Chapter 3

Audit Reports (Part 1)

Standard Unmodified opinion audit report:

AICPA auditing standards provide uniform wording for the auditor’s report,
The reference to “standard” refers to the uniform wording typically used in
audit reports, while “unmodified opinion” refers to the fact that the auditor’s
opinion about the financial statements contains no material exceptions or
qualifications.

The auditor’s standard unmodified opinion audit report contains eight distinct
Parts:
1. Report title. Auditing standards require that the report be titled and that the title
include the word independent.
2. Audit report address. The report is usually addressed to those for whom the
report is prepared, including the company, its stockholders, or the board of
directors.
3. Introductory paragraph. The first paragraph of the report indicates that the
CPA firm has performed an audit, The first paragraph also lists the financial
statements that were audited, including the notes to the financial statements as
well as the balance sheet dates and the accounting periods covered in the income
statement and statement of cash flows.
4. Management’s responsibility. This responsibility includes selecting the
appropriate accounting principles and maintaining internal control over financial
reporting sufficient for preparation of financial statements that are free of
material misstatements due to fraud or error.
5. Auditor’s responsibility. This section must include the heading “Auditor’s
Responsibility” followed by three paragraphs that describe the auditor’s
responsibility:
The first paragraph states that the auditor’s responsibility is to express an
opinion on the financial statements and that the audit was conducted in
accordance with auditing standards generally accepted also notes that the audit
is designed to obtain reasonable assurance about whether the financial statements
are free of material misstatement.
The second paragraph describes the scope of the audit and the evidence
accumulated about the amounts and disclosures in the financial statements.
The last sentence of this paragraph indicates that the audit includes evaluating
the appropriateness of accounting policies selected, the reasonableness of
accounting estimates, and the overall financial statement presentation.
 The third paragraph indicates the auditor believes that sufficient appropriate
evidence has been obtained to support the auditor’s opinion.

6. Opinion paragraph.:
The final paragraph in the standard report, which states the auditor’s conclusions
based on the results of the audit.
The phrase in our opinion indicates that there may be some information risk
associated with the financial statements, even though the statements have been
audited.
7. Name and address of CPA firm: The name identifies the CPA firm who
performed the audit. CPA firm has the legal and professional responsibility to
ensure that the quality of the audit meets professional standards. The city and
state of the audit firm should also be indicated.
8. Audit report date: The appropriate date for the report is the one on which the
auditor completed the auditing procedures needed to obtain sufficient
appropriate audit evidence.

Categories of Audit Reports:

The standard unmodified opinion audit report is issued when the following
conditions have been met:
1. All statements are included in the financial statements.
2. Sufficient appropriate evidence has been accumulated
3. The financial statements are presented fairly in all material respects in
accordance with generally accepted accounting principles
4. No circumstances require an explanatory paragraph or report modification
 MCQ and Essay Questions
1) Which of the following is a correct statement regarding the standard unmodified opinion
audit report?
A) The format of the audit report for public and nonpublic entities are identical.
B) The auditor's responsibility paragraph includes a statement that the auditors are responsible
for selecting the appropriate accounting principles.
C) The audit report includes the name of the lead partner on the audit.
D) The scope paragraph includes a statement that the auditor considers internal controls when
designing the audit procedures performed.

2) Auditing standards require that the audit report must be titled and that the title must
A) include the word "independent."
B) indicate if the auditor is a CPA.
C) indicate if the auditor is a proprietorship, partnership, or corporation.
D) indicate the type of audit opinion issued.

3) To emphasize the fact that the auditor is independent, a typical addressee of the audit
report could be
A)
Company Controller Shareholders Board of Directors
No Yes Yes
B)
Company Controller Shareholders Board of Directors
No No Yes
C)
Company Controller Shareholders Board of Directors
Yes Yes No
D)
Company Controller Shareholders Board of Directors
Yes No No

4) The auditor's responsibility section of the standard unmodified opinion audit report
states that the audit is designed to
A) discover all errors and/or irregularities.
B) discover material errors and/or irregularities.
C) conform to generally accepted accounting principles.
D) obtain reasonable assurance whether the statements are free of material misstatement.
5) The audit report date on a standard unmodified opinion audit report indicates
A) the last day of the fiscal period.
B) the date on which the financial statements were filed with the Securities and Exchange
Commission.
C) the last date on which users may institute a lawsuit against either the client or the auditor.
D) the last day of the auditor's responsibility for the review of significant events that occurred
after the date of the financial statements.

6) The standard audit report for nonpublic entities refers to GAAS and GAAP in which
sections?
A)
GAAS GAAP
Auditor's responsibility Auditor's responsibility
B)
GAAS GAAP
Auditor's responsibility Introductory paragraph
C)
GAAS GAAP
Management's responsibility Management's responsibility
and Opinion paragraph and Introductory paragraph
D)
GAAS GAAP
Management's responsibility
Auditor's responsibility and Opinion paragraph

7) Which of the following is not explicitly stated in the standard unmodified opinion audit
report?
A) The financial statements are the responsibility of management.
B) The audit was conducted in accordance with generally accepted accounting principles.
C) The auditors believe that the audit evidence provides a reasonable basis for their opinion.
D) An audit includes assessing the accounting estimates used.

