Company Auditors Report

The auditor's report is a formal opinion, or disclaimer thereof, issued

by either an internal auditor or an independent external auditor as a
result of an internal or external audit or evaluation performed on a legal
entity or subdivision thereof (called an "auditee"). The report is
subsequently provided to a "user" (such as an individual, a group of
persons, a company, a government, or even the general public, among
others) as an assurance service in order for the user to make decisions
based on the results of the audit.

An auditor's report is considered an essential tool when reporting

financial information to users, particularly in business. Since many third-
party users prefer, or even require financial information to be certified
by an independent external auditor, many auditees rely on auditor reports
to certify their information in order to attract investors, obtain loans, and
improve public appearance. Some have even stated that financial
information without an auditor's report is "essentially worthless" for
investing purposes

It is important to note that auditor's reports on financial statements are

neither evaluations nor any other similar determination used to evaluate
entities in order to make a decision. The report is only an opinion on
whether the information presented is correct and free from material
misstatements, whereas all other determinations are left for the user to
decide.

Types of Auditors Report

There are five common types of auditor's reports, each one presenting a
different situation encountered during the auditor's work. The five
reports are as follows:
 1. Unqualified /unmodified Opinion Report
An opinion is said to be unqualified when the Auditor concludes that the
Financial Statements give a true and fair view in accordance with the
financial reporting framework used for the preparation and presentation
of the Financial Statements. An Auditor gives a Clean opinion or
Unqualified Opinion when he or she does not have any significant
reservation in respect of matters contained in the Financial Statements.
The most frequent type of report is referred to as the "Unqualified
Opinion", and is regarded by many as the equivalent of a "clean bill of
health" to a patient, which has led many to call it the "Clean Opinion",
but in reality it is not a clean bill of health, because the Auditor can only
provide reasonable assurance regarding the Financial Statements, not the
health of the company itself, or the integrity of company records not part
of the foundation of the Financial Statements. [2] This type of report is
issued by an auditor when the financial statements presented are free of
material misstatements and are represented fairly in accordance with the
Generally Accepted Accounting Principles (GAAP), which in other
words means that the company's financial condition, position, and
operations are fairly presented in the financial statements. It is the best
type of report an auditee may receive from an external auditor.
An Unqualified Opinion indicates the following
(1) The Financial Statements have been prepared using the Generally
Accepted Accounting Principles which have been consistently applied;
(2) The Financial Statements comply with relevant statutory
requirements and regulations;
(3) There is adequate disclosure of all material matters relevant to the
proper presentation of the financial information subject to statutory
requirements, where applicable;
(4) Any changes in the accounting principles or in the method of their
application and the effects thereof have been properly determined and
disclosed in the Financial Statements.
The report consists of a title and header, a main body, the auditor's
signature and address, and the report's issuance date. Auditing standards
require that the title includes "independent" to convey to the user that the
report was unbiased in all respects. Traditionally, the main body of the
unqualified report consists of three main paragraphs, each with distinct
standard wording and individual purpose. Nonetheless, certain auditors
(including PricewaterhouseCoopers[1]) have since modified the
arrangement of the main body (but not the wording) in order to
differentiate themselves from other audit firms, even though such
modification is contrary to the clarified US AICPA standards on
auditing.
The first paragraph (commonly referred to as the introductory
paragraph) states the audit work performed and identifies the
responsibilities of the auditor and the auditee in relation to the financial
statements. The second paragraph (commonly referred to as the scope
paragraph) details the scope of audit work, provides a general
description of the nature of the work, examples of procedures
performed, and any limitations the audit faced based on the nature of the
work. This paragraph also states that the audit was performed in
accordance with the country's prevailing generally accepted auditing
standards and regulations. The third paragraph (commonly referred to as
the opinion paragraph) simply states the auditor's opinion on the
financial statements and whether they are in accordance with generally
accepted accounting principles.[1]

2. Qualified Opinion report

Qualified report is given by the auditor in either of these two cases:

1. When the financial statements are materially misstated due to

misstatement in one particular account balance, class of
 transaction or disclosure that does not have pervasive effect on the
financial statements.

2. When the auditor is unable to obtain audit evidence regarding

particular account balance, class of transaction or disclosure that
does not have pervasive effect on the financial statements.
The report is mostly like a Clear Opinion Report and only includes a
paragraph viz. Basis for Qualification after Scope paragraph and before
Opinion paragraph. Opinion paragraph in addition to its standard
wording includes except for the matter described in Basis for
Qualification paragraph the financial statements give true and fair view.
Detailed below:
A Qualified Opinion report is issued when the auditor encountered one
of the two types of situations which do not comply with generally
accepted accounting principles, however the rest of the financial
statements are fairly presented. This type of opinion is very similar to an
unqualified or "clean opinion", but the report states that the financial
statements are fairly presented with a certain exception which is
otherwise misstated. The two types of situations which would cause an
auditor to issue this opinion over the Unqualified opinion are:

