Audit Reports, Modifications and Auditor Communications
Domain 4 tests selecting the right opinion and communicating clearly when the financial statements or the audit scope are affected.
Opinion logic
- Unmodified: financial statements give a true and fair view.
- Qualified: misstatement or scope limitation is material but not pervasive.
- Adverse: misstatement is material and pervasive.
- Disclaimer: inability to obtain evidence is material and pervasive.
- SA 705 requires a Basis for Opinion section; SA 706 permits Emphasis of Matter or Other Matter paragraphs, which are not modifications; SA 701 requires Key Audit Matters for listed companies. SA 260 requires communication of significant findings to those charged with governance.
Worked example
Inventory costing ₹3 crore is overstated; profit before tax is ₹10 crore and total assets are ₹100 crore. The misstatement is material to profit but does not pervade the financial statements, so the auditor issues a qualified opinion with a quantified basis. If the misstatement made the statements as a whole misleading, an adverse opinion would be appropriate.
Traps
Using Emphasis of Matter as a substitute for a qualification; describing a disagreement as a disclaimer; omitting the basis paragraph; failing to report going-concern material uncertainty under SA 570; and treating Key Audit Matters as a modification.