8) The standard unmodified opinion audit report for a nonpublic entity must
A) have a report title that includes the word "CPA."
B) be addressed to the company's stockholders and creditors.
C) be dated.
D) include an explanatory paragraph.

9) The management's responsibility section of the standard unmodified opinion audit report
for a nonpublic company states that the financial statements are
A) the responsibility of the auditor.
B) the responsibility of management.
C) the joint responsibility of management and the auditor.
D) none of the above.
10) The introductory paragraph of the standard unmodified opinion audit report for a
nonpublic company performs which functions?
I. It states the CPA has performed an audit.
II. It lists the financial statements being audited.
III. It states the financial statements are the responsibility of the auditor.
A) I and II
B) I and III
C) II and III
D) I, II and III

11) Which of the following statements are true for the standard unmodified opinion audit
report of a nonpublic entity?
I. The introductory paragraph states that management is responsible for the preparation and
content of the financial statements.
II. The scope paragraph states that the auditor evaluates the appropriateness of accounting
policies used and the reasonableness of significant accounting estimates made by management.
A) I only
B) II only
C) I and II
D) Neither I nor II

12) The auditor's responsibility section of the standard unmodified opinion audit report
states that the auditor is
A) responsible for the financial statements and the opinion on them.
B) responsible for the financial statements.
C) responsible for the opinion on the financial statements.
D) jointly responsible for the financial statements with management.

13) If the balance sheet of a private company is dated December 31, 2016, the audit report is
dated February 8, 2017, and both are released on February 15, 2017, this indicates that the
auditor has searched for subsequent events that occurred up to
A) December 31, 2016.
B) January 1, 2017.
C) February 8, 2017.
D) February 15, 2017.

14) The appropriate audit report date for a standard unmodified opinion audit report for a
nonpublic entity should be
A) the date the financial statements are given to the Board of Directors.
B) the date of the financial statements.
C) the date the auditor completed the auditing procedures in the field.
D) 60 days after the date of the financial statements as required by the SEC.
15) Most auditors believe that financial statements are "presented fairly" when the
statements are in accordance with GAAP, and that it is also necessary to
A) determine that they are not in violation of FASB statements.
B) examine the substance of transactions and balances for possible misinformation.
C) review the statements using the accounting principles promulgated by the SEC.
D) assure investors that net income reported this year will be exceeded in the future.

True or False
1) An audit provides a guarantee that a material misstatement will not exist in the financial
statements.

2) AICPA auditing standards provide uniform wording for the auditor's report to enable users of
the financial statements to understand the audit report.

3) Users of the financial statements rely on the auditor's report because of the absolute assurance
the report provides.

4) The introductory paragraph of the auditor's report states that the auditor is responsible for the
preparation, presentation and opinion on financial statements.

5) The audit report date is the date the auditor completed audit procedures in the field.

6) The scope paragraph of the auditor's responsibility section of the audit report issued for financial
statements of a nonpublic company should refer to auditing standards generally accepted in the
United States of America.

7) In the scope paragraph of the audit report issued for financial statements of a nonpublic
company, the auditor expresses an opinion about the internal controls of the company.

8) The audit report is normally addressed to the company's president or chief executive officer.

9) The phrase "accounting principles generally accepted in the United States of America" can be
found in the opinion paragraph of a standard unmodified opinion report.

10) The date of the auditor's report is indicative of the last day of the auditor's responsibility for
the review of significant events occurring after the balance sheet date.

11) The phrase "auditing standards generally accepted in the United States of America" can be
found in the opinion paragraph of a standard unmodified opinion report for a nonpublic company.

12) The phrase "Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material error" is included in the
auditor's opinion section of an audit report.
 Essay
Describe the standard unmodified opinion audit report to be issued for an audit of a private
company. Begin by specifying the eight parts of the report, and then discuss the contents of each
part.

Case Study
An audit report prepared by Garrett and Brown, CPAs, is provided below. The audit for the year
ended December 31, 2016 was completed on March 1, 2017, and the report was issued to Javlin
Corporation, a private company, on March 13, 2017. List any deficiencies in this report. Do not
rewrite the report.

We have examined the accompanying financial statements of Dalton Corporation as of December

31, 2016. These financial statements are the responsibility of the company's management.
Management's Responsibility for the Financial Statements:
Management is responsible for the preparation and fair presentation of the financial statements in
accordance with generally accepted auditing standards; this includes the design, implementation,
and maintenance of internal control relevant to the preparation and fair presentation of financial
statements that are free from all misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to give an opinion on these financial statements based on our audit. We
conducted our audit in accordance with auditing standards generally accepted throughout the
world. Those standards require that we plan and perform the audit to obtain absolute assurance
about whether the financial statements are free of misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on management's
judgment, including the assessment of the risks of material misstatement of the income statement,
whether due to fraud or error. In making those risk assessments, the auditor considers internal
control relevant to the auditor's preparation and fair presentation of the financial statements in
order to design audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes
evaluating the appropriateness of accounting policies and the accuracy of accounting estimates
made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present accurately the financial position
of Javlin Corporation as of December 31, 2016, in conformity with accounting principles generally
accepted in the United States of America.

Garrett and Brown, CPAs

March, 2017