ISA 705 - MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

Question 1

ISA 705

ISA 705

MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT

Answer 1

Audit has been carried out
1/ SAAE obtained?
YES - Unqualified Opinion
NO - Alternative Procedures
> YES > Unqualified Opinion
> NO > FS may be misstated > Limitation of Scope > Possible Effects (Material/Pervasive)

QUALIFIED OPINION
DISCLAIMER OF OPINION

2/ IFRSs complied with?
YES - Unqualified Opinion
NO - FS Misstated > EFFECTS (Material / Pervasive)

QUALIFIED OPINION
ADVESRSE OPINION

MATERIAL

VALUE
> 5% of PBT is material
> 1% of TA is material
> 1/2 % of revenue is material

IMPACT
Adjustment will:
- turn BIG profit to a SMALL profit
- turn PROFIT To a LOSS
- cause DEBT COVENANT to be breached

NATURE
Non-disclosure / inadequate disclosure

PERVASIVE
Problem is not confined to specific F/S items If so confined, represent or could represent a substantial proportion of the F/S;
or In relation to DISCLOSURES, are fundamental to users’ understanding of the F/S.

Question 2

ISA 705

Answer 2

NATURE - Inability to obtain SAAE

SEVERITY:
MATERIAL BUT NOT PERVASIVE > Qualified “Except For”
MATERIAL AND PERVASIVE > Disclaimer

NATURE - F/S are materially misstated

SEVERITY:
MATERIAL BUT NOT PERVASIVE > Qualified “Except For” MATERIAL AND PERVASIVE > Adverse

Question 3

ISA 705

Circumstances leading to a modified OPINION - The auditor’s inability to obtain SAAE (also referred to as a limitation on the scope)

Answer 3

1/ The auditor’s inability to obtain SAAE (also referred to as a limitation on the scope)
Circumstances beyond the control of the entity
- The entity’s accounting records have been destroyed as a result of a computer virus , fire, flood, or accidental deletion files
ALTERNATIVE PROCEDURE:

• Auditor unable to obtain audit evidence as there is a war or a natural catastrophe in the country in which the evidence exists

ALTERNATIVE PROCEDURE:

Circumstances relating to the nature or timing of the auditor’s work

• Auditor unable to observe the counting of the physical inventories as a result of being appointed after the year-end.

ALTERNATIVE PROCEDURE:

• Auditor determines that performing substantive procedures alone is not sufficient, & the entity’s ICs are not effective , for eg : entity is a supermarket but does not have cash registers

ALTERNATIVE PROCEDURE:

Limitation imposed by management

• Management prevents the auditor from observing the counting of the physical inventory or sending out direct confirmations.

No valid reason for management imposed limitation.

ALTERNATIVE PROCEDURE:

Valid reason for management imposed limitation.

ALTERNATIVE PROCEDURE:

Question 4

ISA 705

Circumstances leading to a modified OPINION - Material misstatement

Answer 4

Material misstatement may relate to:
Specific financial statement items do not conform to the requirements of the IFRS.
Eg : Company does not:

• Depreciate its non-current assets
• Make a provision when it should

Notes to the accounts are inaccurate or inadequate
Eg: inadequate disclosures of the material uncertainty facing the business

Certain disclosures have been omitted from the Notes to the F/S.

Eg: No disclosures of the material uncertainty facing the business

Question 5

ISA 705

Qualified opinions

Answer 5

1/ Qualified opinion due to a MATERIAL MISSTATEMENT of the F/S (TAOB RRRSAD)
2/ Qualified opinion due to INABILITY to obtain SAAE (TAOB RRRSAB)

Question 6

ISA 705

Adverse & Disclaimer opinions

Answer 6

1/ F/S not true & fair** (TAOB RRRSAD)
2/ Auditor disclaims opinion (TAOB RRRSAD**)

Question 7

ISA 705

BASIS PARAGRAPH

Answer 7

1/ BASIS PARA for Qualified opinion - Misstatement (IMDFI)
2/ BASIS PARA for Qualified opinion - Limitation (IRC)