Transcript Auditors' Reports - Lorsbach's Auditing Resource

Audit Reports - Overview
• Providing an independent and expert
opinion on the fairness of financial
statements through an audit is the most
frequent attestation service.
• When performing an audit, the auditors
obtain reasonable assurance that the
statements are in conformity with GAAP.
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Typical Coverage of Audit Reports
Reports on the financial statements ordinarily
include an opinion that is on both the:
1. Financial Statements Themselves:
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Balance sheet
Income statement
Statement of cash flows
Statement of retained earnings (equity)
2. Financial Statement Disclosures:
 The notes to the financial statements are considered
an integral part of the financial statements
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Auditors’ Standard Report–Nonpublic
• Title includes word independent.
• Ordinarily addressed to the company itself,
the shareholders, the audit committee
and/or the board of directors.
• Signed with name of CPA firm not individual
partner unless sole practitioner.
• Dated as of the date on which the auditors
obtained sufficient appropriate audit
evidence to support their opinion, including
review of audit documentation.
• Has 4 sections.
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The AICPA Standard Auditors’ Report-Introductory Paragraph
We have audited the accompanying
consolidated balance sheets of ABC
Company and its subsidiaries, as of
December 31, 20X1 and 20X0, and the
related consolidated statements of income,
retained earnings, and cash flows for the
years then ended.
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The AICPA Standard Auditors’ Report—
Management’s Responsibility Paragraph
Management is responsible for the preparation
and fair presentation of these consolidated
financial statements in accordance with
accounting principles generally accepted in the
United States of America; this includes the
design, implementation, and maintenance of
internal control relevant to the preparation and
fair presentation of consolidated financial
statements that are free from material
misstatement, whether due to fraud or error.
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The AICPA Standard Auditors’ Report-
Auditors’ Responsibility Paragraphs
Our responsibility is to express an opinion on
these consolidated financial statements based on
our audits. We conducted our audits in
accordance with auditing standards generally
accepted in the United States of America. Those
standards require that we plan and perform the
audit to obtain reasonable assurance about
whether the consolidated financial statements
are free of material misstatement.
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The AICPA Standard Auditors’ ReportAuditors’ Responsibility Paragraphs (con’t)
An audit involves performing procedures to obtain audit evidence about
the amounts and disclosures in the consolidated financial statements.
The procedures selected depend on the auditor's judgment, including
the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the
entity's preparation and fair presentation of the consolidated financial
statements in order to design audit procedures that are appropriate in
the circumstances, but NOT for the purpose of expressing an opinion on
the effectiveness of the entity's internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the
consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
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AICPA Standard Auditors’ Report-
Opinion Paragraph
In our opinion, the consolidated financial
statements referred to above present fairly, in
all material respects, the financial position of
ABC Company and its subsidiaries as of
December 31, 20X1 and 20X0, and the results of
their operations and their cash flows for the
years then ended in accordance with accounting
principles generally accepted in the United
States of America.
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Auditors’ Standard Report –
Public Clients - Differences
• Includes the words “Registered” and “Independent” in the
title.
• References standards of the PCAOB rather than generally
accepted auditing standards.
• Includes less detailed discussions of management and
auditor responsibilities
• Includes an additional paragraph indicating that the
auditors have also issued a report on the client’s internal
control over financial reporting.
o The report on internal control may either be presented separately or combined
with the report on the financial statements into one overall report
• Does not include section headings.
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Types of Audit Reports
(Based on type of audit opinion)
• UnModified (Opinion): (PACOB: Unqualified)
– Standard or Clean
– Unmodified, but with Explanation
• Modified (Opinion):
– Qualified
– Adverse
– Disclaimer
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Reports with Unmodified Opinions
1. Standard/Clean report
This report may be issued only when the
auditors have obtained sufficient
appropriate audit evidence to conclude
the financial statements are not
materially misstated and there is no
need to alter the report for situations 2,
3 or 4 below.
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Reports with Unmodified Opinions
1.
