AUDIT REPORT AND OPINIONS

OPINIONS
 After all tests have been conducted
and evaluated , the external auditor
should be able to render a written
report. In this report the auditor must
make an opinion on the financial
statements taken as a whole.
 This opinion is the key part of the
audit report and constitutes a major
task of external auditors.
 WHY THE AUDIT OPINION

 An auditor’s report is considered an essential tool

when reporting financial information to users,
particularly in business since many users prefer or
even require financial information to be certified
by an independent external auditor
 Many auditees rely on auditor reports to certify
their information in order to attract investors,
obtain loans and improve public appearance.
Some have even stated that financial information
without an auditor’s report is ‘essentially worthless’
for investigating purposes.
 SECTIONS OF THE AUDIT REPORT

ISA 700 provides the following outline for

the auditor’s report:
Title
Addressee
Opening or introductory paragraph
(containing an identification of financial
statements audited and a statement of
the responsibility of the entity’s
management and of the auditor)
 SECTIONS CONT’D

Scope paragraph (containing a

reference to ISA or relevant national
standards or practices and a description
of the work the auditor performed
Opinion paragraph (containing an
expression of opinion on the financial
statements)
Auditors signature
Date of the report
Auditor’s address
 OTHERs

Apart from the above commonly known task of

giving an opinion external auditors engage in :
 Compilations
 Agreed upon procedures
 Due diligence
 Internal audit reports
 Financial forecasts
 Filling of public company’s forms
 Fraud and materiality memo
 Environmental audit
 Regulatory inspection reports
 Second opinion
 TYPES OF AUDIT REPORTS OPINIONS

Major types of audit reports opinion are:

Unqualified or clean opinion
Unqualified opinion with an emphasis
of matter
Qualified or Except for opinion
Adverse opinion
Disclaimer
 UNQUALIFIED OR CLEAN OPINION

 Is when the auditor concludes that the financial

statements of the entity give a True and Fair view in
accordance with the financial reporting frame work
used in the preparation and presentation of the financial
statements i.e. when the auditor does not have any
significant reservation in respect of matters contained in
the financial statements
 Put differently such report is issued by an auditors when
they believe the financial statements presented are free
of material misstatements and are represented fairly in
accordance with Generally Accepted Accounting
Principles(GAAP), i.e. that the company financial
condition, operations and options are fairly presented in
the financial statements.
 BEST TYPE OF OPINION

An unqualified opinion is the best type of report an auditee may

receive and it indicates that:
 The financial statements have been prepared in accordance with
GAAPs, which have been consistently applied
 The financial statements comply with the relevant statutory
requirements and regulations
 The view presented by the financial information taken as a whole is
consistent with the auditors knowledge of the business entity
 There is adequate disclosure of all material matters relevant to the
proper presentation of the financial information statements statutory
requirements, where applicable
 Any changes in the accounting policies and properties or in methods
of their application and the effects thereof have been properly
determined and disclosed in the financial statements
 Additional requirements that may have been requested in the terms
of reference have been met
 QUALIFIED OR EXCEPT FOR

A qualified opinion report is issued when

the auditor encountered one of two
types of situations which do not qualify
with GAAP, however, the rest of the
financial statements are fairly presented
The type of opinion is very similar to an
unqualified or clean opinion but the
report states the financial statements are
fairly presented with a certain exception,
which is otherwise misstated
 CIRCUMSTANCES WHICH MAY GIVE RISE TO A QUALIFIED
REPORT

Incorrect valuation of stock in trade if

Lack of a strong internal control system
Insufficient provisions
Wrong valuation of investments
None disclosure of contingent liabilities
INCORRECT VALUATION OF STOCK IN TRADE IF

Incorrect valuation of stock in trade if

Valued at markets prices
Obsolete stock / slow moving /damaged
stock is included in stock
Stock taking was not properly done.
there was wrong cut-off of material stock
Some branches /agents/associated
companies, do not submit their stock
returns.
LACK OF A STRONG INTERNAL CONTROL SYSTEM

Lack of a strong internal control system

thus:
Inability to apply tests
incomplete records
lack of cumulative reliable evidence
chances of frauds are very high in a
business
 INSUFFICIENT PROVISIONS

