When performing an audit, the goal is to enable the auditor to form and express an opinion on the financial statements of the entity in question. The opinion aims to provide users of the financial statements with the necessary information to enable them to use the statements for their purposes. Users are therefore assured that, depending on the opinion expressed, the information is free/not free from material misstatement to the extent that the auditor performed his/her procedures and could conclude as indicated. Misstatements are considered to be material if they, individually or in aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. The auditor’s opinion is based on the evaluation of the conclusions drawn from the audit evidence gathered during the audit process.
It is important to note that the assurance provided by the auditor is never absolute assurance, i.e. stating that all reporting is one hundred percent correct. It is only reasonable assurance, to the extent that required procedures were performed in terms of the International Standards on Auditing. In essence, procedures are performed on a test basis and in many instances using sample selections; therefore all items will not be selected and only reasonable assurance can be provided.
One of two main opinions can be expressed, based on the auditor’s conclusions drawn from procedures performed. The auditor:
Opinion number 1 is the most favourable opinion, where there is reasonable assurance provided by the auditor that the financials are not materially misstated. (Refer to the article in our May 2014 Newsletter explaining the concept of materiality). The opinion in number 2 states that there has been material misstatement in the financial statements, and this will necessitate a modification in the audit report. The extent of material misstatement can be broken down into different modifications to the report/opinions being expressed. Should the material misstatement exist only with reference to a certain line item in, for example, the balance sheet, the opinion expressed will be different from instances where the misstatement is pervasive and in actual fact cannot be isolated to only one line item (affecting, therefore, too many balances that cannot be distinguished).
Opinions an auditor can express can be categorised as follows:
1. Opinion not modified:
1.1 Unqualified opinion
Reasonable assurance can be provided by the auditor that the financial statements as a whole are free from material misstatement.
Matters that do not affect the auditor’s opinion, but are considered a modification:
The opinion is not affected by the matters in the points listed. Therefore reasonable assurance is still provided by the auditor on the financials as a whole being free from material misstatement. The auditor only needs to disclose these mentioned matters in addition to the opinion.
2. Modified opinion:
Matters that do affect the auditor’s opinion
2.1 Qualified opinion
Misstatements found are material, individually or in aggregate, but not pervasive in the financial statements (i.e. they are only applicable to limited line items in the financial statements).
2.2 Adverse opinion
Misstatements found are, individually or in aggregate, material and pervasive in the financial statements.
2.3 Disclaimer of opinion
Sufficient and appropriate audit evidence could not be obtained and possible effects on the financial statements are material and pervasive.
These three opinions already represent the fact that material misstatement was found by the auditor. The auditor cannot state that the statements are free from material misstatement. The degree to which the the financials are affected by the misstatement/s found, is now the only factor to be dealt with to determine which of the three options is applicable.
Should the misstatement be of such a nature that it was found in an area that can be identified and disclosed and that does not cause the rest of the financials to be misstated, a qualified opinion can be expressed. In other instances, where misstatements are considered to be pervasive, either of the other two opinions will apply, depending on the circumstances.
If you have any further questions about your audit report and its meaning, or if you want to discuss our audit service offering, kindly contact your relationship director or Jana Haasbroek (firstname.lastname@example.org).
Graphic illustration of modified opinions