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AUDIT REPORTS
Chapter Objectives
- GAAS
- reasonable assurance
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4. Where an opinion is expressed, it should indicate whether the financial statements,
present fairly, in all material respects, the financial position, results of operations and
changes in financial position in accordance with an appropriate disclosed basis of
accounting, which except in special circumstances, should be IFRS. The report should
provide adequate explanation with respect to any reservation contained in such opinion
1. Standard unqualified
2. Qualified
3. Adverse
4. Disclaimer
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Example of Standard unqualified Audit Report
In our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of ABC corporation as of December
31, 2008, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
MARCH 5, 2009
Such report requires adding the 4th paragraph (explanatory paragraph) after the opinion
paragraph which will refer to management footnote.
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Example of unqualified Report with explanatory paragraph-
Inconsistency of GAAP
In our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of ABC corporation as of December 31, 2008,
and the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
MARCH 5, 2009
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Example of unqualified Report with explanatory paragraph-Going Concern
We have audited the accompanying balance sheet of ABC Corporation as of December 31, 2008, and the
related statement of income, and cash flows for the year then ended. These financial statements are the
responsibility of the company's management. Our responsibility is to express an opinion on these statements
base on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of ABC corporation as of December 31, 2008, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that ABC Company will
continue as a going concern. As discussed in note V to the financial statements, ABC Company
has suffered recurring losses from operations and has net capital deficiency that raises
substantial doubt about the company's ability to continue as a going concern. Management’s
plans in regard to these matters are also described in note y. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
MARCH 5, 2009
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Example of unqualified Report with explanatory paragraph:Non-GAAP
Auditor Concurs
We have audited the accompanying balance sheet of ABC Corporation as of December 31, 2008, and the
related statement of income, and cash flows for the year then ended. These financial statements are the
responsibility of the company's management. Our responsibility is to express an opinion on these statements
base on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of ABC corporation as of December 31, 2008, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting principles.
As described in note VI, in May 2008, the company exchanged shares of its common stock for
Birr 5,060,000 of its outstanding public debt. The fair value of the common stock issued
exceeded the carrying amount of the debt by Birr 466,000, which has been shown as an
extraordinary loss in the 2008 statement of operations. Because a portion of the debt
exchanged was convertible debt, a literal application of statement of financial accounting
standards no. 84"induced conversions of convertible debt," would have resulted in a further
reduction in net income of Birr 3,611,000, which would have been offset by a corresponding
Birr 3,611,000 credit to additional paid in capital; accordingly, there would have been no net
effect on stockholders' investment. In the opinion of company management, with which we
agree, a literal application of accounting literature would have resulted in misleading financial
statements that do not properly portray the economic consequences of the exchange.
MARCH 5, 2009
4. Emphasis of a Matter
Under certain circumstances, the independent auditor may want to emphasize specific
matters regarding the financial statements, even though he/she intends to express an
unqualified opinion.
This also requires adding the 4th paragraph (explanatory paragraph) before or after the
opinion paragraph which will refer to management footnote.
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Example of unqualified Report with explanatory paragraph-Emphasis of a
Matter
We have audited the accompanying balance sheet of ABC Corporation as of December 31, 2008, and the
related statement of income, and cash flows for the year then ended. These financial statements are the
responsibility of the company's management. Our responsibility is to express an opinion on these statements
base on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of ABC corporation as of December 31, 2008, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting principles.
As discussed in note VI to the financial statements, the company has had numerous dealings
with businesses controlled by, and people who are related to, the officers of the company.
MARCH 5, 2009
This requires adding two sentences at the end of introductory paragraph. This also requires
modification of the last sentence of the scope paragraph. Besides, the first sentence of the
opinion paragraph is also modified.
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Example of unqualified Report with explanatory paragraph-Shared
responsibility
We have audited the accompanying balance sheet of ABC Corporation as of December 31, 2008, and the
related statement of income, and cash flows for the year then ended. These financial statements are the
responsibility of the company's management. Our responsibility is to express an opinion on these statements
base on our audit. We did not Audit the Financial Statements of XYZ Company a wholly owned
subsidiary, which statements reflect total assets of Birr 2,500,000 as of December 31, 2008
and total revenues of Birr 6,500,000 for the year then ended. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion, insofar as it relates
to the amounts included for XYZ Company, is based solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit and the report of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors , the financial statements referred
to above present fairly, in all material respects, the financial position of ABC corporation as of December 31,
2008, and the results of its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
MARCH 5, 2009
When another auditor is involved with an audit, the principal auditor should always:
- check the reputation of the other auditor.
- obtain representation letter of other auditor's independence.
- Ascertain that the other auditor knows u.s. accounting and auditing standards
- ascertain that the other auditor knows subsidiary will be included in the consolidated
financial statements
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2. Qualified Audit Report
A qualified opinion report can result from a limitation on the scope of the audit or
failure to follow International Financial Reporting Standards .
