Audit Report

 

1.0 INTRODUCTION

The Companies and Allied Matters Act (CAMA) of 1990 and the Fourth

Standard of reporting provide that an auditor should report on the

financial statements under examination to show if those statements

present a true and fair view of the financial position of the firm. If the

firm’s financial statements do not present a true and fair view, the

auditor should qualify his reports.

The Companies and Allied Matters Act of 1990 requires auditors to

issue an opinion covering the following areas.

(a) The balance sheet of the company;

(b) The profit and loss account;

(c) The statement of sources and application of funds;

(d) The holding companies (in the case of group accounts);

(e) Other accounts as required by the Act such as: the disclosure of

certain information relating to loans to directors and officers,

directors’ emoluments, pensions, and compensation for loss of

office.

The American Institute of Certified Public Accountants, in the

codification of auditing statements under the standard of report, states

the fourth standard of reporting, thus:

· The report shall state the expression of opinion regarding the

· financial statements, taken as a whole. When an overall

· opinion cannot be expressed, the reasons, therefore, should be

· stated and the report shall contain a clear-cut indication of

· the auditor’s examination and the responsibility he is taking.

In this note, therefore, we shall consider the following:

· overview of auditors’ reports relative to the relevant legislation

and auditing standards;

· types of auditor’s opinions and reports;

· qualifications in audit reports;

· reasons for qualification in audit reports.

2.0 OBJECTIVES

At the end of this note, you should be able to:

· outline an overview of auditor’s reports

· explain the types of auditor’s opinions and reports

· highlight the statement of accounting standards on qualifications

in audit reports

· explain reasons for qualifying audit reports

· describe the assertions in a standard auditor’s report.

3.0 MAIN CONTENT

3.1 Overview of Auditor’s Report

Let us make an overview of auditor’s reports, bearing in mind the

provisions of the relevant legislations as well as the Statement of

Auditing Standards, as follows.

(a) The auditing standard applies to all reports in which the auditor

expresses an opinion on financial statements intended to give a

true and fair view of the state of affairs, profit and loss, and

where applicable, source and application of funds. The standard

is not intended to override the statutory exemptions granted in

respect of certain types of enterprises, but it is intended to apply

to the audit reports relating to such enterprises in other respects;

(b) The audit report should identify to whom it is addressed and the

financial statements to which the report relates;

(c) The auditor should refer expressly in his report to the following:

 (i) whether the financial statements have been audited in accordance

with approved auditing standards;

(ii) whether in the auditor’s opinion, the financial statements give a

true and fair view of the state of affairs, profit and loss, and

where applicable, source and application of funds;

(iii) any matter prescribed by the relevant legislations or other

requirements;

(d) When expressing an opinion that the financial statements give a

true and fair view, the auditor should be satisfied among other

things:

(i) that all relevant statements of standard accounting practices have

been complied with except in situations in which for justifiable

reasons, they are not strictly applicable, because they are

impracticable or exceptional, having regard to the circumstances,

would be inappropriate or give a misleading view; and

(ii) that any significant accounting policies which are not the subjects

of statements of standard accounting practices are appropriate to

the circumstances of the business;

(e) The auditor should refer in his report to the particular accounting

convention used in preparing the financial statements, such as

historical cost convention, etc., in order to avoid

misunderstanding;

(f) Emphasis of matter. As a general principle, the auditor issuing an

unqualified opinion should not make reference to specific aspects

of the financial statements in the body of his reports as such

reference may be misconstrued as being a qualification. In order

to avoid giving the impression that a qualification is intended,

references which are regarded as emphasis of matter should be

contained in a separate paragraph and introduced with a phrase

such as:

i. we draw attention to …

ii. and should not be referred to in the opinion paragraph. Emphasis

of matter should not be used to rectify a lack of appropriate

disclosure in the financial statements nor should it be regarded as

a substitute for a qualification.

(g) The auditor should comply with any reporting requirement

imposed by legislation and any other reporting requirement

relevant to the financial statement. Note that the auditor is only

required to include reference to the accounting convention if he

considers it necessary to avoid misunderstanding

3.2 Types of Auditor’s Opinions and Reports

3.2.1 Unqualified Opinion/Report

This is also known as “clean” report. It is referred to as such because

the auditor is able to report affirmatively (positively) on the statements

prepared. It speaks to conformity with the Generally Accepted

Accounting Principles (GAAP), consistent application of accounting

principles and includes all informative disclosures.

Unqualified report cannot be issued when the internal control is very

weak, and where there is restriction on the scope of the auditor’s work.

Below is an example of unqualified report:

We have examined the financial statements set out on pages ……

to .…… and have obtained all necessary information and

explanations which we considered necessary. Proper books have

been kept and proper returns received from the branches, and

the financial statements, which are in agreement therewith, comply

with the requirements of the Companies and Allied Act of 1990.

To the best of our knowledge and belief, the Group complied with the

guidelines of the Productivity, Prices and Incomes Board during the year

ended …………., 20……

In our opinion, the financial statements give a true and fair view of the

state of the financial position of the Company and the Group as at

……….., 20….., and of the Profit and Loss Accounts, the Balance Sheet

and the Sources and Application of Funds of the Group for the year

ended on that date.”

Note that the auditor’s report has two sections, they are as follows.

(a) The scope section/paragraph – explains the financial statements

examined and the application of Generally Accepted Auditing

Standards (GAAS) in performing the audit;

(b) The opinion paragraph – deals with the auditor’s professional

view concerning the results of the audit work.

