Mahal

Examples of Modified Auditors’ Reports on Financial Statements Prepared in

Accordance with the SME-FRS based on HKSA 701 “Modifications to the

Independent Auditor’s Report”

Matters that do affect the auditor’s opinion

Example 1 – Qualified opinion – disagreement with management

Example 2 – Qualified opinion – limitation on the auditor’s work

Example 3 – Disclaimer of opinion – limitation on the auditor’s work

Example 4 – Adverse opinion – disagreement with management

1

Example 1 – Qualified opinion – disagreement with management

INDEPENDENT AUDITOR’S REPORT

TO THE SHAREHOLDERS OF SME LIMITED

(incorporated in [country or place] with limited liability)1

Report on the Financial Statements

We have audited the financial statements of SME Limited (the “Company”) set out on pages ........

to ........, which comprise the balance sheet as at 31 December 200X, and the income statement for

the year then ended, and a summary of significant accounting policies and other explanatory notes.

Directors’ responsibility for the financial statements

The directors are responsible for the preparation and presentation of these financial statements in

accordance with Small and Medium-sized Entity Financial Reporting Standard (SME-FRS) issued by

the Hong Kong Institute of Certified Public Accountants. This responsibility includes designing,

implementing and maintaining internal control relevant to the preparation and presentation of financial

statements that are free from material misstatement, whether due to fraud or error; selecting and

applying appropriate accounting policies; and making accounting estimates that are reasonable in the

circumstances.

[In addition, section 141D of the Hong Kong Companies Ordinance requires that the balance sheet

together with the notes thereon should be prepared in accordance with the requirements of the

Eleventh Schedule to that Ordinance.] 2

Auditor’s responsibility

Our responsibility is to express an opinion on these financial statements based on our audit 3. We

conducted our audit in accordance with Hong Kong Standards on Auditing and with reference to PN

900 (Revised) “Audit of Financial Statements Prepared in Accordance with the Small and Mediumsized

Entity Financial Reporting Standard” issued by the Hong Kong Institute of Certified Public

Accountants. Those standards require that we comply with ethical requirements and plan and perform

the audit to obtain reasonable assurance as to whether the financial statements are free from material

misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures

in the financial statements. The procedures selected depend on the auditor’s judgment, including the

assessment of the risks of material misstatement of the financial statements, whether due to fraud or

error. In making those risk assessments, the auditor considers internal control relevant to the entity’s

preparation and presentation of the financial statements in order to design audit procedures that are

appropriate in the circumstances, but not for the purpose of expressing an opinion on the

effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of

accounting policies used and the reasonableness of accounting estimates made by the directors, as

well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis

for our audit opinion.

1 In Hong Kong, it is a common practice to disclose the place of incorporation of the company.

2 This additional wording is required for companies incorporated in Hong Kong applying section 141D of the Hong Kong

Companies Ordinance

3 Auditors may consider it appropriate to clarify to whom they are responsible here or elsewhere in the report in accordance

with their risk management policies and with reference to Professional Risk Management Bulletin No. 2 “Auditors’ Duty of

Care To Third Parties and The Audit Report”.

2

Basis for qualified opinion

Included in debtors shown on the balance sheet is an amount of HK$X due from a debtor which has

ceased trading. The Company has no security for this debt. On the basis that no security has been

obtained and no cash has been received on the debt, in our opinion the Company should make a full

provision for impairment of HK$X, reducing profit before taxation for the year and net assets at 31

December 200X by that amount.

Qualified opinion arising from disagreement about accounting treatment

In our opinion, except for the effect on the financial statements of the matter described in the basis for

qualified opinion paragraph, the financial statements have been properly prepared, in all material

respects, in accordance with the SME-FRS. [In addition, in our opinion, except for the effect on the

financial statements of the matter described in the basis for qualified opinion paragraph, the balance

sheet together with the notes thereon is properly drawn up so as to exhibit a true and correct view of

the state of the Company’s affairs as at 31 December 200X according to the best of our information

and explanations given to us, and as shown by the books of the Company.]2

Report on other matters under section 141D of the Hong Kong Companies

Ordinance

[We report that we have obtained all the information and explanations which we have required.]2

XYZ & Co.

