Types of Audit Reports You Can Issue Besides Unqualified

By Maire Loughran from Auditing For Dummies

If for some reason, you can’t issue an unqualified report when you complete your audit, you still need to create a report. Three reporting options are available to auditors: the qualified report, the disclaimer report and the adverse report:

Qualified report: You issue a qualified report if you have a scope limitation or a material departure from GAAP but the rest of the financial statement assertions were audited to your satisfaction while applying generally accepted auditing standards (GAAS) and were not materially misstated. In other words, you judge that except for the deviation, the financial statements fairly present the company’s financial position and results.

The structure of a qualified report is somewhat similar to that of an unqualified report. You can present scope limitations or GAAP departures in various ways on a qualified report. For GAAP departures, you use the standard wording for the introductory and scope paragraph, add another paragraph explaining how the company deviated from using GAAP, and modify the opinion paragraph. For scope limitations, you use the standard wording for the introductory paragraph and modify the scope and opinion paragraphs.

The variations on the basic report theme are unlimited. Your CPA firm can provide the wording it typically uses. A complete GAAS guide, which you may have been required to purchase as part of your auditing class, will contain standard examples.
Disclaimer report: If you can’t issue any opinion on the financial statements because you weren’t able to gather a sufficient amount of competent evidence, you issue a disclaimer report. This circumstance may occur if your CPA firm lacks independence, if your client doesn’t provide the records you request, or if you suspect the client is hiding evidence.

Per GAAS reporting standards, if the problem is with independence, your disclaimer doesn’t state the reason that your firm wasn’t independent. Nor do you describe any audit procedures you performed prior to finding out about the independence problem.

If you’re issuing a disclaimer because of scope limitations, you use the standard introductory paragraph from the unqualified report and remove the scope paragraph. Instead of an opinion, you state something like, “The scope of our work wasn’t sufficient to allow us to express an opinion on these financial statements.”
Adverse report: Not good — not good at all. You issue an adverse report when GAAP departures are so widespread that you can’t say the financial statements are presented fairly in accordance with GAAP. For example, if your client failed to consolidate all its operations (meaning to issue one set of financial statements reporting for the parent and all subsidiaries) or didn’t record a material account (such as revenue) properly, you issue an adverse report.

In this case, the introductory and scope paragraph are the same as with an unqualified report. An explanatory paragraph then precedes the opinion paragraph that discusses the reasons for the adverse opinion. Then you modify the opinion paragraph, stating that the facts discussed in the explanatory paragraph caused the financial statements not to present fairly the financial position of your audit client in accordance with accounting principles generally accepted in the United States. Check with your CPA firm for guidance on how to word the opinion paragraph for each unique situation