chapter 14 audit reports
DESCRIPTION
CHAPTER 14 Audit Reports. Report title: Independent Auditor’s Report. The Standard Unqualified Audit Report. Report title: Independent Auditor’s Report Address: To the Stockholders of Ace Corporation:. report may also be addressed to company or board of directors, not management. - PowerPoint PPT PresentationTRANSCRIPT
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CHAPTER 14
AuditReports
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Report title:Independent Auditor’s Report
The Standard Unqualified Audit ReportThe Standard Unqualified Audit Report
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Report title:Independent Auditor’s Report
Address:To the Stockholders of Ace Corporation:
report mayalso be addressed
to company orboard of directors,not management
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Report title:Independent Auditor’s Report
Address:To the Stockholders of Ace Company:
Introductory paragraph:
What statements
were audited?
What time period?
What are clientand auditor
responsibilities?
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Report title:Independent Auditor’s Report
Address:To the Stockholders of Ace Company:
Introductory paragraph:We have audited the accompanying balance sheets of AceCompany as of December 31, 19x5 and 19x4, and the relatedstatements of income, retained earnings, and cash flows forthe years then ended. These financial statements are theresponsibility of the Company’s management. Ourresponsibility is to express an opinion on these financialstatements based on our audits.
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Scope paragraph:We conducted our audits in accordance with generally accepted auditing standards. Those standards require thatwe plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in thefinancial statements. An audit also includes assessing the accounting principles used and significant estimates madeby management, as well as evaluating the overall financialstatement presentation. We believe that our audits providea reasonable basis for our opinion.
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Opinion paragraph:In our opinion, the financial statements referred to abovepresent fairly, in all material respects, the financial positionof Ace Company as of December 31, 19x5 and 19x4 and theresults of its operations and its cash flows for the yearsthen ended in conformity with generally accepted accountingprinciples.
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Opinion paragraph:In our opinion, the financial statements referred to abovepresent fairly, in all material respects, the financial positionof Ace Company as of December 31, 19x5 and 19x4 and theresults of its operations and its cash flows for the yearsthen ended in conformity with generally accepted accountingprinciples.
Name of firm:Taylor & Tower, CPAs
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Opinion paragraph:In our opinion, the financial statements referred to abovepresent fairly, in all material respects, the financial positionof Ace Company as of December 31, 19x5 and 19x4 and theresults of its operations and its cash flows for the yearsthen ended in conformity with generally accepted accountingprinciples.
Name of firm:Taylor & Tower, CPAs
Audit report date:February 27, 19x6
field work completion
date
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Types of Audit ReportsTypes of Audit Reports- unqualified - “statements present fairly”
client
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Types of Audit ReportsTypes of Audit Reports- qualified - “except for one or more exceptions, statements present fairly”
client
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Qualified Audit ReportQualified Audit Report(GAAP Departure)(GAAP Departure)
same introductory paragraph
same scope paragraph
explanatory third paragraph including $-effect
In our opinion, except for the effects of ..., as discussed in the preceding paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of Ace Company as of December 31, 19x5 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.
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Types of Audit ReportsTypes of Audit Reports- adverse - “statements do not present fairly”
client
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Adverse Audit ReportAdverse Audit Reportsame introductory paragraph
same scope paragraph
explanatory third paragraph including $-effect
In our opinion, because of the effects of the matters 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 Ace Company as of December 31, 19x5 or the results of its operations and its cash flows for the year then ended.
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Types of Audit ReportsTypes of Audit Reports- disclaimer - “no opinion”
client
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DisclaimerDisclaimer(scope restriction)(scope restriction)
We were engaged to audit...remainder of the introductory paragraph is the same
no scope paragraph
explanatory third paragraph including $-effect
Since we were unable to ... and we were unable to satisfyourselves as to the ...by means of other auditing procedures, the scope of our work was not sufficient to express, and wedo not express, an opinion on the financial statements.
