Lecture 7

Auditors Reports

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Learning Objective

Objectives of statutory audit

Types of Audit Reports

Conditions requiring qualified report

Other information in the audited Financial

Statements

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Learning Outcomes

At the end of this session, successful students will be able to:

Describe the information that is included in an audit report.

Identify the types of audit opinions and the circumstances in which each type is appropriate.

Definition of Auditing

Auditing is a systematic process

of objectively obtaining and

evaluating evidence regarding

assertions about economic

actions and events to ascertain

the degree of correspondence

between the assertions and

established criteria and

communicating the results to

interested users.

Financial Statements

(including footnotes)

GAAP

Auditor's Report/

Other Reports Persons who rely on the financial reports

Creditors

Investors

Source: American Accounting Association Committee on Basic Auditing Concepts. 1973. A Statement of Basic Auditing Concepts, American Accounting Association (Sarasota, FL).

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Audit Reports

Designed to promote clear communication between auditor and financial statement reader by clearly stating

What was audited and the relative responsibilities of the client and the auditor for the financial statements (introductory paragraph)

The nature of the audit process (scope paragraph)

Auditors opinion on the fair presentation of the financial statements (opinion paragraph)

If an unqualified opinion cannot be expressed, reasons why (explanatory paragraph)

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Reporting on Internal Control over

Financial Reporting

Auditors report also refers to the audit of

internal control over financial reporting

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Types of Audit Reports

Standard unqualified

Unqualified report with an explanatory

paragraph

Qualified

Adverse

Disclaimer

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The Standard Unqualified Report

No material violations of GAAP

Disclosures are adequate

All necessary audit procedures performed (no scope

limitation)

No change in GAAP with material impact

No material weakness in internal control over

financial reporting

No going concern problems

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Modifications to the Standard

Unqualified Report

Statements present fairly, but auditor wishes to

change wordings of the standard report in the

following situation:

Justified departure from GAAP

Inconsistent application of GAAP

Going-concern doubt

Emphasis of a matter

Reference to other auditors

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The Qualified Report

Statements present fairly except for....

Material unjustified departure from GAAP

Inadequate disclosure

Scope limitation

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The Adverse Report

Statements, as a whole, do NOT present fairly

Pervasive and material unjustified departure

from GAAP

Lack of important disclosure

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The Disclaimer of Opinion

Scope limitation

Substantial doubt about the client being going

concern

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Modifications Affecting the Opinion

Departure from GAAPwhether the departure is justified or unjustified, amount and pervasiveness of the misstatement, and potential impact of misstatements on statement users determines whether an unqualified, qualified, or adverse opinion is issued

Inadequate Disclosuresthe auditor should express a qualified or adverse opinion, and provide the omitted information in the audit report Explanatory paragraph should describe the nature of the

omitted disclosures, and the opinion paragraph should be modified.

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Modifications Affecting the Opinion (continued)

Scope limitationimposed by client or circumstance, materiality of the amounts involved, auditors ability to form

an opinion on the statements without the evidence determines

whether qualified or disclaimer is issued

Going concerndepending on auditors assessment of clients ability to remain a going concern, auditor may issue

unqualified opinion with modified wording, qualified opinion,

or disclaim

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References

(1) Arens et al. Auditing and Assurance Services: An Integrated Approach (Chapter 3 & 24)

(2) Gramlings et al. Auditing (Chapter 16)

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