Auditor’s report and modifications - Unmodified opinion and ...

Learning Outcomes

After reading this article, you should be able to:

• Identify the required components and structure of an independent auditor’s report for general purpose financial statements (ISA 700).
• State when an unmodified (unqualified) opinion is appropriate and describe standard report wording.
• Explain the roles and responsibilities detailed in the report, and how they address the expectation gap.
• List and describe the main sections included in a typical auditor’s report under ISA 700.

ACCA Audit and Assurance (AA) Syllabus

For ACCA Audit and Assurance, you must be able to explain from first principles both the form and requirements of the auditor’s report when issuing an unmodified opinion under ISA 700. For revision, focus on:

• The required elements and order of the independent auditor’s report for an audit of financial statements (ISA 700).
• The circumstances and criteria leading to an unmodified (clean) auditor’s opinion.
• The standard opinion wording and structure, including why and where each section appears.
• The division of responsibilities between management, those charged with governance, and the auditor as set out in the report.
• The concept of reasonable assurance and the difference between reasonable and absolute assurance.
• The ways in which the report aims to reduce or manage the expectation gap.
• The interaction between ISA 700 and other reporting standards (e.g. key audit matters, emphasis of matter, and modifications—ISA 701, 705, 706).

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which conditions must exist for an unmodified opinion to be issued in the auditor’s report?
2. List three required elements of the independent auditor’s report under ISA 700.
3. What does the term “reasonable assurance” mean in the context of the auditor’s responsibilities?
4. Give an example of the standard wording used in the “Opinion” section of an unmodified auditor’s report.

Introduction

The auditor’s report is the statutory conclusion of every financial statement audit. ISA 700 requires that the report follows a strict, clear format and includes specific content to improve transparency, reliability, and comparability for users. An unmodified (unqualified) opinion means the auditor considers the financial statements to be free from material misstatement, prepared in accordance with the relevant framework, and sufficiently disclosed. This article explains the structure and wording of a standard (unmodified) auditor’s report, the responsibilities of the parties involved, and the role of the report in addressing the expectation gap.

Key Term: auditor’s report
The formal, written communication in which the auditor expresses an independent opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

The Structure of the Auditor’s Report (ISA 700)

ISA 700 prescribes the minimum required sections, their order, and certain phrasing to improve clarity and consistency worldwide. A general-purpose auditor’s report must include these core components:

1. Title – Must state ‘Independent Auditor’s Report’.
2. Addressee – Identifies the party for whom the report is primarily intended (usually shareholders/members).
3. Opinion – The auditor’s conclusion on whether the financial statements show a true and fair view or are fairly presented.
4. Basis for Opinion – References ISA compliance, describes auditor independence/ethical compliance, and states sufficient appropriate evidence was obtained.
5. Key Audit Matters – For listed entities, outlines matters of most significance as required by ISA 701. (Optional for other entities.)
6. Other Information – Reports on any inconsistencies with other sections of the entity’s annual report not covered by the audit (ISA 720).
7. Responsibilities of Management and Those Charged with Governance – Explains who prepares the accounts, maintains internal control, and assesses going concern.
8. Auditor’s Responsibilities – Sets out the objective to obtain reasonable assurance, details the risk-based audit approach, and clarifies limitations.
9. Report on Other Legal and Regulatory Requirements – Where local law or standards require reporting on additional matters.
10. Signature, Auditor’s Address, and Date – Identifies the audit firm and (for listed companies) the engagement partner, specifies location, and states the date of the auditor’s report.

Key Term: unmodified opinion
The audit opinion issued when the auditor concludes that the financial statements are free from material misstatement and comply with the applicable financial reporting framework.

Circumstances for an Unmodified Opinion

An unmodified opinion is only issued when the audit evidence obtained allows the auditor to conclude that:

• No material misstatements have been found.
• All necessary disclosures and presentation requirements are satisfied.
• The financial statements comply with the relevant framework (e.g., IFRS).

If there are material misstatements or the auditor is unable to obtain sufficient evidence, a modification is required (covered by ISA 705).

Wording of an Unmodified Report

The opinion section must use clear and positive language. Accepted phrases for international use are:

“In our opinion, the financial statements present fairly, in all material respects, the financial position of [Entity] as at [Date], and its financial performance and its cash flows for the year then ended in accordance with [Framework].”

or, if required locally,

“In our opinion, the financial statements give a true and fair view of ...”

Key Term: true and fair view
The financial statements are factually correct, free from bias, and compliant with the applicable reporting framework.

Main Sections and What They Mean

Opinion

States the auditor’s overall conclusion as the first substantive section of the report, specifying the financial statements audited, the period covered, and the applied reporting framework.