Insufficient provisions:
For bad debts –which may give rise to
overstated assets
If there is a disagreement between
management and auditor as regards
provision for depreciation.
If the company’s credit policy is liberal
and yet it is reluctant to provide high rates
of provision for bad debts
 WRONG VALUATION OF INVESTMENTS
Wrong valuation of investments e.g.
– Shares valued at prices different from their market prices.
– If the investments are valued in an awkward manner in particular
private unquoted investments.
None disclosure of contingent liabilities
If there has been no provision for taxation of a material figure.
If the management is not cooperative in a number of
circumstances e.g. does not avail documents.
It there has been a change in profits which is unexplainable
thus there is suspicion of a frau by the management.
If the company has a subsidiary whose accounts were not
considered in the report.
If the auditor is threatened by directors as to how to their
wishes in particular, if there is a secret reverse they have
refused to reveal.
 “EXCEPT FOR”
Two major aspects of Except for opinion:

 Deviation from GAAP :when one or more areas of the financial statements do not
conform with GAAP (e.g. are misstated) but do not affect the rest of the financial
statements form being fairly presented when taken as a whole . For example, when
a business did not correctly compute the depreciation expense of its building.
Even if the expense is considered material, since the rest of the financial statements
do conform with GAAP, then the auditor qualifies the opinion by describing the
depreciation misstatement in the report and continues to issue a clean opinion on
the rest of the financial statements

 Limitation of Scope: occurs when the auditor could not audit one or more areas of
the financial statements and although they could not be verified, the rest of the
financial statements were audited and they conform to GAAP e.g. if the auditor
was not able to observe and test a company’s inventory of goods. If the auditor
audited the rest of the financial statements and is reasonably sure that they
conform to GAAP, then the auditor simply states that the financial statements are
fairly presented with the expectation of the inventory which could not be audited
 WORDING OF “EXCEPT FOR” OPINION

 The wording of the qualified report is very

similar to the unqualified opinion but an
explanatory paragraph is added to explain
the reasons for the qualification after the
scope paragraph but before the opinion
paragraph
 The introductory paragraph is left exactly the
same as the unqualified opinion, while the
scope and opinion paragraphs are slightly
modified in line with the qualification in the
explanatory paragraph
 SCOPE AND OPINION PARAGRAPHS

 Scope paragraph is edited to include the phrase

‘except as discussed in the following paragraph
in the first sentence. This way the user is
immediately made aware of the qualification
and that except for the qualification, the rest of
the audit was performed without qualifications
 Opinion paragraph is edited to include the phase
‘in our opinion except for the effects of the
company’s incorrect determination of
depreciation expenses the financial statements
referred to in the first paragraph presents fairly, in
all material respects, the financial position of in
the first sentence
WORDING OF “EXCEPT FOR” OPINION CONT’D

 The statement reminds the user that the auditor’s opinion

explicitly excludes the qualification expressed.
Depending on the type of qualification, the phrase is
edited to either state the qualifications and adjustments
needed to correct it OR state the scope limitations and
those adjustments could have but not necessary been
required in order to correct it.
 In the case of scope limitation to the opinion would
have been' In our opinion,, except for the effects of such
adjustments, if any, as might have determined to be
necessary had we been able to perform proper tests
and procedures on the company’s inventory, the
financial statements referred to in the first paragraphs
presents fairly in all material respects, the financial
position of ……’
 PERVASIVE

 Generally an adverse opinion is only given if the financial

statements pervasively differ from GAAP e.g. where a
company fails to consolidate a material subsidiary
 The wording of the adverse report is similar to the
qualified report. The scope paragraph is modified
accordingly and an explanatory paragraph is added to
explain the reason for the adverse opinion after the
scope paragraph but before the opinion paragraph.
 Most significant change in the adverse report from the
qualified report is in the opinion paragraph, where the
auditor clearly states that the financial statements are
not in accordance with GAAP, which means that way
they as a whole, are materially incorrect, unreliable and
inaccurate and do not present a fair view of the
auditees position and operation
 EFFECTS OF ADVERSE OPINION

 May lead to removal of the company’s board of directors and

appointment of a new board.
 May lead to a fall in value of the company’s shares because would-
be shareholders will not have any demand for such company’s
shares. Supply for these shares will be high.
 may lead to loss of credibility of the company affected and thus fall
to goodwill, thus it may be:
 Unable to raise further finance easily
 Unable to attract trade creditor’s money in form of trade credit.
 May force the company into receivership if the creditors doubt its
ability its ability to meet their obligations as and when they fall due.
Consequently it may lead into liquidation.
 May lead to lower profits thus dividends which will lower the morale
of present shareholders who may decide to sell off their shares thus
dilution of control.
 Results into appointment of investigators.
 OPINION PARAGRAPH

The paragraph ‘in our opinion,

because of the situation mentioned
above (in the explanatory paragraph),
the financial statements referred to in
the first paragraph do not present fairly
in all material respects, the financial
position of….’
 DISCLAIMER OF OPINION REPORT

A disclaimer of opinion, commonly

referred to simply as a disclaimer, is
issued when the auditor could not
form, and consequently refuses to
present, an opinion on the financial
statements
 IMPLICATION

Adverse opinion is issued when the auditor determines

that the financial statements of an auditee are
materially misstated and when considered as a whole,
do not confirm with GAAP.

