Standard Unqualified Audit Report

An unqualified opinion is the most common type of audit’s report. It is an

independent judgment that a company’s financial records and statements are
appropriately presented in accordance with Generally Accepted Accounting Principles
(GAPP).

A standard unqualified audit report indicates the auditor’s opinion that a client’s financial
statements are fairly presented in accordance with agreed upon criteria. It is a written
notice from an auditor starting that a company has complied with GAPP.

Basic Parts of Standard Unqualified Audit Report

I. Report Title: A report title is one that represents the basic element and
characteristics of that particular report.
II. Address: This part contains the addresses of the stockholders, company, and the
Board of Director.
III. Introductory Page: An introductory paragraph is one which gives a primary view
of the report and generally commences the actual report. It should ensure the
following subject matters:
a. It says an audit has been done.
b. It lists financial statements which were audited.
c. It states that the statements are the responsibility of management and that
auditor’s responsibility is to express an opinion.
IV. Management Responsibility: It ensures that management is responsible for the
financial statements.
V. Auditor’s Responsibility-Scope Paragraph: Auditors are responsible for the
opinion and scope tells what auditor did during the audit.
VI. Opinion Paragraph: Opinion paragraph contains opinion which is based upon
professional judgment, not a guarantee.
VII. Name and Address of CPA Firm: It indicates city and state where it is located.
VIII. Audit Report Date: There must be a specific date on when field work will be
completed.
An Unqualified Audit Report with an Explanatory Paragraph or Modified
Wording

Description of unqualified audit report /explanatory paragraph on modified wording meets

criteria of complete satisfactory audit. An unqualified report with an explanatory paragraph
is a report an audit can issue when falls under one of five situations.

Reason 1: Inconsistent GAAP application:

Current period is not consistent with previous period. required for both voluntary and
required changes, Auditor must agree with change. Explanatory paragraph added after
opinion.

Reason2: Going concern reports:

A client that has a possibility of not remaining a going concern, but has footnotes from the
management about they propose to bring their business back to life, would receive an
unqualified report opinion. The auditor will write an explanatory paragraph that expresses
his or her doubt about the going concern of the business in clear and understandable
language.

Reason 3: Auditor agree with departure from GAAP:

If applying GAAP would be misleading. Explanatory paragraph added before opinion.

paragraph refers to explanatory paragraph. Very unusual.

Reason 4: Emphasis of other matters:

Used to highlight something in FS Explanatory paragraph added after opinion. Reasons:

Significant related-party transaction on sequent event.

Reason 5: Reference to other Auditors:

When the principle auditing firm has a client that is a very large corporation and has many
locations, they will sometimes enlist the experience of other auditing firms. When the
unqualified audit is complete, the principle auditor will author the shared report. The senior
auditor may or may not mention the assisting auditors in the introductory paragraph.

Conditions Requiring Departures

There are three conditions that require a departure from an unqualified report. These are:

 Scope Limitation- a scope restriction imposed by the client or by circumstances

beyond the auditor’s or client’s control which prevents the auditor from
accumulating sufficient evidence to reach a conclusion regarding whether financial
statements are stated in accordance with GAAP. In this condition, the auditor
would issue either a qualified scope and opinion report, or a disclaimer of opinion.
 GAAP Departure- the financial statements were not prepared in accordance with
GAAP. In this condition, the auditor would issue a qualified opinion if the GAAP
violation were moderately material, or an adverse opinion if the GAAP violation
were highly material.
 Lack of Independence- the auditor is not independent. In this condition, the
auditor must issue a disclaimer of opinion.

This is to say that any one of these conditions, if material, must result in a qualified
opinion, an adverse opinion, or a disclaimer of opinion.

 A qualified opinion could happen if there is scope limitation or GAAP departure,

as long as the auditor concludes that the financial statements are fairly presented.
Qualification is possible for both the scope and opinion, or just the opinion. A key
indicator of a qualified opinion is that the auditor must use the phrase "except for"
in the opinion paragraph, which points to the qualifying issue.
 An adverse opinion is used when the auditor concludes that the financial
statements are so misstated or misleading that they do not fairly present the
income, financial position or cash flows of the company. The auditor must have
knowledge that the statements are not fairly stated; therefore, the adverse opinion
is rarely used.
  A disclaimer of opinion is issued when the auditor is unable to reach the
conclusion that the financial statements are fairly presented.

