How is an audit report made?
After performing all the audit procedures, the auditor will prepare an audit report in accordance with the guideline and form of the standards of auditing instead of freestyle. The related standards are standards no. 700, 705, 706, 710, 720, 800, 805, 810, 1000, 930, 920.
Depending on the scope and type of the audits, the audit opinions vary in characteristics. (See detail in the above standards).
For Independent audit (the common type of audit), there are 4 types as below:
- Unqualified opinion: is the type of opinion when the auditors concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.
- Qualified opinion: is the opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.
- Adverse opinion: is the type of opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.
- Disclaimer of opinion: The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.
To understand more about the 4 types of audit opinion, see the standard 700 here
Is it right that an unqualified opinion means that there is no material misstatements in the reports?
(Paragraph 5 of VSA 200)
“As the basis for the auditor’s opinion, VSAs require the auditor to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. Reasonable assurance is a high level of assurance. It is obtained when the auditor has obtained sufficient appropriate audit evidence to reduce audit risk (that is, the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated) to an acceptably low level. However, reasonable assurance is not an absolute level of assurance, because there are inherent limitations of an audit which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than conclusive. (See detail at A28-A52)”
According to this paragraph, we cannot ensure that there is no material misstatement in the audited report, however, if the audit opinion is unqualified, the risk of material misstatement is low.
How to understand about material misstatements?
(Paragraph 6 of VSA 200)
“The concept of materiality is applied by the auditor both in planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements (See regulations and guideline at VSA No.320 and 450). In general, misstatements, including omissions, are considered to be material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. Judgments about materiality are made in the light of surrounding circumstances, and are affected by the auditor’s perception of the financial information needs of users of the financial statements, and by the size or nature of a misstatement, or a combination of both. The auditor’s opinion deals with the financial statements as a whole and therefore the auditor is not responsible for the detection of misstatements that are not material to the financial statements as a whole.”