The qualified audit report is one of the three modified audit reports where the opinion is issued to the financial statements that are not prepared in all material respect while those misstatements are not pervasive.
Compare to the other two reports, this one is less serious than yet it is below the clean opinion.
The qualified audit report is different from the other two modified reports since the misstatement found by auditors affects only the items themselves.
While adverse and disclaimer, the misstatements might affect the whole financial statements.
The simple meaning of a qualified audit report is that the accounting information presents in the financial statements is not correct.
This could mean the accounting treatment is not follow accounting standards like IFRS, US GAAP, or local GAAP.
In the qualified audit report, there is a qualified audit opinion expressed by auditors and states the reason why the qualified opinion is expressed.
Now assuming that you know what is the qualified report and the following is the explanation based on International Standard on Auditing (ISA) issued by IFAC.
Based on ISA 700, the auditor should express the unmodified audit opinion to the financial statements that they audit if they conclude and found no material misstatements.
And if, after auditor testing, and they concluded that there were material misstatements found, and the client is not making adjustments as auditors recommend (it is material but not pervasive), the then qualified opinion should be expressed in the qualified audit report.
But, just to be sure that those misstatements are not pervasive in financial statements.
That means that besides affecting themselves, the misstatements are not affected by other items in the financial statements.
To make sure the opinion issued to the client is done as it should be, the auditor should check and follow the recommendation and guidelines in ISA 700, and ISA 705.
Auditors should state the detailed information related to qualified opinions in the basic opinion paragraph.
For example, detail of misstatements, how they are the effect, and what the standard said about that misstatement.
Then, in the qualified opinion paragraph, the auditor should statement clearly the financial statements that they audit, period cover, accounting standard they use to prepare financial statements, and conclusion of their opinion based on the misstatements found and stated in the basis opinion paragraph.
Now you have understood the meaning and principle of the qualified audit report, and now let go of the example. For example, ABC engages with the Wiki accounting firm to audit its financial statements for the financial year ended 31 December 2015.
As a result of wiki accounting testing, it was found and concluded that the account payable balance at the end of the period does not exist.
As the result of the wiki assessment against ABC materiality set by the wiki, this misstatement is material, but not pervasive. Wiki tries to propose adjustments yet, management did not agree.
Wiki also explains the result of ABC rejection but ABC still does not accept. Then, based on ISA 705, Wiki should express a qualified opinion to ABC financial statements.
Here is a sample:
Difference to other reports
While the unmodified report is issued to the financial statements that present true and fair view as well as compliance with the applicable law, the qualified report might be issued the financial statements that auditors found certain items of the financial statements are materially misstated. It is also possible that the qualified report is issued when then the scope of the audit is limited.
For example, the auditor might not be able to verify the existence of inventories balance that stated in the balance sheet that backdates in two or three years. The reason is that they could not observe the inventories count at the year-end of the date that inventories were counted.
In most cases, the qualified report is ok for both the management of the company as well as the regulator.
However, if the report is not clean like the disclaimer report as well as an adverse report, then the integrity of the report and management of the company is questionable.
Written by Sinra