What opinion to give? - F8

When there is no material problem found in the financial statements, auditor will express an unmodified opinion which states that financial statements show a true and fair view. However, there are situations where auditor may need to modify the opinion. There are three types of modified opinion: qualified (except for...), adverse (do not show true and fair view) or disclaimer (we do not express an opinion) of opinion. ISA 705 provides guidance on which opinion to express.

Firstly, I will introduce the word "pervasiveness". This is one important factor to consider. Something is pervasive if it:
1. Affects the whole financial statements, eg. no longer going concern.
2. Does not affect the whole financial statements but is itself very significant, eg. unreasonable accounting estimates were used.
3. Non-disclosure of something fundamental to users' understanding of the financial statements.

Next, ISA 705 states that auditor shall modify the opinion when:
1. Financial statements as a whole are not free from material misstatements or,
2. Auditor is unable to obtain sufficient appropriate audit evidence to express an opinion.

Now, it's time to use common sense.
1. If financial statements are materially misstated but it is not pervasive, we only qualify the opinion (because not so serious). However, if it is pervasive, then we might express an adverse opinion.
2. If auditor is unable to obtain sufficient appropriate audit evidence about something (eg. going concern status) but it is not pervasive, we only qualify the opinion. However, if it is pervasive, then we might disclaim the opinion (because we don't have enough evidence to prove that it is bad).