There are three types of modified audit reports, and the qualified audit report is one of those. An auditor from any audit firm in Johor Bahru will issue this opinion to the company that did not prepare their financial statements in all material aspects. Yet, the misstatements are not pervasive.
This type of audit report is less severe than the other two reports. It is different from the other two as the misstatements the auditor has found will only influence the related items, whereas, for disclaimer and adverse, the misstatements might affect the entire financial statements.
As a straightforward definition, a qualified audit report indicates that the accounting information that a firm has presented in its financial statements is incorrect, perhaps due to various reasons, including inappropriate double entries made (Also see Advantages of double entry accounting).
This may show that the accounting treatment does not follow the accounting standards such as IFRS, local FRS or United States GAAP.
In a qualified audit report, the auditors will express a qualified audit opinion, and they will also mention why they express a qualified opinion.
According to ISA 700, if the auditors have made a conclusion and did not discover any material misstatements in the financial statements they audit, they need to express unmodified audit opinion to those statements, especially when the management refuse to include audit adjustments suggested by the auditors.
If after their testing and a range of audit approaches, they concluded that they had found some material misstatements, and the client does not make adjustments based on their suggestions, they should express a qualified opinion in the qualified audit report.
However, the auditors should ensure that the misstatements are not pervasive to the client’s financial statements (Also see How to Manage the Accounts of Manufacturing Companies?). This indicates that the misstatements bring no impact to other items in the financial statements apart from affecting themselves.
If the auditors want to ensure that they have issued the opinion to their clients correctly, they should check and adhere to the guidelines in ISA 700 as well as ISA 705.
In the basic opinion paragraph, auditors must express the detail information about qualified opinion, for instance, the detail of misstatements, their effects, as well as what the standards state about the misstatement.
After that, in the qualified opinion paragraph, auditors need to state precisely the financial statements they have audited, period cover, the accounting standard that they utilise to prepare the financial statements, and conclude their opinion according to the misstatements they discover and express them in the opinion paragraph.
Differences Compared to Other Reports
While the auditors would issue an unmodified report to the financial statements which offer a true and fair view and comply with the relevant law, they may issue the modified report on the financial statements which they discovered that the firm has materially misstated certain items. Also, an auditor may issue the qualified report when the audit scope is restricted.
For instance, the auditor may be unable to confirm the existence of inventories balance which a company has stated in its balance sheet (Also see Balance Sheet Versus Profit and Loss) that backdates in a few years. It is because they are unable to observe the number of inventories at the year-end that the company had counted their inventories.
In most situation, a qualified report is fine for both the regulator and the management of the firm. Nevertheless, if the report is not clean, the integrity of the firm’s management and the report is questionable.