An audited report is the independent auditor’s written report issued with a set of financial statements, stating the auditor’s opinion on whether those statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework, or stating that no such opinion can be expressed. It is the auditor’s own document rather than the company’s, and it is the part of the package that carries the auditor’s own conclusion rather than management’s.
Two Rulebooks, and Which One Sets the Wording
Which standard the report is written to turns on the entity audited, not on the size of the company.
Public company work sits with the Public Company Accounting Oversight Board because the law puts it there. It is unlawful for any person that is not a registered public accounting firm to prepare or issue, or to participate in the preparation or issuance of, any audit report with respect to any issuer, broker, or dealer (15 U.S.C. 7212(a)). The report standard for those audits is PCAOB AS 3101, which sets the content of the written report when the auditor expresses an unqualified opinion, the position the auditor is in after conducting the audit under PCAOB standards and concluding that the statements, taken as a whole, are presented fairly in all material respects (PCAOB, AS 3101, paragraphs .01 and .02).
Audits outside that regime run on the AICPA standard, which in a US firm means most private company and nonprofit work. AU-C section 700 addresses the auditor’s responsibility to form an opinion and the form and content of the resulting report, applied to an audit of a complete set of general purpose financial statements. It names the clean result an unmodified opinion, defined as the one expressed when the auditor concludes that the statements are presented fairly, in all material respects, in accordance with the applicable framework (AICPA, AU-C section 700, paragraphs .01, .02 and .10).
So the same clean outcome has two names. The PCAOB calls it unqualified, the AICPA calls it unmodified, and an issuer report saying unmodified, or a private company report saying unqualified, has borrowed the other rulebook’s word.
What Each Report Has to Carry
Both open with the opinion and then explain its basis (PCAOB, AS 3101, paragraphs .08 and .09; AICPA, AU-C section 700, paragraphs .24 and .28), and a few requirements separate them on sight.
An issuer report must be titled Report of Independent Registered Public Accounting Firm, addressed to the shareholders and the board of directors, and must state the year the auditor began serving consecutively as the company’s auditor, alongside the firm’s signature, the city and state of issue, and the report date. The auditor must also determine whether there are any critical audit matters in the audit of the current period’s financial statements, meaning matters that were communicated or required to be communicated to the audit committee, that relate to accounts or disclosures material to the financial statements, and that involved especially challenging, subjective, or complex auditor judgment. Communication of critical audit matters is not required for audits of brokers and dealers reporting under Exchange Act Rule 17a-5, investment companies registered under the Investment Company Act of 1940 other than those that have elected to be regulated as business development companies, employee stock purchase, savings and similar plans, or emerging growth companies (PCAOB, AS 3101, paragraphs .05, .06, .07, .10 and .11).
A non-issuer report needs only a title that clearly indicates it is the report of an independent auditor, and it carries two separately headed sections the issuer report does not have, headed Responsibilities of Management for the Financial Statements and Auditor’s Responsibilities for the Audit of the Financial Statements. The second of those states the report’s own limit: reasonable assurance is a high level of assurance but is not absolute assurance, and therefore is not a guarantee that an audit conducted in accordance with generally accepted auditing standards will always detect a material misstatement when it exists (AICPA, AU-C section 700, paragraphs .22, .31, .34 and .35).
Other sections appear only when circumstances call for them: a going concern section, covered in going concern, an emphasis-of-matter paragraph on a restatement, covered in misstatements, and in an integrated audit a separate opinion on internal control over financial reporting, covered in tests of controls.
The Four Opinion Outcomes
Two questions decide the opinion. Are the statements materially misstated, or was the auditor simply unable to obtain sufficient appropriate audit evidence? And is the effect pervasive?
Pervasive is a defined term rather than a loose adjective, though the standard leaves the call to the auditor. Pervasive effects are those that, in the auditor’s judgment, are not confined to specific elements, accounts, or items of the financial statements; or, if so confined, those that represent or could represent a substantial proportion of the statements; or, regarding disclosures, those fundamental to users’ understanding of them (AICPA, AU-C section 705, paragraph .06). Whether a misstatement is material at all is a separate judgment, treated in materiality and materiality in auditing.
A qualified opinion has two routes into it. Either the auditor has sufficient appropriate audit evidence and concludes misstatements are material but not pervasive, or the auditor could not get that evidence and concludes the possible effects of undetected misstatements could be material but not pervasive. It reads that, except for the effects of the matters described in the Basis for Qualified Opinion section, the statements present fairly, with except for the possible effects used when the cause was missing evidence (AICPA, AU-C section 705, paragraphs .08 and .18).
The last two are the pervasive versions of each route. An adverse opinion follows when the auditor has the evidence and concludes misstatements are both material and pervasive, and it states that because of the significance of the matters described, the statements do not present fairly. A disclaimer follows when the auditor could not get the evidence and the possible effects could be both material and pervasive, and it states that the auditor does not express an opinion. The section heading moves with the outcome, reading Qualified Opinion, Adverse Opinion, or Disclaimer of Opinion (AICPA, AU-C section 705, paragraphs .09, .10, .17, .19 and .20).
Issuers reach the same four outcomes, but the requirements for departing from an unqualified opinion sit in AS 3105 rather than in the unqualified report standard (PCAOB, AS 3101, paragraph .03).
What an Audited Report Is Not
Four things get tangled with it.
It is not a review or a compilation report, because those engagements produce limited assurance and no assurance respectively rather than an opinion, and the scope consequences are set out in audit vs review vs compilation.
It is not the annual report or the Form 10-K, which are the company’s filings and merely contain the auditor’s report; when a previously issued audited report can no longer be relied on, the disclosure runs through Form 8-K.
It is not the financial statements, which are management’s, as the report itself says in describing management’s responsibility for their preparation and fair presentation and for the internal control relevant to preparing statements free from material misstatement (AICPA, AU-C section 700, paragraph .32).
It is not an IRS audit, which is a review or examination of an organization’s or individual’s books, accounts and financial records to confirm that information reported on a tax return is correct under the tax laws, and which ends in an examination result rather than an opinion on financial statements (IRS, IRS audits).
Common Questions
An unqualified opinion for an issuer, or an unmodified opinion for everyone else, is the clean one. The other three are a qualified opinion, an adverse opinion, and a disclaimer of opinion, chosen by whether the problem is a misstatement or missing evidence, and whether its effect is pervasive.
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