Certified Public Accountants (Practising) [or Certified Public Accountants]

[Address]

Date

3

Example 2 – Qualified opinion - limitation on the auditor's work






to........, which comprise the balance sheet as at 31 December 200X, and the income statement for









circumstances.





Our responsibility is to express an opinion on these financial statements based on our audit 3. Except

as described in the basis for qualified opinion paragraph, we conducted our audit in accordance with

Hong Kong Standards on Auditing and with reference to PN 900 (Revised) “Audit of Financial

Statements Prepared in Accordance with the Small and Medium-sized Entity Financial Reporting

Standard” issued by the Hong Kong Institute of Certified Public Accountants. Those standards require

that we comply with ethical requirements and plan and perform the audit to obtain reasonable

assurance as to whether the financial statements are free from material misstatement.














Companies Ordinance




4

Basis for qualified opinion

HK$X of the Company's recorded turnover comprises cash sales, over which there was no system of

internal control on which we could rely for the purpose of our audit. There were no other satisfactory

audit procedures that we could adopt to satisfy ourselves that the recorded turnover was free from

material misstatements.

Qualified opinion arising from limitation of audit scope

In our opinion, except for the effects of such adjustments, if any, as might have been determined to be

necessary had we been able to satisfy ourselves as to cash sales, the financial statements have been

properly prepared, in all material respects, in accordance with the SME-FRS. [In addition, in our

opinion, except for the effects of such adjustments, if any, as might have been determined to be

necessary had we been able to satisfy ourselves as to cash sales, the balance sheet together with the

notes thereon is properly drawn up so as to exhibit a true and correct view of the state of the

Company’s affairs as at 31 December 200X according to the best of our information and explanations

given to us, and as shown by the books of the Company.]2

.

Report on matters under sections 141(4), 141(6) and 141D of the Hong Kong

Companies Ordinance

In respect alone of the limitation on our work relating to cash sales:

‧ we have not obtained all the information and explanations that we considered necessary for the

purpose of our audit; and

‧ we were unable to determine whether proper books of account had been kept.

XYZ & Co.


[Address]

Date

5

Example 3 – Disclaimer of opinion - limitation on the auditor’s work





We were engaged to audit the financial statements of SME Limited (the “Company”) set out on

pages ........ to........, which comprise the balance sheet as at 31 December 200X, and the income

statement, for the year then ended, and a summary of significant accounting policies and other

explanatory notes.








circumstances.





Our responsibility is to express an opinion on these financial statements based on our audit.3 Except

as described in the basis for disclaimer of opinion paragraph, we conducted our audit in accordance

with Hong Kong Standards on Auditing and with reference to PN 900 (Revised) “Audit of Financial

Statements Prepared in Accordance with the Small and Medium-sized Entity Financial Reporting

Standard” issued by the Hong Kong Institute of Certified Public Accountants. Those standards require

that we comply with ethical requirements and plan and perform the audit to obtain reasonable

assurance as to whether the financial statements are free from material misstatement. However,

because of the matter described in the basis for disclaimer of opinion paragraph, we were not able to

obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.

Basis for disclaimer of opinion

We were initially appointed auditors on (date) which was subsequent to the end of the Company's

financial year. In consequence we were unable to carry out auditing procedures necessary to obtain

adequate assurance regarding the quantities and condition of inventories and work in progress,

appearing in the balance sheet at HK$X. There were no other satisfactory audit procedures that we

could adopt to obtain sufficient evidence regarding the existence of inventories and work in progress.

Accordingly, we have not been able to obtain sufficient appropriate audit evidence to provide a basis



Companies Ordinance




6

for an audit opinion. Any adjustment to the figure may have a consequential significant effect on the

profit [loss] for the year and net assets at 31 December 200X.