Single deviation from GAAP this type of qualification occurs

when one or more areas of the financial statements do not conform
with GAAP (e.g. are misstated), but do not affect the rest of the
financial statements from being fairly presented when taken as a
whole. Examples of this include a company dedicated to a retail
business that did not correctly calculate the depreciation expense of
its building. Even if this expense is considered material, since the rest
of the financial statements do conform with gaap, then the auditor
qualifies the opinion by describing the depreciation misstatement in
the report and continues to issue a clean opinion on the rest of the
financial statements.
 Limitation of scope this type of qualification occurs when the
auditor could not audit one or more areas of the financial statements,
and although they could not be verified, the rest of the financial
statements were audited and they conform to GAAP. Examples of this
include an auditor not being able to observe and test a company's
inventory of goods. If the auditor audited the rest of the financial
statements and is reasonably sure that they conform with GAAP, then
the auditor simply states that the financial statements are fairly
presented, with the exception of the inventory which could not be
audited.
The wording of the qualified report is very similar to the Unqualified
opinion, but an explanatory paragraph is added to explain the reasons
for the qualification after the scope paragraph but before the opinion
paragraph. The introductory paragraph is left exactly the same as in the
unqualified opinion, while the scope and the opinion paragraphs receive
a slight modification in line with the qualification in the explanatory
paragraph.
The scope paragraph is edited to include the following phrase in the first
sentence, so that the user may be immediately aware of the qualification.
This placement also informs the user that, except for the qualification,
the rest of the audit was performed without qualifications:
"Except as discussed in the following paragraph, we conducted
our audit..."
The opinion paragraph is also edited to include an additional phrase
in the first sentence, so that the user is reminded that the auditor's
opinion explicitly excludes the qualification expressed. Depending on
the type of qualification, the phrase is edited to either state the
qualification and the adjustments needed to correct it, or state
the scope limitation and that adjustments could have but not
necessarily been required in order to correct it.

3. Adverse Opinion report

An Adverse Opinion Report is issued on the financial statements of a
company when the financial statements are materially misstated and
such misstatements have pervasive effect on the financial statements.
In Audit Report after Scope paragraph but before Opinion paragraph,
Basis for Adverse Opinion paragraph is added. In Opinion paragraph the
wording changes to, "Because of situations mentioned in Basis for
Adverse Opinion paragraph, in our opinion the financial statements of
XYZ Co. Ltd. as mentioned in first paragraph does not give true and fair
view/are not free from material misstatements."
An Adverse Opinion is issued when the auditor determines that the
financial statements of an auditee are materially misstated and, when
considered as a whole, do not conform with GAAP. It is considered the
opposite of an unqualified or clean opinion, essentially stating that the
information contained is materially incorrect, unreliable, and inaccurate
in order to assess the auditee's financial position and results of
operations. Investors, lending institutions, and governments very rarely
accept an auditee's financial statements if the auditor issued an adverse
opinion, and usually request the auditee to correct the financial
statements and obtain another audit report.
Generally, an adverse opinion is only given if the financial statements
pervasively differ from GAAP.[5] An example of such a situation would
be failure of a company to consolidate a material subsidiary.
The wording of the adverse report is similar to the qualified report. The
scope paragraph is modified accordingly and an explanatory paragraph
is added to explain the reason for the adverse opinion after the scope
paragraph but before the opinion paragraph. However, the most
significant change in the adverse report from the qualified report is in
the opinion paragraph, where the auditor clearly states that the financial
statements are not in accordance with GAAP, which means that they, as
a whole, are unreliable, inaccurate, and do not present a fair view of the
auditee's position and operations.
"In our opinion, because of the situations mentioned above (in the
explanatory paragraph), the financial statements referred to in the
 first paragraph do not present fairly, in all material respects, the
financial position of"

4. Disclaimer of Opinion report

A Disclaimer of Opinion is issued in either of the following cases:

When the auditor is not independent or when there is

conflict of interest.

When the limitation on scope is imposed by client, as a

result the auditor is unable to obtain sufficient appropriate
audit evidence.

When the circumstances indicate substantial problem of

going concern in client.

