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Unit 6 AUDITORS' REPORTS

The document discusses auditors' reports and the different types of opinions that may be expressed. It provides the standard unqualified report format and explains the key elements such as addressing the report, describing the responsibilities of management and the auditors, and stating the opinion. The opinion paragraph expresses that the financial statements present fairly in accordance with GAAP. Qualified opinions are also discussed, including qualified "except for" opinions for limitations in scope or disagreements with accounting treatments, and adverse opinions where the financial statements as a whole are misleading. A denial of opinion is also explained which disclaims an opinion due to very significant scope restrictions.

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91 views5 pages

Unit 6 AUDITORS' REPORTS

The document discusses auditors' reports and the different types of opinions that may be expressed. It provides the standard unqualified report format and explains the key elements such as addressing the report, describing the responsibilities of management and the auditors, and stating the opinion. The opinion paragraph expresses that the financial statements present fairly in accordance with GAAP. Qualified opinions are also discussed, including qualified "except for" opinions for limitations in scope or disagreements with accounting treatments, and adverse opinions where the financial statements as a whole are misleading. A denial of opinion is also explained which disclaims an opinion due to very significant scope restrictions.

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zelalem kebede
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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UNIT 5: AUDITORS’ REPORTS

5.1 INTRODUCTION

The audit report is usually the only channel of communication between the shareholders of the
company whose financial statements have been subject to audit and the auditors. As such the
report acts as a bridge taking the large volume of information possessed by auditors and
conveying it to the shareholders in a much abbreviated form.

In order to convey information in a succinct form the audit report has become an extremely
formalized group of phrases, each of which has special significance.
5.2 THE AUDITORS’ STANDARD REPORT

For convenient reference, the auditors’ standard (unqualified) report is presented below.

Auditors’ report to the shareholders of XYZ


we have audited the accompanying balance sheet of the XYZ Company as of December 31, 19 x
1, and the related statements of income, retained earnings, and cash flows for the year then
ended. There financial statements are the responsibility of the company’s management. Our
responsibility is to express an opinion on those financial statements based on our audit.

We conducted an audit in accordance with generally accepted auditing standards. Those


standards require that we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting policies used and significant estimates made by
management, as well as evaluating the overall financial statements presentation. We believe
that our audit provide a reasonable basis for our audit opinion.

In our opinion, the financial statements give a true and fair view of (or present fairly in all
material respects) the financial position of the company as of December 31, 19 x 1 and the
results of its operations and its cash flows for the year then ended in accordance with GAAP.
ABC Auditors

Date

1 | Compiled by Tesfaye N. (MSc)


Address

This report contains the following important elements:


- Title: Auditing standards require that the report be titled
and include the word independent.
- Address: The audit report is addressed to the individual
or group that engaged the auditors.
- Introductory paragraph: - The first paragraph of the
report does three things:
 Specifies the financial statements to
which the report relates,
 Specifies the respective responsibilities
of directors and auditors, and;
 It makes the simple statement that the
auditor has done an audit.
- Scope paragraph: -The scope paragraph describes the
nature of an audit. The scope paragraph states the following:
 The auditors followed GAAS,
 The audit is designed to obtain a
reasonable assurance about whether the financial statements are free of material
misstatements.
 The audit evidence accumulated and the
auditor believes the evidence accumulated was appropriate for the circumstances to
express the opinion presented.
- Opinion paragraph: The final paragraph in the standard
report states the auditors’ conclusion based on the results the audit examination.
- Name of the audit firm.
- Audit report date. The appropriate data for the audit
report is the one on which the auditor has completed the most important auditing procedures
in the field.

2 | Compiled by Tesfaye N. (MSc)


5.3 EXPRESSION OF AN OPINION

The auditors’ opinions when expressing an opinion on financial statements may be summarized
as follows:
1. An unqualified opinion – standard report.
2. A qualified opinion.
3. An adverse opinion.
4. A denial opinion.
All significant reasons for the issuance of a qualified, adverse, or denial of opinion should be set
forth in a reservation paragraph between the scope and opinion paragraph.

Auditors must qualify their report whenever there are material deficiencies in the client’s
financial statements.
5.4 THE UNQUALIFIED REPORT

The unqualified report is used when the following conditions are met:
1. All statements - balance sheet, income statement, statements of
retained earnings, and statement of cash flows are included in the financial statement.
2. The three general standards have been followed in all respects on
the engagements.
3. Sufficient evidence has been accumulated.
4. The financial statements are presented in accordance with generally
accepted accounting principles.
5. There are no circumstances requiring the addition of an explanatory
paragraph or modification of the wording of the report.

In general, auditors express an unqualified opinion on the client’s financial statements when
there has been no material departure from GAAP and there have been no material unresolved
restrictions on the scope of their audit.

Under certain circumstances, however, auditors may add additional wording to the standard
report even though they are issuing an unqualified opinion. This additional wording draws
attention to certain statutory requirements or a specific matter. Another modification of a
standard audit report is the auditors’ emphasis of a matter regarding the client’s financial

3 | Compiled by Tesfaye N. (MSc)


statements. Emphasis of matter may require in the auditor’s unqualified report (1) to highlight a
matter regarding a going concern problem and (2) when there is a significant uncertainty (other
than going concern problem), the resolution of which is dependent upon future events and which
may affect the financial statements.

5.5 QUALIFIED OPINIONS

Auditors may issue opinions other than unqualified opinion when (1) they do not agree with the
accounting principles used in preparing financial statements or when they believe disclosures in
the statement are inadequate; (2) a change in accounting principle is not applied properly a as per
GAAP, and is not adequately disclosed in the financial statements; (3) there are limitations on
scope of examination; and /or (4) there is major uncertainty affecting a client’s business’.

A. Qualified opinion -except for: This is issued when there is a


limitation of Scope; or the auditor disagrees with an accounting treatment or disclosure.
The opinion states that except for the effects of some material departure from GAAP, or
some material limitation in the scope of the auditors’ examination, the financial
statements are presented fairly.

The auditors’ reports should have a separate reservation paragraph disclosing the reasons
for the qualification.
B. Adverse opinion: This is a stronger form of ‘except for’ opinion –
the disagreement is so material that the financial statements as a whole are misleading.
When the auditors express an adverse opinion, they must have accumulated sufficient
appropriate evidence to support their unfavourable opinion.

Whenever the auditors issue an adverse opinion, they should disclose in a separate
paragraph of their report the reasons for the adverse opinion and the principal effects of
the adverse opinion on the client company’s financial position and operating results.

Example, an audit report that included an adverse opinion might have an opinion
paragraph such as the one as follows:

In our opinion, because of the effects of the matters discussed in the preceding paragraph, these
financial statements do not present fairly the financial positions of the company as at December
4 | Compiled by Tesfaye N. (MSc)
31, 19 x 1, and the results of its operations and cash flow position for the year then ended, in
accordance with generally accepted accounting principles.

C. Denial of opinion. A denial (disclaimer) of opinion is no opinion.


In an audit engagement, a denial is required when very significant restrictions on the
scope of the audit preclude compliance with generally accepted auditing standards.

A very significant scope limitation may be caused by the client or by the timing of the
auditors’ appointment and their audit work or by factors beyond the control of the client
or the auditors, rather than by restrictions imposed by the client.

Summary of auditors’ reports


Materiality Type of report
of the issue
Not material
Unqualifie
d
Departure from
GAAP scope limitation
Material
Qualified ‘except for’ qualified ‘except for’
Very
adverse denial
material

5 | Compiled by Tesfaye N. (MSc)

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