When an auditor issues an adverse opinion which of the following?
The first page of audited financial statements is the auditor’s report. This is an important part of the financials that shouldn’t be overlooked. It contains the audit opinion, which indicates whether the financial statements are fairly presented in all material respects, compliant with Generally Accepted Accounting Principles (GAAP) and free from material misstatement. Show
In general, there are four types of audit opinions, ranked from most to least desirable. 1. UnqualifiedA clean “unqualified” opinion is the most common (and desirable). Here, the auditor states that the company’s financial condition, position and operations are fairly presented in the financial statements. 2. QualifiedThe auditor expresses a qualified opinion if the financial statements appear to contain a small deviation from GAAP but are otherwise fairly presented. To illustrate: An auditor will “qualify” his or her opinion if a borrower incorrectly estimates the reserve for a contingency, but the exception doesn’t affect the rest of the financial statements. Qualified opinions are also given if the company’s management limits the scope of audit procedures. For example, a qualified opinion may have resulted if you denied the auditor access to year-end inventory counts due to safety concerns during the COVID-19 pandemic. 3. AdverseWhen an auditor issues an adverse opinion, there are material exceptions to GAAP that affect the financial statements as a whole. Here, the auditor indicates that the financial statements aren’t presented fairly. Typically, an adverse opinion letter outlines these exceptions. 4. DisclaimerEven more alarming to lenders and investors is a disclaimer opinion. Disclaimers occur when an auditor gives up in the middle of an audit. Reasons for disclaimers may include significant scope limitations, material doubt about the company’s going-concern status and uncertainties within the subject company itself. A disclaimer opinion letter briefly outlines the auditor’s reasons for throwing in the towel. Beyond the opinionAuditors’ reports for public companies also must include a discussion of so-called “critical audit matters” (CAMs). Essentially, these are the most complicated issues that arose during the audit. CAMs are specific to the engagement and the year of the audit. As a result, they’re expected to change from year to year. This requirement represents a major change to the pass-fail audit opinions that have been in place for decades. It’s intended to give stakeholders greater insight into the company’s disclosures and the auditor’s work when issuing an unqualified opinion. Contact us for more information on audit opinions. © 2022 Relevant to ACCA Qualification exams AA and AAA The International Auditing and Assurance Standards Board (IAASB) finalised its project on auditor reporting in 2015, which resulted in a set of new and revised standards on auditor reporting as well as revised versions of ISA, 570Going Concern and a number of other International Standards on Auditing (ISAs). Candidates attempting Audit and Assurance (AA) and Advanced Audit and Assurance (AAA) are required to have a sound understanding of these standards. This article will focus primarily on: the requirements of ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report; how ISA 701 interacts with the other reporting standards (ISA 705 and 706); and the reporting requirements in ISA 570 (Revised), Going Concern. Candidates often find auditor’s reports a challenging part of the syllabus and in preparation for exams it is imperative that candidates can:
Candidates will not be expected to draft an auditor’s report in either AA or AAA, but may be asked to present reasons for an unmodified or a modified opinion, or the inclusion of an Emphasis of Matter paragraph. Candidates attempting AA may be required to identify and describe the elements of the auditor’s report and therefore candidates should ensure that they have a sound understanding of ISA 700, Forming an Opinion and Reporting on Financial Statements. AAA questions may require a candidate to determine whether a transaction, or a series of transactions and events or other issues arising during the audit, gives rise to a KAM and should also be prepared to critique the content of a KAM section of an auditor’s report. AA candidates should be able to discuss what should be included in the KAM section to ensure the auditor’s report is compliant with ISA 701. Candidates may also be presented with extracts from an auditor’s report and be asked to critically appraise the extracts, or challenge the proposed audit opinion. Candidates are therefore reminded to ensure they have a sound understanding of the relevant Syllabus and Study Guide and ensure the revision phase in the lead-up to the examination includes plenty of exam-standard question practise, particularly if this is an area of the syllabus which a candidate finds challenging. Key Audit Matters (KAM)In January 2015 the IAASB issued ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report. This standard is required to be applied to the audit of all listed entities. The objectives of ISA 701 are for the auditor to:
‘Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with those charged with governance.’ (1) Determination of KAMThe definition in paragraph 8 of ISA 701 states that KAM are selected from matters which are communicated with those charged with governance. Matters which are discussed with those charged with governance are then evaluated by the auditor who then determines those matters which required significant auditor attention during the course of the audit. There are three matters which the ISA requires the auditor to take into account when making this determination:
|