Lecture 2

Audit report

Adapted from 2014 Pearson Education

1
 Standard unmodified opinion audit
report

Conditions for standard unmodified

opinion audit report

Learning Categories of audit reports

objectives
Audit report with emphasis of matter

Modifications to the opinion in audit

report

2
 Parts of the 1. Report title

Standard 2. Audit report address

3. Introductory paragraph
Unqualified Audit 4. Management’s Responsibility

Report 5. Auditor’s Responsibility

6. Opinion Paragraph
7. Name and Address of CPA firm
8. Audit report date

3-3
Examples

3-4
Examples

3-5
Conditions for Standard
Unqualified Audit Report

INCLUDES ALL FINANCIAL SUFFICIENT APPROPRIATE

STATEMENTS EVIDENCE

NO CIRCUMSTANCES
FINANCIAL STATEMENTS
REQUIRE AN
PRESENT IN ACCORDANCE
EXPLANATORY
WITH ACCOUNTING
PARAGRAPH OR REPORT
STANDARDS
MODIFICATION

3-6
Five
Categories
of Audit
Reports

3-7
Unqualified 1. Lack of consistent application of generally accepted
accounting principles

Report with 2. Substantial doubt about going concern

3. Auditor agrees with a departure from promulgated
Explanatory accounting principles
4. Emphasis of a matter
Paragraph 5. Reports involving other auditors

3-8
 Auditors must note
circumstances in which
accounting principles are not
consistently applied
Lack of Consistent
Application of
GAAP
Auditor should modify the
report when a material
change occurs by adding an
explanatory paragraph in the
report

3-9
Substantial Doubt About
Going Concern

• Significant recurring operating

losses or working 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 entity’s ability
to operate.

3-10
Hoang
Anh Gia
Lai – Audit
report
2018

11
 Departure may not require a
qualified or
adverse opinion
Auditor
Agrees with The auditor must separately
a Departure explain in the
from a audit report that adhering to
Promulgated the principle
Principle
would have produced a
misleading result.

Circumstances are unusual

3-
12
 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 Related Party

Events Transactions

Financial
Material
Statement
Uncertainties
Comparability
3-13
Codupha –
Audit report
2017

14
Reports • Make no reference in the audit
report

Involving • Make reference in the report

Other (modified wording report)

Auditors • Qualify the opinion

15
Reports Involving Other Auditors
VEA – Review report Jun 2019

16
 Departures from an
Unqualified Opinion

1. Scope limitation

2. GAAP departure

3. Auditor not independent

3-17
Qualified Opinion

A qualified opinion report can result from a

limitation on the scope of the audit or
failure to follow generally accepted
accounting principles.

3-18
Qualified Opinion

3-19
Adverse Opinion

Auditor believes the financial statements

are not presented fairly in conformity
with GAAP.

3-
20
Adverse Opinion

3-
21
22
 Disclaimer of Opinion

3-23
 Disclaimer of Opinion

Issued when the auditor is unable

to be satisfied that the overall financial
statements are fairly presented.

Can arise only from a lack of

knowledge by the auditor.

3-24
25
26
 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.

3-27
 Levels of Materiality

Amounts are immaterial.

Amounts are material but do not overshadow

the financial statements as a whole.

Amounts are so material or so pervasive that

overall fairness of the statements is in question.

3-28
 Materiality Decisions

Failure to
follow GAAP

Audit report

Qualified
Unqualified Adverse
opinion only

3-29
 Relationship of Materiality to
Type of Opinion
Materiality Significance in Terms of Type of
Level Reasonable Users’ Decisions Opinion

Users’ decisions are unlikely

Immaterial to be affected. Unqualified

Users’ decisions are likely

Material to be affected. Qualified

Highly Users’ decisions are likely Disclaimer

material to be significantly affected. or adverse

3-30
 Materiality Decisions
Non-GAAP Conditions
 Dollar amount compared with a base

 Measurability

Nature of the item

3-31
 Materiality Decisions
Scope Limitations Condition
Scope
limitation

Audit report

Qualified scope
Unqualified Disclaimer
and opinion

3-32
 Discussion of Conditions
Requiring Departure

 Auditor’s scope has been restricted

Statements are not in conformity with GAAP

Auditor is not independent

3-33
 Auditor’s Decision Process

Determine whether any conditions exists

requiring a departure from a standard
unqualified report.

Write
Decide Decide appropriate
Audit
type of report
Materiality Report

3-34
35