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CHAPTER 14 Audit Reports

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.

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CHAPTER 14 Audit Reports

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  1. CHAPTER 14 Audit Reports

  2. Report title: Independent Auditor’s Report The Standard Unqualified Audit Report

  3. 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

  4. Report title: Independent Auditor’s Report Address: To the Stockholders of Ace Company: Introductory paragraph: What statements were audited? What time period? What are client and auditor responsibilities?

  5. Report title: Independent Auditor’s Report Address: To the Stockholders of Ace Company: Introductory paragraph: We have audited the accompanying balance sheets of Ace Company as of December 31, 19x5 and 19x4, and the related 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.

  6. Scope paragraph: We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

  7. Opinion paragraph: In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ace Company as of December 31, 19x5 and 19x4 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.

  8. Opinion paragraph: In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ace Company as of December 31, 19x5 and 19x4 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Name of firm: Taylor & Tower, CPAs

  9. Opinion paragraph: In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ace Company as of December 31, 19x5 and 19x4 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Name of firm: Taylor & Tower, CPAs Audit report date: February 27, 19x6 field work completion date

  10. client Types of Audit Reports - unqualified - “statements present fairly”

  11. client - qualified - “except for one or more exceptions, statements present fairly” Types of Audit Reports

  12. Qualified Audit Report(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.

  13. client Types of Audit Reports - adverse - “statements do not present fairly”

  14. Adverse Audit Report same 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 abovedo notpresent 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.

  15. client Types of Audit Reports - disclaimer - “no opinion”

  16. Disclaimer(scope restriction) Wewere 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 satisfy ourselves as to the ...by means of other auditing procedures, the scope of our work was not sufficient to express, and we do not express, an opinion on the financial statements.

  17. changes in consistency changes in comparability Unqualified Reports with Explanatory Paragraphs or Modified Wording Changes in consistency (AU 420 and 508) must be distinguished from changes in comparability.

  18. changes in consistency changes in comparability - 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

  19. changes in consistency changes in comparability - 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

  20. changes in consistency changes in comparability no audit report effect additional fourth paragraph

  21. Consistency Modification same introductory paragraph same scope paragraph same opinion paragraph As discussed in note ? to the financial statements, the company changed its method of...in (current year). This report is a modification; i.e., unqualified but the wording is changed.

  22. In some circumstances, a lack of consistency may result in a qualified or adverse 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)

  23. Unqualified Reports with Explanatory Paragraphs or Modified Wording Substantial doubt about the client’s ability to remain a going concern (AU 341) will result in a disclaimer or an additional fourth paragraph to an unqualified report. occasionally referred to as the “kiss of death” opinion

  24. Going Concern Modification same introductory paragraph same scope paragraph same opinion paragraph The accompanying financial statements have been prepared assuming that Ace Company will continue as a going concern. As discussed in note ? to the financial statements, ...(some circumstance)...raises substantial doubt about the company’s ability to continue as a going concern. Manage- ment’s plans in regard to these matters are also described in note ?. 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.

  25. Unqualified Reports with Explanatory Paragraphs or Modified Wording Departure from a promulgated accounting principle (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 have an additional explanatory paragraph either preceding or following the opinion paragraph.

  26. Unqualified Reports with Explanatory Paragraphs or Modified Wording 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. The report should be unqualified but have an additional explanatory paragraph either preceding or following the opinion paragraph.

  27. Unqualified Reports with Explanatory Paragraphs or Modified Wording 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.

  28. Opinion based, in part, on thereport of another auditor 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

  29. Opinion based, in part, on the report of another auditor 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.

  30. Opinion based, in part, on the report of another auditor If the results of these inquiries are unsatisfactory, the principal auditor must: - qualify or disclaim the audit report OR - audit the component

  31. Opinion based, in part, on the report of another auditor 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

  32. Shared Modification 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 not audit the financial statements of Trace Company, a consolidated subsidiary in which the Company had an equity interest of 57% as of December 31, 19x5, which statements reflect 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 has been furnished to us, and our opinion, insofar as it relates to amounts included for Trace Company, is based solely on the report of the other auditors.

  33. Shared Modification We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.

  34. Shared Modification In our opinion, based on our audits and the report of other auditors, 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 the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. This report is a modification; i.e., unqualified but the wording is changed.

  35. conditions requiring a departure from the unqualified report

  36. conditions requiring a departure from the unqualified report Scope limitation (AU 508) - the auditors were unable to perform some aspect of the audit that they considered necessary: client-imposed - the client will not allow the auditor to perform an audit procedure circumstance-imposed - because of some circumstance other than a client-imposed restriction, the auditor could not perform an audit procedure

  37. client-imposed scope limitation audit scope is significantly limited audit scope is not significantly limited probably disclaim pursue alternative procedures

  38. circumstance-imposed scope limitation adequate alternative procedures are available adequate alternative procedures are not available no audit report effect qualify or disclaim

  39. income statement balance sheet Scope limitations may result in different opinions on individual statements. EXAMPLE: an auditor cannot adequately verify beginning inventory of a first-year client opinions?

  40. unqualified income statement balance sheet Scope limitations may result in different opinions on individual statements. EXAMPLE: An auditor cannot adequately verify beginning inventory of a first-year client disclaimer

  41. Scope Restriction Disclaimer Wewere 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 satisfy ourselves as to the ...by means of other auditing procedures, the scope of our work was not sufficient to express, and we do not express, an opinion on the financial statements.

  42. Scope Restriction Qualification same 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 had we been able to..., 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.

  43. conditions requiring a departure from the unqualified report Departures from GAAP (AU 508) result in a qualified or adverse opinion depending on materiality and pervasiveness. The correct information should be included in an additional third paragraph. If this information is not available, the report should state that fact.

  44. GAAP Departure Qualification 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.

  45. conditions requiring a departure from 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.

  46. Lack 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 not audited by us. Accordingly, we do not express an opinion on them.

  47. The audit report should not include anystatements that would counterbalancethe 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

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