Audit Report Other than Unqualified

There are four type of audit report and unqualified report is one of them. Sometimes an
auditor can’t issue unqualified report if for some reasons. So three reporting options are
available to an auditor. They are given below:

Qualified Report: An auditor issues qualified opinion when company’s financial records
have not been maintained according to GAAP but no misrepresentations are identified.
An opinion rendered in a qualified report is similar to an unqualified opinion. Here auditing
body highlights why audit report is not qualified.

Disclaimer Report: An auditor gives disclaimer report when he becomes unable to

provide a define opinion. This can be due to lack of properly maintained financial records
or insufficient support from management. For that reason, an auditor may not have had
the opportunity to fulfill tasks that deem to be crucial to the audit.

Adverse Report: The worst type financial report that can be issued to a business is called
an adverse report. This indicates that the firm’s financial records do not conform to GAAP.
In addition, the financial report provides by the business have been misrepresented. It
indicates fraud though this may occur by error. When this type of report is issued a
company must correct its financial statement. This type of report generally unaccepted
for investors, lenders and other parties.

Definitions of Materiality

Materiality is the measure of the estimated effect that the presence or absence of
an item of information may have on the accuracy or validity of a statement. Materiality is
judged in terms of its inherent nature, impact (influence) value, use value, and the
circumstances (context) in which it occurs.
Materiality in Auditing

The International Auditing and Assurance Standards Board (IAASB) is an

independent standard-setting body that serves the public interest by setting high-quality
international standards for auditing, assurance, and other related standards The IAASB
issues the International Standards on Auditing, which consists of a growing number of
individual standards.

In terms of ISA 200, the purpose of an audit is to enhance the degree of confidence
of intended users in the financial statements. The auditor expresses an opinion on
whether the financial statements are prepared, in all material respects, in accordance with
an applicable financial reporting framework, such as IFRS. ISA 320, paragraph A3, states
that this assessment of what is material is a matter of professional judgement.

The concept of materiality is applied by the auditor both in planning and performing
the audit, and in evaluating the effect of identified misstatements on the audit and of
uncorrected misstatements, if any, on the financial statements and in forming the opinion
In the auditor’s report.

ISA 320, paragraph 10, requires that "planning materiality" be set prior to the
commencement of detailed testing. ISA 320, paragraph 12 requires that materiality be
revised as the audit progresses, if (and only if) information is revealed that, if known at
the onset of the audit, would have caused the auditor to set a lower materiality. In practice,
materiality is re-assessed at least once, during the conclusion of the audit, prior to the
issuing of the audit report. This materiality is referred to as "final materiality".

ISA 320, paragraph 11, requires the auditor to set "performance materiality". ISA
320, paragraph 9, defines performance materiality as an amount or amounts that is less
than the materiality for the financial statements as a whole ("overall materiality"). It
includes materiality that is applied to particular transactions, account balances or
disclosures. Paragraph 9 also states that the purpose of setting performance materiality
is to reduce the risk that the aggregate total of uncorrected misstatements could be
material to the financial statements.
 In terms of ISA 320, paragraph A1, a relationship exists between audit risk and
materiality. This relationship is inverse. The higher the audit risk, the lower the materiality
will be set. The lower the audit risk, the higher the materiality will be set.

Determining Materiality

This section looks at how both overall materiality and performance materiality are
determined.

Determining Overall Materiality

Auditors set the materiality for the financial statements as a whole (referred to in this guide
as ‘overall materiality’) at the planning stage. The primary purpose for setting overall
materiality when planning the audit is that it is used to identify performance materiality
(which is needed, for example, to help auditors design their audit procedures) and a
clearly trivial threshold for accumulating misstatements.

