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financial statements are usually found to be in conformance with generally accepted accounting principles. The standard unqualified audit report is the most common type of audit report. Both the auditor and the client desire the issuance of an unqualified report, because it indicates that "the auditor has no reservations about the fairness of presentation" (Rittenberg & Schwieger, 2005). An unqualified report indicates that the "audit was performed in accordance with generally accepted auditing standards (for nonpublic companies) or in accordance with the standards of the PCAOB (for public
Unqualified Opinion report
The most frequent type of report is referred to as the Unqualified Opinion, and is regarded by many as the equivalent of a ³clean bill of health´ to a patient, which has led many to call it the Clean Opinion, but in reality it is not a clean bill of health. This type of report is issued by an auditor when the financial statements presented are free from material misstatements and are represented fairly in accordance with the Generally Accepted Accounting Principles (GAAP), which in other words means that the company¶s financial condition, position, and operations are fairly presented in the financial statements. It is the best type of report an auditee may receive from an external auditor
Qualified Opinion report
A Qualified Opinion report is issued when the auditor encountered one of two types of situations which do not comply with generally accepted accounting principles, however the rest of the financial statements are fairly presented. This type of opinion is very similar to an unqualified or ³clean opinion´, but the report states that the financial statements are fairly presented with a certain exception which is otherwise misstated. The two types of situations which would cause an auditor to issue this opinion over the Unqualified opinion are:
Single deviation from GAAP ± this type of qualification occurs when one or more areas of the financial statements do not conform with GAAP (e.g. are misstated), but do not affect the rest of the financial statements from being fairly presented when taken as a whole. Examples of this include a company dedicated to a retail business that did not correctly calculate the depreciation expense of its building. Even if this expense is considered material, since the rest of the financial statements do conform with GAAP, then the auditor qualifies the opinion by describing the depreciation misstatement in the report and continues to issue a clean opinion on the rest of the financial statements. Limitation of scope - this type of qualification occurs when the auditor could not audit one or more areas of the financial statements, and although they could not be verified, the rest of the financial statements were audited and they conform GAAP. Examples
Investors. an adverse opinion is only given if the financial statements pervasively differ from GAAP. the most significant change in the adverse report from the qualified report is in the opinion paragraph. and usually request the auditee to correct the financial statements and obtain another audit report. . are unreliable. where the auditor clearly states that the financial statements are not in accordance with GAAP. Generally.of this include an auditor not being able to observe and test a company¶s inventory of goods. inaccurate. This placement also informs the user that. and inaccurate in order to assess the auditee¶s financial position and results of operations. The wording of the adverse report is similar to the qualified report. but an explanatory paragraph is added to explain the reasons for the qualification after the scope paragraph but before the opinion paragraph. The wording of the qualified report is very similar to the Unqualified opinion. If the auditor audited the rest of the financial statements and is reasonably sure that they conform with GAAP. unreliable. and governments very rarely accept an auditee¶s financial statements if the auditor issued an adverse opinion. do not conform with GAAP. The scope paragraph is modified accordingly and an explanatory paragraph is added to explain the reason for the adverse opinion after the scope paragraph but before the opinion paragraph. when considered as a whole. as a whole. the rest of the audit was performed without qualifications Adverse Opinion report An Adverse Opinion is issued when the auditor determines that the financial statements of an auditee are materially misstated and. lending institutions. then the auditor simply states that the financial statements are fairly presented. The scope paragraph is edited to include the following phrase in the first sentence. so that the user may be immediately aware of the qualification. except for the qualification. An example of such a situation would be failure of a company to consolidate a material subsidiary. and do not present a fair view of the auditee¶s position and operations. It is considered the opposite of an unqualified or clean opinion. However. The introductory paragraph is left exactly the same as in the unqualified opinion. essentially stating that the information contained is materially incorrect. while the scope and the opinion paragraphs receive a slight modification in line with the qualification in the explanatory paragraph. which means that they. with the exception of the inventory which could not be audited.
