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11.4.2 Auditor’s Report

Comprehensive guide to understanding the auditor's report as required by Canadian corporate law, including roles and responsibilities, stakeholder impact, and essential audits features.

The Auditor’s Report

Canadian corporate law mandates that every limited company must appoint an auditor. The auditor’s primary role is to represent the shareholders and provide an annual report on the company’s financial statements, offering a professional opinion on their fairness. The auditor’s opinion must be documented in writing.

Appointment and Dismissal

The appointment of the auditor occurs at the company’s annual meeting through a resolution passed by the shareholders. If necessary, the shareholders also hold the authority to dismiss the auditor. An exception exists for privately held corporations, where if all shareholders concur, an audit can be deemed unnecessary.

Content of the Auditor’s Report

An effective auditor’s report should include:

  • Title: Identifying the document as an independent auditor’s report.
  • Addressee: Indicating the intended recipients, usually the shareholders or the board of directors.
  • Introduction: Stating the financial statements audited and the responsibility division between management and the auditor.
  • Scope: Describes the breadth of the audit, the auditing standards used, and a summary of the work performed.
  • Opinion: A crucial section expressing the auditor’s opinion on the financial statements.
  • Signature: The report must be signed by the auditor.
  • Date and Place: Indicating when and where the report was completed.

Types of Auditor’s Opinions

1. Unqualified Opinion

Often referred to as a “clean opinion,” the unqualified opinion indicates that the financial statements present a true and fair view in accordance with the applicable financial reporting framework. The auditor does not have any reservations about the accuracy or completeness of the financial statements.

2. Qualified Opinion

A qualified opinion is given when the auditor encounters one or two issues that do not comply with the applicable financial reporting framework. These issues are not pervasive and can usually be isolated. The auditor will specify the nature of the qualification in the report.

3. Adverse Opinion

An adverse opinion is issued when the auditor believes that the financial statements are materially misstated and do not reflect a true and fair view. This opinion indicates serious issues and is a red flag for investors and other stakeholders.

4. Disclaimer of Opinion

A disclaimer of opinion is given when the auditor is unable to obtain sufficient appropriate audit evidence on which to base an opinion. This could be due to significant uncertainties, limitations in scope, or other reasons preventing the auditor from forming an opinion.

Importance of Auditor’s Reports

Auditor’s reports are critical for corporate governance and transparency. They provide assurance to shareholders, investors, and other stakeholders that the financial statements are accurate and reliable. The type of opinion given by the auditor can greatly influence the perceptions and decisions of these parties.

Auditor’s reports also play a vital role in identifying potential issues and areas for improvement within the company, helping to maintain trust and confidence in the financial reporting process.


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## What is the primary purpose of the auditor’s report according to Canadian corporate law? - [ ] To increase the company’s profit - [ ] To manage the daily operations of the company - [x] To represent shareholders and report on the financial statements - [ ] To ensure only private corporations are audited > **Explanation:** Canadian corporate law mandates that every limited company must appoint an auditor to represent shareholders and report annually on the financial statements. ## Who appoints the auditor in a Canadian limited company? - [ ] The board of directors - [ ] The company’s management - [x] The shareholders at the annual meeting - [ ] The government > **Explanation:** The auditor is appointed by a resolution of the shareholders at the company’s annual meeting. ## What must the auditor express in their report? - [ ] The company’s future profitability - [x] An opinion on the fairness of the financial statements - [ ] The content of internal emails - [ ] The marketing strategy of the company > **Explanation:** The auditor must provide a written opinion regarding the fairness of the company’s financial statements. ## Can the auditor be dismissed, and if so, by whom? - [ ] No, the auditor cannot be dismissed once appointed - [ ] Yes, by the board of directors - [ ] Yes, by the company’s management - [x] Yes, by the shareholders > **Explanation:** The auditor may be dismissed by a resolution of the shareholders. ## Under which condition is the appointment of an auditor not required for a corporation? - [ ] If the company is a public company - [x] If all shareholders of a privately held corporation agree an audit is unnecessary - [ ] If the company has been in operation for less than a year - [ ] If the company’s financial statements are audited by an internal team > **Explanation:** The only exception to this requirement is for privately held corporations where all shareholders agree that an audit is not necessary. ## What is the relationship between the auditor and the shareholders? - [ ] The auditor manages the company on behalf of the shareholders - [ ] The auditor and shareholders have no relationship - [x] The auditor represents the shareholders and reports on financial statements - [ ] The auditor is one of the shareholders > **Explanation:** The auditor represents the shareholders and provides them with a report on the company’s financial statements. ## When is the auditor typically appointed? - [ ] During the company's financial crisis - [ ] At the end of the fiscal year - [x] At the company’s annual meeting - [ ] During the board of directors' meetings > **Explanation:** The auditor is appointed by a resolution of the shareholders at the company’s annual meeting. ## What must be agreed upon for a privately held corporation to bypass the requirement for an auditor? - [x] All shareholders must agree that an audit is not necessary - [ ] Only the majority shareholder must agree - [ ] The board of directors must pass a special resolution - [ ] A government waiver must be obtained > **Explanation:** For privately held corporations, an audit can be bypassed if all shareholders agree it is not necessary. ## Which of the following is NOT a responsibility of the auditor? - [ ] Auditing the company’s financial statements - [x] Managing the company's day-to-day operations - [ ] Providing a written opinion on the fairness of financial statements - [ ] Reporting to shareholders annually > **Explanation:** The auditor is not responsible for managing the company's day-to-day operations; they are tasked with auditing financial statements and reporting to the shareholders. ## What type of opinion does the auditor provide in their report? - [x] An opinion on the fairness of the financial statements - [ ] An opinion on the company’s stock price - [ ] An opinion on the company’s internal policies - [ ] An opinion on the marketing strategies of the company > **Explanation:** The auditor must provide a written opinion specifically on the fairness of the company's financial statements.

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