Unmodified Vs unqualified opinion:
Unmodified and unqualified opinion makes a lot of people confusing and even some auditors.
Before we explain the difference between these two terms, unmodified and unqualified opinion, we should guide you on which auditing standard that you should go to deal with audit opinion.
Some audit firms use local audit standards that allow and require by the local authority to perform their auditing works while most of the international audit firms use both local and international standards on auditing.
You can check this with your company’s annual audit report. It normally states in the standard of use section.
Assuming that ISA is the standard that we use to perform our financial audit and the standard we use to deal with issuing audit reports or opinions is ISA 700 as well as ISA 705.
Well, to deal with audit opinion based on international standards on auditing, the auditor should go to ISA 700 and ISA 705.
ISA 700 dealing with unmodified audit opinion and ISA 705 is dealing with modified opinion.
Now, that enough for which ISA we should go to deal with when issuing the opinion on financial statements based on audit standard. Now let move to the different between Unmodified Opinion and Unqualified Opinion.
Explaining the difference:
If you go to ISA 700 and searching for term unqualified, you will never found it.
Let try searching it by yourself, ok?
Do you know why?
Well, because IFAC did not use term unqualified in its standard to call or refer to the opinion express by the auditor to the financial statements that do not have any problem. The clean opinion.
But instead, it uses the term unmodified.
Unmodified is the official term to express such an opinion or to call such an opinion.
But unqualified is the term called by general accountant and auditor when they refer to that kind of opinion. So, there is no difference, it just the term. But the meaning is the same.
In conclusion, unmodified and unqualified opinions refer to the opinion issued by the auditor to the financial statements that they found no material misstatements.
In case auditors found that there is a material misstatement, they will issue a qualified or adverse opinion based on the materiality as well as their effect on the financial statements.
This is the summary of ISA 210: Agreeing with the Term of Audit Engagement. In this summary, we follow the structure of ISA which is starting from Introduction, Objective, Definition, and Requirement.
You may jump to the specific areas as your requirement. The summary here does not include all the points in standard and it is for quick check only. The full standard is recommended for professional practices.
The Main Purposes of ISA 210 are to:
- Provide the standard and guidance on how the audit firm agree with the term of engagement with its clients
- Provide the standard and guidance on how to audit firms respond to the requests on changing the term and condition.
This standard provides as the basis and guidance when it is preparing to bind agreement with its client for both audit and non-audit services like tax service, accounting review, as well as advisory services.
However, once such non-audit services exist, the standard recommended having a separate engagement letter.
The formal engagement letter is recommended in any situation, term and diction should be clear and understandable from both parties.
The main objective of ISA 210 is said that audit could perform its works only when the term and conditions of the engagement are agreed upon. In that case, the term and conditions are present and agreed by both parties, if possible from those charges with the government.
To simplify on this point, the auditor should accept or continues its works when there is no evidence that management does not agree with the term and conditions.
The following is the definition of the key term in ISA 210:
Precondition for an audit is the condition in which auditor could establish that the Financial Statements that auditor going to audit are preparing in accordance with applicable standard and, the understanding and agreeing rule and responsibilities on management as well as those charge with governments on Financial Statements.
The following are the requirement for five importance point in ISA 210:
Preconditions for an Audit
- Determine if the frameworks to be used are acceptable and if the framework to be used is not acceptable, then the auditor should not accept the engagement.
- Confirm and agreed with management about their responsibilities on the preparation of Financial Statements and Internal Control on Financial Reporting.
- Confirm with management about auditor right to access information, and if management does not agree, engagement should not accept.
- Confirm the scope of the audit and if the limitation is imposed. Access if the impose affect the audit words for its opinion.
- The auditor might not accept the engagement if the precondition is not discussed.
Agreement on Audit Engagement Terms
- The term and conditions should be included and agreed with management in the application form. For example, contract or engagement letter. The importance of information including Scope, Objective, Responsibility of both parties, financial framework, and the report that going to issue by the auditor. Audit Fee and the basis of audit fee calculation should be included.
- Law and regulation related to audit engagement might need to consider.
- A recurring audit happens when the firm continuing audit of the current client. Before continuing the standard require the firm to reassess if there is anything need to change to the original engagement. ISA 210 requires a firm might need to inform management of the terms and conditions.
Acceptance of a Change in the Terms of the Audit Engagement
- During the audit, the client might be asking for changing the term and condition. In such a case, the auditor needs to consider when the change is acceptable or not.
- If the change is not acceptable, the auditor should not continue engagement. If it is accepted, the new agreement should be formed. All applicable law and ethics should be considered.
