Monday, 30 March 2015


The companies Act Cap 486 requires that the auditor of a limited liability company to report to the members, whether the financial statements laid before the AGM, show a true and fair view of the state of affairs of the company and comply with the requirements of the companies Act. The audit report is therefore the means by which the auditor reports his opinion as to whether the financial statements show a true and fair view of the state of affairs. The report is addressed to the shareholders.

The requirements of the Companies Act with regard to the Auditor’s Report:
S.162 (1) of the Companies Act (CA): Stipulates the statements that should be expressly stated in the Auditors Report.  These statements are;

·         Whether they have obtained all the information and explanations, which to the best of their knowledge and belief were necessary for the purposes of their audit.
·         Whether in their opinion, proper books of account have been kept by the company, so far as it appears from their examination of those books, and proper returns adequate for the purposes of their audit have been received from branches not visited by them.
·         Whether, the company’s balance sheet and profit and loss account dealt by the report are in agreement with the books of accounts and returns.
·         Whether, in their opinion and to the best of their information and according to the explanations given to them, the financial statements give the information required by the Act in the manner so required and give a true and fair view:

o   In the case of the balance sheet, of the state of the company’s affairs as at the end of its financial year; and
o   In the case of the profit and loss account, of the state of the profit or loss for its financial year.
o   In the case of a holding company submitting group financial statements whether in their opinion, the group financial statements have been properly prepared in accordance with the provisions of the Act so as to give a true and fair view of the state of affairs and profit or loss of the company and its subsidiaries.

Basic elements of the auditor’s report
The Companies Act does not stipulate the form the auditors report should take.  The auditing standard seeks to ensure that the auditor’s report is clear and unambiguous.  To this end, it seeks to standardize the form of the auditor’s report.  It seeks to do this by giving to basic elements of the auditor’s report.
·         Appropriate title
An appropriate title such as the independent auditors report distinguishes the Auditor’s Report from any other reports that may be annexed to the annual report and Financial Statements.
·         The Auditor’s report should be appropriately addressed
Usually the auditors report is addressed to the members on whose behalf the audit
is carried out.  For practical reasons, it also limits the users of the auditor’s report.
·         Introductory paragraph
This identifies the Financial Statements audited. Under the Companies Act, Financial Statements or Accounts consist primarily of the Balance Sheet, Profit and Loss account and notes to the account.  International Accounting Standards on Cash Flow Statements requires auditors to recognized the Cash Flows as part of the Financial Statements.
The auditor’s report relates to the above statements only.  However, the published Financial Statements that are sent to the readers include other reports that may contain financial information such as the Chairman’s Statement.  The DirectorsReport, the detailed Profit and Loss account and other statistical information. 
Although the auditor reviews these other statement or reports, he does not report on
them.  It must therefore be clear in his report that he is not reporting on these other
statements otherwise the financial information contained therein could have anunmerited air of authenticity.

It is felt that most readers of auditors reports and Financial Statements assume that   
the auditor prepared the Financial Statements. It’s necessary for the auditor to clarify that the preparation of Financial Statements is the responsibility of the directors.
·         Paragraph on the scope of the audit
The reader requires assurance that the auditors procedures were authoritative and   through.  The auditor therefore needs to state that they have audited in accordance with International Standards of Auditing.
It is felt within the profession that readers expert auditors to detect and report on material errors and frauds.  It is not practicable within the constraints of auditing to detect all material misstatements be they as a result of frauds or errors.  And even though an audit shouldn't be relied upon for the detection of errors and irregularities, the auditor must arrange his audit in such a manner as to have   reasonable assurance that the Financial Statements are free of material misstatements.It is important to inform the reader that auditing is a limited exercise that cannot guarantee 100% completeness and accuracy.  That the auditor examines items a test basis not all of them and that in valuing assets and liabilities there is subjectivity involved.
·         Opinion paragraph
The report should clearly state the auditor’s opinion as to whether the financial statements give a true and fair view in accordance with the relevant financial reporting framework and whether they comply with the companies Act requirements.
·         Dating the audit report: 
Clearly specifies the date the auditor committed himself    
to his opinion so that any subsequent developments are considered in the light of
that date.
·         Auditor’s address
·         Signature in the name of the audit firm and location of the auditor i.e. office.

