A qualified report is not necessary unless the amounts at issue are material. If a qualified report is called for the auditors must decide:

a) To which specific matters their reservations apply;

b) Whether they actively disagree or on the other hand lack sufficient evidence to enable them form an opinion as regards material items in the accounts;

c) Whether in either event the matters in question are so material as to affect the presentation of a true and fair view.

If for instance the items in doubt or disagreement are limited and therefore not so material as to cast doubt on the views shown by the accounts as a whole, the auditors will be able to report that in their opinion subject to specific reservations or with specific exemptions the accounts present a true and fair view. There may however be cases where the substantial items or those in disagreement are so material that the audits must report stating their reason either:

i. that they are unable to form an opinion whether the accounts present a true and fair view or;

ii. that in their opinion the accounts do not present a true and fair view. A qualification in this extreme term is only made in rare circumstances.

The Companies Act lays down no specific requirements as to the manner in which auditors should when they judge it necessary, qualify their report. This can only be decided in the circumstances of each particular case. It would be undesirable to suggest standard forms of working that might be appropriate to the variety of circumstances in which it may be necessary for auditors to give a qualifying report. The guiding principle is that it is the duty of an auditor to convey information not merely to arouse inquiry.

Before qualifying their report, auditors should discuss the accounts with the company's management and make their views clear. This enables the directors to examine the matter at issue and as far as they judge it practical and appropriate they may take steps to provide the missing information or to amend the accounts in such a way as to enable the auditors give a report without qualification. A qualifying statement should be direct and informative. It should be phrased as to leave the reader in no doubt as to its meaning. Therefore, it should:

a) Be as concise as is consistent with clarity;

b) Be specific as to the items and facts as far as possible the amounts involved;

c) Within the limits of the information available to the auditors make clear its effects on the accounts and;

d) Express the auditor's opinion without the possibility of misinterpretation.

The object is to give in clear and unequivocal terms so far as circumstances permit such information in augmentation of that provided by the accounts and notes thereto as will in the auditor's opinion provide the information required by the acts and ensure that the accounts will then give a true and fair view. It must be emphasised that the fact that the auditors judge it necessary to include qualifying statements in their report does not necessarily impute the financial integrity of a company's directors who are ultimately responsible for the form and presentation of the accounts and the information they contain. It is the duty of the auditors to exercise their judgement and express their opinion, their obligation is inescapable. It would be wholly inappropriate for instance for auditors to seek to avoid qualifying their reports by resigning before the expiry of their term of office simply because they are dissatisfied with the position disclosed by their audit.

i. it identifies the nature of circumstances and recognises only two which are uncertainty and disagreement.


The auditor may be unable to express an opinion on a set of accounts as a result of uncertainty. This would seem to imply that to some extent he has been unable to obtain all the information and explanation which he deemed necessary for the purposes of the audit. These can be as a direct intervention or lack of cooperation by the management or the management can give him all the help he needs but he is still unable to express an opinion due to circumstances beyond a management's control and limitations from the available information. The standard recognizes that uncertainty can arise as a result of limitations in the scope of the audit and as a result of inherent uncertainties.

Uncertainty can be of two levels, material and not fundamental and fundamental. An uncertainty is material but not fundamental if the auditor has reservations on only a particular aspect of the accounts and not on the accounts as a whole. In this situation the auditor is able to form an opinion on the accounts as a whole with particular reservations on a specific matter. He therefore disclaims opinion on only an aspect of the accounts and not the accounts taken as a whole.

An uncertainty becomes fundamental when its impact on the accounts taken as a whole is to make them meaningless for any decision making purposes and to reduce their informational value. In this situation, the auditor is unable to form an opinion on the accounts taken as a whole and he therefore disclaims his opinion altogether by stating that he is unable to form an opinion as to whether the financial statement gives a true and fair view.


The ISA gives circumstances in which disagreement could arise between the auditor and the management.

These are:

• Departures from accepted accounting practices where (i) there has been failure to comply with the relevant IAS and the auditor does not concur (ii) an accounting policy not the subject of a IAS is adopted which in the opinion of the auditor is not appropriate to the circumstances of the business or (iii) exceptionally a IAS has been followed with the result that the financial statements do not present a true and fair view.

