1. Audit Reports: an Introduction
Dr. Donald McConnell Jr.
12/6/2018

2. Why Discuss Audit Reports This Early in the Course?
Everything you’ll study in this course concerning evidence accumulation has an impact on the type of audit report we issue
Various client circumstances impact upon the nature of the audit report, e.g.:
Scope restrictions
Going concern issues
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3. There Are Four Fundamental Types of Audit Reports
Unqualified (the standard report)
Qualified, due to material:
Improper GAAP (the numbers or notes)
Scope restriction:
Imposed by circumstances
Client imposed
Adverse: extremely material GAAP impropriety
Disclaimer: technically not an opinion
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4. The Unqualified Report (AU 508.08)
The standard report (clean opinion)
Issued when:
Full and fair disclosure of all material facts
No material scope restrictions
Auditor is independent
Has three paragraphs:
Introductory paragraph
Scope paragraph
Opinion paragraph
Analysis of the report: AU
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5. Very Common Types of CPA Exam Questions:
identify the deficiencies in a presented audit report
Less commonly, write an audit report based on a given set of circumstances
Multiple-choice questions on reports tend to be extremely “picky”
What does this suggest?
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6. Departures from Unqualified Opinions: Qualified, Adverse, and Disclaimer
Know how they differ from one another and the standard report
Know the conditions for issuing each type of report
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7. Qualified Opinions (AU 508.20)
Expressed when there is a material
GAAP departure
Scope restrictions imposed by client or circumstances
These are the “except for” opinions
Must include a separate explanatory paragraph (s) preceding opinion paragraph:
Explaining all substantive reasons for qualification
Financial statement effects, if practicably determinable
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8. GAAP Departure Qualifications (AU 508.39)
Note explanatory paragraph indicating reasons for qualification and effects
Explanatory paragraph must precede the opinion paragraph
“except for…” stated only once: in opinion paragraph
Cover AU
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9. Scope Restriction Qualifications (AU 508.26)
“except for…” stated twice: once in scope paragraph and once in opinion paragraph
“except for” wording in opinion paragraph should base qualification on possible effects to the F.S.’s, and not to the scope limitation itself
Example: “in our opinion, except for the above mentioned limitation on scope…” is unacceptable
Cover AU
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10. What Is the Difference between Material and Extremely Material
What Is the Difference between Material and Extremely Material? Some Examples:
Assume client has $10 million total assets
Client has capitalized $1 million of R & D expenditures. What opinion would auditor render?
Material: qualified for GAAP departure
$5 million?
Extremely material: adverse opinion
What if R & D expenditures are $10,000?
Immaterial: unqualified opinion
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11. Adverse Opinions (AU )
Only used for extremely material GAAP departures: F.S.’s rendered meaningless
Extremely rare: SEC will not accept
State that the financial statements do not present fairly
Characterized by knowledge of F.S. effect
Substantive reasons and effects (if determinable) must be in a paragraph(s) preceding opinion paragraph
Cover AU
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12. Disclaimer of Opinion (AU 508.63)
Required for:
Extremely material scope limitation, whether imposed by client or circumstances
Auditor lacking independence
Optional for extremely material uncertainty (AU , fn 4)
Scope issues:
Have not obtained sufficient competent evidential matter
Substantive reasons for disclaimer must be in a paragraph preceding opinion paragraph
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13. Disclaimer of Opinion (AU 508.63) (con.)
Report must disclose any other reservations concerning fair presentation in accordance with GAAP
AU : note many significant differences from standard report
A common “real world” cause for disclaimers: new audit client with material inventories (AU )
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14. Various Audit Report Issues
What happens if there is an immaterial GAAP problem and/or immaterial scope problem?
Unqualified report is issued
In “real world,”nonstandard opinions are unusual. Why?
Client imposed scope: what if F.S. effects potentially borderline between material and extremely material?
Disclaimer.
What’s a piecemeal opinion? (AU )
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15. Modified Unqualified Opinions (AU 508.11)
A subset of unqualified opinions
“Clean opinions” with modifying language or, more typically, modifying paragraph(s)
Modifying paragraph(s) can precede or follow opinion paragraph except in case of:
Substantial doubt about going concern status [must follow opinion paragraph]
Material change in accounting principles (fn 8) [must follow opinion paragraph]
Discussion of examples in AU
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