While the approach is not mandated, typically there are three key steps:

• choosing the appropriate benchmark;

• determining a level (usually a percentage) of this benchmark; and

• justifying the choices (i.e., explaining the judgement).

There are, however, other practical challenges to think about here such as:

• whether to set a specific level of materiality for individual balances, classes of

transactions or disclosures; and

• short and long periods of account.

Choosing a Benchmark

ISA 320.A4 includes a number of factors to consider when choosing a benchmark.

These include the nature of the entity and the industry in which it operates and whether
users focus on particular items in the financial statements. Also important is the relative
volatility of the benchmark, so some reference to previous periods is common. The
appropriate benchmark chosen should therefore link to what the users are most
concerned about in the financial statements.

Appropriate benchmarks

ISA 320 gives a number of examples of benchmarks that can be used. These include:

• profit before tax or normalized (or adjusted) profit before tax

• total income or total expenses

• gross profit

• total equity

• net assets

Determining the Level of the Benchmark

There is almost nothing in the ISA about this but the emphasis is on professional
judgement. The two examples of applying a percentage to a benchmark in ISA 320.A8
are for a profit oriented manufacturing business (5% of profit before tax from continuing
operations) and a not-for-profit entity (1% of total income or expenses). It does stress that
higher or lower percentages may be appropriate.

For guidance here, it is useful to look at methodologies used by small and medium-sized
audit firms (although these methodologies wisely tend to steer clear of being too
prescriptive) as well as examples included in reviews by regulators, for example the UK
Financial Reporting Council (FRC) Audit Quality Thematic Review on materiality (2013).
Two things immediately become apparent:

• auditors tend to use a range of levels for each benchmark; and

• the ranges used are similar.

Another feature highlighted by the FRC thematic review is that the larger firms tend to
use different ranges for listed and non-listed entities. This is reasonable as the
stakeholders are often different and they may well have different priorities on which they
base their economic decisions.

Typically, firms and networks issue guidance that says ‘up to X%’ or ‘Y% or less’ to
highlight the fact that benchmark levels will vary according to the circumstances and that
this requires judgement. Nonetheless a regular criticism from regulators is that they see
auditors take the ‘unthinking’ approach of always using the top end of the range.

Justifying the Decisions

It’s often said that, regardless of a firm’s policies and procedures, experienced
auditors will have a good instinct as to what is and isn’t going to affect decisions made by
users of the financial statements (and therefore what materiality actually is). It is good
that the standards do not box auditors into something that may not make sense. The key,
however, is to reflect this experience and the thought process on the file. Poor
documentation (including on materiality) is one of the most common criticisms of
regulators.

Determining Performance Materiality

ISA 320.9 defines performance materiality as the amount(s) set by auditors at

below overall materiality to reduce to an appropriately low level the probability that the
aggregate of uncorrected and undetected misstatements exceeds overall materiality. In
simple terms, performance materiality is the ‘working materiality’. It sets a numerical level
which helps guide auditors to do enough work (but, importantly, not too much) to support
their audit opinion. It recognizes that if auditors simply applied the overall materiality
throughout the planning and fieldwork stages they would be taking an undue risk that
material misstatements were not detected by their audit work.

Broadly it Serves Two Functions

• to reduce the aggregation risk (the risk that the aggregate of uncorrected and undetected
misstatements individually below materiality will exceed materiality for the financial
statements as a whole) to an acceptable level; and
• to provide a safety net against the risk of undetected misstatements.

What is Professional Ethics?

Professionally accepted standards of personal and business behavior, values

and guiding principles. Codes of professional ethics are often established by
professional organizations to help guide members in performing their job functions
according to sound and consistent ethical principles.

