The purpose of this article is to discuss the AICPA professional standards that provide uniform wording for the standard unqualified audit report. Included will be a list of the seven parts of a standard unqualified audit report along with a description of the contents. In addition, there will be discussion regarding the circumstances that prevent the issuance of an unqualified report, as well as descriptions of the other types of audit report that may be issued.
A standard unqualified audit report indicates that the opinion expressed is “clean” and management’s assertions in regard to the financial statements are usually found to be in conformance with generally accepted accounting principles. The standard unqualified audit report is the most common type of audit report. Both the auditor and the client desire the issuance of an unqualified report, because it indicates that “the auditor has no reservations about the fairness of presentation” (Rittenberg & Schwieger, 2005). An unqualified report indicates that the “audit was performed in accordance with generally accepted auditing standards (for nonpublic companies) or in accordance with the standards of the PCAOB (for public companies)” (Messier, Glover, & Prawitt, 2006, p. 50).
Seven Parts of a Standard Unqualified Audit Report
The seven parts of a standard unqualified audit report are the title, addressee, introductory paragraph, scope paragraph, opinion paragraph, name of auditor (CPA firm), and date of report. Following is a description of the contents of each part.
1. Title – Public company reports are required to begin with a title that references the “Independent Registered Public Accounting Firm”. Reports for nonpublic companies may contain titles such as “Independent Auditors Report, or “Report of the Independent Auditor”.
2. Addressee – This is the individual, group, entity, board of directors, and/or stockholders who retained the services of the auditor.
3. Introductory Paragraph – This paragraph must state three things: “which financial statements are covered by the report, that the statements are the responsibility of management, and that the auditor has a responsibility to express an opinion” (Messier et al., 2006, p. 50).
4. Scope Paragraph – This paragraph states what is involved in the audit. For public companies the scope paragraph states that the audit was performed in accordance with Public Company Accounting Oversight Board (PCAOB) standards, and for nonpublic companies it states that the audit was performed in accordance with generally accepted auditing standards (GAAS). The scope paragraph must also state “that the audit provides only reasonable assurance that the financial statements contain no material misstatements,…that an audit involves an examination of evidence on a test basis,…
5. Opinion Paragraph – This paragraph expresses the auditor’s opinion in regard to the fairness of the financial statements based upon evidence obtained through the audit.
6. Name of Auditor – This is the name of the CPA firm that conducted the audit, along with a manual or printed signature of the auditor.
7. Date of Report – This is “the date on which the auditor has completed all significant auditing procedures” (Messier et al., 2006, p. 52).
Circumstances that Prevent Issuance of an Unqualified Report
There are three specific circumstances that would prevent external auditors from issuing an unqualified report: scope limitation, departure from GAAP, and lack of independence of the auditor. Scope limitation results from the inability to gather adequate evidence. Departure from GAAP results from the fact that a departure from generally accepted accounting principles affects the financial statements. Lack of independence of the auditor refers to the fact that the auditor is not independent of the entity that he or she is auditing.
Other Types of Audit Report
When one of the above circumstances prevents the issuance of an unqualified report, one of three other report types may be issued: qualified report, disclaimer report, and adverse report. A qualified report is issued when the financial statements present fairly, but there is a scope limitation or departure from GAAP. A disclaimer report is issued when an opinion on the financial statements is disclaimed due to lacking evidence or lack of independence. An adverse report is issued when “the financial statements do not present fairly in conformity with GAAP because the departure materially affects the overall financial statements” (Messier et al., 2006, p. 689).
References
Messier, Jr., W. F., Glover, S. M., & Prawitt, D. F. (2006). Auditing & Assurance Services: A Systematic Approach. (4th ed.). New York: McGraw-Hill Irwin.
Rittenberg, L. E. & Schwieger, B. J. Auditing: Concepts for a Changing Environment. (5th ed.). Thompson.
