A standard unqualified auditor's report is issued when the following conditions have been met:
1. All statements---balance sheet, income statement, statement of retained earnings, and statement of cash flows---are included in the financial statements.
2. The three general standards have been followed in all respects on the engagement.
3. Sufficient appropriate evidence has been accumulated, and the auditor has conducted the engagement in a manner that enables him or her to conclude that the three standards of field work have been met.
4. The financial statements are presented in accordance with U.S. generally accepted accounting principles. This also means that adequate disclosures have been included in the footnotes and other parts of the financial statements.
5. There are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report.
When these conditions are met, the standard unqualified audit report, as shown in Figure 3-1, is issued. The standard unqualified audit report is sometimes called a clean opinion because there are no circumstances requiring a qualification or modification of the auditor’s opinion. The standard unqualified report is the most common audit opinion. Sometimes circumstances beyond the client’s or auditor’s control prevent the issuance of a clean opinion. However, in most cases, companies make the appropriate changes to their accounting records to avoid a qualification or modification by the auditor.
If any of the five requirements for the standard unqualified audit report are not met, the standard unqualified report cannot be issued. Figure 3-2 indicates that categories of audit reports that can be issued by the auditor. The departures from a standard unqualified report are considered increasingly severe as one moves down the figure. Financial statement users are normally much more concerned about a disclaimer or adverse opinion than an unqualified report with an explanatory paragraph.
TABLE 2-3 Generally Accepted Auditing Standards
- 1. The audit must be performed by a person or persons having adequate technical training and proficiency as an auditor.
- 2. The auditor must maintain independence in mental attitude in all matters relating to the audit.
- 3. The auditor must exercise due professional care in the performance of the audit and the preparation of the report.
Standards of Field Work
- The auditor must adequately plan the work and must properly supervise any assistants.
- The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further auditing procedures.
- The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.
Standards of Reporting
- 1. The auditor must state in the auditor’ report whether the financial statements are presented in accordance with generally accepted accounting principles (GAAP).
- 2. The auditor must identify in the auditor’s report those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period.
- 3. When the auditor determines that informative disclosures are not reasonably adequate, the auditor must so state in the auditor’s report.
- 4. The auditor must either express an opinion regarding the financial statements, taken as a whole, or state that an opinion cannot be expressed, in the auditor’s report. When the auditor cannot express an overall opinion, the auditor should state the reasons therefor [sic] in the auditor’s report. In all cases where an auditor’s name is associated with financial statements, the auditor should clearly indicate the character of the auditor’s work, if any, and the degree of responsibility the auditor is taking, in the auditor’s report.