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  • 1. REPORTING ON AUDITED FINANCIAL STATEMENTS I. FOUR STANDARDS OF REPORTING A. The report shall state whether the financial statements are presented in accordance with generally accepted accounting principles. B. Unless otherwise stated in the report, accounting principles have been consistently observed in the current period in relation to the preceding period. C. Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report. D. The report shall contain either an expression of opinion regarding the financial statements taken as a whole, or an assertion to the effect that an opinion cannot be expressed. II. AICPA STANDARD AUDIT REPORT 1
  • 2. -+ Independent Auditor's Report ¦Title -+ [Addressee] -+ We have audited the accompanying balance sheet of ¦Opening X Company as of December 31, 19XX and the related ¦Paragraph: statements of income, retained earnings and cash ¦ flows for the year then ended. These financial ¦Extent of statements are the responsibility of the ¦examination Company's management. Our responsibility is to ¦(assertions) express an opinion on these financial statements ¦ based on our audit. ¦Responsibilities! -+ -+ We conducted our audit in accordance with ¦Scope generally accepted auditing standards. Those ¦Paragraph: standards require that we plan and perform the ¦ audit to obtain reasonable assurance about whether¦Nature of the financial statements are free of material ¦examination misstatement. An audit includes examining, on a ¦ test basis, evidence supporting the amounts and ¦*Standards disclosures in the financial statements. An audit¦*Tests also includes assessing the accounting principles ¦*Judgment used and significant estimates made by management,¦*Reasonable as well as evaluating the overall financial ¦ basis statement presentation. We believe that our audit¦ provides a reasonable basis for our opinion. ¦ -+ -+ In our opinion, the financial statements referred ¦Opinion to above present fairly, in all material respects,¦Paragraph: the financial position of X Company as of December¦ 31, 19XX, and the results of its operations and its¦Degree of cash flows for the year then ended in conformity ¦correspondence with generally accepted accounting principles. ¦ -+Criteria [Signature] [Date] 2
  • 3. III. KEY ASSERTIONS IN THE AUDIT REPORT TITLE (Independent Auditor's Report) ADDRESSEE (Board of Directors &/or stockholders - Not management) INTRODUCTORY PARAGRAPH 1. We have audited 2. Financial statements listed 3. Financial statements are management's responsibility 4. To express an opinion is auditor's responsibility SCOPE PARAGRAPH 1. Audit conducted per GAAS (not GAAP) 2. GAAS required that we plan & perform audit to provide reasonable assurance statements free of material misstatement 3. Audit involves • Examining on a test basis evidence supporting amounts & disclosures • Assessment of accounting principles • Assessment of significant estimates • Evaluation of overall presentation 4. Audit provides reasonable basis for an opinion OPINION PARAGRAPH 1. In our opinion 2. Statements fairly presented, in all material respects, per GAAP (Not GAAS) MANUAL OR PRINTED SIGNATURE ( DATE ( 3
  • 4. IV. OVERVIEW: AUDIT REPORTING A. Unqualified Reports 1. Financial statements in conformance with 2. Audit was done in accordance with 3. Auditors must qualify their report whenever there are material deficiencies in the client's financial statements. B. Modifications: Circumstances for modifying standard audit Required report type report Only if material (except Pervasive for independence issues) <---Lesser Greater---> Limitation on Scope Auditor lacks independence Departure from GAAP Other auditor Departure from promulgated GAAP (Justified) Lack of consistency Uncertainty (including going concern) Emphasis of a matter 4
  • 5. IV. SUMMARY OF STANDARD REPORT DEPARTURES Paragraph Modified Circumstance Introductory Scope Opinion Explanatory * Unqualified with Explanatory Language A. Other Auditor – Make Reference B. Justified GAAP Departure C. Going Concern D. Inconsistency E. Uncertainties F. Emphasize a Matter Qualified Opinion G. Departure from GAAP No No Yes Yes H. Scope Limitation Disclaimer E. Uncertainties (NOT SEC) D. Going Concern RARE) H. Scope Limitation I. Lack of independence Adverse Opinion G. Departure from GAAP * If opinion is modified, explanatory paragraph goes before the opinion paragraph. For inconsistency or going concern opinions, the explanatory paragraph goes after the opinion. All other explanatory paragraphs can go before or after the opinion paragraph. 5
  • 6. VI. UNQUALIFIED WITH EXPLANATORY LANGUAGE A. Other Auditors 1. Report--Unqualified (sometimes with explanatory language modifying each paragraph, but 2. General Situation: ABC company, ABC company, USA Brazil Audited by Audited by Norm & Norm, CPAs Juan & Juan, CPAs Who issues the report on ABC company? 3.Principal auditor must be selected based on: a. b. 4. The principal auditor must: 6
  • 7. 5. If the principal auditor is satisfied with the other auditor, the following highlights further reporting and procedural responsibilities: Does Principal Auditor wish to make reference to Other Auditor in the overall audit report? No Yes Does Principal Perform 1 or more of the Auditor wish to following procedures name Other Auditor involving the Other in the overall Auditor: report? 1.Visit 2.Review audit program No Yes 3.Review work papers 4.Do additional audit procedures Issue standard Give 1.Give audit report appropriate appropriate %’s %’s audited audited by by Other Other Auditor Auditor in in overall overall audit audit report report 2. 3.Present Other Auditor’s report 7