When there are significant uncertainties in the business of

client.
The audit report changes significantly when there is
Disclaimer of opinion. An additional paragraph "Basis for
Disclaimer" is added in audit report which is placed after
Scope paragraph and before Opinion paragraph. In Scope
paragraph the wording changes to "We were engaged to
audit the financial statements of XYZ Co. Ltd." from "We
have audited the financial statements of XYZ Co. Ltd." In
Opinion paragraph wording changes to "We do not express
an opinion on the financial statements of XYZ Co. Ltd. due
to situations explained in Basis for Disclaimer paragraph"
A Disclaimer of Opinion, commonly referred to simply as
a Disclaimer, is issued when the auditor could not form and
consequently refuses to present an opinion on the financial
statements. This type of report is issued when the auditor
tried to audit an entity but could not complete the work due
to various reasons and does not issue an opinion. The
disclaimer of opinion report can be traced back to 1949,
when the Statement on Auditing Procedure No.
23: Recommendation Made To Clarify Accountant's
Representations When Opinion Is Not Expressed was
published in order to provide guidance to auditors in
presenting a disclaimer.[6]
Statements on Auditing Standards (SAS) provide certain
situations where a disclaimer of opinion may be appropriate:

A lack of independence, or material conflict(s) of interest,

exist between the auditor and the auditee (SAS No. 26)

There are significant scope limitations, whether

intentional or not, which hinder the auditor's work in
obtaining evidence and performing procedures (SAS No.
58);

There is a substantial doubt about the auditee's ability to

continue as a going concern or, in other words, continue
operating (SAS No. 59)

There are significant uncertainties within the auditee

(SAS No. 79).
Although this type of opinion is rarely used,[6] the most
common examples where disclaimers are issued include
audits where the auditee willfully hides or refuses to provide
evidence and information to the auditor in significant areas
of the financial statements, where the auditee is facing
significant legal and litigation issues in which the outcome is
uncertain (usually government investigations), and where
the auditee has going concern issues (the auditee may not
continue operating in the near future).[6] Investors, lending
institutions, and governments typically reject an auditee's
financial statements if the auditor disclaimed an opinion, and
 will request the auditee to correct the situations the auditor
mentioned and obtain another audit report.
A disclaimer of opinion differs substantially from the rest of
the auditor's reports because it provides very little
information regarding the audit itself, and includes an
explanatory paragraph stating the reasons for the disclaimer.
Although the report still contains the letterhead, the auditee's
name and address, the auditor's signature and address, and
the report's issuance date, every other paragraph is modified
extensively, and the scope paragraph is entirely omitted
since the auditor is basically stating that an audit could not
be realized.
In the introductory paragraph, the first phrase changes from
"We have audited" to "We were engaged to audit" in order to
let the user know that the auditee commissioned an audit,
but does not mention that the auditor necessarily completed
the audit. Additionally, since the audit was not completely
and/or adequately performed, the auditor refuses to accept
any responsibility by omitting the last sentence of the
paragraph. The scope paragraph is omitted in its entirety
since, effectively, no audit was performed. Similar to the
qualified and the adverse opinions, the auditor must briefly
discuss the situations for the disclaimer in an explanatory
paragraph. Finally, the opinion paragraph changes
completely, stating that an opinion could not be formed and
is not expressed because of the situations mentioned in the
previous paragraphs.

5. Audit Report with an emphasis of matter paragraph

Emphasis of matter paragraph, as the name suggests, is a paragraph that

is included by the auditor in his report (audit report) to direct the
attention of users of financial statements to a matter that has been
discussed appropriately in the financial statements (usually a disclosure).
The reason why auditor invites the attention of users is that in auditors
judgment the matter is of such importance that users should know about
this in order to completely understand the financial statements.

Emphasis of Matter paragraph (EMP) has been defined in International

Standards on Auditing (ISAs) as follows:

A paragraph included in the auditors report that refers to a matter

appropriately presented or disclosed in the financial statements that,
in the auditors judgment, is of such importance that it is fundamental
to users understanding of the financial statements.

From the above definition we can understand that:

EMP is basically a reference to a matter or a disclosure in the

financial statements

by including an additional paragraph auditor has highlighted it so

that it is considered by the user of financial statements

EMP will always be about the matters already presented/disclosed

appropriately in the financial statements

In the auditors judgment the matter or disclosure so highlighted is

so important that if it is missed then users may be mislead or may end
up not understanding the financial statements accurately.

Emphasis of Matter paragraph may be included in auditors report

when:

Auditor believes that there is a need to draw users attention

to significant uncertainty surrounding accounting estimates

In case new or amended audit report has been issued after the
discovery of subsequent events.
 In case material uncertainty exists surrounding the use of going
concern assumption but the same has been disclosed to the
satisfaction of the auditor in the financial statements.

In case financial statements have been prepared under two

financial reporting frameworks then auditor shall include Emphasis of
Matter paragraph pointing to the disclosure in respect of extent of
compliance of framework

In case of early application of accounting standard that has

pervasive effect on financial statements i.e. new accounting standard
has been followed and applied before its effective date.

In case auditor discovered that prior period financial statements

contain material misstatements and also amended audit report has
not been issued but the corresponding figures have been
restated and appropriate disclosures have been made in the current
period financial statements.

In case financial statements are prepared under special purpose

framework

An entity is facing major catastrophe and its effects are expected

to propagate to future periods and it is and will significantly affect the
financial position of entity.