Form of audit report

• International Auditing Guidline-13 on the auditors’ report on

financial statements; provide guidance on the form and content of
the auditors’ report issued after an examination of financial
statements.
• According to the guidelines, the basic elements of the auditors’ report are
as follows:
1. Title: An appropriate title as ‘Independent Auditors Report,’ helps the
users /readers/ to identify the report and to distinguish it from
reports issued by others.
2. Address: The report should be appropriately addressed.
• For example, in the case of a statutory audit of a company, the report
is addressed to the shareholders.
3. Identification of financial statements: The financial statements can
be identified by including the name of the entity and the date period
covered by the financial statements. (Introductory paragraph)
4. Reference to auditing standards or practices: Such references in
the report assure the reader that the audit has been carried out in
accordance with established standards or practices. (Scope paragraph)
5. Opinion on the financial statements: The report should clearly set
forth the auditors opinion on the entity’s financial positions and
operational results e.g. the financial statements give a true and fair
view. (Opinion paragraph)
6. Signature: The report should be signed in the name of the audit firm
or the personnel name of the firm sings on behalf of the firm in case of
statutory audit of companies.
7. Auditors’ or Audit firm’s Address: The report should also mention
the specific location in the city where the auditor(s), or audit firm
maintain his offices.

 Types of auditors’ reports (opinions)

• Expressing an independent and expert opinion on the fairness of financial
statements is the most important and valuable service rendered by
auditors.
• Thus, the auditors’ reports may be classified as follows.
1. Unqualified (clean) report
2. Qualified report (except for opinion)
3. Adverse report (do not present fairly)
4. Disclaimer of opinion ( no-opinion)
1. Unqualified (clean) report
• An auditors’ report with an unqualified opinion may be issued only
when the following conditions have been meet.
1. The financial statements are presented in conformity with generally
accepted accounting principles, including disclosure.
2. The audit was performed in accordance with generally accepted
auditing standards (GAAS).
3. No significant scope limitations preventing the auditors from
gathering the evidence necessary to support their opinion.
4. There are no circumstances requiring the addition of an explanatory
paragraph or modification of the wording of the report.
• The unqualified opinions, of course, the most desirable report from the client’s
point of view.
• The client usually will make a necessary adjustment to the statements to enable
the auditors to issue this type of opinion.
The unqualified auditor’s report could take either of the following two forms.
1. An unqualified opinion - standards report:- The standard report express a
“clean opinion” and may be issued only when the conditions listed in the
preceding sections have been met and no conditions requiring explanatory
language exists.
2. An unqualified opinion -with explanatory language:- Under certain
circumstances, auditors add explanatory languages to their report, even when
issuing an unqualified opinion.
• Adding the additions languages is not regarded as a qualified; rather, the
language merely draws attention to a significant situation.
 Independent Auditor's Report

The board of directors and shareholders

ABC Company
Addis Ababa

We have audited the accompanying balance sheet of ABC 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 generally accepted auditing standards
(GAAS). 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 ABC Company as of December 31,
20XX, and the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
[Signature]
[Date]

 Unqualified Report with Explanatory Paragraph

 Conditions for Unqualified Report with Explanatory Paragraph;
1. Lack of consistent application of generally accepted accounting
principles.
2. Substantial doubt about going concern.
3. Justified departure from promulgated accounting principles.
4. Emphasis of a matter.
5. Reports involving other auditors.
1. Lack of consistent application of generally accepted
accounting principles.
 When the auditors believe that the new principles is generally accepted
and the change is justified, the audit report is modified to highlight the
lack of consistent application of acceptable accounting principles, but
the opinion remains unqualified.
2. Substantial doubt about going concern.
 Significant recurring operating losses or working capital deficiencies.
 Inability of the company to pay its obligations as they come due.
 Loss of major customers, the occurrence of uninsured catastrophes.
 Legal proceedings, legislation that might jeopardize the entity’s ability
to operate.
3. Justified departure from promulgated accounting
principles.
 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.
4. Emphasis of a matter.
 Auditors also may issue an unqualified opinion that departs from the
wording of the standards report in order to emphasize a matter
regarding the financial statement.
5. Reports involving other auditors.
• When part of the audit is carried out by another CPA firm, the principal
CPA firm has two options:
a) Making no reference to other auditor’s work
 The principal auditor assumes full responsibility; This is true when the
other auditor is well known;
 When the principal hired the other auditor;
 The principal auditor has visited and reviewed the work of the other
auditor;
 No need of explanatory paragraph/wording.
b) Make reference to the other auditor
 Shared responsibility opinion is issued; even though it is signed only by
the principal auditors.
 Usually issued when the other auditors were engaged by the client, rather
than the principal;
 The auditors’ additional wording is not qualification, rather indication of
shared responsibility.
2. Qualified opinions
• A qualified opinion expresses the auditor’s reservations or uncertainty
about fair presentation in some areas of the financial statements but not so
significant as to necessitate a disclaimer or adverse opinion.
• The opinion states that except for the effects of some deficiency in
the financial statements, or some limitations in the scope of the
auditors’ examination, the financial statements are presented fairly.
• All qualified reports include a separate explanatory paragraph
before the opinion paragraph disclosing the reasons for the
qualification.
• Opinion paragraph of a qualified report includes the appropriate
qualifying language and a reference to the explanatory paragraph.
• Qualified audit reports should include precisely worded qualifying
languages that include the phrase such as “except for” or “with the
exception of”.
• The materiality of the exception governs the use of the qualified
opinion.
• When the report is qualified, the introductory and scope paragraph of
the standard report are unaffected.
• The modification involves adding an explanatory paragraph following
the scope paragraphs and qualifying the opinion paragraph.
• Following is an example of the explanatory and opinion paragraphs of an
audit reports qualified for a departure from generally accepted
accounting principles.
Explanatory Paragraph of qualified reports

