This document discusses key aspects of audit reports, including: - The auditor's standard report provides an opinion on whether the financial statements are presented fairly and in accordance with GAAP. - Audit reports typically include opinions on the financial statements themselves (balance sheet, income statement, etc.) and the related disclosures. - Modifications to the standard report may be needed if certain conditions are present, such as material departures from GAAP or scope limitations. - The auditor's report for public clients follows specific requirements regarding titles, addresses, references to auditing standards, and inclusion of opinions on internal control over financial reporting. - The opinion paragraph states the auditor's opinion on whether the financial statements

1. 17-1
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 gather
evidence to obtain reasonable assurance that the
statements are in conformity with GAAP

2. 17-2
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

3. 17-3
Conditions Requiring a Modification of the
Auditors’ Standard Report
❑Conditions, although not departures from GAAP,
about which the readers of the financial statements
should be informed
❑Material departure from GAAP in the client’s
financial statements
❑Material scope limitation

4. 17-4
Auditors’ Standard Report –
Public Clients
Includes the words “Registered” and “Independent” in the title.
Must be addressed to shareholders and board of directors (additional parties are allowable).
References auditing standards of the PCAOB.
Provides a discussion of auditor and management responsibilities.
Includes a paragraph indicating that the auditors have also issued a report on the client’s
internal control over financial reporting, or is a combined report on both the financial
statements and internal control.
Includes a Critical Audit Matters Section.
Includes statement on year audit firm began serving the client.
Signed with name of CPA firm not individual partner
Includes the City of the office with responsibility for the audit
Dated no earlier than the date on which the auditors obtained sufficient appropriate audit
evidence to support their opinion

5. 17-5

6. 17-6
Opinion Paragraph
Opinion on the Financial Statements
We have audited the accompanying balance sheets of X Company (the
“Company”) as of December 31, 20X7 and 20X6, the related statements of
income, comprehensive income, stockholders’ equity, and cash flows, for
each of the three years in the period ended December 31, 20X7, and the
related notes [and schedules] (collectively referred to as the “financial
statements”). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
20X7 and 20X6, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 20X7, in conformity
with accounting principles generally accepted in the United States of
America.
We also have audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States) (“PCAOB”) the Company’s
internal control over financial reporting as of December 31, 20X7, based on
Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) and our
report dated February 9, 20X8 expressed an unqualified opinion.

7. 17-7
Basis of Opinion
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the Company’s financial statements based on
our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement, whether
due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.

8. 17-8
Critical Audit Matters
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period
audit of the financial statements that were communicated or required to be communicated
to the audit committee and that (1) relate to accounts or disclosures that are material to
the financial statements and (2) involved our especially challenging, subjective, or complex
judgments. The communication of critical audit matters does not alter in any way our
opinion on the financial statements, taken as a whole, and we are not, by communicating
the critical audit matters below, providing separate opinions on the critical audit matters or
on the accounts or disclosures to which they relate.
[Include critical audit matters]
Blue, Gray & Company
Certified Public Accountants
We have served as the Company’s auditor since 20X0.
Los Angeles, California
February 9, 20X8

9. 17-9
Summary of a PCAOB Critical Audit Matter
©MCGRAW-HILL EDUCATION.

10. 17-10
Auditors’ Standard Report –
Nonpublic Clients
Major revision from text coverage issued in
May 2019 (Handout)
Effective for periods beginning after
December 15, 2020
Discuss the current version
Look at some features of the new version

12. 17-12
Second Paragraph: New

13. 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.

14. 17-14
The AICPAStandard Auditors’ Report:
Auditors’ Responsibility Section
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.

15. 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.

16. 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
(the firm that performs majority of the work) does not wish to take
responsibility for the work of the component auditors.

17. 17-17
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 states
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.

18. 17-18

19. 17-19
Unmodified Opinions With Additional
Financial Statement-Related Matter
Substantial doubt about the company’s
going-concern status
Generally accepted accounting principles not
consistently applied
Other circumstances that the auditors
believe should be emphasized

20. Going Concern
Auditor not required to perform procedures specifically designed to
test going-concern assumption but must evaluate the assumption
◦ Conditions indicative of going concern problem
◦ Negative cash flows from operations
◦ Defaults on loan agreements
◦ Adverse financial ratios
◦ Work stoppages
◦ Legal proceedings
◦ Loss of a key franchise, customer, or supplier
◦ An uninsured catastrophe

21. Emphasis-of-MatterParagraph—Substantial Doubtas to Going
ConcernStatus
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note X to the financial statements, the Company
has suffered recurring losses from operations, has a net capital
deficiency, and has stated that substantial doubt exists about the
Company’s ability to continue as a going concern. Management’s
evaluation of the events and conditions and management’s plans
regarding these matters also are described in Note X. The
financial statements do not include any adjustments that might
result from the outcome of this uncertainty. 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.

