a.

i. Forming an opinion The following matters are relevant to forming an appropriate opinion. This constitutes a limitation on the scope of the audit. The auditors will not be able to obtain sufficient appropriate audit evidence about the relevant period. Therefore, the audit opinion will be modified.

Missing accounting records constitutes a limitation on the scope of the audit, therefore, the auditors will not be able to obtain sufficient appropriate audit evidence about the relevant period, hence, the audit opinion will be modified.

The modification should give details of what records are missing and why, or cross-refer to where this information is given in the financial statements.

The extent of the modification will depend on which records are missing and where the auditors‟ scope is limited.

It is likely that the information with regard to the income statement/statement of comprehensive income is limited and the statement of financial position.

A modification might be limited to a qualification („except for‟) over the statement of comprehensive income of the year, but if in the judgement of the auditor, the matter is considered pervasive, there should be a “disclaimer of opinion”.

ii. Evaluation of the suitability of Richard’s draft

Richard is correct to modify the opinion on the grounds of limitation of scope, however, the draft should refer to the exact nature of the problem, for instance, possible fraud.

b.

i. The claim was made after the end of the reporting period and is a non-adjusting event. The probability that the claim will be successful is less than 50% (on the assumption that the lawyers have given a reasonable opinion).

It is, therefore, appropriate to disclose the item as a contingent liability (in this case, a material non-adjusting event after the reporting period).

The auditor should therefore give an unmodified opinion.

A “Material Uncertainty Related to Going Concern” paragraph is normally only used when the matter involves material uncertainty that is adequately disclosed.

Material uncertainty usually exists only when there is some concern about the going concern status of the entity or about a matter that could have a major impact on the financial statements.

In this case, we are informed that the company has sufficient cash resources to meet the legal claim in full, in the event that it is successful. It, therefore, appears that material uncertainty does not exist, and a „Material Uncertainty Related to Going Concern‟ paragraph would be inappropriate.

ii. An auditor’s report is said to be modified where either:

• A matter arises which does not affect the opinion given by the auditor, but which gives rise to an “emphasis of matter paragraph” or an “other matter” paragraph in the auditor’s report (covered by ISA 705); and

• A matter arises which does affect the opinion issues on the financial statements. This will give rise to a “qualified opinion, a disclaimer of opinion or an advise opinion” (covered by ISA 705)

A modified report can therefore either have an unmodified audit opinion or a modified audit opinion.

A modified opinion is made up of:

• Opinion paragraph The opinion paragraph at the start of the auditor’s report must be headed “Qualified opinion,” “Adverse opinion,” or “Disclaimer of opinion‟, as appropriate. Specific wording is prescribed for the different types of modified opinions. • Basis for modified opinion paragraph

When a modified opinion is issued, ISA 705 requires the „basis for opinion‟ paragraph to be amended to „Basis for qualified opinion‟, „Basis for adverse opinion‟, or „Basis for disclaimer of opinion‟, as appropriate.

This “basis for opinion” paragraph must include the following:

• For a material misstatement relating to specific amounts – a description and quantification of the impact on the financial statements (or a statement that quantification is not possible);

• For a material misstatement relating to narrative disclosures – an explanation of how the disclosures are misstated;

• For a material misstatement relating to the non-disclosure of information that should have been disclosed – the nature of the omitted information and, unless prohibited by law or regulation, the omitted disclosures; and

• If the modification results from an inability to obtain sufficient appropriate audit evidence – the reasons for that inability. For qualified and adverse opinions, the basis for the qualified/adverse (as appropriate) opinion paragraph will also state, “We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified/adverse (as appropriate) opinion”.