Disclaimer of opinion: disclaimer on view given by financial statements4

Because of the significance of the matters described in the basis for disclaimer of opinion paragraph,

we do not express an opinion on the financial statements as to whether they have been properly

prepared, in all material respects, in accordance with the SME-FRS. [In addition, we do not express

an opinion on the balance sheet together with the notes thereon as to whether they are properly

drawn up so as to exhibit a true and correct view of the state of the Company’s affairs as at 31

December 200X according to the best of our information and explanations given to us, and as shown

by the books of the Company.]2

Report on matters under sections 141(4), 141(6) and 141D of the Hong Kong

Companies Ordinance

In respect alone of the limitation on our work relating to inventories and work in progress:

‧ we have not obtained all the information and explanations that we considered necessary for the

purpose of our audit; and

‧ we were unable to determine whether proper books of account had been kept.

XYZ & Co.


[Address]

Date

4 In this example, it is assumed that the counting of physical inventories is so material and pervasive that the auditor has

not been able to obtain sufficient appropriate audit evidence and accordingly is unable to express an opinion on the

financial statements. If the limitation of scope is not considered so material and pervasive, the auditor may express an

“except for” opinion.

7

Example 4 – Adverse opinion – disagreement with management






to........, which comprise the balance sheet as at 31 December 200X, and the income statement, for









circumstances.





Our responsibility is to express an opinion on these financial statements based on our audit3. We

conducted our audit in accordance with Hong Kong Standards on Auditing and with reference to PN

900 (Revised) “Audit of Financial Statements Prepared in Accordance with the Small and Mediumsized

Entity Financial Reporting Standard” issued by the Hong Kong Institute of Certified Public

Accountants. Those standards require that we comply with ethical requirements and plan and perform

the audit to obtain reasonable assurance as to whether the financial statements are free from material

misstatement.














Companies Ordinance



Care To Third Parties and The Audit Report”

8

Basis for adverse opinion

As more fully explained in note ... to the financial statements, losses expected to arise on certain longterm

contracts currently in progress have not been recognised as expenses, as the directors consider

that such losses should be off-set against amounts recoverable on other long-term contracts. In our

opinion, the expected losses on individual contracts should be recognised as expenses immediately

as required by Section 8 of the SME-FRS. If losses had been so recognised the effect would have

been to [reduce the profit/increase the loss] before taxation for the year and reduce the gross

amounts due from customers at 31 December 200X by HK$X.

Adverse opinion

In our opinion, because of the significance of effects of the matters described in the basis for adverse

opinion paragraph, the financial statements have not been properly prepared, in accordance with the

SME-FRS. [In addition, in our opinion the balance sheet together with the notes thereon is not

properly drawn up so as to exhibit a true and correct view of the state of the Company’s affairs as at

31 December 200X according to the best of our information and explanations given to us, and as

shown by the books of the Company.]2

Report on other matters under section 141D of the Hong Kong Companies

Ordinance

[We report that we have obtained all the information and explanations which we have required.]2

XYZ & Co.


[Address]

RPG 4 – EXAMPLES OF INDEPENDENT AUDITORS’ REPORTS

EFFECTIVE FOR AUDITS OF FINANCIAL STATEMENTS FOR PERIODS BEGINNING ON OR AFTER 1 JANUARY 2010

AND AUDITORS’ REPORTS DATED ON OR AFTER 1 JULY 2013

18

QUALIFIED OPINION REPORTS

Example 9: Inability to obtain sufficient appropriate audit evidence – Unable to observe

physical inventory count

INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF XYZ BERHAD


We have audited the financial statements of XYZ Berhad, which comprise the balance sheet as at

31 December 20XX, and the income statement, statement of changes in equity and cash flow

statement1

for the year then ended, and a summary of significant accounting policies and other

explanatory information, as set out on pages AA to ZZ.

