The independent auditor's report is the only part of the audit most users ever read. Its wording is largely standardized, which makes errors easy to miss: a wrong framework name, a missing going concern section, a date earlier than the representation letter, a responsibilities paragraph copied from an old template.
This post walks through the report for an audit of a nonissuer under AU-C 700, as revised by SAS No. 134, section by section. It describes what each section must contain rather than reproducing the illustrative wording, which is in the AICPA Professional Standards; for a starting draft, use the independent auditor's report template. For how the opinion itself is chosen and modified, see types of audit opinions.
The order of the report
SAS 134 reorganized the report so the opinion comes first. For an unmodified opinion on a complete set of general purpose financial statements, the core sequence is as follows. The positions of the going concern, emphasis-of-matter, other-matter, key audit matters, other information and supplementary information sections depend on the illustrations in AU-C 700, 706, 720 and 725, so follow the illustration for the circumstances:
- Title
- Addressee
- Opinion
- Basis for Opinion
- Substantial doubt about going concern (when applicable)
- Emphasis-of-matter and other-matter paragraphs (when applicable; position can vary)
- Key audit matters (only when the auditor is engaged to communicate them)
- Responsibilities of Management for the Financial Statements
- Auditor's Responsibilities for the Audit of the Financial Statements
- Other reporting responsibilities, such as other information and supplementary information (when applicable)
- Report on other legal and regulatory requirements (when applicable)
- Auditor's signature
- City and state
- Date
Title
The report has a title that clearly indicates it is the report of an independent auditor. "Independent Auditor's Report" is the usual form. The word "independent" distinguishes it from reports issued by others and signals that the auditor has met the independence requirements. If the firm is not independent, it cannot issue an audit report; see SSARS compilation vs review vs audit for the alternatives.
Addressee
The report is addressed as required by the circumstances of the engagement, usually to those for whom it is prepared: the board of directors, the shareholders or members, or the trustees. The engagement letter should set the addressee. Addressing the report to management alone is unusual and should match the terms agreed.
Opinion section
The first section, under the heading "Opinion," does four things:
- identifies the entity whose financial statements were audited
- states that the financial statements have been audited
- identifies the title of each statement and the period covered, and refers to the notes, including the summary of significant accounting policies
- expresses the opinion that the financial statements present fairly, in all material respects, the financial position, results of operations and cash flows (or the equivalent for the framework) in accordance with the applicable financial reporting framework
Check the statement titles against the actual financial statements word for word. A report that refers to a "statement of operations" when the financial statements say "statement of income," or that omits the statement of changes in equity, is a common error. Name the framework precisely, for example accounting principles generally accepted in the United States of America.
Where comparative financial statements are presented and both periods were audited by the same firm, the opinion covers both periods. AU-C 710 addresses comparative financial statements, including reporting when a predecessor auditor audited the prior period; AU-C 510 covers the related work on opening balances.
Basis for Opinion section
Directly after the opinion, the Basis for Opinion section:
- states that the audit was conducted in accordance with auditing standards generally accepted in the United States of America (GAAS); see GAAS explained
- refers to the section of the report that describes the auditor's responsibilities under GAAS
- states that the auditor is required to be independent of the entity and to meet other ethical responsibilities in accordance with the relevant ethical requirements relating to the audit
- states whether the auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for the opinion
If the audit was also conducted under Government Auditing Standards, the report says so here and adds the related reporting. See Yellow Book (GAGAS).
Going concern
When the auditor concludes that substantial doubt about the entity's ability to continue as a going concern exists, AU-C 570 requires a separate section with an appropriate heading. It draws attention to the note that discloses the conditions and management's plans, states the auditor's conclusion that substantial doubt exists, and states that the opinion is not modified with respect to the matter. When substantial doubt is alleviated by management's plans, there is no separate section, though the auditor may add an emphasis-of-matter paragraph. See going concern assessment under AU-C 570.
Emphasis-of-matter and other-matter paragraphs
AU-C 706 governs these paragraphs. An emphasis-of-matter paragraph refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor's judgment, is fundamental to users' understanding, such as a significant subsequent event or a change in accounting principle. Some standards require one in specific situations. An other-matter paragraph refers to a matter other than those presented or disclosed that is relevant to users' understanding of the audit, the auditor's responsibilities or the report. Neither modifies the opinion, and each must be headed and placed so it is clearly distinguishable.
Key audit matters
Key audit matters under AU-C 701 are communicated only when the auditor is engaged to do so. They are not a default part of a private company report. If included, they appear in their own section with the heading "Key Audit Matters."
Responsibilities of Management for the Financial Statements
This section, under that heading, describes management's responsibility for:
- preparing and fairly presenting the financial statements in accordance with the applicable framework
- designing, implementing and maintaining internal control relevant to preparing financial statements that are free from material misstatement, whether due to fraud or error
- where the framework requires it, evaluating whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern for the period the framework specifies (under US GAAP, within one year after the date the financial statements are issued or available to be issued)
The section should not be edited to suit the client. If management does not acknowledge these responsibilities, the auditor should not accept the engagement under AU-C 210.
Auditor's Responsibilities for the Audit of the Financial Statements
This is the longest section. Paraphrased, it covers:
- Objectives: to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue a report that includes the opinion.
