Auditing and Assurance Services

Seventeenth Edition, Global Edition

Chapter 24
Audit Reports

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Parts of Standard Unmodified
Opinion Audit Report
• The auditor’s standard unmodified opinion audit
report contains eight distinct parts:
– Report title
– Auditor report address
– Opinion section
– Basis for opinion
– Management’s responsibility
– Auditor’s responsibility
– Signature and address of CPA firm
– Audit report date

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Disclosure of Key Audit Matters
• International auditing standards and PCAOB auditing
standards require communication of “key audit matters” or
“critical audit matters” in the standard unmodified audit
report
– The AICPA reporting standards do not require the
communication of key audit matters
• Key audit matters, if disclosed, are included in a section
following the Basis for Opinion section

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Conditions for Standard Unmodified
Opinion Audit Report
• Standard unmodified opinion audit report is issued
when:
– All statements and required disclosures are included
in the financial statements
– Sufficient appropriate evidence has been accumulated
– Financial statements are presented fairly in
accordance with GAAP or other appropriate
accounting framework
– No circumstances requiring the addition of an
emphasis-of-matter paragraph or modification of the
wording or auditor’s opinion in the report

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Figure 24.2 Categories of Audit
Reports

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Emphasis-of-Matter Explanatory
Paragraph/Nonstandard Report
Wording (1 of 2)
• The unmodified opinion audit report with emphasis-
of-matter paragraph or nonstandard report wording:
– Meets the criteria of a complete audit with satisfactory
results and financial statements that are fairly
presented
– But the auditor believes it is important to draw the
reader’s attention to certain matters or the auditor is
required to provide additional information

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Emphasis-of-Matter Explanatory
Paragraph/Nonstandard Report
Wording (2 of 2)
• The most important causes of the addition of an
emphasis-of-matter paragraph/nonstandard report
wording:
– Lack of consistent application of GAAP
– Auditor agrees with a departure from promulgated
accounting principles
– Substantial doubt about going concern
– Emphasis of other matters
– Reports involving other auditors

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Emphasis of Other Matters
• Auditor may want to emphasize specific matters
regarding the financial statements under certain
circumstances:
– Material related party transactions
– Subsequent events
– Comparability of the financial statements
– Material uncertainties disclosed in the footnotes
– A major catastrophe that has had or continues to
have a significant effect on the entity’s financial
position

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Modifications to the Opinion in the
Audit Report (1 of 2)
• Three conditions requiring a modification to the
opinion:
– The scope of the audit has been restricted (scope
limitation)
– The financial statements have not been prepared in
accordance with GAAP (GAAP Departure)
– The auditor is not independent

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Modifications to the Opinion in the
Audit Report (2 of 2)
• When any of the three conditions requiring a departure
from an unmodified opinion exists and is material, the
opinion in the audit report must be modified
• Three main types of audit reports are issued under
these conditions:
– Qualified opinion
– Adverse opinion
– Disclaimer of opinion

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Materiality (1 of 3)
• Materiality is an essential consideration in determining
the appropriate type of report for a given set of
circumstances
• The common definition of materiality is as follows:
– A misstatement in the financial statements can be
considered material if knowledge of the misstatement
will affect a decision of a reasonable user of the
statements

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Materiality (2 of 3)
• Three levels of materiality are used for determining
the type of opinion to issue:
– Amounts are immaterial
– Amounts are material but do not overshadow the
financial statements as a whole
– Amounts are so material or so pervasive that overall
fairness of the statements is in question

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Materiality (3 of 3)
• In application, deciding on actual materiality in a given
situation is a difficult judgment
• The evaluation of materiality also depends on the
following:
– Materiality decisions—non-GAAP condition
– Dollar amounts compared with a benchmark
– Measurability
– Nature of the item
– Materiality decisions—scope limitations condition

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Table 24.1 Relationship of Materiality
to Type of Opinion (1 of 2)
Materiality Significance in Terms of Type of Opinion
Reasonable Users’ Decisions
Immaterial Users’ decisions are unlikely to be Unmodified
affected.
Material Users’ decisions are likely to be Qualified
affected only if the information in
question is important to the specific
decisions being made. The effect of
the misstatement(s) is not pervasive
to the financial statements and the
overall financial statements are
presented fairly.

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Table 24.1 Relationship of Materiality
to Type of Opinion (2 of 2)
Materiality Significance in Terms of Type of Opinion
Reasonable Users’ Decisions
Highly Most or all Users’ decisions based on Disclaimer or Adverse
material the financial statements are likely to
be significantly affected. The effect of
the misstatement(s) is pervasive to
the financial statements.

Note: Lack of independence requires a disclaimer regardless of materiality.

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Conditions Requiring a Modification
of Opinion (1 of 2)
• Auditor’s scope has been restricted
– Qualified or disclaimer of opinion, depending on
materiality
• Statements are not in conformity with GAAP
– Qualified or an adverse opinion, depending on the
materiality of the item in question

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Conditions Requiring a Modification
of Opinion (2 of 2)
• Justified departure from GAAP
– Unmodified opinion except for the reference to the
added explanatory paragraph
• Auditor is not independent
– Disclaimer of opinion
– Overrides any other scope limitations

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Auditor’s Decision Process for Audit
Reports
• Auditors use a well-defined process for deciding the
appropriate audit report in a given set of
circumstances:
– Determine whether any condition exists requiring a
departure from a standard unmodified opinion report
– Decide the materiality for each condition
– Decide the appropriate type of report for the
condition, given the materiality level
– Inclusion of key audit matters or critical audit matters

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Table 24.2 Audit Report for Each Condition
Requiring a Departure from a Standard Unmodified
Opinion Report at Different Level of Materiality

* If the auditor does not concur with the appropriateness of the change, the condition is considered a violation of GAAP.
† The auditor has the option of issuing a disclaimer of opinion.
‡ If the auditor can demonstrate that GAAP would be misleading, an unmodified opinion audit report with an explanatory
paragraph is appropriate.

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