The independent auditor's report

1 Introduction

Chapter 1 introduced the sections that you would expect to see in any auditor's report. This chapter looks at:

• Additional paragraphs that would only be included in specific circumstances
  

• Modified audit opinions.
  

Note that the terms 'auditor's report' and 'audit opinion' are not the same thing. The audit opinion is only the first section of an auditor's report. It is followed by a 'basis for opinion' section and sections detailing the respective responsibilities of management and the auditor (see Illustrative example in Chapter 1).

1.1 Going concern reporting

When the going concern basis is appropriate and no material uncertainty has been identified, ISA 570 (Revised 2024) requires a separate Going Concern section. It states those conclusions and explains that they rest on evidence up to the report date and do not guarantee the entity’s survival. For a listed entity, significant judgments in concluding there is no material uncertainty also require a description of how the auditor evaluated management’s assessment and reference to relevant disclosures.

2 Additional paragraphs

2.1 Emphasis of matter

An emphasis of matter is a paragraph in the auditor’s report which draws attention to some matter already properly disclosed within the financial statements. Such a paragraph does not affect the audit opinion: it is simply drawing attention to an important note in the financial statements that shareholders ought to be aware of to properly appreciate the financial statements.

Here is an example:

If the matter had not been disclosed properly then the opinion paragraph would have to be modified (see later).

2.2 Material Uncertainty Related to Going Concern

One of the auditor's responsibilities is to conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the company’s ability to continue as a going concern.

Where a material uncertainty exists and disclosure is adequate, the opinion is unmodified and a separate Material Uncertainty Related to Going Concern section draws attention to the disclosure. It states that the basis is appropriate, the material uncertainty exists, the opinion is not modified for this matter, and the conclusions are based on evidence up to the report date and are not a survival guarantee. For listed entities it also describes how management’s assessment was evaluated.

For example:

Although similar to an emphasis of matter, its use is very specific.

3 Modified audit opinions

3.1 Modified opinions

Auditors will modify their opinion if:

• The financial statements contain one or more material misstatements, or
  

• The auditor has been unable to obtain sufficient appropriate audit evidence.
  

Each of these problems may result in an ‘extreme’ expression of opinion:

• If material misstatements are so many and so severe that in the auditor’s opinion the financial statements, as a whole, do not show a true and fair view, the auditor will state this in an adverse opinion.
  

• If a lack of sufficient appropriate audit evidence is so extensive that the auditor cannot form an opinion on whether the financial statements, as a whole, show a true and fair view, the auditor will state this in a disclaimer of opinion.
  

Note that these expressions of opinion relate to matters that affect the financial statements ‘as a whole’ – the term to describe such matters is that they are pervasive.

If matters are material but not pervasive, the auditor will be able to conclude ‘except for … [problem] … the financial statements show a true and fair view …’. This is a qualified opinion.

The different forms of modified opinion can be summarised as follows:

If the opinion is unmodified, the opinion paragraph is headed up ‘Opinion’. However, to warn users that something is amiss, this paragraph’s title changes when the opinion is modified:

• ‘Qualified opinion’,
  

• ‘Adverse opinion’ or
  

• ‘Disclaimer of opinion’
  

3.2 Basis for opinion paragraphs

When an opinion is modified, the title of the ‘basis’ is changed to match the ‘opinion’ paragraph. For example ‘Basis for qualified opinion’.

3.3 Examples of modified opinions

Note that, wherever possible, the auditor will quantify and state the effects on the financial statements of the matter(s).