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INTRODUCTION

An audit report is a written opinion of an auditor regarding an organization’s financial statements.

The report is written in a standard format, as mandated by the Companies Act 2016 and International Standards on Auditing (ISA).

ISA 700 (Revised) – Forming an Opinion and Reporting on Financial Statements deals with the auditor’s responsibility to form an opinion on the financial statements, as well as the form and content of the auditor’s report issued as a result of the audit.

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INTRODUCTION (CONT.)

Audit opinion can be categorized into:

(a) An unqualified opinion, if the financial statements are a fair representation of an entity’s financial position;

(b) A qualified opinion, if there are any scope limitations that were imposed upon the auditor’s work;

(d) A disclaimer of opinion, which can be triggered by several situations. For example, the auditor may not be independent, or if there is a going concern issue with the auditee.

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OBJECTIVES AND FORMAT OF AN AUDIT REPORT

The objectives of an audit report is to communicate auditors’ findings to the users of the financial statements, and to express an opinion on the truth and fairness of the financial statements.
In order to form that opinion, auditors must conclude as to whether they have obtained reasonable assurance that the financial statements are free from material misstatement, either due to fraud or error.
Auditors must also expressly state in their audit report whether the financial statements presents a true and fair view of the financial performance and position of the entity

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Example of Standard Unqualified Report

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THE NEED FOR AN AUDIT REPORT

Relevance and reliability are the primary qualities that make audited financial statements useful for decision-making purposes.
The need for independent audits of financial reports can be divided into:

Conflict of Interest - might exist between the management and shareholders.
Consequence - financial reports should contain relevant and reliable information.
Complexity - since accounting is getting more complicated, there is a greater risk of misinterpretation and unintentional error.
Remoteness - prevents users from directly assessing the quality of the report.

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PARTS OF THE STANDARD�UNQUALIFIED AUDIT REPORT

Report title – independent auditor’s report
Audit report address – to the company, shareholders & BOD
Introductory paragraph – simple statement that CA firm has done an audit, lists the FS that were audited &, management & auditor’s responsibility
Scope paragraph – factual statement what auditor did in the audit (followed MASA, audit is performed to obtain reasonable assurance whether the FS are free from material misstatement)
Opinion paragraph – states the auditor’s conclusions based on the result of the audit
Name of CPA firm – identifies the CA firm & the practitioner who performed the audit
Audit report date – last day of the auditor’s responsibility for the review of significant events that occurred after the date of the FS

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CONDITIONS FOR STANDARD�UNQUALIFIED AUDIT REPORT

All financial statements are included.

The ISAs have been followed in all respects on the engagement.

Sufficient evidence has been accumulated to conclude that the three standards of field work have been met.

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CONDITIONS FOR STANDARD�UNQUALIFIED AUDIT REPORT

The financial statements are presented in accordance with generally accepted accounting principles.

There are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report.

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FOUR CATEGORIES OF AUDIT REPORTS

Standard unqualified

Unqualified with explanatory paragraph or modified wording

Qualified

Adverse or disclaimer

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Unqualified Audit Report

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Unqualified Audit Report

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UNQUALIFIED REPORT WITH EXPLANATORY PARAGRAPH

Lack of consistent application of generally accepted accounting principles

Substantial doubt about going concern

Auditor agrees with a departure from promulgated accounting principles

Emphasis of a matter

Reports involving other auditors

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What makes an audit report qualified?

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What makes an audit report qualified?

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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.

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AUDITOR AGREES WITH A DEPARTURE�FROM A PROMULGATED PRINCIPLE

The auditor must be satisfied and must state and explain, in a separate paragraph or paragraphs in the audit report, that adhering to the principle would have produced a misleading result in that situation.

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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.
Meets the criteria of a complete audit (True & Fair view), but the auditor feels that it is important to provide additional info to highlight a matter already disclosed in the FS, in his report
Examples: existence of significant related party transactions, important events occurring subsequent to the balance sheet date

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DEPARTURES FROM AN�UNQUALIFIED OPINION

The scope of the Audit has been restricted (scope limitation) – auditor has not accumulated sufficient evidence to conclude his opinion (2 causes)
Disagreement – auditor is able to express an opinion, but his opinion differs from the view expressed by management in the FS (4 circumstances)
Inherent uncertainty – doubts of going concern

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THREE MAIN TYPES OF AUDIT REPORTS �(OTHER THAN AN UNQUALIFIED REPORT)

Qualified opinion

Least severe
Can result from a limitation of the scope or failure to follow approved accounting standards
Can be issued only when the auditor concludes that the overall FS are fairly stated
Auditor will use the term ‘except for’ in the opinion paragraph

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THREE MAIN TYPES OF AUDIT REPORTS �(OTHER THAN AN UNQUALIFIED REPORT) (CONT.)

Adverse opinion

Used only when the auditor believes that the overall FS are so materially misstated or misleading that they do not present fairly the financial position or results of operations and cash flows in conformity with approved accounting standards
Can arise only when the auditor has knowledge, of the absence of conformity

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THREE MAIN TYPES OF AUDIT REPORTS �(OTHER THAN AN UNQUALIFIED REPORT) (CONT.)

Disclaimer opinion

Issued when the auditor has been unable to satisfy himself that the overall FS are fairly presented
Can arise only from a lack of knowledge by the auditor
Used only when the condition is highly material and pervasive

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FORMS OF REPORTS ON ACCOUNT (TABLE 3-1)

Circumstances	Not so material & pervasive	Material & pervasive
Inherent uncertainty	Except for/Modified	Disclaimer
Limitation on scope of audit	Except for	Disclaimer of opinion
Disagreement	Except for	Adverse opinion

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MEANING OF PERVASIVE

“not pervasive” – misclassification of cash & accounts receivable affects only those two accounts.
“pervasive” – failure to record a material sale affects sales, accounts receivable, income tax expense, accrued income tax & retained earnings, current assets, total assets, CL, total liabilities, OE, gross margin and operating income.

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Sumber : Sir Syed Channel

Mgt restrictions
Late information on certain procedure
inadequate client records

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3-27	Question	Answer
	1.	Disclaimer. The client refuses to allow the auditor to expand the scope of his audit, a disclaimer of opinion is appropriate rather than a qualified as to scope and opinion (highly material and pervasive)
	2.	Disclaimer. The auditor cannot issue an unqualified opinion on the income statement or the statement of cash flows because a disclaimer of opinion is necessary for the beginning balance sheet. The auditor may issue an unqualified opinion on the ending balance sheet and a disclaimer of opinion on the income statement, statement of cash flows, and the beginning balance sheet.
	3.	Standard unqualified. The auditor is able to satisfy him or herself that with the use of alternative procedures.
	4.	Adverse. The materiality of twenty percent of net earnings before taxes would be sufficient for many auditors to require an adverse opinion.
	5.	Disclaimer because the audit personnel is lack of independence, has material investment in audit client.
	6.	Standard unqualified. The company has made a decision to follow a different financing method, which is adequately disclosed. There is no change of accounting principle.

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