AU-C 700: Forming an Opinion and Reporting on Financials

An audit report is the primary way an auditor communicates their findings to outside parties. To ensure these communications are consistent, the American Institute of Certified Public Accountants (AICPA) provides guidance for auditors. Section AU-C 700 of the AICPA’s professional standards establishes the framework for the auditor’s report for non-public entities. The purpose of AU-C 700 is to standardize the report’s form and content, which helps users of financial statements, such as investors or lenders, clearly comprehend the auditor’s conclusions and allows for more effective comparison across different organizations.

The Unmodified Audit Opinion

An unmodified audit opinion is the most common and desirable outcome of a financial statement audit, often called a “clean” opinion. It signals that the auditor has concluded the financial statements are presented in a trustworthy manner. This type of opinion does not mean the company is a good investment or will be profitable; it relates strictly to the reliability of its financial reporting.

The central conclusion in an unmodified report is that the financial statements are “presented fairly, in all material respects.” Fairness relates to the appropriate application of accounting principles and the representation of the company’s financial position. A misstatement is considered material if it is significant enough to potentially influence the economic decisions of a person relying on those statements.

This opinion also states that the statements conform “in accordance with the applicable financial reporting framework.” For most entities in the United States, this framework is U.S. Generally Accepted Accounting Principles (U.S. GAAP). This provides the common set of rules and conventions that companies must follow when preparing their financial statements.

Required Components of the Auditor’s Report

Title

Every audit report under AU-C 700 must have a title that includes the word “Independent,” such as “Independent Auditor’s Report.” This requirement communicates that the auditor is external to the company and has no vested interest that would compromise their objectivity. Independence is a core principle of the auditing profession, and this title affirms that status.

Addressee

The report must be addressed to the appropriate parties, which depends on the entity’s structure and the audit engagement terms. The report is commonly addressed to the company’s shareholders and its board of directors. This clarifies for whom the report was prepared and who is entitled to rely on its contents.

Auditor’s Opinion Section

The Auditor’s Opinion section is presented first for prominence and directly states the auditor’s conclusion on the financial statements. It identifies the audited company and explicitly lists the titles of each financial statement that was part of the audit, such as the balance sheet, statement of income, and statement of cash flows. The section also specifies the dates or periods covered by the audit.

Basis for Opinion Section

The “Basis for Opinion” section follows the opinion and provides context for the conclusion. It states the audit was conducted in accordance with U.S. Generally Accepted Auditing Standards (GAAS). This section also references the part of the report detailing the auditor’s responsibilities and affirms the auditor’s independence and ethical compliance. It concludes with a statement that the auditor believes the evidence obtained was sufficient and appropriate to support their opinion.

Responsibilities of Management for the Financial Statements

This section clarifies management’s role in the financial reporting process. It states management is responsible for preparing the financial statements, which includes designing and maintaining internal controls to prevent material misstatement. Management must also evaluate whether conditions exist that raise substantial doubt about the company’s ability to continue as a going concern.

Auditor’s Responsibilities for the Audit of the Financial Statements

This part details the auditor’s role, explaining their objective is to obtain reasonable assurance about whether the financial statements are free from material misstatement. Reasonable assurance is a high level of assurance but is not an absolute guarantee. The section describes aspects of the audit process, including exercising professional judgment, assessing risks, and understanding internal controls to design appropriate audit procedures.

Signature, Tenure, City/State, and Date of the Auditor

The report concludes with the audit firm’s signature and the city and state where the auditor practices. It is dated with the day the auditor obtained sufficient evidence to support the opinion, often the final day of fieldwork. This date is important because it marks the point up to which the auditor has considered events and transactions affecting the financial statements.

Forming the Audit Opinion

Evaluating Audit Evidence

Gathering and evaluating audit evidence is a central part of any audit. The auditor must design procedures to obtain sufficient evidence regarding management’s assertions in the financial statements. Evidence can include inspecting records, observing processes, external confirmations, and analytical procedures. The auditor must collect enough high-quality evidence to reduce audit risk—the risk of issuing an incorrect opinion—to an acceptably low level.

Assessing Uncorrected Misstatements

During the audit, the auditor may identify uncorrected misstatements, ranging from clerical errors to incorrect accounting estimates. The auditor is required to accumulate these misstatements and evaluate their effect, both individually and in aggregate, on the financial statements. If the total uncorrected misstatements are deemed immaterial, an unmodified opinion can still be issued.

Evaluating Qualitative Aspects of Accounting Practices

An auditor’s evaluation includes qualitative aspects of an entity’s accounting practices. This involves assessing the company’s accounting policies, the reasonableness of its accounting estimates, and the overall presentation of the financial statements. The auditor also considers whether there are indicators of management bias in making these judgments to ensure the statements are transparent.

Concluding on the Financial Statements as a Whole

The final step is to synthesize all evidence and evaluations. The auditor considers whether the financial statements as a whole, including the notes, are consistent with their understanding of the entity. They must conclude whether the statements adequately reflect the underlying events and transactions. This judgment determines if an unmodified opinion is appropriate.