Transcript Auditors' Reports - Carroll University

Chapter 12
Auditors’ Reports
The very existence of the accounting profession depends on public confidence in the
determination of certified public accountants to safeguard the public interest.
J.L Carey (Professional Ethics of Public Accounting)
Reports on Audited
Financial Statements
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Enron Corp.
and subsidiaries as of December 31, 2000 and 1999, and the results
of their operations, cash flows, and changes in shareholders’ equity
for each of the three years in the period ended December 31, 2000,
in conformity with accounting principles generally accepted in the
United States.
The opinion paragraph from Arthur Andersen’s final
audit of Enron Corp. (dated February 23, 2001)
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Audit Report
Providing an independent and expert
opinion on the fairness of financial
statements
When performing an audit, the auditors
obtain reasonable assurance that the
statements are in conformity with
GAAP
Typical Coverage of Audit Reports
Financial Statements




Balance Sheet
Income Statement
Statement of Cash Flows
Statement of Retained Earnings (equity)
Financial Statement Disclosures

The notes to the financial statements are
considered an integral part of the financial
statements
Reports Accompanying Financial
Statements
Report on financial statements and related disclosures (prepared
by auditor)

Are financial statements and disclosures according to GAAP?
Report on internal control over financial reporting (prepared by
management)

Has company maintained effective internal control over financial
reporting?
Report on internal control over financial reporting (prepared by
auditor)


Is management’s assessment of its internal control appropriate?
Has company maintained effective internal control over financial
reporting?
Types of Auditors’ Reports
Unqualified Report
•
Expresses an unqualified opinion
Unqualified Opinion with Modified Wording
•
•
F/S are in conformity with GAAP
Additional matters are disclosed in report
Qualified Opinion
•
“Except for” some matter, F/S are in conformity with
GAAP
Adverse Opinion
•
F/S are not in conformity with GAAP
Disclaimer of Opinion
•
No opinion is issued by auditors
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STANDARD (“CLEAN”) Audit Report
Introductory Paragraph



F/S included and years examined
Responsibility of auditor
Management responsibility
Scope Paragraph



Audit conducted in accordance with PCAOB standards
Description of an audit --- specific references to “test basis,”
“materiality,” and “significant estimates”
Audit provides reasonable basis for opinion
Opinion Paragraph – “fairly presented, in all material respects, in
accordance with U.S. generally accepting accounting principles.”
Internal Control
 References examination, report, and opinion on internal
control
Conditions Required for Issuance of an
Unqualified Report
Independence of Mental Attitude
Evidence Available, No Scope Limitations
Followed GAAP
Consistent Application of GAAP
Disclosures are Adequate and Complete
Expression of Opinion
No Going Concern Problem
Independent Auditors’ Report (AS 5)
Report Title
Report Address
Introductory Paragraph
Scope Paragraph
Opinion Paragraph
Internal Control
Paragraph
Signature
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
DUNDER-MIFFLIN, INC.
We have audited the accompanying balance sheets of DUNDER-MIFFLIN, INC. as of December 31, 2012 and
2011, and the related statements of income, shareholders’ equity, and cash flows for each of the years in the
three-year period ended December 31, 2012. These financial statements are the responsibility of DUNDERMIFFLIN, INC.'s management. Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of DUNDER-MIFFLIN, INC. as of December 31, 2012 and 2011, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with
accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), DUNDER-MIFFLIN, INC.’S internal control over financial reporting as of December 31,
2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated January 29, 2012 expressed an
unqualified opinion thereon.
Michael Scarn, LLP
Scranton, PA
Report Date
January 29, 2013
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Reports on Internal Control
Options


Separate reports on F/S and I/C,
with each reports referencing the
other
Combined report on F/S and I/C
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Reports on Internal Control Over
Financial Reporting






Identification of management's conclusion about effectiveness
of company's internal control over financial reporting.
Responsibilities of auditor and management for internal control
Definition of the scope of the engagement.
Definition of internal control over financial reporting.
Identification of inherent limitations of internal control
Opinions on:



Whether management’s assessment is fairly stated.
Whether company has maintained effective internal control over
financial reporting.
Reference to auditor's report on financial statements, including
the type of opinion expressed.
Explanatory Language Added to the
Standard Unqualified Financial
Statement Audit Report
Opinion based in part on
the report of another
auditor.
Going Concern.
Agreement with a Departure
from GAAP.
Lack of Consistency.
Emphasis of a Matter.
Other Issues Affecting the
Auditor’s Report
Reference to Other Auditors
Circumstances Concerning Comparative
Financial Statements


