THE INTERNATIONAL Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants issued exposure drafts ISA 705 and 706 in March 2005 and requested comments on these proposed standards by July 31, 2005.
MODIFICATIONS TO THE OPINION IN THE AUDITOR'S REPORT
IAASB is concerned that the use of the term 'modified' in the current ISA 701 to mean both modifications to the auditor's opinion and the inclusion of an emphasis of matter paragraph in the auditor's report may cause confusion. For example, jurisdictions that translate the ISA have found it difficult to explain the difference between a qualified and a modified auditor's report. Consequently, it is proposed that the term 'modified' is used only in the context of modifications to the opinion in the auditor's report. In future, the term 'modified auditor's report' will not be used in the ISA.
Division of responsibility is proposed to be withdrawn, as it is felt that the principal auditor's responsibility is the same for all audits.
Piecemeal opinion is also proposed to be withdrawn, as it is felt that this tends to overshadow or contradict the adverse opinion or disclaimer of opinion.
The IAASB believes that neither a disclaimer of opinion nor an adverse opinion can be described as a qualified opinion; such opinions are not qualified in any way. Thus, the exposure draft uses the term 'modifications to the opinion' to describe qualified opinions (except for, adverse and disclaimer opinions).
The proposed ISA 705 establishes standards and provides guidance on:
(a) Circumstances that may result in a modification to the opinion in the auditor's report,
(b) The type of opinion appropriate in the circumstances, and
(c) The form and content of the auditor's report when the auditor's opinion is modified,
(d) The format and content of such reports, including headings to be used within the report.
It establishes three types of modified opinions, a qualified (i.e. 'except for'), an adverse, and a disclaimer, the choice of which will depend on the auditor's judgement about materiality and pervasiveness of the matter giving rise to the modification. It also contains illustrative auditors' reports.
Prior to issuing the report, the auditor should communicate circumstances that lead to expected modifications to the opinion in the auditor's report to those charged with governance.
ISA 706 - EMPHASIS OF MATTER PARAGRAPHS IN THE INDEPENDENT AUDITOR'S REPORT
The proposed ISA 706 establishes standards and provides guidance on circumstances when the auditor considers including an emphasis of matter paragraph or an other matters paragraph in the auditor's report on financial statements, and on the form and placement of such paragraphs. It describes the need for the auditor's report to emphasise a matter presented or disclosed in the financial statements or the notes thereto when, in the auditor's judgement, the matter is both unusual and of fundamental importance to the users' understanding of the financial statements.
These ISAs, if adopted, will be effective for auditors' reports dated on or after December 31, 2006.
Mr. Raphael E. Gordon is the managing partner of KPMG Peat Marwick, chairman of KPMG CARICOM and past president of the Institute of Chartered Accountants of Jamaica. The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG Peat Marwick.
