Chapter 18

Reports on
Audited
Financial
Statements
(AU-C 700)

McGraw-Hill/Irwin

Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

LO# 1

Reporting on the Financial Statement

Audit: The Standard Unqualified Report
Eight Elements
1. Report title
2. Addressee
3. Introductory paragraph
4. Scope paragraph
5. Opinion paragraph
6. Explanatory paragraph
referring to the audit of
ICFR

The standard unqualified

report is issued when the
auditor has gathered sufficient
evidence, the audit has been
performed in accordance with
PCAOB standards, and the
financial statements conform
to GAAP.

7. Name of auditor
8. Audit report date

18-2

LO# 1

Standard Unqualified Audit Report

(PCAOB)

18-3

LO# 2

Adjustments to the Standard

Unqualified/Unmodified Financial
Statement Audit Report
5. Explanatory
Paragraph: Reference to
report on audit of ICFR

2. Explanatory
Paragraph:
Going concern

1. Modified Wording:
Opinion based in part on
the report of another
auditor
3. Explanatory
Paragraph: Lack of
consistency

4. Explanatory
Paragraph: Additional
emphasis
18-4

LO# 2

1. Reference to Other Auditors

18-5

LO# 2

2. Going Concern

18-6

LO# 2

3. Lack of Consistency
Changes Affecting Consistency
Change in
accounting
principle
Correction
of an error
in principle

Change in
reporting
entity

Changes Not Affecting Consistency

Change in
accounting
estimate

Correction of an
error that does
not involve an
accounting
principle

Change in
classification
and
reclassification

Change expected
to have a material
future effect
18-7

LO# 2

4. Additional Emphasis
Under certain circumstances an auditor may want to
emphasize a specific matter regarding the financial
statements even though he or she intends to express an
unqualified/unmodified opinion.

This information
should be presented
in an explanatory
paragraph.

18-8

Conditions for Departure from

Unqualified/Unmodified Report

LO# 3

1. Scope
Limitation
2. Departure
from GAAP
3. Lack of Auditor
Independence
18-9

LO# 4

Departures from an
Unqualified/Unmodified Financial
Statement Audit Report
Qualified
except for
(1 or 2 ,not pervasive)

Disclaimer
(1 or 3)
Adverse
(2, pervasive)
18-10

LO# 5

Effect of Materiality

18-11

LO# 5

Discussion of Conditions Requiring

Other Types of Financial Statement
Audit Reports
Scope
Limitation

Results from an inability to obtain

sufficient competent evidence
about some component of the
financial statements.

Not in
Conformity
with GAAP

Results when financial statements

are materially affected by an
unacceptable departure from GAAP.

Auditor Not
Independent

Results when auditor has some

form of prohibited relationship with
the client (see Ch. 19).
18-12

LO# 5

Discussion of Conditions Requiring

Other Types of Financial Statement
Audit Reports
Scope
Limitation

Issue a qualified opinion or a

disclaimer.

Not in
Conformity
with GAAP

Issue a qualified opinion or

adverse opinion.

Auditor Not
Independent

Issue a disclaimer.

18-13

LO# 6

Special Reporting Issues

Different reports on
comparative
financial statements

Change in report on
prior-period
financial statements
Report by a
predecessor
auditor

18-14

LO# 6

Different Reports on
Comparative Financial Statements
Prior Years

Current Year

Issued Standard
Unqualified Opinion.

Issues Qualified
Opinion.

18-15

LO# 6

Different Reports on
Comparative Financial Statements
Prior Years

Current Year

Issued Qualified Opinion

or Disclaimer.

Issues Unqualified
Opinion.

18-16

LO# 6

Change in Report on Prior Period

18-17

LO# 6

Report by a Predecessor Auditor

The predecessor auditor should
do the following before
reissuing a report on prior-year
financial statements published
for comparative purposes:
1. Read the financial statements of the
current period.
2. Compare the prior-period financial
statements reported on with the
current-year financial statements.
3. Obtain a letter of representation from
the current-year or successor auditor.
18-18

Other Information in
Documents Containing Audited
Financial Statements

LO# 7

The auditor has no responsibility beyond the financial

information contained in the report, and he or she has
no obligation to perform any audit procedures to
corroborate the other information. However, the auditor
is required to read the other information and consider
whether it is consistent with the information contained
in the audited financial statements.
Annual
Reports

Registration
Statements
18-19

LO# 7

Special Reports
Financial statements
prepared on a
comprehensive basis
of accounting other
than GAAP

Specified elements,
accounts, or items of a
financial statement

Compliance with
aspects of contractual
agreements or
regulatory requirements

18-20

LO# 8

Financial Statements
Prepared According to a Special
Purpose Framework
Regulatory Basis

Tax Basis

Cash (or Modified Cash)

Basis

Contractual Basis
18-21

LO# 9

Specific Elements, Accounts, or

Items of a Financial Statement
In some situations an auditor may be engaged to
audit only part (or specified elements, accounts,
or items) of the financial statements.
Rather than auditing specified elements,
accounts, or items, an auditor may be engaged to
apply only agreed-upon procedures.

18-22

LO# 9

Agreed-Upon Procedures Report

18-23

LO# 10

Compliance Reports Related to

Audited Financial Statements
The auditor provides negative assurance as to compliance
with the provisions of contractual agreements or regulatory
requirements.

18-24