AUDITING
CHAPTER 3
Reports
By
David N. Ricchiute
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TOPICS
Reports on audited financial statements
Audit report opinions
Modifications to audit reports
Updated reports & reports for foreign
countries
Reports on attest & assurance services
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GBW 8th ed., Ch. 3
AUDIT REPORT DEFINED
Audit report is a letter communicating
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What was audited
Management’s responsibilities
Auditor’s responsibilities
What an audit entails
Auditor’s opinion
GBW 8th ed., Ch. 3
UNQUALIFIED OPINION
DEFINED
Unqualified opinion in audit report
means management’s assertions are
fairly presented in the auditor
Applies to quality of financial
statements not to quality of entity as
investment or credit risk
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GBW 8th ed., Ch. 3
STANDARD AUDIT REPORT
OPINION
Unqualified opinion
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Independent auditor’s opinion that
management’s financial statements
present fairly in all material respects
the financial position, results of
operations, & cash flows in conformity
with GAAP
GBW 8th ed., Ch. 3
SARBANES-OXLEY
Management’s responsibilities
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Reviewed entire annual/quarterly report
Report does not contain untrue statement of material
fact or omit material fact
Financial statements present fairly financial condition
& results of operations
Establish, maintain, evaluate effectiveness of internal
controls
Identified to auditors significant deficiencies, fraud
GBW 8th ed., Ch. 3
ELEMENTS OF REPORT
Title: Independent Auditor’s Report
Addressee: shareholders, board of directors
Introductory paragraph
Scope paragraph
Opinion paragraph
Firm signature
Date of report
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GBW 8th ed., Ch. 3
INTRODUCTORY
PARAGRAPH
Statement that
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Financial statements were audited
Financial statements are management’s
responsibility
Auditor’s responsibility is to issue opinion
GBW 8th ed., Ch. 3
SCOPE PARAGRAPH
Statement that
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Audit conducted in accordance with U. S. GAAS
GAAS requires planning, performing audit to
obtain reasonable assurance financial statements
free from material misstatements
Audit includes
 Examining evidence on test basis
 Evaluating accounting principles & estimates
 Evaluating overall financial presentation
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GBW 8th ed., Ch. 3
MEANING OF SCOPE
PARAGRAPH
Reasonable not absolute assurance
implies auditor may
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Overlook immaterial misstatements
Test samples rather than all transactions
& events
GBW 8th ed., Ch. 3
USE OF STANDARD SCOPE
PARAGRAPH-1
Implies auditor complied with all
general standards
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Adequately trained & proficient
Independent in mental attitude
Exercised due professional care
GBW 8th ed., Ch. 3
USE OF STANDARD SCOPE
PARAGRAPH-2
Implies auditor complied with all
fieldworks standards
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Planned engagement & supervised
assistants
Obtained understanding of internal control
Obtained sufficient, competent evidential
matter
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GBW 8th ed., Ch. 3
OPINION PARAGRAPH
Statement of opinion
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Whether financial statements present fairly
in all material respects
 Financial position
 Results of operations
 Cash flows
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In conformity with GAAP
GBW 8th ed., Ch. 3
USE OF STANDARD
OPINION PARAGRAPH
Implies compliance with reporting
standards
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Financial statements presented in
accordance with U.S. GAAP
Principles are applied consistently
Disclosures are reasonably adequate
Opinion applies to statements taken as a
whole
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GBW 8th ed., Ch. 3
SIGNIFICANCE OF AUDIT
REPORT DATE
Last day of fieldwork
Last day responsible for detecting
subsequent events
Dual dating: financial statements revised for
subsequent event after fieldwork date but
before report release
Event date: date to which all responsibilities
extended
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GBW 8th ed., Ch. 3
OTHER TYPES OF
OPINIONS
Departures from GAAP or scope
limitation require other opinion
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Qualified: sufficient evidence or assertions
fairly presented except for certain
matter(s)
Adverse: assertions are not fairly presented
Disclaimer: auditor does not express an
opinion usually due to insufficient evidence
(scope limitation)
GBW 8th ed., Ch. 3
STANDARDS FOR
INTERNATIONAL REPORTS
US reporting standards are GAAP
Japanese auditors use private sector
reporting standards
German auditors use commercial law as
reporting standards
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GBW 8th ed., Ch. 3
QUALIFIED OPINION
Except for effects of a matter, financial
statements present fairly in all other
material respects
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Statements depart materially from GAAP
Management unable to justify material
change in accounting principle
Scope of audit materially limited
GBW 8th ed., Ch. 3
ADVERSE OPINION
Management’s financial statements do
not present fairly
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Financial statements depart from GAAP
Management unable to justify change in
accounting principle
Effects of departure so highly material that
qualified opinion unwarranted
GBW 8th ed., Ch. 3
DISCLAIMER OF OPINION
Auditor does not express opinion
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Scope limitation so material auditor does
not have reasonable basis to reach opinion
Auditor is not independent of
management
GBW 8th ed., Ch. 3
