audit

It is important to note that auditor's reports on financial statements are neither evaluations nor
any other similar determination used to evaluate entities in order to make a decision. The report
is only an opinion on whether the information presented is correct and free from material
misstatements, whereas all other determinations are left for the user to decide.

There are four common types of auditor’s reports, each one presenting a different situation
encountered during the auditor’s work. The four reports are as follows:

=== Unqualified Opinion r The most frequent type of report is referred to as the Unqualified
Opinion, and is regarded by many as the equivalent of a “clean bill of health” to a patient,
[2]
 which has led many to call it the Clean Opinion, but in reality it is not a clean bill of health. [3]
[why?]
 This type of report is issued by an auditor when the financial statements presented are free
of 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.

The report consists of a title and header, a main body, the auditor’s signature and address, and
the report’s issuance date. US auditing standards require that the title includes "independent" to
convey to the user that the report was unbiased in all respects. Traditionally, the main body of
the unqualified report consists of three main paragraphs, each with distinct standard wording and
individual purpose, however certain auditors (including PricewaterhouseCoopers[1]) have since
modified the arrangement of the main body (but not the wording) in order to differentiate
themselves from other audit firms.

The first paragraph (commonly referred to as the introductory paragraph) states the audit work
performed and identifies the responsibilities of the auditor and the auditee in relation to the
financial statements. The second paragraph (commonly referred to as the scope paragraph)
details the scope of audit work, provides a general description of the nature of the work,
examples of procedures performed, and any limitations the audit faced based on the nature of the
work. This paragraph also states that the audit was performed in accordance with the country’s
prevailing generally accepted auditing standards and regulations. The third paragraph
(commonly referred to as the opinion paragraph) simply states the auditor’s opinion on the
financial statements and whether they are in accordance with generally accepted accounting
principles.[1][2]

The following is an example of a standard unqualified auditor’s report on financial statements as

it is used in most countries, using the name ABC Company as an auditee’s name:
INDEPENDENT AUDITOR’S REPORT

Board of Directors, Stockholders, Owners, and/or Management of

ABC Company, Inc.
123 Main St.
Anytown, Any Country

We have audited the accompanying balance sheet of ABC Company, Inc. (the “Company”) as of
December 31, 20XX and the related statements of income, retained earnings, 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 financial statements based on
our audit.

We conducted our audit in accordance with auditing standards generally accepted in (the country
where the report is issued). 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 also 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 the Company as of December 31, 20XX, and the results of its operations
and its cash flows for the year then ended in accordance with accounting principles generally
accepted in (the country where the report is issued).
AUDITOR’S SIGNATURE
Auditor’s name and address

Date = Last day of any significant field work

This date should not be dated earlier than when the auditor has sufficient audit evidence to
support the opinion.
[edit]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 “clean 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 of this include an
auditor not being able to observe and test a company’s inventory of goods. If the auditor audited
the rest of the financial statements and is reasonably sure that they conform with GAAP, then the
auditor simply states that the financial statements are fairly presented, with the exception of the
inventory which could not be audited.
The wording of the qualified report is very similar to the Unqualified opinion, but
an explanatory paragraph is added to explain the reasons for the qualification after the scope
paragraph but before the opinion paragraph. The introductory paragraph is left exactly the same
as in the unqualified opinion, while the scope and the opinion paragraphs receive a slight
modification in line with the qualification in the explanatory paragraph.

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. This placement also informs the user that,
except for the qualification, the rest of the audit was performed without qualifications:
“Except as discussed in the following paragraph, we conducted our audit...”

The opinion paragraph is also edited to include an additional phrase in the first sentence, so that
the user is reminded that the auditor’s opinion explicitly excludes the qualification expressed.
Depending on the type of qualification, the phrase is edited to either state the qualification and
the adjustments needed to correct it, or state the scope limitation and that adjustments could have
but not necessarily been required in order to correct it.

For a qualification arising from a deviation from GAAP, the following phrase is added to the
opinion paragraph, using the depreciation example mentioned above:
“In our opinion, except for the effects of the Company’s incorrect determination of depreciation
expense, the financial statement referred to in the first paragraph presents fairly, in all material
respects, the financial position of…”

For a qualification arising from a scope of limitation, the following phrase is added to the
opinion paragraph, using the inventory example mentioned above:
“In our opinion, except for the effects of such adjustments, if any, as might have been determined
to be necessary had we been able to perform proper tests and procedures on the Company’s
inventory, the financial statement referred to in the first paragraph presents fairly, in all material
respects, the financial position of…”

Due to the phrases added to the scope and opinion paragraphs, many refer to this report as
the Except-For Opinion.[4]
[edit]Adverse Opinion report

An Adverse Opinion is issued when the auditor determines that the financial statements of an
auditee are materially misstated and, when considered as a whole, do not conform with GAAP. It
is considered the opposite of an unqualified or clean opinion, essentially stating that the
information contained is materially incorrect, unreliable, and inaccurate in order to assess the
auditee’s financial position and results of operations. Investors, lending institutions, and
governments very rarely accept an auditee’s financial statements if the auditor issued an adverse
opinion, and usually request the auditee to correct the financial statements and obtain another
audit report.

Generally, an adverse opinion is only given if the financial statements pervasively differ from
GAAP.[5] An example of such a situation would be failure of a company to consolidate a material
subsidiary.

