Modified opinions

Accounting Ahead | Original study resource | accountingahead.com.au

Modified opinions

MODULE 4 | 4.3.4 | STUDENT COMPANION

An opinion is modified when the statements are materially misstated, or when the auditor can't obtain

sufficient appropriate evidence that they aren't. Two questions decide which modified opinion: the

nature of the problem, and whether its effects, or possible effects, are pervasive. A material but contained

problem gives a qualified opinion of either kind; a pervasive misstatement gives an adverse opinion;

pervasive possible effects of missing evidence give a disclaimer. The basis section explains the matter

and, where practicable, its financial effect.

Which modified opinion?

Material, but not pervasive Material and pervasive

Material misstatement

The statements are

materially misstated

QUALIFIED 'Except for the effects of the

matter...'

Voltana, had management refused the $600,000

warranty increase: a misstatement confined to one

provision and its expense

ADVERSE '...do not give a true and fair view'

A property developer (imagined) books the full profit on

off-the-plan apartment sales when buyers sign, years

before settlement, and refuses to change

Can't obtain evidence

No sufficient appropriate

evidence

QUALIFIED 'Except for the possible effects of

the matter...'

A timber yard (imagined): auditor appointed after year

end, too late for the stocktake; inventory material but

contained

DISCLAIMER 'We do not express an opinion'

A company (imagined) whose accounting system was

destroyed in a cyber attack, with failed backups

Pervasive effects aren't confined to particular items; or, if they are, they make up a substantial proportion of the statements; or, for disclosures, they are

fundamental to users' understanding.

Reading the examples: at Voltana, the refused $600,000 would on its own exceed materiality of about

$480,000, and with the other uncorrected items would total about $790,000. It is material, but confined to one

provision and its expense, so the opinion would be qualified. The developer's single profit policy misstates

revenue, profit, receivables, inventory and the related disclosures right across the statements, so it is pervasive.

At the timber yard only inventory, and the cost of sales it feeds, is in doubt; after the cyber attack, most balances

can't be verified at all.

ADVANCED AUDIT AND ASSURANCE | M4 | 4.3.4 | STUDENT COMPANION

1

Accounting Ahead | Original study resource | accountingahead.com.au

How the auditor's report changes

Unmodified Qualified or adverse Disclaimer

Opinion heading Opinion Qualified Opinion, or Adverse Opinion Disclaimer of Opinion

Key wording '...gives a true and fair view...' 'Except for the (possible) effects of...', or

'...does not give a true and fair view'

'We were engaged to audit...' and 'We do not

express an opinion'

Basis section Basis for Opinion Basis for Qualified (or Adverse) Opinion:

describes the matter; quantifies the financial

effects where practicable, or says why not;

describes omitted disclosures and includes

them if practicable

Basis for Disclaimer of Opinion: explains why

the evidence couldn't be obtained

'Evidence is sufficient and

appropriate'

Yes Yes, 'for our qualified (adverse) opinion' Not stated

Auditor's responsibilities Full description Full description Cut back: engaged to audit, but couldn't

obtain the evidence

Key Audit Matters and

Other Information sections

Included where they apply Included; the modifying matter is referred to,

not described as a key audit matter

Neither section, unless the law requires it

Whenever a modified opinion is expected: tell those charged with governance in advance, with the circumstances and the proposed wording.

Why a disclaimer isn't a harsher adverse opinion: they answer different questions. An adverse opinion is a

firm conclusion, based on sufficient evidence, that the statements are pervasively wrong. A disclaimer says the

auditor couldn't gather enough evidence to reach any conclusion: one says 'we know this is wrong', the other 'we

can't tell'. That is also why a disclaimer drops the statements that would suggest assurance, including the Key

Audit Matters and Other Information sections.

Multiple uncertainties: in extremely rare cases the auditor disclaims even with sufficient evidence about each

of several uncertainties, because their possible interaction and combined effect make an opinion on the

statements as a whole impossible.

When management limits the audit

1 Management limits the scope after acceptance

For example, it refuses access to records or people

2 Ask management to remove the limitation

3 Refused: tell those charged with governance, and try

alternative procedures

4 Still no sufficient appropriate evidence: how big could

the effects be?

Removed: carry on with the auditRemoved

Evidence obtained: no modification for this matterEvidence

Material, not pervasive: QUALIFY, 'except for the possible

effects'

Not pervasive

Material and pervasive: WITHDRAW where practicable and

allowed by law, after explaining the matters to those charged with

governance

Pervasive

Can't withdraw: DISCLAIM an opinionCan't withdraw

Australia: a public company's auditor can resign only with ASIC's consent

(s329(5)); not needed for a proprietary company or a small company limited

by guarantee (s329(9))

Before acceptance: if a limitation would lead to a disclaimer, don't accept the

engagement as an audit, unless the law requires it

ADVANCED AUDIT AND ASSURANCE | M4 | 4.3.4 | STUDENT COMPANION

2

Accounting Ahead | Original study resource | accountingahead.com.au

Australian points: the company's officers must give the auditor access to the books and the information,

explanations and assistance the audit needs (s312), and a management-imposed limitation may itself have to be

reported to ASIC under s311 as an attempt to interfere with the audit. Before accepting an engagement, an

auditor shouldn't accept it as an audit if a limitation in its proposed terms would lead to a disclaimer, unless the

law requires it (ASA 210).

See also: the Exam Reference Pack, page 8, for the full opinion decision path.

Practice questions

MODULE 4 | 4.3.4 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - Which opinion?

