Modified Report
An auditor’s report is considered to be modified when it includes:
(a) Matters That Do Not Affect the Auditor’s Opinion
• emphasis of matter
(b) Matters That Do Affect the Auditor’s Opinion
• qualified opinion
• disclaimer of opinion
• adverse opinion
(a) Matters That Do Not Affect the Auditor’s Opinion
In certain circumstances, an auditor’s report may be modified by adding an emphasis of matter paragraph to highlight a matter affecting the financial statements. The auditor considers modifying the auditor’s report by adding a paragraph if there is a significant uncertainty (other than going concern problem), the resolution of which is dependent upon future events and which may affect the financial statements. The addition of such an emphasis of matter paragraph does not affect the auditor’s opinion. It would ordinarily refer to the fact that the auditor’s opinion is not qualified in this respect.
(b) Matters That Do Affect the Auditor’s Opinion
An auditor may not be able to express an unqualified opinion when either of the following circumstances exists and, in the auditor’s judgment, the effect of the matter is or may be material to the financial statements:
• there is a limitation on the scope of the auditor’s work; or
• there is a disagreement with management regarding the acceptability of the accounting policies selected, the method of their application or the adequacy of financial statement disclosures.
The circumstances described in (a) could lead to a qualified opinion or a disclaimer of opinion. The circumstances described in (b) could lead to a qualified opinion or an adverse opinion.
Qualified Opinion
A qualified opinion is expressed when the auditor concludes that an unqualified opinion cannot be expressed, but that the effect of any disagreement with management is not so material and pervasive as to require an adverse opinion, or the limitation of scope is not so material and pervasive as to require a disclaimer of opinion. A qualified opinion should be expressed as being “subject to’” or “except for” the effects of the matter to which the qualification relates.
Disclaimer of Opinion
A disclaimer of opinion is expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and is, therefore, unable to express an opinion on the financial statements.
Adverse Opinion
An adverse opinion is expressed when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements.
At the end of the audit report, it is signed by the auditor. The audit report is the medium of communication of the auditor’s expert views on the financial statements and it has a significant bearing on the credibility of such statements. By expressing views in the report, the auditor takes upon himself a great responsibility because a large number of people are likely to put reliance on the financial statements. Therefore, he is necessarily to be careful, clear and objective in the matter of preparation of the report. A good audit report should clearly express an opinion as to whether the financial statements of the company present the financial information truly and fairly in conformity with accounting principles and legal requirements.