22. 17-22
Consistency in Application of
Accounting Principles
Auditors are required to indicate in the report when a company
has changed accounting principles resulting in a material effect
on the financial statements being reported on
This requirement pertains to changes in accounting principles but
not changes in accounting estimates
In accepting the change, the auditors should evaluate whether
◦ The newly adopted principle is generally accepted
◦ The method of accounting for the effect of the change is in
conformity with generally accepted accounting principles
◦ The disclosures related to the change are adequate
◦ Management has justified that the new accounting principle is
preferable.

23. 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.

24. ©MCGRAW-HILL EDUCATION.

25. Auditors report on the consistency of application of accounting principles. Assume that the following list
describes changes that have a material effect on a client's financial statements for the current year.
• (1) A change from the completed-contract method to the percentage-of-completion method of
accounting for long-term construction contracts.
• (2) A change in the estimated service lives of previously recorded plant assets based on newly
acquired information.
• (3) Correction of a mathematical error in inventory pricing made in a prior period.
• (4) A change from direct costing to full absorption costing for inventory valuation.
• (5) A change from deferring and amortizing preproduction costs to recording such costs as an
expense when incurred because future benefits of the costs have become doubtful. The new
accounting method was adopted in recognition of the change in estimated future benefits.
• (6) A change to including the employer's share of FICA taxes as “Retirement benefits” on the
income statement. This information was previously included with “Other taxes.”
• (7) A change from the FIFO method of inventory pricing to the LIFO method of inventory pricing.
Required:
For each of the above situations, state whether the audit report should include an emphasis-of-matter
paragraph on consistency.

26. 17-26
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.

27. 17-27
Group Financial Statements
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)

28. 17-28
Group Financial Statements
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 oversees auditors.

29. 17-29
Group Financial Statements
Communicate with component auditors
◦ Inform component auditors how their work will be used.
◦ Communicate ethical requirements.
◦ Provide list of related parties.
◦ Communicate significant risks of misstatement.
Group auditor alternatives
◦ Make no reference to the component auditors.
◦ Make reference to the component auditors.

30. 17-30
Group Financial Statements
©MCGRAW-HILL EDUCATION.

31. 17-31
Summary of Emphasis of Matter Paragraphs and Group Audits

32. 17-32
Group Financial Statements
Report:
[Standard introductory paragraph language] We did not audit the financial
statements as and for the year ended December 31, 20x1 of Glendo, Inc.,
which statements reflect total sales constituting 27 percent of total
consolidated sales for 20x1. 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 20x1, 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, …

33. LandoCorporationisadomesticcompanywithtwo whollyowneddomesticsubsidiaries.Michaels,CPA,
hasbeenengagedtoauditthefinancialstatementsoftheparentcompanyandoneofthesubsidiaries
andtoactasthegroupauditors.Thomas,CPA,hasauditedfinancialstatementsoftheothersubsidiary.
MichaelshasnotyetdecidedwhethertomakereferencetotheauditofThomas.
Required:
a. WhatauditproceduresshouldMichaelsperformwithrespecttothecomponentauditor,
regardlessofwhetherMichaelsdecidestomakereferencetoThomasinthereport?
b. WhatmodificationsaremadetotheauditreportifMichaelsdecidestomakereferencetothe
auditofThomas?

34. 17-34
Modified Opinions

35. 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.

36. Nonpublic Report--Qualified for a Departure from GAAP
(Introductory and Scope Paragraphs are Standard)
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 effects of not capitalizing certain 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
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.

37. 17-37
Public Report--Qualified for a Departure from GAAP
Opinion
We have audited the accompanying balance sheet of Wend Company as of
December 31, 20X8; the related statements of income, stockholders equity, and
cash flows for the year then ended; and the related notes. In our opinion, except for
the effects of not capitalizing certain lease obligations as discussed in the following
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.
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.

38. 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
◦Imposed by client
◦ Client refused to allow auditors to send confirmations to
customers

39. ©MCGRAW-HILL EDUCATION.
Qualified Report—Scope Limitation
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.

40. 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

41. 17-41
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.

42. 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

43. 17-43
Recap: Modified Reports

44. Placement of Additional Paragraphs
Before opinion paragraph—Basis for Modification
(Qualified, Adverse, Disclaimer) Paragraphs
Following opinion paragraph—Emphasis of matter
and other matter paragraphs

45. Two or More Report Modifications
Qualified for two or more reasons
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

46. 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 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.

47. 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 auditor either:
◦ Predecessor auditor reissues report with original date, or
◦ Current auditor refers to report of other auditor.

50. 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 10-K (annual report)
Auditors should be well versed on requirements of each form