When the auditor is unable to obtain sufficient appropriate audit evidence the auditors report may contain?

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Principles

The objective of the auditor is to express clearly an appropriate modified opinion on the annual accounts and the underlying transactions that is necessary:

• when the auditor concludes that the annual accounts are not free from

  [link title="material" link="%2Faware%2FGAP%2FPages%2FCA-FA%2FPlanning%2FMateriality.aspx" /] 

  misstatement or the

  [link title="underlying%20transactions" link="%2Faware%2FCA%2FPages%2FConcepts%2FUnderlying-transactions.aspx" /] 

  do not comply in all material respects with the applicable legal and regulatory framework; or
• when the auditor is unable to obtain sufficient appropriate

  [link title="audit%20evidence" link="%2Faware%2FGAP%2FPages%2FAudit-evidence.aspx" /] 

  to conclude that the annual accounts are free from

  [link title="material" link="%2Faware%2FGAP%2FPages%2FCA-FA%2FPlanning%2FMateriality.aspx" /] 

  misstatement or that the underlying transactions comply in all material respects with the legal and regulatory framework.

Instructions

When a compliance audit is combined with a financial audit, the

[link title="opinion%20on%20the%20aspect%20of%20compliance" link="%2Faware%2FCA%2FPages%2FReporting%2FForming-and-opinion-in-compliance-audit.aspx" /] 

[link title="opinion%20on%20the%20financial%20statements" link="%2Faware%2FFA%2FPages%2FReporting%2FForming-an-opinion-in-financial-audit.aspx" /] 

Types of modified opinion

The decision as to which type of modified opinion is appropriate depends upon:

• the nature of the matter giving rise to the modification; and
• the auditor’s judgement about the

  [link title="pervasiveness" link="%23Pervasive-effects" /] 

  of the effects or possible effects of the matter on the annual accounts or the underlying transactions.

Three types of modified opinions can be summarised as follows:

Qualified opinion

The auditor should express a qualified opinion:

• when the auditor has obtained sufficient appropriate audit evidence and concludes that misstatements or instances of non-compliance, individually or in the aggregate, are material, but not pervasive, to the annual accounts or the underlying transactions; or
• when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the possible effects on the annual accounts or underlying transactions of undetected misstatements are

  [link title="material" link="%2Faware%2FGAP%2FPages%2FCA-FA%2FPlanning%2FMateriality.aspx" /] 

  but not

  [link title="pervasive" link="%23Pervasive-effects" /] 

  .

Adverse opinion

The auditor should express an adverse opinion when (s)he has obtained sufficient appropriate audit evidence and concludes that misstatements or instances of non-compliance that are material individually or in the aggregate are

[link title="pervasive" link="%23Pervasive-effects" /] 

Disclaimer of opinion

The auditor should disclaim an opinion on the financial statements when (s)he is unable to obtain sufficient appropriate

[link title="audit%20evidence" link="%2Faware%2FGAP%2FPages%2FAudit-evidence.aspx" /] 

[link title="material" link="%2Faware%2FGAP%2FPages%2FCA-FA%2FPlanning%2FMateriality.aspx" /] 

[link title="pervasive" link="%23Pervasive-effects" /] 

Inability to obtain sufficient appropriate audit evidence

The auditor’s inability to obtain sufficient appropriate

[link title="audit%20evidence" link="%2Faware%2FGAP%2FPages%2FAudit-evidence.aspx" /] 

• Circumstances beyond the control of the entity
• Circumstances relating to the nature or timing of the auditor’s work
• Limitations imposed by management

An inability to perform a specific procedure does not constitute a scope limitation if the auditor can obtain sufficient appropriate

[link title="audit%20evidence" link="%2Faware%2FGAP%2FPages%2FAudit-evidence.aspx" /] 

