audit reports

The most common case in which conditions beyond the client’s and auditor’s control
cause a scope restriction is an engagement agreed on after the client’s balance sheet
date. The confirmation of accounts receivable, physical examination of inventory, and
other important procedures may be impossible under those circumstances. When the
auditor cannot perform procedures he or she considers desirable but can be satisfied
with alternative procedures that the information being verified is fairly stated, an
unqualified report is appropriate. If alternative procedures cannot be performed, a qualified
scope and opinion or disclaimer of opinion is necessary, depending on materiality.
A restriction on the scope of the auditor’s examination requires a qualifying paragraph
preceding the opinion to describe the restriction. In the case of a disclaimer, the
entire scope paragraph is excluded from the report.
For example, the report in Figure 3-7 is appropriate for an audit in which the
amounts were material but not pervasive and the auditor could not obtain audited
financial statements supporting an investment in a foreign affiliate and could not satisfy
himself or herself by alternate procedures.
When the amounts are so material that a disclaimer of opinion rather than a qualified
opinion is required, the auditor uses only three paragraphs. The first (introductory)
paragraph is modified slightly to say “We were engaged to audit. . ..” The second
FIGURE 3-7
Qualified Scope and Opinion Report Due to Scope Restriction
INDEPENDENT AUDITOR’S REPORT
(Same introductory paragraph as standard report)
Scope Paragraph—
Qualified
Third Paragraph—
Added
Opinion Paragraph—
Qualified
Except as discussed in the following paragraph, we conducted our audit . . . (remainder is the same as
the scope paragraph in the standard report)
We were unable to obtain audited financial statements supporting the Company’s investment in a
foreign affiliate stated at $475,000 or its equity in earnings of that affiliate of $365,000, which is
included in net income, as described in Note X to the financial statements. Because of the nature of
the Company’s records, we were unable to satisfy ourselves as to the carrying value of the investment
or the equity in its earnings by means of other auditing procedures.
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 examine evidence regarding the foreign affiliate investment and
earnings, the financial statements referred to above present fairly, in all material respects, the financial
position of Laughlin Corporation as of December 31, 2007, and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles generally accepted in the
United States of America.
FIGURE 3-8
Disclaimer of Opinion Due to Scope Restriction
INDEPENDENT AUDITOR’S REPORT
Introductory Paragraph—
Modification of Standard Report
Second Paragraph—Added
Opinion Paragraph—Disclaimer
We were engaged to audit . . . (remainder is the same as the introductory paragraph in the standard
report)
(Same wording as that used for the third paragraph in Figure 3-7)
Because we were unable to obtain audited financial statements supporting the Company’s investment
in a foreign affiliate and we were unable to satisfy ourselves as to the carrying value of the investment
or the equity in its earnings by means of other auditing procedures, the scope of our work was not
sufficient to enable us to express, and we do not express, an opinion on these financial statements.
60 PART ONE / THE AUDITING PROFESSION