Auditing Test #1- 4 Basic Types of Audit Reports/ and Other Opinions

1. Unqualified opinion (the standard report)
2. Qualified opinion
3. Adverse opinion
4. Disclaimer of opinion

This opinion is issued when the following conditions have been met:
(i) All statements- balance sheet, income statement, statement of retained earnings, and statement of cash flows- are included in the financial statements.

(ii) The 3 general standards have been followed in all respects on the engagement.

(iv) The financial statements are presented in accordance with US GAAP. This also means that adequate disclosures have been included in the footnotes and other parts of the financial statements.

(v) There are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report.

***The standard unqualified audit report is sometimes called a clean opinion because there are no circumstances requiring a qualification or modification of the auditor's opinion. It is the most common audit opinion.

A qualified opinion report can result from a limitation on the scope of the audit or failure to follow GAAP. However a qualified opinion report can only be issued when the auditor concludes that the overall financial statements are fairly stated. The qualified opinion is considered the least severe type of departure from an unqualified report can be of 2 forms:

(i) qualification of both the scope and the opinion
or
(ii) opinion alone

When the auditor has been unable to accumulate all of the evidence required by GAAS. When there is a scope limitation (by client or circumstances).

Restricted to situations in which the financial statements are not stated in accordance with GAAP.

A) when there is GAAP departure qualification--->use "except for" once in opinion paragraph.

B) when there is scope limitation qualification--->use "except for" twice, once in scope paragraph and once in opinion paragraph.

***Include an explanatory paragraph preceding the opinion paragraph***

This opinion 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. The adverse opinion report can arise only when the auditor has knowledge, after an adequate investigation, of the absence of conformity. This is uncommon and thus the adverse opinion is rarely used.

Note: substantive reason and effects (if determinable) must be in a paragraph(s) preceding opinion paragraph.

This opinion is issued when the auditor has been unable to satisfy himself or herself that the overall financial statements are fairly presented. The necessity for disclaiming an opinion may arise because of a severe limitation on the scope of the audit or a nonindependent relationship under the code of professional conduct between the auditor and the client. Either of these situations prevents the auditor from expressing an opinion on the financial statements as a whole. The auditor also has the option to issue a disclaimer of opinion for a going concern problem.

Note: Substantive reasons for disclaimer must be in a paragraph preceding opinion paragraph. Introductory and opinion paragraphs modified; scope paragraph eliminated.

(This is a subset of unqualified opinions): the unqualified audit report with explanatory paragraph or modified wording meets the criteria of a complete audit with satisfactory results and financial statements that are fairly presented, but the auditor believes it is important or is required to provide additional information.

J: Lack of consistent application of GAAP
K: Substantial doubt about "going concern"
L: Auditor agrees with a departure from promulgated accounting principles.
M: Emphasis of a matter
N: Reports involving other auditors

J,K,L,M--->require an explanatory paragraph following the opinion paragraph. The 3 standards reporting paragraphs remain unchanged.

N--->reports involving the use of other auditors use a modified wording report. No new paragraph, existing 3 paragraphs are all modified.

Notes: when the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern, an unqualified opinion with an explanatory paragraph is required regardless of the disclosures in the financial statements.

***When there is substantial doubt about going concern--->disclaimer is permitted

(i) Make no reference in the audit report
(ii) Make reference in the report (modified wording report): Shared opinion or report. The report does not include a separate paragraph that discusses the shared responsibility, but does so in the introductory paragraph and refers to the other auditor in the scope and opinion paragraphs. The portions of the financial statements audited by the other auditor can be stated as percentages or absolute amounts.

AICPA professional standards provide uniform woding for the auditor's report.
-different auditors may alter the wording or presentation slightly, but the meaning will be the same.

(i) Report title
(ii) audit report
(iii) introductory paragraph
(iv) scope paragraph
(v) opinion paragraph
(vi) name of cpa firm
(vii) audit report date

Report title: the title should include the word "independent to show that the audit was unbiased.

Audit report address: Usually addressed to the company, its stockholders, or the board of directors. Recently it has become customary to address the report to the Board of Directors and stockholders to indicate that the auditor is independent of the company.

State that the audit has been performed (to differentiate it from a compilation or review report).

-It lists the financial statements that were audited including the balance sheet dates and the accounting periods for the income statement and statement of cash flows.

-The wording of the financial statements in the report should be identical to those used by management on the financial statements.

-The statements are the responsibility of management and that the auditor's responsibility is to express an opinion on the statements based on an audit.

-Clarify the respective roles of management and the auditor.