Basis for Opinion

Affirms audit compliance with all relevant ISAs, confirms auditor independence and ethical behaviour, and asserts that the audit evidence obtained was sufficient and appropriate. If the report is modified, this section will also explain the reason for modification and quantify its effect.

Key Audit Matters (Listed Entities)

ISA 701 requires that, for listed entities, a section describing matters of most significance in the audit is included. Each key audit matter is described along with how it was addressed. For non-listed entities, this section is optional unless required by law or regulation.

Other Information

Refers to narrative content or supplementary reports (such as the chair’s statement) in the entity’s annual report not audited by the external auditor. The auditor must consider whether any such other information is materially inconsistent with the audited financial statements or auditor knowledge. If a material inconsistency is identified, it must be referred to here.

Responsibilities of Management and Those Charged with Governance

Explains that management is responsible for:

• Preparing the financial statements in line with the applicable financial reporting framework.
• Designing, implementing, and maintaining adequate internal controls.
• Assessing and concluding on the entity’s status as a going concern.

Those charged with governance (e.g., directors) must oversee the financial reporting process.

Key Term: expectation gap
The difference between what users think auditors do (or are responsible for) and what auditors are actually required to do by law and professional standards.

Auditor’s Responsibilities for the Audit

Clearly sets out that:

• The auditor’s objective is to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error.
• The audit involves procedures to address identified risks, but is not a guarantee of detecting all issues.
• Limitations exist due to use of sampling, inherent limitations of controls, and the judgement involved in auditing.

Key Term: reasonable assurance
A high but not absolute level of confidence provided to users that the financial statements are free of material misstatement.

Key Term: material misstatement
An error, omission, or fraud that could influence the economic decisions of users based on the financial statements.

Signature, Address, and Date

Identifies the firm and, for listed entities, the individual engagement partner. The signature confirms responsibility for the report. The report is dated as of the date the auditor has sufficient appropriate evidence and after management has authorised the statements.

Additional Requirements

Where local laws require, the report may include further required reporting on other matters (for instance, reporting responsibilities on internal controls or consistency of the other information).

The Expectation Gap and User Confidence

By specifying exactly:

• Who is responsible for preparing the accounts,
• What the auditor’s scope and limitations are,
• What “reasonable assurance” and “materiality” mean,

the report seeks to prevent misunderstandings—helping users to interpret the auditor’s opinion correctly rather than expecting absolute error/fraud detection or guarantees.

Worked Example 1.1

A private company’s auditor has completed the audit of financial statements prepared under IFRS. No material issues are found, disclosures are adequate, and management confirms its responsibilities. What opinion should be issued and what wording is used?

Answer:
The auditor will issue an unmodified opinion. The Opinion section will include: “In our opinion, the financial statements present fairly, in all material respects, the financial position of [Company] as at 31 December 20X5, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards.”

Worked Example 1.2

The auditor’s report states that “reasonable assurance” has been provided after a risk-based audit with some sampling. The chair of the company expects that the audit means the accounts are guaranteed correct and no fraud could be present. Is this expectation correct?

Answer:
No. The auditor’s report explains that “reasonable assurance” does not mean guarantee. The auditor provides a high level of confidence but cannot confirm that all misstatements or fraud have been detected due to the inherent limitations of the audit.

Exam Warning

Do not confuse "unmodified" (unqualified) opinions, which mean a clean bill of health, with "qualified," "adverse," or "disclaimer" opinions—which are various types of modified opinions. Modified opinions are covered by ISA 705.

Typical Outline of an Unmodified Auditor’s Report

Revision Tip

If unsure whether to use "true and fair view" or "fairly presents," align with the specific jurisdiction or the reporting framework indicated in the question.

Summary

An unmodified auditor’s report under ISA 700 communicates: the scope of the audit, a clear positive conclusion on the financial statements, and the division of responsibilities. The structure and required sections help ensure user understanding, standardise reporting globally, and limit the expectation gap. The report’s standard wording and detailed section content are essential for exam success.

Key Point Checklist

This article has covered the following key knowledge points:

• Describe the required structure and elements of the auditor’s report under ISA 700.
• Explain when and why an unmodified opinion is issued.
• State the standard opinion wording for an unqualified report.
• Distinguish management’s responsibilities from those of the auditor as stated in the report.
• Define and use the concepts of reasonable assurance, material misstatement, and the expectation gap.
• Recognise the significance of each section of the report for user understanding in the ACCA exam context.

Key Terms and Concepts

• auditor’s report
• unmodified opinion
• true and fair view
• expectation gap
• reasonable assurance
• material misstatement