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Chapter 3
Audit Reports
Concept Checks
P. 57
1. The standard unmodified opinion audit report for a nonpublic entity contains
the following eight parts:
that the title includes the word independent.
its stockholders, or the board of directors.
3. Introductory paragraph: The introductory paragraph of the report
statement and statement of cash flows.
4. Management’s responsibility: This paragraph indicates that the
by the heading “Management’s Responsibility for the Financial
Statements”.
5. Auditor’s responsibility: The auditor’s responsibility section of the
report includes three paragraphs and it must include the heading
statements are free of material misstatement.
The second paragraph is the scope paragraph and is a factual
indicates that the auditor considers the entity’s internal control, but
not for the purposes of expressing an opinion on the effectiveness
presentation.
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Concept Check, P. 57 (continued)
the audit opinion.
6. Opinion paragraph: The final paragraph in the standard report states
paragraph must include the title “Opinion”.
7. Signature and Address of CPA firm: The name identifies the CPA
state where the auditor is located.
8. Audit report date: The appropriate date for the report is the one on
2. The auditor should include an explanatory paragraph in an unmodified
opinion audit report when the audit is completed with satisfactory results and
paragraph or a modification in the wording of the standard unmodified opinion
audit report:
principles
Substantial doubt about going concern
P. 69
1. The scope of the audit has been restricted. One example is when the
2. The financial statements have not been prepared in accordance with
3. The auditor is not independent. An example is when the auditor owns
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Concept Check, P. 69 (continued)
with explanatory paragraph). A qualified opinion is appropriate when the
deviation from GAAP is material but not highly material; the adverse opinion
is appropriate when the deviation is highly material.
Review Questions
benefit of users of the auditor’s report. When there are departures from the
standard wording, users are more likely to recognize and consider situations
requiring a modification or qualification to the auditor’s report or opinion.
1. An audit involves performing procedures to obtain audit evidence
2. The audit procedures selected depend on the auditor’s judgment,
and consider the auditor’s assessment of the risks of material
misstatement, whether due to fraud or error.
express such an opinion.
4. An audit includes evaluating the appropriateness of the accounting
3–3 The purpose of the opinion paragraph is to state the auditor’s conclusions
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3–3 (continued)
1. The words “in our opinion,” which indicate that the conclusions are
2. A statement about whether the financial statements were presented
3–4 The auditor’s report should be dated February 17, 2017, the date on which
3–5 A standard unmodified opinion audit report may be issued under the
following circumstances:
1. All statements—balance sheet, income statement, statement of
2. Sufficient appropriate evidence has been accumulated and the
with auditing standards.
3. The financial statements are presented in accordance with
appropriate accounting standards such as U.S. generally accepted
3–6 The introductory, scope, and opinion paragraphs are modified to include
reference to management’s report on internal control over financial reporting, and
the scope of the auditor’s work and opinion on internal control over financial
3–7 The standard unmodified opinion audit report for a non–public entity under
AICPA auditing standards and the standard unqualified report for a public company
under PCAOB auditing standards are very similar in substance. The introductory
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3–7 (continued)
The scope paragraphs in each report are similar. However, there are
on internal control.
3–8 An unmodified opinion audit report with an explanatory paragraph or
modified wording is the same as a standard unmodified opinion report except
that the auditor believes it is necessary to provide additional information
paragraph or modified wording are:
1. The entity changed from one generally accepted accounting principle
2. A shared report involving the use of other auditors.
1. No reference is made to the other auditor. This will occur if the other
auditor audited an immaterial portion of the financial statements,
total.
3. The report may be qualified if the principal auditor is not willing to
3–11 Changes that affect the consistency of the financial statements may
involve any of the following:
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3–11 (continued)
a. Change in accounting principle
b. Change in reporting entity
c. Corrections of errors involving accounting principles.
statements. In that case, no explanatory paragraph for lack of consistency is
1. Report title: Same as standard unmodified opinion report.
2. Audit report address: Same as standard unmodified opinion report.
5. Auditor’s responsibility: The first two auditor responsibility paragraphs
opinion.
basis for the qualified opinion.
term except for in the opinion paragraph.
opinion report.
