Understanding Audit Opinions and Procedures


Concluding a Formal Audit Report

Under the rules of the auditing profession, a formal audit report concludes with an opinion. This opinion relates to the nature, scope, and outcome of the review, including the financial statements of the entity in question.

Relevant Frameworks

NIF (preamble, objectives, scope, and presentation of valuation)

NAGA (overview, scope and limitations, target audience, statement)

Role of the Auditor

An independent auditor, based on their review, provides an opinion on the financial statements prepared by the enterprise.

Nexus Between NIF and NAGA

The audit will be based on compliance with the NAGA and NA, as they represent the basic methodology for the review. These frameworks provide the basis for obtaining sufficient competent evidence to support an opinion. The NIF, on the other hand, represents the norms to support accounting records.

Value Added of the Audit

The opinion of the auditor adds credibility to the financial statements because it is independent of the company. This independence ensures that the opinion is unbiased and reliable.

Types of Audits

External Audits: Financial, tax, comprehensive, forensic, due diligence

Internal Audits: Financial, administrative, operational

Nature of the Examination

Given that the evidence is more persuasive than conclusive in nature, the application of professional judgment is crucial throughout the independent auditor’s work. This applies both to determining the audit procedures and in assessing whether the methods adopted by the company in preparing the financial statements are appropriate.

Understanding Financial Information

Characteristics of Reliable Information

Reliability: Accuracy, representativeness, objectivity, verifiability, sufficient information

Revelation: The possibility of prediction and confirmation, relative importance



Constraints: Timing, cost objective, quantitative balance between these characteristics

Elements of the Audit Opinion

Receiver: The party to whom the opinion is addressed.

Identification of the Entity: The company or organization being audited.

Identifying the Responsibility of the Company and Auditor: Clarifying the respective roles and responsibilities.

General Description of the Scope of the Audit: Outlining the areas covered by the audit.

Auditor’s Opinion: The auditor’s conclusion based on the audit findings.

Report Writing: The formal report documenting the audit process and findings.

Signature of the Opinion: The auditor’s signature signifying their responsibility for the opinion.

Date of the Opinion: The date on which the opinion is issued.

Addressing the Opinion

The opinion is addressed to the partner or shareholder who has contracted the audit services.

Writing Style

The opinion is typically written in the first person singular or second person plural.

Obligation of Signing the Opinion

The opinion should include the name and signature of the auditor who prepared it.

Importance of the Date

The date signifies the auditor’s responsibility for the period covered by the audit.

Completion of the Audit

The auditor completes the review when they have obtained sufficient competent evidential matter.

Subsequent Events

Transactions and events that occurred during the period after the balance sheet date may have an impact on the financial statements. These events are classified as:

– Changes that cause adjustments to the results of the financial year to which the financial statements refer.

– Changes that originate amendments to the representation of the financial statements.

– Changes that cause notes to the financial statements through revelations.

Auditor’s Responsibility for Subsequent Events

The auditor is responsible for:

– Determining what subsequent events could affect the financial statements.

– Determining if adjustments or revelations are required.

– Determining if the effect is on the financial statements or requires a note disclosure.

– Including a paragraph of emphasis in the opinion to draw the reader’s attention if necessary.

Timing of Subsequent Events

Subsequent events can be given before dictation, including the term of the audit and delivering the opinion.

Types of Audit Opinions

Unqualified Opinion

Issued when there are only minor errors, such as those related to internal control and figures.

Qualified Opinion

Issued when there are restrictions and diversions from NIF that are important but not significant.

Disclaimer of Opinion

Issued when the auditor considers the restrictions on the scope to be significant and therefore cannot form an opinion on the financial statements.

Adverse Opinion

Issued when the deviations from NIF are significant according to the auditor’s opinion.

Repercussions of a Qualified Opinion

A qualified opinion is represented in the opinion paragraph with phrases such as”except for limitation of scop” or”except for diversion to NIF” The auditor must assess the exception based on its discretion and severity, explain the causes that originate the exception, and express their opinion in the relevant paragraph.

Limitation on the Scope

Occurs when the auditor is not able to implement audit procedures based on their criteria and professional judgment. Types of constraints include those imposed by the company (e.g., the company does not provide access to necessary information) and practical impossibility.

Effect of a Limitation

Depending on its importance, a limitation may result in a qualified opinion or a disclaimer of opinion. The opinion paragraph should state the nature and origin of the limitations.

Deviation from NIF

A deviation from NIF refers to an incorrect application of the rules. When issuing a qualified opinion due to a deviation, the auditor must describe the exception and may quantify the effect of the deviation. The relative impact of the deviation will determine whether a qualified or adverse opinion is issued.

Adverse Opinion or Disclaimer of Opinion

An adverse opinion is issued when the auditor disagrees with the NIF and considers them invalid. The auditor is obligated to disclose all discrepancies or limitations and cannot give a biased view on line items. A disclaimer of opinion is issued when the limitations are so significant that they invalidate the audit. The auditor is obligated to reveal all deviations and cannot issue a partial opinion on single items. The opinion paragraph will be modified to reflect the disclaimer, and the auditor will state that they are unable to express an opinion due to the limitations.

Audit Risk

Audit risk is the possibility of issuing an opinion with exceptions due to errors and biases in the financial statements. It can be classified as:

– Inherent risk: Risk that is not controlled.

– Control risk: Risk that internal controls fail to prevent or detect material misstatements.

– Detection risk: Risk that the auditor’s procedures will not detect a material misstatement.

Emphasis of Matter Paragraph

The emphasis of matter paragraph is used to draw attention to matters that are fundamental to users’ understanding of the financial statements. This paragraph can be used to disclose:

– Changes to NIF

– Quantifiable contingencies

– Going concern problems

– Correction of previous year’s errors

– Related parties

– Mergers

– Pre-operational stage


Contingencies involve conditions or situations that have a degree of uncertainty and may result in a future event. Examples include:

– Incoming revenue

– Recoverability of accounts receivable

– Inventory obsolescence

– Warranty and product service issues

– Litigation

– Tax liabilities

– Demands

– Strikes

Treatment of Unquantifiable Contingencies

An unquantifiable contingency may result in:

– Deviation from NIF: Qualified or adverse opinion

– Limitation of scope: Qualified opinion or disclaimer of opinion

– Emphasis of matter paragraph: Disclosure of the contingency

Going Concern

Going concern refers to the assumption that a business will continue to operate in the foreseeable future. A company may face going concern problems when there is a risk of liquidation or bankruptcy.

Treatment of Going Concern Problems

When there are going concern problems, the auditor may issue a qualified opinion with an emphasis of matter paragraph. Disclaimer or adverse opinions are not appropriate in this situation.

Changes to NIF

Changes to NIF can occur due to choice or new regulations. The auditor must justify the change and disclose it in the financial statements. If a new rule is adopted, the auditor should disclose that the company valued and interpreted the change.

Application of New Laws

When new laws are applied, the auditor must reflect this in the emphasis of matter paragraph. The paragraph should state that the company has valued and interpreted the change in accordance with the new regulations.