ANNOUNCEMENT!

→ KINDLY BE INFORMED IF YOU HAVE BEEN

BARRED FROM EXAM, I WOULD NOT APPROVE
YOUR APPEAL FOR UNBAR.

→ Mid-term test is scheduled on 1 November 2019

(Friday) @ 9am – 11pm at Lecture Hall. If you have
class on Friday, please see me for earlier
arrangement of test by showing your timetable as
an evidence.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3-1

 AUDIT REPORTS

CHAPTER 3

MASNIZA SUPAR

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3-2

 TOPIC OUTLINES
1. Standard Unqualified Audit Report
2. Unqualified Report with Explanatory Paragraph
OR Modified Wording
3. Qualified Opinion Report
4. Disclaimer Opinion Report
5. Adverse Opinion Report
6. Materiality level

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3-3

 PARTS OF THE STANDARD UNQUALIFIED
AUDIT REPORT

1. Report title
2. Audit report address
3. Introductory paragraph
4. Scope paragraph
5. Opinion paragraph
6. Name of CA firm
7. Auditor’s address
8. Audit report date
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3-4
 CONDITIONS FOR STANDARD UNQUALIFIED
AUDIT REPORT

1. Includes all financial statements (FS)

2. The ISAs have been followed

3. Sufficient evidence has been accumulated

4. The FS are prepared in accordance with

approve accounting standards.

5. There are no circumstances requiring the addition of an

explanatory paragraph

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3-5

 UNQUALIFIED REPORT WITH EXPLANATORY
PARAGRAPH OR MODIFIED WORDING

An unqualified opinion with explanatory or modified

paragraph states meets the criteria of a complete audit
with satisfactory results and financial statements that are
fairly presented, but the auditor believes it is important or
is required to provide additional information.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3-6

 UNQUALIFIED REPORT WITH EXPLANATORY
PARAGRAPH OR MODIFIED WORDING

1. Lack of consistent application of approved accounting

standards.
2. Substantial doubt about going concern
3. Auditor agrees with a departure from promulgated
accounting principles
4. Emphasis of a matter
5. Reports involving other auditors (modified
wording)

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3-7

 LACK OF CONSISTENT
APPLICATION OF APPROVED
ACCOUNTING STANDARDS

Auditors must note circumstances in which

accounting principles are not consistently
applied

Auditor should modify the report when a

material change occurs by adding an
explanatory paragraph in the report

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3-8

 SUBSTANTIAL DOUBT ABOUT
GOING CONCERN

 Significant recurring operating

losses or working capital deficiencies.
 Inability of the company to pay its
obligations as they come due.
 Loss of major customers, the
occurrence of uninsured catastrophes.
 Legal proceedings, legislation that
might jeopardize the entity’s ability to operate.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3-9

 AUDITOR AGREES WITH A DEPARTURE FROM
A PROMULGATED PRINCIPLE

Departure may not require a qualified or

adverse opinion

The auditor must separately explain in the

audit report that adhering to the principle
would have produced a misleading result.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 10

 EMPHASIS OF A MATTER

Under certain circumstances, the CPA may

want to emphasize specific matters regarding
the financial statements, even though the
CPA intends to express an unqualified opinion.

Subsequent Related Party

Events Transactions

Financial
Statement
Comparability

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 11

 DEPARTURES FROM AN UNQUALIFIED
OPINION

1. Scope limitation

2. Disagreement

3. Inherent uncertainty

4. Independent of auditor

*Page 59

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 12

 DEPARTURES FROM AN UNQUALIFIED OPINION

1. Scope limitation
A scope restriction imposed by the client or by
circumstances beyond the auditor’s or client’s
control which prevents the auditor from
accumulating sufficient evidence to reach a
conclusion regarding whether financial statement
are stated in accordance with approved accounting
standards.
(Qualified scope of opinion if moderately
material or a disclaimer of opinion if highly
material)

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 13

 DEPARTURES FROM AN UNQUALIFIED OPINION

2. Disagreement
Disagreement arises where the auditor is able to form an opinion
but the opinion differs from the view expressed by the
management in the financial statements.
Example of situations:
1. Non-compliance with the provision of the companies Act 1965
or other legislation.
2. Non-conformity with the accounting standards.
3. Disagreements with facts or amounts included in the financial
statements.
4. Inadequate disclosure or facts or amounts included in the
financial statements.
(qualified of opinion if moderately material or adverse of
opinion if highly material)

