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AUDITING CHAPTER 3

AUDITING CHAPTER 3. Reports By David N. Ricchiute. TOPICS. Reports on audited financial statements Audit report opinions Modifications to audit reports Updated reports & reports for foreign countries Reports on attest & assurance services. AUDIT REPORT DEFINED.

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AUDITING CHAPTER 3

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  1. AUDITINGCHAPTER 3 Reports By David N. Ricchiute

  2. TOPICS • Reports on audited financial statements • Audit report opinions • Modifications to audit reports • Updated reports & reports for foreign countries • Reports on attest & assurance services GBW 8th ed., Ch. 3

  3. AUDIT REPORT DEFINED • Audit report is a letter communicating • What was audited • Management’s responsibilities • Auditor’s responsibilities • What an audit entails • Auditor’s opinion GBW 8th ed., Ch. 3

  4. UNQUALIFIED OPINION DEFINED • Unqualified opinion in audit report means management’s assertions are fairly presented in the auditor • Applies to quality of financial statements not to quality of entity as investment or credit risk GBW 8th ed., Ch. 3

  5. STANDARD AUDIT REPORT OPINION • Unqualified opinion • Independent auditor’s opinion that management’s financial statements present fairly in all material respects the financial position, results of operations, & cash flows in conformity with GAAP GBW 8th ed., Ch. 3

  6. SARBANES-OXLEY • Management’s responsibilities • Reviewed entire annual/quarterly report • Report does not contain untrue statement of material fact or omit material fact • Financial statements present fairly financial condition & results of operations • Establish, maintain, evaluate effectiveness of internal controls • Identified to auditors significant deficiencies, fraud GBW 8th ed., Ch. 3

  7. ELEMENTS OF REPORT • Title: Independent Auditor’s Report • Addressee: shareholders, board of directors • Introductory paragraph • Scope paragraph • Opinion paragraph • Firm signature • Date of report GBW 8th ed., Ch. 3

  8. INTRODUCTORY PARAGRAPH • Statement that • Financial statements were audited • Financial statements are management’s responsibility • Auditor’s responsibility is to issue opinion GBW 8th ed., Ch. 3

  9. SCOPE PARAGRAPH • Statement that • Audit conducted in accordance with U. S. GAAS • GAAS requires planning, performing audit to obtain reasonable assurance financial statements free from material misstatements • Audit includes • Examining evidence on test basis • Evaluating accounting principles & estimates • Evaluating overall financial presentation GBW 8th ed., Ch. 3

  10. MEANING OF SCOPE PARAGRAPH • Reasonable not absolute assurance implies auditor may • Overlook immaterial misstatements • Test samples rather than all transactions & events GBW 8th ed., Ch. 3

  11. USE OF STANDARD SCOPE PARAGRAPH-1 • Implies auditor complied with all general standards • Adequately trained & proficient • Independent in mental attitude • Exercised due professional care GBW 8th ed., Ch. 3

  12. USE OF STANDARD SCOPE PARAGRAPH-2 • Implies auditor complied with all fieldworks standards • Planned engagement & supervised assistants • Obtained understanding of internal control • Obtained sufficient, competent evidential matter GBW 8th ed., Ch. 3

  13. OPINION PARAGRAPH • Statement of opinion • Whether financial statements present fairly in all material respects • Financial position • Results of operations • Cash flows • In conformity with GAAP GBW 8th ed., Ch. 3

  14. USE OF STANDARD OPINION PARAGRAPH • Implies compliance with reporting standards • Financial statements presented in accordance with U.S. GAAP • Principles are applied consistently • Disclosures are reasonably adequate • Opinion applies to statements taken as a whole GBW 8th ed., Ch. 3

  15. SIGNIFICANCE OF AUDIT REPORT DATE • Last day of fieldwork • Last day responsible for detecting subsequent events • Dual dating: financial statements revised for subsequent event after fieldwork date but before report release • Event date: date to which all responsibilities extended GBW 8th ed., Ch. 3

  16. OTHER TYPES OF OPINIONS • Departures from GAAP or scope limitation require other opinion • Qualified: sufficient evidence or assertions fairly presented except for certain matter(s) • Adverse: assertions are not fairly presented • Disclaimer: auditor does not express an opinion usually due to insufficient evidence (scope limitation) GBW 8th ed., Ch. 3

  17. STANDARDS FOR INTERNATIONAL REPORTS • US reporting standards are GAAP • Japanese auditors use private sector reporting standards • German auditors use commercial law as reporting standards GBW 8th ed., Ch. 3

  18. QUALIFIED OPINION • Except for effects of a matter, financial statements present fairly in all other material respects • Statements depart materially from GAAP • Management unable to justify material change in accounting principle • Scope of audit materially limited GBW 8th ed., Ch. 3

  19. ADVERSE OPINION • Management’s financial statements do not present fairly • Financial statements depart from GAAP • Management unable to justify change in accounting principle • Effects of departure so highly material that qualified opinion unwarranted GBW 8th ed., Ch. 3

