 In this presentation, we will take a look at the general format or general outline of an audit report. As we do so, remember that this is going to be the end process. So now we're imagining the end process and as we go through future presentations, we'll be going through the audit process with the goal of ending, of course, with the end process of the audit report, the audit report that is the document that's going to be issuing the opinion of support accounting instruction by clicking the link below, giving you a free month membership to all of the content on our website broken out by category, further broken out by course, each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it, the audit tour. So in looking at the format of the audit report, we're visualizing where we're going. Where are we going to end up at the end of the audit process? Now, the audit report is going to be fairly standardized because we have a specific goal in mind at the end of the audit process. That is, of course, to give our opinion on whether or not the financial statements are being presented in a fair way in accordance to whatever they are being prepared in accordance with such as generally accepted accounting principles. Because the goal is going to be a specific goal, the format of the audit report will take a specific format as well. In other words, we have a pretty good idea of what we would like the audit report to look like at the end of the process. Now, you might be saying, how could we know what we would want it to look like when we're trying to issue an opinion and we don't know what our opinion is at the beginning. But, of course, our opinion, what we're hoping for is to be able to say, hey, these audit reports are good. They have been presented in accordance with whatever they've been said they're going to be presented with with regards to those assertions. That's what the specific goal is. That's what we're hoping will happen. And therefore, we have a pretty good idea of the format of the audit report at the end of the process. However, there are certain conditions which may restrict us from having that standard format to basically issue an opinion saying, hey, the financial statements are in accordance, and we're going to basically want to know exactly what those differences are so that we can then standardize what the financial statements or the audit report will look like if we have some problems, some areas where the financial statements do not line up exactly what we would hope to line up where the audit doesn't go exactly as we would hope, where we can't issue exactly a clean type of presentation. So let's look at first what, of course, the normal format would be of the audit report, and then we'll take a look and think about some types of restrictions or deviations from that normal clean type of audit report that we would put together under normal or good conditions if everything runs smoothly through the audit process. Now, later on, we'll go through the audit report in more detail as we go through the steps of the audit, but we want to get a good idea of what the endpoint will be as we go through and start through the audit process. So audit report for a public company, so now we're thinking about publicly traded companies typically here, we're going to have a title line which includes independent registered public accounting firm. So we're going to be saying, hey, this is an independent registered publicly accounting firm that hopefully will give some assurance to the reader of the audit report. Why? Because we're saying, hey, we're independent. We're not part of the company. Therefore, you can depend on what we're saying a little bit more, hopefully, than the company itself because we're not invested in the company in the same way that, of course, management or an agent of the company would be. We'll discuss more about matters of independence later in future presentations. Also note that audit reports for non publicly traded companies will most likely take a very similar type of format. But of course, the more stringent type of format, the longer type of format is going to be those for the publicly traded companies are typically going to have more types of regulations. Therefore, that's the one we usually will consider then possibly tone it back a bit or look at those types of situations or the wording, which may not be as necessary or restricted with regards to non publicly traded types of companies. So the rules do differ slightly. Usually the rules are more stringent or more strict with regard to publicly traded companies, larger companies usually addressed to the stockholders and board of directors of the company. So note what's happening with the audit is we're going to have an audit if the publicly traded audit, it's because it's required to have an audit in order to be publicly traded. Who's going to be hiring the auditor, the company, the company's hiring the auditor because they're the ones that are required to have an audit in order to be a publicly traded company. Therefore, the audit, who is the audit going to be given to you're basically saying, hey, here's our opinion. That's what the audit is. That's what the audit report is our opinion as the auditor, who are we going to address this letter to this opinion to the stockholders and board of directors of the company. That's usually who we think is the most important for for our audit report, right? The board of directors is going to be in charge in essence of regulating the actions of management of the company. The stockholders are the people that own the company and vote for then the board of directors, the board of directors, then the people that hire management. So the audit then, judging the fairness of the financial statements is in essence, or in some degree, some type of check or regulation on a very enlarged companies that have this separation of duties or have a less direct management or type of agency issue between the owners, stockholders, and of course, the management who are a couple steps removed, the management being hired by the board of directors, board of directors being voted on by the stockholders. So in essence, the audit can be thought of as something of a kind of a review of whether or not the information is being put together in accordance with what the job of management is to do, which is to put the financial statements together in accordance with the assertions of whatever regulations they're putting them together in accordance with generally accepted accounting principles, often being the case for for profit