ACCA Audit and Assurance (F8) Practice Exam

When would an auditor typically issue a modified audit report?

1. When the financial statements are clear and complete

2. When there are sufficient and appropriate evidence obtained

3. When financial statements are not free from material misstatement

4. When the audit is performed in accordance with the local standards

The correct answer is: When financial statements are not free from material misstatement

A modified audit report is issued when the auditor encounters situations that lead to a conclusion that the financial statements do not present a true and fair view or are not free from material misstatement. This can occur due to various reasons, such as limitations on the scope of the audit or finding that the financial statements are based on inadequate accounting policies or estimates that do not comply with the applicable financial reporting framework. When financial statements contain material misstatements, whether due to error or fraud, or when there are significant uncertainties that cannot be adequately resolved, the auditor must inform the users of those statements through a modified audit report. This serves to highlight the concerns and provides transparency regarding the reliability of the financial statements. In contrast, if the financial statements are clear and complete, if sufficient and appropriate evidence has been obtained, or if the audit has been conducted following local standards, these conditions would typically lead to an unmodified audit report, indicating that the financial statements are considered to be free from material misstatement.