The wording of the adverse report is similar to the qualified report. 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. However, the most
significant change in the adverse report from the qualified report is in the opinion paragraph,
where the auditor clearly states that the financial statements are not in accordance with GAAP,
which means that they, as a whole, are unreliable, inaccurate, and do not present a fair view of
the auditee’s position and operations.
“In our opinion, because of the situations mentioned above (in the explanatory paragraph), the
financial statements referred to in the first paragraph do not present fairly, in all material
respects, the financial position of…”
[edit]Disclaimer of Opinion report

A Disclaimer of Opinion, commonly referred to simply as a Disclaimer, is issued when the

auditor could not form, and consequently refuses to present, an opinion on the financial
statements. 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. The disclaimer of
opinion report can be traced back to 1949, when the Statement on Auditing Procedure No.
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.[6]

Statements on Auditing Standards (SAS) provide certain situations where a disclaimer of opinion

may be appropriate:
 A lack of independence, or material conflict(s) of interest, exist between the auditor and
the auditee (SAS No. 26)
 There are significant scope limitations, whether intentional or not, which hinder the
auditor’s work in obtaining evidence and performing procedures (SAS No. 58);
 There is a substantial doubt about the auditee’s ability to continue as a going concern or,
in other words, continue operating (SAS No. 59)
 There are significant uncertainties within the auditee (SAS No. 79).

Although this type of opinion is rarely used, [6] 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, where the auditee is
facing significant legal and litigation issues in which the outcome is uncertain (usually
government investigations), and where the auditee hasgoing concern issues (the auditee may not
continue operating in the near future).[6] Investors, lending institutions, and governments
typically reject an auditee’s financial statements if the auditor disclaimed an opinion, and will
request the auditee to correct the situations the auditor mentioned and obtain another audit report.

A disclaimer of opinion differs substantially from the rest of the auditor’s reports because it
provides very little information regarding the audit itself, and includes an explanatory paragraph
stating the reasons for the disclaimer. Although the report still contains the letterhead, the
auditee’s name and address, the auditor’s signature and address, and the report’s issuance date,
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.

In the introductory paragraph, the first phrase changes from “We have audited” to “We were
engaged to audit” in order to let the user know that the auditee commissioned an audit, but does
not mention that the auditor necessarily completed the audit. Additionally, since the audit was
not completely and/or adequately performed, the auditor refuses to accept any responsibility by
omitting the last sentence of the paragraph. The scope paragraph is omitted in its entirety since,
effectively, no audit was performed. Similar to the qualified and the adverse opinions, the auditor
must briefly discuss the situations for the disclaimer in an explanatory paragraph. Finally, the
opinion paragraph changes completely, stating that an opinion could not be formed and is not
expressed because of the situations mentioned in the previous paragraphs.
The following is a draft of the three main paragraphs of a disclaimer of opinion because of
inadequate accounting records of an auditee, which is considered a significant scope of
limitation:
We were engaged to audit the accompanying balance sheet of ABC Company, Inc. (the
“Company”) as of December 31, 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.

The Company does not maintain adequate accounting records to provide sufficient information
for the preparation of the basic financial statements. The Company’s accounting records do not
constitute a double-entry systemwhich can produce financial statements.

Because of the significance of the matters discussed in the preceding paragraphs, the scope of
our work was not sufficient to enable us to express, and we do not express, an opinion of the
financial statements referred to in the first paragraph.
[edit]Auditor’s report on internal controls of public companies
See also: Sarbanes-Oxley Act

Following the enactment of the Sarbanes-Oxley Act of 2002, the Public Company Accounting
Oversight Board (PCAOB) was established in order to monitor, regulate, inspect, and discipline
audit and public accounting firms of public companies. The PCAOB Auditing Standards No.
2 now requires auditors of public companies to include an additional disclosures in the opinion
report regarding the auditee’s internal controls, and to opine about the company’s and auditor’s
assessment on the company’s internal controls over financial reporting. These new requirements
are commonly referred to as the COSO Opinion.

The auditor’s report is modified to include all necessary disclosures by either presenting the
report subsequent to the report on the financial statements, or combining both reports into one
auditor’s report. The following is an example of the former version of adding a separate report
immediately after the auditor’s report on financial statements.

Internal control over financial reporting

We have also audited management’s assessment, included in the accompanying Management’s
Annual Report on Internal Control Over Financial Reporting, that the Company maintained
effective internal control over financial reporting as of December 31, 20XX, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”).The 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. 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.We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United
States). 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. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.

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. A
company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that ABC Company maintained effective internal
control over financial reporting as of December 31, 20XX, is fairly stated, in all material
respects, based on criteria established in Internal Control—Integrated Framework issued by
COSO. Furthermore, in our opinion, ABC Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 20XX, based on criteria
established in Internal Control—Integrated Framework issued by COSO.
Auditor’s reports on financial statements in different countries
See also: International Standards on Auditing

The auditor’s report usually does not vary from country to country, although some countries do
require either additional or less wording. In the United States, auditors are required to include in
the scope paragraphs a phrase stating that they conducted their audit “in accordance with
generally accepted auditing standards in the United States of America”, and, in the opinion
paragraph, state whether the financial statements are presented “in conformity with generally
accepted accounting principles in the United States of America”. Some countries, such as
thePhilippines, use similar reports to those issued in the United States, with the exception that
second paragraph would state that the audit was conducted in accordance with Philippine
Standards on Auditing, and that the financial statements are in accordance with Philippine
Financial Reporting Standards.
Auditor’s reports for a Single Audit
Main article: Single Audit

In the United States, Single Audits are performed on various entities who receives federal

aid from the U.S. federal government. Auditors who perform these Single Audits are required to
emit three auditor’s reports. The first report is a report on the entity’s financial statements as
discussed in the previous sections. The other two reports are compliance-oriented reports related
to specific requirements of the OMB Circular A-133 and of Government Auditing Standards
(otherwise known as the “Yellow Book” standards). The American Institute of Certified Public
Accountants (AICPA) provides illustrative audit reports [3] of the OMB A-133 and the Yellow
Book reports for auditors who are performing Single Audits.