Transcript AC-300: Foundation and Accounting For Sales and Collections

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The Auditor’s
Role - According
to Mother-in-Law
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I’m an
auditor!
Jack, the Auditor
Jack, what
do you do?
Mother-in-Law
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What does
Jack do?
Friend of
Mother-in-Law
He snoops
around in other
peoples books.
Mother-in-Law
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Audit Reports
 The
auditor’s report is the CPA’s
end product, which is intended to
describe the results of the
examination.
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Historical Perspective
 The
accounting profession was
introduced in the US by British
accountants.
 Thus,
early audit reports were heavily
influenced by the reports used in
Britain.
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Historical Perspective
 The
wording of these reports was
not uniform, but they were
generally referred to as
“Auditor’s Certificates.”
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Early Audit Report
We have examined the above
accounts with the books and vouchers
of the company and find the same to
be correct.
We approve and certify the above
balance sheet correctly sets forth the
position of the company.
Price Waterhouse and Company
For St. Louis Breweries, Ltd, 1900
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Historical Perspective
 In
the absence of statutory
requirements for audits, early
public accounting practitioners
had to justify each engagement
on the basis of its economic
benefit to the client.
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Historical Perspective
 Because
auditing standards had
not been developed, audits were
not uniform.
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Historical Perspective
 Both
the Federal Reserve Board
(FRB) and the Federal Trade
Commission (FTC) were
dissatisfied with public
accounting practice because of
the quality of statements being
issued.
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Historical Perspective
 As
a result of discussions
between the FRB, the FTC and
the American Institute of
Accountants (AIA), the
forerunner of the AICPA, the
FRB issued a suggested auditors
report in 1917.
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I have audited the accounts of Blank and
Company for the period from … to … and I
certify that the above balance sheet and
statement of profit and loss have been made
in accordance with the plan suggested and
advised by the Federal Reserve Board and in
my opinion set forth the financial condition
of the firm at … and the results of its
operations for the period.
/s/ Auditor
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Historical Perspective
 This
report marked the beginning of a
series of recommended reports that
ultimately led to today’s standard
audit report.
 Since
1917, the wording of the
standard auditor’s report has been
revised eight times.
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Audit Report Revisions
 The
development of GAAS;
An evolution in the types of
procedures auditors perform;
Added efforts to describe the nature
of an audit; and
The development of GAAP.
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Today’s Report . . .
Emphasize management’s
responsibility for the statements;
Briefly describe an audit; and
Express an opinion about
management’s presentation (the
financial statements).
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Historical Perspective
 Before
read
1934, the auditor’s report
“We certify that in our
opinion . . .”
This led to reports being referred to
as auditor’s certificates.
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Historical Perspective
However, the word certificate
seemed to imply more exactness than
could be achieved in the financial
statements, and
The profession has shifted to the
more appropriate term auditor’s
report.
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Historical Perspective
The term auditor’s report is
more consistent with the idea
that the auditor is . . .
expressing
an opinion on, rather
than
certifying the financial
statements.
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Historical Perspective
By permitting auditors to exercise
judgment (express an opinion on),
 users
can expect to be able to rely on
the auditor’s reports. . .
 as
providing reasonable assurance that
no material misstatements have been
included in the accounts.
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Historical Perspective
Material misstatements are those
errors that are sufficiently important
that they could alter a prudent
investor’s decision.
Materiality pertains to both . . .
 Quantitative,
and
 Qualitative judgments.
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An Overview
Exhibit 1 (p. 3-9) shows a standard
auditor’s report.
This exhibit is sometimes called a
short-form report and is the most
common report issued for inclusion in
clients’ annual reports.
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Generally Accepted Auditing
Standards (GAAS)
The Standards
of Reporting
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Format of Audit Reports
The most common standard (shortform) audit report has three
components . . .
 The
introductory paragraph;
 The
scope section; and
 The
opinion section
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Report Title . . .
Auditing standards require the
report be titled and include the word
“independent” which conveys to users
that the audit is unbiased.
 Independent
 Report
auditor’s report;
of independent auditor;
 Independent
accountant’s opinion.
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Audit Report Address
Auditor’s reports may be
addressed to:
The
company;
The
stockholders; or
The
Board of Directors
Typically
addressed to
one of these.
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Introductory Paragraph
We have audited the accompanying
Balance Sheet of XYZ Company as of
December 31, 1995, and 1994, and the
related Statements of Income,
Retained Earnings, and Cash Flows for
the years then ended.
