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Reports are essential to audit and assurance engagements because they com - municate the auditor’s findings. Users of financial statements rely on the auditor’s report to provide assurance on the company’s financial statements. As the story at the beginning of this chapter illustrates, the auditor will likely be held responsible if an incorrect audit report is issued. The audit report is the final step in the entire audit process. The reason for studying it now is to permit reference to different audit reports as evidence accumulation is studied throughout this text. These evidence concepts are more meaningful after you understand the form and content of the final product of the audit. We begin by describing the content of the standard auditor’s report. STANDARD UNQUALIFIED AUDIT REPORT To allow users to understand audit reports, AICPA professional standards provide uniform word ing for the auditor’s report, as illustrated in the auditor’s standard unqualified audit report in Figure 3-1. Different auditors may alter the wording or presentation slightly, but the meaning will be the same. Parts of Standard Unqualified Audit Report OBJECTIVE 3-1 Describe the parts of the standard unqualified audit report. The auditor’s standard unqualified audit report contains seven distinct parts, and these are labeled in bold letters in the margin beside Figure 3-1. 1. Report title. Auditing standards require that the report be titled and that the title include the word independent. For example, appropriate titles include “independent auditor’s report,” “report of independent auditor,” or “independent accountant’s opinion.” The requirement that the title include the word inde pendent conveys to users that the audit was unbiased in all aspects. 2. Audit report address. The report is usually addressed to the company, its stockholders, or the board of directors. In recent years, it has become customary to address the report to the board of directors and stockholders to indicate that the auditor is independent of the company. 3. Introductory paragraph. The first paragraph of the report does three things: First, it makes the simple statement that the CPA firm has done an audit. This is intended to distinguish the report from a compilation or review report. The scope paragraph (see part 4) clarifies what is meant by an audit. Second, it lists the financial statements that were audited, including the balance sheet dates and the accounting periods for the income statement and statement of cash flows. The wording of the financial statements in the report should be identi cal to those used by management on the financial statements. Notice that the report in Figure 3-1 is on comparative financial statements. Therefore, a report on both years’ state - ments is needed. Third, the introductory paragraph states that the statements are the respon sibility of management and that the auditor’s responsibility is to express an opinion on the statements based on an audit. The purpose of these statements is to communicate that management is responsible for selecting the appro priate gener ally accepted accounting principles and making the measurement decisions and disclosures in applying those principles and to clarify the respective roles of management and the auditor. 4. Scope paragraph. The scope paragraph is a factual statement about what the auditor did in the audit. This paragraph first states that the auditor followed U.S. generally accepted auditing standards. For an audit of a public company, the para graph will indicate that the auditor followed standards of the Public Company Accounting Oversight Board. Because financial statements prepared in accordance with U.S. accounting principles and audited in accordance with U.S. auditing standards are available throughout the world on the Internet, the country of origin of the accounting 46 PART ONE / THE AUDITING PROFESSION
FIGURE 3-1 Standard Unqualified Report on Comparative Statements ANDERSON and ZINDER, P.C. Certified Public Accountants Suite 100 Park Plaza East Denver, Colorado 80110 303/359-0800 Independent Auditor’s Report To the Stockholders General Ring Corporation We have audited the accompanying balance sheets of General Ring Corporation as of December 31, 2007 and 2006, and the related statements of income, retained earnings, and cash flows for the years 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 audits provide 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 General Ring Corporation as of December 31, 2007 and 2006, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. ANDERSON AND ZINDER, P.C., CPAs February 15, 2008 Report Title Audit Report Address Introductory Paragraph (Factual Statement) Scope Paragraph (Factual Statement) Opinion Paragraph (Conclusions) Name of CPA Firm Audit Report Date (Date Audit Field Work Is Completed) principles used in preparing the financial statements and auditing standards followed by the auditor are identified in the audit report. The scope paragraph states that the audit is designed to obtain reasonable assur ance about whether the statements are free of material misstatement. The inclusion of the word material conveys that auditors are responsible only to search for significant misstatements, not minor misstatements that do not affect users’ decisions. The use of the term reasonable assurance is intended to indicate that an audit cannot be expected to completely eliminate the possibility that a material misstatement will exist in the financial statements. In other words, an audit pro vides a high level of assurance, but it is not a guarantee. The remainder of the scope paragraph discusses the audit evidence accumu lated and states that the auditor believes that the evidence accumulated was appropriate for the circumstances to express the opinion presented. The words test basis indicate that sampling was used rather than an audit of every transaction and amount on the statements. Whereas the introductory paragraph of the report states that management is responsible for the preparation and content of the financial statements, the scope paragraph states that the auditor evaluates the appropri ateness of those accounting principles, estimates, and financial statement dis closures and presentations given. 5. Opinion paragraph. The final paragraph in the standard report states the auditor’s conclusions based on the results of the audit. This part of the report is so important that often the entire audit report is referred to simply as the auditor’s opinion. The opinion paragraph is stated as an opinion rather than as a statement of absolute fact or CHAPTER 3 / AUDIT REPORTS 47
Page 1: CHAPTER # 3 AUDIT REPORTS THE AUDIT
Page 5 and 6: FIGURE 3-2 Four Categories of Audit
Page 7 and 8: • The report includes a paragraph
Page 9 and 10: The auditor’s concern in such sit
Page 11 and 12: of the other auditor. The principal
Page 13 and 14: follow GAAP, but if the amounts are
Page 15 and 16: 1. Transactions are illegal or frau
Page 17 and 18: paragraph is the same as the third
Page 19 and 20: AUDITOR’S DECISION PROCESS FOR AU
Page 21 and 22: or for an unqualified shared report
Page 23 and 24: 3-9 (Objectives 3-4, 3-5) Distingui
Page 25 and 26: (3) a client-imposed scope limitati
Page 27 and 28: 3-29 (Objectives 3-4, 3-5, 3-6, 3-7
Page 29 and 30: (1) Unqualified—standard wording

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