The opinion s essentially stating that the information

contained is:
 Materially incorrect
 Unreliable and
 In accurate
Such that assessing the auditees financial positions and
results is rendered difficult or even impossible
 WHEN APPROPRIATE

A disclaimer of opinion may be appropriate:

 A lack of independence or material conflict
(s) of interest, exists between the auditor and
the auditee
 There are significant scope limitations,
whether intentional or not, which hinder the
auditors work in obtaining evidence and
performing procedures
 There is a substantial doubt about the auditors
ability to continue as a going concern
 There are significant uncertainties within the
auditees
 RARELY USED

Disclaimer of opinions is rarely used, but common

examples include:
 Where the auditee willfully hides or refuses to provide
evidence and information to the auditor in significant
areas of the financial statements
 Where the auditee is facing significant legal and
litigation issues in which the outcome is uncertain (usually
government investigations) and
 Where the auditee as going concern issues investors,
lending institutions and government typically reject an
auditees financial statements if the auditor disclaimed
an opinion and will request an auditee to correct the
situations the auditor mentioned and obtain another
audit report
 SUBSTANTIAL DIFFERENCE

 A disclaimer of opinion differs substantially from

the rest of the auditors reports because it provides
very little information regarding the audit itself,
and includes an explanatory paragraph stating
the reasons for the disclaimer
 Although the report still contains the letterhead,
the auditees name and address, the auditor’s
signature and address, the reports issuance date,
every paragraph is modified extensively, and the
scope paragraph is entirely omitted since the
auditor is basically stating that an audit could not
be realized.
 PHRASE CHANGES

 In the introductory paragraph, the first phrase

changes from ‘we have audited’ to ‘we were
engaged to audit’ n order to let now that the
auditee commissioned an audit, but does not
mention that the auditor necessarily
completed the audit.
 Additionally, since the audit does not mention
that the auditor necessarily completed the
audit. Additionally, since the audit was not
completely and/ or adequately performed,
the auditor refuses to accept any
responsibility by omitting the last sentence of
the paragraph.
 SCOPE PARAGRAPH IS OMITTED

 The scope paragraph is omitted in its

entirety since, effectively, no audit was
performed. Similar to the qualified and
the adverse opinions, the auditor must
briefly discuss the situations for the
disclaimer in the explanatory paragraph.
 Finally, the opinion paragraph
changes completely, stating that an
opinion could not be formed and is not
expressed because of the situations
mentioned in the previous paragraphs.
 THREE PARAGRAPHS

The following is a draft of the three main paragraphs of a disclaimer

of opinion because of inadequate accounting records of an
auditee, which is considered a significant scope of limitation:
“We were engaged to audit the accompanying balance sheet of
ABC Company, Inc. (the ‘company’) as of December 31, 20XX and
the related statements of income and cash flows for the year ended.
These financial statements are the responsibility of the Company’s
management.

The company does not maintain adequate accounting records to

provide sufficient information for the preparation of the basic financial
statements. The Company’s accounting records do not constitute a
double-entry system which can provide financial statements.

Because of the significance of the matters discussed in the preceding

paragraphs, the scope of our work was not sufficient to enable us to
express, and we do not express, an opinion of the financial
statements referred to in the first paragraph”.
 OPINION SHOPPING

 The most common example is an auditee that

knows that the current auditor is going to issue a
qualified, adverse, or disclaimer of opinion report who
then rescinds the audit engagement before the opinion
is issued, and subsequently ‘shops’ for another auditor
who is willing to issue an ‘unqualified’ opinion, regardless
of any qualifying situations mentioned in the previous
sections.
 However, opinion shopping is not limited to auditees
contracting auditors based on issuing opinions. It also
includes auditors who are over pleasing to auditees by
issuing unqualified reports without properly auditing, or
by simply overlooking material issues affecting the audit.
These auditors’ objective is to appear much more
attractive and easy-going than other auditors in order to
secure future audit engagements and fees