When the auditor has no reservations on the matters required by the Seventh Schedule, he issues a clean report. If he has any reservations, he may issue a qualified report. The circumstances which cause auditors to introduce qualifying statements into their reports where the matters at issue are material include the following
a) If the auditors are unable to obtain all the information and explanations they consider necessary for the purposes of their audit, for example, if they are unable to obtain satisfactory evidence:
i. of the existence of ownership of material assets or of the amounts at which they have been stated on the basis adopted;
ii. of the validity of payments;
iii. That the records properly reflect all transactions of the business because the evidence has been lost or destroyed or is otherwise not forthcoming or has never existed.
b) If in the opinion of the auditors:
i. Proper books of accounts have not been kept in accordance with the Companies Act;
ii. Proper returns adequate for their audit have not been received from branches nor visited by them;
iii. The balance sheet and the profit and loss account are not in agreement with the accounting books and returns.
c) If in the opinion of the auditors the accounts though based on proper books of account fail to give the information required by the act for example, a failure to comply with specific disclosure requirements of the Companies Act in material respects.
d) If in the opinion of the auditors the accounts though otherwise complying with the disclosure requirements fail to disclose a true and fair view for example:
i. Because in the auditor's opinion the underlying accounting policies do not conform to accounting principles appropriate to the circumstances and nature of the business;
ii. Because they are prepared on principles inconsistent with those previously adopted and without adequate explanation and disclosure of the effects of the change;
iii. Because the auditors are unable to agree with the amounts at which an asset or a liability is stated;
iv. Because the auditors are unable to agree with the amount at which income or expenditure or profit is stated;
v. Because the accounts do not disclose information though not specifically required by the companies act, is necessary for the presentation of a true and fair view;
vi. Because additional information given in a note or in the director's report materially alters the view otherwise given by the accounts.
e) If in the case of a holding company submitting group accounts it is the opinion of the auditors that the group accounts have not been properly prepared in accordance with the provisions of the act so as to give a true and fair view of the profit and loss of the company and its subsidiaries so far as it concerns the members of the company
More than one of the circumstances in which qualification is necessary may be present in any particular case. Where the auditor has these reservations, he must inform the shareholders in his audit report.