ISA 705 Modified Opinion on F/S Flashcards
Which two main concepts are discussed in ISA 705?
[Ref. ISA 705]
- When to modify opinion on F/S.
- How to draft modified opinion paragraphs.
What are different types of Modified Opinions?
[Ref. ISA 705]
- Qualified Opinion.
- Adverse Opinion.
- Disclaimer of Opinion.
When is Qualified Opinion Expressed?
[Ref. ISA 705]
- If there is Misstatement whose effect is Material.
- If there is Scope Limitation whose effect is Material.
When is Adverse Opinion Expressed?
[Ref. ISA 705]
If there is Misstatement whose effect is Pervasive.
When is Disclaimer of Opinion Expressed?
[Ref. ISA 705]
- If there is Scope Limitation whose effect is Pervasive.
- If there are Multiple Uncertainties
Give some examples of Misstatements?
[Ref. ISA 705]
- Subsequent Adjusting events are not recorded in financial statements (e.g. Bankruptcy of debtor/recovery of doubtful debt, Decision of legal cases, Sale of inventory below cost).
- Subsequent Non-Adjusting events are not disclosed in financial statements (e.g. destruction of major assets by fire or natural disaster, issuing significant bank guarantee).
- Not including required disclosures (e.g. circumstances of impairment loss, related party relationships or transactions, EPS of a listed company)
- Debt-covenant breached but management still classified it as long-term loan.
- Litigations pending against company not appropriately recorded or disclosed.
- Contingent assets (i.e. possible but not probable) are disclosed in financial statements.
- Selective revaluation of fixed assets, or no revaluation conducted at year-end when revaluation model is used.
- Damaged or Obsolete inventory is not recorded at Lower of Cost and NRV.
- Impairment loss (or depreciation) is not recorded on plant which is not in use, or is not useful.
- Not recording provision for bad debts or provision for warranty.
- Research cost or Repair expense is capitalized.
Give some examples of Scope Limitation?
[Ref. ISA 705]
Limitation by Circumstances beyond control of entity or relating to nature/timing of auditor’s work:
- Accounting records of entity have been destroyed (e.g. by fire, computer virus or other natural disaster).
- Accounting records of entity have been seized by govt. authorities.
- If auditor is appointed after year end and is unable to observe the physical count of inventory.
- Inventory is at a location where there is threat of life.
- Inventory has been mixed with someone else’s inventory.
- No explanation for negative balances of assets.
Limitations imposed by management/ entity:
- Management prevents the auditor from observing the counting of the physical inventory.
- Management prevents the auditor from sending external confirmation.
- Management does not provide written representations to auditor.
- Management does not provide minutes of meetings of TCWG to auditor.
When will management integrity be doubtful?
[Ref. ISA 705]
- When there is intentional misstatement/misrepresentation by management.
- When there is scope limitation imposed by management.
What is Material?
[Ref. ISA 705]
Items are material if they, individually or in aggregate, could influence the economic decisions of users.
Materiality depends on size as well as nature of misstatement.
What is Pervasive?
[Ref. ISA 705]
Pervasive effects:
- Are not confined to specific accounts/elements;
- If so confined, represent substantial proportion of F/S
What is auditor’s course of action if there is a Scope Limitation imposed by Management after acceptance?
[Ref. ISA 705]
- Request management to remove the limitation.
- Communicate the matter to TCWG.
- If Material, revise risk of fraud (including integrity of management) + express Qualified Opinion.
- If Pervasive, withdraw from engagement if possible and practicable + communicate to Shareholders and Regulators.
- Disclaimer of opinion if withdrawal is not possible and practicable.
Draft an Example of “Qualified Opinion” ?
[Ref. ISA 705]
Qualified Opinion:
We have audited the ……………….
In our opinion, except for the (possible) effects of the matter described in the Basis for Qualified Opinion section of our report, financial statements give true and fair view of financial position of ABC Limited at December 31, 2020 and its financial performance and cash flow for the year then ended in accordance with IFRS.
Draft an Example of “Basis for Qualified Opinion” due to Misstatement?
[Ref. ISA 705]
Basis for Qualified Opinion:
Management has not stated the inventories at the lower of cost and net realizable value but has stated them solely at cost, which is a departure from IFRS. Had management stated the inventories at the lower of cost and net realizable value, inventories would have been written down by xxx, cost of sales would have been increased by xxx, and income tax, net income and shareholders’ equity would have been reduced by xxx, xxx and xxx, respectively.
We conducted our audit in accordance with …………
Draft an Example of “Basis for Qualified Opinion” due to Scope Limitation?
[Ref. ISA 705]
Basis for Qualified Opinion:
We did not observe the counting of the physical stock as of December 31, 20X1 because we were appointed after the year end. We were unable to obtain sufficient appropriate audit evidence by performing alternative audit procedures. Consequently, we were unable to verify whether inventory is stated fairly in financial statements.
We conducted our audit in accordance with …………
Draft an Example of “Adverse Opinion” ?
[Ref. ISA 705]
Adverse Opinion
We have audited the ……………….
In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion section of our report, financial statements do not give true and fair view of financial position of ABC Limited at December 31, 2020 and its financial performance and cash flow for the year then ended in accordance with IFRS.