• Disagreement as to the facts or amounts included in the financial statement.

• Disagreement as to the manner or extent of disclosure of facts or amounts in the financial statements.

• Failure to comply with the relevant legislation or other requirements.

Where the auditor disagrees with the management on just an aspect of the accounts, he will indicate in his report that he has exceptions as against reservations noted under uncertainty and he will mention in his report that to the extent of the exceptions the accounts do not give a true and fair view. This is where the disagreement is material but not fundamental. A disagreement becomes fundamental where its impact on the financial statements is to make them misleading as a whole. In this situation the auditor will state that the accounts taken as a whole do not give a true and fair view.


The auditors will not clutter their opinion with trivial matters and therefore their audit is carried out with emphasis on matters that could have material impact on the report. A matter generally is held to be material if its disclosure or non-disclosure would affect the view given by the accounts. Materiality may be considered in the context of the financial statement as a whole, the balance sheet, the profit and loss account, or individual items within the financial statement. In addition, depending upon the nature of the matter materiality may be considered in relative or absolute terms. If therefore the auditor concludes that, judged against criteria he believes to be most appropriate in the circumstances, the matter does not materially affect the view given by the financial statements he should not qualify his opinion.

Materiality is essentially a matter of professional judgement and therefore an individual item can be judged material if knowledge of that item could reasonably be deemed to have influence on the users of the financial statement. The issue of materiality arises in two situations:

(i) determining the extent to which detailed audit work should be performed in specific areas and (ii) determining whether errors or other mis-statements have affected the true and fair view.

An amount is not material solely by reason of its size. Other factors including those set out below must be considered in making decisions as to materiality: (a) the nature of the item i.e. whether it is a factor entering into the determination of net income, unusual or extra-ordinary, contingent upon an event or condition, determinable based upon existing facts and circumstances and required by statute or regulation (b) the amount itself in relation to the financial statements taken as a whole, the total of the amount of which it forms or should form a part, related items (e.g. if the figure under review is the doubtful debt provision then debtors would be related items), the corresponding amounts in previous years or the expected amounts in future years. It has been found that it is possible to have quantitative guidelines as to materiality and these range between 5 and 10 percent when compared to an appropriate base. Below 5% would not normally be material unless it is one of those transactions which must be disclosed by statute e.g. directors emoluments.

ii. Fundamentality

When a matter is fundamental then it is considered so crucial to the view given by the accounts that it can render them totally misleading or meaningless. This usually arises in very rare circumstances. Remember that an uncertainty ceases to be just material and becomes fundamental when its impact on the financial statements is to make them meaningless. A disagreement ceases to be just material and becomes fundamental if its impact on the financial statements taken as a whole is so great as to make them totally misleading. It would appear that failure to comply with IAS and the requirements of legislation would automatically make a disagreement fundamental because compliance with the IAS and Companies Act is necessary for accounts to give a true and fair view.

When the auditor is faced with a situation of uncertainty whether it is limitation of scope or inherent but it is only restricted to an item in the accounts and not the accounts as a whole then he should use a "subject to" form of report.

Where the uncertainty is considered fundamental then the auditor should use a disclaimer of opinion.

When it is a situation of disagreement on an aspect of the accounts then the auditor uses an "except for" opinion.

When the disagreement is fundamental, then he gives an adverse opinion

Emphasis of matter

The standard states as a general principle, the auditor issuing an unqualified opinion should not make reference to specific aspects of the financial statements in the body of his report as such a reference may be misconstrued as being a qualification. In rare circumstances the reader will obtain a better understanding of the financial statements if his attention is drawn to important matters. These situations arise when there is an unusual event, an unusual accounting policy, or an unusual condition and it is felt that awareness of such a situation is fundamental to the understanding of the financial statement, therefore to avoid being misconstrued as being a qualification reference which are intended to be of emphasis of matter should be minimal and should be made not in the opinion paragraph of the report but in a separate and subsequent paragraph introduced with the phrase "Without qualifying our opinion above, we draw attention to....",