Pervasive effects

Pervasive effects are those that, in the auditor’s judgement, are not confined to specific elements, accounts or items of the financial statements (i.e. they are spread throughout the accounts or transactions tested), or, if they are so confined, they represent or could represent a substantial proportion of the financial statements, or relate to disclosures which are fundamental to users’ understanding of the financial statements. In the Statement of Assurance ECA only presents audit opinions at the overall level of the underlying transactions recorded in the accounts, not at that of the individual chapters of MFF headings. Determining whether errors are pervasive is also done at the level of the overall opinion. Where the auditor finds a

[link title="material" link="%2Faware%2FGAP%2FPages%2FCA-FA%2FPlanning%2FMateriality.aspx" /] 

[link title="audit%20evidence" link="%2Faware%2FGAP%2FPages%2FAudit-evidence.aspx" /] 

[link new-window title="ISA%20705" link="https%3a%2f%2fwww.ifac.org%2fsystem%2ffiles%2fpublications%2ffiles%2fIAASB-2020-Handbook-Volume-1.pdf%23INTERNATIONAL%2520STANDARD%2520ON%2520AUDITING%2520705%2520(REVISED)" icon="file-pdf-o" /] 

[link title="adverse%20opinion" link="%23Adverse-opinion" /] 

Basis for modification paragraph

Separate heading

When the auditor modifies the opinion on the annual accounts or underlying transactions, (s)he should include a paragraph in the auditor’s report that provides a description of the matter giving rise to the modification. The primary basis for a modified opinion is clearly specified errors identified during the audit. The auditor should place this paragraph immediately before the opinion paragraph in the auditor’s report and use the heading "Basis for Qualified Opinion," "Basis for Adverse Opinion," or "Basis for Disclaimer of Opinion," as appropriate.

Quantification

If a material misstatement of the annual accounts or error in the underlying transactions relates to specific amounts, the auditor should include in the Basis for Modification paragraph a description and quantification of the effects of the misstatement or error, unless impracticable. If it is not practicable to quantify the effects, the auditor should state as much in the Basis for modification paragraph.

Disclosure of information

If there is a material misstatement of the annual accounts that relates to narrative disclosures, the auditor should include in the Basis for Modification paragraph an explanation of how the disclosures are misstated.

Non-disclosure of information

If there is a material misstatement of the annual accounts or the underlying transactions that relates to the non-disclosure of information that is required to be disclosed, the auditor should discuss the matter with those charged with governance, describe in the Basis for Modification paragraph the nature of the omitted information and, unless prohibited by law or regulation, include the omitted disclosures, provided it is practicable to do so and the auditor has obtained sufficient appropriate audit evidence about the omitted information.

Lack of audit evidence

If the modification results from an inability to obtain sufficient appropriate

[link title="audit%20evidence" link="%2Faware%2FGAP%2FPages%2FAudit-evidence.aspx" /] 

Other matters requiring modification

Even if the auditor has expressed an

[link title="adverse%20opinion" link="%23Adverse-opinion" /] 

[link title="disclaimed%20an%20opinion" link="%23Disclaimer-of-opinion" /] 

Modification paragraph

When the auditor modifies the audit opinion, the auditor should use the heading “Qualified Opinion", “Adverse Opinion" or “Disclaimer of Opinion" as appropriate, for the opinion paragraph.

Expressing a qualified opinion

When the auditor expresses a

[link title="qualified%20opinion" link="%23Qualified-opinion" /] 

Expressing an adverse opinion

When the auditor expresses an

[link title="adverse%20opinion" link="%23Adverse-opinion" /] 

Expressing a disclaimer of opinion

When the auditor disclaims an opinion due to an inability to obtain sufficient appropriate audit evidence, the auditor should formulate the opinion as follows: A disclaimer of opinion on the reliability of the annual accounts: “Because of the significance of the matter(s) described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion and, accordingly, we do not express an opinion on the consolidated annual accounts." A disclaimer of opinion on the legality and regularity of the underlying transactions: “Because of the significance of the matter(s) described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion and, accordingly, we do not express an opinion on the underlying transactions."

