Chapter-Six

Auditors Report
Meaning of Audit report
 An auditor’s report is the independent examination and
expression of opinion on the financial statements of the
company by appointed auditors.
 The responsibility for the preparation of the financial
statements and the presentation of the information included
there in rests with management of the company.
 The auditor’s report is, therefore, the means by which the
auditors formally communicates the results of his /her/audit to
the members of the company as well as to the readers of
financial statements, such as creditors, financial institutions,
and all others who have a stack in the company. 1
 Cont’d
The auditor’s report does not guarantee the truth or
otherwise of the matter reported upon; it is
expression of auditors’ opinion on the financial
statements.
Purpose and form of audit report
The auditor’s report serves for the following
purposes.
1. It substantiates that the financial information of the
company reflects a true and fair picture of the
clients business.
2. It summarizes the result of the audit work carried
out by the auditors 2
 Cont’d
3. It offers an opportunity to the readers of
financial statements such as creditors,
bankers, financial institutions, and potential
investors and others to get reliable insight
into the financial position of the company as
reflected by its profit and loss accounts and
the balances sheet.
4. Auditors’ report is the indicator of
credibility of financial statements.
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 Form of audit report
Audit report should cover the following forms:
1. Title: An appropriate title as ‘Independent Auditors Report,’
helps the users / readers / to identify the report and to distinguish it
from reports issued by others.
2. Addressee: The report should be appropriately addressed. For
example: In most cases the report is addressed to the
shareholders.
3. Identification of financial statements (Introductory
paragraph): The fist paragraph of the auditor’s report is reflected
to as the introductory paragraph. It clearly states:
– The financial statements that have been audited
– The financial statements are the responsibility of
managements
– The auditors’ responsibility is to express an opinion on them.
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 Cont’d
The financial statements can be identified by
including the name of the entity and the date period
covered by the financial statements.
4.Reference to auditing standards or
practices(scope paragraph):
The second paragraph of auditors’ report which
describes the nature of an audit, that is, the
standards being followed and procedures
applied.
Such references in the report assure the reader that
the audit has been carried out in accordance with
established standards or practices. 5
 Cont’d
5. Opinion on the financial statements (opinion
paragraph):
 The third paragraph of auditors’ report which
describes the auditors opinion on the financial
statement .
The report should clearly set forth the auditors
opinion on the entity’s financial positions and
operational results
e.g. The financial statements give a true and fair
view.

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 Cont’d
6. Signature: The report should be signed in the name
of the audit firm or the personnel name of the firm
sings on behalf of the firm.
The report is singed with the name of the CPA firm,
not the name of an individual partner in the firm.
The date under signature is normally the last day of
field work
7. Auditors’ or Audit firm’s Address: The report
should also mention the specific location in the city
where the auditor(s), or audit firm maintain his
offices.
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 Types of auditors’ reports (opinions)

The auditors’ reports may be classified as

follows. 
A. Unqualified ( clean ) report
B. Qualified report / negative report/
C. Adverse report
D. Disclaimer of opinion ( no-opinion)

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 1. Unqualified (clean) report
An auditors’ report with an unqualified opinion may
be issued only when the following two conditions
have been meet.
1. The financial statements are presented in conformity
with generally accepted accounting principles,
including disclosure.
2. The audit was performed in accordance with generally
accepted auditing standards, with no significant scope
limitations preventing the auditors from gathering the
evidence necessary to support their opinion.
 The unqualified opinions, of course, the most
desirable report from the client’s point of view.
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 2. Qualified opinions
 Qualified opinion expresses the auditor’s
reservations or uncertainty about fair presentation
in some areas of the financial statements.
The opinion states that except for the effects of
some deficiency in the financial statements, or
some limitations in the scope of the auditors’
examination, the financial statements are presented
fairly.
All qualified reports include a separate explanatory
paragraph before the opinion paragraph disclosing
the reasons for the qualification.
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 Cont’d
Auditors may issue qualified audit opinion when:
1. There is a departure from generally accepted
accounting principles by client and auditors do
not agree with the accounting principles used in
preparing financial statements.
 When the departure is immaterial, on unqualified
opinion may be issued.
2. Scope limitations: limitation on the scope of an
audit arise when the auditors are unable to perform
an essential audit procedures. Limitation may be
imposed either by circumstances surrounding the
audit 11
 Cont’d
When the circumstance imposed scope limitation is
involved, the auditor will attempt to perform
alternative procedures to gather sufficient competent
evidential matter, and may issue an unqualified opinion
if the collected evidential matters are believed by the
auditors to be sufficient. Otherwise, qualified opinion
may be issued or an auditor may disclaim an opinion.
3. When the account do not disclose a true and fair view
of the companies affair, and when books of accounts
have not been kept in accordance with the law and
profit and loss accounts are not in agreements with the
books of account and other related issues.
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 3. Adverse Opinions
 An adverse opinion is the opposite of an
unqualified opinion; it is an opinion that is issued
when;
1. The financial statements do not present fairly the
financial position, results of operation, and cash
flows of the client in conformity with generally
accepted accounting principles.
2. When the deficiencies (departure) in the financial
statements are so significant, that the financial
statements taken as a whole are misleading.

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 Cont’d
An audit report that express an adverse opinion generally includes
standard introductory and scope paragraphs, one or more
explanatory paragraphs preceding the opinion paragraph and
describing the reasons for the adverse opinion, and an opinion
paragraphs.
4. Disclaimer of opinion:
A disclaimer of opinion means giving no opinion as to the status of
the financial statements under audit. Auditors issue a disclaimer
whenever:
1. Auditors are unable to form an opinion or have not formed an
opinion as to the fairness of presentation of the financial statements
due to significant scope limitations either by substantial
circumstances and/ or by client and this limitations of scope
precludes the auditors’ compliance with generally accepted auditing
standards and
2. When a material uncertainty affects the financial statements. 14
End of chapter Six

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