What it means when auditors qualify opions?
THERE was some concern recently when the auditors of at least five listed companies issued qualified audit opinions on these companies' latest financial statements, while the auditors of another listed company drew attention to the fact that the company's ability to go on operating was hanging in balance.
All this came out on April 30, the last day for companies with a Dec 31 year-end to submit their 2009 audited accounts to Bursa Malaysia. Under the exchange's listing rules, a listed company is obliged to immediately announce any qualification in an auditors' report.
The five companies that failed to get clean audit opinions are Nam Fatt Corp Bhd, Patimas Computers Bhd, Mangotone Group Bhd, Wawasan TKH Holdings Bhd, and KBB Resources Bhd.
Essentially, a qualified opinion means that the auditors had incomplete information in doing their work, or they may disagree with the company's management on certain assumptions.
In the case of Luster Industries Bhd, its auditors, Grant Thornton, did not qualify its opinion on Luster's financial statements, but pointed out to shareholders that the company's fate rests on whether it can stage a turnaround.
Ng Mi Li says in certain circumstances, an auditor's report may be modified by adding an 'emphasis of matter' paragraph to highlight a matter affecting the financial statements. Financially distressed Luster submitted its proposed regularisation plans to the authorities in September last year. Bursa Malaysia rejected the proposals in February and Luster is awaiting the outcome of its appeal.
Expressing the right opinion
PricewaterhouseCoopers (PwC) Malaysia partner Ng Mi Li says a qualified opinion should be expressed when the auditors conclude that they cannot issue a clean opinion, but that the effect of any disagreement with management or any limitation on the scope of work is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion.
An unqualified opinion should be expressed when the auditor concludes that the financial statements give a true and fair view or are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.
In certain circumstances, an auditor's report may be modified by adding an “emphasis of matter” paragraph (not tantamount to a qualification) to highlight a matter affecting the financial statements.
The emphasis of matter is used, for instance, in the case of a material matter regarding a company's status as a going concern, when there is a significant uncertainty. The Luster audit opinion is an example.
“An uncertainty is a matter whose outcome depends on future actions or events not under the direct control of the entity but that may affect the financial statements,” says Ng.
Another instance is when there is a need to report on matters other than those affecting the financial statements.
“For example, if an amendment to other information in a document containing the audited financial statements is necessary and the entity refuses to make the amendment, the auditor would consider including in the auditor's report an emphasis of matter paragraph describing the material inconsistency,” she says.
Basis of qualification
According to Wong Liu & Partners, the auditors of vermicelli maker KBB Resources, the counting of the finished goods (amounting to RM27.48mil as at Dec 31, 2009) held at different warehouses of a subsidiary was carried out without the auditors' presence and the management did not arrange for their observation.
The auditors also could not ascertain the quantities of raw materials amounting to RM10.89mil. These led to the qualified audit opinion. A source familiar with the situation says KKB Resources have taken steps to resolve the issue.
The Patimas audit qualification was due to the amount owed to the company by former subsidiary Tsun Macro Sdn Bhd, amounting to RM6.4mil.
The problem is Tsun Macro is in liquidation and the auditors say they are unable to obtain sufficient audit evidence to ascertain the recoverability of the amount outstanding. However, the Patimas management says the servicing of the debt is covered by an August 2005 agreement.
“Despite the fact that the court granted a petition order in 2007 to wind up Tsun Macro, Patimas has been receiving repayment in accordance with the terms of the financial assistance settlement agreement,” says Patimas managing director Law Siew Ngoh.
“In relation to the auditors' report, we would encourage readers not to misinterpret the qualification as an 'adverse opinion' qualification. In our case, it was due to the limited audit evidence for this particular matter that gave rise to the qualification.
“Notwithstanding the matter highlighted, the financial statements of Patimas have been properly drawn up to show a true and fair view of the company's financial position.
“As for the outstanding amount of RM6.4mil, the sum would be repaid in full within the next two years. It is important to note that the outstanding is secured by personal guarantees and this mitigates the risk posed by Tsun Macro's liquidation,” says Law.
Wawasan TKH's auditors say they qualified their opinion on the company's 2009 accounts because they could not determine the effect of impairment adjustments, if any, on the carrying amounts of the property, plant and equipment of the disposable food-wares unit and goodwill of Wawasan TKH.
Moore Stephens AC, the auditors of Mangotone, cited a long list of factors as to why it expressed a disclaimer opinion on the company's latest annual financial statements, starting with the “substantial doubts” that the company can continue to be a going concern.
A disclaimer
Ng of PwC says: “A disclaimer of opinion should be expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and accordingly is unable to express an opinion on the financial statements.”
She says that the addition of a paragraph emphasising a going concern problem or significant uncertainty is ordinarily adequate to meet the auditor's reporting responsibilities regarding such matters.
“However, in extreme cases, such as situations involving multiple uncertainties that are significant to the financial statements, the auditor may express a disclaimer of opinion instead of adding an emphasis of matter paragraph,” she says.
