audit reports

FIGURE 3-11
Qualified Opinion Due to Inadequate Disclosure
INDEPENDENT AUDITOR’S REPORT
(Same introductory and scope paragraphs as the standard report)
Third Paragraph—Added
Opinion Paragraph—Qualified
On January 15, 2007, the company issued debentures in the amount of $3,600,000 for the purpose of
financing plant expansion. The debenture agreement restricts the payment of future cash dividends to
earnings after December 31, 2007. In our opinion, disclosure of this information is required to
conform with accounting principles generally accepted in the United States of America.
In our opinion, except for the omission of the information discussed in the preceding paragraph, the
financial statements referred to above present fairly . . . (remainder is the same as the opinion in the
standard report)
a qualified or an adverse opinion. It is common to put this type of qualification in an
added paragraph preceding the opinion (the scope paragraph will remain unqualified)
and to refer to the added paragraph in the opinion paragraph. Figure 3-11 shows an
example of an audit report in which the auditor considered the financial statement disclosure
inadequate.
Rule 203 Reports Determining whether statements are in accordance with GAAP can
be difficult. Rule 203 in the Code of Professional Conduct permits a departure from generally
accepted accounting principles when the auditor believes that adherence to these
would result in misleading statements.
When the auditor decides that adherence to GAAP would result in misleading
statements, there should be a complete explanation in a third paragraph. The paragraph
should fully explain the departure and why GAAP would result in misleading
statements. The opinion paragraph should then be unqualified except for the reference
to the third paragraph. As discussed earlier in the chapter, this is called an unqualified
audit report with an explanatory paragraph.
Auditor is Not Independent
Lack of Statement of Cash Flows The client’s unwillingness to include a statement of
cash flows is specifically addressed in SAS 58 (AU 508). When the statement is omitted,
there must be a third paragraph stating the omission and an “except for” opinion qualification.
If the auditor has not fulfilled the independence requirements specified by the Code of
Professional Conduct, a disclaimer of opinion is required even though all the audit procedures
considered necessary in the circumstances were performed. The wording in
Figure 3-12 is recommended when the auditor is not independent.
FIGURE 3-12
Disclaimer Due to Lack of Independence
We are not independent with respect to Home Decors.com, Inc., and the accompanying balance sheet
as of December 31, 2007, and the related statements of income, retained earnings, and cash flows for
the year then ended were not audited by us. Accordingly, we do not express an opinion on them.
Note: When the auditor lacks independence, no report title is included.
The lack of independence overrides any other scope limitations. Therefore, no
other reason for disclaiming an opinion should be cited. There should be no mention
in the report of the performance of any audit procedures. As a result, it is a one-paragraph
audit report.
62 PART ONE / THE AUDITING PROFESSION