Previous year audited by other auditors
First year audit
Reporting on Other Information accompanying
the financial statements
Division of Responsibility
Group Financial Statements: Financial
statements comprised of more than one
division/subsidiary/segment/component
Group Auditors: Conduct audit of material
portion of the entity
Component Auditors: May be engaged by group
auditors to audit divisions, subsidiaries, or
components
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Division of Responsibility
Take
Responsibility
for
Component
Auditors’
Work?
YES
Standard Report
(Unqualified
Opinion)
YES
Obtain permission
and present
component
auditors’ report
NO
Refer to
Component
Auditors by
Name?
NO
Indicate Division
of Responsibility
in Unqualified
Opinion
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Effect on Report
Group auditors should


Verify component auditors’ reputation and
independence
Communicate and coordinate with component
auditors
Options


Take responsibility for work: Standard report
Name component auditors


Present report of component auditors, only with their
permission
Refer to component auditors


Modify introductory, scope, and opinion paragraphs of
report
Still express unqualified opinion, if appropriate
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Comparative F/S
Continuing Auditors

Update opinion by considering if previously-issued
opinions still appropriate

If previously-issued opinions not appropriate, revise
opinion in current report
Predecessor Auditors

With permission, auditors may present reissued report
from predecessor on prior-years’ F/S along with their
report on current F/S

If predecessors’ report not presented, auditors’ report must
reference predecessors’ report and opinion on prior-years’
F/S
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Report by a Predecessor Auditor
Before reissuing the report:
predecessor auditor should:
1. Read the financial statements of the
current period.
2. Compare the prior-period financial
statements reported on with the currentyear financial statements.
3. Obtain a letter of representation from
the current-year or successor auditor.
Other Information Accompanying The
Financial Statements
Provided by the Company --- Review, make sure that it is
consistent with F/S
Supplemental information required by FASB/GASB

Exception based (similar to consistency)
Information contained in an AUDITOR SUBMITTED
document



Typing or reproducing Financial Statements
Presenting Financial Statements to third parties
Attach report stating relationship with the submitted document
Emphasis of Matter Paragraph—Substantial
Doubt as to Going Concern Status
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has suffered
negative cash flows from operations and has an accumulated deficient,
conditions that raise substantial doubt about the Company's ability to continue
as a going concern. Management’s plans in regard to these matters are also
described in Note 1. The consolidated fanatical statements n do not include
any adjustments that might result from the outcome of this uncertainly. Our
opinion is not modified with respect to this matter.
NOTE: Ordinarily an unmodified opinion with an emphasis of matter paragraph is
issued. Alternatively, a disclaimer of opinion may be issued.
Lack of Consistency
Changes Affecting Consistency
Change in
Accounting
Principle
Correction
of an Error
in Principle
Change in
Reporting
Entity
Changes Not Affecting
Consistency
Change in
Accounting
Estimate
Change in
Classification
and
Reclassificatio
n
Correction of an
error that does
not involve an
accounting
principle
Change
expected to
have a material
future effect
Consistency
Relates to:

Change in accounting principles

Adjustments to correct misstatements in previously-issued
F/S
Type of changes in accounting principles:

Accounting principles (GAAP to GAAP)

Form of reporting entity

Accounting principles (non-GAAP to GAAP)

Accounting principle inseparable from changes in estimates
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Consistency: Effect on Report
Add explanatory paragraph following the
opinion paragraph
May issue a qualified opinion (GAAP
departure) if:
 Change is not justified
 Change is not accounted for in
conformity with GAAP
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Emphasis of Matter Paragraph
Lack of Consistency
A lack of consistent application of accounting principles
results in an emphasis of matter paragraph, such as:
As discussed in Note 5 to the consolidated financial
statements, the Company adopted Statement of Financial
Accounting Standards Update No. XXX (provide title) as of
December 31, 20X8. Our opinion is not modified with
respect to this matter.
Emphasis of a Matter
Explanatory paragraph after opinion paragraph
discussing the matter (e.g., a subsequent event
not affecting year-end F/S's)
Usually items that are difficult to disclose in the
financial statements
Non-Quantitative Matters
 Subsequent Events

