Describe the reporting options when there is a material problem identified in the financial statements (i.e.,...
Describe the reporting options when there is a material problem identified in the financial statements (i.e., they are not in conformity with GAAP). Also describe the reporting options when there is a material problem with the audit (i.e., in some way, the auditor could not follow GAAS). Include in your answer both the type of opinion and which paragraphs would be affected.
Homework Answers
An auditor's opinion is presented in an auditor's report.The audit report begins with an introductory section outlining the responsibility of management and the responsibility of the auditor firm. The second section identifies the financial statements on which on which auditors opinion is given. The third section outlines the auditor's opinion. The fourth section is not found in all the audit reports, but in some it is presented as an explanation regarding a qualified, adverse or disclaimer of opinion.
Types of audit opinions are
Unqualified Opinion:
It is also known as clean opinion. The auditor gives this opinion when the financial statements are free from material misstatements. This opinion is also given over the internal controls of an entity if management has claimed responsibility for its establishment and maintenance and auditor has performed tests to check its effectiveness.
Qualified Opinion:
It is given when the financial statements are not presented in accordance with the Generally Accepted Accounting Principles(GAAP). The auditor provides an additional paragraph including exclusions from the cleanliness of the financial statements and reports why the audit report is not unqualified.
In Audit report, after scope paragraph but before Opinion paragraph, Explanatory paragraph is added.
The wordings used in the scope paragraph are "Except as discussed in the following paragraph , we conducted our audit...."
Adverse Opinion:
It is the most unfavorable opinion a business may receive. It is given when the Financial statements are not in accordance with GAAP and grossly misstated,misrepresented. It is an indicator of fraud, and the entities that receive this opinion must correct their financial statements and the financial statements must be re-audited. Generally, lenders,Investors do not accept this financial statements with adverse opinion.
In Audit report, after scope paragraph but before Opinion paragraph, Basis for adverse opinion paragraph is added. In opinion paragraph the wording changes to "Because of situations mentioned in Basis for adverse opinion paragraph, in our opinion the financial statements of XYZ co. Ltd. as mentioned in first paragraph does not give true and fair view or are not free from material misstatements."
Disclaimer of Opinion:
This opinion is given if the auditor is unable to complete the audit report due to absence of financial information or insufficient co operation from management. This is an indication that no opinion over the financial statements was able to be determined. In short, a disclaimer of opinion is not an opinion itself.
In Audit report, after scope paragraph but before Opinion paragraph, Basis for Disclaimer paragraph is added. In scope paragraph the wording changes to " we were engaged to audit the financial statements of XYZ Co. Ltd." . In opinion paragraph "We do not express an opinion on the financial statements of XYZ Co. Ltd. due to situations explained in Basis for Disclaimer Paragraph".
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