Standard/Clean report. This report may be issued only when the auditors
have obtained sufficient appropriate audit evidence to conclude the
financial statements are not materially misstated and there is no need to
alter the report for situations 2, 3 or 4 below.
2. With an Emphasis of Matter paragraph
To emphasize a matter appropriately
presented in the financial statements (e.g.,
going concern, a change in accounting
principles/practices).
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Reports with Unmodified Opinions
1.
2.
Standard/Clean report. This report may be issued only when the auditors
have obtained sufficient appropriate audit evidence to conclude the
financial statements are not materially misstated and there is no need to
alter the report for situations 2, 3 or 4 below.
With an Emphasis of Matter paragraph. To emphasize a matter
appropriately presented in the financial statements (e.g., going concern, a
change in accounting principles/practices).
3. With an Other Matter paragraph
To emphasize a matter other than those
presented or disclosed in the financial
statements (e.g., other information in documents
containing audited financial statements).
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Reports with Unmodified Opinions
1.
2.
3.
Standard/Clean report. This report may be issued only when the auditors have
obtained sufficient appropriate audit evidence to conclude the financial statements
are not materially misstated and there is no need to alter the report for situations 2,
3 or 4 below.
With an Emphasis of Matter paragraph. To emphasize a matter appropriately
presented in the financial statements (e.g., going concern, a change in accounting
principles/practices).
With an Other Matter paragraph. To emphasize a matter other than those
presented or disclosed in the financial statements (e.g., other information in
documents containing audited financial statements).
4. Opinion on Group Financial Statements
When two or more CPA firms are involved in an
audit and the group auditor (firm that does most of
the work) does not wish to take responsibility for
the work of the component auditors.
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Going Concern Paragraph
• Auditor not required to perform procedures specifically
designed to test going-concern assumption, but must
ask management for any identified conditions or
concerns that raise substantial doubt.
• Substantial doubt generally concluded from other
procedures performed throughout the audit
• Indicators of Substantial Doubt:
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Negative cash flows from operations
Defaults on loan agreements
Adverse financial ratios
Work stoppages
Legal proceedings
• Paragraph required when evaluation of management’s plans
does not remove substantial doubt as of the audit report date.
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Emphasis of Matter Paragraph—
Substantial Doubt as to Going Concern
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 financial
statements 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 IF disclosures are adequate.
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Emphasis of Matter Paragraph—
Lack of Consistency
A lack of consistent application of accounting
principles/practices from prior period(s).
Example:
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.
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Additional Emphasis of Matter Situations—
Auditor Discretionary
• A significant 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 subsequent events.
• Accounting matters affecting comparability
(other than changes in accounting principles) of
financial statements with those of the
preceding year.
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When Audits Performed by
Multiple CPA Firms
Group Auditors (PACOB: Principal)
Component Auditors (PACOB: Other)
Usually when one or more subsidiaries is audited
by another CPA firm selected by the client or CPA.
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Group Financial Statements
When the group audit firm is different from one or more
component audit firms, group engagement team should
obtain an understanding of:
• Whether component auditors are competent and
understand and will comply with ethical requirements.
• Extent of group engagement team involvement with
component auditors.
• Whether group engagement team will be able to obtain
necessary information on the consolidation process.
• Whether component auditors operate in a regulatory
environment that actively oversees auditors.
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Group Financial Statements (con’t)
Group auditor communications with component
auditors:
• How their work will be used.
• Discuss ethical requirements.
• Provide list of related parties.
• Share significant risks of misstatements.
• Provide materiality threshold.
• Provide financial reporting framework and
audit standards to be used.
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Group Auditor Reporting Options
1. Make no reference to the component auditors
Group auditor assumes responsibility for the
component auditor’s work and must perform added
procedures to evaluate the component auditor’s
work. (Both F.S. same reporting framework or component
F.S. adjusted during consolidation.)
2. Make reference to the component auditors.
Shared responsibility for the audit and is usually
done when component auditor is selected by client
or not well known. (Both F.S. same reporting framework or
component F.S. adjusted during consolidation, GAAS or PCAOB
standards (or determined met), report use unrestricted.)