Directors’ Responsibility for the Financial Statements

The directors of the Company are responsible for the preparation of financial statements so as to

give a true and fair view in accordance with Financial Reporting Standards2

and the requirements

of the Companies Act 1965 in Malaysia. The directors are also responsible for such internal

control as the directors determine is necessary to enable the preparation of financial statements

that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We

conducted our audit in accordance with approved standards on auditing in Malaysia. Those

standards require that we comply with ethical requirements and plan and perform the audit to

obtain reasonable assurance about whether the financial statements are free from material

misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and

disclosures in the financial statements. The procedures selected depend on our judgement,

including the assessment of risks of material misstatement of the financial statements, whether due

to fraud or error. In making those risk assessments, we consider internal control relevant to the

entity’s preparation of financial statements that give a true and fair view in order to design audit

procedures that are appropriate in the circumstances, but not for the purpose of expressing an

opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the

appropriateness of accounting policies used and the reasonableness of accounting estimates

made by the directors, as well as evaluating the overall presentation of the financial statements.

1

Financial Reporting Standard (FRS) 101 uses the term statement of financial position, statement of

comprehensive income, statement of changes in equity and statement of cash flows. An entity may use

other titles for the statements other than those used in FRS 101.

2

Financial Reporting Standards is also known as Accounting Standards for Entities Other than Private

Entities. Where the entity uses Accounting Standards for Private Entities (or also known as Private Entity

Reporting Standards), the words should be changed accordingly to reflect the accounting framework

adopted by the entity.




19

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a

basis for our qualified audit opinion.

Basis for Qualified Opinion

We did not observe the counting of the physical inventories as of 31 December 20XX, since that

date was prior to the time we were initially engaged as auditors for the Company. Owing to the

nature of the Company’s records, we were unable to satisfy ourselves as to inventory quantities by

other audit procedures.

Qualified Opinion

In our opinion, except for the effects of the matter described in the Basis of Qualified Opinion

paragraph, the financial statements give a true and fair view of the financial position of the

Company as of 31 December 20XX and of its financial performance and cash flows for the year

then ended in accordance with Financial Reporting Standards2

and the requirements of the

Companies Act 1965 in Malaysia.

Report on Other Legal and Regulatory Requirements

In accordance with the requirements of the Companies Act 1965 in Malaysia, we also report that

in our opinion, the accounting and other records and the registers required by the Act to be kept

by the Company have been properly kept in accordance with the provisions of the Act.

Other Matters

This report is made solely to the members of the Company, as a body, in accordance with Section

174 of the Companies Act 1965 in Malaysia and for no other purpose. We do not assume

responsibility to any other person for the content of this report.

(Audit Firm)

[AF: 8888]

Chartered Accountants

(Partner)

[9999/9/99 (J/PH)]

Chartered Accountant

Date

[Location in the country]




20

Example 10: Financial statements are materially misstated – Inappropriate accounting

method

INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF XYZ BERHAD


We have audited the financial statements of XYZ Berhad, which comprise the balance sheet as at

31 December 20XX, and the income statement, statement of changes in equity and cash flow

statement1


explanatory information, as set out on pages AA to ZZ.

Directors’ Responsibility for the Financial Statements

The directors of the Company are responsible for the preparation of financial statements so as to

give a true and fair view in accordance with Financial Reporting Standards2

and the requirements

of the Companies Act 1965 in Malaysia. The directors are also responsible for such internal

control as the directors determine is necessary to enable the preparation of financial statements

that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We

conducted our audit in accordance with approved standards on auditing in Malaysia. Those



misstatement.


disclosures in the financial statements. The procedures selected depend on our judgement,

including the assessment of risks of material misstatement of the financial statements, whether due

to fraud or error. In making those risk assessments, we consider internal control relevant to the

entity’s preparation of financial statements that give a true and fair view in order to design audit

procedures that are appropriate in the circumstances, but not for the purpose of expressing an

opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the


made by the directors, as well as evaluating the overall presentation of the financial statements.

1

Financial Reporting Standard (FRS) 101 uses the term statement of financial position, statement of

comprehensive income, statement of changes in equity and statement of cash flows. An entity may use

other titles for the statements other than those used in FRS 101.

