audit reports

of the other auditor. The principal auditor may also decide that a qualification is
required in the overall report if the other auditor qualified his or her portion of the
audit. Qualified opinions and disclaimers are discussed in a later section.
DEPARTURES FROM AN UNQUALIFIED AUDIT REPORT
It is essential that auditors and readers of audit reports understand the circumstances
when an unqualified report is inappropriate and the type of audit report issued in each
circumstance. In the study of audit reports that depart from an unqualified report,
there are three closely related topics: the conditions requiring a departure from an
unqualified opinion, the types of opinions other than unqualified, and materiality.
First, the three conditions requiring a departure are briefly summarized. Each is
discussed in greater depth later in the chapter.
1. The Scope of the Audit Has Been Restricted (Scope Limitation) When the auditor
has not accumulated sufficient evidence to conclude whether financial statements are
stated in accordance with GAAP, a scope restriction exists. There are two major causes
of scope restrictions: restrictions imposed by the client and those caused by circum -
stances beyond either the client’s or auditor’s control. An example of a client restriction
is management’s refusal to permit the auditor to confirm material receivables or to
physically examine inventory. An example of a restriction caused by circumstances is
when the engagement is not agreed on until after the client’s year-end. It may not be
possible to physically observe inventories, confirm receivables, or perform other
important procedures after the balance sheet date.
2. The Financial Statements Have Not Been Prepared in Accordance with Generally
Accepted Accounting Principles (GAAP Departure) For example, if the client insists on
using replacement costs for fixed assets or values inventory at selling price rather than
historical cost, a departure from the unqualified report is required. When generally
accepted accounting principles are referred to in this context, consideration of the adequacy
of all informative disclosures, including footnotes, is especially important.
3. The Auditor Is Not Independent Independence ordinarily is determined by Rule 101
of the rules of the Code of Professional Conduct. Auditor independence requirements
and the Code of Professional Conduct are further discussed in Chapter 4.
When any of the three conditions requiring a departure from an unqualified report
exists and is material, a report other than an unqualified report must be issued. Three
main types of audit reports are issued under these conditions: qualified opinion,
adverse opinion, and disclaimer of opinion.
OBJECTIVE 3-5
Identify the types of audit reports
that can be issued when an
unqualified opinion is not justified.
A qualified opinion report can result from a limitation on the scope of the audit or
failure to follow generally accepted accounting principles. A qualified opinion report
can be used only when the auditor concludes that the overall financial statements are
fairly stated. A disclaimer or an adverse report must be used if the auditor believes that
the condition being reported on is highly material. Therefore, the qualified opinion is
considered the least severe type of departure from an unqualified report.
A qualified report can take the form of a qualification of both the scope and the
opinion or of the opinion alone. A scope and opinion qualification can be issued only
when the auditor has been unable to accumulate all of the evidence required by generally
accepted auditing standards. Therefore, this type of qualification is used when the
auditor’s scope has been restricted by the client or when circumstances exist that prevent
the auditor from conducting a complete audit. The use of a qualification of the
opinion alone is restricted to situations in which the financial statements are not stated
in accordance with GAAP.
Qualified Opinion
CHAPTER 3 / AUDIT REPORTS 55