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Changes in consistency (AU 420 and 508) must be distinguished from changes in comparability.
changes inconsistency
changes incomparability
Unqualified Reports with Explanatory Unqualified Reports with Explanatory Paragraphs or Modified WordingParagraphs or Modified Wording
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changes inconsistency
- changes in accounting principles (ex., FIFO to LIFO)- changes in reporting entities (ex., equity method to consolidation)- correction of errors involving principles - non-GAAP method to GAAP
changes incomparability
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changes inconsistency
- changes in estimate (ex., asset useful life)- changes in statement format or presentation- purchase or sale of a subsidiary- error correction not involving principles (ex., math error of prior year)
- changes in accounting principles (ex., FIFO to LIFO)- changes in reporting entities (ex., equity method to consolidation)- correction of errors involving principles - non-GAAP method to GAAP
changes incomparability
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changes inconsistency
changes incomparability
noauditreporteffect
additionalfourth
paragraph
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Consistency ModificationConsistency Modification
same introductory paragraph
same scope paragraph
same opinion paragraph
As discussed in note ? to the financial statements, thecompany changed its method of...in (current year).
This report is a modification; i.e., unqualified but the wording is changed.
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In some circumstances, a lack In some circumstances, a lack of consistency may result in a of consistency may result in a qualifiedqualified or or adverseadverse opinion: opinion:
- the client cannot justify the change- the client changed to a non-GAAP method- the client refuses to properly disclose the lack of consistency (footnote disclosure)
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Substantial doubt about the client’s ability to remain a going concern (AU 341) will result ina disclaimer or an additional fourth paragraphto an unqualified report.
occasionallyreferred to as
the “kiss of death”
opinion
Unqualified Reports with Explanatory Unqualified Reports with Explanatory Paragraphs or Modified WordingParagraphs or Modified Wording
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Going Concern ModificationGoing Concern Modificationsame introductory paragraphsame scope paragraphsame opinion paragraph
The accompanying financial statements have been preparedassuming that Ace Company will continue as a goingconcern. As discussed in note ? to the financial statements,...(some circumstance)...raises substantial doubt about thecompany’s ability to continue as a going concern. Manage-ment’s plans in regard to these matters are also described innote ?. The financial statements do not include any adjust-ments that might result from the outcome of this uncertainty.
This report is a modification; i.e., unqualified but the wording is changed.
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Departure from a promulgated accountingprinciple (AU 508) occurs when the auditor and client agree that a departure from GAAP is justified to avoid misleading results.
The report should be unqualified but havean additional explanatory paragraph eitherpreceding or following the opinion paragraph.
Unqualified Reports with Explanatory Unqualified Reports with Explanatory Paragraphs or Modified WordingParagraphs or Modified Wording
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The report should be unqualified but havean additional explanatory paragraph eitherpreceding or following the opinion paragraph.
Emphasis of a matter (AU 508) is appropriate when the auditor believes that an unqualified opinion is warranted but attention should be drawn to a matter.
Unqualified Reports with Explanatory Unqualified Reports with Explanatory Paragraphs or Modified WordingParagraphs or Modified Wording
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Opinion based, in part, on the report of another auditor (AU 543, 508) occurs when a part of the client is audited by another auditor.
Unqualified Reports with Explanatory Unqualified Reports with Explanatory Paragraphs or Modified WordingParagraphs or Modified Wording
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The overall report must be signed by the principal auditor. This designation is based on: - materiality of the portion of the statements examined - knowledge of overall statements- importance of client components audited
Opinion based, in part, on theOpinion based, in part, on thereport of another auditorreport of another auditor
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The principal auditor must:- make inquiries into the repu- tation of the other auditor- obtain representation from other auditor regarding independence- ascertain that the other auditor knows GAAS, SEC standards, and that the component audited is part of a larger company.
Opinion based, in part, on theOpinion based, in part, on thereport of another auditorreport of another auditor
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If the results of these inquiries are unsatisfactory, the principal auditor must:- qualify or disclaim the audit reportOR- audit the component
Opinion based, in part, on theOpinion based, in part, on thereport of another auditorreport of another auditor
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If the results of these inquiries are satisfactory, the principal auditor must decide whether to refer to the other auditor in the report:- no reference to the other auditor in the report- a shared report indicating divided responsibility
Opinion based, in part, on theOpinion based, in part, on thereport of another auditorreport of another auditor
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We have audited the accompanying consolidated balance sheets of Ace Company as of December 31, 19x5, and the related consolidated statements of income, retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did notaudit the financial statements of Trace Company, aconsolidated subsidiary in which the Company had an equityinterest of 57% as of December 31, 19x5, which statementsreflect total assets of $xx,xxx as of December 31, 19x5 and total revenues of $x,xxx for the year then ended. Those statements were audited by other auditors whose report hasbeen furnished to us, and our opinion, insofar as it relates toamounts included for Trace Company, is based solely on the report of the other auditors.
