TIGS & Company is the appointed auditors of RACE Ltd. After completing the audit but before issuing report, the auditor has come to the conclusion that an unqualified opinion cannot be expressed but that the effect of the disagreement with the management is not so material and pervasive as would require an adverse opinion. Advice in detail how should he reports?
A qualified opinion should be expressed when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with management is not so material and pervasive as to require an adverse opinion, or limitation on scope is not so material and pervasive as to require a disclaimer of opinion. A qualified opinion should be expressed as being ‘subject to’ or ‘except for’ the effects of the matter to which the qualification relates.
An adverse opinion should be expressed when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements.
Whenever the auditor expresses an opinion that is other than unqualified, a clear description of all the substantive reasons should be included in the report and unless impracticable, a qualification of the possible effect(s), individually and in aggregate, on the financial statements should be mentioned in the auditor’s report. In circumstances where it is not practicable to quantify the effect of modifications made in the audit report accurately, the auditor may do so, on the basis of estimates made the management after carrying out such audit tests as are possible and clearly indicate the fact that the figures are based on management estimates.
Ordinarily, this information would be set out in a separate paragraph preceding the opinion or disclaimer of opinion and may include a reference to a more extensive discussion, if any, in a note to the financial statements.