MAGSAYO, KAREN JOY T.

MAY 28, 2021

BSA-3 ACCTG 313 – Auditing Theory

AUDITOR’S REPORT

1. UNQUALIFIED OPINION

An unqualified opinion is the most commonly used report, which is issued when the auditor
concludes that the gathered evidence supports the fairness and completeness of all
management assertions incorporated in the financial statements. It is known as clean audit
report because the users perceive this report to be free from any material misstatements. An
unqualified report signifies that the auditors are satisfied and found no problems or deficiencies
with the client’s financial reporting.

The standard unqualified auditor’s report consists of ten (10) basic elements, which also
remains the same to the other types of opinion:
i. the title vi. auditor’s opinion
ii. addressee vii. other reporting responsibilities
iii. introductory paragraph viii. auditor’s signature
iv. management’s responsibility for the ix. date of the auditor’s report
financial statements x. auditor’s address.
v. auditor’s responsibility

An unqualified opinion states that the financial statements of a corporate client are fairly and
appropriately presented, without any identified exceptions and in compliance with Generally
Accepted Accounting Principles (GAAP).

When expressing an unmodified opinion on financial statements prepared in accordance with a

fair presentation framework, the auditor’s opinion shall, unless otherwise required by law or
regulation, use one of the following phrases, which are regarded as being equivalent:

(a) In our opinion, the accompanying financial statements present fairly, in all material respects,
[…] in accordance with [the applicable financial reporting framework]; or

(b) In our opinion, the accompanying financial statements give a true and fair view of […] in
accordance with [the applicable financial reporting framework

This means that the auditor have received ample appropriate audit documentation to justify their
view that there is nothing wrong with financial statements from a material viewpoint and in
compliance with applicable accounting principles.
 2. QUALIFIED OPINION DUE TO LIMITATION OF SCOPE

A qualified opinion is given when an auditor isn’t confident about a particular procedure or
transaction, preventing them from providing an unqualified or clean assessment. Auditors apply
this kind of opinion in the same manner as they apply an unqualified opinion. They do, though,
have an exception stating the particular reasons they are unable to present an unqualified
opinion.

Limitation of scope arises when the auditor does not receive all information and explanations
that he deems necessary for the completion of the audit. The auditor can, therefore, not give an
objective conclusion of his analysis with regard to the company's economic status. Management
may contribute to the auditor's limitation by refusing to render all information required.
Destruction of accounting records also limits the auditor's capability to deliver a judgment.

In a qualified opinion report due to scope limitation, auditors usually state “except for the effects
of the matter described in the Basis for Qualified Opinion, the financial statements present fairly,
in all material respects…”.In this type of report, auditors may not be able to obtain evidence
about certain matters resulting in the qualification of related transactions or balances.

3. QUALIFIED OPINION DUE TO MATERIAL MISSTATEMENTS

A qualified opinion is given when an auditor isn’t confident about a particular procedure or
transaction, preventing them from providing an unqualified or clean assessment. Auditors apply
this kind of opinion in the same manner as they apply an unqualified opinion. They do, though,
have an exception stating the particular reasons they are unable to present an unqualified
opinion.

A misstatement is a difference between the amounts, classification, presentation, or disclosure

of a reported financial statement item and the amount, classification, presentation, or disclosure
that is required for the item to be in accordance with the applicable financial reporting
framework. Accordingly, a material misstatement of the financial statements may arise in
relation to:

a) The appropriateness of the selected accounting policies;

b) The application of the selected accounting policies; or
c) The appropriateness or adequacy of disclosures in the financial statements.

If there is a material misstatement of the financial statements that relates to narrative

disclosures, the auditor shall include in the Basis for Opinion section an explanation of how the
disclosures are misstated.

In order to form an opinion on the financial statements, the auditor is required to conclude as to
whether reasonable assurance has been obtained about whether the financial statements as a
whole are free from material misstatement. This conclusion takes into account the auditor’s
evaluation of uncorrected misstatements, if any, on the financial statements in accordance with
accounting standards.
 4. DISCLAIMER OF OPINION

A disclaimer of an opinion is issued when auditors are distancing themselves from providing any
opinion at all related to the financial statements. An auditor may disclaim an opinion if a client
organization limits an auditor's ability to perform a comprehensive audit or collect adequate
audit evidence to warrant satisfactory opinions on the matter. Auditors who are not given the
ability to observe or review operating processes may feel hesitant to share their opinions,
because they believe a disclaimer is required and sufficient.When the auditor disclaims an
opinion due to an inability to obtain sufficient appropriate audit evidence, the auditor shall:

a) State that the auditor does not express an opinion on the accompanying financial
statements;
b) State that, because of the significance of the matter(s) described in the Basis for
Disclaimer of Opinion section, the auditor has not been able to obtain sufficient
appropriate audit evidence to provide a basis for an audit opinion on the financial
statements; and
c) Amend the statement that indicates that the financial statements have been audited
required by paragraph 27(b) of proposed ISA 700 (Revised) to state that the auditor was
engaged to audit the financial statements.

Auditors give a statement of judgment for three reasons: (1) content coverage restriction, (2)
substantial uncertainty persists, and (3) auditors lack freedom. Auditors actually note in the
opinion report disclaimer that they are "unable to form an opinion." Auditors are unable to form
an opinion due to scope limitations or the presence of substantial uncertainty. Under this case,
the situation for the disclaimer of judgment is that auditors conclude that the issue is too
material to give an opinion on the financial statements.

