WE are currently in the so-called reporting season wherein listed entities with December year-ends are starting to issue out their financial statements.
In our market due to various complexities, we are having all manner of audit opinions. This has resulted in the users of financials struggling with placing reliance on the financials.
Other concerns have been generally on the understandability of the figures as well especially if they are inflation adjusted.
Before I proceed further, I would like to refer to the article published in this paper as per the link: https://www.theindependent.co.zw/2021/11/05/auditors-and-corporate-failure/.
In that I detailed types of audits including Financial Statements Audits, which are the focus of this article.
Just to summarise though, the auditors, usually external, come in primarily to look at an entity’s financial statements and express an opinion on whether the numbers being reported by and large represent the actual financial performance for a defined period and the financial position at a given date.
The audit opinion
The audit opinion is the communication to the users of the financials that the auditors to highlight in the auditor’s view whether or not the figures reported are a true and fair representation of the status and performance the organisation.
Audit opinions are guided are International Standards on Auditing (ISAs) as issued by the International Federation of Accountants (IFAC)’s standard setting body, the International Auditing and Assurance Standards Board (IAASB).
Our own laws, such as the Companies and Other Business Entities Act (COBE Act) also provides the requirements for the auditor’s report under section 193.
There is guidance in terms of expectations from the law around what is expected from the auditors, for example that, the accounts are properly drawn up in accordance with the COBE Act so as to give a true and fair view of the state of the company’s affairs at the date of its financial statements for its financial year in question.
Other elements of the audit opinion include the opinion itself, meaning what the view of the auditor is.
This opinion is informed by the auditor’s evaluation of the conclusions made from the evidence gathered during the audit process. The auditor is also guided by the framework selected by the preparers of the financials.
Zimbabwe was one of the first African countries to adopt International Financial Reporting Standards (IFRS) and this remains the framework in use by most entities. The Public Accountants and Auditors Board (PAAB) has also adopted IFRS for use in Zimbabwe. This is also aligned to section 184 of the COBE Act. This noble initiative has rather interestingly been the source of many headaches as entities in Zimbabwe fail to comply with their selected framework due to our own country specific challenges which are not adequately covered by IFRS.
Examples are discussed further down. In such scenarios auditors then come up with modified (qualified) opinions.
The audit opinion also contains key audit matters, which is a fairly recent addition to the requirements of the standard audit opinion. This was in a bid to share further insights with the users of the financials. Examples of such matters can include areas in which significant judgements or estimates were applied.
Financial reporting can at times include a lot of judgement in coming up with a reasonable valuation, for example on some complex assets like biological assets.
Valuation of more usual assets like buildings can also include making use of a lot of judgement and thus can be one such matter as well. Estimating a provision of doubtful debts (allowance for credit losses) can also involve making a lot of judgement call so this too can be another area.
This is done to ensure that the figures presented speak to the reality subsisting within an entity and its environment. By drawing attention to these key audit matters, the auditors are equipping the users of financials with information which will assist them in their analyses.
In order to be complete, an opinion will also include responsibilities for the auditors and directors. My view is that there is always a bit of blurring of those responsibilities particularly from a user’s point of view.
This is magnified when something goes wrong. The auditor always seems to carry a larger responsibility. I suppose that comes with the weight of their offices as well as the morals and the leadership expected from the public. Other matters can also be presented in an opinion should the auditor have areas they wish to highlight.
Broad types of opinions
There are two broad categories of opinions, modified and unmodified opinion. The modified opinion is generally the ‘clean’ opinion while the modified is often referred to the qualified.
Drilling down to detail, a qualified opinion is only one of the many types of modified opinions. The clean opinion is generally thumbs up and gives confidence to the users of the financials.
The Zimbabwean market is filled with modifications at the moment especially looking at the previous financial year. I will expand briefly on the many types with examples.
For this section, I will only focus on the disclaimer, adverse and qualified opinion. The disclaimer is when the auditor is essentially saying they are unable to express an opinion. This might be because there was a limitation, and they could not fully carry out the audit.
This can send a message that can be ruinous because the auditor is saying I cannot opine. This would raise more questions in the minds of the users of financials.
We also have an adverse opinion, which is simply highlighting that the entire set of financials have a material issue, which can potentially cast doubt on the full set of financials. The exchange rate issues, which we are presently grappling with are an example of such a matter.
If there are concerns around the rate to make use of in reporting, then naturally almost every aspect of the financials can thus be tainted. Debate around this topic has been raging for a while within our market.
The final modification I will talk about is a qualification. This is when there are concerns but they are somewhat localised to a particular element of the financials. Interestingly, this modification has popularised to the point that all modifications are simply referred to as qualifications.
Final thoughts and conclusion
I have run down the types of modifications, but I want to conclude by addressing the concern which may be, how to proceed when making use of financials with a modification.
Firstly, one must understand the type of modification and what gave rise to it. Key audit matters are important regardless of the type of opinion because they point to areas that need special attention from a user’s perspective because significant judgement was applied.
In addition, going through the non-financial information, if provided, will help gain a better understanding of the entity.
Furthermore, gaining an understanding of the overall environment and industry to which the organisation belongs to are of critical importance as well to really come up with informed decisions.
- Mavengere is the technical director at the Institute of Chartered Accountants of Zimbabwe (Icaz), which is the largest and longest standing PAO in Zimbabwe, having been established on 11 January 1918, and is a body corporate incorporated under the Chartered Accountants Act [Chapter 27:02]. Icaz provides leadership on the development, promotion, and improvement of the accountancy profession focusing in the areas of accounting education, assurance, good governance practices and leadership and organisational excellence. Owen can be contacted on email@example.com or twitter: @OwenMavengere.