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Chapter 18

CHAPTER 18 REPORTS ON AUDITED FINANCIAL STATEMENTS AND SPECIAL REPORTING ISSUES. Chapter 18. ELEMENTS OF THE STANDARD UNQUALIFIED REPORT. The report title The addressee The introductory paragraph The scope paragraph The opinion paragraph The audit report date The name of the auditor

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Chapter 18

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  1. CHAPTER 18REPORTS ON AUDITED FINANCIAL STATEMENTS AND SPECIAL REPORTING ISSUES Chapter 18

  2. ELEMENTS OF THE STANDARD UNQUALIFIED REPORT • The report title • The addressee • The introductory paragraph • The scope paragraph • The opinion paragraph • The audit report date • The name of the auditor • Exhibit 18-1 – Page 625

  3. EXPLANATORY LANGUAGE ADDED TO THE STANDARDUNQUALIFIED AUDIT REPORT • Opinion based in part on the report of another auditor. • Going concern. • Agreement with a departure from GAAP. • Lack of consistency. • Emphasis of a matter. • Report is still a “Standard Unqualified Report” but an explanatory paragraph is included

  4. OPINION BASED IN PART ON ANOTHER AUDITOR • Sometimes, part of the audit may be completed by another firm (e.g. report on consolidated f/s – one subsidiary may be audited by a different firm) • Principal auditor needs to decide responsibility level: Level of ResponsibilityEffect on Audit Report Full Responsibility No reference to other auditor Shared Responsibility Reference to other auditor • Exhibit 18-2 – Page 626

  5. REPORTING ON A GOING CONCERN (1) The auditor could disclaim an opinion; or (2) The audit report should include an explanatory paragraph such as the following: The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 6 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 6. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. See Exhibits 18 – 3 and 18 – 4 – Page 628

  6. AGREES WITH GAAP DEPARTURE • Explanatory paragraph should describe: • Departure from GAAP • The approximate effects of the departure • The reasons why compliance with GAAP would be misleading • Situation is not common.

  7. LACK OF CONSISTENCY • Changes affecting consistency should be disclosed in an explanatory paragraph: • Change in accounting principle • Change in reporting entity • Correction of an error in principle • Changes NOT affecting consistency should be disclosed in a footnote but do not require recognition in the report: • Change in accounting estimate • Correction of an error not involving a principle • Change in classifications • Change expected to have a material future effect

  8. EMPHASIS OF A MATTER • May emphasize a matter in an explanatory paragraph: • Examples: • Significant related-party transactions • Significant subsequent events

  9. DEPARTURES FROM AN UNQUALIFIED REPORT • Conditions: • Scope limitation. • Statements not in conformity with GAAP. • Auditor is not independent.

  10. OTHER AUDIT REPORTS (FIG 18-1) • Qualified: Results from either a scope limitation or a departure from GAAP, but the overall financial statements are presented fairly. • Disclaimer: Results from either insufficient competent evidence to form an opinion on the overall financial statements or because there is a lack of independence. • Adverse: Financial statements do NOT present fairly in accordance with GAAP because the departure is pervasively material.

  11. SCOPE LIMITATION • A scope limitation results from an inability to obtain sufficient competent evidence about some part or parts of the financial statements. • Scope restrictions may be client-imposed or result from the circumstances of the engagement. • Exhibits 18 – 6 and 18 – 7 on Page 633

  12. SCOPE LIMITATION • Examples: • Inability to observe inventory. • Inability to confirm accounts receivable. • Inability to obtain audited financial statements for a long-term investment that is accounted for using the equity method.

  13. STATEMENTS NOT IN CONFORMITY WITH GAAP • If the financial statements are materially affected by a departure from GAAP, the auditor should express a qualified or adverse opinion. • Qualified: Exhibit 18 – 8 – Page 634 • Adverse: Exhibit 18 – 9 – Page 634

  14. STATEMENTS NOT IN CONFORMITY WITH GAAP • Examples: • An accounting principle that is not acceptable. • Inadequate disclosure. • A lack of justification for a change in accounting principle.

  15. AUDITOR NOT INDEPENDENT • If an auditor is not independent, a disclaimer of opinion should be issued. • The auditor should not state the reasons for the lack of independence nor describe any audit procedures performed. • Exhibit 18 – 11 on Page 635

  16. SPECIAL REPORTING ISSUES • Reporting on comparative financial statements. • Other information contained in audited financial statements. • Special reports.

  17. REPORTS ON COMPARATIVE FINANCIAL STATEMENTS • Different reports on comparative financial statements (e.g. one year is unqualified, & the other is qualified or disclaimed) – Exhibits 18-12 & 18-13 • A change in the report on the prior-period financial statements (e.g. company issued qualified report in PY but restated PY results in CY in accordance with GAAP) – Exhibit 18 – 14 • Report by a predecessor auditor

  18. REPORTS ON COMPARATIVE FINANCIAL STATEMENTS Predecessor Auditor (continued): • Must perform the following before reissuing report: • Read the financial statements of the current period • Compare the prior period f/s with the current year f/s • Obtain letter of representation from successor auditor indicating any material items affecting PY report • If you choose not to include the predecessor auditor’s report, should indicate in the Intro Paragraph that the financial statements for the PY were audited by other auditors and mention the date and type of report. • Exhibit 18 – 15 on Page 639

  19. OTHER INFORMATION • Auditing standards provide guidance for the auditor's consideration of other information included in documents contained in (1) annual reports of entities or (2) other documents to which the auditor devotes attention at the client's request. • The auditor the auditor should read the other information and consider whether such information is consistent with the information contained in the audited financial statements.

  20. SPECIAL REPORTS • Financial statements prepared on a comprehensive basis of accounting other than GAAP. • Specified elements, accounts, or items of a financial statement. • Compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements. • Financial presentations to comply with contractual agreements or regulatory provisions. • Financial information presented in prescribed forms or schedules that require a prescribed form of auditor's report.

  21. FINANCIAL STATEMENTS PREPARED ON A COMPREHENSIVE BASIS OTHER THAN GAAP • Tax basis: Basis used to file income tax return • Cash (or modified cash) basis: Reports on revenues received and expenses paid • A definite set of criteria having substantial support (e.g. price level-adjusted basis) • Exhibit 18 – 16 on Page 641

  22. SPECIFIED ELEMENTS, ACCOUNTS, OR ITEMS • Situations where the auditor may be engaged to audit only part (specified accounts or items) of the financial statements • Example: A report on rentals, royalties, or profit participation • Auditor must consider materiality in relation to the individual item, as well as how this item relates to other parts of the financial statements • Exhibit 18 – 17 on Page 643

  23. COMPLIANCE REPORTS RELATED TO AUDITED FINANCIAL STATEMENTS • An auditor may be asked to report on an entity's compliance with certain contractual agreements or regulatory requirements related to audited financial statements. • The auditor provides negative assurance (e.g. “nothing came to our attention that indicated noncompliance”) • Example: Report on compliance with covenants in loan agreement (Exhibit 18 – 19 on Page 645

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