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Appendix 2: Deciding on the form of an audit report

Local government: Results of the 2011/12 audits.

Audit reports

An audit report is addressed to the readers of an entity's financial and non-financial information. All public entities are accountable to Parliament for their use of public money and their use of any statutory powers or other authority given to them by Parliament.

This Appendix sets out the nature of our audit reports and explains the main concepts and frameworks we apply to deciding the appropriate form of an audit report.

Non-standard audit reports

A non-standard audit report is one that contains:

  • a modified opinion; and/or
  • an "emphasis of matter" or an "other matter" paragraph.45

A modified opinion follows:

  • a misstatement about the treatment or disclosure of a matter in the financial and/or non-financial information; or
  • a limitation in scope  - this may happen when the appointed auditor cannot get enough appropriate evidence to support, and so cannot express, an opinion on the financial or non-financial information or a part of the financial or non-financial information.

There are three types of modified opinion (each explained below):

  • an "adverse" opinion;
  • a "disclaimer of opinion"; and
  • a "qualified opinion".

The appointed auditor will include an "emphasis of matter" paragraph or "other matter" paragraph in the audit report to draw attention to matters such as:

  • fundamental uncertainties;
  • breaches of law; or
  • concerns about probity or financial prudence.

The appointed auditor has to include an "emphasis of matter" paragraph or an "other matter" paragraph in the audit report in such a way that it cannot be mistaken for a modified opinion.

Deciding on the appropriate form of an audit report

This flowchart outlines the decisions that an appointed auditor has to make when considering the appropriate form of an audit report.

Note: This flowchart is based on the requirements of the New Zealand equivalents to the International Standards on Auditing No. 700: Forming an Opinion and Reporting on Financial Statements; No. 705: Modifications to the Opinion in the Independent Auditor's Report; and No. 706: Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report.

The diagram in this Appendix outlines the decisions that an appointed auditor has to make when considering the appropriate form of an audit report.

Adverse opinions

An adverse opinion, the most serious type of non-standard audit report, is expressed when the appointed auditor, having got enough appropriate audit evidence, concludes that misstatements, individually or together, are material and pervasive to the financial and/or non-financial information.

Disclaimers of opinion

A disclaimer of opinion is expressed when the appointed auditor is unable to get enough appropriate audit evidence on which to base the opinion (that is, a limitation in scope), and the appointed auditor concludes that the possible effects on the financial and/or non-financial information of undetected misstatements, if any, could be material and pervasive.

A disclaimer of opinion is expressed when, in extremely rare circumstances involving multiple uncertainties, the appointed auditor concludes that, notwithstanding having got enough appropriate audit evidence regarding each of the individual uncertainties, it is not possible to form an opinion on the financial statements and/or non-financial performance information because of the potential interaction of the uncertainties and their possible cumulative effect on the financial and/or non-financial information.

Qualified opinions

A qualified opinion is expressed when the appointed auditor, having got enough appropriate audit evidence, concludes that misstatements, individually or together, are material, but not pervasive, to the financial and/or non-financial information.

A qualified opinion is expressed when the appointed auditor cannot get enough appropriate audit evidence on which to base the opinion, but the appointed auditor concludes that the possible effects on the financial and/or non-financial information of undetected misstatements, if any, could be material but not pervasive.

"Emphasis of matter" paragraphs

In certain circumstances, it may be appropriate for the appointed auditor to include further comments in the audit report to draw readers' attention to a matter that, in the appointed auditor's professional judgement, is fundamental to their understanding the financial and/or non-financial information. These comments will be included in the audit report in an "emphasis of matter" paragraph, provided the appointed auditor has enough appropriate audit evidence that the matter is not materially misstated in the financial and/or non-financial information.

"Other matter" paragraphs

In certain circumstances, it may be appropriate for the appointed auditor to communicate a matter that is not adequately presented or disclosed in the financial and/or non-financial information because, in the appointed auditor's professional judgement, the matter is relevant to readers' understanding of the financial and/or non-financial information. The additional comments will be included in the audit report in an "other matter" or a similarly titled paragraph.


45: A non-standard audit report is issued in keeping with the requirements of the New Zealand equivalents to the International Standards on Auditing No. 705: Modifications to the Opinion in the Independent Auditor's Report and/or No. 706: Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report.

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