types of organization. Audit report sections include the opinion, opinion on the financial statements. So we're going to give the auditor's opinion on the financial statements. A paragraph with the auditor's opinion of internal controls if report on internal controls is included in a separate report. So as we go through the opinion, we're going to of course give our opinion on the financial statements. That's the end product. That's what the audit report is given to do. And then we will include the basis for the opinion. The critical audit matters. And then it's going to end with the signature of the CPA firm. The year the audit began serving as auditor, the year the auditor began serving as auditor, city and state where report is issued and the date of the report. Now let's think about different types of opinions. Now normally you would think that the audit report what we're gearing towards is to have an unqualified opinion. This is the highest level of opinion. It sounds funny because you have unqualified sounds like a negation type of term. But what it means is it is a negation type of term, but it doesn't seem like the type of word that you would have for the best report that you can give. The one we're actually looking for is unqualified. And what we're saying here is that, look the financial statements are good. The assertions are in compliance. They are in compliance with the assertions. They say they're in compliance with. They put the financial statements in accordance with whatever format they said they were going to, such as generally accepted accounting principles. And we don't have any qualifications that we have found to that being the case within our audit. So it takes a little bit of time, at least it did for me to look at something that's called unqualified as actually what we're expecting to happen. So we're hoping if everything goes well, everybody really wants to issue an unqualified opinion at the end of the day. What we would like to happen is management wants to say, hey, I'd like to hire an auditor. I'd really like the auditor to say, hey, you did a great job. Everything looks good in accordance with the format that you were following in terms of generally accepted accounting principles possibly. The auditor really wants to basically say, I've checked everything out. I've reviewed it as best I can. And I've gone through all the evidence and all the evidence does show that you have indeed put the financial statements together in accordance with generally accepted accounting principles. I have no qualifications to that. And therefore I'm going to give an unqualified or clean audit report on it. That's what everybody wants to happen. That's what happens hopefully most of the time. I mean, if you have good clients that are putting this together, good companies and the auditor will talk about what type of clients auditors will work with and how to pick clients and that kind of thing later. But if you have a good set of clients that are putting together good financial statements and are adhering to the regulations, then of course we would expect that most of our clients would have and we would be issuing unqualified, best clean type of audit reports. And if someone wants to ask us why we gave the unqualified report, then we can provide the audit evidence in order to support our opinion about our good clean clients that have been doing their job properly, representing the financial statements in accordance with whatever type of regulations they're saying they're representing their financial statements in. So that's what we would expect, unqualified. That's going to be the baseline report. That's what everybody's hoping to happen. Now we might have qualifications though. However, what if there is an issue? What if there's a qualification? Well, there's going to be some kind of standards that we're going to have to say. So if, and we'll go into this in a bit more detail, but if there's a problem, what we're saying here is it's not totally unqualified. We have a qualification here. So this, we might say, and you can imagine this is saying this looks good except for this qualification, right? Which is basically this blemish, it looks good kind of thing. And so we'll discuss that in a little bit more detail shortly. We could have an adverse opinion, which is basically, and that's not good. We would basically be saying no. And we'll talk a little bit more about that opinion as well. And we could have a disclaimer of opinion, which basically means we cannot have, we're not going to be able to issue an opinion on these financial statements. So let's take a look at that in a bit more depth. First, the unqualified opinion, which we talked about a bit already, the auditor's report audit opinion is the main product or output of the audit. So just remember, that's of course what we're trying to do. That's the product that we're giving is the opinion on the report. That's what's lending to the trust of the third parties by a third party opinion from us. And that's going to increase, hopefully the confidence in the financial statements and therefore better and more business transactions will take place because of it, because of the transparency, because of the communication in it and people's more better reliance on it. So the standard unqualified clean audit report is the most common type of report issued. And of course, that's the one we're looking for. We're hoping that we can give a clean report. We want to say that we did everything well. Here's the clean report. Everything looks great as we knew it would be because we have good clients and everything's pushing forward as it well. Unqualified means that because the financial statements are free of material misstatements, so they don't have the material misstatements and recall what material means, those that would change the opinion of a decision maker that is gonna be a decision maker that is reasonable. So we have that term reasonable decision maker. The auditor does not find it necessary to qualify his or her opinion. So we don't have a but in there, right? We don't have a, this is the way it is, but except qualification about the fairness of the financial statements. So what about, what if we do have a qualification? What if there's a problem? So we don't have the most standard, there's a qualification. So this is another type of audit report. We're gonna have to qualify our opinion then. If an auditor's financial statements contain a misstatement that the auditor considers material and management refuses to correct the misstatement. So