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 14

 DEPARTURES FROM AN UNQUALIFIED OPINION

3. Inherent Uncertainty
An inherent uncertainty exists when the outcome or
effect of matter cannot be reasonably determined
and it affect the financial statements by their nature
rather than limitations in the scope of audit. Such
situation would include doubt regarding going
concern, the outcome of long-term contracts,
judgment regarding saleability of inventory or
collectability of account receivables.
(unqualified with explanatory paragraph, or
disclaimer of opinion)

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 15

 DEPARTURES FROM AN UNQUALIFIED OPINION

4. Independent of auditor
The auditor is not independent.
(Disclaimer of opinion)

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 16

 QUALIFIED REPORT

A qualified opinion states that there has

been either a limitation on the scope of the
audit or a departure from approved accounting
standards in the financial statements, but that
the auditor believes that the overall financial
statements are fairly presented.

The auditor must use the term “except for’’ in the opinion
paragraph
The implication ; the auditor is satisfied that the overall FS
are correctly stated except for a specific aspect of them

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 17

 DISCLAIMER OF OPINION

A disclaimer of opinion states that the auditor

has been unable to satisfy him or herself as to
whether or not the overall financial statements
are fairly presented because of a significant
limitation of the scope of the audit, or a
non-independent relationship under the Code of
Professional Conduct between the auditor and
the client.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 18

 ADVERSE OPINION

Auditor believes the financial statements are not

presented fairly in conformity with approved
accounting standards.

- Auditor believes that the overall FS are so materially misstated

- The adverse report can arise only when auditor has knowledge
after an adequate investigation.
- This opinion is rarely used

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 19

 MATERIALITY

A misstatement in the financial statements

can be considered material if knowledge of
the misstatement would affect a decision
of a reasonable user of the statements.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 20

 LEVELS OF
MATERIALITY

Amounts are immaterial.

Amounts are material but do not overshadow

the financial statements as a whole.

Amounts are so material (highly material) or

so pervasive that overall fairness of the FS
is in question.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 21

 MATERIALITY
DECISIONS

 Dollar amount compared with a base

 Measurability

 Nature of the item

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 22

 RELATIONSHIP OF MATERIALITY TO
TYPE OF OPINION

Materiality Significance in Terms of Type of

Level Reasonable Users’ Decisions Opinion

Users’ decisions are unlikely

Immaterial to be affected. Unqualified

Users’ decisions are likely

Material to be affected. Qualified

Highly Users’ decisions are likely Disclaimer

material to be significantly affected. or adverse
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 23
 MATERIALITY DECISIONS
(Condition requiring an Unqualified Report with Explanatory Paragraph / Modified
Wording)

Circumstances Immaterial
Departure from approved accounting Unqualified with explanatory
standards / lack of consistent application paragraph
of approved accounting standards

Going concern issue Unqualified with explanatory

paragraph

Report involving other auditor Unqualified with modified

wording

Emphasis of a matter Unqualified with explanatory

paragraph

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 24

 MATERIALITY DECISIONS
Condition requiring a departure from Unqualified Report

Circumstances Immaterial Material Highly material

Going concern - Unqualified with Qualified (except for) Disclaimer

issue explanatory
paragraph (not
disclosed)
- Standard
Unqualified
(disclosed) ***

Scope limitation Unqualified with - Qualified scope, Disclaimer

explanatory paragraph (additional paragraph)

Non-independence Not applicable for materiality level – issue Disclaimer Report

of auditor
Non-compliance Unqualified with - Qualified (except for) Adverse
with approved explanatory paragraph
accounting
standards
Emphasis of a Unqualified with Nil Nil
matter explanatory paragraph

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 25

 TUTORIAL WEEK 3
1. Exercise 3.27; pg: 73 (exercise in class)

2. Exercise 3.28; pg: 74 (exercise in class)

3. Additional tutorial – (Homework; download from e-learn)

4. All past years mid-term exam – homework/revision for test

*** Please indicate your group (AC10 or AC20) for each tutorial need to be submitted.
*** Mid-term test is scheduled on 1 November 2019 @ 9am – 11pm.

THANK YOU 

Mistakes are proof that you are trying

~Unknown~

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 3 - 26