1.5 Non-standard audit reports issued

1.501
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.¹

1.502
Our discussion covers non-standard audit reports issued during the 2006 calendar year.

Why are we reporting this information?

1.503
An audit report is addressed to the readers of an entity’s financial report. However, all public entities are ultimately accountable to Parliament, including for their use of public money and for their use of any statutory powers or other authority given to them by Parliament. We therefore consider it important to draw Parliament’s attention to the range of matters that give rise to non-standard audit reports.

1.504
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?

1.505
A non-standard audit report² is one that contains:

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

1.506
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 report), 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 in scope because the auditor has been unable to obtain enough evidence to support, and accordingly is unable to express, an opinion on the financial report or a part of the financial report.

1.507
There are three types of qualified opinions:

• an “adverse” opinion (see paragraph 1.511);
• a “disclaimer of opinion” (see paragraph 1.513); and
• an “except-for” opinion (see paragraph 1.514).

1.508
The auditor will include an explanatory paragraph (see paragraph 1.516) in the audit report to emphasise a matter such as:

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

1.509
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.

1.510
Figure 1.6 outlines the decisions to be made in considering the appropriate form of audit report.

Figure 1.6
Audit report options

Adverse opinion

1.511
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.

1.512
Expression of an adverse opinion represents the most serious type of non-standard audit report.

Disclaimer of opinion

1.513
A disclaimer of opinion is expressed when the possible effect of a limitation in the scope of the auditor’s examination is so material or pervasive that the auditor has not been able to obtain enough evidence to support, and accordingly is unable to express, an opinion on the financial report.

Except-for opinion

1.514
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.

1.515
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 report. 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

1.516
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.

1.517
For example, it could be relevant to draw attention to an entity having breached its statutory obligations for certain matters where that breach may affect or influence a reader’s understanding of 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 report.

Summary of the non-standard audit reports issued

1.518
Figure 1.7 summarises the non-standard audit reports issued during the 2006 calendar year for entities within the local government portfolio. The Appendix provides the details of those audit reports.

Figure 1.7
Summary of the non-standard audit reports issued

Figure 1.7 summarises the non-standard audit reports issued during the period 1 January 2006 to 31 December 2006 for entities within the local government portfolio. The Appendix provides the details of those audit reports.

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

2: 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.