What type of audit report modification (aka “qualification”) do I need to use? This is a question we often get asked on our technical helpline.

Auditors are reminded of the requirements of ISA (UK) 705 Modifications to the Opinion in the Independent Auditor’s Report in determining the type of audit report required.

The table image, attached, is extracted from the Application and Other Explanatory Material of ISA (UK) 705 and (per paragraph A1 of ISA (UK) 705) “illustrates how the auditor’s judgment about the nature of the matter giving rise to the modification, and the pervasiveness of its effects or possible effects on the financial statements, affects the type of opinion to be expressed.”

Example scenarios covering each of the 4 modifications are:

• An inability to attend the year-end stock take due to lockdown, where alternative procedures have proved unsuccessful in confirming the existence of stock, would likely result in a limitation of scope qualification (the green quadrant).
• The auditor identifies that a material asset is impaired, but the directors refuse to book the write down; this would be a disagreement in accounting treatment, and would lead to a qualified opinion (the red quadrant). This is typically referred to as an “Except for” qualification (i.e. everything is ok except for the indication of a material impairment of the carrying value of a particular asset).
• If the property was an investment property company where the fair values had fallen significantly but the directors refused to accept the reduction in value, this would likely be both material and pervasive (as it affects the whole financial statements), leading to an adverse opinion (the blue quadrant).
• If the client’s accounting records had not been appropriately maintained, controls had failed, the going concern situation has not been appropriately disclosed and access to component auditor working papers was not available, this could lead to a disclaimer of opinion (the orange quadrant).

Auditors should remember that issuing anything other than a clean audit report requires some intricate changes to the wording of the standard audit report text. Members of ICAEW’s Audit & Assurance Faculty can access a number of help sheets that walk through all of the required changes.