Question

Identifies the appropriate type of audit report from the list below (a. through f.) and briefly explain the rationale for selecting the report.

Appropriate type of audit report:

Unqualified, standard

1. Unqualified, explanatory paragraph

2. Qualified opinion because of departure from GAAP

3. Qualified scope and opinion

4. Disclaimer

5. Adverse

Audit Situations:

An audit client has a significant amount of loans receivable outstanding (40% of assets), but has an inadequate internal control system over the loans. The auditor cannot locate sufficient information to prepare an aging of the loans or to identify the collateral for about 75% of the loans, even though the client states that all loans are collateralized. The auditor sent out confirmations to verify the existence of the receivables, but only 10 of the 50 sent out were returned. The auditor attempts to verify the other loans by looking at subsequent payments, but only eight had remitted payments during the month of January, and the auditor wants to wrap up the audit by February 15. The auditor estimates that if only 10 of the 50 loans were correctly recorded, loans would need to be written down by $7.5 million.

Answer 1

There are 4 types of audit reports that can be expressedby an auditor

1. Unmodified opinion

2. Modified opinion

a. Qualified opinion

b. Adverse Opinion

c. Disclaimer of opinion

Let us know the meaning of these Four in brief

Unqualified Opinion

Often called a clean opinion, an unqualified opinion is an audit report that is issued when an auditor determines that each of the financial records provided by the small business is free of any misrepresentations. In addition, an unqualified opinion indicates that the financial records have been maintained in accordance with the standards known as Generally Accepted Accounting Principles (GAAP). This is the best type of report a business can receive.

Typically, an unqualified report consists of a title that includes the word “independent.” This is done to illustrate that it was prepared by an unbiased third party. The title is followed by the main body. Made up of three paragraphs, the main body highlights the responsibilities of the auditor, the purpose of the audit and the auditor’s findings. The auditor signs and dates the document, including his address.

Qualified Opinion

In situations when a company’s financial records have not been maintained in accordance with GAAP but no misrepresentations are identified, an auditor will issue a qualified opinion. The writing of a qualified opinion is extremely similar to that of an unqualified opinion. A qualified opinion, however, will include an additional paragraph that highlights the reason why the audit report is not unqualified.

Adverse Opinion

The worst type of financial report that can be issued to a business is an adverse opinion. This indicates that the firm’s financial records do not conform to GAAP. In addition, the financial records provided by the business have been grossly misrepresented. Although this may occur by error, it is often an indication of fraud. When this type of report is issued, a company must correct its financial statement and have it re-audited, as investors, lenders and other requesting parties will generally not accept it.

Disclaimer of Opinion

On some occasions, an auditor is unable to complete an accurate audit report. This may occur for a variety of reasons, such as an absence of appropriate financial records. When this happens, the auditor issues a disclaimer of opinion, stating that an opinion of the firm’s financial status could not be determined.

The auditor has to consider the materiality and pervaisiveness in the misstatement

Here in the given case, the auditor has verified a loans receivable which is significant amount in business and also in which internal control system is also inadequate.

If the internal control system is inadequate the Auditor has to perform other functions like Substantive audit procedures, external confirmations etc...

But here in case most of the loans receivable has no security for 75% of loans identifed to the auditor, and also external confirmations is received only for 20%(in proportionate) to loans receivable, and also Auditor has asked for repayments but only 8 repaid

So it is clearly indicates a misstatement which is pervaisive to the financial statements. so the Auditor has to express a Adverse opinion and has to written down loans by 7.5 million. If the management has not obeied that quit from the engagement