1.7 Non-standard audit reports issued

Introduction

1.701
In this article, we discuss the non-standard audit reports issued on the annual financial reports of entities that are within the local government portfolio.¹⁹

1.702
Our discussion covers non-standard audit reports issued during the period 1 April 2005 to 31 December 2005. The shortened reporting period in this article compared to the article in last year’s report on local government²⁰is so that the reporting periods for all non-standard audit reports articles in the future will be aligned.

Why are we reporting this information?

1.703
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 are therefore ultimately accountable to Parliament. We therefore consider it important to draw Parliament’s attention to the range of matters that give rise to non-standard audit reports.

1.704
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?

1.705
A non-standard audit report²¹ is one that contains:

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

1.706
The auditor expresses a qualified opinion, as opposed to an unqualified opinion (which is issued when the auditor is satisfied, in all material respects, with the matters outlined in the financial statements), because of:

• a disagreement between the auditor and the entity about the treatment or disclosure of a matter in the financial report; or
• a limitation on scope because the auditor has been unable to obtain sufficient evidence to support, and accordingly is unable to express, an opinion on the financial report or a part of the financial report.

1.707
There are 3 types of qualified opinions:

• an “adverse” opinion (explained in paragraph 1.712);
• a “disclaimer of opinion” (paragraph 1.714); or
• an “except-for” opinion (paragraph 1.715).

1.708
In addition, the auditor can issue an opinion that is only partially “adverse” or partially a “disclaimer of opinion”. Usually these opinions are issued where the auditor is able to provide more positive assurance about an aspect or aspects of the entity’s financial report. The summary of non-standard audit reports issued in Figure 1.6 identifies the partial “adverse” and partial “disclaimer of opinions” that have been issued.

1.709
The auditor will include an explanatory paragraph (see paragraph 1.716) in the audit report in order to emphasise a matter such as:

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

1.710
Auditors are required to ensure that an explanatory paragraph is included in the audit report in such a way that it cannot be mistaken for a qualified opinion.

1.711
Figure 1.5 outlines the decisions to be made in considering the appropriate form of audit report.

Adverse opinion

1.712
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.

1.713
Expression of an adverse opinion represents the most serious type of nonstandard audit report.

Disclaimer of opinion

1.714
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

1.715
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.

1.716
An except-for opinion can be expressed when the auditor concludes that a breach of statutory obligations has occurred and that the breach is material to the reader’s understanding of the financial statements. An example of this is where a local authority subsidiary has breached the requirements of the Local Government Act 2002 because it has not prepared a statement of intent and it is therefore unable to prepare performance information that reflects its achievements measured against performance targets.

Explanatory paragraph

1.717
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 emphasise a matter that is regarded as relevant to a reader’s proper understanding of an entity’s financial report.

1.718
For example, it could be relevant to draw attention to an entity having breached its statutory obligations in respects of certain matters where that breach may affect or influence a reader’s understanding about the entity. In this situation, the audit report would normally draw attention to the breach only when the entity has not clearly set out the breach in its financial statements.

Summary of the non-standard audit reports issued

1.719
Figure 1.6 summarises the non-standard audit reports issued during the period 1 April 2005 to 31 December 2005 for entities within the local government portfolio. The Appendix on pages 93-101 provides the details of those audit reports.

1.720
No disclaimer of opinions or partial disclaimer of opinions were issued during the period.

Figure 1.5
Audit report options

Figure 1.6
Summary of non-standard audit reports 1 April 2005 to 31 December 2005

19: We report separately on entities that are part of the Crown Reporting Entity.

20: Local Government: Results of the 2003-04 Audits, parliamentary paper B.29[05b], pages 11-22.

21: 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.