3.2.2 Qualified Opinion

This type of report lacks sufficient competent evidential matter to

support an opinion. It has restrictions on the scope of the audit, and the

auditor believes that:

 (a) there is material departure from GAAP;

(b) there is lack of consistency;

(c) there are significant uncertainties.

In this situation, the auditor must disclose the reasons and possible

effects of his qualification. The auditor should use the words “except”,

“exception” or “subject to” in the opinion paragraph.

3.2.3 Adverse Opinion

Adverse opinion is issued by an auditor when exception is so material to

warrant justification. The financial statements, as a whole, do not

present fairly the true financial position of the company. Thus, adverse

opinion is issued when qualified opinion cannot be justified, and the

auditor must disclose substantive reasons and the principal effects on the

overall financial statements.

3.2.4 Disclaimer Opinion

If an auditor does not have enough evidence to form an opinion, he must

state so in his report and disclaims an opinion. A disclaimer can result

either because the scope of the auditor’s examination was seriously

limited or due to some unpredictable uncertainties.

Therefore, for an auditor to disclaim an opinion, there must be serious

scope limitation or unusual uncertainties, and the financial statements

revealed material departures from the GAAP.

3.3 Qualification in Audit Reports

We shall consider this in relation to the stipulations in the Statement of

Auditing Standards.

(a) When the auditor is unable to report affirmatively on the relevant

matters, he should qualify his report by referring to all material

matters about which he has reservations. All reasons for the

qualification should be given together with a qualification of its

effect on the financial statements, if this is both relevant and

practicable. Also, reference may need to be made to noncompliance

with legislation and other requirements.

 (b) A qualified report should leave the reader in no doubt as to the

meaning and implications for an understanding of the financial

statements.

(c) The nature of the circumstances giving rise to a qualification of

opinion will generally fall into one of two main categories:

(i) where there is an uncertainty which prevents the auditor from

forming an opinion on a matter, or

(ii) where the auditor is able to form an opinion on the matter giving

rise to the qualification, but this conflicts with the view given by

the financial statements (disagreement).

(d) The forms of qualification which should be used in different

circumstances are shown below (courtesy of Recommendation of

Auditing Practices Committee on Qualification in Audit Reports):

Note our discussion on the types of auditor’s opinion and reports (3.2

above). Each of the above categories gives rise to alternative forms of

qualification, depending upon whether the subject of the uncertainty or

disagreement is considered to be fundamental so as to undermine the

view given by the financial statements taken as a whole.

· Disclaimer of opinion: the auditor states that he is unable to form

an opinion as to whether the financial statements give a true and

fair view.

· “Subject to” opinion: the auditor effectively disclaims an opinion

on a particular matter which is not considered fundamental.

· Adverse opinion: the auditor states that in his own opinion, the

financial statements do not give a true and fair view.

· “Except” opinion: the auditor expresses an adverse opinion on a

particular matter which is not considered fundamental.

3.4 Reasons for Qualification in Audit Reports

The reasons for qualification can be obtained as follows:

(a)    Uncertainties

(i) Limitation in the scope of the audit: this arises if the auditor is

unable to obtain all the information and explanations which he

considers necessary for the purpose of the audit, for example,

absence of proper accounting records;

(ii) Inherent uncertainties: this results from circumstances in which

it is not possible to reach an objective conclusion as to the

outcome of a situation due to the circumstances themselves rather

than to any limitation of the scope of audit procedures, for

example, major litigations.

(b) Disagreements

Circumstances that can give rise to disagreements are as follows:

(i) Departures from acceptable accounting practices;

(ii) Disagreement as to the facts or amounts included in the financial

statements;

(iii) Disagreement as to the manner or extent of disclosure of facts or

amounts in the financial statements;

(iv) Failure to comply with relevant legislations or other

requirements.

3.5 Assertions in a Standard Auditor’s Report

The standard auditor’s report in this context is referred to as a clean or

unqualified opinion. There are certain basic elements that should be

pointed out for clear understanding and appreciation of the duties of

auditors.

These basic assertions or elements are as follows.

(i) We have examined;

(ii) The financial statements;

(iii) Of a particular company;

(iv) Application of the GAAS;

(v) Tests of the accounting records of client;

(vi) Application of other audit procedures;

(vii) In our opinion;

(viii) Present fairly or present a true and fair view of the company’s

financial position;

(ix) In accordance with the GAAP;

(x) Consistent application of accounting principles.

4.0 CONCLUSION

In this note, you have learnt that the reason for the standard of reporting

is to alert every auditor on the responsibilities he owes to the public and

his client. The greatest legal requirement placed upon the statutory

auditor is for the auditor to state if the accounts audited are true and fair.

Financial statements can be said to be true and fair if the assets are truly

and fairly stated, all liabilities are taken into account, the results shown

in the profit and loss accounts are truly and fairly reported, and all

pieces of information are provided in accordance with the GAAP and

the Companies and Allied Matters Act of 1990.

5.0 SUMMARY

In this note, you have interacted with the following topics:

· An overview of the auditor’s reports in relation to the relevant

legislation and the auditing standards;

· Types of auditor’s opinions and reports;

· Qualifications in audit reports;

· Reasons for qualification in auditor reports;

· Basic assertions in a standard auditor’s reports.

<<<Previous Note

View Course Content

Next Note>>>