MODERN AUDITING MODERN AUDITING 7th Edition7th Edition

MODERN AUDITING MODERN AUDITING 7th Edition7th Edition

Developed by:Dr. Raymond N. Johnson, CPAGregory K. Lowry, MBA, CPA

John Wiley & Sons, Inc.

William C. BoyntonWilliam C. BoyntonCalifornia Polytechnic State California Polytechnic State University at San Luis ObispoUniversity at San Luis Obispo

Raymond N. JohnsonRaymond N. JohnsonPortland State UniversityPortland State University

Walter G. KellWalter G. KellUniversity of MichiganUniversity of Michigan

Chapter 20: Reporting on Audited Financial Statements

Chapter 20: Reporting on Audited Financial Statements

• Standards of Reporting

• The Standard Auditor’s Report

• Departures from the Standard Auditor’s Report

• Other Reporting Considerations

1st Reporting Standard1st Reporting Standard

• The report shall state whether the financial statements are presented in accordance with generally accepted accounting principles.

1st Reporting Standard1st Reporting Standard

The auditor’s opinion as to conformity with GAAP should be based on his or her judgment as to whether:

• The accounting principles selected and applied have general acceptance

• The accounting principles are appropriate in the circumstances

• The financial statements, including the related notes, are informative of matters that may affect their use, understanding, and interpretation

• The information presented in the financial statements is classified and summarized in a reasonable manner

• The statements reflect the underlying events and transactions in a manner that presents the financial position, results of operations, and cash flows within reasonable and practicable limits

2nd Reporting Standard2nd Reporting Standard

• The report shall identify those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period.

• Objectives– Assurance about comparability– Reporting when comparability has been affected by

material changes in accounting principles

3rd Reporting Standard3rd Reporting Standard

• Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report.

• Objectives– Assurance about disclosure– Reporting when disclosure is inadequate

4th Reporting Standard4th Reporting Standard

• The report shall either contain:– An expression of opinion regarding the financial statements, taken as a

whole, or

– An assertion to the effect that an opinion cannot be expressed. When an overall opinion cannot be expressed, the reasons therefore should be stated.

• In all cases where an auditor’s name is associated with financial statements, the report should contain a clear-cut indication of the character of the auditor’s work, if any, and the degree of responsibility the auditor is taking.

The Standard Auditor’s ReportThe Standard Auditor’s Report

• Title: Independent Auditor’s Report

• Introductory Paragraph

• Scope Paragraphs

• Opinion Paragraph

• Signature

• Date

Non-Standard Auditor’s ReportsNon-Standard Auditor’s Reports

• Unqualified Opinion with Additional Explanatory Language

• Departures from GAAP– Qualified Opinion– Adverse Opinion

• Scope Limitations– Qualified Opinion– Disclaimer of Opinion

Unqualified Opinion with Additional Explanatory Language

Unqualified Opinion with Additional Explanatory Language

• Inconsistent application of GAAP– Change to an acceptable method that is adequately

disclosed

• Going concern– Substantial doubt

• Emphasis of a matter– Auditor choice

Unqualified Opinion with Additional Explanatory Language

Unqualified Opinion with Additional Explanatory Language

Report Format– Standard Introductory Paragraph– Standard Scope Paragraph– Standard Opinion Paragraph– Explanatory Paragraph

Unqualified Opinion with Additional Explanatory Language

Unqualified Opinion with Additional Explanatory Language

• Shared Scope– The decision not to refer

• Auditor is well known to the principle auditor

• Work has been performed under the principle auditor’s guidance and review

• Principle auditor reviews programs and working papers

– The decision to refer• Does not meet criteria above

• Inquiries made about professional reputation

• Representation from other auditor about independence

• Auditor outside the U.S. is knowledgeable about US GAAP and US GAAS

Unqualified Opinion with Additional Explanatory Language

Unqualified Opinion with Additional Explanatory Language

Shared Scope Report Format– Modify Introductory Paragraph to describe sharing

of scope– Modify Scope Paragraph to Indicate that opinion was

based on your audit, and the audit of other auditors.– Modify Opinion Paragraph to indicate you opinion

was based on your audit and the report of other auditors

Unqualified Opinion with Additional Explanatory Language

Unqualified Opinion with Additional Explanatory Language

Nonconformity with GAAP Necessary for Fair Presentation– Standard Introductory Paragraph– Standard Scope Paragraph– Explanatory Paragraph

• States circumstances

• Explains that the use of an alternative principle is justified

– Standard Opinion Paragraph

Departure from GAAPDeparture from GAAP

• Qualified Opinion or Adverse Opinion

• Difference between Qualified and Adverse– The dollar magnitude of the effects

– The significance of the item to the client

– The pervasiveness to the misstatement (number of statements items affected)

– The effect of the misstatement on the financial statements taken as a whole

Qualified OpinionQualified Opinion

• Report Format– Standard introductory paragraph

– Standard scope paragraph

– Explanatory paragraph that describes the nature and magnitude of the departure from GAAP.

– Qualify opinion on the financial statements and refer to the preceding paragraph.

Adverse OpinionAdverse Opinion

• Report Format– Standard introductory paragraph

– Standard scope paragraph

– Explanatory paragraph that describes the nature and magnitude of the departure from GAAP.

– Issue an adverse opinion that financial statements do not present fairly and refer to the preceding paragraph.

Scope LimitationsScope Limitations

• Qualified Opinion or Disclaimer of Opinion

• Qualified Opinion– Material– Circumstance Imposed

• Hired after the beginning of the year• Inadequate records

• Disclaimer of Opinion– Material Client Imposed– Very Material Circumstance Imposed

Qualified Opinion - ScopeQualified Opinion - Scope

• Report Format– Standard introductory paragraph

– Refer to a following paragraph that describes the scope limitation and then continue with the standard scope paragraph

– Explanatory paragraph that describes the nature and magnitude of the scope limitation.

– Express a qualified opinion in the opinion paragraph with reference to the explanatory paragraph.

Disclaimer of OpinionDisclaimer of Opinion

• Report Format– Omit the last sentence of the introductory paragraph

– Omit the scope paragraph

– Explanatory paragraph that describes the nature and magnitude of the scope limitation.

– Disclaim opinion on the financial statements.

Other Reporting ConsiderationsOther Reporting Considerations

• Reporting when the CPA is not independent

• Circumstances concerning comparative financial statements

• Information accompanying audited financial statements

• Financial statements prepared for use in other countries.

Auditor is Not IndependentAuditor is Not Independent

• One paragraph report stating:– That the auditor is not independent,

– The financial statements were not audited, and

– The firm does not express an opinion on the financial statements.

Comparative Financial Statements

Comparative Financial Statements

• Different Opinions (AU 508.67)

• Updating an opinion (AU 508.68)

• Change in auditors (AU 508.70)

Information Accompanying Audited Financial Statements

Information Accompanying Audited Financial Statements

• Supplementary information is an essential part of an entity’s financial reporting. (AU 550 / 558)

• Limited procedures– Inquiry– Comparison of the information for consistency with other

available data

• Standard report, except:– Required supplementary information is omitted– Material departure from prescribed guidelines– Auditor unable to complete prescribed procedures– Auditor is unable to remove substantial doubts about whether

the information conforms to prescribed guidelines

Financial Statements Prepared for Use in Other Countries (AU 534)

Financial Statements Prepared for Use in Other Countries (AU 534)

• If for use in Other Country ONLY– U.S. Style Report– Report of the Other Country

• If for use in the U.S.– Qualified or Adverse Opinion, depending upon the

departure from U.S. GAAP