 the most common examples where disclaimers are issued include audits where the auditee willfully hides or refuses to provide evidence and information to the auditor in significant areas of the financial statements. In the introductory paragraph. The scope paragraph is omitted in its entirety since. Although this type of opinion is rarely used. in other words. the auditee¶s name and address. since the audit was not completely and/or adequately performed. when the Statement on Auditing Procedure No. Additionally. the financial position of  Disclaimer of Opinion report A Disclaimer of Opinion. but does not mention that the auditor necessarily completed the audit.In our opinion. and the report¶s issuance date. and consequently refuses to present. and where the auditee has going concern issues (the auditee may not continue operating in the near future). 23: Recommendation Made To Clarify Accountant¶s Representations When Opinion Is Not Expressed was published in order to provide guidance to auditors in presenting a disclaimer. the auditor refuses to accept any responsibility by omitting the last sentence of the paragraph. The disclaimer of opinion report can be traced back to 1949. and governments typically reject an auditee¶s financial statements if the auditor disclaimed an opinion. which hinder the auditor s work in obtaining evidence and performing procedures (SAS No. 26) There are significant scope limitations. because of the situations mentioned above (in the explanatory paragraph). an opinion on the financial statements. There is a substantial doubt about the auditee s ability to continue as a going concern or. exist between the auditor and the auditee (SAS No. lending institutions. in all material respects. the auditor¶s signature and address. or material conflict(s) of interest. the financial statements referred to in the first paragraph do not present fairly. A disclaimer of opinion differs substantially from the rest of the auditor¶s reports because it provides very little information regarding the audit itself. Investors. the first phrase changes from ³We have audited´ to ³We were engaged to audit´ in order to let the user know that the auditee commissioned an audit. whether intentional or not. and includes an explanatory paragraph stating the reasons for the disclaimer. every other paragraph is modified extensively. and the scope paragraph is entirely omitted since the auditor is basically stating that an audit could not be realized. Statements on Auditing Standards (SAS) provide certain situations where a disclaimer of opinion may be appropriate: y y y y A lack of independence. and will request the auditee to correct the situations the auditor mentioned and obtain another audit report. 79). commonly referred to simply as a Disclaimer. no audit was performed. Similar to the qualified and the . 59) There are significant uncertainties within the auditee (SAS No. This type of report is issued when the auditor tried to audit an entity but could not complete the work due to various reasons and does not issue an opinion. Although the report still contains the letterhead. 58). continue operating (SAS No. effectively. where the auditee is facing significant legal and litigation issues in which the outcome is uncertain (usually government investigations). is issued when the auditor could not form.
which is considered a significant scope of limitation: We were engaged to audit the accompanying balance sheet of ABC Company. The Company¶s a ccounting records do not constitute a double-entry system which can produce financial statements.adverse opinions.  Auditor¶s report on internal controls of public companies See also: Sarbanes-Oxley Act Following the enactment of the Sarbanes-Oxley Act of 2002. regulate. The Company does not maintain adequate accounting records to provide sufficient information for the preparation of the basic financial statements. inspect. an opinion of the financial statements referred to in the first paragraph. 20XX and the related statements of income and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Finally. the Public Company Accounting Oversight Board (PCAOB) was established in order to monitor. or combining both reports into one auditor¶s report.The . Inc. and to opine about the company¶s and auditor¶s assessment on the company¶s internal controls over financial reporting. The following is a draft of the three main paragraphs of a disclaimer of opinion because of inadequate accounting records of an auditee. 20XX. and discipline audit and public accounting firms of public companies. Internal control over financial reporting We have also audited management¶s assessment. The PCAOB Auditing Standards No. stating that an opinion could not be formed and is not expressed because of the situations mentioned in the previous paragraphs. the opinion paragraph changes completely. the scope of our work was not sufficient to enable us to express. 2 now requires auditors of public companies to include an additional disclosures in the opinion report regarding the auditee¶s internal controls. the auditor must briefly discuss the situations for the disclaimer in an explanatory paragraph. that the Company maintained effective internal control over financial reporting as of December 31. The auditor¶s report is modified to include all necessary disclosures by either presenting the report subsequent to the report on the financial statements. and we do not express. Because of the significance of the matters discussed in the preceding paragraphs. The following is an example of the former version of adding a separate report immediately after the auditor¶s report on financial statements. included in the accompanying Management¶s Annual Report on Internal Control Over Financial Reporting. (the ³Company´) as of December 31. These new requirements are commonly referred to as the COSO Opinion. based on criteria established in Internal Control²Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (³COSO´).
