Audit Report Format | Unmodified Opinion | Audit Report | Auditing Course | CPA Exam AUD

Summary

In this session, Professor Farhad breaks down the components of a standard unmodified audit opinion report for non-public companies. The audit report includes eight key parts: the title, the addressees, the auditor’s opinion, the basis for the opinion, management’s responsibility, the auditor’s responsibilities, the signature and address of the audit firm, and the date of the audit report. Each part plays a crucial role in ensuring transparency, auditor independence, and clarity in presenting the audit opinion. This detailed walkthrough helps students and professionals understand the structure of an audit report, which is essential for CPA exam preparation.

Takeaways

• 😀 The auditor's opinion is the most important part of the audit report, stating whether the financial statements present fairly in accordance with US GAAP.
• 😀 The report must be addressed to the stockholders and board of directors, not management, to maintain the auditor's independence.
• 😀 The auditor’s report should include the word 'Independent' to emphasize that the auditor is free from any influence from the client.
• 😀 The opinion section must state that the audit was conducted in accordance with generally accepted auditing standards (GAAS).
• 😀 Management is responsible for preparing the financial statements in accordance with GAAP and ensuring the company’s internal controls are adequate.
• 😀 The auditor's responsibility is to provide reasonable assurance that the financial statements are free from material misstatements, whether caused by fraud or error.
• 😀 The auditor evaluates the appropriateness of accounting policies and management's significant estimates, but does not express an opinion on the effectiveness of internal controls.
• 😀 The auditor must obtain sufficient and appropriate audit evidence to form their opinion and ensures independence from the company throughout the audit.
• 😀 The auditor communicates with the board of directors regarding the scope, timing, and findings of the audit, including any issues with internal controls.
• 😀 The signature of the audit firm (not an individual) and the location of the firm are included in the audit report.
• 😀 The audit report date signifies the point at which the auditor has gathered sufficient evidence, and it marks the final day for considering material transactions up until that date.

Q & A

What is the significance of the word 'independent' in an audit report?

The word 'independent' is essential because it emphasizes that the auditor is unbiased and has no conflicts of interest with the client. It ensures the credibility of the audit opinion.

Who is the audit report typically addressed to, and why?

The audit report is typically addressed to the stockholders and the board of directors, not the management. This ensures the auditor's independence and prevents any potential conflicts of interest.

Why was the auditor's opinion moved to the beginning of the audit report in the new format?

The auditor's opinion was moved to the beginning of the report to give it prominence, as it is the most crucial element of the audit. This helps stakeholders understand the auditor's conclusion upfront.

What does 'present fairly' mean in the context of an audit opinion?

'Present fairly' means that the financial statements are prepared according to the relevant accounting framework (such as US GAAP or IFRS) and accurately reflect the company's financial position, operations, and cash flow.

What does the 'basis for opinion' section of the audit report explain?

The 'basis for opinion' section explains the procedures the auditor followed to form their opinion, including adherence to auditing standards and the collection of sufficient and appropriate evidence to support the opinion.

What is management's responsibility in preparing financial statements?

Management is responsible for the preparation and fair presentation of the financial statements, ensuring they comply with accounting standards like GAAP, and for maintaining internal controls to prevent errors or fraud.

What are the auditor's responsibilities in an audit?

The auditor's responsibility is to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error, and to issue an audit opinion based on this assessment.

What is the difference between 'reasonable assurance' and 'absolute assurance' in auditing?

'Reasonable assurance' means the auditor can provide a high level of confidence that the financial statements are free from material misstatements, while 'absolute assurance' would imply a 100% guarantee, which is not possible in auditing.

Why is it more difficult to detect fraud than errors in an audit?

Fraud is harder to detect because it often involves intentional actions like collusion, forgery, or misrepresentation, whereas errors are typically unintentional and may be easier to identify.

What is the purpose of the auditor's communication with the board of directors?

The auditor communicates with the board of directors regarding key matters such as the planned scope and timing of the audit, significant findings, and issues related to internal controls to ensure transparency and proper oversight.