8. Audit report date: Same as standard unmodified opinion report.
3–13 A qualified opinion states that there has been either a limitation on the
scope of the audit of material accounts, transactions, or disclosures or a material
departure from GAAP in the financial statements, but that the auditor believes
An adverse opinion states that the auditor believes the overall financial
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3–13 (continued)
A disclaimer of opinion states that the auditor has been unable to satisfy
himself or herself as to whether or not the overall financial statements are fairly
Examples of situations that are appropriate for each type of opinion are as
follows:
OPINION TYPE
EXAMPLE SITUATION
Qualified
Inability to confirm the existence of an
asset which is material but not
extremely material in value.
Adverse
A highly material departure from GAAP.
Disclaimer
Material physical inventories not
observed and the inventory cannot
be verified through other procedures.
Lack of independence by the auditor.
3–14 A qualified report due to a scope limitation is issued when the auditor
can neither perform procedures that he or she considers necessary nor
satisfy himself or herself by using alternative procedures, usually due to the
existence of conditions beyond the client’s or the auditor’s control, but the
amount involved in the financial statements is not highly material. An important
part of qualified opinion due to a scope limitation is that it results from not
include the qualified opinion.
A report qualified as to opinion only results when the auditor has
accumulated sufficient appropriate evidence but has concluded that the financial
statements are not correctly stated. The only circumstance in which an opinion
only qualification is appropriate is for material, but not highly material, departures
scope.
3–15 The common definition of materiality as it applies to accounting and,
therefore, to audit reporting is:
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3–15 (continued)
user of the statements.
Conditions that affect the auditor’s determination of materiality include:
Potential users of the financial statements
Dollar amounts of the following items: net income before taxes,
financial statements than other misstatements.
3–16 Materiality for lack of independence in audit reporting is easiest to define.
If the auditor lacks independence as defined by the AICPA Code of Professional
Conduct, it is always considered highly material and therefore a disclaimer of
3–17 The auditor’s opinion may be qualified by scope limitations caused by
client restrictions or by limitations resulting from conditions beyond the client’s
control. The former occurs when the client will not, for example, permit the
A disclaimer of opinion is issued if the scope limitation is so material that
the auditor cannot determine if the overall financial statements are fairly
presented. If the scope limitation is caused by the client’s restriction, the auditor
When there is a scope restriction that results in the failure to verify
material, but not pervasive accounts, a qualified opinion may be issued. This is
scope limitation should not be mentioned.
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3–19 Given the global nature of the financial markets, investors, both in the
statements difficult. Similarly, differences exist in auditing standards issued
across the globe, so the adoption of International Statements on Auditing (ISAs)
Multiple Choice Questions From CPA Examinations
3–20 a. (4) b. (1) c. (4)
3–21 a. (1) b. (4) c. (2)
3–22 a. (2) b. (2) c. (4)
Discussion Questions and Problems
specific accounting procedures applied.
c. The opinion paragraph is not intended to be a certification or a
guarantee of the accuracy and correctness of the financial statements,
specifically search for material errors and fraud. It also fails to
recognize the audit standards followed by the auditor.
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3–23 (continued)
generally accepted auditing standards but does not uncover
certain material errors or fraud, the auditor is unlikely to have
responsibility for failing to do so.
1. Patel may or may not choose to add an explanatory
paragraph that highlights the recent acquisition of Stockard
include that explanatory paragraph.
b. The following deficiencies are in Patel’s report:
1. That Bellamy is presenting comparative financial statements.
the prior period financial statements.
2. The fact that it is a private company, means the report should
comply with reporting requirements in AICPA auditing
3. The balance sheet is as of a specific date, whereas the
income statement and the statement of retained earnings
are for a period of time. The introductory paragraph should
that states the responsibilities of management.
5. There is no separate auditor’s responsibility paragraph. The