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Group Audits: Key Definitions
Group. All the components whose financial information is included in the group
financial statements. A group always has more than one component.
Group Engagement Team. Partners and staff who establish the overall group audit
strategy, communicate with component auditors, perform work on the consolidation
process, and forming an opinion on the group financial statements.
Component. An entity or business activity for which group or component management
prepares financial information that is required by the applicable financial reporting
framework to be included in the group financial statements.
Component Auditor. An auditor who performs work on the financial information of a
component that will be used as audit evidence for the group audit. A component auditor
may be part of the group engagement partner’s firm, a network firm of the group
engagement partner’s firm, or another firm.
Component Materiality. The materiality for a component determined by the group
engagement team for the purposes of the group audit.
Significant Component. A component identified by the group engagement team (i) that is
of individual financial significance to the group, or (ii) that, due to its specific nature or
circumstances, is likely to include significant risks of material misstatement of the group
financial statements.
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Group Auditor Assuming Responsibility
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Shared Responsibility
Report Language:
[Standard introductory paragraph language] We did not audit
the financial statements as and for the year ended December
31, 2011 of Glendo, Inc., which statements reflect total sales
constituting 27 percent of total consolidated sales for 2011.
Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as
it relates to data included for Glendo, Inc. for 2011, is based
solely on the report of the other auditors.
[Standard scope paragraph language] We believe that our
audits and the reports of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the reports of other
auditors, …
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Summary of Emphasis of Matter
Paragraphs and Group Audits
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Modified Opinions
1. A qualified opinion. A qualified opinion states that
the financial statements are presented fairly in
conformity with generally accepted accounting
principles “except for” the effects of a GAAP
noncompliance or audit scope limitation.
2. An adverse opinion. An adverse opinion states that
the financial statements are not presented fairly in
conformity with generally accepted accounting
principles.
3. A disclaimer of opinion. A disclaimer of opinion
means that due to a significant scope limitation, the
auditors were unable to form an opinion or did not
form an opinion on the financial statements.
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Appropriate Modified Opinion
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Qualified Opinion—Departure from GAAP
• Departure from GAAP
– Immaterial – Unmodified
– Material – Qualified
– Material & Pervasive - Adverse
• Misstatements become pervasive when any one of the
following applies:
– Not confined to specific accounts.
– If confined, they represent a substantial proportion
of the financial statements (very material).
– In relation to disclosures, they are fundamental to
users’ understanding of the financial statements.
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Qualified Report - Departure from GAAP
(Introductory and Scope Paragraphs are Standard)
The Company has excluded from property and debt in the
accompanying balance sheet certain lease obligations that, in our
opinion, should be capitalized in order to conform with generally
accepted accounting principles. If these lease obligations were
capitalized, property would be increased by $__________, long-term
debt by $___________, and retained earnings by $__________ as of
December 31, 20X1, and net income and earnings per share would
be increased (decreased) by $___________ and $_____, respectively,
for the year then ended.
In our opinion, except for the effects of not capitalizing lease
obligations as discussed in the Basis for Qualified Opinion
Paragraph, the financial statements referred to above present fairly,
in all material respects, the financial position of XYZ Company as of
December 31, 20X1, and the results of its operations and cash flows
for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
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Adverse Opinion
• Financial statements do not present fairly
the financial position, results of operations,
and cash flows of client in conformity with
GAAP.
• Material & pervasive departures from GAAP.
• Auditor believes departure causes financial
statements taken as a whole to be
misleading.
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Adverse Opinion
In our opinion, because of the effects of the
matters discussed in the Basis for Adverse
Opinion Paragraph, the financial statements
referred to above do not present fairly, in
conformity with accounting principles generally
accepted in the United States of America, the
financial position of XYZ Company as of December
31, 20X5, or the results of its operations or its
cash flows for the year then ended.
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Qualified Opinion-Lack of Sufficient Appropriate
Audit Evidence (Scope Limitations)
• Imposed by circumstances
– Important accounting records destroyed
• Due to nature of audit
– Engaged too late in year to observe client’s
beginning inventory (First consider alternative
procedures.)
