Forming an Opinion and Reporting: formula sheet

Key formulas

Basis of the opinion (SA 700, para 11)

Opinion = conclusion on (a) sufficient appropriate evidence (SA 330) + (b) materiality of uncorrected misstatements (SA 450) + (c) evaluations in paras 12–15

Write all three limbs. Missing the misstatement limb is a common loss of marks.

Sufficient appropriate evidence

Sufficiency = quantity; Appropriateness = relevance + reliability

Higher risk of misstatement needs more evidence. Poor quality cannot be cured by more quantity.

Fair presentation evaluation (para 14)

(a) overall presentation, structure and content; (b) statements and notes represent underlying transactions and events fairly

Applies only to a fair presentation framework.

Compliance framework (para 19)

No duty to evaluate fair presentation; if statements are misleading in extremely rare cases, discuss with management and decide whether and how to communicate

Do not apply the para 14 test here.

Modification trigger (para 17)

Statements not free from material misstatement OR unable to obtain sufficient appropriate evidence → modify opinion per SA 705 (Revised)

Two triggers: misstatement and scope limitation.

Equivalent phrases (A19)

"present fairly, in all material respects" = "give a true and fair view"

The wording used follows law or practice in the jurisdiction.

Qualified opinion

Material but not pervasive misstatement, or possible effects of undetected misstatements material but not pervasive → "except for" opinion

The rest of the financial statements are fine. The report carries a Basis for Qualified Opinion section.

Adverse opinion

Material AND pervasive misstatement → financial statements do not give a true and fair view

Expressed when the auditor concludes, on the evidence obtained, that the misstatements are material and pervasive. It does not depend on whether management agrees or disagrees.

Disclaimer of opinion

Unable to obtain sufficient appropriate evidence + possible effects material AND pervasive → no opinion expressed

Also used in extremely rare cases of multiple uncertainties where, despite evidence on each, no opinion can be formed because of their possible cumulative interaction.

Decision grid (SA 705, Para A1)

Nature of matter × Pervasiveness → type of opinion

Misstated: material → qualified; pervasive → adverse. Evidence unavailable: material → qualified; pervasive → disclaimer.

No contradiction rule

Adverse or disclaimer on the whole → no unmodified opinion on a single statement or element under the same framework

Such an unmodified opinion would contradict the adverse opinion or disclaimer. Exceptions in A16: unmodified under one framework and adverse under a different framework; disclaimer on results and cash flows with an unmodified opinion on financial position (opening balances, SA 510).

Duty to modify (SA 700, Para 17)

Not free from material misstatement OR unable to get sufficient appropriate evidence → modify under SA 705

Modification is mandatory, not optional.

Order of sections in the report

Title → Addressee → Opinion → Basis for Opinion → Key Audit Matters → Other Information → Management's responsibilities → Auditor's responsibilities → Other Legal and Regulatory Requirements → Signature, place, date

Illustrative order from the SA 700 and SA 706 illustrations. Emphasis of Matter and Other Matter paragraphs sit as separate sections, as in the SA 706 illustration, where Other Matter follows Key Audit Matters.

Standards followed

Audit conducted in accordance with SAs specified under section 143(10) of the Companies Act, 2013

This is the wording in the Basis for Opinion section.

Opinion wording for an unmodified report

Gives the information required by the Companies Act, 2013 in the manner so required AND gives a true and fair view in conformity with accounting principles generally accepted in India

Both limbs are stated, along with the state of affairs, profit or loss and cash flows for the year.

Key audit matters

KAMs = matters of most significance in the audit of the current period; no separate opinion on them

Described as per SA 701. They are not a substitute for a modified opinion.

Section 143(3) reporting

Report on Other Legal and Regulatory Requirements: reword the illustration to suit the audit

SA 706 illustrations state that the auditor must suitably reword the wording to meet the circumstances of the audit.

Emphasis of Matter test

Matter is presented or disclosed in the financial statements + fundamental to users' understanding → EOM paragraph

The opinion is not modified. The paragraph refers to the note where the matter is disclosed.

Other Matter test

Matter is NOT presented or disclosed in the financial statements + relevant to users' understanding of the audit, the auditor's responsibilities or the report → Other Matter paragraph

Used for matters outside the financial statements, such as a predecessor auditor's report on comparatives.

EOM is not a substitute (SA 706, A7)

EOM ≠ modified opinion (SA 705) ≠ missing required disclosure ≠ going concern reporting (SA 570)

If a modified opinion, a required disclosure or going concern reporting is called for, an EOM paragraph cannot stand in for it.

Other framework disclosure (SA 700, A26)

Misleading disclosure → modified opinion; not misleading but fundamental → EOM

Applies when the statements also disclose compliance with another framework and that disclosure cannot be clearly differentiated from the statements.

