Auditing 81.3550
Chapter Two
Audit Reports
Highlights
• Describe basic contents of Audit Report
• Identify the 4 basic types of Audit Reports
• What conditions apply to each type of
report
• Materiality - what is it?
• Process involved in determining which
report is appropriate
Audit Report - Standard Sections
1. Report Title - required
by section 5400.07
2. Addressee - 5400.31 to whom report is
address to often to
Shareholders
3. Introduction
Paragraph - identifies
audit has been done,
clarifies what an audit
means, lists statements
audited, discusses
parties’ responsibilities
4. Scope Paragraph reasonable assurance
and free from material
misstatement - but not
guarantee
Report title:
Auditor’s Report
Address:
To the Shareholders of Ace Company:
Introductory paragraph:
We have audited the balance sheets of Ace Company as
at December 31, 2004 and the statements of income,
retained earnings, and changes in financial position 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 audits.
Scope paragraph:
We conducted our audits in accordance with generally
accepted auditing standards. 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.
Opinion paragraph:
In our opinion, these financial statements present fairly, in all
material respects, the financial position of Ace Company as
at December 31, 2004 and the results of its operations and the
changes in its financial position for the years then ended in
accordance with generally accepted accounting principles.
Name of firm:
Taylor & Tower, CAs
City:
Anywhere, any province
Audit report date:
February 27, 2005
Audit Report - Standard Sections
5. Opinion Paragraph states auditor’s
conclusion based on
evidence obtained
during audit
6. Name of Firm - one
responsible for the
audit
7. Place of issue - often
indicated at foot of
report
8. Auditor’s Report Date
- one by which most
audit procedures were
completed by
- indicates last date of
responsibility
Audit Report - Standard Sections
- Double dating of Audit
report used when
material even occurs
after the completion of
the field work but
before report is issued
Audit Report Categories
• Standard Unqualified
• Unqualified with
explanatory paragraph
• Qualified
• Adverse or Denial of
Opinion
Most Common Type of Audit
Report - Unqualified
• Often called “Standards
Audit Report”
• All conditions of the
standard audit have been
meet
• Auditors feel comfortable
with rendering unqualified
opinion on FS
Unqualified Opinion with
Explanatory Paragraph
• Audit completed but auditor believes additional
information is required or of great importance
• Statements still believed to present fairly all regular
conditions have been met
• For example - audit may have been conducted with
basis of accounting different from GAAP
• Explanation section/disclosure of additional
information in the audit report follows in a new
paragraph after the opinion one
Qualified Opinion
• Can also be called a “reserved”
opinion
• can result from a scope limitation
(auditor’s field work restricted but
only in one area) - often imposed
by client or beyond client or
auditors control
• or failure to follow GAAP (small
area of departure and effect can be
quantified)
Qualified Opinion
• Examples include: inappropriate accounting
treatment, valuation or failure to disclose
essential info
• satisfied with overall financial statements as
presenting fairly
• should use terms - except for or except that or
except as in opinion paragraph to outline
exceptions
• very rare to have this type of report
Adverse Opinion
• Used only when
auditor concludes that
statements do not
present fairly
• i.e.. Materially
misstated or
misleading
• normally due to
GAAP departures
Denial of Opinion
• Auditor does not feel confident that financial
statements present fairly - unable to express an
opinion
• could be result of severe scope limitation or severe
GAAP noncompliance
• lack of knowledge - unable to give opinion
• differs from adverse where there is knowledge of
significant departure and can identify
misstatements
Denial – Scope Restriction
Same introductory paragraph
Except as explained in the following paragraph, we
conducted our audit in accordance with generally accepted
auditing standards...
Explanatory third paragraph including $-effect
In view of the possible material effects on the
financial statements of the matters described in the
preceding paragraph, we are unable to express an
opinion whether these financial statements are
presented fairly in accordance with generally
accepted accounting principles.
Materiality
• Defn (5130.05) misstatement in financial
statements is considered to be
material if the decision of a
person who is relying on the
financial statements would be
changed
• requires professional
judgement to determine effect
Materiality
• Items to consider in
determining materiality
– compare dollar amount to
base common ones
include: income B4 taxes,
total assets, current assets,
and working capital
– note need to add up all
errors found to consider
total plus look at
pervasiveness
– Measurability can we
accurately measure the
effects of this error
– Nature of Item does this
affect users decision for
example is it fraud, may
have future effects, send
incorrect message, or may
have other consequences
(such as debt call or convent
failure)
Materiality
• Immaterial - misstatement in F/S unlikely to
affect decision of user - can issue
unqualified opinion (example bank balance
is found to be in error $10 on a million
dollar balance)
• Pervasive - extent to which exception/error
affects different parts of F/S
Materiality
• Material item - not pervasive = would affect users
decision need since not pervasive likely overall
statements still useful.
– If use overall still useful issue qualified opinion using
“except for”
• Material item - pervasive = affects decision plus
other parts of the statement likely will overall
statements
– increased level of pervasiveness = adverse opinion
more likely
Reliance on Specialists or
Another Auditor
• Primarily auditor
responsible for audit
regardless of personnel
or specialists hired
• Primary- responsible to
check credentials,
competence and integrity
of specialist/auditor
Reliance on Specialists or
Another Auditor
• Normally use of a specialist or another
auditor is not mentioned in audit report
• Scope limitation = find out cannot rely on
another auditor/specialist
• if unqualified opinion appropriate- name of
secondary auditor/specialist not mentioned
• qualified or denial opinion - may mention
name and explain reason(s) for qualification
Type of Audit Report
Level Materiality
Scope Restriction
Not GAAP
Immaterial
Standard Report
Standard Report
Material
Qualified report
Qualified Report
Material &
Pervasive
Denial of Opinion
Adverse Opinion