What Circumstances Meet the Condition that the Auditor is Unable to Obtain Sufficient Appropriate Audit Evidence ?

The auditor’s inability to obtain sufficient appropriate audit evidence (also referred to as a limitation on the scope of the audit) may arise from :

1. Circumstances beyond the control of the entity;
2. Circumstances relating to the nature or timing or the auditor’s work; or
3. Limitations imposed by management

An inability to perform a specific procedures does not constitute a limitation on the scope of the audit if the auditor is able to obtain sufficient appropriate audit evidence by performing alternative procedures.

Examples of circumstances beyond the control of the entity include when :

1. The entity’s accounting records have been destroyed
2. The accounting records of a significant component have been seized indefinitely by governmental authorities

Examples of circumstances relating to the nature of timing of the auditor’s work include when :

1. The entity is required to use the equity method of accounting for an associated entity, and the auditor is unable to obtain sufficient appropriate audit evidence about the latter’s financial information to evaluate whether the equity method has been appropriately applied
2. The timing of the auditor’s appointment is such that the auditor is unable to observe the counting of the physical inventories
3. The auditor determines that performing substantive procedures alone is not sufficient, but the entity’s controls are not effective

Examples of an inability to obtain sufficient appropriate audit evidence arising from a limitation on the scope of the audit imposed by management include when :

1. Management prevents the auditor from observing the counting of the physical inventory
2. Management prevents the auditor from requesting external confirmation of specific account balances.

Source : IAS 705 – Modifications to the Opinion in the Independent Auditor’s Report paragraphs A8 - A12

In What Circumstances the Material Misstatements of Financial Statements May Arise ?

ISA 700 requires the auditor, in order to form an opinion on the financial statements, to conclude as to whether reasonable assurance has been obtained about whether the financial statements as a whole are free from material misstatement. This conclusion takes into account the auditor’s evaluation of uncorrected misstatements, if any, on the financial statements in accordance with ISA 450.

ISA 450 defines a  misstatement as a difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework.

Accordingly, a material misstatement of the financial statements may arise in relation to :

1. The appropriateness of the selected accounting policies;
2. The application of the selected accounting policies; or
3. The appropriateness or adequacy of disclosures in the financial statements

Appropriateness of the Selected Accounting Policies

In relation to the appropriateness of the accounting policies management has selected, material misstatements of the financial statements may arise when :

1. The selected accounting policies are not consistent with the applicable financial reporting framework; or
2. The financial statements, including the related notes, do not represent the underlying transactions and events in a manner that achieves fair presentation

Financial reporting frameworks often contain requirements for the accounting for, and disclosure of, changes in accounting policies. Where the entity has changed its selection of significant accounting policies, a material misstatement of the financial statements may arise when the entity has not complied with these requirements.

Application of the Selected Accounting Policies

In relation to the application of the selected accounting policies, material misstatements of the financial statements may arise :

1. When management has not applied the selected accounting policies consistently with the financial reporting framework, including when management has not applied the selected accounting policies consistently between periods or to similar transactions and events (consistency in application); or
2. Due to the method of application of the selected accounting policies (such as an unintentional error in application).

Appropriateness or Adequacy of Disclosures in the Financial Statements

In relation to the appropriateness or adequacy of disclosures in the financial statements, material misstatements of the financial statements may arise when :

1. The financial statements do not include all of the disclosures required by the applicable financial reporting framework;
2. The disclosures in the financial statements are not presented in accordance with the applicable financial reporting framework; or
3. The financial statements do not provide the disclosures necessary to achieve fair presentation.

Source : ISA 705 – Modifications to the Opinion in the Independent Auditor’s Report paragraphs A2 - A7