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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Auditor's reports

Dax Ltd has net current liabilities and its main bank loan matures in four months. The directors prepared financial statements on the going concern basis, with no disclosure of any uncertainty. The auditor believes a material uncertainty exists and that the going concern basis is appropriate. What is the correct audit opinion?

The auditor should issue a qualified or adverse opinion, depending on pervasiveness, because omitting disclosure of a material uncertainty is a material misstatement. A material uncertainty section is only used when disclosure is adequate, and responsibility for disclosure being with the directors does not remove the auditor's reporting duty.

  1. AUnmodified opinion with a material uncertainty section
  2. BQualified or adverse opinion because of a material misstatement through omitted disclosureCorrect
  3. CDisclaimer of opinion because the auditor cannot conclude on going concern
  4. DUnmodified opinion with no reference, as the directors are responsible for disclosure

Explanation

Where a material uncertainty exists and the financial statements fail to disclose it, ISA 570 requires a qualified or adverse opinion, depending on the pervasiveness. The report should explain the omission in the basis for opinion section and state that the financial statements do not adequately disclose the uncertainty. An unmodified opinion with the section is only valid when disclosure is adequate.

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