Understanding Audit Report Types: A Clear Breakdown
Understanding Audit Report Types
Types of Audit Opinions Based on Circumstances
Favorable Opinion
No circumstances affect the opinion.
“The Annual Accounts express, in all significant respects, a true…”
Review with Caveats
Any of the circumstances described below.
“The Annual Accounts express the true picture… except for…”
Adverse Opinion
- Errors or failures of GAAP.
“The financial statements do not express…”
Review Denied
- Limitation on scope
- Uncertainties
The auditor cannot express an opinion on the financial statements.
Limitation of Scope
Failure to implement audit procedures required by the technical rules or other alternatives.
May arise from:
- Imposed by the company audited
- Various circumstances
In any case, the limitation is described in a paragraph between the scope paragraph and the opinion paragraph. In the scope paragraph: “…except for…”
Effects on the Opinion:
- Review with reservations
- Review denied
Error or Breach of Generally Accepted Accounting Principles (GAAP)
Classes:
- Application of accounting principles and standards other than those generally accepted.
- Errors in the preparation of annual accounts.
- The accounts do not contain all the necessary information.
- Facts after the closing date of the exercise without the effect having been corrected in the annual accounts or shown on the report.
Assessment and, where appropriate, quantify the effect on the financial statements.
In any event, a description of the breach and its effects is included in a middle paragraph.
Effects on the Opinion:
- Review with reservations
- Unfavorable opinion
Uncertainty
Concept: A subject or situation where the outcome is not certain at the balance sheet date because it depends on the occurrence or non-occurrence of some other future event, or the entity cannot reasonably estimate it. Therefore, it cannot be determined whether the annual accounts must be adjusted, or in what amounts.
The auditor should not qualify as uncertainty normal estimates about future events undertaken by the entity in its annual accounts (non-compliance with GAAP).
If the auditor cannot obtain the evidence needed to assess whether the final outcome can be reasonably estimated, it would result in a limitation on the scope.
In any case, the uncertainty description is included in a paragraph in between.
Effects on the Opinion:
- Review with reservations
- Review denied
Changes in Accounting Policies, Principles, and Rules
Objective: Compliance with the Principle of Uniformity. Promote comparability between years.
Possible Cases:
- Change justified. Only if compliance with Accounting Principles and Standards requires a formal mention in the opinion paragraph of the exception to the application of this principle, referring to the note of the report explaining the change.
- Change not justified or applying a new accounting principle that is generally not accepted. This would be a breach of GAAP, and act accordingly.
Effects on the Opinion, in the latter case:
- Review with reservations
- Unfavorable opinion