Need for Ethics:

 Ethics means a code of conduct that directs an individual in dealing with others.
Business Ethics is a form of the skill that examines ethical moralities and honesty or
ethical problems that can arise in a business environment. It deals with matters
regarding morals, principles, duties and corporate governance applicable to a
company and its employees, customers, shareholders, media, suppliers,
government and dealers. This is what the famous Henry Kravis had to say about
professional ethics: “If you don't have integrity, you have nothing. You can't buy
accountability. You can have all the money in the world, but if you are not a moral
and ethical person, you really have nothing.”
 Ethics are also related to the core of management practices such as human
resource management, accounting information, production, sales and marketing,
intellectual property knowledge and skill, international business and economic
systems. In the corporate world, the organization’s culture sets standards for
shaping the difference between good or bad, right or wrong and fair or unfair. This
quote by Albert Einstein says it all: “Relativity applies to physics, not ethics.” The
point being that it is possible to make profits without having to negotiate on ethics.
And over and above the factor of correctness associated with ethics, an ethical
business and its proprietors only serve themselves, their clients and the whole
enterprise much better in the final reckoning.
 Management gurus often preach on the advantage an ethical company has over
their competitors.
 Lately, ethical issues in business have become more complicated because of the
international and diversified nature of many big corporations and because of the
difficulty of economic, social, global, political, legal, and administrative regulations
and peculiarities.
 In every company, the managers should remember that leading by example is the
first and very important step in nurturing a culture of ethical conduct. Hence, the best
way to encourage ethical behavior is by setting a good personal example. Teaching
an employee ethics is not always effective. One can explain and define ethics to an
adult, but understanding ethics does not necessarily result in ethical behavior. John
Mackey once quoted that “Business social responsibility should not be coerced; it is
a voluntary decision that the entrepreneurial leadership of every company must
make on its own.”

Thus, ethics are important not only in business but in all the other parts of life because it
is an important base on which a civilized and cultured society is built. A business or
society without ethics and scruples is only headed towards self-destruction.

Parts of the Code: A code of professional conduct is a necessary component to any

profession to maintain standards for the individuals within that profession to adhere. It
brings about accountability, responsibility and trust to the individuals that the profession
serves.

There are some parts of code in professional conduct for Ethics: -

Values

Business values typically are expressed in terms of how the company performs its day-
to-day interactions with suppliers, employees and customers. A primary objective of the
code of ethics is to define what the company is about and make it clear that the company
is based on honesty and fairness. Another commonly defined value is respect in all
interactions, regardless of the circumstances.
Principles

Principles are used to further support the business values by including operational credos
employees should follow. Customer satisfaction, business profitability and continuous
improvement are key factors in documenting business principles. Corporate responsibility
to the environmentally friendly use of natural resources is another business principle that
often is found in code of ethics.

Management Support

Manager support of the values and principles may be documented in the code of ethics.
Open door policies for reporting ethics violations can be included in the code, along with
a process to anonymously report any code of ethics issues. To reflect how seriously
management considers the code, some businesses display the code of ethics with
management signatures in prominent areas, such as the break room, where employees
will see it on a daily basis.

Personal Responsibility

Another component is a statement regarding each employee's personal responsibility to

uphold the code of ethics. This may contain information regarding both the legal and moral
consequences if an employee violates the code. The requirement to report any violators
is normally a component of the ethics code's personal responsibility. This is meant to
show that it is not sufficient to merely adhere to the values and principles but to help
ensure every employee supports the code of ethics by reporting violators.

Compliance

Any laws or regulations may be referenced as rules to adhere to as part of daily business
interaction.

Independence

Auditor independence refers to the independence of the internal auditor or of

the external auditor from parties that may have a financial interest in the business being
audited. Independence requires integrity and an objective approach to the audit process.
The concept requires the auditor to carry out his or her work freely and in an objective
manner.

Independence of the internal auditor means independence from parties whose

interests might be harmed by the results of an audit. Specific internal management issues
are inadequate risk management, inadequate internal controls, and poor governance.
The Charter of Audit and the reporting to an Audit Committee generally provides
independence from management, the code of ethics of the company (and of the Internal
Audit profession) helps give guidance on independence from suppliers, clients, third
parties, etc.

Independence of the external auditor means independence from parties that have an
interest in the results published in financial statements of an entity. The support from and
relation to the Audit Committee of the client company, the contract and the contractual
reference to public accounting standards/codes generally provides independence
from management, the code of ethics of the Public Accountant profession) helps give
guidance on independence from suppliers, clients, third parties.