2

Financial Reporting Standards is also known as Accounting Standards for Entities Other than Private

Entities. Where the entity uses Accounting Standards for Private Entities (or also known as Private Entity

Reporting Standards), the words should be changed accordingly to reflect the accounting framework

adopted by the entity.




21




As discussed in Note GG to the financial statements, no depreciation has been provided in the

financial statements which practice, in our opinion, is not in accordance with FRS 116, Property,

Plant and Equipment. Had depreciation been provided for, the depreciation charge for the year

ended 31 December 20XX would be RMXXX,XXX based on the straight-line method of depreciation

using annual rates of 5% for the building and 20% for the equipment. In addition, the carrying

value of property, plant and equipment and retained earnings would have been reduced by

RMXXX,XXX and RMXXX,XXX respectively. The profit for the year ended 31 December 20XX would

have been reduced by RMXXX,XXX.

Qualified Opinion

In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion

paragraph, the financial statements give a true and fair view of the financial position of the

Company as of 31 December 20XX and of its financial performance and cash flows for the year

then ended in accordance with Financial Reporting Standards2

and the requirements of the

Companies Act 1965 in Malaysia.


In accordance with the requirements of the Companies Act 1965 in Malaysia, we also report that

in our opinion:

(a) except for the matter as described in the Basis for Qualified Opinion paragraph, the

accounting and other records have been properly kept in accordance with the provisions of

the Act.

(b) the registers required by the Act to be kept by the Company have been properly kept in

accordance with the provisions of the Act.

Other Matters

This report is made solely to the members of the Company, as a body, in accordance with Section

174 of the Companies Act 1965 in Malaysia and for no other purpose. We do not assume

responsibility to any other person for the content of this report.

(Audit Firm)

[AF: 8888]

Chartered Accountants

(Partner)

[9999/9/99 (J/PH)]

ISA (UK and Ireland) 705

14

Illustration 1:

Circumstances include the following:

Audit of a complete set of general purpose financial statements prepared by

management of the entity in accordance with International Financial Reporting

Standards.

The terms of the audit engagement reflect the description of management’s

responsibility for the financial statements in ISA 210.9

Inventories are misstated. The misstatement is deemed to be material but not

pervasive to the financial statements.

In addition to the audit of the financial statements, the auditor has other reporting

responsibilities required under local law.


[Appropriate Addressee]

Report on the Financial Statements10

We have audited the accompanying financial statements of ABC Company, which comprise

the balance sheet as at December 31, 20X1, and the income statement, statement of changes

in equity and cash flow statement for the year then ended, and a summary of significant

accounting policies and other explanatory information.

Management’s11 Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial

statements in accordance with International Financial Reporting Standards,

12 and for such

internal control as management determines is necessary to enable the preparation of financial

statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those



misstatement.


disclosures in the financial statements. The procedures selected depend on the auditor’s

judgment, including the assessment of the risks of material misstatement of the financial

9

ISA 210, “Agreeing the Terms of Audit Engagements.”

10 The sub-title “Report on the Financial Statements” is unnecessary in circumstances when the second subtitle

“Report on Other Legal and Regulatory Requirements” is not applicable.

11 Or other term that is appropriate in the context of the legal framework in the particular jurisdiction.

12 Where management’s responsibility is to prepare financial statements that give a true and fair view, this

may read: “Management is responsible for the preparation of financial statements that give a true and fair

view in accordance with International Financial Reporting Standards, and for such ...”


15

statements, whether due to fraud or error. In making those risk assessments, the auditor

considers internal control relevant to the entity’s preparation and fair presentation13 of the

financial statements in order to design audit procedures that are appropriate in the

circumstances, but not for the purpose of expressing an opinion on the effectiveness of the

entity’s internal control.14 An audit also includes evaluating the appropriateness of accounting

policies used and the reasonableness of accounting estimates made by management, as well

as evaluating the overall presentation of the financial statements.