Types of audit opinions
i.               Unqualified opinion
ii.              Qualified opinion
iii.            Disclaimer of opinion
iv.            Adverse opinion

a)      Unqualified opinion
When the auditor is satisfied in all material respects that enables him to express the required opinion on the financial statements without any reservations. This is sometimes called a clean opinion. This is expressed when the auditor concludes that the financial statements give a true and fair view in accordance with the relevant financial reporting framework.

Emphasis of matter report: 
There are occasions when the auditor has no reservations as to the financial statements but where there exists an unusual event, condition or accounting policy, he feels that unless the reader’s attention was drawn to the unusual matter the reader may not reach a proper understanding of the financial position and results.  In such circumstances the auditor should express an unqualified opinion but also include an extra paragraph called on ‘Emphasis of matter’ paragraph to draw the readers attention to the unusual matter.

The addition of such an emphasis of matters paragraph does not lead to a qualification of the audit opinion but is intended to enable the reader to obtain a better understanding. To avoid this being understood as a qualification the emphasis of matter should be included after the opinion paragraph and should contain the phrase “without qualifying our opinion above”

Practical examples of emphasis of matter

1.       An unusual condition would include distraction of assets after the balance sheet date but the company remains a going concern.
2.       The company being insolvent on the face of its own balance sheet but the auditor has letters of support which he is satisfied can be fulfilled by the other party.  Thus he will accept the appropriateness of the going concern assumption.  Unusual events could include changes in legislation that could have a material impact on the entity’s business subsequent to the balance sheet date.  Unusual accounting policies that may lead to an emphasis of matter would usually involve those matters not covered by any accounting standard such as accounting for agricultural produce or livestock
3.       Inherent uncertainties that may call for emphasis of matter would include contingencies at the balance sheet date which have not been resolved as at the date of signing the auditor’s report.
4.       They could also include negotiations for financing which have not been finalized by the date of signing the auditors report.

Qualifications in audit reports
When the auditor has reservations on any matter that is considered material to the financial statements he may introduce qualifying remarks in his audit report.  The auditor’s reservations could arise out of the following;

a.        There is a limitation on the scope of his work;
b.       There is a disagreement with management
c.        There is a significant uncertainty affecting the financial statements, the resolution of which is dependent upon future events.

b)      Qualified audit opinion (except for opinion)
This is expressed when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with management or limitation on scope is not so material and pervasive as to require an adverse opinion or disclaimer of opinion. A qualified report implies that all other aspects of the financial statements are okay except for the effects of the matter to which the qualification relates.

c)      Disclaimer of opinion
This is issued when the possible effect of a limitation on scope or uncertainty is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and as a result he is unable to express an opinion on the financial statements. A disclaimer of opinion implies that the auditor is unable to form an opinion because sufficient audit evidence could not be obtained.

d)      Adverse opinion
This is expressed when the effects of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements. The auditor states that due to the nature of the disagreement in his opinion the financial statements do not show a true and fair view.

Limitation of scope
If for any reason the auditor is unable to receive all the information and explanation he deems necessary for the purposes of his audit then there has been a limitation in the scope of his work.  It means that the auditor is unable to conclude objectively.