Types of Independence:

1. Programming Independence: Programming independence essentially protects

the auditor's ability to select the most appropriate strategy when conducting an
audit.

2. Investigative Independence: Investigative independence protects the auditor's

ability to implement the strategies in whatever manner they consider necessary.

3. Reporting Independence: Reporting independence protects the auditor's ability

to choose to reveal to the public any information they believe should be disclosed.
Integrity: The fundamental principles require that a member should behave with integrity
in all professional, business and financial relationships. Integrity implies not merely
honesty but fair dealing and truthfulness.

The principle of integrity imposes an obligation on all professional auditors to be straight

forward and honest in all professional and business relationships.

It follows that a professional auditor's advice and work must be uncorrupted by self-
interest and not be influenced by the interests of other parties.

A professional auditor shall not knowingly be associated with reports, returns,

communications or other Information where the professional auditor believes that the
information:
- contains a materially false or misleading statement.
- contains statements or information furnished recklessly; or
- Omits or obscures information required to be included where such omission or
obscurity would be misleading.

When a professional auditor becomes aware that the auditor has been associated with
such information, the auditor shall take steps to be disassociated from that information.

A professional auditor will be deemed not to be in breach of paragraph if the professional

auditor provides a modified report in respect of a matter contained in paragraph.

Objectivity of Professional Ethics:

Objectivity is the state of mind which has regard to all considerations relevant to the task
in hand but no other.

The principle of objectivity imposes an obligation on all professional accountants not to

compromise their professional or business judgment because of bias, conflict of interest
or the undue influence of others.
A professional accountant may be exposed to situations that may impair objectivity. It is
impracticable to define and prescribe all such situations. A professional accountant shall
not perform a professional service if a circumstance or relationship biases or unduly
influences the accountant's professional judgment with respect to that service.

Professional Competence of Ethics:

The principle of professional competence imposes the following obligations on all

professional accountants:

a. To maintain professional knowledge and skill at the level required to ensure that
clients or employers receive competent professional service; and

b. To act diligently in accordance with applicable technical and professional

standards when providing professional services.

Competent professional service requires the exercise of sound judgment in applying

professional knowledge and skill in the performance of such service. Professional
competence may be divided into two separate phases:

a. Attainment of professional competence; and

b. Maintenance of professional competence.

The maintenance of professional competence requires a continuing awareness and an

understanding of relevant technical, professional and business developments. Continuing
professional development enables a professional accountant to develop and maintain the
capabilities to perform competently within the professional environment.

A professional accountant shall take reasonable steps to ensure that those working under
the professional accountant's authority in a professional capacity have appropriate
training and supervision.
Threats and Safeguards of Ethics

Safeguards are actions or other measures that may eliminate threats or reduce them to
an acceptable level. They fall into two broad categories:

a. Safeguards created by the profession, legislation or regulation; and

b. Safeguards in the work environment.

Safeguards Created by the Profession, Legislation or Regulation Include:

a. Educational, training and experience requirements for entry into the profession.

b. Continuing professional development requirements.

c. Corporate governance regulations.

d. Professional standards.

e. Professional or regulatory monitoring and disciplinary procedures.

f. External review by a legally empowered third party of the reports, returns,

communications or information produced by a professional accountant.

Ethical and Technical Standards

As Certified Public Accountant I should see to it that professional ethics are more
than just moral principles and they are one of the important foundations upon which a
profession is built. As my business is predicated on having the trust and respect of my
clients and on my integrity and good judgment, I shall then endeavor to fulfil my
obligations through the following ethical and technical standards:

The Public Interest: I must at all times safeguard the interest of our clients provided
that they do not conflict with the duties and loyalties owed to the government and or
community and its laws.
Integrity: I must be straightforward, honest and sincere in my approach to professional
work

Objectivity: I must be fair and must not allow prejudice, conflict or interest or bias to
override my objectivity. When reporting on financial statements, which come under my
review, I must maintain an impartial attitude.