  20. DISCLAIMER OF OPINION • Auditor does not express opinion • Scope limitation so material auditor does not have reasonable basis to reach opinion • Auditor is not independent of management GBW 8th ed., Ch. 3

  21. STANDARD REPORT MODIFICATIONS : Summary • Based in part on report of another auditor • Emphasize a matter • Departure from GAAP • Inconsistency • Scope limitations • Going concern • Lack of independence GBW 8th ed., Ch. 3

  22. MODIFICATIONS:Another Auditor • Principle auditor shares responsibility with another auditor • Modified wording in introductory & opinion paragraphs GBW 8th ed., Ch. 3

  23. MODIFICATIONS:Emphasis of a Matter • Auditor wishes to emphasize a matter & still issue an unqualified opinion • Explanatory paragraph added after opinion paragraph • Example: The accompanying financial statements have been re- stated GBW 8th ed., Ch. 3

  24. MODIFICATIONS:Departure from GAAP With Agreement • Management’s financial statements depart from GAAP • With auditor’s agreement • Unqualified opinion • Explanatory paragraph after opinion paragraph GBW 8th ed., Ch. 3

  25. MODIFICATIONS:Limited Departure from GAAP • Management’s financial statements depart from GAAP • Material departure from GAAP in limited area • Explanatory paragraph before opinion paragraph & qualified opinion • Example As discussed in Note 2, the Bank has charged goodwill to shareholders’ equity but GAAP requires an asset GBW 8th ed., Ch. 3

  26. MODIFICATIONS:PervasiveDeparture from GAAP • Management’s financial statements depart from GAAP • Pervasive departure from GAAP • Explanatory paragraph before opinion paragraph & adverse opinion • Example The company carries property, plant, & equipment at appraisal values but GAAP requires values not exceed cost. GBW 8th ed., Ch. 3

  27. MODIFICATIONS:JustifiableInconsistency • Management changes accounting principle(s) and justifies change • Explanatory paragraph after opinion paragraph • Example As discussed in Note 3, the company changed its method of accounting for goodwill & other intangibles GBW 8th ed., Ch. 3

  28. MODIFICATIONS:Inconsistency not Justified • Management changes accounting principle(s) but fails to justify change • Limited area • Explanatory paragraph before qualified opinion • Pervasive • Explanatory paragraph before adverse opinion GBW 8th ed., Ch. 3

  29. MODIFICATIONS:Scope Limitation Limited Area • Prevent auditor from performing 1 or more necessary auditing procedures • Limited area: • Modify scope paragraph • Explanatory paragraph before qualified opinion • Example We were unable to obtain evidential matter supporting the Company’s representations regarding the contingent liability as discussed in Note 8. GBW 8th ed., Ch. 3

  30. MODIFICATIONS:Pervasive Scope Limitation • Prevent auditor from performing 1 or more necessary auditing procedures • Pervasive limitation • Modify introductory paragraph • Omit scope paragraph • Explanatory paragraph before disclaimer of opinion • Example The Company did not give effect to all adjustments to the carrying value of assets & classification of liabilities resulting from bankruptcy proceedings GBW 8th ed., Ch. 3

  31. MODIFICATIONS:Going Concern • When auditor retains substantial doubt as to ability of client to continue as a going concern (SAS 59) • Explanatory paragraph after opinion paragraph GBW 8th ed., Ch. 3

  32. MODIFICATIONS:Lack of Independence • Auditor is not independent of client • SAS 26 requires a 1-paragraph explanation with disclaimer of opinion • Example We are not independent with respect to the Trailways Company. . . .the balance sheet, statements of income, retained earnings, & cash flows were not audited by us. We do not express an opinion on them. GBW 8th ed., Ch. 3

  33. REPORTS: COMPARATIVE STATEMENTS • When opinions differ • Criteria for both opinions must be met with explanatory paragraphs • When opinion updated • Update opinion paragraph & add explanatory paragraph acknowledging change GBW 8th ed., Ch. 3

  34. REPORTS ON ATTESTATION SERVICES • Letter communicating • Management’s & attester’s responsibilities • Attester's opinion • Management’s assertions (if written) GBW 8th ed., Ch. 3

  35. UNQUALIFIED OPINION Definition: unqualified opinion in attestation report means management’s assertions are fairly presented in the attester's opinion GBW 8th ed., Ch. 3

  36. OTHER TYPES OF OPINIONS • Departures from attestation standards or measurement criteria require other opinion • Qualified: assertions fairly presented except for certain matter(s) • Adverse: assertions are not fairly presented • Disclaimer: attester does not express an opinion usually due to insufficient evidence GBW 8th ed., Ch. 3

  37. REPORTS FOR ASSURANCE SERVICES Not required • Short history of offering assurance services • Traditionally, reports not required • Oscars • Tony awards • National book awards GBW 8th ed., Ch. 3

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