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Audit firms are advanced in terms of being able to work remotely. Many firms, even the smaller firms, have cloud-based software that can be accessed anywhere and at any time. The use of cloud-based facilities that allow for the storing and sharing of information enable clients to provide the auditor with information electronically. Together with the ability to have virtual meetings, audits are continuing, writes Hayley Barker Hoogwerf, SAICA Project Director: Assurance.
The advances in technology that provide the auditor with the ability to continue operating do not come without challenges. The two biggest challenges that auditors face are the inability to perform physical verification of assets and employees, and the inability to obtain and inspect original documents. The auditor’s inability to perform specific audit procedures may give rise to a limitation on the scope of the audit, when no alternative procedures can be performed, which in turn may impact the audit opinion expressed.
Auditors are permitted to resume their duties as the country has moved to lockdown alert level 3. However, certain opportunities to obtain sufficient appropriate audit evidence have been lost, with the most pertinent of these being the auditor’s ability to physically attend a March, April and even May 2020 year-end inventory count. These missed opportunities will be considered a limitation on the scope of the audit if the auditor is not able to obtain sufficient appropriate audit evidence by performing alternative procedures. As a result, the market may well see an increase in modified audit opinions expressed. What does this mean for the investor?
Types of modifications to the audit opinion
The auditor is required to form an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. This opinion must be supported by the necessary audit evidence. If the auditor is unable to obtain sufficient appropriate audit evidence to support the audit conclusion, the auditor is required to modify the audit opinion.
There are two types of modified audit opinions that the auditor can express when faced with an inability to obtain sufficient appropriate audit evidence, namely:
In determining which modification is appropriate, the auditor needs to consider whether the possible effects on the financial statements of undetected misstatements, if any, could be either material, or material and pervasive.
Materiality is a user-orientated concept and recognises that some matters, either individually or in aggregate, are important to users in making economic decisions based on the financial statements. Materiality can also be described as a measure of users’ tolerance for misstatement. The auditor’s determination takes into account both quantitative and qualitative factors.
The Glossary of Terms to the International Auditing and Assurance Standards Board’s International Standards indicates that a matter is pervasive if it is not confined to specific elements, accounts or items of the financial statements, but if so confined, represents a substantial portion of the financial statements, or in relation to disclosures, is fundamental to users’ understanding of the financial statements.
If the auditor concludes that the possible effects on the financial statements of undetected misstatements could be material but not pervasive, a qualified opinion will be expressed. Here, the auditor states that except for a particular matter, the financial statements present fairly, in all material aspects, the state of affairs. The auditor is required to describe the matter that gave rise to the qualified opinion and make it clear why he/she was not able to obtain sufficient appropriate audit evidence and why the effect on the financial statements may be material, in a separate section of the auditor’s report.
Examples of the wording used in the auditor’s report under the Basis of Qualified Opinion paragraph are as follows:
It is important to note that the auditor is saying that except for the identified matter that is explained in the basis for the qualified opinion, the rest of the financial statements fairly present the state of affairs.
Disclaimer of opinion
If the auditor concludes that the possible effects on the financial statements of undetected misstatements could be both material and pervasive, the auditor will issue a disclaimer of opinion.
An example of the wording used in the auditor’s report under the Basis of Disclaimer of Opinion paragraph is as follows:
It is important to note that the auditor does not withhold the opinion on the affected elements of the financial statements; an opinion on the financial statements as a whole is not expressed.
The auditor’s report is the auditor’s primary means of communicating the results of the audit to the users of the financial statements. A modified opinion does not necessarily mean a complete failure on either the part of management or the auditor in preparing or reporting on the financial statements. In the event of a modification to the audit opinion, investors and other users of the financial statements are encouraged to pay close attention to the auditor’s report as it contains valuable information that is key to the users’ understanding of what gave rise to the modification.