1. Scope limitation
– caused by client
– caused by circumstances
The first sentence of the scope paragraph is modified by using the word” except.” The
explanatory paragraph is also added before the opinion paragraph. Besides, the first
sentence of the opinion paragraph is modified by using the following phrase”Except for the
effects ofofsuch
Example adjustment”
Qualified Audit Report-Scope Limitation
In our opinion, Except for the effects of such adjustment , if any, as might have
been determined to be necessary had we been able to examine evidence
regarding the foreign affiliate investment and earnings , the financial statements
referred to above present fairly, in all material respects, the financial position of ABC
Corporation as of December 31, 2008, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
MARCH 5, 2009
2. IFRS Departure
The explanatory paragraph is added before the opinion paragraph indicating the deviation
from IFRS and providing amounts if reasonably possible. Further more, the first sentence of
opinion paragraph is modified by including “ except for the effects of…”
We have audited the accompanying balance sheet of ABC Corporation as of December 31,
2008, and the related statement of income, and cash flows for the year then ended. These
financial statements are the responsibility of the company's management. Our responsibility is
to express an opinion on these statements base on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
The company has excluded from property and debt in the accompanying balance
sheet, certain lease obligations that, in our opinion, should be capitalized in order
to conform to generally accepted accounting principles. If these lease obligations
were capitalized, property would be increased by Birr 300,000, long term debt by
Birr 250,000, and retained earnings by Birr 50,000 as of December 31, 2008.
Additionally, net income would be increased by Birr 50,000 and earnings per
share would be decreased by Birr 0.50 for the year then ended.
In our opinion, except for the effects of not capitalizing certain lease obligations, as
discussed in the preceding paragraph, the financial statements referred to above
present fairly, in all material respects, the financial position of ABC Corporation as of
December 31, 2008, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
MARCH 5, 2009
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3. 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 IFRS
It requires adding the explanatory paragraph before the opinion paragraph and
describing the reasons. Besides, the opinion paragraph is modified.
We have audited the accompanying balance sheet of ABC Corporation as of December 31, 2008, and the
related statement of income, and cash flows for the year then ended. These financial statements are the
responsibility of the company's management. Our responsibility is to express an opinion on these
statements base on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a reasonable basis for our
opinion.
As discussed in note VII to the financial statements, the company carries its property, plant,
and equipment accounts at appraisal values, and provides depreciation on the basis of such
values. Generally accepted accounting principles require that property, plant, and equipment
be stated at an amount not in excess of cost, reduced by depreciation based on such amount.
Because of this departure, as of December 31, 2008 inventories have been increased by Birr
450,000 by inclusion in manufacturing overhead of depreciation in excess of that based on
cost; property, plant, and equipment, less accumulated depreciation is carried at Birr
12,500,000 in excess of an amount based on cost; resulting on an increase in retained
earnings of Birr 450,000 and appraisal surplus of Birr 12,500,000. For the year ended
December 31, 2008 cost of goods sold has been increased by Birr 350,000 because of the
effects of the depreciation accounting referred to above, resulting in a decrease in net income
of Birr 117,000.
In our opinion, because of the effects of the matter discussed in the preceding paragraph, the
financial statements referred to above do not present fairly, in all material respects, the
financial position of ABC Corporation as of December 31, 2008, and the results of its
operations and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
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4. Disclaimer of Opinion
It is issued when the auditor is unable to be satisfied that the overall financial
statements are fairly presented
It is issued when there are serious scope limitation and lack of auditor independence
a. Disclaimer of Opinion –Scope Limitation
It requires modifying the first sentence and deleting the last sentence of the introductory
paragraph. The scope paragraph is also deleted. The explanatory paragraph is added before
the opinion paragraph.
We were engaged to audit the balance sheet of ABC Corporation as of December 31, 2008,
and the related statement of income, and cash flows for the year then ended. These financial
statements are the responsibility of the company's management.
We did not observe the taking of the physical inventory as of December 31, 2008 or
2007, since those dates were prior to our appointment as auditors for the company,
and we were unable to satisfy ourselves regarding inventory quantities by means of
other auditing procedures. The December 31, 2008 and 2007 inventory amounts
enter into the determination of net income and cash flows for the year ended
December 31, 2008.
Since the company did not take physical inventories and we were unable to apply
other auditing procedures to satisfy ourselves as to inventory quantities, the scope of
our work was not sufficient to enable us to express, and we do not express, an
opinion on these financial statements.
MARCH 5, 2009
We are not independent with respect to ABC corporation, and the accompanying
balance sheet as of December 31, 2008, and the related statements of income, and
cash flows for the year then ended were not audited by us. Accordingly, we do not
express an opinion on them.