Transcript Auditors' Reports - Walla Walla University

Chapter 17
Auditors’ Reports
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Audit Report
 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
17-2
Model Audit Report
The Shareholders:
We have eyeballed the ball park figures on the statement
of lies, retained deficits and source and application of
executive petty cash. Our examination included a general
rationalization of the accounting standards and such test of
the accounting records and other unsupported entries as
we considered unavoidable, subject to the constraints of
our time budget and audit fee.
Our gut feeling is that these ball park figures are solid
numbers and we are fit to roll with them, having been
prepared in accordance with generally accepted corporate
memos applied randomly on a basis consistent with that of
producing a satisfactory profit.
Yours in haste,
Aurthur Unknown, CPA
Siberia
February 30, 2009
17-3
Typical Coverage of Audit Reports
Reports on the financial statements ordinarily
include an opinion that is on both the:

Financial statements themselves:





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
17-4
Auditors’ Standard Report –
Nonpublic Clients
 Details




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
17-5
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.
17-6
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.
17-7
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.
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.
17-8
The 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.
17-9
Condition Required for Issuance of
Unmodified Opinion

The auditors are able to obtain
sufficient appropriate audit evidence
to obtain reasonable assurance so
as to be able to conclude that the
financial statements as a whole are
free from material misstatements.
17-10
Auditors’ Standard Report – Public Clients

Differences from nonpublic




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.
• 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.
17-11
Types of Reports with Unmodified Opinions
1. Unmodified opinion—standard report. This report may be issued only
when the auditors have obtained sufficient appropriate audit evidence to
conclude the financial statements are not misstated and there is no need to
alter the report for situations 2, 3 or 4 below.
2. Unmodified opinion—with an emphasis of matter paragraph. To
emphasize a matter appropriately presented in the financial statements
(e.g., a change in accounting principles).
3. Unmodified opinion—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. Unmodified 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.
17-12
Types of Reports with 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 some matter.
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.
17-13
Going Concern

Requirements
 Auditor not required to perform procedures
specifically designed to test going-concern
assumption but must evaluate the assumption
 Conditions
• Negative cash flows from operations
• Defaults on loan agreements
• Adverse financial ratios
• Work stoppages
• Legal proceedings
17-14
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.
17-15
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.
17-16
Additional Emphasis of Matter Situations—
Auditor Discretionary


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.
17-17
Group Financial Statements 1/5
Consolidated Parent
Company (Audited by
Group Auditor)
Subsidiary A
(Audited by
Group Auditor
Subsidiary B
(Audited by
Group Auditor)
Subsidiary C
(Audited by
Component Auditor
17-18
Group Financial Statements 2/5

Group engagement team should obtain
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 overseas auditors.
17-19
Group Financial Statements 3/5
 Communicate




Inform component auditors how their work will
be used.
Communicate ethical requirements.
Provide list of related parties.
Communicate significant risks of
misstatements.
 Group


with component auditors
auditor alternatives
Make no reference to the component auditors
Make reference to the component auditors.
17-20
Group Financial Statements 4/5
17-21
Group Financial Statements 5/5
Report:
[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, …
17-22
Summary of Emphasis of Matter
Paragraphs and Group Audits
17-23
Issuance of Modified Opinions
17-24
Qualified Opinion—Departure from
GAAP

Departure from GAAP
 Immaterial – unmodified
 Material – qualified
 Material and 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.
 In relation to disclosures, they are fundamental to
users’ understanding of the financial statements.
17-25
Example of a 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.
17-26
Adverse Opinion
 Financial
statements do not present fairly
the financial position, results of operations,
and cash flows of client in conformity with
GAAP
 Material and pervasive departures from
GAAP
 Auditor believes departure causes
financial statements taken as a whole to
be misleading
17-27
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.
17-28
Qualified Opinion-Lack of Sufficient Appropriate
Audit Evidence (Scope Limitations)
 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

Imposed by client
• Client refused to allow auditors to send
confirmations to customers
17-29
Example of a Qualified Report-Scope Limitation
Basis for Qualified Opinion
The company has excluded from property and debt in the accompanying balance
sheets certain lease obligations that in our opinion, should be capitalized in order to
conform with accounting principles generally accepted in the United States of
America. If these lease obligations were capitalized, property would be increased by
$15,000,000, long-term debt by $14,500,000, and retained earnings by $500,000 as
of December 31, 20X8. Additionally, net income would be increased by $500,000
and earnings per share would be increased by $1.22 for the year then ended.
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.
17-30
Disclaimer of Opinion
 Auditor
has no opinion
 Issued whenever unable to form an
opinion as to fairness of financial
statements
 Circumstances resulting in a disclaimer
are those in which the possible
misstatements are material and pervasive.

Multiple uncertainties may also lead to a
disclaimer
 Not
an alternative to adverse opinion
17-31
Example of a Disclaimer of Opinion-Scope Limitation
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.
17-32
Placement of Additional Paragraphs

Before opinion paragraph—Basis for
Modification (Qualified, Adverse, Disclaimer)
Paragraphs
 Following opinion paragraph—Emphasis of
matter and other matter paragraphs
17-33
Summary of Appropriate Auditors’ Reports
17-34
Two or More Report Modifications

Qualified by two or more
 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
17-35
Different Opinions on Different Statements
 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 issue 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.
17-36
Reporting on Comparative
Financial Statements




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 firm


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.
17-37
Reports to SEC


Forms filed with SEC which include audited financial
statements
 Forms S-1 through S-11 (registration statements)
 Forms SB-1 and SB-2 (registration for small
businesses)
 Form 8-K (current report)
 Form 10-Q (quarterly report)
 Form 19-K (annual report)
Auditors should be well versed on requirements of each
form
17-38