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UNIT 6: AUDIT REPORT

INTRODUCTION
The audit report is the means by which the auditors express their opinion on the truth and
fairness of a company's financial statement for the benefit principally of the shareholders, but
also for the users.

STATUTORY REQUIREMENTS
International Auditing Standards require the auditors to state explicitly whether in the
auditors' opinion the annual accounts have been properly prepared in accordance with the
GAAP and in particular whether a true and fair view is given;
- In the balance sheet, of the state of the company's affairs at the end of financial year.
- In the profit and loss account, of the company's profit or loss for the financial year;
In addition, certain requirements are reported on by exception; the auditor only has to
report if they have not been met. The following are matters with which the auditors imply
satisfaction in an unqualified report.
- Proper accounting records have been kept and proper returns adequate for the audit
received from branches not visited.
- The accounts are in agreement with accounting records and returns.
- All information and explanations have been received as the auditors think necessary
and they have had access at all times to the company's book, accounts and vouchers.
- Details and directors' emoluments and other benefits, and particular of higher paid
employees have been correctly disclosed in the financial statements.
- Particulars of loans and other transactions in favor of directors and others have been
correctly disclosed in the financial statements.
- The information given in the directors' report is consistent with the accounts.
-

 Four categories of audit report

 Standard Unqualified report
 Qualified report

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 Adverse and,
 disclaimer

1. Standard Unqualified Opinion

Unqualified opinion: the unqualified opinion has no reservations concerning the financial
statements. This is also known as a clean opinion meaning that the financial statements appear
to be presented fairly.

The auditor’s standard unqualified audit report contains seven distinct parts;
1. Report title: Auditing standards require that the report be titled and that the title include
the word independent. For example, appropriate titles include “independent auditor’s report,”
“report of independent auditor,” or “independent accountant’s opinion.” The requirement that
the title include the word independent conveys to users that the audit was unbiased in all
aspects.
2. Audit report address: The report is usually addressed to the company, its
stockholders, or the board of directors. In recent years, it has become customary to address the
report to the board of directors and stockholders to indicate that the auditor is independent of
the company.
3. Introductory paragraph: The first paragraph of the report does three things:

First, it makes the simple statement that the CPA firm has done an audit. This is intended to
distinguish the report from a compilation or review report. The scope paragraph clarifies what
is meant by an audit.
Second, it lists the financial statements that were audited, including the balance sheet dates
and the accounting periods for the income statement and statement of cash flows.
The wording of the financial statements in the report should be identical to those used by
management on the financial statements.
Third, the introductory paragraph states that the statements are the responsibility of
management and that the auditor’s responsibility is to express an opinion on the statements

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based on an audit. The purpose of these statements is to communicate that management is

responsible for selecting the appropriate accounting principles and making the measurement
decisions and disclosures in applying those principles and to clarify the respective roles of
management and the auditor.

4. Scope paragraph: The scope paragraph is a factual statement about what the auditor
did in the audit. This paragraph first states that the auditor followed U.S. generally accepted
auditing standards. For an audit of a public company, the paragraph will indicate that the
auditor followed standards of the Public Company Accounting Oversight Board. Because
financial statements prepared in accordance with U.S. accounting principles and audited in
accordance with U.S. auditing standards are available throughout the world on the Internet,
the country of origin of the accounting principles used in preparing the financial statements
and auditing standards followed by the auditor are identified in the audit report.
The scope paragraph states that the audit is designed to obtain reasonable assurance about
whether the statements are free of material misstatement.
misstatement. The inclusion of the word material
conveys that auditors are responsible only to search for significant misstatements, not minor
misstatements that do not affect users’ decisions. The use of the term reasonable assurance is
intended to indicate that an audit cannot be expected to completely eliminate the possibility
that a material misstatement will exist in the financial statements. In other words, an audit
provides a high level of assurance, but it is not a guarantee.
The remainder of the scope paragraph discusses the audit evidence accumulated and states
that the auditor believes that the evidence accumulated was appropriate for the circumstances
to express the opinion presented. The words test basis indicates that sampling was used rather
than an audit of every transaction and amount on the statements.
5. Opinion paragraph: The final paragraph in the standard report states the auditor’s
conclusions based on the results of the audit. This part of the report is so important that often
the entire audit report is referred to simply as the auditor’s opinion.
opinion. The opinion paragraph is
stated as an opinion rather than as a statement of absolute fact or a guarantee. The intent is to
indicate that the conclusions are based on professional judgment. The phrase in our opinion
indicates that there may be some information risk associated with the financial statements,
even though the statements have been audited.

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6. Name of CPA firm: The name identifies the CPA firm or practitioner who performed
the audit. Typically, the firm’s name is used because the entire CPA firm has the legal and
professional responsibility to ensure that the quality of the audit meets professional standards.
7. Audit report date: The appropriate date for the report is the one on which the auditor
completed the auditing procedures in the field. 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.
 The standard unqualified audit report is issued when the following conditions have
been met:

1. All statements—balance sheet, income statement, statement of retained earnings, and

statement of cash flows—are included in the financial statements.

2. The three general standards have been followed in all respects on the engagement.
3. 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.

4. 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.

5. There are no circumstances requiring the addition of an explanatory paragraph or

modcation of the wording of the report.

2. Qualified opinion

Qualified opinion: this means that the auditor has taken exception to certain current-period
accounting applications or is unable to establish the potential outcome of a material
uncertainty.

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A Qualified Opinion report is issued when the auditor encountered one of two types of
situations which do not comply with generally accepted accounting principles, however the
rest of the financial statements are fairly presented.
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 to GAAP (e.g. are misstated),
but do not affect the rest of the financial statements from being fairly presented when
taken as a whole.
 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 to GAAP, then the auditor simply states that the
financial statements are fairly presented, with the exception of the inventory which
could not be audited.
 ♥ because of time limitation.
 ♥ because of data...
 ♥ depreciation expense ...

3. Adverse opinion

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.
The adverse opinion report can arise only when the auditor has knowledge , after
an adequate investigation, of the absence of conformity. This is uncommon and thus the
adverse opinion is rarely used.

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Circumstances Giving Rise to Disagreements

The explanatory notes suggest that circumstances giving rise to disagreement include the
following.
a) Inappropriate accounting policies
b) Disagreement as to facts or amounts included in the financial statements.
~Material difference with evidence
c) Disagreement as to the manner or extent of disclosure of facts or amounts in the
financial statements.
d) Failure to comply with relevant legislation or other requirements

4. Disclaimer opinion

~ no enough evidence presented from the organization.

~ the auditors to be free from legal liability auditos put their
opinion ...

A disclaimer of opinion is issued when the auditor has been unable to satisfy

him or her that the overall financial statements are fairly presented. The
necessity for disclaiming an opinion may arise because of a severe limitation on the scope
of the audit or a no independent relationship under the Code of Professional Conduct
between the auditor and the client. Either of these situations prevents the auditor from
expressing an opinion on the financial statements as a whole. Both disclaimers and
adverse opinions are used only when the condition is highly material.
Opinion: Disclaimer on view given by financial statements
Because of the possible effect of the limitation in evidence available to us, we are unable to
form opinion as to whether the financial statements give a true and fair view of the financial
affairs as at 31 December 20.. or of its profit(loss) for the year then ended. In all the respects,
in our opinion the financial statements have been prepared in accordance with GAAP In
respect of the limitation on our work relating to stock and work in progress.

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a) We have not obtained all the information and explanations that we considered
necessary for the purpose of our audit, and
b) We were unable to determine whether proper accounting records had been maintained.