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

Karst Co is in financial difficulty and its lender has indicated it may withdraw its facility. The directors have prepared the financial statements on the going concern basis and disclose the material uncertainty only vaguely, omitting the key facts about the facility. The auditor considers the disclosure inadequate. What is the appropriate audit opinion?

The auditor should give a qualified or adverse opinion, depending on how material and pervasive the inadequate disclosure is. Inadequate disclosure of a material uncertainty is a material misstatement, and an emphasis of matter or a separate uncertainty section alone cannot remedy it.

  1. AUnmodified opinion with an emphasis of matter paragraph
  2. BQualified or adverse opinion, depending on the materiality and pervasiveness of the inadequate disclosureCorrect
  3. CDisclaimer of opinion because the auditor cannot obtain evidence on future events
  4. DUnmodified opinion with a material uncertainty section only

Explanation

ISA 570 requires a qualified ('except for') or adverse opinion when disclosure of a material uncertainty is inadequate, which is a material misstatement. The report must also state that a material uncertainty exists. An emphasis of matter cannot cure inadequate disclosure, and a disclaimer relates to inability to obtain evidence, not a disclosure deficiency.

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