AU-C section 700, Forming an Opinion and Reporting on Financial Statements, covers two things for an audit of a nonissuer: how the auditor reaches an opinion on the financial statements, and what the auditor's report looks like when the opinion is unmodified. SAS No. 134, effective for audits of financial statements for periods ending on or after December 15, 2021, restructured the report, moving the opinion to the front and adding sections that explain the basis for the opinion and the responsibilities of each party.
This page paraphrases the standard. Read AU-C 700 in AICPA Professional Standards before relying on any point here. For a section-by-section walk through a sample report, see independent auditor's report example.
What is the objective of AU-C 700?
The auditor's objectives are to form an opinion on the financial statements based on an evaluation of the audit evidence obtained, and to express clearly that opinion through a written report that also describes the basis for the opinion.
How does the auditor form the opinion?
The auditor concludes whether reasonable assurance has been obtained about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. That conclusion takes into account:
- whether sufficient appropriate audit evidence has been obtained, see AU-C 330 and AU-C 500
- whether uncorrected misstatements are material, individually or in the aggregate, see AU-C 450
- the qualitative aspects of the entity's accounting practices, including indicators of possible bias in management's judgments
The auditor then evaluates whether the financial statements are prepared, in all material respects, in accordance with the requirements of the applicable framework. The evaluation covers, among other things:
- whether the financial statements adequately disclose significant accounting policies
- whether the accounting policies selected and applied are consistent with the framework and appropriate
- whether accounting estimates made by management are reasonable
- whether information is relevant, reliable, comparable and understandable
- whether the financial statements provide adequate disclosures so that intended users can understand the effect of material transactions and events
- whether the terminology used, including the title of each statement, is appropriate
- the overall presentation, structure and content, and whether the statements represent the underlying transactions and events in a manner that achieves fair presentation, where that is the framework's concept
If the framework is a fair presentation framework, the evaluation also considers whether the financial statements achieve fair presentation. For a compliance framework, whether they comply. In either case, the auditor evaluates whether the financial statements adequately refer to or describe the applicable framework.
If the auditor concludes the financial statements are not prepared in all material respects in accordance with the framework, or cannot obtain enough evidence, the opinion is modified. See AU-C 705.
What does the SAS 134 report contain?
For an unmodified opinion on general purpose financial statements, the sections of the sample reports in SAS 134 and SAS 137 appear in this order. Sections in italics are conditional. AU-C 700 requires the Opinion section first and the Basis for Opinion immediately after it (unless law or regulation prescribes otherwise). The numbering below shows the usual sequence; where a conditional section sits depends on the illustrations in AU-C 570, 700, 701, 706 and 720 and on the auditor's judgment.
| Order | Section | Notes |
|---|---|---|
| 1 | Title | "Independent Auditor's Report" or similar, to distinguish it from others |
| 2 | Addressee | As required by the circumstances of the engagement |
| 3 | Opinion | Identifies the entity, states that the financial statements were audited, names each statement and the notes, gives the period, and gives the opinion |
| 4 | Basis for Opinion | States that the audit was in accordance with GAAS, refers to the auditor's responsibilities section, states independence and ethics compliance, and that the evidence is sufficient and appropriate |
| 5 | Going concern | Only when substantial doubt exists. See AU-C 570. |
| 6 | Key audit matters | Only when the auditor is engaged to communicate them under AU-C 701 |
| 7 | Emphasis-of-matter or other-matter paragraphs | Only when appropriate. AU-C 706 does not fix a position. See AU-C 706 |
| 8 | Responsibilities of Management for the Financial Statements | Preparation and fair presentation, internal control, and management's evaluation of going concern |
| 9 | Auditor's Responsibilities for the Audit | Reasonable assurance, professional judgment and skepticism, risk assessment, evaluating going concern, communication with those charged with governance |
| 10 | Other Information | Only when AU-C 720 applies and the auditor has obtained all the other information by the report date. See AU-C 720 |
| 11 | Report on Other Legal and Regulatory Requirements | Only when applicable |
| 12 | Signature | Manual or printed signature of the firm |
| 13 | City and state | Where the auditor practices |
| 14 | Date | Date of the auditor's report |
Where the report has other reporting responsibilities beyond the financial statements opinion, the auditor uses a heading such as "Report on the Audit of the Financial Statements" for the first part, and a separate heading for the others. Reporting on supplementary information under AU-C 725 is covered in that section, not in this table.
The conditional sections can move with the matter and the auditor's judgment, but the Opinion and Basis for Opinion sections come first. Keep the language in the required sections as the standard's illustrations have it. If management will not acknowledge its responsibilities, see AU-C 210 and AU-C 580.
How is the report dated?
The report is dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the opinion. That evidence includes evidence that the financial statements, including the related notes, have been prepared and that those with recognized authority have asserted that they have taken responsibility for them.
In practice, the date is the point when the file supports the opinion: the representation letter is signed, subsequent events procedures are complete, and management has approved the final statements. Procedures for subsequent events run to this date. See AU-C 560.
Comparative financial statements
When comparative financial statements are presented, the auditor's opinion refers to each period for which statements are presented and on which an audit opinion is expressed. If the opinion now expressed on a prior period differs from the one previously expressed, the report discloses the date and type of the earlier opinion and the reasons in an emphasis-of-matter or other-matter paragraph. If a predecessor audited the prior period and its report is not reissued, an other-matter paragraph is required, covering that a predecessor audited it, the opinion type and any modification reasons, any emphasis or other-matter paragraph in that report, and its date. If the prior period was not audited (including periods that were only reviewed or compiled), the statements are marked as unaudited and an other-matter paragraph says the auditor assumes no responsibility for them. See AU-C 510 and AU-C 706.
How does this connect to other standards?
| Situation | Where it is addressed |
|---|---|
| Modified opinion | AU-C 705 |
| Emphasis or other matter | AU-C 706 |
| Going concern | AU-C 570 |
| Other information in annual report | AU-C 720 |
| Key audit matters | AU-C 701 (only when engaged) |
| Special purpose frameworks | AU-C 800 |
| Supplementary information | AU-C 725 |
| Integrated audits of internal control over financial reporting | AU-C 940 |
Checklist before release
Practice suggestions, not requirements:
- Framework named correctly in the Opinion section and consistent with the notes
- Each statement, the notes and the period named correctly, including comparatives
- Sections in SAS 134 order, using the required headings
- Report date supported by the signed representation letter and completed subsequent events work
- Firm name, city and state complete
- Going concern, other information and supplementary information sections present where required
- Draft checked against the firm's current template. See the independent auditor's report template.
What must be documented?
The file should support the opinion and the date, and show the evaluation of the financial statements against the framework. See AU-C 230 audit documentation.
Common weaknesses in reports
Practice checks, not requirements of the standard. Gaps to avoid:
- Pre-SAS 134 wording or section order still in the firm template
- Report dated before the representation letter or before subsequent events work was complete
- Framework reference not matching the financial statements
- Other information section missing when an annual report exists
- Required headings changed
- Comparative periods not addressed
Related
- Independent auditor's report example
- Types of audit opinions
- AU-C 705 modifications to the opinion
- AU-C 706 emphasis-of-matter and other-matter paragraphs
- AU-C 720 other information
- Independent auditor's report template
Sources
- AICPA, AU-C Section 700, Forming an Opinion and Reporting on Financial Statements, as amended by SAS No. 134 (periods ending on or after December 15, 2021)
- AICPA, AU-C Sections 570, 701, 705, 706, 720 and 725
- AICPA, AU-C Section 560 (report date)
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