The company’s inventories are carried in the balance sheet at xxx. Management has not stated

the inventories at the lower of cost and net realizable value but has stated them solely at cost,

which constitutes a departure from International Financial Reporting Standards. The company’s

records indicate that had management stated the inventories at the lower of cost and net

realizable value, an amount of xxx would have been required to write the inventories down to

their net realizable value. Accordingly, 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.

Qualified Opinion

In our opinion, except for the effects of the matter described in the Basis for Qualified

Opinion paragraph, the financial statements present fairly, in all material respects, (or give a

true and fair view of) the financial position of ABC Company as at December 31, 20X1, and

(of) its financial performance and its cash flows for the year then ended in accordance with

International Financial Reporting Standards.


[Form and content of this section of the auditor’s report will vary depending on the nature of

the auditor’s other reporting responsibilities.]

[Auditor’s signature]

[Date of the auditor’s report]

[Auditor’s address]

13 In the case of footnote 12, this may read: “In making those risk assessments, the auditor considers internal

control relevant to the entity’s preparation of financial statements that give a true and fair view in order to

design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an

opinion on the effectiveness of the entity’s internal control.”

14 In circumstances when the auditor also has responsibility to express an opinion on the effectiveness of

internal control in conjunction with the audit of the financial statements, this sentence would be worded as

follows: “In making those risk assessments, the auditor considers internal control relevant to the entity’s

preparation and fair presentation of the financial statements in order to design audit procedures that are

appropriate in the circumstances.” In the case of footnote 12, this may read: “In making those risk

assessments, the auditor considers internal control relevant to the entity’s preparation of financial statements

that give a true and fair view in order to design audit procedures that are appropriate in the circumstances.”


16

Illustration 2:


Audit of consolidated general purpose financial statements prepared by management

of the parent in accordance with International Financial Reporting Standards.


responsibility for the financial statements in ISA 210.

The financial statements are materially misstated due to the non-consolidation of a

subsidiary. The material misstatement is deemed to be pervasive to the financial

statements. The effects of the misstatement on the financial statements have not been

determined because it was not practicable to do so.

In addition to the audit of the consolidated financial statements, the auditor has other

reporting responsibilities required under local law.



Report on the Consolidated Financial Statements15

We have audited the accompanying consolidated financial statements of ABC Company and

its subsidiaries, which comprise the consolidated balance sheet as at December 31, 20X1, and

the consolidated income statement, statement of changes in equity and cash flow statement


explanatory information.

Management’s16 Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated

financial statements in accordance with International Financial Reporting Standards,

17 and for

such internal control as management determines is necessary to enable the preparation of

consolidated financial statements that are free from material misstatement, whether due to

fraud or error.


Our responsibility is to express an opinion on these consolidated financial statements based

on our audit. We conducted our audit in accordance with International Standards on Auditing.

Those standards require that we comply with ethical requirements and plan and perform the

audit to obtain reasonable assurance about whether the consolidated financial statements are

free from material misstatement.

15 The sub-title “Report on the Consolidated Financial Statements” is unnecessary in circumstances when the

second sub-title “Report on Other Legal and Regulatory Requirements” is not applicable.


17 Where management’s responsibility is to prepare consolidated financial statements that give a true and fair

view, this may read: “Management is responsible for the preparation of consolidated financial statements

that give a true and fair view in accordance with International Financial Reporting Standards, and for such

...”


17


disclosures in the consolidated financial statements. The procedures selected depend on the

auditor’s judgment, including the assessment of the risks of material misstatement of the

consolidated financial statements, whether due to fraud or error. In making those risk

assessments, the auditor considers internal control relevant to the entity’s preparation and fair

presentation18 of the consolidated financial statements in order to design audit procedures that

are appropriate in the circumstances, but not for the purpose of expressing an opinion on the

effectiveness of the entity’s internal control.19 An audit also includes evaluating the


made by management, as well as evaluating the overall presentation of the consolidated

financial statements.


basis for our adverse audit opinion.

