This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members to identify the various changes that may need to be made to audit reports under International Standards of Auditing (UK) where there is a modified opinion, emphasis of matter or other matter paragraph.

Members may also wish to refer to the following related helpsheets and guidance:

• Audit reports - overview
• Audit reports – going concern
• Prior year unaudited – Audit report implications
• FRC Bulletins – Illustrative Audit Reports
• Audit and Assurance Faculty guides

An unmodified audit report and unmodified audit opinion is given when the auditor assesses that the financial statements are true and fair and does not need to bring users’ attention to a particular matter. This means that the auditor has been able to gather sufficient appropriate evidence that the financial statements are free from material misstatement.

However, changes to the audit report may be required for a number of reasons. For example, the auditor may wish to draw users’ attention to a matter that has been correctly disclosed in the accounts, or the auditor may need to modify their audit opinion due to a disagreement with management. Further changes to the audit report may or may not be needed as a result of modifying the audit opinion.

This helpsheet assumes that the auditor is not required to report on, and has not decided to voluntarily include, key audit matters.

Emphasis of matter and other matter paragraphs do not modify the audit opinion; instead they are used to draw users’ attention to a matter that is important to their understanding of the financial statements, the audit, the auditor’s responsibilities or the auditor’s report. ISA (UK) 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s report addresses both emphasis of matter paragraphs and other matter paragraphs. These should not be used as a substitute for issuing a modified opinion. The circumstances that lead to an emphasis of matter or other matter being issued are outlined in the following flowchart.

To view the flowchart please download the PDF version of this helpsheet.

The Audit and Assurance Faculty has produced the guide How to report an emphasis of matter under COVID-19: a guide for auditors – it covers where an emphasis of matter paragraph may be included, situations that might drive their use and how to construct the wording of such paragraphs. Although it is written in the context of COVID-19, there is a lot of wider guidance included that auditors may find useful.

Further guidance on the audit report modifications required where the corresponding figures are unaudited can be found in the helpsheet Prior year unaudited – audit report implications.

In some circumstances, the auditor is unable to obtain sufficient appropriate audit evidence to determine whether the financial statements (in whole or in part) give a true and fair view or, having gained sufficient appropriate audit evidence, the auditor has assessed that the financial statements (either as a whole or in part) do not give a true and fair view. Where either of these circumstances occur, the auditor will need to modify their audit opinion.

The type of modification depends not only how material the issue is, but also on how pervasive it is. Paragraph 5 of ISA (UK) 705 Modifications to the Opinion in the Independent Auditor’s Report defines pervasive effects on the financial statements as those that, in the auditor’s judgement:

(i) Are not confined to specific elements, accounts or items of the financial statements;
(ii) If so confined, represent or could represent a substantial proportion of the financial statements; or
(iii) In relation to disclosures, are fundamental to users’ understanding of the financial statements.

The circumstances that lead to a modified audit opinion are outlined in the flowchart below.

To view the flowchart please download the PDF version of this helpsheet.

Audit and Assurance Faculty guides have been produced to help firms prepare their audit reports for each of these specific situations.

Where an auditor has been unable to obtain sufficient, appropriate audit evidence it is also referred to as a limitation of scope. The auditor should be aware that if there is a management imposed limitation on the scope of the audit that the auditor concludes could be pervasive, where practicable and possible under applicable law or regulation, the auditor shall withdraw from the audit rather than issue a disclaimer of opinion (ISA (UK) 705 paragraphs 13 and 14).

For guidance on the audit report requirements in respect of going concern, see Audit reports – going concern.

Guidance on the audit report changes required where there is a material uncertainty related to going concern can be found in the helpsheet Going concern – material uncertainty related to going concern. Where the accounts are prepared on a basis other than going concern, guidance on the changes needed to the audit report are in the helpsheet Going concern – basis other than going concern.

These are not the only changes that the auditor may need to make to their audit report; other changes may need to made depending on the specific circumstances. The modified audit opinion may also impact on other matters the auditor is required to report on directly or required to report by exception. For example, if the auditor has been unable to obtain sufficient appropriate evidence or has identified a material misstatement in the financial statements, the other information may have the same issue. When preparing the audit report, the auditor should ensure that they appropriately tailor each section, as necessary, to the circumstances arising.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.