(a) True and fair
The term ‘a true and fair view’ is not defined in statute and it has therefore fallen to the auditing profession to reach a reasoned and consistent interpretation of the term. Financial statements should be true and fair if prepared in accordance with recommended accounting policies.
Truth relates to factual accuracy and correctness of the financial statements. For example, the statement of financial position should be an ‘accurate’ reflection (within acceptable limits) of the company’s assets and liabilities at the year end.
Fairness relates to the presentation of information and the view conveyed to the reader. It is important that information in the financial statements is presented in a manner that is free from bias and does not lead the reader to any view that is not a reasonable reflection of the company’s financial situation.

Relationship between materiality and true and fair
‘True and fair’ is a matter for professional judgement. ‘Materiality’ is just one of the factors considered in making such a judgement.
For example, if a company’s actual revenue for a year of $220,000 was inaccurately stated (e.g. at $220,100) the financial statements could still be judged ‘true and fair’ as knowledge of the misstatement would not cause a reader of the financial statements to change his opinion of them (i.e. the misstatement is not material).
Conversely, if a misstatement is judged to be material, the true and fair view is impaired.
Accounting standards are intended to give a true and fair view and need not be applied to immaterial items. Where material, compliance with accounting standards will normally be necessary for financial statements to give a true and fair view.

(b) Effect on auditor’s reports and reasons
(1) Gifty Goods
Effect on auditor’s report
The audit opinion on the current year statement of profit or loss and other comprehensive income and comparative statement of profit or loss and other comprehensive income (closing inventories) and statement of financial position (inventories) will be qualified (‘except for’).
The qualification arises because of the auditor’s inability to obtain sufficient appropriate evidence (limitation on scope). It will not be a disclaimer of opinion as the item is not likely to be pervasive as well as material.
The report will explain to why the auditor was unable to obtain sufficient appropriate audit evidence.
The opinion paragraph will state that ‘except for’ adjustments that might be necessary to opening inventories and/or closing inventory comparatives; the financial statements show a true and fair view.
Reasons
Comparatives are part of the audited financial statements.

(2) Cecilia’s Contracts
Effect on auditor’s report
The auditor’s report is likely to include an emphasis of matter paragraph drawing attention to the disclosure made in the financial statements.
The audit opinion will not be modified as the matter has been appropriately disclosed and provided for (if necessary).
Reasons
The disclosure of a possible provision that may be required to reduce inventories to their net realisable value is a significant uncertainty. An emphasis of matter paragraph is appropriate to draw users’ attention to this disclosure, provided the matter is appropriately disclosed in the financial statements. The fact that the decision will not be known until after the financial statements are signed does not alter the fact that disclosure has been made as required by accounting standards.