Uncertainties result from circumstances in which it is not possible for the auditor to reach any objective conclusion as to the outcome of a situation due to the circumstances themselves or as a result of a limitation on scope of the audit. Such uncertainties are resolved through the passage of time e.g. if the company is faced with a legal case say for breach of contact the actual impact on the financial statements will only be known after the case has been heard and determined. The auditor should form an opinion on the adequacy of the accounting treatment of such uncertainty. This will involve consideration of:
- The appropriateness of any accounting policies adopted by management in treating the effect of such uncertainties;
- The reasonableness of the estimates included in the Financial Statements;
- The adequacy of disclosure.
- Some inherent uncertainties are fundamental. These are uncertainties where the degree of uncertainty and its potential impact on the view given by the financial statements may be very great.
In other situations uncertainty could be as a result of a limitation in the scope of the audit where the auditor has not been able to obtain some information that is considered necessary for the purposes of the audit.
(ii) Circumstances of disagreement arise where the auditor disagrees with the accounting treatment or disclosure of a matter such as the non-provision of a doubtful debt.
Thus, circumstances giving rise to a disagreement will include:
- a) Departures from acceptable accounting policies/practices:-
- Failure to follow an IAS
- An unacceptable policy not allowed by IAS
Compliance with an IAS where this does not in the circumstances give a true and fair view.
b) Disagreement as to facts or amounts included in financial statements
c) Disagreement as to the manner or extent of disclosure of facts or amounts
d) Failure to comply with legislation.
(e) Before the adoption of International Standards on Auditing (ISA) in Kenya in 1999 (auditors were governed by the Kenyan auditing guidelines), the ―subject to‖ opinion was issued when there was a limitation in scope that was material (but not fundamental) whereas the except for opinion was given when there was a disagreement between management and auditor which was material but not fundamental