Chapter 16

Auditors Reports

Copyright 2012 South-Western/Cengage Learning

Audit Opinion Formulation Process

LO 1: Levels of Assurance Provided by Auditors

Financial statement assurances range from audits to reviews to compilations Positive assurance requires auditors to gather sufficient evidence to render an opinion Negative assurance is provided when performing services such as reviews of annual or interim financial information

LO 2: Audit Reports
Designed to promote clear communication between auditor and financial statement reader by clearly stating
What was audited and the relative responsibilities of the client and the auditor for the financial statements (introductory paragraph) The nature of the audit process (scope paragraph) Auditors opinion on the fair presentation of the financial statements (opinion paragraph) If an unqualified opinion cannot be expressed, reasons why (explanatory paragraph)

Reporting on Internal Control over Financial Reporting

Auditors report also refers to the audit of internal control over financial reporting The auditor may issue
Separate report Combined report

The fourth reporting standard requires auditors to either express an opinion or state why an opinion cannot be expressed

LO 3: Types of Audit Reports

Standard unqualified Unqualified report with an explanatory paragraph

Qualified
Adverse

Disclaimer

The Standard Unqualified Report

No material violations of GAAP Disclosures are adequate All necessary audit procedures performed (no scope limitation) No change in GAAP with material impact No material weakness in internal control over financial reporting No going concern problems Auditor is independent

Modifications to the Standard Unqualified Report

Statements present fairly, but auditor wishes to change wordings of the standard report in the following situation:
Justified departure from GAAP Inconsistent application of GAAP Going-concern doubt Emphasis of a matter Reference to other auditors

The Qualified Report

Statements present fairly except for....
Material unjustified departure from GAAP Inadequate disclosure

Scope limitation

The Adverse Report

Statements, as a whole, do NOT present fairly Pervasive and material unjustified departure from GAAP Lack of important disclosure

The Disclaimer of Opinion

Scope limitation Substantial doubt about the client being going concern The CPA firm not being engaged to perform an audit

Modifications Affecting the Opinion

Departure from GAAPwhether the departure
is justified or unjustified, amount and pervasiveness of the misstatement, and potential impact of misstatements on statement users determines whether an unqualified, qualified, or adverse opinion is issued Inadequate Disclosuresthe auditor should express a qualified or adverse opinion, and provide the omitted information in the audit report
Explanatory paragraph should describe the nature of the omitted disclosures, and the opinion paragraph should be modified.

Modifications Affecting the Opinion

(continued)

Scope limitationimposed by client or circumstance,

materiality of the amounts involved, auditors ability to form an opinion on the statements without the evidence determines whether qualified or disclaimer is issued

Going concerndepending on auditors assessment of

clients ability to remain a going concern, auditor may issue unqualified opinion with modified wording, qualified opinion, or disclaim

Audit Reports on Comparative Statements

Companies under the jurisdiction of the SEC must present comparative balance sheets for two years and the other statements for three years Circumstances related to the prior-year(s) statements have changed, auditor can now express an unqualified opinion on them and should add a paragraph to explain the change in the opinion

Audit Reports on Comparative Statements (continued)

When another audit firm audited one or more of the prior-year statements, there will be two auditors reports:
the predecessor firms report that covers the year(s) it audited the successor firms report covering the year(s) it audited

If predecessors report is not presented, successor should indicate:

That financial statements of the previous period(s) were audited by other auditors Date of that report Type of report previously issued Substantive reasons therefore if the report was other than unqualified

LO 4: Financial Statement Reviews

Sometimes a client does not need an audit. Practitioners can perform fewer procedures and report a lower, or no, level of assurance on the financial statements
The most common of these financial statement services are compilations and reviews

The standards for compilations and reviews of financial statements of non-public entities are called Statements on Standards for Accounting and Review Services (SSARS)

Financial Statement Reviews

(continued)

Inquiry and analytical procedures are performed for each significant account balance
Accountant does NOT assess internal control or perform substantive tests Provides limited assurance that accountant is not aware of any reporting problems Accountant must be independent

Compilation
Presents management information in financial statement form without any form of assurance The accountant must have general knowledge of client accounting records, accounting methods, and form and content of statements The accountant is not required to perform procedures to verify, corroborate, or review client information

Compilation (continued)
The accountant must read the statements to make sure they are free from obvious material misstatement If the accountant believes the statements are incorrect, incomplete, or misleading, (s)he must obtain any additional information necessary to prepare accurate statements

Compilation (continued)
Compiled statements may omit disclosures if the accountant believes the omission is not done to mislead, and it is noted in the compilation report If the accountant is not independent of client, a separate paragraph is added to the compilation report stating lack of independence Compiled statements may only be prepared for nonpublic entities

LO 5: Interim Financial Information

The SEC requires publicly traded companies to have their quarterly financial information reviewed by their independent auditors
Review procedures much the same as required by SSARS Reporting on interim statements presented separately Reporting on interim information accompanying audited annual financial statements

LO 6: Special Reports
Statements prepared on a comprehensive basis other than GAAP (OCBOA) Reporting on specified elements, accounts, or items of financial statements Reporting on compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements

Special Reports (continued)

Reporting on special-purpose financial presentations to comply with contractual agreements or regulatory provisions Reporting on financial information presented in prescribed forms or schedules

LO 7: Attesting to Other Information Provided by Management

Prospective Financial Statements
Forecasts and projections May compile (no assurance) or examine (positive assurance)

Pro forma financial information

Historical information adjusted for proposed or actual transactions

Compliance Attestation

Attesting to Other Information Provided by Management (continued)

Compliance with requirements of specified laws, regulations, rules, contracts, or grants Effectiveness of entitys internal control over compliance with specified requirements