A qualified report is not necessary unless the amounts at issue are material. If a qualified report is called for the auditors must decide:
- To which specific matters their reservations apply;
- 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;
- 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:
- that they are unable to form an opinion whether the accounts present a true and fair view or;
- 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:
- Be as concise as is consistent with clarity;
- Be specific as to the items and facts as far as possible the amounts involved;
- Within the limits of the information available to the auditors make clear its effects on the accounts and;
- 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. It identifies the nature of circumstances and recognises only two which are uncertainty and disagreement.