what is audit report

An audit report is a written opinion of an auditor regarding an entity's financial

statements.

What is A standard unqualified audit report

A standard unqualified audit report indicates the auditor's opinion that a client's
financial. statements are fairly presented in accordance with agreed upon criteria. It is a
written. notice from an auditor starting that a company has complied with GAPP.
A standard unqualified audit report is like a thumbs-up from auditors. It means they have
checked a company's financial statements and found them to be accurate and in line with
accepted accounting standards.

Parts of Standard Unqualified Audit Report

Report Title: This is the name of the report, like "Independent Auditor's Report." It must have
the word "independent" to show that the audit was unbiased.
Audit Report Address: The report is usually sent to the company, its shareholders, or the board
of directors. Nowadays, it's often addressed to shareholders to emphasize the auditor's
independence.
Introductory Paragraph: This first part says that the auditing firm conducted an audit, not just a
review or compilation. It lists the financial statements audited and mentions that these
statements are the responsibility of the company's management. The auditor's role is to
express an opinion based on their audit.( The first paragraph of the report does three things:
First, it makes the simple statement that the CPA firm has done an audit.
Second, it lists the financial statements that were audited, including the balance sheet dates
and the accounting periods for the income statement and statement of cash flows.
3rd the introductory paragraph in the audit report says that the company's financial statements
are the responsibility of the company's management. The auditor's job is to review these
statements and give their opinion based on their audit.)
Scope Paragraph: This paragraph explains what the auditor did during the audit. It mentions
that they followed accepted auditing standards and aimed to provide reasonable assurance
that the financial statements don't have significant errors (material misstatements). They don't
focus on tiny errors that don't impact decisions.
Opinion paragraph. the last part of the standard audit report is where the auditor shares their
thoughts and conclusions based on their audit findings. This part is so crucial that people often
call the whole report "the auditor's opinion." It's stated as an opinion because it's based on the
auditor's professional judgment, not as an absolute fact or a guarantee.
Name of CPA Firm: This is the name of the company or individual who did the audit. Usually, it's
the firm's name because the whole firm is responsible for making sure the audit meets
professional standards.
Audit Report Date: This is the date when the auditor finished the most critical parts of the audit
work. It's important because it tells users when the auditor's responsibility ends for checking
important events that happened after the financial statements were made.
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Conditions for Standard Unqualified Audit Report

 All Financial Statements Included: This means all the important financial statements, like
the balance sheet, income statement, retained earnings, and cash flow statement, are in
the report.
 Following General Standards: The auditor has followed three basic rules in their work.
 Enough Evidence and Proper Work: The auditor collected sufficient evidence and did
their work in a way that meets those three basic rules.
 Financial Statements Follow Rules: The financial statements follow the accepted
accounting rules, including necessary disclosures in the footnotes and other parts of the
statements.
 No Need for Changes: There's nothing in the situation that requires adding more
information or changing the report's wording.

Four Categories of Audit Reports

UNQUALIFIED AUDIT REPORT WITH EXPLANATORY 2 PARAGRAPH OR MODIFIED
WORDING
The following are the most important causes of the addition of an explanatory paragraph or a
modification in the wording of the standard unqualified report: -
Lack of Consistent Application of Accounting Rules: This means that a company isn't
consistently using the accepted accounting rules for its financial statements.
Substantial Doubt about Going Concern: It means there are serious concerns about whether a
company can keep operating in the future.
Auditor Agrees with Not Following Standard Accounting Rules: The auditor is okay with the
company not following the usual accounting rules for a specific reason.
Emphasis of a Matter: The auditor wants to highlight something important in the report, like a
significant event or condition.
 (No Mention in the Audit Report: If there's no mention of the other auditor in the
report, it means everything is okay unless something unusual requires a change. This
usually happens when the other auditor checked a small part of the financial
statements, they are well-known and trusted, or the main auditor reviewed their work
carefully. The other auditor is still responsible for their own work in case of legal issues.
 Mention in the Report (Shared Opinion): Sometimes, both auditors share the
responsibility for the report. This happens when it's not practical for the main auditor to
check the other auditor's work, or when the part the other auditor checked is
important. The report doesn't have a separate section about shared responsibility but
mentions it in the beginning and refers to the other auditor in some parts. They can say
how much of the financial statements the other auditor checked, either in percentages
or actual amounts.)