- Reasonable assurance: a high level of assurance but not absolute assurance, so it does not guarantee that an audit conducted under GAAS will always detect a material misstatement. The risk of not detecting a material misstatement resulting from fraud is higher than for error, because fraud may involve collusion, forgery, intentional omissions, misrepresentations or override of internal control.
- Materiality: misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user. See AU-C 320.
- What the auditor does: exercises professional judgment and maintains professional skepticism; identifies and assesses risks of material misstatement and designs and performs responsive procedures, including examining evidence on a test basis; obtains an understanding of internal control relevant to the audit in order to design appropriate procedures, but not to express an opinion on the effectiveness of internal control (with an explicit statement that no such opinion is expressed); evaluates the appropriateness of accounting policies and the reasonableness of significant estimates and the overall presentation; and concludes whether there are conditions or events that raise substantial doubt about going concern for a reasonable period of time.
- Communications: the auditor is required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings and certain internal control related matters identified during the audit. See the governance communication template.
If the auditor is also engaged to report on internal control under AU-C 940, the report changes accordingly.
Other reporting responsibilities
Supplementary information
When supplementary information, such as consolidating schedules or schedules of expenses, accompanies the financial statements and the auditor reports on it under AU-C 725, a separate section or paragraph states whether it is fairly stated, in all material respects, in relation to the financial statements as a whole. Required supplementary information is reported under AU-C 730.
Other information
When the entity issues an annual report that contains the audited financial statements and other information, and the auditor has obtained some or all of that information by the report date, AU-C 720 (as revised by SAS No. 137) requires a separate section headed "Other Information." It describes the auditor's responsibilities: to read the other information and consider whether a material inconsistency exists between it and the financial statements, or whether it otherwise appears to be materially misstated. The auditor does not express an opinion or any form of assurance on it.
Report on other legal and regulatory requirements
If the auditor has additional reporting responsibilities, for example under Government Auditing Standards or a regulator's requirements, they are reported in a separate section after the report on the financial statements, or in a separate report.
Signature, location and date
- Signature: the report includes the manual or printed signature of the auditor's firm.
- City and state: the report states the city and state where the auditor practices.
- Date: the report is dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence to support the opinion. That includes evidence that the complete set of financial statements, including notes, has been prepared and that management has asserted that it has taken responsibility for them.
The representation letter is dated as of the report date (AU-C 580). The report release date is the date the auditor grants the entity permission to use the report. Under AU-C 230, the final audit file is assembled within 60 days following that date. Subsequent events procedures under AU-C 560 extend to the report date. See subsequent events.
Reviewer's checklist for the report
- Entity name matches the legal name in the financial statements.
- Every statement title and period matches the financial statements exactly.
- Framework named correctly, including special purpose frameworks under AU-C 800 where applicable.
- Sections in the SAS 134 order, with the required headings.
- Going concern section present if substantial doubt exists after considering management's plans.
- Supplementary information and other information sections included when applicable.
- Report dated no earlier than the date the evidence was complete, and the representation letter dated as of the report date.
- Firm signature and city and state present.
- Prior period and predecessor auditor references correct.
Frequently asked questions
What are the sections of an independent auditor's report?
For a nonissuer under AU-C 700, the main sections are the title, addressee, Opinion, Basis for Opinion, management's responsibilities, auditor's responsibilities, any other reporting sections, the firm's signature, city and state, and the report date.
Why does the opinion come first in the auditor's report?
SAS 134 moved the Opinion section to the beginning of the report so users see the auditor's conclusion immediately, followed by the Basis for Opinion section that supports it.
What date goes on the auditor's report?
The report is dated no earlier than the date the auditor has obtained sufficient appropriate audit evidence, including evidence that the financial statements have been prepared and management has taken responsibility for them. The representation letter is dated as of the report date.
Does the report say the auditor tested internal control?
The report states that the auditor obtains an understanding of internal control relevant to the audit to design appropriate procedures, but not to express an opinion on its effectiveness, and that no such opinion is expressed.
Where can I find the exact wording of the report?
The illustrative reports are in the illustrations that accompany AU-C 700 and related sections of the AICPA Professional Standards. Firms usually maintain approved report templates based on those illustrations.
CORAA prepares ready-to-review audit files for US CPA firms; see /us.
Sources
- AICPA, AU-C Section 700, Forming an Opinion and Reporting on Financial Statements (as revised by SAS No. 134)
- AICPA, AU-C Section 705, Modifications to the Opinion in the Independent Auditor's Report, and AU-C Section 706, Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs
- AICPA, AU-C Section 701, Communicating Key Audit Matters in the Independent Auditor's Report
- AICPA, AU-C Section 570, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern
- AICPA, AU-C Section 710, Comparative Information: Corresponding Figures and Comparative Financial Statements; AU-C Section 510, Opening Balances: Initial Audit Engagements
- AICPA, AU-C Section 720, The Auditor's Responsibilities Relating to Other Information Included in an Annual Report (as revised by SAS No. 137); AU-C Section 725, Supplementary Information in Relation to the Financial Statements as a Whole; AU-C Section 730, Required Supplementary Information
- AICPA, AU-C Section 580, Written Representations; AU-C Section 560, Subsequent Events and Subsequently Discovered Facts; AU-C Section 230, Audit Documentation; AU-C Section 210, Terms of Engagement
Part of CORAA University · Completion and reporting: related guides, calculators and templates.
AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error