Auditors’ Reports
Slide 17- 1
Review of Audit Process
1.
2.
3.
4.
5.
6.
Slide 17- 2
Obtain an understanding of internal
control sufficient to plan the audit.
Determine the planned level of control
risk.
Design and perform additional tests of
controls.
Reassess control risk and modify
planned substantive tests.
Perform substantive tests and
complete the audit.
Form an opinion and issue the audit
report.
Chapters 7-16
Chapter 17
Types of Opinions

Unqualified opinions
» Standard unqualified opinion
» Unqualified opinion with explanatory
language
– Part of the audit performed by other auditors
– Questions concerning going concern status
– GAAP not consistently applied
– Emphasis of a matter
– Justified departures from recognized accounting
principles
Slide 17- 3
Conditions Required for Issuance of
an Unqualified Report

The financial statements are presented
in conformity with GAAP, including
adequate disclosure.

The audit was performed in accordance
with GAAS, and there were no
significant scope limitations.
Slide 17- 4
Types of Opinions

Qualified opinions
» Departures from GAAP
– Material but not “substantially misleading”
» Scope limitations
– Circumstance-imposed scope limitations

Slide 17- 5
Material but not “substantially misleading”
Types of Opinions

Adverse opinions
» Very material departures from GAAP cause
financial statements taken as a whole to be
substantially misleading.

Disclaimer of opinion
» Substantial circumstance-imposed scope
restrictions.
» Significant client-imposed scope restrictions.
» Significant uncertainties
» Lack of auditor independence
Slide 17- 6
Standard Unqualified Report

Introductory paragraph
» Identifies the financial statements that were audited.
» States that the financial statements are the responsibility of
management.
» States that the auditors’ responsibility is to express an
opinion.

Scope paragraph
» Describes the nature of an audit

Opinion paragraph
» Presents the auditors’ opinion as to whether the financial
statements are in accordance with GAAP.
Slide 17- 7
The Standard Auditors’ Report
Introductory Paragraph
We have audited the accompanying balance sheet of XYZ
Company as of December 31, 20XX, and the related
statements of income, retained earnings, and cash flows
for the year then ended. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
Slide 17- 8
The Standard Auditors’ Report
Scope Paragraph
We conducted our audit in accordance with auditing
standards generally accepted in the United States of
America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about
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 principles used and significant
estimates made by management, as well as evaluating
the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
Slide 17- 9
The Standard Auditors’ Report
Opinion Paragraph
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of XYZ Company as of December 31, 20XX, and the results
of its operations and its cash flows for the year then ended
in conformity with accounting principles generally accepted
in the United States of America.
Slide 17- 10
SARBOX Perspective

