CHAPTER THREE:

AUDIT REPORTS
The Audit Report should be
Timely, But At What Cost?
Discuss??
 Con’t
• Users of financial statements rely on the Timely
auditor’s report to provide assurance on the
company’s financial statements.
• Audit report is the final step in the entire audit
process.

o Different category of auditor opinion can be discussed

below….
 1. Standard Unqualified Audit Report

The standard unqualified audit report is issued when the

following conditions have been met:
I. All statements—balance sheet, income statement,
statement of retained earnings, and statement of cash flows
—are included in the financial statements.
II. The three general standards have been followed in all
respects on the engagement. (training, independece & Due
care
III. Sufficient & appropriate evidence has been
accumulated, and the auditor has conducted the
engagement in a manner that enables him or her to
conclude that the three standards of field work have
been met.
 1. Standard Unqualified Audit Report
IV. The financial statements are presented in
accordance with U.S. generally accepted
accounting principles. This also means that
adequate disclosures have been included in
the footnotes and other parts of the financial
statements.
V. There are no circumstances requiring the
addition of an explanatory paragraph or
modification of the wording of the report.
 1. Standard Unqualified Audit Report

The auditor’s standard unqualified audit report

contains seven distinct parts.
1. Report title “independent auditor’s report,”
2. Audit report address eg “To the shareholders of
ABC Company.”
3. Introductory paragraph (has 3 categories)
a. Simple statement what has been done by audit firm
b. The list of f/sta’t audited
c. Expression of opinion regarding mgt responsibility
and auditor’s objectives
 Cont’d

4. Scope paragraph: is a factual statement about

what the auditor did in the audit.
• It states that the auditor followed the appropriate
GAAS.
• Is designed to obtain reasonable assurance (high
level of assurance about existence) about
whether the statements are free of material
misstatement.
 Cont’d
5. Opinion paragraph: The final paragraph (the third
paragraph) in the standard report states the auditor’s
conclusions based on the results of the audit.
6. Name of audit firm: since audit firm has the legal
and professional responsibility to ensure that the
quality of the audit meets professional standards.
7. Audit report date This date is important to users
because it indicates the last day of the auditor’s
responsibility for the review of significant events that
occurred after the date of the financial statements.
 B. Conditions for standard unqualified Report
The standard unqualified audit report is issued when the
following conditions have been met:
• All statements are included in the financial statements audit.
• The three general standards (technical proficiency and
training, independence, and due professional care) have been
followed.
• Sufficient and appropriate evidence has been accumulated
according to field work standard.
• The financial statements are presented in accordance with the
relevant GAAP. This also means that adequate disclosures
have been included.
• There are no circumstances requiring the addition of an
explanatory paragraph or modification of the wording of the
report.
Unqualified Audit Report with Explanatory
Paragraph or Modification of Wordings
When???
• Lack of Consistent application of GAAP
When a material change occurs, the auditor should
modify the report by adding an explanatory
paragraph after the opinion paragraph that discusses
the nature of the change and points the reader to the
footnote that discusses the change.
 Substantial doubt about going concern
The following factors causes uncertainty about the ability
of a company to continue as a going concern:
• Significant recurring operating losses
• Working capital deficiencies
• Inability of the company to pay its obligations as they come due
• Loss of major customers
• the occurrence of uninsured catastrophes such as an
earthquake or flood
• Unusual labor difficulties (strike)
• Legal proceedings, legislation, or similar matters that
have occurred that might jeopardize the entity’s ability
to operate
Auditors concur (agree) the departure
from GAAP
This requires adding an explanatory paragraph
before or after opinion paragraph by referring to
management footnote and discuss non-GAAP item.
Emphasis of a matter(departure)
• The existence of significant related party
transactions
• Important events occurring subsequent to the
balance sheet date
• The description of accounting matters affecting
the comparability of the financial statements with
those of the preceding year
•Material uncertainties disclosed in the footnotes
Reports involving other auditors

when the client has several branches or

subdivisions, the principal audit firm has three
alternatives.
• Make no Reference in the Audit Report
• Make Reference in the Report (Modified
Report Wording) (shared opinion)
• Qualify the Opinion
 Conditions for departure from Unqualified Audit
Report
1. When The scope of the audit has been restricted
Client-imposed restrictions
Eg, management’s refusal to permit the auditor to
confirm material receivables or to physically
examine inventory.
circumstance-imposed restrictions
when the auditor is not appointed until after the
client’s year-end.
2. GAAP Departure
3. Auditors Dependence
2. Qualified Audit Report (failure to follow GAAP)
used only when the auditor concludes that the overall financial
statements are fairly stated with some exceptions.
When auditor use these kinds of report they, include the phrase
‘except-for’
3. Adverse Audit Report (do not present fairly)
An adverse opinion is used only when the auditor
believes that the overall financial statements are so
materially misstated or misleading that they do not
present fairly the financial position or results of
operations and cash flows in conformity with
GAAP.
 4. Disclaimer of Opinion Report
•

is issued when the auditor has been unable to

satisfy him- or- herself that the overall financial
statements are fairly presented. The auditor also has
the option to issue a disclaimer of opinion for a
going concern problem.
 Both disclaimers and adverse opinions are used
only when the condition is highly material.
 It may arise due to;
• Disclaimer of Opinion –Scope Limitation
• Disclaimer of Opinion –Lack of Independence
 Summary
Materiality Significance in terms of Types of
level reasonable decision opinion
Highly Unlikely to be significantly Standardized
Immaterial affected Unqualified
auditor Opinion
Immaterial Unlikely to be affected Qualified
Auditor report
Material Likely to be affected Adverse auditor
opinion
Highly Likely to be significantly Disclaimer
material affected opinion
END