• Imposed by client
– Client refused to allow auditors to send
confirmations to customers (Auditor should first elevate
to those charged with governance and then consider
alternative procedures.)
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Qualified Report--Scope Limitation Example
Basis for Qualified Opinion
We were unable to obtain audited financial statements supporting the
company’s investment in a foreign affiliate stated at $20,500,000, or its
equity in earnings of that affiliate of $6,250,450, which is included in net
income, as described in Note 8 to the financial statements; nor were we
able to satisfy ourselves as to the carrying value of the investment in the
foreign affiliate or the equity in earnings by other auditing procedures.
Qualified Opinion
In our opinion, except for the possible effects of the matters described
in the Basis for Qualified Opinion paragraph, the financial statements
referred to above present fairly, in all material respects, the financial
position of Wend Company as of December 31,20X8, and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
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Disclaimer of Opinion
• Auditor has no opinion.
• Issued whenever auditor is unable to
form an opinion as to fairness of the F.S.
• Circumstances resulting in a disclaimer are
those in which the possible misstatements
in the F.S. aspects with insufficient
evidence could be material & pervasive.
(Multiple or very significant uncertainties may
also lead to a disclaimer.)
• Not an alternative to adverse opinion.
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Disclaimer of Opinion Example
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based
on conducting the audit in accordance with auditing standards generally
accepted in the United States of America. Because of the matter described in
the Basis for Disclaimer of opinion paragraph, however, we were not able to
obtain sufficient appropriate audit evidence to provide a basis for an audit
opinion.
Basis for Disclaimer of Opinion
We were unable to obtain audited financial statements supporting the
Company's investment in a foreign affiliate stated at $20,500,000, or its equity
in earnings of that affiliate of $6,250,450, which is included in net income, as
described in Note 8 to the financial statements; nor were we able to satisfy
ourselves as to the carrying value of the investment in the foreign affiliate or
the equity in earnings by other auditing procedures.
Disclaimer of Opinion
Because of the significance of the matter described in the Basis for Disclaimer of
Opinion paragraph, we have not been able to obtain sufficient appropriate
audit evidence to provide a basis for an audit opinion. Accordingly, we do not
express an opinion on these financial statements.
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Placement of Additional Paragraphs
• Before opinion paragraph—Basis for
Modification (Qualified, Adverse, Disclaimer)
paragraphs
• Following opinion paragraph—Emphasis
of matter and other matter paragraphs
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Summary of Appropriate Auditors’ Reports
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Two or More Report Modifications
• Qualified by two or more situations.
– Example: Qualified because of both a scope
limitation and separate departure from GAAP.
• Wording of report would include appropriate
qualifying language and explanatory
paragraphs for both types of qualifications.
• Auditor should consider cumulative effects –
disclaimer of opinion may be appropriate.
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Financial Statements
with Different Opinions
It is acceptable to express an unqualified opinion
on one statement while expressing a qualified or
adverse on the others.
Example: Auditors retained after client has
taken its beginning inventory. A disclaimer
may be issued on the income statement (the
auditor doesn't know if income is reasonably
stated), but an unqualified opinion may be
issued on the year-end balance sheet.
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Comparative Financial Statements
• Audit report should cover current year as well as prior
period audited by their firm.
• Can express different opinions on different years.
• Auditor should update report for all prior periods
presented for comparison.
• If prior period audited by another (predecessor) CPA:
– Current year opinion only covers years the CPA firm audited.
– For financial statements audited by predecessor auditors either:
• Predecessor auditor reissues report with original date or
• Current auditors refer to report of other auditors.
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Reference to Predecessor Auditor Report
Other Matter
The financial statements of XYZ Company for the
year ended December 31, 20X7, were audited by a
predecessor auditing firm whose opinion, dated
March 1, 20X8, on those statements was qualified
as being presented fairly except for the effects on
the 20X7 statements of the adjustments
pertaining to the valuation of inventory, as
discussed in Note X to the financial statements.
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