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  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

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 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

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 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

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 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.

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 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.

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 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.

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 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.
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17 -8
 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.

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17 -9
 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.

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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.

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 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.

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 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

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17 -13
 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.

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 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.

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17 -15
  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.
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 Consolidated Parent
Company (Audited by
Group Auditor)

Subsidiary A Subsidiary B Subsidiary C

(Audited by (Audited by (Audited by
Group Auditor) Group Auditor) Component Auditor)

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  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.

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17 -18
  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 misstatements.

 Group auditor alternatives

 Make no reference to the component auditors
 Make reference to the component auditors.

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 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, …

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Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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 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.

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17 -24
 (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.

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17 -25
  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

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17 -26
 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.

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17 -27
  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

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17 -28
 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 mate-
rial 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.

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17 -29
  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

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17 -30
 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.
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17 -31
  Before opinion paragraph—Basis for
Modification (Qualified, Adverse,
Disclaimer) Paragraphs
 Following opinion paragraph—Emphasis of
matter and other matter paragraphs

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Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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  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

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17 -34
 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.

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17 -35
 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.

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  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

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