5. ADVERSE OPINION

An adverse opinion is issued when the auditors are dissatisfied with the client's financial records
and find a high degree of factual misstatements or anomalies. When an adverse audit report is
released, it typically means that the financial accounts contain gross misstatements and
anomalies, which opens the door to theft. It indicates that the company's financial statements
were not prepared in compliance with GAAP.When the auditor expresses an adverse opinion,
the auditor shall state that, in the auditor’s opinion, because of the significance of the matter(s)
described in the Basis for Adverse Opinion section:

a) When reporting in accordance with a fair presentation framework, the accompanying

financial statements do not present fairly (or give a true and fair view of) […] in
accordance with [the applicable financial reporting framework]; or
b) When reporting in accordance with a compliance framework, the accompanying financial
statements have not been prepared, in all material respects, in accordance with [the
applicable financial reporting framework].
In this type of report, auditors obtained sufficient appropriate audit evidence to conclude that
financial statements contain the misstatement that is both material and pervasive. An adverse
opinion that is given by the auditors usually means that the financial statements as a whole are
not reliable.

6. MODIFIED OPINION DUE TO GOING CONCERN

The financial statements are prepared on the assumption that the entity is a going concern and
will continue operations for the foreseeable future under the going concern basis of accounting.
General purpose financial statements are prepared using the continuing concern basis of
accounting, unless management either wants to liquidate the firm or to discontinue operations,
or has no practical choice but to do so. When the going concern basis of accounting is used,
assets and liabilities are recorded with the expectation that the entity will be able to realize its
assets and discharge its liabilities in the usual course of business.

The going concern principle is assuming that a business will continue in the future, unless there
is evidence to the contrary. When an auditor conducts an examination of the accounting records
of a company, he or she has an obligation to review its ability to continue as a going concern; if
the assessment is that there is a substantial doubt regarding the company’s ability to continue in
the future, a going concern qualification must be included in his or her opinion of the company’s
financial statements. This statement is typically presented in a separate explanatory paragraph
that follows the auditor’s opinion paragraph.

The auditor's responsibility is to gather adequate audit evidence as to the adequacy of the
management's use of the current financial statements accounting concern foundation and to
evaluate if there is significant doubt about the entity's continued performance as a concern
based on the audit evidence acquired. These obligations remain even if the financial reporting
system used to prepare the financial statements does not include a particular obligation for
management to assess the entity's capacity to continue as a going concern. However, the
potential consequences of inherent restrictions on the auditor's capacity to detect significant
misstatements are larger in the case of future events or situations that may lead a business to
cease to exist as a going concern. These future occurrences or situations cannot be predicted
by the auditor. The failure to mention any significant question as to the ability of the entity in the
report of the auditor to continue as a concern cannot thus be seen as a guarantee that the entity
is able to continue to be an issue.

7. AUDIT REPORTS THAT INCLUDE KEY AUDIT MATTERS

There are certain circumstances when the auditor decides to communicate key audit matters in
the auditor’s report. Key Audit Matters (KAM) are defined as “Those matters that, in the
auditor’s professional judgment, were of most significance in the audit of the financial
statements of the current period. Key audit matters are selected from matters communicated
with those charged with governance.”The purpose of communicating key audit matters is to
enhance the communicative value of the auditor’s report by providing greater transparency
about the audit that was performed.

The auditor shall determine, from the matters communicated with those charged with
governance, those matters that required significant auditor attention in performing the audit. In
making this determination, the auditor shall take into account the following:

a) Areas of higher assessed risk of material misstatement, or significant risks identified in

accordance with ISA 315
b) Significant auditor judgments relating to areas in the financial statements that involved
significant management judgment, including accounting estimates that have been
identified as having high estimation uncertainty.
c) The effect on the audit of significant events or transactions that occurred during the
period.

The auditor shall describe each key audit matter, using an appropriate subheading, in a
separate section of the auditor’s report under the heading “Key Audit Matters,” unless
circumstances in which a matter determined to be a key audit matter is not communicated in the
auditor’s report apply. The introductory language in this section of the auditor’s report shall state
that:

a) Key audit matters are those matters that, in the auditor’s professional judgment, were of
most significance in the audit of the financial statements [of the current period]; and
b) These matters were addressed in the context of the audit of the financial statements as
a whole, and in forming the auditor’s opinion thereon, and the auditor does not provide a
separate opinion on these matters.

8. MODIFIED UNQUALIFIED DUE TO INCONSISTENTLY ON THE APPLICATION OF

STANDARD

An independent auditor's judgment that a company's financial statements are truthful and fairly
presented is referred to as a modified unqualified opinion. However, an auditor's view suggests
that some specific aspects of a company's financial statements require explanation and
emphasis owing to uneven compliance with Generally Accepted Accounting Principles (GAAP).

In some circumstances, an auditor may issue a report or opinion that includes modification in
the wordings included in the paragraphs. Modified opinions are issued to the entity's financial
statements when auditors found that those statements are not prepared and present fairly in all
material respect in accordance with the accounting framework that they are applying.

A modified unqualified opinion asserts that a business client's financial statements are
presented honestly and correctly, with no noted deviations. In this case, auditors assess that
there are no substantial misstatements in the financial statements, but they consider that extra
disclosure is necessary for the user's understanding of the financial statements. The auditors
will issue a modified unqualified opinion on some particular areas that require clarification and
emphasis in order to comply with the applicable accounting rules.
AN EXAMPLE OF AUDIT REPORT THAT INCLUDES KEY AUDIT MATTERS