Refer to Exhibit 1 (p. 3-9)
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Introductory Paragraph
These financial statements are
the responsibility of the
company’s management.
Our responsibility is to express
an opinion on these financial
statements based on our audits.
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Applicable Dates and Periods of
Financial Statements . . .
The report is typically issued for
comparative financial statements,
as reflected by the dates of the
reports cited in the first
sentence of the first paragraph.
(SAS 58, Section 5081).
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Applicable Dates and Periods of
Financial Statements . . .
The profession’s reporting
standards require an
expression of opinion
regarding the financial
statements taken as a whole.
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Basic Financial Statements
The term basic financial statements
is used in the professional literature
to refer to . . .
 The
four main statements;
 Descriptions
 Notes
of accounting policies;
to the financial statements;
 Schedules
and explanatory material.
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The Scope Paragraph
The scope paragraph is a factual
statement about what the auditor did
in the audit.
The paragraph begins with reference
to the generally accepted auditing
standards.
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The Scope Paragraph
We conducted our audits in
accordance with generally accepted
auditing standards. These standards
require that we plan and perform the
audit to obtain reasonable assurance
about whether the financial
statements are free of material
misstatements.
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The Scope Paragraph
An audit includes examining, on
a test basis, evidence supporting
the amounts and disclosures in
the financial statements.
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The Scope Paragraph
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.
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The Opinion Paragraph
In our opinion, the financial
statements referred to above present
fairly, in all material respects, the
financial position of X Company as of
[at] December 31, 1995, and 1994, and
the results of its operations and its
cash flows for the years then ended in
conformity with generally accepted
accounting principles.
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Present Fairly . . .
Present fairly, in all material
respects, means . . .
. . . That the statements provide
an objective, candid, and
equitable representation of the
entity’s financial position.
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Unqualified Opinion
Two types of opinions contain the
“unqualified” opinion.
 The
and
standard unqualified audit report;
 The
standard unqualified report with
explanatory language or an explanatory
paragraph.
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Standard Unqualified Report
The auditor has audited a set of
financial reports (statements).
The auditor accepts responsibility for
expressing an opinion on these
reports.
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Standard Unqualified Report
The auditor has conducted an audit in
accordance with GAAS
The statements are presented in
accordance with GAAP.
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Standard Unqualified Report
The report basically implies that
the audited financial statements
contain no significant problems or
deficiencies
Hence, it is often referred to as
a “Clean Opinion.”
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Qualified Opinion . . .
Three conditions require a departure
from the “unqualified” report . ..
 The
scope of the audit has been
restricted;
 The
financial statements have not been
prepared in accordance with GAAP; and
 The
auditor is not independent.
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Qualified Opinion . . .
Another way of saying this is that a
qualified opinion arises from either:
 The
auditor’s being unable to gather
sufficient evidence to serve as a basis
for an opinion; or
 The
client’s failure to follow GAAP in
preparing the financial statements.
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The Qualified Opinion says:
. . . Except for the effects of the
matter(s) to which the
qualification relates, the financial
statements presented fairly, in all
material respects, the financial
position, results of operations, and
cash flows of the entity in
conformity with GAAP.
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Qualified Opinion . . .
When issuing a qualified opinion, the
auditor states in the scope paragraph
that a limitation exists . . . then . . .
Indicates in an added paragraph preceding the opinion the effect of the
limitation on his/her opinion on the
financial statements, and modifies
the opinion paragraph.
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Qualified Opinion . . .
When the statements are not
presented in accordance with GAAP,
and the auditor issues a qualified
opinion . . .
The auditor must generally describe
the deviation in a paragraph
preceding the opinion paragraph and
modify the opinion paragraph.
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Adverse Opinion . . .
When an auditor issues an adverse
opinion, the report states that the
financial statements are not
presented in conformity with GAAP.
In one or more paragraphs preceding
the opinion paragraph, the report
indicates the reasons why the
statements are not presented fairly.
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Disclaimer of Opinion
When issuing a disclaimer of opinion,
the auditor states that
 he/she
does not express an opinion on
the financial statements, and
 takes
them.
no responsibility for reporting on
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Disclaimer of Opinion
A disclaimer of opinion is generally
issued when . . .
 The
auditor is not independent and thus
could not add credibility to the financial
statements by performing an audit; or
 The
auditor has not been able to obtain
sufficient evidence on which to base an
opinion.
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