Basis for Adverse Opinion

As explained in Note X, the company has not consolidated the financial statements of

subsidiary XYZ Company it acquired during 20X1 because it has not yet been able to

ascertain the fair values of certain of the subsidiary’s material assets and liabilities at the

acquisition date. This investment is therefore accounted for on a cost basis. Under

International Financial Reporting Standards, the subsidiary should have been consolidated

because it is controlled by the company. Had XYZ been consolidated, many elements in the

accompanying financial statements would have been materially affected. The effects on the

consolidated financial statements of the failure to consolidate have not been determined.

Adverse Opinion

In our opinion, because of the significance of the matter discussed in the Basis for Adverse

Opinion paragraph, the consolidated financial statements do not present fairly (or do not give

a true and fair view of) the financial position of ABC Company and its subsidiaries as at

December 31, 20X1, and (of) their financial performance and their cash flows for the year

then ended in accordance with International Financial Reporting Standards.


control relevant to the entity’s preparation of consolidated financial statements that give a true and fair view

in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of

expressing an opinion on the effectiveness of the entity’s internal control.”


internal control in conjunction with the audit of the consolidated financial statements, this sentence would

be worded as follows: “In making those risk assessments, the auditor considers internal control relevant to

the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit

procedures that are appropriate in the circumstances.” In the case of footnote 17, this may read: “In making

those risk assessments, the auditor considers internal control relevant to the entity’s preparation of

consolidated financial statements that give a true and fair view in order to design audit procedures that are

appropriate in the circumstances.”


18








19

Illustration 3:




Standards.



The auditor was unable to obtain sufficient appropriate audit evidence regarding an

investment in a foreign affiliate. The possible effects of the inability to obtain

sufficient appropriate audit evidence are deemed to be material but not pervasive to

the financial statements.






We have audited the accompanying financial statements of ABC Company, which comprise

the balance sheet as at December 31, 20X1, and the income statement, statement of changes

in equity and cash flow statement for the year then ended, and a summary of significant

accounting policies and other explanatory information.




22 and for such




Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those



misstatement.


disclosures in the financial statements. The procedures selected depend on the auditor’s






view in accordance with International Financial Reporting Standards, and for such ...”


20

judgment, including the assessment of the risks of material misstatement of the financial

statements, whether due to fraud or error. In making those risk assessments, the auditor

considers internal control relevant to the entity’s preparation and fair presentation23 of the

financial statements in order to design audit procedures that are appropriate in the

circumstances, but not for the purpose of expressing an opinion on the effectiveness of the

entity’s internal control.24 An audit also includes evaluating the appropriateness of accounting

policies used and the reasonableness of accounting estimates made by management, as well

as evaluating the overall presentation of the financial statements.




ABC Company’s investment in XYZ Company, a foreign associate acquired during the year

and accounted for by the equity method, is carried at xxx on the balance sheet as at December

31, 20X1, and ABC’s share of XYZ’s net income of xxx is included in ABC’s income for the

year then ended. We were unable to obtain sufficient appropriate audit evidence about the

carrying amount of ABC’s investment in XYZ as at December 31, 20X1 and ABC’s share of

XYZ’s net income for the year because we were denied access to the financial information,

management, and the auditors of XYZ. Consequently, we were unable to determine whether

any adjustments to these amounts were necessary.

Qualified Opinion

In our opinion, except for the possible effects of the matter described in the Basis for

Qualified Opinion paragraph, the financial statements present fairly, in all material respects,

(or give a true and fair view of) the financial position of ABC Company as at December 31,

20X1, and (of) its financial performance and its cash flows for the year then ended in

accordance with International Financial Reporting Standards.








control relevant to the entity’s preparation of financial statements that give a true and fair view in order to

design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an

opinion on the effectiveness of the entity’s internal control.”


internal control in conjunction with the audit of the financial statements, this sentence would be worded as

follows: “In making those risk assessments, the auditor considers internal control relevant to the entity’s

preparation and fair presentation of the financial statements in order to design audit procedures that are

appropriate in the circumstances.” In the case of footnote 22, this may read: “In making those risk

assessments, the auditor considers internal control relevant to the entity’s preparation of financial statements

that give a true and fair view in order to design audit procedures that are appropriate in the circumstances.”


