Audit Reports

Presentation for PPAk UI Students by Theodorus Djoko Sutrisno

Parts of the Standard Unqualified Audit Report

1. Report title 2. Audit report address 3. Introductory paragraph 4. Scope paragraph 5. Opinion paragraph 6. Name of CPA firm 7. Audit report date
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Conditions for Standard Unqualified Audit Report

1. All financial statements are included. 2. The three general standards have been followed in all respects on the engagement. 3. Sufficient evidence has been accumulated to conclude that the three standards of field work have been met.

Conditions for Standard Unqualified Audit Report

(contd)

4. The financial statements are presented in accordance with generally accepted accounting principles. 5. There are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report.

STANDARD UNQUALIFIED REPORT (contd)

Introductory paragraph
a. CPA firm has done an audit b. Lists of F/S being audited c. Separation of responsibilities

Scope paragraph
a. how the audit was conducted b. reasonable assurance c. material misstatements d. test basis
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STANDARD UNQUALIFIED REPORT (contd)

Paragraph of OPINION
From in our opinion phrase a. an opinion, not a statement or guarantee b. conclusion is made based on professional judgment c. there is an information risk From in all material respects phrase the opinion is limited to just material financial information

STANDARD UNQUALIFIED REPORT

(contd)

Conditions required: a. All statements are included b. General standards are followed c. Evidence are sufficient and standards of fieldwork are met d. F/S are in accordance with GAAP e. No circumstances for either explanatory paragraph or modification of wordings

II. UNQUALIFIED REPORT

Conditions:

with explanatory paragraph or modified wording

1. Lack of consistency 2. Material uncertainties 3. Doubt about going concern 4. Departure from promulgated accounting principles 5. Emphasis of a matter 6. Reports involving other auditors

II. UNQUALIFIED REPORT

with explanatory paragraph or modified wording (contd)

This report is issued whenever auditors believe that it is important/required to provide additional information But this doesnt mean that the audit is not satisfactory, the F/S are not presented fairly or that the auditors are not independent Refers to the conditions/causes of this kind of report:
a. If one or all causes --except for the involvement of other auditors exist, an explanatory paragraph is then required and no wording modifications required b. a modified wording of all 3 paragraphs is required solely for the involvement of other auditors

UNQUALIFIED REPORT

REPORTS INVOLVING OTHER AUDITORS

No reference (standard unqualified report)

1. when the other auditor audited insignificant portion 2. when the other auditors are supervised and/or reviewed by principal auditors a. b. c. so-called shared opinion/report (see figure 3-5) the portion audited by others is material/significant modified wordings are required for all 3 paragraphs

Make reference (modified wording)

Qualify the opinion

released if the principal are unwilling to take other auditors responsibility

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SPECIFIC CONDITIONS IN AUDIT

and its implications to audit reports

Restrictions to auditors scope of audit Statements are not in accordance with GAAP Auditors are not independent

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DEPARTURES from UNQUALIFIED REPORT

Refers to the 3 conditions requiring the departure: Auditors scope has been restricted:
a. by the client (client-imposed restrictions), means that the client is likely to prevent the discovery of misstatement, a Disclaimer of Opinion or Qualification of Scope & Opinion is then released b. by conditions beyond control, a Qualification of Scope & Opinion is released a Qualification of Opinion or Adverse if the client is unwilling to correct the misstatement (s)
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Statements are not in accordance with GAAP/PSAK

III. DEPARTURES from UNQUALIFIED REPORT (contd)

Auditor is not independent, a Disclaimer of opinion is

released A restriction on the scope of auditors examination requires a qualifying paragraph preceding the opinion to describe the restriction (see figure 3-6) If a Disclaimer of opinion is released, the entire scope paragraph is excluded from the report (see figure 3-7)

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AUDIT REPORT

STANDARD UNQUALIFIED REPORT

NON-STANDARD UNQUALIFIED REPORT

MODIFIED UNQUALIFIED QUALIFIED OPINION

EXPLANATORY PARAGRAPH

DISCLAIMER OF OPINION

ADVERSE OPINION

MODIFIED WORDING

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NON-STANDARD UNQUALIFIED REPORTS

QUALIFIED REPORTS

DISCLAIMER OF OPINION

ADVERSE OPINION

SCOPE AND OPINION

OPINION ALONE

a. Auditors are unable to satisfy themselves that the overall F/S are fairly stated b. Could be from limitation of scope of audit, or c. When auditor is not independent

There is a material misstatements after the investigation process or statements are not in accordance with GAAP

Distinction: lack of knowledge by auditors

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Consistency versus Comparability

Changes that affect consistency and require an explanatory paragraph if they are material: 1. Changes in accounting principles 2. Changes in reporting entities 3. Corrections of errors involving principles

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Consistency versus Comparability (contd)

Changes that affect comparability but not consistency: 1. Changes in an estimate 2. Error corrections not involving principles 3. Variations in format and presentation of financial information 4. Changes because of substantially different transactions or events
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Substantial Doubt about Going Concern

1. Significant recurring operating losses or working capital deficiencies 2. Inability of the company to pay its obligations as they come due 3. Loss of major customers, the occurrence of uninsured catastrophes 4. Legal proceedings, legislation, that might jeopardize the entitys ability to operate
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Auditor Agrees with a Departure from a Promulgated Principle

The auditor must be satisfied and must state and explain, in a separate paragraph or paragraphs in the audit report, that adhering to the principle would have produced a misleading result in that situation.

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Emphasis on a Matter

Under certain circumstances, the CPA may want to emphasize specific matters regarding the financial statements, even though the CPA intends to express an unqualified opinion.

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Reports Involving Other Auditors

1. Make no reference in the audit report. 2. Make reference in the report (modified wording report). 3. Qualify the opinion.

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Departures from an Unqualified Opinion

1. Scope limitation 2. GAAP departure 3. Auditor not independent
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Qualified Opinion
A qualified opinion report can result from a limitation on the scope of the audit or failure to follow generally accepted accounting principles.

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Adverse Opinion
It 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.

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Disclaimer of Opinion

It is issued when the auditor is unable to be satisfied that the overall financial statements are fairly presented.

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Materiality Decisions
Failure to follow GAAP Audit report Qualified opinion only

Unqualified

Adverse
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Materiality Decisions
Scope limitation Audit report Qualified scope and opinion

Unqualified

Disclaimer
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The Auditor Is Not Independent

Level of Materiality Immaterial Material Disclaimer of opinion (regardless of materiality) Extremely Material

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