  • 8. 6. What if other auditors qualify their report? 7. What if principal auditors do not want to rely on the other auditors? 8. Audit report: Other auditor modifications (Opening paragraph) ...Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the financial statements of B Company, a wholly owned subsidiary, which statements reflect total assets of $3,500,000 as of December 31, 19XX, and total revenues of $9,750,000 for the year then ended. These statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for B Company, is based solely on the report of the other auditors. (Scope paragraph) ...as well as evaluating the overall financial statement presentation. We believe that our audit and the report of the other auditors provide a reasonable basis for our opinion. (Opinion paragraph) In our opinion, based on our audit and the report of other auditors, the financial statements... 8
  • 9. B. Uncertainties 1. Past history (HINT: “SUBJECT TO” is a bad answer) 2. Emphasis on disclosures 9
  • 10. 3. Loss Contingencies: (FASB No. 5) Likelihood of Occurrence of event Financial Statement Effect on Audit or events Treatment Report Remote No note disclosure (slight chance) is necessary (unless specifically required by GAAP) Reasonably Possible Note disclosure is (more than remote, necessary but less than likely) and a reasonable estimate can be made. Probable (likely to a. Amount capable occur) of reasonable estimation- financial statement amounts are adjusted. b. Amount is not capable of reasonable estimation-note disclosure is necessary a. Did you obtain enough evidence on uncertainties? b. Are disclosures and estimates OK? 10
  • 11. C. GAAP Not Consistently Applied (i.e. 2nd std. of reporting. 1. Auditor assesses whether the change is justified per APB Opinion No. 20. If no, then it is a departure from GAAP-- Qualified or Adverse opinion. 2. Overview: Type of Change . Change in Estimation or Change in Error Principal or Entity Estimate Reclassification Error Principle Entity or Special Change Non GAAP GAAP to GAAP to GAAP - Restate Restate Restate Pro Retroactive Forma Restatement All Require footnote All Require footnote disclosure in the disclosure in the financial statements financial statements No explanation necessary to Explanatory paragraph must be 11 add to opinion added to the audit report
  • 12. D. Emphasis of a matter. 1. May put additional paragraph either before or after opinion paragraph. 2. “In some circumstances, the auditor may wish to emphasize a matter regarding the financial statements, but, nevertheless, intends to express an unqualified opinion.” 3. Examples: E. Justified Departure from GAAP 1. Can put additional paragraph either before or after opinion paragraph. 2. GAAP vs. fairly presented. 3. Relates to Rule 203 of Code of ethics which states that when GAAP are being followed by a client in an area may be departed from when: ...[when] due to unusual circumstances the financial statements or data would otherwise be misleading, the member can comply with the rule by describing the departure [from GAAP], its approximate effects, if practicable, and the reasons why compliance with the principle would result in a misleading statement. 12
  • 13. F. PROMULGATED GAAP (AU 411.05&.06) Category A (No disclosure): FASB statements FASB interpretations APB opinions ARB GASB statements & interpretations preferred for state & local government) Category B (Disclosure): AICPA Industry Audit & Accounting Guides AICPA Statements of Position FASB & GASB technical bulletins Category C (disclosure): AICPA accounting interpretations Practices prevalent in the industry Category D (Disclosure): APB statements AICPA issues papers FASB concept statements AcSEC practice bulletins FASB EITF minutes GASB concept statements International accounting standards Accounting textbooks & articles 13
  • 14. VII. QUALIFIED OPINIONS (“Except for”) A. Departures from GAAP--Unjustified. B. Try to get client to change to GAAP. C. Provide necessary information related to item in an explanatory paragraph before the opinion paragraph. D. Example: AUDIT REPORT: QUALIFIED OPINION PARAGRAPH In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of X Company as of December 31, 19XX, and except for the effect of not recording a loss on sale of securities as a reduction of net income as discussed in the preceding paragraph, the statement of income, retained earnings, and cash flows present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 19XX, in conformity with generally accepted accounting principles. 14
  • 15. VIII. SCOPE LIMITATIONS A. Sufficient evidential matter does/did exist but is/was not available to the auditor for reasons such as management’s record retention policies or a restriction imposed by management. B. Type of report depends on importance of omitted procedures to ability to form an opinion. D.Client imposed vs. circumstance imposed scope limitation. E. Overview: Is audit scope Yes “significantly" Generally limited? Yes Is the limitation client imposed? No No Are adequate alternate The limitation itself procedures will not lead to a available? modified opinion. No Qualify (“except for”) or disclaim based on importance of omitted procedures. 15
  • 16. F. AUDIT REPORT: DISCLAIMER OPINION PARAGRAPH Because of the significance of the [scope limitation] discussed in the preceding paragraph, we are unable to express, and we do not express, an opinion on the financial statements. G. AUDIT REPORT: AUDITOR LACKS INDEPENDENCE (AU 504.10) [No title] We are not independent with respect to X Company, and the accompanying balance sheet as of December 31, 19XX, and the related statements of income, retained earnings, and cash flows for the year then ended were not audited by us and, accordingly, we do not express an opinion on them. Signature Date 16
  • 17. IX. ADVERSE OPINIONS A. Adverse opinion is the opposite of an unqualified opinion--it is an opinion that the financial statements do not present fairly the ..... in conformity with GAAP. B. So material & lacking in fairness that a qualified opinion would not be warning enough. C. Obviously RARE. D. REPORT: ADVERSE OPINION PARAGRAPH In our because of the effects of opinion, [departure from generally accepted accounting principles] discussed in the preceding paragraph, the financial statements referred to above do not present fairly, in conformity with generally accepted accounting principles, the financial position of X Company as of December 31, 19XX, or the results of operations or its cash flows for the year then ended. 17