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					Auditing 81.3550

   Chapter Two
   Audit Reports
• Describe basic contents of Audit Report
• Identify the 4 basic types of Audit Reports
• What conditions apply to each type of
• Materiality - what is it?
• Process involved in determining which
  report is appropriate
 Audit Report - Standard Sections
1. Report Title - required   clarifies what an audit
   by section 5400.07           means, lists statements
                                audited, discusses
2. Addressee - 5400.31 -        parties’
   to whom report is            responsibilities
   address to often to       4. Scope Paragraph -
   Shareholders                 reasonable assurance
3. Introduction                 and free from material
   Paragraph - identifies       misstatement - but not
   audit has been done,         guarantee
Report title:
Auditor’s Report
To the Shareholders of Ace Company:

Introductory paragraph:
We have audited the balance sheets of Ace Company as
at December 31, 2004 and the statements of income,
retained earnings, and changes in financial position for
the year then ended. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
Scope paragraph:
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are
free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles
used and significant estimates made by management,
as well as evaluating the overall financial statement
Opinion paragraph:
In our opinion, these financial statements present fairly, in all
material respects, the financial position of Ace Company as
at December 31, 2004 and the results of its operations and the
changes in its financial position for the years then ended in
accordance with generally accepted accounting principles.

Name of firm:
Taylor & Tower, CAs
Anywhere, any province

Audit report date:
February 27, 2005
Audit Report - Standard Sections
5. Opinion Paragraph -   7. Place of issue - often
   states auditor’s         indicated at foot of
   conclusion based on      report
   evidence obtained     8. Auditor’s Report Date
   during audit             - one by which most
6. Name of Firm - one       audit procedures were
   responsible for the      completed by
   audit                  - indicates last date of
 Audit Report - Standard Sections

- Double dating of Audit
   report used when
   material even occurs
   after the completion of
   the field work but
   before report is issued
Audit Report Categories
            • Standard Unqualified
            • Unqualified with
              explanatory paragraph
            • Qualified
            • Adverse or Denial of
Most Common Type of Audit
   Report - Unqualified
         • Often called “Standards
           Audit Report”
         • All conditions of the
           standard audit have been
         • Auditors feel comfortable
           with rendering unqualified
           opinion on FS
         Unqualified Opinion with
          Explanatory Paragraph
• Audit completed but auditor believes additional
  information is required or of great importance
• Statements still believed to present fairly all regular
  conditions have been met
• For example - audit may have been conducted with
  basis of accounting different from GAAP
• Explanation section/disclosure of additional
  information in the audit report follows in a new
  paragraph after the opinion one
Qualified Opinion
       • Can also be called a “reserved”
       • can result from a scope limitation
         (auditor’s field work restricted but
         only in one area) - often imposed
         by client or beyond client or
         auditors control
       • or failure to follow GAAP (small
         area of departure and effect can be
            Qualified Opinion
• Examples include: inappropriate accounting
  treatment, valuation or failure to disclose
  essential info
• satisfied with overall financial statements as
  presenting fairly
• should use terms - except for or except that or
  except as in opinion paragraph to outline
• very rare to have this type of report
Adverse Opinion
        • Used only when
          auditor concludes that
          statements do not
          present fairly
        • i.e.. Materially
          misstated or
        • normally due to
          GAAP departures
             Denial of Opinion
• Auditor does not feel confident that financial
  statements present fairly - unable to express an
• could be result of severe scope limitation or severe
  GAAP noncompliance
• lack of knowledge - unable to give opinion
• differs from adverse where there is knowledge of
  significant departure and can identify
          Denial – Scope Restriction

Same introductory paragraph
Except as explained in the following paragraph, we
conducted our audit in accordance with generally accepted
auditing standards...
Explanatory third paragraph including $-effect
  In view of the possible material effects on the
  financial statements of the matters described in the
  preceding paragraph, we are unable to express an
  opinion whether these financial statements are
  presented fairly in accordance with generally
  accepted accounting principles.

  • Defn (5130.05) -
    misstatement in financial
    statements is considered to be
    material if the decision of a
    person who is relying on the
    financial statements would be
  • requires professional
    judgement to determine effect
• Items to consider in
  determining materiality
   – compare dollar amount to        – Measurability can we
     base common ones                  accurately measure the
     include: income B4 taxes,         effects of this error
     total assets, current assets,   – Nature of Item does this
     and working capital               affect users decision for
   – note need to add up all           example is it fraud, may
     errors found to consider          have future effects, send
     total plus look at                incorrect message, or may
     pervasiveness                     have other consequences
                                       (such as debt call or convent
• Immaterial - misstatement in F/S unlikely to
  affect decision of user - can issue
  unqualified opinion (example bank balance
  is found to be in error $10 on a million
  dollar balance)
• Pervasive - extent to which exception/error
  affects different parts of F/S
• Material item - not pervasive = would affect users
  decision need since not pervasive likely overall
  statements still useful.
   – If use overall still useful issue qualified opinion using
     “except for”
• Material item - pervasive = affects decision plus
  other parts of the statement likely will overall
   – increased level of pervasiveness = adverse opinion
     more likely
Reliance on Specialists or
    Another Auditor
           • Primarily auditor
             responsible for audit
             regardless of personnel
             or specialists hired
           • Primary- responsible to
             check credentials,
             competence and integrity
             of specialist/auditor
     Reliance on Specialists or
         Another Auditor
• Normally use of a specialist or another
  auditor is not mentioned in audit report
• Scope limitation = find out cannot rely on
  another auditor/specialist
• if unqualified opinion appropriate- name of
  secondary auditor/specialist not mentioned
• qualified or denial opinion - may mention
  name and explain reason(s) for qualification
                          Type of Audit Report
Level Materiality    Scope Restriction     Not GAAP

Immaterial          Standard Report       Standard Report

Material            Qualified report     Qualified Report

Material &
Pervasive           Denial of Opinion    Adverse Opinion