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
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.
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.
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 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
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 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.
Summary of auditors’ reports Materiality
of the issue
Type of report
Not material
Material
Departure from
GAAP scope limitation
Qualified ‘except for’ qualified ‘except for’ Very
material adverse denial
