The standard unmodified report issued in the audit of a non issuer includes a(n)

Because we are discussing audit reports on financial statements, we first briefly provide an overview of financial statements, including disclosures. Next, we discuss in detail the standard unmodified audit reports included in AICPA Auditing Standards Board and Public Company Accounting Oversight Board professional standards.

Financial Statements

Auditors most frequently report upon a complete set of financial statements: that is, the balance sheet, the income statement, the statement of retained earnings, and the statement of cash flows and related notes.1 In some cases, the statement of retained earnings is either expanded to a statement of stockholders' equity or combined with the income statement. Financial statements generally are presented in comparative form for the current year and one or more preceding years. The financial statements for a parent corporation usually are consolidated with those of the subsidiaries. In the United States, these financial statements are most frequently prepared following the general-purpose frameworkA financial reporting framework designed to meet the common financial information needs of a wide range of users (e.g., GAAP, International Financial Reporting Standards). referred to as accounting principles generally accepted in the United States of America.2

Financial Statement Disclosures

The purpose of notes to financial statements is to properly disclose information required by generally accepted accounting principles that cannot be adequately conveyed on the face of the financial statements. Adequate disclosure in the notes to the financial statements is necessary for the auditors to issue an unmodified opinion on the financial statements.

   The Financial Accounting Standards Board (FASB), the Government Accounting Standards Board (GASB), the Federal Accounting Standards Advisory Board (FASAB), and the Securities and Exchange Commission (SEC) have issued numerous pronouncements that have added extensive disclosure requirements. Examples of these requirements include the disclosure of significant accounting policies, accounting changes, loss contingencies, and lease and post-retirement benefit information.

   In evaluating financial reporting disclosures, the auditors should keep in mind that disclosures are meant to supplement the information on the face of the financial statements—not correct improper financial statement presentation. Thus, a note or supplementary schedule, no matter how skillfully drafted, does not compensate for the erroneous presentation of an item in the financial statements.

Comparative Financial Statements

Comparative financial statementsA complete set of financial statements for one or more prior periods included for comparison with the financial statements of the current period. are financial statements for one or more prior periods, included for comparison with the financial statements of the current period. Comparative financial statements allow users to identify changes and trends in the financial position and operating results of a company over an extended period, and thus are more useful to investors and creditors than are financial statements for a single period. Publicly owned companies are required to include in their annual reports the balance sheets for each of the last two years and the related statements of income, retained earnings, and cash flows for each of the last three years. The auditors' report covers all financial statements that are presented. Later in this chapter, we will describe in detail the auditors' reporting responsibilities when management presents comparative financial statements.

The Auditors' Standard Report—Nonpublic Clients

   Before continuing, notice several details about this report. It has a title that includes the word independent. It is addressed to those for whom it is prepared, generally the audited company itself or to those charged with governance. After the introductory paragraph, the report is divided into sections with headings.

   The introductory paragraph of the auditors' report identifies the financial statements that have been audited. The section heading of Management's Responsibility for the Financial Statement indicates that management is responsible for the preparation and fair presentation of the financial statements, in accordance with generally accepted accounting principles (or another financial reporting frameworkA set of criteria used to determine measurement, recognition, presentation, and disclosure of all material items appearing in the financial statements: for example, accounting principles generally accepted in the United States of America, International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), or a special-purpose framework (discussed in Chapter 19). An "applicable financial reporting framework" is the framework adopted by management of the company being audited in a particular situation. such as cash basis, if appropriate) and its responsibility for internal control. The Auditors' Responsibility section includes three paragraphs that (1) indicate that it is the auditors' responsibility to express an opinion on the financial statements based on an audit conducted in accordance with generally accepted auditing standards, (2) outline the nature of an audit, and (3) conclude that the auditors believe that sufficient appropriate audit evidence has been obtained to provide a basis for the audit opinion. Finally, the Opinion Section presents the auditors' opinion on whether the financial statements are presented fairly in conformity with accounting principles generally accepted in the United States.3

   Historically, audit reports referred simply to generally accepted auditing standards and generally accepted accounting principles. Today, however, a number of nations have their own generally accepted standards (principles), and those standards generally differ from one another. To reduce confusion, audit reports issued in the United States now use terms such as “generally accepted auditing standards (United States of America)” or “auditing standards generally accepted in the United States of America.” A similar modification is made relating to generally accepted accounting principles. For simplicity's sake, in our text discussion, we often will use the simpler historical terms or their abbreviations “GAAP” and “GAAS.”

   Notice that the audit report is signed with the name of the CPA firm, not the name of an individual partner in the firm. This signature stresses that it is the firm, not the individual, that takes responsibility for the audit report. If the CPA is practicing under his or her own name as a sole practitioner, the report is signed with the CPA's personal signature. In addition, a sole practitioner should use I instead of we in the audit report.4

   Also notice the date under the signature. The auditors' report should not be dated earlier than the date on which the auditors have obtained sufficient appropriate audit evidence to support their opinion on the financial statements. Sufficient appropriate audit evidence has been obtained when all audit documentation has been reviewed, the financial statements (including notes) are prepared, and management has asserted that they have taken responsibility for these financial statements (ordinarily through a representation letter). The date of the audit report is quite significant because the auditors have a responsibility to perform procedures through that date to search for any subsequent events that may affect the fairness of the client's financial statements (see Chapter 16), and due to requirements relating to changes in documentation that arise after that date (see Chapter 5).

   An auditors' report with an unmodified opinion may be issued only when the auditors have obtained sufficient appropriate audit evidence to conclude that the financial statements, as a whole, are not materially misstated.

The Auditors' Standard Report—Public Clients

   There are a number of differences between this PCAOB audit report and the report used for audits of nonpublic companies. The primary differences are that the PCAOB report:

   We will now turn our attention to modifications of auditors' standard reports. Although our illustrations are for audit reports of nonpublic companies, they require few or no changes to be used for the PCAOB audit report.

1As is discussed in further detail in Chapter 19, an auditor may report on less than the complete set of financial statements. Thus, for example, an auditor could issue an audit report with an opinion on a balance sheet alone. One issue that complicates matters is a GAAP requirement that when a company presents a balance sheet and an income statement, it must also present a statement of cash flows; if a statement of cash flows is omitted in this situation, a departure from GAAP exists.

2While financial statements may be prepared using a number of financial reporting frameworks other than GAAP (e.g., International Financial Reporting Standards, Cash Basis, Tax Basis), throughout this chapter we will ordinarily just refer to GAAP unless a distinction relating to another framework is being made.

3Auditors sometimes have reporting responsibilities related to other legal and regulatory requirements. For example, for audits performed under Government Auditing Standards, the auditors may be required to report on internal control over financial reporting and on compliance with laws, regulations, and other matters. It is when the relevant law or regulation requires or permits the auditors to report within the auditors' report on the financial statements that this becomes relevant. In such a situation, the overall report is divided as described below:

Note that this treatment is not applicable for emphasis of matter or other matter paragraphs added to an audit report and is not required by the PCAOB.

4Section ISA 700 of the International Standards on Auditing allows the signature to be that of the audit firm, the personal name of the auditor who directed the audit, or both, as appropriate for the particular jurisdiction.

What is a standard unmodified audit report?

What are the contents of unmodified audit report?

What is an unmodified report?

When can an unmodified report be issued by the auditor?