Reports Involving Other Auditors: When more than one auditor works on an audit, this term
refers to the part of the report that deals with their work together.
If the main auditor doesn't want to take any responsibility for the other auditor's work, they
might give a qualified opinion or a disclaimer, depending on how important it is.
If the other auditor already gave a qualified opinion, the main auditor might also qualify their
own report. We'll talk more about qualified opinions and disclaimers later.

DEPARTURES FROM AN UNQUALIFIED AUDIT REPORT

Scope Limitation: When the auditor can't get enough evidence to say if the financial statements
follow the rules (GAAP), it's called a scope limitation. This can happen because the client
restricts access to important information or due to circumstances beyond anyone's control. For
instance, if the client won't let the auditor confirm big receivables or check inventory, that's a
client restriction. If they start the audit late, it might be impossible to do certain checks after
the financial year-end.
Not Following GAAP: If the client doesn't follow the standard accounting rules, like using
replacement costs for assets or valuing inventory at selling prices instead of historical costs, the
auditor can't give an unqualified report. They have to mention this departure from the standard
rules. It's also important to check if all the additional information (like footnotes) is good
enough.
Auditor Not Independent: If the auditor isn't independent, which is usually determined by
professional rules, and this is important, they can't give an unqualified report.
Types of Reports: When there are issues that prevent an unqualified report, the auditor has to
issue a different type of report. There are three main types: a qualified opinion, an adverse
opinion, and a disclaimer of opinion. These reports show that something is not quite right with
the financial statements.
Qualified Opinion Report: This report happens when there are problems with the audit's scope
or the financial statements don't follow the standard accounting rules. However, the auditor
still thinks the financial statements are mostly okay.
Disclaimer or Adverse Report: If the problems are really serious, the auditor can't give a
qualified opinion. Instead, they have to issue a disclaimer (saying they can't give an opinion) or
an adverse report (saying the financial statements are wrong).
Adverse Opinion Report: This report is used when the auditor thinks the financial statements
are really, really wrong. They believe the statements don't show the financial situation
accurately according to the standard accounting rules (GAAP).
Disclaimer of Opinion Report: This report happens when the auditor can't be sure if the
financial statements are accurate. It can be because they couldn't check everything due to a big
limitation in their audit scope or because they have a conflict of interest with the client
according to professional rules.

MATERIALITY
Materiality Matters: When deciding what type of audit report to give, one key factor is
"materiality." If a mistake or issue in the financial statements isn't significant or doesn't really
affect the financial picture, then it's okay to give an unqualified report (meaning everything is
fine).

Amounts Are Immaterial

Immaterial Amounts: If there's a mistake in the financial statements, but it's so small that it
won't really impact anyone's decisions, it's considered "immaterial."
Unqualified Opinion: In such cases, the auditor can give an unqualified report (everything is
fine) because the mistake doesn't matter much. For example, if management made a small
error in recording insurance, it's not a big deal if the amounts involved are tiny.
Amounts Are Material but Do Not Overshadow the Financial Statements as a Whole
Second Level of Materiality: This happens when a mistake in the financial statements could
impact someone's decision, but the statements are still generally accurate and helpful.
Example: If there's a big mistake in reporting fixed assets, it might make someone think twice
about lending money if those assets are being used as collateral. However, an error in inventory
doesn't mean that everything else in the financial statements is seriously wrong. Cash, accounts
receivable, and other parts of the statements are still mostly correct.
Amounts Are So Material or So Pervasive That Overall Fairness of the Statements Is in
Question
Highest Level of Materiality: This happens when users might make wrong decisions if they trust
the financial statements.
Example: If the inventory is the biggest part of the financial statements, a big mistake there
could be so important that the auditor's report must say the financial statements as a whole
can't be considered accurate.
Auditor's Response: When this highest level of materiality exists, the auditor has to give either a
disclaimer of opinion (saying they can't give an opinion) or an adverse opinion (saying the
financial statements are wrong), depending on the specific situation.