Additional Emphasis of Matter
Situations—Auditor Discretionary


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
A risk or uncertainty.
Significant related party transactions
described in a note to the financial statements.
The company is a component of a larger
business enterprise.
Unusually important significant events.
Accounting matters affecting comparability
(other than changes in accounting principles)
of financial statements with those of the
preceding year.
Rule 203 Report
Allows for non-GAAP solutions to fairly present the
company's financial situation.
Rule 203 of the AICPA Code of Professional Conduct --recognizes that adherence to certain accounting
principles may create situations in which a company's
financial condition may not be fairly presented.
Solution: Insert an additional middle paragraph (between
scope and opinion paragraphs) stating the deviation
from GAAP, but still issue an unqualified report.
Auditor Agrees with a Departure from
Promulgated Accounting Principles
In unusual circumstances financial statements may be
misleading if a promulgated accounting principle was
followed.
Rule 203 of the Code of
Professional Conduct allows
the auditor, in such
circumstances, to issue an
unqualified opinion.
An explanatory paragraph
should describe the departure,
the approximate effects of the
departure, if practicable, and the
reasons that compliance with the
accounting principle results in
misleading financial statements.
Modifications of the Auditors’ Report-Unqualified Opinions
Type of Report
Introductory or
Sco pe Paragraph
Explanato ry
Paragraph
Opinion
Paragraph
Shared
responsibility
Describe work of
other auditors
None
Ò...based on our
audit and the
report of other
auditors...Ó
Going concern
uncertainty
None
Describe
uncertainty
None
GAAP not
consistent
None
None
Emphasis of
matter
None
Describe change in
principle
Describe matter
Justified departure
from official
GAAP
None
Describe departure
None
None
Departures from an Unqualified
Financial Statement Audit Report
Qualified
“except for”
Adverse
Disclaimer
Qualified Opinion
Issued when departure is material, yet not pervasive
Report Modifications:

Introductory and scope paragraphs remain the same

Add paragraph preceding the opinion paragraph
explaining departure and detailing $ amounts involved

Modify opinion paragraph (“In our opinion, except for
the matter discussed in the preceding paragraph,….”)
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Conditions for Departure
Scope
Limitation
Departure
from GAAP
Lack of Auditor
Independence
Conditions Requiring Other Types of
Financial Statement
Audit Reports
Scope
Limitation
Results from an inability to obtain
sufficient competent evidence
about some component of the
financial statements.
Not in
Conformity
with GAAP
Results when financial statements
are materially affected by an
unacceptable departure from GAAP.
Auditor Not
Independent
Results when auditor is not
independent.
Scope Limitations
Is the
Limitation
Material?
NO
Standard Report
(Unqualified
Opinion)
Alternative
Procedures
Available?
YES
Standard Report
(Unqualified
Opinion)
NO
Qualified
Opinion
YES
NO
Is the
Limitation
Pervasive?
YES
Disclaimer of
Opinion
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Type of Scope Limitations
Circumstance-Imposed


Situation in which matters beyond auditors’ and
client’s control limit procedures performed by
auditor
Example: inability to observe year-end inventory
because of late appointment
Client-Imposed


Situation in which client specifically limits
auditors’ procedures
Should be viewed as a significant restriction and
a disclaimer is ordinarily issued
12-35
Scope Limitation: Qualified Opinion
Issued when scope limitations are material, but not
pervasive
Report Modifications:
 Introductory paragraph remains the same
 Scope paragraph: “Except as discussed in the
following paragraph [the scope limitation],
we conducted our audit…”
 Add paragraph preceding the opinion
paragraph describing the scope limitation
 Modify opinion paragraph (“In our opinion,
except for”)
12-36
GAAP Departures
Qualified (“Except for ...”) Opinions
Scope limitations can cause disclaimers or qualified opinions
depending upon severity and materiality.


Key question: Is the scope limitation limited, or does it permeate
the financial statements?
If alternative procedures are available, the auditor may still be able
to issue an unqualified opinion.
Report Modifications:




Intro paragraph remain the same
Scope paragraph: “Except for the problem noted, the audit was
conducted in accordance with auditing standards generally
accepted in the United States”.
Add middle paragraph explaining problem
Change opinion paragraph (“In our opinion, except for the matter
discussed in the preceding paragraph,….”)
GAAS Departures
Modifications of Auditors’ Report—
Qualified Opinions
Type of Report
Qualified—GAAP
Departure
Qualified—Scope
Limitation
Introductory or
Scope Paragraph
Explanatory
Paragraph
Opinion Paragraph
None
Describe
Departure and
Effects
“except for the
effects of the
departure the
financial
statements…”
Describe Scope
Limitation
“except for the
effects of such
adjustments, if any,
as might have been
determined to be
necessary had we
been able to…”
“Except as
explained in the
following
paragraph…”
Adverse Opinion
Issued when F/S do not present fairly according to
GAAP (i.e., a serious, pervasive departure from
GAAP).
Report Modifications:



Introductory and scope paragraphs remain the same
Add paragraph preceding the opinion paragraph
explaining the departure and detailing $ amounts
involved
Change opinion paragraph (“financial statements do
not present fairly”)
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Disclaimer of Opinion
Issued when the auditor is unable to be satisfied
that the overall financial statements are fairly
presented.
Reasons for Disclaimer
Uncertainities
Scope Limitation
Going Concern
Unaudited
Review
Compliation
Agreed Upon Other Procedures
Not Independent
Scope Limitation: Disclaimer of
Opinion
Pervasive scope limitation, usually client-imposed

Significance of the limitation is such that auditors cannot gather
sufficient appropriate evidence to form an opinion
Report Modifications:




Introductory paragraph: (“We were engaged to audit ….”; omit
auditors’ responsibility)
Omit scope paragraph
Add paragraph preceding the opinion paragraph describing the
scope limitation
Modify opinion paragraph (“…we do not express an opinion….”)
May still issue opinion on internal control if no scope limitation on the
examination of internal control
12-44
Lack of Independence
Scenario: Auditors begin engagement but
independence subsequently compromised
Report



Single paragraph
Indicates auditors are not independent
Does not indicate why independence lacking
12-45
Reporting CPA is NOT
Independent
Should state that CPA is not independent but need not state the
reason why
I am (We are) not independent with respect to the XYZ Company and the
accompanying balance sheet as of December 31, 20XX, and the related
statements of income retained earnings, and cash flows for the year then
ended were not audited by me (us) and, accordingly, I (we) do not express
and opinion on them.
No heading on report
Do not describe procedures performed
Must describe material departures from GAAP
Modifications of the Auditors’ Report-Adverse & Disclaimer
Type of Report Introductory or Explanatory
Scope
Paragraph
Paragraph
Adverse
Disclaimer of
Opinion-Scope
Limitation
None
Describe reason for Òthe financial
opinion
statements do not
present fairlyÓ
ÒWe were engagedÓ Describe scope
restriction and any
Omit ÒOur
reservations
responsibility...Ó
Omit scope
paragraph
Opinion
Paragraph
Òwe do not express
an opinion on the
financial statementsÓ
Summary of Appropriate Auditors’
Reports
Placement of Explanatory
Paragraphs
Before Opinion Paragraph



Qualified opinions
Disclaimers
Adverse opinions
Following Opinion Paragraph


Consistency
Substantial doubt about continued existence
Other types of paragraphs may precede or
follow the opinion paragraph
Special Reports
Financial Statements
prepared on a
Comprehensive
Basis of Accounting
other than GAAP
Specified Elements,
Accounts, or Items
of Financial
Statement
Compliance with
Contractual
Agreements or
Regulatory
Requirements
Financial Statements
Prepared on a Comprehensive Basis
of Accounting Other Than GAAP
Regulatory Basis
Tax Basis
Cash (or Modified Cash)
Basis
A Definite Set of Criteria
Having Substantial
Support
Specific Elements, Accounts, or
Items of a Financial Statement
In some situations an auditor may be engaged to
audit only part (or specified elements, accounts,
or items) of the financial statements.
GAAP
Basis of
Accounting
Basis of
accounting
prescribed by a
contract or
agreement
Other
comprehensive
basis of
accounting
(OCBOA)
Prospective Financial
Statements
Forecasts and Projections
Use of Prospective Financial Statements
Types of Engagements
Examination of Prospective Financial Statements
Agreed-Upon Procedures
Engagements
Audit is limited to certain specific audit
procedures.
Referred to as procedures and findings
engagements.
The SASs deal with financial statement items,
whereas the SSAEs deal with nonfinancial
statement subject matter.
Review and Compilation
Services
Standards for compilations and reviews
of financial statements are called...
Association with Unaudited F/S
Auditors permit use of name in communication
including F/S
Issue disclaimer of opinion (one paragraph)



Do not mention auditing procedures performed
Must identify any known departures from GAAP in the
report
Should cover all unaudited prior-years’ financial
statements
12-56
Types of Engagements and
Related Reports
Type of
Engagement
Amount of
Evidence
Level of
Assurance
Form of
Conclusion Distribution
Examination
Extensive
High
Positive
Review
Significant
Moderate Negative
General
Varying
Limited
Agreed-Upon Varying
Procedures
Findings
General
Reporting Summary
Opinion
Material
Pervasive
Departure from GAAP
Qualified
Adverse
Scope Limitation
Qualified
Disclaimer
Other matters (Consistency,
Going-concern, Rule 203,
Emphasis of a matter)
Unqualified
Unqualified
Other matters (Division of
responsibility when referencing
work of component auditors)
Unqualified
Unqualified
Paragraphs modified/added
Intro
Scope
X
Opinion
Add’l
X
X
X
X
X
X
X
X
May issue disclaimer if:
•Lack of independence
•Associated with financial statements
•Material and pervasive going-concern uncertainty
12-58