Question

The following are three independent situations. For each case, state the type of audit opinion that should be expressed and provide a brief explanation to justify your choice: 1. The auditors of Purple Ltd were refused access to six months of the minutes of the directors’ meetings (held monthly) because they contained discussions of a highly confidential matter. No alternative procedures could be performed.

2.Due to the recent downturn in the Australian economy, Orange Ltd has made substantial losses for the last three quarters and now has a negative working capital balance. The auditor of Orange Ltd has concerns over the entity’s ability to continue as a going concern in the short to medium term. Management of the company believe that the company is fully solvent and have not disclosed these matters in the financial statements

3. Pink Ltd has reported a net profit after tax of $5m, which represents an increase of 25% over the previous year. However, the Directors’ Report states the increase in net profit from the prior year is more than 40%. As the annual report has been printed, the directors are not prepared to correct the error.

Answer 1

1. Disclaimer of opinion

As per law, auditor can give a disclaimer of opinion when he is not getting enough evidence to check if audit report is free from material misstatements or not. In such case auditors scope is limited. The auditor is limited in this way, for instance, when auditors cannot access particular financial data. Here, auditor is not having access to the last 6 months minutes of directors meeting. And he even cannot perform alternate procedures on the same.

As per law,  If a limitation on the scope is validated due to the auditor’s inability to obtain sufficient appropriate audit evidence and its possible effects on the financial report of undetected misstatements is both material and pervasive, the auditor shall issue a disclaimer of opinion.

2.  Unmodified with an Emphasis of Matter Paragraph

As per law, if  Under normal circumstances when the auditor concludes that the financial report is prepared, in all material respects, in accordance with the applicable financial reporting framework, the auditor shall express an unmodified opinion. However, An Emphasis of Matter (EoM) paragraph shall be used when the auditor considers it necessary to draw user’s attention to a matter presented or disclosed in the financial report that, in the auditor’s judgement, is of such importance that it is fundamental to users’ understanding of the financial report. As per law, in the case of signigicant uncertainty, going concern, an unmodified opinion with an emphasis of matter paragraph should be issued.

3. Except for modified opinion

As per law,  If the auditor concludes that the financial report, as a whole, is not free from material misstatement or if the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial report as a whole is free from material misstatement, the auditor shall modify the opinion. However, auditor thinks that apart from a specific area, other areas of financial statement are free from materisl misstatement, he should issue an except for modified opinion.

Except For: The auditor shall issue a qualified opinion when there is (are) material but not pervasive misstatement(s), or when the possible effects of the inability of the auditor to obtain sufficient appropriate audit evidence on the financial report of undetected misstatements are concluded as material but not pervasive. “Except for” statement is required in the Basis for Qualified Opinion paragraph.