Annual Audit Manual
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8013 Modified audit opinion
Sep-2020
In This Section
When modifications are required
Communication with those charged with governance
Management imposed scope limitation
Internal control mechanism to address the risk of inappropriate modified auditor’s report
Overview
- Our objectives with regard to audit opinion modifications;
- Circumstances when modifications to our opinion are necessary;
- The requirement to communicate with those charged with governance;
- Types of modified opinions we can issue.
CAS Objective
The objective of the auditor is to express clearly an appropriately modified opinion on the financial statements, that is necessary when (CAS 705.4):
(a) The auditor concludes, based on the audit evidence obtained, that the financial statements as a whole are not free from material misstatement; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.
CAS Requirement
The auditor shall modify the opinion in the auditor’s report when (CAS 705.6):
(a) The auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.
OAG Policy
Audit teams shall consult Audit Services when proposing a modified opinion on the financial statements or financial information, emphasis of matter paragraphs or other matter paragraphs. [Sep-2020]
The following shall be documented as a significant matter:
1) Results of audit procedures indicating that the financial information is or could be materially misstated, including identified misstatements, whether corrected, or expected to be corrected, or not by the entity, which could either individually or when aggregated have a material effect on the financial statements of the entity.
2) Failure to achieve a CAS objective, in which case the significant matter shall include consideration of the implications for the overall audit objective and the audit opinion. [Sep-2015]
OAG Guidance
The circumstances described in CAS 705.6(a) could lead to a qualified opinion or an adverse opinion. The circumstances described in CAS 700.6(b) could lead to a qualified opinion or a disclaimer of opinion.
For detailed guidance on evaluation of whether modifications are required and how we deal with them in our audit report, refer to CAS 706 and consult with Audit Services.
We document circumstances that may lead to our opinion modifications as significant matters.
Use the latest CAS 700 Auditor’s Report template.
CAS Requirement
When the auditor expects to modify the opinion in the auditor’s report, the auditor shall communicate with those charged with governance the circumstances that led to the expected modification and the wording of the modification (CAS 705.30).
CAS Guidance
Communicating with those charged with governance the circumstances that lead to an expected modification to the auditor’s opinion and the wording of the modification enables (CAS 705.A27):
(a) The auditor to give notice to those charged with governance of the intended modification(s) and the reasons (or circumstances) for the modification(s);
(b) The auditor to seek the concurrence of those charged with governance regarding the facts of the matter(s) giving rise to the expected modification(s), or to confirm matters of disagreement with management as such; and
(c) 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).
OAG Guidance
For guidance on communicating with those charged with governance refer to OAG Audit 2210.
CAS Requirement
The auditor shall express a qualified opinion when (CAS 705.7):
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.
OAG Guidance
For more detailed guidance refer to CAS 705 and consult with Audit Services.
If the auditor is unable to obtain sufficient appropriate audit evidence due to a limitation imposed by management, there are additional considerations. Use the latest CAS 700 Auditor’s Report template.
CAS Requirement
The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements (CAS 705.8).
OAG Guidance
For more detailed guidance refer to CAS 705 and consult with Audit Services.
Use the latest CAS 700 Auditor’s Report template.
CAS Requirement
The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive (CAS 705.9).
The auditor shall disclaim an opinion when, in extremely rare circumstances involving multiple uncertainties, the auditor concludes that, notwithstanding having obtained sufficient appropriate audit evidence regarding each of the individual uncertainties, it is not possible to form an opinion on the financial statements due to the potential interaction of the uncertainties and their possible cumulative effect on the financial statements (CAS 705.10).
OAG Guidance
For more detailed guidance refer to CAS 705 before disclaiming an opinion on the financial statements and consult with Audit Services.
If we are unable to obtain sufficient appropriate audit evidence due to a limitation imposed by management, there are additional considerations. See below guidance, Management imposed scope limitation.
Use the latest CAS 700 Auditor’s Report template.
CAS Requirement
If, after accepting the engagement, the auditor becomes aware that management has imposed a limitation on the scope of the audit that the auditor considers likely to result in the need to express a qualified opinion or to disclaim an opinion on the financial statements, the auditor shall request that management remove the limitation (CAS 705.11).
If management refuses to remove the limitation referred to in paragraph 11 of this CAS, the auditor shall communicate the matter to those charged with governance, unless all of those charged with governance are involved in managing the entity, and determine whether it is possible to perform alternative procedures to obtain sufficient appropriate audit evidence (CAS 705.12).
If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor shall determine the implications as follows (CAS 705.13):
(a) If the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive, the auditor shall qualify the opinion; or
(b) If the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive so that a qualification of the opinion would be inadequate to communicate the gravity of the situation, the auditor shall:
i) Withdraw from the audit, where practicable and possible under applicable law or regulation; or
ii) If withdrawal from the audit before issuing the auditor’s report is not practicable or possible, disclaim an opinion on the financial statements.
If the auditor withdraws as contemplated by paragraph 13(b)(i), before withdrawing, the auditor shall communicate to those charged with governance any matters regarding misstatements identified during the audit that would have given rise to a modification of the opinion (CAS 705.14).
CAS Guidance
The practicality of withdrawing from the audit may depend on the stage of completion of the engagement at the time that management imposes the scope limitation. If the auditor has substantially completed the audit, the auditor may decide to complete the audit to the extent possible, disclaim an opinion and explain the scope limitation within the Basis for Disclaimer of Opinion section prior to withdrawing (CAS 705.A13).
In certain circumstances, withdrawal from the audit may not be possible if the auditor is required by law or regulation to continue the audit engagement. This may be the case for an auditor that is appointed to audit the financial statements of public sector entities. It may also be the case in jurisdictions where the auditor is appointed to audit the financial statements covering a specific period, or appointed for a specific period and is prohibited from withdrawing before the completion of the audit of those financial statements or before the end of that period, respectively. The auditor may also consider it necessary to include an Other Matter paragraph in the auditor’s report (CAS 705.A14).
When the auditor concludes that withdrawal from the audit is necessary because of a scope limitation, there may be a professional, legal or regulatory requirement for the auditor to communicate matters relating to the withdrawal from the engagement to regulators or the entity’s owners (CAS 705.A15).
OAG Guidance
In circumstances described in CAS 705.11-14, we communicate the related matter to the engagement leader and document it as a significant matter. Consult in accordance with OAG Audit 3081 as appropriate.
Internal control mechanism to address the risk of inappropriate modified auditor’s report
OAG Guidance
In the first year a modification is proposed, Audit Services informs and seeks advice from the Annual Audit and Special Examination Oversight Committee of matters that may lead to a modified auditor’s reports and of a modified auditor’s report prior to their issuance. Then, Audit Services advises the audit team on the conclusion reached by Audit Services. The audit team informs the Auditor General of any proposed modified opinions prior to the finalization of the Auditor’s Report. These procedures do not apply in subsequent consecutive years should the modification for the same reason continue to be required.