1.2 Non-standard Audit Reports Issued

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This article covers non-standard audit reports issued during the year 1 April 2003 to 31 March 2004, and outlines the nature of those reports.

Why Are We Reporting This Information?

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An audit report is addressed to the readers of an entity’s financial report. However, all public entities are in one sense or another creatures of statute and, therefore, also accountable to Parliament. We consider it important to draw Parliament’s attention to the range of matters that give rise to non-standard audit reports.

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In each case, the issues underlying a non-standard audit report are drawn to the attention of the entity and discussed with its governing body.

What Is a Non-standard Audit Report?

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A non-standard audit report¹ is one that contains:

• a qualified audit opinion; and/or
• an explanatory paragraph.

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The auditor expresses a qualified audit opinion because of a disagreement or a limitation on scope. The type of opinion will be either an “adverse” opinion (explained in paragraphs 1.208-1.209), or a “disclaimer of opinion” (see paragraph 1.210), or an “except-for” opinion (see paragraph 1.211).

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The auditor will include an explanatory paragraph (see paragraphs 1.212-1.213) in the audit report in order to draw attention to:

• a breach of law; or
• a fundamental uncertainty.

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An explanatory paragraph is included in the audit report in such a way that it cannot be mistaken for a qualification of the opinion.

“Adverse” Opinion

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An “adverse” opinion is expressed when there is disagreement between the auditor and the entity about the treatment or disclosure of a matter in the financial report and, in the auditor’s judgement, the treatment or disclosure is so material or pervasive that the report is seriously misleading.

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Expression of an “adverse” opinion represents the most serious type of non-standard audit report.

“Disclaimer of Opinion”

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A “disclaimer of opinion” is expressed when the possible effect of a limitation on the scope of the auditor’s examination is so material or pervasive that the auditor has not been able to obtain sufficient evidence to support, and accordingly is unable to express, an opinion on the financial report.

“Except-for” Opinion

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An “except-for” opinion is expressed when the auditor concludes that either:

• the possible effect of a limitation on the scope of the auditor ’s examination is, or may be, material but is not so significant as to require a “disclaimer of opinion” – in which case the opinion is qualified by using the words “except for the effects of any adjustments that might have been found necessary” had the limitation not affected the evidence available to the auditor; or
• the effect of the treatment or disclosure of a matter with which the auditor disagrees is, or may be, material but is not, in the auditor’s judgement, so significant as to require an “adverse” opinion – in which case the opinion is qualified by using the words “except for the effects of” the matter giving rise to the disagreement.

Explanatory Paragraph

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In certain circumstances, it may be appropriate for the auditor to include in the audit report additional comment, by way of an explanatory paragraph, to draw attention to a matter that is regarded as relevant to a proper understanding of the financial report.

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For example, it could be relevant to draw attention to the entity having breached its statutory obligations, or to a fundamental uncertainty that might make the going-concern assumption inappropriate. Inclusion of an explanatory paragraph tends to constitute the most common type of non-standard audit report.

Summary of the Non-standard Audit Reports Issued

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The following table summarises the non-standard audit reports issued during the year 1 April 2003 to 31 March 2004. The Appendix provides the details of those reports.

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No “disclaimers of opinion” were issued during the year.

Footnote 1: A non-standard audit report is issued in accordance with the Institute of Chartered Accountants of New Zealand Auditing Standard No. 702: The Audit Report on an Attest Audit (AS-702).