Sony corporation has not presented segment information for each of the three
years in the period ended march 3, 1992. The presentation of segment
information concerning operations in different industries, and foreign
operations and export sales is required by generally accepted accounting
principles for a complete presentation of the consolidated f/statements.

Opinion Paragraph
In our opinion, “except for” the omission of the segment information as
discussed in the third paragraph of this report, the f/statements audited by us
presents fairly, in all material respects, the financial position of sonny
corporation and its consolidated subsidiary at March 31, 1991 and 1992, and
the results of its operations and their cash flows for each of the three years in
the period ended march 31, 1992, in conformity with generally accepted
accounting principle.
Auditors may issue qualified audit opinion when:

1. There is a departure from generally accepted accounting principles

by client and auditors do not agree with the accounting principles used in
preparing financial statements.

 When the departure is immaterial, an unqualified opinion may be

issued.
 But, when it is material but not material enough to make the
financial statements misleading, a qualified opinion is appropriate.
 So material departure to make the financial statement misleading
adverse opinion is appropriate.
2. Scope limitations; limitation on the scope of an audit arise when the
auditors are unable to perform essential audit procedures.
• Limitation may be imposed either
 by circumstances surrounding the audit (for example, the auditors
were engaged too late in the year to observe the client’s beginning
inventory or
 by the client (for example, the client refuses to allow the auditor to
send confirmation to customers).
• the auditor will attempt to perform alternative procedures to gather
sufficient competent evidential matter, and may issue an unqualified
opinion if the collected evidential matters are believed by the
auditors to be sufficient.
• Otherwise, qualified opinion may be issued or an auditor may disclaim an
opinion
3. When the account do not disclose a true and fair view of the companies
affair, and when books of accounts have not been kept in accordance
with the law and profit and loss accounts are not in agreements with the
books of account and other related issues.
 Explanatory paragraph is added b/n the scope and opinion paragraph.
3. Adverse Opinions
• An adverse opinion is the opposite of an unqualified opinion; it is an
opinion that is issued when;
1. The financial statements do not present fairly the financial position,
results of operation, and cash flows of the client in conformity with
generally accepted accounting principles.
2. When the deficiencies (departure) from GAAPs in the financial statements
are so material, the departure overshadows the overall f/statements or
misleading financial statements.
• When the auditors express an adverse opinion, they must disclose in a
separate paragraph of their report the reasons for the adverse opinion
and the principal effect on the financial statements.
• An audit report that express an adverse opinion generally includes
 standard introductory and scope paragraphs,
 one or more explanatory paragraphs preceding the opinion
paragraph and describing the reasons for the adverse opinion, and
 an opinion paragraphs.

Opinion Paragraph for adverse report

In our opinion, because of the effects of the matters discussed in the

preceding paragraph, the f/statements referred to above do not present
fairly, in conformity with GAAP the financial position of XYZ company as
of Dec., 31, 20x9, or the results of its operations or its cash flows for the
year then ended.
4. Disclaimer of opinion
• A disclaimer of opinion means giving no opinion as to the status of the
financial statements under audit.
• Auditors issue a disclaimer whenever:
1. Auditors are un able to form an opinion or have not formed an opinion as
to the fairness of presentation of the financial statements due to significant
scope limitations either by substantial circumstances and/or by client and
this limitations of scope precludes (prevents) the auditors’ compliance with
generally accepted auditing standards and
2. When a material uncertainty affects the financial statements.

E.g. The probable outcome of a very significant lawsuit against the

client
• A disclaimer can only be issued when the auditors do not have sufficient
information to form an opinion on the financial statements.
• Issued when there is substantial scope limitations.
• Issued in rare cases.
• Scope paragraph is omitted and replaced by explanatory paragraph.

Since the Co. did not take physical inventories and we were not able to
apply other auditing procedures to satisfy ourselves as to inventory
quantities and the cost of property and equipment, the scope of our work
was not sufficient to enable us to express, and we do not express, an
opinion on these financial statements.
• Independent auditors report the phrase “Financial statements present fairly,
in all material respects”
 The auditors cannot say that the “statements present exactly or correctly
the financial position or operating results” since many of items in the
financial statements cannot be measured exactly.
• The meaning of “present fairly” in dependent auditor’s report is to
state the fairly stated financial statements are
1. Prepared in accordance with accounting principles that have general
acceptance and are appropriate in the circumstance
2. Information of matters that may affect their use, understanding and
interpretation are classified, summarized and presented in a reasonable
manner, neither too detailed nor too condensed.
3. Prepared to reflect transactions and events within a range of reasonable
limits.
 End of Chapter six

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