note there, we'll talk a little bit more about this later, but note how we have that we found a misstatement. And not only that, we're gonna say, hey, the financial statements are wrong. We found this misstatement and management says, I'm not gonna fix it for whatever reason. Maybe they have a good reason to do it or whatever, but they're not gonna fix it. And that would mean, and it might be good. It might be a good reason. They might say, hey, that's gonna misrepresent our financial statements. And we're gonna say, but that's what generally accepted accounting principles says to do. It says you have to do this. And they might say, well, I'm not gonna do it because I think it misrepresents my financial statements in this way, shape or form. And we might go, ah, well, we can't issue an opinion saying that the financial statements are correcting the courts with generally accepted accounting principle with this material misstatement on it. And therefore, if you don't fix it, then, or change it, then we're gonna have to put a qualification on the financial statement in some way. Or if the auditor is unable to obtain sufficient evidence regarding a specific account. Another situation might be, well, you're not giving me enough information to get at this number, this particular number, I can't get at it because you're not giving me the information to test it for what, and again, there might be valid reasons that might be in another country. We might not have the ability to do that. So for whatever reason, it might be a valid reason, but we can't do it, can't test this thing. Therefore, we have a qualification. The auditor might may qualify the report explaining that the financial statements are fairly stated, except for misstatement identified by the auditor. So we're gonna say, either there's a misstatement or there's something that we couldn't fully verify. And therefore, look, everything we tested is good, everything's good, except this one particular point, qualification, I couldn't test it, or I don't believe it's in accordance with generally accepted accounting principles. And that's our qualification. Adverse, what about an adverse opinion? This isn't good. If the auditee's financial statements contain a misstatement that the auditor considers so material that it perversely affects the interpretation of the financial statements, the auditor will issue an adverse opinion, indicating that the financial statements are not fairly stated and should not be relied upon. Now, if it comes to the point where we're gonna say, hey, we're gonna issue an adverse opinion, it's very rare that you would actually issue the adverse opinion, because probably what will happen before that point in time is you're gonna start to indicate problems and you're gonna say, hey, look, you're not giving me this information, I can't find this, this looks wrong, this looks like it's not reported correctly and you're not, and you don't seem willing to change it or anything like that. And what probably will end up happening is instead of it, and we get to the adverse opinion, we might have a disclaimer or the engagement may end at some point in time. In other words, if we're going through the engagement from the planning process all the way to the audit report, and things have not gone bad going good through that process, the process might be terminated before the end of the time period or we might be in a situation where we were unable to get the information we needed and then issue a disclaimer of opinion. If not, then if we went all the way through and issued the opinion, and again, this is our report, this is the end product that we're trying to do here, the audit report, and they're looking for an unqualified opinion. We give an adverse opinion, people aren't gonna be happy with this, but we have to follow the regulations on whatever the regulations are. So just note that adverse opinion, of course, is saying that there's gonna be an auditor's financial statements contain a misstatement that the auditor considers so material that it perversely affects the interpretation of the financial statements. So we cannot give an opinion on it like we would like to do that would be unqualified or even qualified. We have to say adverse. And again, at that point in time, I mean, at some point, that might be just something that terminates the engagement and we end up not issuing the report or disclaiming the report could happen before an adverse opinion or report is given because obviously an adverse report would be of no use to a company because they wouldn't be able to use it for if they needed a bank loan or something like that. That's not what they're looking to get. So again, that would have to happen, but it's not what we would expect to be happening. And then there's a disclaimer. If a scope limitation is so large that it limits the ability of the auditor to make an opinion on the financial statements. And again, this might actually be more common, of course, because it could be the case that we just can't conduct the audit for either legitimate reasons or not. It might be that the client is not giving us the information for whatever reason. Scope limitation means that we just can't get to the information. We can't get enough information usually on something in order to basically get an opinion on it. So for example, they might have a part of their company in China or something like that and regulations are such that we can't get to it. And if that part of the company is substantial enough, we're gonna say, we can't test it. We can't test that part of the company. And so we can't give an opinion on it. And so we could end up in the fact that we have to disclaim it because we just don't have the ability to test on it. And then so we would issue the disclaimer. The auditor will issue a disclaimer of opinion indicating that it's not possible to express an opinion on the fairness of the financial statement. So we're just gonna say, hey, there's a scope limitation. This is what we need to do in order to do the audit. We can't do it because we can't get the information either because management or whatever won't provide it to us or there are certain other limitations such as regulatory limitations, limitations on us. Maybe we're not big enough to be in all these different countries that are gonna be necessary or to complete the audit or we're being restricted by government regulation, say in other countries or other states or something like that. Therefore, we can't give an opinion because we couldn't gather the evidence in order to give one.