Going concern, material uncertainty (SA 700 Appendix)

Adequate disclosure → draw attention to it; inadequate disclosure → modify the opinion

This follows the auditor's responsibility described in the report text.

IFC opinion duty

Section 143(3)(i): auditor opines on (i) adequacy of the IFC system and (ii) operating effectiveness of such controls

This is a statutory duty in India. It sits alongside, and differs from, the general SA 700 statement that internal control is understood only to design procedures.

Communication with TCWG (SA 700, para 40)

Planned scope and timing + significant audit findings (including significant deficiencies in internal control) + independence statement and relationships + key audit matters

The report must state that these communications are made.

Modification communication (SA 705, para 30)

Expected modification → tell TCWG the circumstances and the wording

Purposes under A27: give notice, seek concurrence or confirm disagreement, allow TCWG to give more information.

Key audit matters

KAMs = matters of most significance among those communicated with TCWG

Not described if law or regulation precludes public disclosure, or in extremely rare cases where adverse consequences outweigh public interest benefit.

Fraud risk in auditing

Risk of not detecting fraud-related material misstatement > risk for error

Because fraud may involve collusion, forgery, intentional omissions, misrepresentations or override of internal control.

Quick revision

• SA 700 (Revised) governs forming an opinion and the form of the report; SA 705 governs modified opinions; SA 706 governs EOM and OM paragraphs.
• A modified opinion is a qualified opinion, an adverse opinion, or a disclaimer of opinion.
• If a disclosure on compliance with another framework is misleading, give a modified opinion under SA 705.
• If that disclosure is not misleading but is fundamental to users' understanding, add an EOM paragraph.
• With two applicable frameworks, consider each separately; the opinion refers to both.
• If statements comply with one framework but not the other, an unmodified opinion on one and a modified opinion on the other can be given.
• An EOM paragraph ends with a statement that the opinion is not modified in respect of the matter.
• An EOM can carry a descriptive heading, for example Emphasis of Matter – Effects of a Fire.
• An OM paragraph does not cover other reporting duties, additional specified procedures, or opinions on specific matters.
• An OM paragraph on other reporting duties may go in the Report on Other Legal and Regulatory Requirements section.
• On a disclaimer for lack of evidence, the auditor's responsibilities section is cut down to the items SA 705 lists.
• Reporting under Section 143(3) of the Companies Act, 2013 needs the SA 700 wording to be suitably reworded to fit the audit.

Common mistakes

• Saying the auditor gives absolute assurance that the statements are correct. Fix: Always use the words reasonable assurance and as a whole, free from material misstatement.
• Treating sufficient and appropriate as the same thing. Fix: Define sufficient as quantity and appropriate as quality, covering relevance and reliability.
• Treating qualified, adverse and disclaimer as degrees of the same thing without linking them to the nature of the matter. Fix: Always state the nature first. Adverse comes only from misstatement. Disclaimer comes only from inability to get evidence (or the rare multiple-uncertainties case).
• Giving a disclaimer because the client is uncooperative on a small item. Fix: A disclaimer needs possible effects that are both material and pervasive. If only material, the opinion is qualified.
• Placing Basis for Opinion before Opinion. Fix: Remember that Opinion comes first in SA 700 (Revised), then Basis for Opinion.
• Treating key audit matters as a way to give a separate opinion. Fix: State that KAMs are matters of most significance in the current period and no separate opinion is given on them.
• Treating an EOM paragraph as a qualification of the opinion. Fix: Remember that SA 706 says an EOM paragraph does not affect the opinion. A qualification changes the opinion itself.
• Using EOM to cover a missing or inadequate disclosure. Fix: An EOM requires the matter to be presented or disclosed already. Per A7 it cannot substitute for required disclosures or a modified opinion. If disclosure is inadequate, modify the opinion.
• Saying the auditor never opines on internal control effectiveness. Fix: Add that section 143(3)(i) gives the Indian auditor a duty to opine on adequacy of the IFC system and operating effectiveness.
• Treating TCWG as only the audit committee. Fix: Define TCWG as the persons or organisations responsible for overseeing the entity. It may be the board or the audit committee depending on the structure.

Exam tips

• Structure answers as provision, facts, conclusion. Quote SA 700 para 11 early.
• In numerical cases, always show the aggregate of misstatements against materiality.
• Name the framework type before applying paras 14 or 19.
• Mention both modification triggers from para 17.
• If the case mentions missing records or refusal of access, think scope limitation and insufficient evidence.
• Always give the two-factor reasoning, nature of the matter and pervasiveness. Marks are given for analysis, not only for the label.
• Use the exact words "material", "pervasive" and "sufficient appropriate audit evidence" in your answer.
• In a distinction question, compare on basis (misstatement or evidence limitation), pervasiveness, wording of the opinion and the auditor's position.