“A disclaimer of opinion is expressed when the auditor is unable to render an opinion as to whether the financial statements show a true and fair view.”
By TEE LIN SAY
THERE was some concern recently when the auditors of at least five listed companies issued qualified audit opinions on these companies' latest financial statements, while the auditors of another listed company drew attention to the fact that the company's ability to go on operating was hanging in balance.
All this came out on April 30, the last day for companies with a Dec 31 year-end to submit their 2009 audited accounts to Bursa Malaysia. Under the exchange's listing rules, a listed company is obliged to immediately announce any qualification in an auditors' report.
The five companies that failed to get clean audit opinions are Nam Fatt Corp Bhd, Patimas Computers Bhd, Mangotone Group Bhd, Wawasan TKH Holdings Bhd, and KBB Resources Bhd.
Essentially, a qualified opinion means that the auditors had incomplete information in doing their work, or they may disagree with the company's management on certain assumptions.
In the case of Luster Industries Bhd, its auditors, Grant Thornton, did not qualify its opinion on Luster's financial statements, but pointed out to shareholders that the company's fate rests on whether it can stage a turnaround.
Ng Mi Li says in certain circumstances, an auditor's report may be modified by adding an 'emphasis of matter' paragraph to highlight a matter affecting the financial statements.Expressing the right opinion
PricewaterhouseCoopers (PwC) Malaysia partner Ng Mi Li says a qualified opinion should be expressed when the auditors conclude that they cannot issue a clean opinion, but that the effect of any disagreement with management or any limitation on the scope of work is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion.
An unqualified opinion should be expressed when the auditor concludes that the financial statements give a true and fair view or are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.
In certain circumstances, an auditor's report may be modified by adding an “emphasis of matter” paragraph (not tantamount to a qualification) to highlight a matter affecting the financial statements.
The emphasis of matter is used, for instance, in the case of a material matter regarding a company's status as a going concern, when there is a significant uncertainty. The Luster audit opinion is an example.
“An uncertainty is a matter whose outcome depends on future actions or events not under the direct control of the entity but that may affect the financial statements,” says Ng.
Another instance is when there is a need to report on matters other than those affecting the financial statements.
“For example, if an amendment to other information in a document containing the audited financial statements is necessary and the entity refuses to make the amendment, the auditor would consider including in the auditor's report an emphasis of matter paragraph describing the material inconsistency,” she says.
Basis of qualification
According to Wong Liu & Partners, the auditors of vermicelli maker KBB Resources, the counting of the finished goods (amounting to RM27.48mil as at Dec 31, 2009) held at different warehouses of a subsidiary was carried out without the auditors' presence and the management did not arrange for their observation.
The auditors also could not ascertain the quantities of raw materials amounting to RM10.89mil. These led to the qualified audit opinion. A source familiar with the situation says KKB Resources have taken steps to resolve the issue.
The Patimas audit qualification was due to the amount owed to the company by former subsidiary Tsun Macro Sdn Bhd, amounting to RM6.4mil.
The problem is Tsun Macro is in liquidation and the auditors say they are unable to obtain sufficient audit evidence to ascertain the recoverability of the amount outstanding. However, the Patimas management says the servicing of the debt is covered by an August 2005 agreement.
“Despite the fact that the court granted a petition order in 2007 to wind up Tsun Macro, Patimas has been receiving repayment in accordance with the terms of the financial assistance settlement agreement,” says Patimas managing director Law Siew Ngoh.
“In relation to the auditors' report, we would encourage readers not to misinterpret the qualification as an 'adverse opinion' qualification. In our case, it was due to the limited audit evidence for this particular matter that gave rise to the qualification.
“Notwithstanding the matter highlighted, the financial statements of Patimas have been properly drawn up to show a true and fair view of the company's financial position.
“As for the outstanding amount of RM6.4mil, the sum would be repaid in full within the next two years. It is important to note that the outstanding is secured by personal guarantees and this mitigates the risk posed by Tsun Macro's liquidation,” says Law.
Wawasan TKH's auditors say they qualified their opinion on the company's 2009 accounts because they could not determine the effect of impairment adjustments, if any, on the carrying amounts of the property, plant and equipment of the disposable food-wares unit and goodwill of Wawasan TKH.
Moore Stephens AC, the auditors of Mangotone, cited a long list of factors as to why it expressed a disclaimer opinion on the company's latest annual financial statements, starting with the “substantial doubts” that the company can continue to be a going concern.
A disclaimer
Ng of PwC says: “A disclaimer of opinion should be expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and accordingly is unable to express an opinion on the financial statements.”
She says that the addition of a paragraph emphasising a going concern problem or significant uncertainty is ordinarily adequate to meet the auditor's reporting responsibilities regarding such matters.
“However, in extreme cases, such as situations involving multiple uncertainties that are significant to the financial statements, the auditor may express a disclaimer of opinion instead of adding an emphasis of matter paragraph,” she says.
“A disclaimer of opinion is expressed when the auditor is unable to render an opinion as to whether the financial statements show a true and fair view.”
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