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Auditing Lecture

The document discusses different types of audit reports that may be issued if the auditor is not independent or the financial statements are not prepared in accordance with GAAP, including qualified opinions, adverse opinions, and disclaimers of opinion which depend on the level of material misstatement and limitations in scope. It also covers how the number of paragraphs in the audit report indicates whether exceptions exist.

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Saleh Raouf
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25 views

Auditing Lecture

The document discusses different types of audit reports that may be issued if the auditor is not independent or the financial statements are not prepared in accordance with GAAP, including qualified opinions, adverse opinions, and disclaimers of opinion which depend on the level of material misstatement and limitations in scope. It also covers how the number of paragraphs in the audit report indicates whether exceptions exist.

Uploaded by

Saleh Raouf
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Principles of Audit

3 year
rd

Chapter (2)
Audit Reports

Lecture 6
Audit Reports other than unqualified:

 Issued when the auditor is not independent and financial


statements have not prepared in accordance with GAAP

1. Qualify the Opinion

2. Adverse Opinion

3. Disclaimer of Opinion
1. Qualify the Opinion
• A qualified opinion report can result from a limitation
on the scope of the audit or failure to follow generally
accepted accounting principles.
•
• A qualified report can take the form of a qualification of
both the scope and the opinion or of the opinion alone.

• A scope and opinion qualification can be issued only


when the auditor has been unable to accumulate all of
the evidence required by generally accepted auditing
standards.
• The use of a qualification of the opinion alone is
restricted to situations in which the financial statements
are not stated in accordance with GAAP.

• When an auditor issues a qualified report, he or she


must use the term except for in the opinion paragraph

• The implication is that the auditor is satisfied that the


overall financial statements are correctly stated “except
for” a specific aspect of them. It is unacceptable to use
the phrase except for with any other type of audit
opinion.
2. Adverse Opinion

• An adverse opinion is used only when the auditor


believes that the overall financial statements 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 GAAP.
3. Disclaimer of Opinion
• A disclaimer of opinion is issued when the auditor has
been unable to satisfy himself or herself that the overall
financial statements are fairly presented.
• The necessity for disclaiming an opinion may arise
because of a severe limitation on the scope of the audit
or a non-independent relationship between the auditor
and the client.
• Either of these situations prevents the auditor from
expressing an opinion on the financial statements as a
whole. The auditor also has the option to issue a
disclaimer of opinion for a going concern problem.
• The disclaimer is distinguished from an adverse
opinion in that it can arise only from a lack of
knowledge by the auditor, whereas to express an
adverse opinion, the auditor must have knowledge
that the financial statements are not fairly stated.

• Both disclaimers and adverse opinions are used only


when the condition is highly material.
Materiality

 Materiality is an essential consideration in determining


the appropriate type of report for a given set of
circumstances
 A misstatement in the financial statements can be
considered material if knowledge of the misstatement
will affect a decision of a reasonable user of the
statements.
Levels of Materiality

Relationship of Materiality to Type of Opinion


Materiality Significance in Terms of Reasonable Users’ Type of
Level Decisions Opinion
Immaterial Users’ decisions are unlikely to be affected Unqualified
Material Users’ decisions are likely to be affected only Qualified
if the information in question is important to
the specific decisions being made. The overall
financial statements are presented fairly.

Highly Most or all users’ decisions based on the Disclaimer or


financial statements are likely to be Adverse
material significantly affected
Note: Lack of independence requires a disclaimer
regardless of materiality.

When the auditor lacks independence, no report title


is included
Number of Paragraphs in the Report

• A three-paragraph report ordinarily indicates that


there are no exceptions in the audit.

• However, three-paragraph reports are also issued


when a disclaimer of opinion is issued due to a
scope limitation or for an unqualified shared
report involving other auditors.
• More than three paragraphs indicate some type of
qualification or required explanation.
• An additional paragraph is added before the opinion for a
qualified opinion, an adverse opinion, and a disclaimer of
opinion for a scope limitation.
• This results in a four-paragraph report, except for the
disclaimer of opinion for a scope limitation.
• A disclaimer due to a scope limitation results in a three-
paragraph report because the scope paragraph is omitted.
• A disclaimer due to a lack of independence is a one
paragraph report.
• When an unqualified opinion with explanatory
paragraph is issued, an explanatory paragraph
usually follows the opinion.
• No explanatory paragraph is required for an
unqualified shared report involving other
auditors, but the wording in all three paragraphs
is modified.

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