STANDARD REPORT
MODIFICATIONS : Summary
Based in part on report of another
auditor
Emphasize a matter
Departure from GAAP
Inconsistency
Scope limitations
Going concern
Lack of independence
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GBW 8th ed., Ch. 3
MODIFICATIONS:
Another Auditor
Principle auditor shares responsibility
with another auditor
Modified wording in introductory &
opinion paragraphs
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GBW 8th ed., Ch. 3
MODIFICATIONS:
Emphasis of a Matter
Auditor wishes to emphasize a matter &
still issue an unqualified opinion
Explanatory paragraph added after
opinion paragraph
Example:
The accompanying financial
statements have been restated
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GBW 8th ed., Ch. 3
MODIFICATIONS:
Departure from GAAP With Agreement
Management’s financial statements
depart from GAAP
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With auditor’s agreement
 Unqualified opinion
 Explanatory paragraph after opinion paragraph
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GBW 8th ed., Ch. 3
MODIFICATIONS:
Limited Departure from GAAP
Management’s financial statements
depart from GAAP
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Material departure from GAAP in limited
area
 Explanatory paragraph before opinion
paragraph & qualified opinion
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Example
As discussed in Note 2, the Bank has charged
goodwill to shareholders’ equity but GAAP
requires an asset
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GBW 8th ed., Ch. 3
MODIFICATIONS:
Pervasive Departure from GAAP
Management’s financial statements
depart from GAAP
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Pervasive departure from GAAP
 Explanatory paragraph before opinion
paragraph & adverse opinion
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Example
The company carries property, plant, &
equipment at appraisal values but GAAP
requires values not exceed cost.
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GBW 8th ed., Ch. 3
MODIFICATIONS:
Justifiable Inconsistency
Management changes accounting
principle(s) and justifies change
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Explanatory paragraph after opinion
paragraph
Example
As discussed in Note 3, the company changed its
method of accounting for goodwill & other
intangibles
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GBW 8th ed., Ch. 3
MODIFICATIONS:
Inconsistency not Justified
Management changes accounting
principle(s) but fails to justify change
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Limited area
 Explanatory paragraph before qualified opinion
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Pervasive
 Explanatory paragraph before adverse opinion
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GBW 8th ed., Ch. 3
MODIFICATIONS:
Scope Limitation Limited Area
Prevent auditor from performing 1 or
more necessary auditing procedures
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Limited area:
Modify scope paragraph
 Explanatory paragraph before qualified opinion
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Example
We were unable to obtain evidential matter
supporting the Company’s representations
regarding the contingent liability as discussed in
Note 8.
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GBW 8th ed., Ch. 3
MODIFICATIONS:
Pervasive Scope Limitation
Prevent auditor from performing 1 or
more necessary auditing procedures
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Pervasive limitation
 Modify introductory paragraph
 Omit scope paragraph
 Explanatory paragraph before disclaimer of
opinion
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Example
The Company did not give effect to all
adjustments to the carrying value of assets &
classification of liabilities resulting from
bankruptcy proceedings
GBW 8th ed., Ch. 3
MODIFICATIONS:
Going Concern
When auditor retains substantial doubt
as to ability of client to continue as a
going concern (SAS 59)
Explanatory paragraph after opinion
paragraph
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GBW 8th ed., Ch. 3
MODIFICATIONS:
Lack of Independence
Auditor is not independent of client
SAS 26 requires a 1-paragraph
explanation with disclaimer of opinion
Example
We are not independent with respect to the
Trailways Company. . . .the balance sheet,
statements of income, retained earnings, &
cash flows were not audited by us. We do
not express an opinion on them.
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GBW 8th ed., Ch. 3
REPORTS: COMPARATIVE
STATEMENTS
When opinions differ
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Criteria for both opinions must be met with
explanatory paragraphs
When opinion updated
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Update opinion paragraph & add
explanatory paragraph acknowledging
change
GBW 8th ed., Ch. 3
REPORTS ON
ATTESTATION SERVICES
Letter communicating
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Management’s & attester’s responsibilities
Attester's opinion
Management’s assertions
(if written)
GBW 8th ed., Ch. 3
UNQUALIFIED OPINION
Definition: unqualified opinion in
attestation report means management’s
assertions are fairly presented in the
attester's opinion
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GBW 8th ed., Ch. 3
OTHER TYPES OF
OPINIONS
Departures from attestation standards
or measurement criteria require other
opinion
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Qualified: assertions fairly presented
except for certain matter(s)
Adverse: assertions are not fairly presented
Disclaimer: attester does not express an
opinion usually due to insufficient evidence
GBW 8th ed., Ch. 3
REPORTS FOR ASSURANCE
SERVICES
Not required
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Short history of offering assurance services
Traditionally, reports not required
 Oscars
 Tony awards
 National book awards
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GBW 8th ed., Ch. 3