Audit Reports
Chapter 3
Instructor: Arshad Hasan
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
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Parts of the Standard
Unqualified Audit Report
1. Report title
2. Audit report address
3. Introductory paragraph
4. Scope paragraph
5. Opinion paragraph
6. Name of CA firm
7. Audit report date
©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
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Four Categories of Audit
Reports
1. Standard unqualified
2. Unqualified with explanatory paragraph
or modified wording
3. Qualified
4. Adverse or disclaimer
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Conditions for Standard
Unqualified Audit Report
1. All financial statements are included.
2. The three general standards have been followed in all respects
on the engagement. (Proficiency, Independence, Professional Care)
3. Sufficient evidence has been accumulated to conclude that three
standards of field work have been met. (Planning, Understanding, Audit Evidence)
4. The financial statements are presented in accordance with IFRS /
generally accepted accounting principles.
5. There are no circumstances requiring the addition of an
explanatory paragraph / modification of wording of report.
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Unqualified Report with
Explanatory Paragraph
1. Lack of consistent application of generally
accepted accounting principles / IFRS
2. Substantial doubt about going concern
3. Auditor agrees with a departure from
promulgated accounting principles
4. Emphasis of a matter
5. Reports involving other auditors
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Substantial Doubt About
Going Concern
1. Significant recurring operating losses
or working capital deficiencies.
2. Inability of the company to pay its
obligations as they come due.
3. Loss of major customers, the occurrence
of uninsured catastrophes.
4. Legal proceedings, legislation that might
jeopardize the entity’s ability to operate.
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Auditor Agrees with a Departure
from a Promulgated Principle
The auditor must be satisfied and must state
and explain, in a separate paragraph or
paragraphs in the audit report, that adhering
to the principle would have produced a
misleading result in that situation.
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Emphasis of a Matter
Under certain circumstances, the CA may
want to emphasize specific matters regarding
the financial statements, even though the
CA intends to express an unqualified opinion.
1.
2.
3.
4.
Existence of significant related party transactions
Events occurring subsequent to balance sheet date
Matters affecting comparability of financial statements
Material uncertainties disclosed in footnotes
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Reports Involving Other
Auditors
1. Make no reference in the audit report
2. Make reference in the report
(modified wording report)
3. Qualify the opinion
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Departures from An
Unqualified Opinion
1. Scope limitation
2. GAAP departure
3. Auditor not independent
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Qualified Opinion
A qualified opinion report can result from
a limitation on the scope of the audit or
failure to follow generally accepted
accounting principles.
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Adverse Opinion
It 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.
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Disclaimer of Opinion
It is issued when the auditor is unable
to be satisfied that the overall financial
statements are fairly presented.
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Reporting on Internal Control
over Financial Reporting
Auditors of public companies subject to Section
404 of the Sarbanes-Oxley Act must
report on the effectiveness of internal
control over financial reporting.
PCAOB Auditing Standard 5 requires
the audit of internal control to be integrated
with the audit of the financial statements.
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Sarbanes-Oxley Act
Separate Report on Financial Statements and
Internal Control Over Financial Reporting
1. Introductory paragraph
2. Scope paragraph
3. Definition paragraph
4. Inherent limitations paragraph
5. Opinion paragraph
6. Cross Reference Paragraph
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Materiality
A misstatement in the financial statements
can be considered material if knowledge of
the misstatement would affect a decision
of a reasonable user of the statements.
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Levels of Materiality
Amounts are immaterial.
Amounts are material but do not overshadow
the financial statements as a whole.
Amounts are so material or so pervasive that
overall fairness of the statements is in question.
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Relationship of Materiality to
Type of Opinion
Materiality Significance in Terms of
Type of
Level
Reasonable Users’ Decisions Opinion
Users’ decisions are unlikely
Immaterial to be affected.
Unqualified
Material
Users’ decisions are likely
to be affected.
Qualified
Highly
material
Users’ decisions are likely
to be significantly affected.
Disclaimer
or adverse
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Materiality Decisions
 Dollar amount compared with a base
 Measurability
 Nature of the item
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Proposed use of international
accounting and auditing standards by
U.S. companies
Globalization of world’s capital markets are
leading to calls for a single set of accounting
standards to be used around the world.
The SEC has a proposed roadmap that could
lead to the use of IFRS by U.S. public companies
beginning in 2014
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End of Chapter 3
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