Audit Reports

Requiring an Explanatory Paragraph or Modified Report Wording
Other Opinion Possibilities

Scope Limitation
GAAP Departure
Lack of Independence
Other Information

Standard Report
Five Conditions for the Standard Report

– Must include the word independent.
Audit report address – Customary

to address to board of directors and stockholders to demonstrate independence.
Introductory paragraph – States that an audit has been performed; identifies the financial statements and appropriate dates; states that the financial statements are the responsibility of the entity’s management.
Scope paragraph – States that auditor followed GAAS or PCAOB standards and indicates that the audit only provides reasonable assurance.
Opinion paragraph – Communicates the results of the audit.
Name of CPA firm or practitioner.
Audit report date showing last day of field work. Auditor is held accountable only through this date

basic financial statements are included.
Three General Standards have been followed.
Sufficient

evidence has been accumulated and three Field Work Standards have been followed.
Financial Statements are in accordance with U.S. GAAP.
No circumstances require an explanatory paragraph or modified wording of the report.

Time Period Covered
The Audit Report

a public company to attest to management’s report on the

effectiveness of internal control over financial reporting.
PCOAB Auditing Standard 2 requires the audit of internal control to be integrated with the audit of the financial statements.

financial statements addresses multiple reporting periods, management’s assertion about the

effectiveness of internal control is as of the end of the most recent fiscal year.

reports or a combined report, such as the one shown

in Figure 3-3 on page 50.
The combined report on financial statements and internal control over financial reporting addresses both the financial statements and management’s report on internal control over financial reporting.

of Consistency
Going Concern Problem
Auditor Agrees with a Departure from GAAP
Emphasis

of a Matter
Reports Involving Other Auditors

Note: The first four reports above require an explanatory paragraph
following the opinion paragraph. There is no change in the wording
of the three standard paragraphs. For reports involving other
auditors, the three standard report paragraphs are modified but
there is not a separate explanatory paragraph.

explanatory paragraph when material (See Fig. 3-4 on page 51):
Change

in accounting principles (i.e., FIFO to LIFO)
Change in reporting entities (i.e., change is companies in combined financial statements)
Corrections of changing from unacceptable to acceptable accounting principles.

The following affect comparability but not consistency. If material these items may require disclosure, but not a explanatory paragraph:
Change in accounting estimate (i.e., asset’s depreciable life)
Error correction not involving accounting (i.e., math error)
Variations in format and presentation.
Changes due to substantially different events such as the sale of a subsidiary.

going concern for a reasonable time (not over one year

from date of financial statements).
Include an explanatory paragraph that includes the phrases “substantial doubt” and “going concern.” See Figure 3-5 on page 53.

8

Note: SAS No. 59 permits but does not require a disclaimer of opinion
when there is substantial doubt about ability to continue as a going
concern.

issue an unqualified opinion when a departure from GAAP is

necessary to prevent financials from being misleading.
Modify report wording by adding an explanatory paragraph.

paragraph to emphasize items such as:
Significant related party transactions
Important subsequent

events
Factors affecting comparability of financial statements.
Material uncertainties disclosed in the notes to the financial statements.

the other auditor’s work (and it is unqualified) the standard

report may be issued without modification.
If the other auditors report is qualified and the qualification is material to the financial statements taken as a whole, you must qualify your report.

Shared Responsibility
The opinion is unaffected (i.e. can be unqualified).
Modify all three paragraphs of the standard report (See Figure 3-6 on page 54).

Assume No Responsibility
A qualified opinion or disclaimer, depending on materiality, is required.

paragraph to exclude a specific item from the auditor’s opinion.
Qualified

opinion is appropriate when there is a:
Material scope limitation (qualified scope, additional paragraph, and qualified opinion)
Material departure from GAAP (additional paragraph, qualified opinion)

Note: Materiality is defined in Table 3-1 on page 57.

Used when auditor feels that financial statements contain contain a

highly material departure from GAAP.

An auditor may have to play the bad guy to protect the public

Note: Materiality is defined in Table 3-1 on page 57.

opinion is appropriate when:
There is a highly material scope limitation.
There

is a lack of independence

Note: Auditor has option to issue a disclaimer
of opinion for a going concern problem.

Note: Materiality is defined in Table 3-1 on page 57.

Report – Qualified Opinion
Effect of Scope Limitation on Audit Report

– Disclaimer of Opinion

for an immaterial scope limitation.
If the scope is restricted by

the client, the auditor will usually disclaim an opinion.
If scope is restricted by other conditions:
Qualified opinion if statements “as a whole” are not affected.
Disclaimer if scope limitation affects numerous financial statement items.

Note: Materiality is defined in Table 3-1 on page 57.

Opinion
Introductory paragraph is same as in standard report.
Scope paragraph identifies

limitation by adding “except as discussed in the following paragraph.”
A separate explanatory paragraph is added to the report to describe the scope limitation.
Opinion paragraph wording is changed to express an “except for” qualified opinion.

Note: See Figure 3-7 on page 59.

of Opinion
Introductory paragraph modified to say “We were engaged to

audit…” rather than “We have audited …”.
Scope paragraph is omitted.
A separate explanatory paragraph is added to the report to describe the scope limitation.
Opinion paragraph wording is changed to disclaim an opinion.

Note: See Figure 3-8 on page 60.

Report – Qualified Opinion
Effect of Scope Limitation on Audit Report

– Adverse Opinion

if GAAP departure is immaterial.
If financial statements “taken as a

whole” are not misleading, then a qualified opinion can be issued. Required for omission of statement of cash flows (SAS 58).
If financial statements “taken as a whole” are misleading, then an adverse opinion must be issued. See Nature of Item on page 58.

How misleading are the financial statements?

Note: Materiality is defined in Table 3-1 on page 57.

Opinion
Introductory paragraph is same as in standard report.
Scope paragraph is

the same as the standard report.
A separate explanatory paragraph is added to the report to describe the GAAP departure and its effect on the financial statements.
Opinion paragraph wording is changed to express an “except for” qualified opinion.

Note: See Figures 3-9 and 3-11 on pages 60-61.

Opinion
Introductory paragraph is same as in standard report.
Scope paragraph is

the same as the standard report.
Separate explanatory paragraphs are added to the report to describe the GAAP departures and their effects on the financial statements.
Opinion paragraph wording is changed to express an adverse opinion .

Note: See Figure 3-10 on page 61.

required to issue a special disclaimer of opinion.
One paragraph report

with no title (See Figure 3-12 on page 61).
No opinion is expressed.

audited financial statements in the annual report, the auditor is

required to read the information to ensure that it is not materially inconsistent with the audited financial statement.
Auditors are not currently responsible for information on a company’s web site, even if it includes audited financial statements.