This could arise due to the following circumstances:

a.        Refusal by management to allow the auditor to examine certain documents or records.
b.       If the auditor is denied the opportunity to carry out an auditing procedure he considers important and he cannot conclude through alternative procedures, then there is a limitation of scope.
c.        Destruction of accounting records or documents through fire or other disaster meaning that such records are not available to be examined by the auditor.
d.       Being appointed auditor after the year-end with the result that certain evidence will not be collected.
 Effect of a limitation in scope on the auditor’s opinion
If the possible effect of a limitation on scope of an audit is material but not fundamental to the financial statements the auditor issues a qualified opinion (except for opinion)
If the possible effect of a limitation on scope of an audit is of fundamental importance that the auditor is unable to express an opinion on the financial statements, the auditor issues a disclaimer of opinion as mentioned above.
When there is a limitation on the scope of the auditor’s work that requires the expression of a qualified opinion or disclaimer of opinion, the auditor should describe the nature of the limitation in his report and indicate the possible adjustments to the financial statements that might have been determined to be necessary, had the limitation not existed.

Inherent Uncertainties
Inherent uncertainties result from circumstances in which it is not possible for the auditor to reach any objective conclusion as to the outcome of a situation due to the circumstances themselves rather than a limitation on scope of the audit. Such uncertainties are only resolved through the passage of time e.g. to wait for the outcome of a litigation however time is a great constraint and Financial Statements must be prepared within the required time. The auditor should form an opinion on the adequacy of the accounting treatment of such inherent uncertainty. This will involve consideration of:

·         The appropriateness of any accounting policies adopted by management in treating the effect of such uncertainties.
·         The reasonableness of the estimates included in the Financial Statements.
·         The adequacy of disclosure.

Some inherent uncertainties are fundamental.  These are uncertainties where the degree of uncertainty and its potential impact on the view given by the financial statements may be very great.  In determining whether an inherent uncertainty is fundamental the auditors consider:

·         The risk of the estimate included in the Balance Sheet may be subject to change.
·         The range of possible outcomes.
·         The consequences of those outcomes on the view given by the financial statements.

Inherent uncertainties are considered as fundamental when they involve a significant level of concern about the validity of the going concern basis or other matters whose potential effect on the Financial Statements is unusually great.
Under disagreement the auditor is able to conclude objectively.  He has received all the information and explanations he considers necessary for the purpose of the audit.  But his conclusion is at variance with the position adopted by management or the view given by the accounts.

Circumstances giving rise to disagreements include:

(a)     Application of inappropriate accounting policies by management;
(b)    They can disagree on amounts and facts included in the financial statements. E.g. the auditor might feel that the amount provided for as a contingent loss arising from a legal suit against the company is too low.
(c)     They can disagree on interpretation of an accounting standard or even legislation.
(d)    Disagree as to the manner or extent of disclosure of facts or amounts in the financial statements.
(e)     They can disagree on the mode of the disclosure of information.
Where the auditor disagrees with the accounting treatment or disclosure of a matter in the financial statements and in the auditor’s opinion the effect of that disagreement is material to the financial statements, the auditor should;

·         Include in his report a description of all the factors giving rise to the disagreement;
·         The implications of such factors on the financial statements;
·         A quantification of the effect on the financial statements.

Effects of disagreements on the audit opinion
When the auditor concludes that the effect of the matter-giving rise to the disagreement is so fundamental that the financial statements are misleading the auditor should issue an adverse opinion.
If the nature of the disagreement is material but not fundamental the auditor should issue a qualified opinion indicating that all other aspects of the financial statements are okay except for the matter giving rise to the disagreement.

Material but not pervasive
Auditors may not include qualifying remarks in their audit reports unless the matter is material.  Material but not pervasive means that the reservation that the auditor has is material in the context of a segment of the financial statements but not the financial statements taken as a whole.

Material and pervasive
A matter becomes material and pervasive when it is material in the context of the financial statements taken as a whole.  A limitation of scope becomes pervasive when it makes the financial statements misleading for decision-making purposes or of little information of value for decision-making purposes.  A disagreement becomes pervasive when it makes the financial statements taken as a whole to be totally misleading.

Qualification matrix
This summarises the forms qualification issued by the auditor under different circumstances.

Nature of circumstance

Material but not significant
Limitation on scope/uncertainty
Qualified opinion (except for opinion)

Disclaimer of opinion
Qualified opinion (except for opinion)
Adverse opinion