As a result of the Sarbanes-Oxley Act of
2002, auditors are required to also
provide assurance on internal control for
public companies.
» Report on internal controls may be
separate or combined with report on
financial statements
Slide 17- 11
Modifications of the Auditors’ Report
Unqualified Opinions
Type of
Report
Introductory or
Scope
Paragraph
Explanatory
Paragraph
Shared
responsibility
Describe work of
other auditors
None
Going concern
uncertainty
None
Describe
uncertainty
GAAP not
consistent
None
Emphasis of
matter
None
Slide 17- 12
“...based on
our audit and
the report of
other
auditors...”
None
Describe change
in principle
None
Describe matter
None
None
Justified
departure from
official GAAP
Opinion
Paragraph
Describe
departure
None
Shared Responsibility Report
Introductory
We did not audit the financial statements of St. Lawrence
Cement, Inc., which statements reflect assets of constituting
43% of the consolidated totals as of December 31, 2092 and
2091, respectively, and revenues of constituting 42%, 47% and
52% of the consolidated totals for the years ended December 31,
2092, 2091, and 2090, respectively. Those statements were
audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to the amounts
included for that entity, is based solely on the reports of the
other auditors.
Scope
...
We believe that our audits and the reports of other auditors
Opinion
In our opinion, based on our audits and the reports of other
auditors,
Slide 17- 13
Explanatory Paragraph
Going Concern Problem
The accompanying financial statements have been prepared assuming that
[America West Airlines, Inc..] will continue as a going concern. As discussed in
note 1 to the financial statements, the Company filed a voluntary petition seeking
to reorganize under chapter 11 of the federal bankruptcy laws. This event and
circumstances relating to this event, including the Company’s significant losses,
accumulated deficit, and highly leveraged capital structure, raise substantial
doubt about its ability to continue as a going concern. Although the
Company is currently operating as debtor-in-possession under the jurisdiction of
the Bankruptcy Court, the continuation of the business as a going concern is
contingent upon, among other things, the ability to (1) formulate a Plan of
Reorganization which will gain approval of the creditors and stockholders and
confirmation of the Bankruptcy Court, (2) maintain compliance with all debt
covenants under the debtor-in-possession financing agreements, (3) achieve
satisfactory levels of future operating results and cash flows, and (4) obtain
additional debt and equity. The accompanying financial statements do not include
and adjustments that might result from the outcome of these uncertainties.
Slide 17- 14
Explanatory Paragraphs
Consistency
As discussed in notes four and eleven to the combined financial
statements, [General Mills, Inc..] adopted in fiscal 1994 the provisions
of the Financial Accounting Standards Board’s Statements of Financial
Accounting Standards No. 109, “Accounting for Income Taxes,” and
No. 112, “Employers’ Accounting for Postemployment Benefits.”
____________________________________
As discussed in Note 9 to the consolidated financial statements,
effective January 1, 1995 [American Airlines] changed its method
of accounting for the impairment of long-term assets to conform with
Statement of Financial Accounting Standards No. 121.
Slide 17- 15
Modifications of the Auditors’ Report
Qualified Opinions
Type of
Report
Qualified-GAAP
Departure
Qualified-Scope
Limitation
Slide 17- 16
Introductory or
Scope Paragraph
None
Explanatory
Paragraph
Describe
departure
“Except as explained
Describe scope
in the following
restriction
paragraph”
Opinion
Paragraph
“except for the
problem) the
financial
statements
present fairly
“except for the
effects of such
adjustments as
might have been
determined to be
necessary
Example of a Qualified Report
Departure from GAAP
(Introductory and Scope Paragraphs are Standard)
The Company has excluded from property and debt in the accompanying
balance sheet certain lease obligations that, in our opinion, should be
capitalized in order to conform with generally accepted accounting principles.
If these lease obligations were capitalized, property would be increased by
$__________, long-term debt by $___________, and retained earnings by
$__________ as of December 31, 20X1, and net income and earnings per
share would be increased (decreased) by $___________ and $_____,
respectively, for the year then ended.
In our opinion, except for the effects of not capitalizing lease obligations, as
discussed in the preceding paragraph, the financial statements referred to
above present fairly, in all material respects, the financial position of XYZ
Company as of December 31, 20X1, and the results of its operations and cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
Slide 17- 17
Example of a Qualified Report
Scope Limitation
Standard Introductory Paragraph
Except as discussed in the following paragraph, we conducted our audit...
We were unable to obtain audited financial statements supporting the
Company’s investment in a foreign affiliate stated at $_______, or its equity in
earnings of that affiliate of $_______, which is included in net income, as
described in Note 8 to the financial statements; nor were we able to satisfy
ourselves as to the carrying value of the investment in the foreign affiliate or
the equity in earnings by other auditing procedures.
In our opinion, except for the effects of such adjustments, if any, as might have
been determined to be necessary had we been able to examine evidence
regarding the foreign affiliate investment and earnings, the financial
statements referred to above present fairly,...
Slide 17- 18
Modifications of the Auditors’ Report
Adverse & Disclaimer
Type of Report Introductory or
Scope
Paragraph
Adverse
Disclaimer of
Opinion-Scope
Limitation
Slide 17- 19
None
Explanatory
Paragraph
Describe reason for “the financial
opinion
statements do not
present fairly”
“We were engaged” Describe scope
restriction and any
Omit “Our
reservations
responsibility...”
Omit scope
paragraph
Opinion
Paragraph
“we do not express
an opinion on the
financial
statements”
Example Adverse Opinion
Standard introductory
Standard Scope
Explanatory
In our opinion, because of the effects of the matters
discussed in the preceding paragraph, the financial
statements referred to above do not present fairly, in
conformity with accounting principles generally
accepted in the United States of America, the financial
position of XYZ Company as of December 31, 20X5,
or the results of its operations or its cash flows for the
year then ended.
Slide 17- 20
Example Disclaimer of Opinion
Introductory
Additional
Paragraph
Opinion
Slide 17- 21
We were engaged...
The Company did not make a count of its physical
inventory, stated in the accompanying financial
statements at $_____ as of December 31, 20X2.
Further, evidence supporting the cost of property and
equipment acquired prior to December 31, 20X1, is no
longer available. The Company’s records do not permit
the application of other auditing procedures to
inventories or property and equipment.
Since the Company did not take physical inventories
and we were not able to apply other auditing
procedures to satisfy ourselves as to inventory
quantities and the cost of property and equipment, the
scope of our work was not sufficient to enable us to
express, and we do not express, an opinion on these
financial statements.
Placement of Explanatory Paragraphs

Before opinion paragraph
»
»
»

Following opinion paragraph
»
»

Qualified opinions
Disclaimers
Adverse opinions
Consistency
Substantial doubt about continued existence
Either before or after opinion paragraph
» Justified departure from GAAP
» Emphasis of a matter
Slide 17- 22
Comparative Financial Statements

Comparative statements supported by profession
» Public companies – SEC requires 2 years B/S and 3
years I/S, R/E and C/F.
» Private companies – generally follow SEC requirement


Report should cover all financial statements
presented.
Factors affecting nature of report:
» Predecessor auditor – reissue report or reference.
» Updating of opinion – re-expressed or revised.
» Prior year statements – audited or unaudited.
Slide 17- 23