Audit Reports and Modified Opinions
Reporting
Audit Reports and Modified Opinions
Syllabus tag: KASNEB CPA | Advanced Level | CA36 Advanced Auditing and Assurance
1. The enhanced audit report — ISA 700
Standard sections: (1) title and addressee; (2) opinion paragraph — placed first; (3) basis for opinion (ISAs, independence, ethical requirements); (4) key audit matters (listed entities, ISA 701); (5) going concern section; (6) other information (ISA 720); (7) responsibilities of management; (8) auditor's responsibilities; (9) signature, date, location.
2. Key audit matters — ISA 701
KAMs are matters of most significance in the audit, selected from matters communicated to those charged with governance. Required for listed entities. For each KAM: why it was a KAM and how it was addressed. They do not represent separate opinions — they contextualise the audit for users.
3. When opinions are modified
Modifications arise from: misstatements in the financial statements (disagreement with management) or inability to obtain sufficient appropriate evidence (limitation of scope). The type depends on whether the matter is material but not pervasive, or material and pervasive.
| Material, not pervasive | Material AND pervasive | |
|---|---|---|
| Misstatement | Qualified opinion | Adverse opinion |
| Limitation of scope | Qualified opinion | Disclaimer of opinion |
Pervasive means: affects a large proportion of the financial statements; is fundamental to users' understanding; affects multiple elements; or represents a substantial portion of the statements.
4. Qualified opinion
Language: "In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements give a true and fair view..."
5. Adverse opinion
Language: "In our opinion, because of the significance of the matter described in the Basis for Adverse Opinion paragraph, the financial statements do not give a true and fair view..."
6. Disclaimer of opinion
No opinion is expressed. Language: "We do not express an opinion on the accompanying financial statements. Because of the significance of the matter(s) described in the Basis for Disclaimer of Opinion paragraph, we were unable to obtain sufficient appropriate audit evidence..."
7. Emphasis of Matter and Other Matter paragraphs
Emphasis of Matter (EOM): draws attention to a matter already adequately disclosed in the financial statements but fundamental to users' understanding — the opinion is NOT modified. Example: significant uncertainty, early adoption of a new standard. Other Matter paragraph: refers to matters not presented or disclosed in the financial statements. Example: the audit covers only certain components.
8. Communication with those charged with governance — ISA 260
Two-way, timely communication on: planned scope and timing; significant findings; significant difficulties encountered; KAMs; independence matters; management's representations; any other matters relevant to oversight of financial reporting.