Confidentiality: I must respect the confidentiality of information acquired in the course

of my work and must not disclose any such information to a third party without specific
authority or unless there is a legal or professional duty to disclose it.

Competence and Due Care: I must perform professional services with due care,
competence and diligence. I had a continuing duty to maintain professional knowledge
and skill at a level required to ensure that my clients receive the advantage of competent
professional service based on up-to-date developments in practice, legislation and
techniques.

Independence: I must be and should be seen to be free of any interest which might be
regarded, whatever its actual effect, as being incompatible with integrity and objectivity.

I must conduct myself in a manner consistent with the good reputation of my profession
and refrain from any conduct, which might bring discredit to my profession.

Responsibility to Clients- Confidentiality:

Confidentiality involves a set of rules or a promise that limits access or places restrictions
on certain types of information

Client Confidentiality: Client confidentiality is the principle that an institution or individual

should not reveal information about their clients to a third party without the consent of the
client or a clear legal reason. This concept is commonly provided for in law in most
countries. The access to a client's data as provided by the institution in question is usually
limited to law enforcement agencies and requires some legal procedures to be
accomplished prior to such action. This applies to bank account information or medical
record. In some cases, the data is inaccessible to third parties and should never be
revealed; this can include confidential information gathered by attorneys, psychiatrists,
psychologists or priests.

Duty of Confidentiality: The duty of confidentiality obliges solicitors (or attorneys) to

respect the confidentiality of their client's affairs. Information that solicitors obtain about
their client’s affairs may be confidential, and must not be used for the benefit of persons
not authorized by the client.

Professional Responsibility: Professional responsibility is the area of legal practice that

encompasses the duties of attorneys to act in a professional manner, obey the law, avoid
conflicts of interests and put the interests of clients ahead of their own interests.

Responsibility to Clients- Contingent Fees:

The term "contingent tee" means - expected as stated any fee established
for the sale of a product or the performance of any service pursuant to an
arrangement in which no the will be charged unless a specified finding or result is
attained, or in which the amount of the tee is otherwise dependent upon the finding
or result of such product or service. Solely for the purposes of this definition, a fee
is not a contingent fee if the amount is axed by courts or other public authorities
and not dependent on a finding or result.

A registered public accounting firm is not independent of its audit client if the firm, or any
affiliate of the firm, during the audit and professional engagement period, provides any
service or product to the audit client for a contingent the or a commission or receives from
the audit client directly or indirectly contingent fee or commission.

Contingent Fee Agreement Basis: Contingency fee agreement is a payment

arrangement that allows a plaintiff who has been injured and is seeking legal remedy to
obtain legal representation even if they do not have money to pay a lawyer at the
beginning of the case. A client does not have to pay a contingency fee up front, agreeing
instead to pay an attorney a percentage of the client's award should they win the case.
The contingency fee agreement will dictate the circumstances of payment, and how much
an attorney is owed. The rules governing lawyers in your state will frequently determine
when contingency fees are appropriate.

Missouri Rule of Professional Conduct 4-1E5 requires a written fee agreement in

contingent fee representations. The detail that is necessary in a fee agreement is defined
by the circumstances. A lawyer has a duty to communicate with the client to the extent
reasonable necessary to permit the client to make informed decisions regarding the
representation and comment.

The scope of representation should be set forth and any limits on what the lawyer will do
must be clearly spelled out. A lawyer cannot limit his/her duties or liabilities under the
Missouri rules of professional conduct in the fee agreement. If a division fees with a lawyer
from another firm is involved, the clients consent must be obtained. This consent must be
confirmed in writing. The agreement should set how fees, expenses, and costs will be
handled and billed when payment is expected and what is included in the fee.

Auditor's Responsibility to Colleagues:

He should not solicit business directly or indirectly. He must, when approached by

a client of another cost auditor to render services or advice of a special character,
communicate to the other cost auditor of the circumstances. He, when engaged for
services under a reference from another practicing member, shall not go beyond the
extent of that engagement without consulting the member who initially referred the matter
to him. He should, in all cases, make a communication to the other member or cost auditor
before accepting the appointment.

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