An audit is a review of the financial statements by independent auditors in which the auditors express whether the financial statements present a true and fair view. This opinion is expressed through an audit report that is based on the audit findings and procedures. An unmodified audit report is also called a clean report and is a type of audit report that is considered a good report for the client.
Definition
An unmodified audit report in auditing can be defined as a report that the auditors prepare when the financial statements in question are free from material misstatements and present the financial position of the company fairly and in conformity with generally accepted accounting principles (GAAP) or any other framework that the company is allowed to adopt.
Explanation
Simply put, when the auditors can sufficiently conclude that the financial statements are free from material misstatements and conform with the applicable financial reporting standards, they express an unmodified audit opinion. The wording of an unmodified opinion is structured in either of the following ways.
- “In our opinion, the financial statements are free from material misstatements” OR
- “The financial statements are presented, in all material respects, in accordance with the applicable framework”
An unmodified audit opinion provides a high level of assurance to the users of the audit report. It assures the users that the independent examination of the financial statements has not revealed any material misstatements and that’s what makes it the management’s favorite report.
Things that stop Auditors from issuing an Unmodified Audit Report
There are circumstances under which the auditors may choose not to issue an unmodified audit report. These circumstances are created when:
- There is a material misstatement in the financial statements OR
- The auditors can’t find sufficient appropriate evidence.
If one of the above arises, the opinion could be modified to qualified, adverse, or a disclaimer of opinion depending on the nature and severity of the matter. IFAC has recently revised ISA 705 which deals with the rules and regulations regarding modifications to the audit opinion.
Elements
Every audit report has a standardized structure and includes necessary information that users of the report need to know. The auditor highlights key issues of the engagement and includes a basis of audit opinion paragraph to help users understand the audit process and make decisions accordingly. The contents of the unmodified audit opinion include:
1. Opinion
The first element of an unmodified audit report is opinion in which the auditor expresses a conclusive statement about the audit of the financial statements ie; “in our opinion, the financial statements are free from material misstatements”.
2. Basis for opinion
It includes the assertions of the audit engagement. In simple words, it states that the audit was conducted in accordance with international standards of auditing. In addition, the significant estimates and judgments of directors of the underlying entity are put forward in the basis for the opinion section. Use of accounting policies, both individually and throughout the group, circumstances of the entity, and whether they are appropriate, adequately disclosed, and consistently applied throughout the engagement; all these are disclosed in the basis for the opinion section.
3. Key Audit Matters
Though compulsory for public limited companies only, it may be voluntarily included in audits of exempted companies as well. It includes the matters that the auditor thinks the users should know. These include the most important matters of the engagement as per the auditor based on their professional judgment and understanding of the audit.
The above are the key contents of an unmodified audit report that you should expect in every unmodified opinion. Other elements of the report include other matter paragraphs (if any), responsibilities for the financial statements, auditors’ responsibilities, and the date, address, and signature of key audit partners.