A company¶s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. etc. in all material respects. 20XX. in all material respects. In our opinion. and performing such other procedures as we considered necessary in the circumstances. Auditors are required to consider the going concern of an auditee before issuing a report. management¶s assessment that ABC Company maintained effective internal control over financial reporting as of December 31. If the auditee is not a going concern. projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). accurately and fairly reflect the transactions and dispositions of the assets of the company. and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition. testing and evaluating the design and operating effectiveness of internal control. is fairly stated. the auditor does not modify his/her . use. effective internal control over financial reporting as of December 31. Also. or that the degree of compliance with the policies or procedures may deteriorate. Our responsibility is to express an opinion on management¶s assessment and on the effectiveness of the Company¶s internal control over financial reporting based on our audit. in our opinion. Furthermore. bankrupt. based on criteria established in Internal Control²Integrated Framework issued by COSO.  Going concern Going concern is a term  which means that an entity will continue to operate in the near future which is generally more than next 12 months. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles.Company¶s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. in reasonable detail. internal control over financial reporting may not prevent or detect misstatements. or disposition of the company¶s assets that could have a material effect on the financial statements. Because of its inherent limitations. based on criteria established in Internal Control²Integrated Framework issued by COSO. A company¶s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that. ABC Company maintained. shutdown. it means that it is either dissolved. so long as it generates or obtains enough resources to operate. 20XX. If the auditee is a going concern. and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company. evaluating management¶s assessment. We believe that our audit provides a reasonable basis for our opinion.
These conditions raise substantial doubt about its ability to continue as a going concern. since it is considered a ³self-fulfilling prophesy´ by some. 12 of the 20 largest bankruptcies in U. lending institutions. the auditor may add additional information to the report if it is deemed necessary without changing the overall opinion of the report. when a lack of going concern is determined by the auditor. then the auditor is required to include an explanatory paragraph before the opinion paragraph or following the opinion papragraph. if the auditor considers that the auditee is not a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. and state the auditee¶s plan to correct the situation. The following is the most widely used format of the paragraph which. As discussed in Note (X) to the financial statements. and therefore reduces the chance that the auditee may obtain the capital or borrowing it needs to survive once the disclosure is made. Management's plans in regard to these matters are also described in Note (X). history occurred between 2001 and 2002 and none of them had a ³going concern disclosure´ in their previous auditor¶s report. although some situations require that the additional information be included in paragraphs before the opinion paragraph. many auditors are increasingly reluctant to include this disclosure in their opinions. and credit agencies. deals with a company that has recurring losses: The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. financial statements for a wholly-owned subsidiary whose sole user of its financial statements is its parent company.S. in this case. the disclosure paragraph should state the situation. or will not be a going concern in the near future. etc. If this situation occurs. the audit report is restricted to a specified user and the auditor includes this restriction in the report. the Company has suffered recurring losses and has a net capital deficiency. In a study performed on 2001 bankruptcies.report in any way. The disclosure paragraph should immediately follow the opinion paragraph. Such as opinion is called an "unqualified modified opinion".  which is commonly referred to as the going concern disclosure. As for the actual wording of the auditor¶s report. such as a report for financial statements made in cash basis which are prepared for tax purposes only. Additionally. Unfortunately. in the audit report explaining the situation. state the auditor¶s determination. Usually. and so the auditor may be pressured to avoid including a going concern disclosure. this additional information is included after the opinion paragraph. The most frequent paragraphs include: y Limiting distribution of the report In some occasions. the auditee is more likely to stop being a going concern while the auditor loses potential future audit engagements. nearly half (48%) of selected public companies who faced bankruptcy in 2001 did not have a ³going concern disclosure´ in the previous auditor¶s reports. However.mean while  Other explanatory information and paragraphs Although the auditor reports mentioned above are the standard reports for financial statement audits. .  This is because a disclosure for a lack of going concern is viewed negatively by investors.
that the component s audited information is therefore the responsibility of another auditor.8 Auditor¶s reports on financial statements in different countries .4 Disclaimer of Opinion report 1. stating that the main auditor did not audit the component.3 Adverse Opinion report 1.y Additional or supplemental information Certain auditees include additional and/or supplemental information with their financial statements which is not directly related to the financial statements. Certain audit work performed by another auditor Sometimes an auditee requires that two or more auditors perform audits on its operations in order to obtain a more effective audit. time. and that the main auditor is simply including it in the original auditee s information. and education statistics along with the financial statement reports for the general public to read and use.1 Unqualified Opinion report 1.2 Qualified Opinion report 1. location. When the main auditor has to rely on another auditor s work.7 Other explanatory information and paragraphs 1. the main auditor may either accept responsibility for the component s information and not modify the audit report. the auditor includes a brief disclaimer paragraph to state that the auditor s report only applies to the financial statements and its respective notes. subsidiaries. that another auditor audited the component.6 Going concern 1. Examples include governments that incorporate health. or may chose to disclaim the audit on the specific component. this disclaimer is usually included in the introductory paragraph. This usually occurs in large governments and corporations who have certain dependencies. If used. crime. and/or technical constraints. y o o o o o o o o 1. Since it is not directly related to the audit of the financial statements. or other similar components which require an auditor different from its main auditor to perform an audit on the original auditee s component due to size.5 Auditor¶s report on internal controls of public companies 1.
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