AUDIT REPORTS

CHAPTER 3
MASNIZA SUPAR

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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TOPIC OUTLINES
1. Standard unqualified audit report
2. Unqualified Report with Explanatory Paragraph
OR Modified Wording
3. Qualified Opinion Report
4. Disclaimer Opinion Report
5. Adverse Opinion Report
6. Materiality level
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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PARTS OF THE STANDARD

UNQUALIFIED AUDIT REPORT
1.
2.
3.
4.
5.
6.
7.
8.

Report title
Audit report address
Introductory paragraph
Scope paragraph
Opinion paragraph
Name of CPA firm
Auditors address
Audit report date

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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CONDITIONS FOR STANDARD

UNQUALIFIED AUDIT REPORT
1. Includes all financial statements
2. The ISAs have been followed
3. Sufficient evidence has been accumulated
4. The FS are prepared in accordance with
approve accounting standards.
5. There are no circumstances requiring the addition
of an explanatory paragraph
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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UNQUALIFIED REPORT WITH

EXPLANATORY PARAGRAPH OR MODIFIED
WORDING

An unqualified opinion with explanatory or modified

paragraph states meets the criteria of a complete audit

with satisfactory results and financial statements that ar

fairly presented, but the auditor believes it is important
is required to provide additional information.
information

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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UNQUALIFIED REPORT WITH EXPLANATORY

PARAGRAPH OR MODIFIED WORDING

1. Lack of consistent application of approved accountin

standards.
2. Substantial doubt about going concern
3. Auditor agrees with a departure from promulgated
accounting principles
4. Emphasis of a matter
5. Reports involving other auditors (modified
wording)

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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LACK OF CONSISTENT
APPLICATION OF APPROVED
ACCOUNTING STANDARDS
Auditors must note circumstances in
which accounting principles are not
consistently applied
Auditor should modify the report when a
material change occurs by adding an
explanatory paragraph in the report

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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SUBSTANTIAL DOUBT ABOUT

GOING CONCERN

Significant recurring operating

losses orworking capital deficiencies.
Inability of the company to pay its
obligations as they come due.
Loss of major customers, the
occurrence of uninsured catastrophes.
Legal proceedings, legislation that
might jeopardize the entitys ability to operate.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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AUDITOR AGREES WITH A DEPARTURE

FROM A PROMULGATED PRINCIPLE

Departure may not require a qualified or

adverse opinion
The auditor must separately explain in the
audit report that adhering to the principle
would have produced a misleading result.

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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EMPHASIS OF A MATTER
Under certain circumstances, the CPA may
want to emphasize specific matters regarding
the financial statements, even though the
CPA intends to express an unqualified opinion.
Subsequent
Events

Related Party
Transactions

Financial
Statement
Comparability
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DEPARTURES FROM AN
UNQUALIFIED OPINION
1. Scope limitation
2. Disagreement
3. Inherent uncertainty

*Page 59

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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QUALIFIED REPORT
A qualified opinion states that there has
been either a limitation on the scope of the
audit or a departure from approved accounting
standards in the financial statements, but that
the auditor believes that the overall financial
statements are fairly presented.
The auditor must use the term except for in the opinion
paragraph
The implication ; the auditor is satisfied that the overall FS
are correctly stated except for a specific aspect of them
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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DISCLAIMER OF OPINION
A disclaimer of opinion states that the auditor
has been unable to satisfy him or herself as to
whether or not the overall financial statements
are fairly presented because of a significant
limitation of the scope of the audit, or a
non-independent relationship under the Code of
Professional Conduct between the auditor and
the client.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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ADVERSE OPINION
Auditor believes the financial statements are not
presented fairly in conformity with approved
accounting standards.

- Auditor believes that the overall FS are so materially misstated

- The adverse report can arise only when auditor has knowledge
after an adequate investigation.
- This opinion is rarely used

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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MATERIALITY
A misstatement in the financial statements
can be considered material if knowledge of
the misstatement would affect a decision
of a reasonable user of the statements.

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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LEVELS OF
MATERIALITY
Amounts are immaterial.
Amounts are material but do not overshadow
the financial statements as a whole.
Amounts are so material (highly material) or
so pervasive that overall fairness of the FS
is in question.
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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MATERIALITY
DECISIONS
Dollar amount compared with a base
Measurability
Nature of the item

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RELATIONSHIP OF MATERIALITY TO
TYPE OF OPINION
MaterialitySignificance in Terms of
Type of
Level
Reasonable Users Decisions Opinion

Users decisions are unlikely

Immaterialto be affected.
Unqualified
Material

Users decisions are likely

Qualified
to be affected.

Highly
Users decisions are likely Disclaimer
material to be significantly affected. or adverse
2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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MATERIALITY DECISIONS

(Condition requiring an Unqualified Report with Explanatory Paragraph /

Modified Wording)

Circumstances

Immaterial

Departure from approved accounting

standards / lack of consistent application
of approved accounting standards

Unqualified with explanatory

paragraph

Going concern issue

Unqualified with explanatory

paragraph

Report involving other auditor

Unqualified with modified

wording

Emphasis of a matter

Unqualified with explanatory

paragraph

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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MATERIALITY DECISIONS

Condition requiring a departure from Unqualified Report

Circumstances

Immaterial

Material

Highly material

Going concern
issue

Qualified (except for)

Disclaimer

Disclaimer

Unqualified with
explanatory
paragraph(not
disclosed)
Standard
Unqualified
(disclosed) ***

Scope limitation

Unqualified with
explanatory paragraph

Qualified scope,
(additional paragraph)

Lack of
independence

Nil

Nil

Disclaimer

Non-compliance
with approved
accounting
standards

Unqualified with
explanatory paragraph

- Qualified (except for)

Adverse

Emphasis of a
matter

Unqualified with
explanatory paragraph

Nil

Nil

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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TUTORIAL WEEK 3
1.

Exercise 3.27; pg: 73

2.

Exercise 3.28; pg: 73

3.

Additional tutorial (download from e-learn)

Please read ISA 701 key Audit Matters. (Please download from e-learn
in the folder Notes - additional). To be discuss in class on week 3.

THANK YOU

Mistakes are proof that you are trying

~Unknown~

2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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