Under what circumstances is an explanatory paragraph be added to the audit report?

Discusses the parts of the audit report, including the need for an explanatory paragraph. It also discusses the three conditions that require a departure from the unmodified opinion audit report. Finally, it discusses the three alternative opinions that may be appropriate when the client's financial statements are not in accordance with GAAP.

SAS No. 33 The Auditor's Report on Financial Statements

Status

Revised by Auditing Standards Committee in Taiwan on 21 December, 1999.

Summary

The auditor should review and assess the conclusions drawn from the audit evidence obtained as the basis for the expression of an opinion on the financial statements. The auditor’s report should contain a clear written expression of opinion on the financial statements taken as a whole.

The auditor’s report includes the following basic elements, ordinarily in the following layout:

• Title;
• Addressee;
• Opening or introductory paragraph
• Scope paragraph
• Opinion paragraph
• Date of the report;
• Auditor’s address; and
• Auditor’s signature.

The auditor’s report should have an appropriate title to distinguish the auditor’s report from reports that might be issued by others.

Introductory Paragraph

The auditor’s report should identify the financial statements of the entity that have been audited, including the date of and period covered by the financial statements. The report should include a statement that the financial statements are the responsibility of the entity’s management and a statement that the responsibility of the auditor is to express an opinion on the financial statements based on the audit.

Scope Paragraph

The auditor’s report should describe the audit as including:

• Examining, on a test basis, evidence to support the financial statement amounts and disclosures;
• Assessing the accounting principles used and significant estimates made by management in the preparation of the financial statements; and
• Evaluating the overall financial statement presentation.

The report should include a statement by the auditor that the audit provides a reasonable basis for the opinion.

Opinion Paragraph

The opinion paragraph of the auditor’s report should clearly state the auditor’s opinion as to whether the financial statements are presented fairly, in all material respects, in accordance with generally accepted accounting principles and, where appropriate, whether the financial statements comply with statutory requirements.

Date of Report

The auditor should date the report as of the completion date of the audit.

The Auditor’s Reports

Unqualified Report
An unqualified opinion should be expressed when the auditor concludes that the financial statements are presented fairly, in all material respects, in accordance with generally accepted accounting principles.

Modified Reports
An auditor’s report is considered to be modified in the following situations:

Matters that Do Not Affect the Auditor’s Opinion

The auditor’s opinion is based in part on the report of another auditor.

• There is substantial doubt about the entity’s ability to continue as a going concern.
• There has been a material change between periods in accounting principles or in the method of their application.
• Opinion on prior-period financial statements different from the opinion previously expressed.
• Prior period financial statements were audited by another auditor.
• Emphasis of a significant matter.

Matters that Do Affect the Auditor’s Opinion

• There is a limitation on the scope of the auditor’s work; or
• There is a disagreement with management regarding the acceptability of the accounting policies selected, the method of their application or the adequacy of financial statement disclosures.

The circumstances described in (a) could lead to a qualified opinion or a disclaimer of opinion. The circumstances described in (b) could lead to a qualified opinion or an adverse opinion.

Qualified Opinion
A qualified opinion should be expressed when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with management, or limitation on scope is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion. A qualified opinion should be expressed as being ‘except for’ the effects of the matter to which the qualification relates.

Disclaimer of Opinion
A disclaimer of opinion should be expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence and accordingly is unable to express an opinion on the financial statements.

Adverse Opinion
An adverse opinion should be expressed when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements.

Whenever the auditor expresses an opinion that is other than unqualified, a clear description of all the substantive reasons should be included in the report and, unless impracticable, a quantification of the possible effect(s) on the financial statements. This information would be set out in a separate paragraph preceding the opinion or disclaimer of opinion on the financial statements and may include a reference to a more extensive discussion, if any, in a note to the financial statements.

Effective date

This Statement is effective from 31 December, 1999.

Under what circumstances might an explanatory paragraph follow the opinion paragraph of an audit report?

When should the auditor include an explanatory paragraph?

What are some of the reasons for an explanatory paragraph within the audit report?

In what circumstances is an auditor required or allowed to include an emphasis of matter paragraph in the audit report on the financial statements?