Shared ModificationShared Modification
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We conducted our audits in accordance with generally accepted auditing standards. Those standards require thatwe plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in thefinancial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits and thereport of other auditors provide a reasonable basis for our opinion.
Shared ModificationShared Modification
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In our opinion, based on our audits and the report of otherauditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ace Company as of December 31, 19x5 and theresults of its operations and its cash flows for the year thenended in conformity with generally accepted accountingprinciples.
Shared ModificationShared Modification
This report is a modification; i.e., unqualified but the wording is changed.
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conditions requiring a departure conditions requiring a departure from the unqualified reportfrom the unqualified report
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conditions requiring a departure conditions requiring a departure from the unqualified reportfrom the unqualified report
Scope limitation (AU 508) - the auditors wereunable to perform some aspect of the audit that they considered necessary:
client-imposed - the client will not allow theauditor to perform an audit procedure
circumstance-imposed - because of somecircumstance other than a client-imposedrestriction, the auditor could not perform anaudit procedure
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audit scopeis not
significantly limited
probablydisclaim
pursue alternativeprocedures
client-imposed scope limitationclient-imposed scope limitation
audit scopeis
significantly limited
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adequatealternativeprocedures
areavailable
qualify or disclaim
adequatealternativeprocedures
are notavailable
circumstance-imposed scope limitationcircumstance-imposed scope limitation
no auditreport effect
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Scope limitations may result in differentopinions on individual statements.
EXAMPLE: an auditor cannot adequately verify beginning inventory of a first-year client
balancesheetopinions?
incomestatement
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Scope limitations may result in differentopinions on individual statements.
EXAMPLE: An auditor cannot adequately verify beginning inventory of a first-year client
incomestatement
disclaimer
unqualified balancesheet
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Scope Restriction DisclaimerScope Restriction Disclaimer
We were engaged to audit...remainder of the introductory paragraph is the same
no scope paragraph
explanatory third paragraph including $-effect
Since we were unable to ... and we were unable to satisfyourselves as to the ...by means of other auditing procedures, the scope of our work was not sufficient to express, and wedo not express, an opinion on the financial statements.
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Scope Restriction QualificationScope Restriction Qualificationsame introductory paragraph
Except as discussed in the following paragraph, we conducted the audit ...remainder of the scope paragraph is the same
explanatory third paragraph including $-effect:We were unable to...
In our opinion, except for the effects of such adjustments,if any, as might have been determined to be necessary hadwe been able to..., the financial statements referred to abovepresent fairly, in all material respects, the financial positionof Ace Company as of December 31, 19x5 and the resultsof its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.
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conditions requiring a departure conditions requiring a departure from the unqualified reportfrom the unqualified report
Departures from GAAP (AU 508) result in aqualified or adverse opinion depending onmateriality and pervasiveness.
The correct information should be includedin an additional third paragraph. If thisinformation is not available, the report should state that fact.
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GAAP Departure QualificationGAAP Departure Qualificationsame introductory paragraph
same scope paragraph
explanatory third paragraph including $-effect
In our opinion, except for the effects of ..., as discussed in the preceding paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of Ace Company as of December 31, 19x5 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.
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conditions requiring a departure conditions requiring a departure from the unqualified reportfrom the unqualified report
Auditor’s lack of independence (AU 504) will result in a disclaimer. The report should not mention the reason for the lack of independence or any audit procedures.
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Lack of Independence DisclaimerLack of Independence Disclaimer
We are not independent with respect to Ace Company,and the accompanying balance sheet as of December 31, 19x5, and the related statements of income, retained earnings, and cash flows for the year then ended were notaudited by us. Accordingly, we do not express an opinion on them.
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The audit report should The audit report should notnot include any include anystatements that would statements that would counterbalancecounterbalance
the opinion:the opinion:
- negative assurance - “nothing came to our attention that would lead us to believe...”
- piecemeal opinion - positive comments on some components of the financial statements when a disclaimer or adverse opinion is issued