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Hello,
I would like to ask in the auditors report when does the auditor give QUALIFIED EXCEPT FOR opinion , WHY is it given and WHAT it explains to users ???
Moreover, Emphasis of matter and other matter pharagraph are given in what circumstancesTo explain Qualified Except for opinion I think its good to understand the other points related to audit opinion as well.
Unmodified Opinion: When an auditor is able to satisfactorily conclude that Financial Statement are free from material misstatements they express an unmodified opinion.
Modifications to the opinion:
The auditor may choose not to issue an unmodified opinion when:
1) When the Financial Statements are not free from material misstatements or
2) When they have been unable to obtain sufficient appropriate evidence.In these circumstances the auditor has to issue a modified version of their opinion. There are three types of modification. Their use depends upon the nature and severity of the matter under consideration.
They are:
1) the QUALIFIED opinion
2) the ADVERSE opinion
3) the DISCLAIMER of opinion.To understand these you need to understand the term PERVASIVENESS
Pervasiveness: Pervasiveness is a matter that requires professional judgement. In this case the judgement is:
i) whether the matter is isolated to specific components of the financial statements OR
ii) whether the matter pervades or effects many elements of the financial statements making the financial statements unreliable as whole.In simple words, if the auditor believes that the financial statements may be relied upon in some part for decision making then the matter is material but not pervasive. However, if they believe that financial statements should NOT BE RELIED UPON AT ALL for making decisions then the matter is pervasive.
The usage of three forms of opinion modification depends upon the NATURE of the matter and the Auditor’s JUDGEMENT about the PERVASIVENESS of the matter.
1) QUALIFIED OPINON
If the Financial Statements are materially misstated and the auditor concludes that the matter (misstatement) is Material but not pervasive the auditor will give a Qualified opinion (except for…..)
Example: Failure to depreciate non-current asset by directors, or Failure to disclose a contingent liability.Also
If the auditor is unable to obtain sufficient appropriate evidence and the auditor concludes that the matter is material but not pervasive the auditor will give a Qualified opinion (….except for…).
Example: Auditor not being able to attend the year-end inventory/stock count.2) ADVERSE OPINON
If the Financial Statement are materially misstated and the auditor concludes that matter is material and pervasive the auditor will give an Adverse opinion (…do not present fairly….)
3) DISCLAIMER of OPINION
If the auditor is unable to obtain sufficient appropriate evidence and concludes the matter is material and pervasive the auditor will give a Disclaimer of opinion (…we do not express an opinion….)
Emphasis of Matter (EOM) Paragraph:
The EOM is not linked to modifications of opinion. The purpose of an EOM Paragraph is to draw the users attention to a matter already disclosed in the financial statements because the auditor believes it is fundamental to their understanding.
Example: (you know the note 1 about the uncertainty, we the auditors think its really important, so make sure you’ve read it’)Other Matters Paragraph:
Other Matter paragraphs are used to refer the matters that have not been disclosed in the financial statements that the auditor believes are significant to user understanding.Emphasis of Matter paragraph may be included in auditor’s report when:
Auditor believes that there is a need to draw user’s attention to significant uncertainty surrounding accounting estimates
In case new or amended audit report has been issued after the discovery of subsequent events.
In case material uncertainty exists surrounding the use of going concern assumption but the same has been disclosed to the satisfaction of the auditor in the financial statements.
In case financial statements have been prepared under two financial reporting frameworks then auditor shall include Emphasis of Matter paragraph pointing to the disclosure in respect of extent of compliance of framework
In case of early application of accounting standard that has pervasive effect on financial statements i.e. new accounting standard has been followed and applied before its effective date.
In case auditor discovered that prior period financial statements contain material misstatements and also amended audit report has not been issued but the corresponding figures have been restated and appropriate disclosures have been made in the current period financial statements.
In case financial statements are prepared under special purpose framework
An entity is facing major catastrophe and its effects are expected to propagate to future periods and it is and will significantly affect the financial position of entity.
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