Additional Considerations in Engagement Acceptance
- In some jurisdiction, the financial reporting standard is supplement by law and regulation, and in that case, ISA 210 requires the auditor to consider that the financial statements being reported are consistence with applicable financial reporting standard. If not, the auditor should consider if the modified option is required.
Summary by Sinra
This is the complete summary of ISA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing.
The summary follows the standard structure of ISA which starts from Introduction, and follow by Objective, Definition, Requirement, and finally Application of Standard.
- Overall responsibilities of auditor auditing the financial statements based on ISA
- Enable the independent auditor to meet those objectives
- Explains the scope, authority, and structure of the ISAs
- Cover when the audit financial statements by ISA
- Increase the degree of confidence of users of financial statements
- By express their option on the financial statements according to the framework they are preparing.
- The financial statements re-prepare by management and under the supervision of Those Charged with governance.
- It is not over right any law and regulation
- It requires the auditor to obtain reasonable assurance on financial statements
- Reasonable Assurance is not an absolute assurance, inherent limitation.
- The form of opinion expressed by the auditor will depend upon the applicable financial reporting framework and any applicable law or regulation
Overall Objectives ISA 200:
In overall, the main objective of this ISA are:
- To obtain reasonable assurance on the financial statements
- To report on the financial statements, and communicate as required by the ISAs, in accordance with the auditor’s findings.
Definitions of the key term in ISA 200:
For a definition, please refer to full ISA.
- Applicable financial reporting framework—Refer to the framework that management use to prepare its entity’s financial statements and acceptable by relevance authority and regulator
- Audit evidence—Refer to any kind of information that audit use in order to drive conclusions on their audit.
- Audit risk—The that prevent auditor to make the right conclusion.
- Auditor—Professional who perform audit works.
- Detection risk—is basically refer to the risk that auditor might not detect.
- Financial statements—The five statements including Balance Sheet, Income Statements, Statement of Change in Equity, Statement of Cash Flow and Noted to Financial Statement.
- Historical financial information—Please refer to full ISA
- Management—Please refer to full ISA
- Misstatement—Please refer to full ISA
- Professional judgment—Please refer to full ISA
- Professional skepticism—Please refer to full ISA
- Reasonable assurance—Please refer to full ISA
- Risk of material misstatement—Please refer to full ISA
Requirements of ISA 200:
- Ethical Requirements Relating to an Audit of Financial Statements— Comply with relevant ethical requirements.
- Professional Skepticism— plan and perform an audit with professional skepticism.
- Professional Judgment— exercise professional judgment in planning and performing
- Sufficient Appropriate Audit Evidence and Audit Risk— sufficient appropriate audit evidence to reduce audit risk to an acceptably low level
- Conduct of an Audit in Accordance with ISAs— comply with all ISAs relevant to the audit, understand the entire areas of ISA.
This is the Summary of SA 720, The Auditor’s Responsibilities Relating to Other Information in Documents Containing Audited Financial Statements. The summary here follows the standard structure of ISA which is followed by Introduction, Objective, Definitions, and Requirement of this standard.
The summary here is just for your quick check, and the full standard is recommended for professional practices.
- Auditor’s responsibilities are not cover Others Information that contains the audit finance statement; however, auditors are required to read that Others Information because the creditability of audited financial statement may undermine by material inconsistency.
- Others Information include Annual Reports and Others similar.
The objective of ISA 720 is to provide the Appropriate respond by auditors when Others Information contain Audited Finance Statements, and there is inconsistency. That mean, any auditor face the problem or deal with
- Others Information: Financial and Non-Financial Information other than Audited Financial Statements.
The following are the requirement that auditor need to do base on this standard
- Read others Information:
- Read Others Information to identify the material inconsistency
- Obtain the Other Information prior to the date of the auditor’s report
- Material Inconsistencies:
- Determine whether the audited financial statements or the other information needs to be revised if there is inconsistency.
If the inconsistency identify prior to the audit report
- If revisions of financial statements are necessary and management refuses, shall modify the opinion in the auditor’s report in accordance with ISA 705.
- If revisions of others information are necessary and management refuses, shall communicate with those charged with governance, and if those charge with governance involves, include in Another Mater paragraph, or withhold the report and withdraw the engagement if possible.
If the inconsistency identify prior to the audit report
- If the revision of financial statement is necessary and management refuses, shall follow the relevant requirement in ISA 560.
- If the revision of other information is necessary, and management agreed, the additional procedure shall perform if required. If not agreed, shall notify to those charged with governance, and if those charge of governance involves, take any other appropriate action.
Material Misstatements of Fact
- Apparent material misstatement of fact, the auditor shall discuss the matter with management, if found.
- Request management to consult with a quality third party if required
- Notify to those charges with governance if management refuses to make the change on the material of fact found.
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