify audit opinion but audit reports.
The audit report is said to be modified when some additional paragraphs like other matter paragraphs and emphasis of other matter paragraphs are included in the audit report. It’s important to note that in such a situation audit report is modified, but the audit opinion is not modified.
Other matter paragraph
Other matter paragraph is used by auditors when they want to communicate some additional information in the audit report. This information has not part of the financial statement. However, auditors understand that users of the financial statement should have an understanding of this matter.
For instance, other matter paragraph is used when the company is required to prepare a financial statement in line with more than one financial reporting framework. These frameworks can be GAAP to meet local compliance and IFRS to meet cross border regulations.
Audit report emphasis of matter
The emphasis of other matter paragraph is used by auditors when they want to highlight some important information to the readers of financial statement. Although, auditors have included that specific information in the financial statement. Still, they want to place emphasis that users of financial statements should go at specific reference and read about it.
For instance, sometimes regulatory information may be critical to the users of financial statement. Hence, auditors place emphasis on their reports.
Audit report with reservation
Audit report with reservations can be stated qualified audit report, adverse audit report, and disclaimer of opinion.
If auditors have reservations on the accuracy, completeness, validity and overall presentation of financial statement, they need to modify their audit opinion. The modification of audit opinion results in modification of audit report.
Conclusion
Auditors collect sufficient and appropriate audit evidence to form audit opinion. If auditors conclude that there are no material misstatements and the financial statement is prepared in compliance with the applicable regulatory framework, they issue a clean audit report. On the other hand, if they have noticed some misstatements which remain uncorrected or there is some scope limitation, auditors can issue qualified audit reports, adverse audit reports, or disclaimers.
