Negative Audit Opinion Wording – Potential for Confusion
Readers may have heard by now that there is a new audit reporting requirement about going concern contained in a new style of audit opinion. For companies and credit unions with a reporting period commencing on or after 17 June 2016 (in effect 30 June 2017 year-ends onwards), auditors must now include a specific conclusion in the auditor’s report on going concern.
This change happened in June 2016, when IAASA (the Irish Auditing and Accounting Supervisory Authority) took over the setting of auditing standards for Ireland. Subsequently in January 2017, IAASA issued a new single Ethics Standard and a new ISQC1. It also published a new suite of ISAs (Ireland), including the International Standard on Auditing (ISA) 700 (Ireland) on ‘Forming an Opinion and Reporting on Financial Statements’ and ISA 570 on ‘Going Concern’ which were both updated.
The new audit report significantly places the audit opinion at the beginning of the report and the Bannerman paragraph, is placed last of all. Locating the audit opinion paragraph at the beginning is a plus, as it is more likely to be read now than in the past.
However, one potentially unfortunate side effect of the new style report could lead to misunderstandings. The use of sentences with double-negatives, could cause confusion. In the old-style audit report, any special mention of going concern was only given in the event where there was a concern (such as in an Emphasis of Matter paragraph). Now there is a direct reference to going concern, but using double negatives. Here is the wording:
‘Conclusions relating to going concern
We have nothing to report in respect of the following matters in relation to which the ISAs (Ireland) require us to report to you where:
- the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or
- the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.’
Situations could easily arise where the page break, coming between the opening text and the first bullet point or a page break between the first and second bullet point, could confuse readers who see the words ‘the directors have not disclosed….’. If readers do not take their time to read the audit report carefully, there could be misunderstandings with unfortunate consequences.
It’s worth mentioning this, in advance, to clients and other users like financial lenders, sooner rather than later as they could be taken aback by this style of language and especially the specific reference to going concern.
