Four Categories of Audit Reports

1. Standard or unqualified

2. Unqualified with Explanatory paragraph or modified wording

3. Qualified

4. Adverse or disclaimer

Standard Unqualified report

The five conditions for a standard unqualified report have been met

Unqualified report with explanatory paragraph or modified wording    

A complete audit took place with satisfactory results and F/S that are fairly presented, but the auditor believes that it is important or is required to present additional information

Qualified

The auditor concludes that the overall F/S are fairly presented, but the scope of the audit has been materially restricted or GAAP were not followed in preparing the F/S.

Adverse or disclaimer

The auditor concludes that the F/S are not fairly presented (adverse). He or she is unable to form an opinion as to whether the F/S are fairly presented (disclaimer) or he or she is not independent (disclaimer)

7 parts of Standard unqualified report

1. Report title with word "independent"

2. Audit report address

3. Introductory paragraph

4. Scope paragraph - states what auditor did

5. Opinion paragraph

6. Auditor Signature

7. Report Date

5 Conditions for a Standard Unqualified Audit Report

All 4 Statements are included in F/S.

 

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

 

Sufficient evidence has been accumulated, and the auditor concludes that the three standards of field work have been met.

 

The F/S are presented in accordance with GAAP

 

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 Modified Wording

meets the criteria of a complete audit with satisfactory results and F/S are fairly presented,

 

but the independent auditor believes it is important or is required to provide additional information.

Most Important Causes of Explanatory Paragraph or Modified Wording

-Lack of consistent application of GAAP (EP).
-Substantial doubt about going concern (EP). 

-Auditor agrees with a departure from promulgated accounting principles (EP).
-Emphasis of a matter (EP).
-Reports involving other auditors (MW).
EP=Explanatory Paragraph
MW=Modified Wording

Lack of Consistent Application of GAAP

The 2nd reporting standard requires the auditor to call attention to circumstances where accounting principles have NOT been consistently observed.
GAAP requires that changes in accounting principles or their method of application:
-be to a preferable principle, and
-the nature and impact of the change be adequately disclosed.

Lack of Consistent Application of GAAP – Consistency vs. Comparability

Consistency-related changes include (EP required):
-Changes in accounting principles.
-Changes in reporting entities.
-Corrections of errors involving principles, by changing from an accounting principle that is not generally acceptable to one that is generally acceptable, including correction of the resulting error.

 

Comparability-related changes include (No EP required):
-Changes in an estimate.
-Error corrections not involving principles, such as a previous years’ math error.
-Variations in format and presentation of financial information.
-Changes related to new endeavors/events.
 

Going concern modification

Auditor must judge whether client will be able to continue operations for a period of one year from B/S date.
If cannot, auditor must modify audit opinion
-Explanatory paragraph
-Disclaimer permitted if there is substantial doubt – rare!

Substantial Doubt About Going Concern – Factors That Give Rise To Doubt

-Significant recurring operating losses or 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 earthquake or flood, or unusual labor difficulties.
-Legal proceedings, legislation, or similar matters that have occurred that might jeopardize the entity’s ability to operate.

Reports Involving Other Auditors

When the auditor relies on a different CPA firm to perform part of the audit (which is common for clients with several widespread branches or divisions), the principal CPA firm has three alternatives.
-Full responsibility
-Shared responsibility
-No responsibility

Conditions Requiring a Departure from Unqualified Report

1.    The Scope of the Audit Has Been Restricted (Scope Limitation)
Exists when the auditor has not accumulated sufficient evidence to conclude whether the F/S are stated in accordance with GAAP.
-Imposed by client, or
-Caused by circumstances
Conditions Requiring a Departure

 

2. The F/S Have Not Been Prepared In Accordance With GAAP (GAAP Departure)
This included departures from adequate footnote disclosures.

 

3. The Auditor Is Not Independent
The auditor is guided by Rule 101 of the Code of Professional Conduct regarding independence.

Internal Control Audit Reports – Introduction

- Identify management’s conclusion about effectiveness of IC
- Identify title of management report containing management’s assessment
- Statement that assessment is management’s responsibility
- Statement that auditor’s responsibility is to express opinion on assessment and an opinion on company’s IC

Internal Control Audit Reports – Scope

- States audit conducted in accordance with PCAOB standards
- States reasonable assurance provided about whether effective IC was maintained in all material respects
- States audit includes obtaining understanding of IC, evaluating management’s assessment, testing and evaluating design and operating effectiveness of IC’s
- States auditor believes audit provides reasonable basis for opinion

Internal Control Audit Reports – Definition and Limitations

- Definition – Internal control must be defined
- Limitations – inherent limitations of ICs must be discussed

 

- May not prevent or detect material misstatements
- Changes in conditions may prevent controls from being effective in future
- Compliance with IC system may deteriorate
 

Internal Control Audit Reports – Two Opinions

- Opinion on whether management’s assessment of the effectiveness of ICs is fairly stated
- Auditor’s opinion about whether management maintained effective IC over financial reporting as of year end based on criteria

Internal Control Opinion Options

Management assessment opinion:
- Unqualified
- Qualified
- Disclaimer
- Adverse

 

Internal control opinion:
- Unqualified
- Disclaimer

- Adverse: issued if the auditor discovers a material weakness in the internal controls at year end