For each situation, say which opinion the auditor should give, and why.

Situation (all imagined companies) Opinion Why

(a) Numbat Glassworks Ltd closed one of its three furnaces

in May. The board refuses to write down the idle furnace,

carried at $3.2 million; its recoverable amount is $0.4 million.

Profit before tax is $11 million; materiality is $550,000.

(b) Dollarbird Recruitment Ltd recognises the full value of

three-year staffing contracts as revenue when they are

signed, not as the staff are provided. Revenue, receivables,

contract liabilities, profit, equity and most notes are affected.

(c) Snowgum Lifts Ltd: a server failure destroyed the

ticket-scanning records for one resort's July school holidays,

and no other evidence of that revenue exists. It is material;

everything else is well supported.

(d) Firetail Laundries Ltd: the directors refuse to sign

written representations that they have met their responsibility

for the financial report and given the auditor all relevant

information.

(e) Gidgee Data Centres Ltd: a $70 million loan falls due in

six months and refinancing talks continue. Note 2 explains

this clearly and states that a material uncertainty exists.

(f) Quokka Books Ltd: management declines to correct a

$35,000 overstatement of depreciation. Materiality is

$900,000, and no qualitative factor makes it material.

ADVANCED AUDIT AND ASSURANCE | M4 | 4.3.4 | STUDENT COMPANION

3

Accounting Ahead | Original study resource | accountingahead.com.au

Question 2 - Draft the Basis for Qualified Opinion

Draft the Basis for Qualified Opinion paragraph for Numbat Glassworks in situation (a), including the financial

effect of the matter. Ignore tax.

Question 3 - The withheld board minutes

You are auditing Kinchela Tiles Ltd (imagined), an unlisted public company that makes ceramic tiles. During the

final audit, its managing director refuses to let you read the board minutes for the last two months of the year,

saying they cover only 'confidential strategy'. Plan your response, step by step.

ADVANCED AUDIT AND ASSURANCE | M4 | 4.3.4 | STUDENT COMPANION

4

Accounting Ahead | Original study resource | accountingahead.com.au

Worked answers

MODULE 4 | 4.3.4 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - The opinions

Situation Opinion Why

(a) Numbat Glassworks Qualified ('except for the effects') A $2.8 million overstatement is material, but confined to

one asset and its expense: not pervasive

(b) Dollarbird

Recruitment

Adverse The misstatement runs through revenue, receivables,

liabilities, profit, equity and most notes: material and

pervasive

(c) Snowgum Lifts Qualified ('except for the possible

effects')

An inability to obtain evidence, material but confined to

one revenue stream: not pervasive

(d) Firetail Laundries Disclaimer Without the representations about the directors' own

responsibilities, the auditor must disclaim (ASA 580);

the evidence gap is pervasive

(e) Gidgee Data

Centres

Unmodified, with a Material

Uncertainty Related to Going

Concern section

The uncertainty is adequately disclosed, so the

statements aren't misstated

(f) Quokka Books Unmodified The misstatement is clearly below materiality with no

qualitative factor; it is still communicated and covered in

the representations

Question 2 - Numbat Glassworks: a sample paragraph

Basis for Qualified Opinion. Property, plant and equipment includes a furnace, idle since May 2026, carried at

$3.2 million (see the property, plant and equipment note). Its recoverable amount is $0.4 million, and AASB 136

Impairment of Assets requires it to be written down to that amount. Had it been written down, property, plant

and equipment and equity would each be $2.8 million lower, and an impairment expense of $2.8 million would

reduce profit before tax from $11.0 million to $8.2 million. [The standard statements follow: the audit was

conducted under the Australian Auditing Standards; independence; and the evidence is sufficient and

appropriate for our qualified opinion.]

The opinion paragraph then reads 'except for the effects of the matter described in the Basis for Qualified

Opinion section', followed by the usual true and fair wording.

Question 3 - Kinchela Tiles: the response

Ask why, and treat it as a warning sign. Minutes record decisions on borrowings, litigation, major contracts,

related party dealings and events after year end. Withholding two months of them could hide something

material, so raise your scepticism and reassess the risk of fraud.

Ask management to remove the restriction. It is a management-imposed limitation on the scope of the

audit, and officers must give the auditor access to the company's books, which include its minutes (s312).

ADVANCED AUDIT AND ASSURANCE | M4 | 4.3.4 | WORKED ANSWERS

5

Accounting Ahead | Original study resource | accountingahead.com.au

If refused, tell those charged with governance: the board, through its chair or the audit committee, and

ask them to give access.

Try alternative procedures: enquiries of the directors, including the non-executive directors; a review of

events and documents after year end, such as legal letters and new contracts; and written representations

about the matters discussed. These are unlikely to substitute fully for the minutes.

Decide the opinion. Possible effects material but not pervasive: qualify ('except for the possible effects').

Material and pervasive: withdraw where practicable and allowed by law, after explaining the matters to those

charged with governance; as Kinchela is a public company, resigning needs ASIC's consent (s329(5)). If you

can't withdraw, disclaim.

Consider integrity and fraud. Does the refusal cast doubt on management's integrity, and so on its

representations? An attempt to interfere with the audit must be notified to ASIC under s311, as soon as

practicable and within 28 days.

Communicate and document: tell those charged with governance in advance of any expected modification

and its wording, and record each step and your reasoning.

ADVANCED AUDIT AND ASSURANCE | M4 | 4.3.4 | WORKED ANSWERS

6