Consequential changes to description of auditor’s responsibility

In the case of a qualified or adverse opinion

When the auditor expresses a qualified or adverse opinion, (s)he should amend the description of the auditor’s responsibility to state that (s)he believes that the audit evidence (s)he has obtained is sufficient and appropriate to provide a basis for his/her modified audit opinion.

In the case of a disclaimer of opinion

When the auditor disclaims an opinion due to an inability to obtain sufficient appropriate audit evidence, (s)he should amend the introductory paragraph of the Statement of Assurance to state that (s)he was engaged to audit the annual accounts or underlying transactions. The auditor should also amend the description of the auditor’s responsibility and the description of the scope of the audit to state only the following: “Our responsibility is to express an opinion on the consolidated annual accounts (or the underlying transactions) based on conducting the audit in accordance with International Standards on Auditing. Because of the matter(s) described in the Basis for Disclaimer of Opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion."

Communication with those charged with governance

When the auditor expects to modify the opinion in the Statement of Assurance, (s)he should communicate with those charged with governance the circumstances that lead to the expected modification and the proposed wording of the modification. Communicating with those charged with governance the circumstances that lead to an expected modification to the auditor’s opinion and the proposed wording of the modification enables:

• the auditor to give notice to those charged with governance of the intended modification(s) and the reasons or circumstances for the modification(s);
• the auditor to seek the concurrence of those charged with governance with regard to the facts of the matter(s) giving rise to the expected modification(s), or to confirm matters of disagreement with management as such; and
• those charged with governance to have an opportunity, where appropriate, to provide the auditor with further information and explanations in respect of the matter(s) giving rise to the expected modification(s).

Resources

Examples

Modified opinions in ECA’s annual reports

[link new-window title="Adverse%20opinion%20on%20the%20legality%20and%20regularity%20of%20payments%20underlying%20the%20accounts%20in%20the%20Annual%20report%20on%20the%20implementation%20of%20the%20budget%20concerning%20the%20financial%20year%202015." link="https%3A%2F%2Fwww.eca.europa.eu%2Flists%2Fecadocuments%2Fannualreports-2015%2Fannualreports-2015-en.pdf%23page%3D13" icon="external-link" /] 

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[toggle title="Examples%20of%20material%20misstatements%20of%20the%20consolidated%20accounts"] A material misstatement of the consolidated annual accounts may arise in relation to the: Appropriateness of the selected accounting policies, i.e. they

• are inconsistent with the applicable financial reporting framework;
• are inappropriate in the circumstances; or
• result in the annual accounts not representing the underlying transactions and events in a manner that achieves fair presentation. Financial reporting frameworks often contain requirements for the accounting for, and disclosure of, changes in accounting policies. Where the entity has changed its selection of significant accounting policies, a material misstatement of the financial statements may arise when the entity has not complied with these requirements;

Application of the selected accounting policies, i.e. inconsistent application and unintentional misstatements in application. Appropriateness or adequacy of disclosures in the consolidated annual accounts, i.e.

• all required disclosures are not included;
• disclosures in the consolidated annual accounts are not presented in accordance with the applicable financial reporting framework; or
• the consolidated annual accounts do not provide the disclosures necessary to achieve fair presentation.

[/toggle] 

[toggle title="Examples%20of%20material%20instance%20of%20non-compliance"] A material instance of non-compliance of the transactions underlying the annual accounts (an error or deviation) may arise in relation to: The appropriateness of the compliance processes and policies, i.e. :

• they are not consistent with the applicable legal and regulatory framework;
• they are not appropriate in the circumstances; or
• they result in the transactions underlying the annual accounts not complying in all material aspects with the legal and regulatory framework.

The application of rules, regulations and policies, i.e.

• inconsistent application whether in terms of required timeframe or similar transactions and events;
• incorrect method of application, or when there is disagreement with management about the underlying facts and circumstances to which the rules, etc., are applied; or
• when the entity has not complied with new requirements following a change in rules, etc.

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