21

Illustration 4:




Standards.



The auditor was unable to obtain sufficient appropriate audit evidence about a single

element of the financial statements. That is, the auditor was also unable to obtain

audit evidence about the financial information of a joint venture investment that

represents over 90% of the company’s net assets. The possible effects of this inability

to obtain sufficient appropriate audit evidence are deemed to be both material and

pervasive to the financial statements.






We were engaged to audit the accompanying financial statements of ABC Company, which

comprise the balance sheet as at December 31, 20X1, and the income statement, statement of

changes in equity and cash flow statement for the year then ended, and a summary of

significant accounting policies and other explanatory information.




27 and for such




Our responsibility is to express an opinion on these financial statements based on conducting

the audit in accordance with International Standards on Auditing. Because of the matter

described in the Basis for Disclaimer of Opinion paragraph, however, we were not able to







view in accordance with International Financial Reporting Standards and for such ...”


22

Basis for Disclaimer of Opinion

The company’s investment in its joint venture XYZ (Country X) Company is carried at xxx

on the company’s balance sheet, which represents over 90% of the company’s net assets as at

December 31, 20X1. We were not allowed access to the management and the auditors of

XYZ, including XYZ’s auditors’ audit documentation. As a result, we were unable to

determine whether any adjustments were necessary in respect of the company’s proportional

share of XYZ’s assets that it controls jointly, its proportional share of XYZ’s liabilities for

which it is jointly responsible, its proportional share of XYZ’s income and expenses for the

year, and the elements making up the statement of changes in equity and cash flow statement.

Disclaimer of Opinion

Because of the significance of the matter described in the Basis for Disclaimer of Opinion

paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a

basis for an audit opinion. Accordingly, we do not express an opinion on the financial

statements.








23

Illustration 5:




Standards.



The auditor was unable to obtain sufficient appropriate audit evidence about multiple

elements of the financial statements. That is, the auditor was unable to obtain audit

evidence about the entity’s inventories and accounts receivable. The possible effects

of this inability to obtain sufficient appropriate audit evidence are deemed to be both

material and pervasive to the financial statements.






We were engaged to audit the accompanying financial statements of ABC Company, which

comprise the balance sheet as at December 31, 20X1, and the income statement, statement of

changes in equity and cash flow statement for the year then ended, and a summary of

significant accounting policies and other explanatory information.




30 and for such




Our responsibility is to express an opinion on these financial statements based on conducting

the audit in accordance with International Standards on Auditing. Because of the matters

described in the Basis for Disclaimer of Opinion paragraph, however, we were not able to







view in accordance with International Financial Reporting Standards and for such...”


24

Basis for Disclaimer of Opinion

We were not appointed as auditors of the company until after December 31, 20X1 and thus

did not observe the counting of physical inventories at the beginning and end of the year. We

were unable to satisfy ourselves by alternative means concerning the inventory quantities

held at December 31, 20X0 and 20X1 which are stated in the balance sheet at xxx and xxx,

respectively. In addition, the introduction of a new computerized accounts receivable system

in September 20X1 resulted in numerous errors in accounts receivable. As of the date of our

audit report, management was still in the process of rectifying the system deficiencies and

correcting the errors. We were unable to confirm or verify by alternative means accounts

receivable included in the balance sheet at a total amount of xxx as at December 31, 20X1.

As a result of these matters, we were unable to determine whether any adjustments might

have been found necessary in respect of recorded or unrecorded inventories and accounts

receivable, and the elements making up the income statement, statement of changes in equity

and cash flow statement.

Disclaimer of Opinion

Because of the significance of the matters described in the Basis for Disclaimer of Opinion

paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a

basis for an audit opinion. Accordingly, we do not express an opinion on the financial

statements.






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