Electronic Presentations in Microsoft ® PowerPoint ® Prepared by Brad MacDonald SIAST © 2003 McGraw-Hill Ryerson Limited

Copyright © 2003 McGraw-Hill Ryerson Limited Chapte r 3 2 Reports on Audited Financial Statements

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 3 Learning Objective 1 Determine whether an accountant is associated with financial statements.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 4 You are associated with financial statements when you have consented to the use of your name in connection with the statements or you have prepared or performed some other services with respect to the statements even if your name is not used in any written report. –Reference: CICA Handbook, Section 5020

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 5 Association with Financial Statements The concept of association is far reaching. –Statements are produced on the PA’s letterhead. –Statements result from computerized bookkeeping services performed by the PA. –A document containing financial statements identifies an accountant as the public accountant or auditor for the company.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 6 Learning Objective 2 Explain the general meaning of the three “levels of assurance.” Level of assurance

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 7 Levels of Assurance High assurance Audit Positive Assurance “In our opinion..” Middle assurance No assurance Compilation “No attempt to verify accuracy or completeness of information” Review Negative Assurance “Nothing has come to our attention”

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 8 Learning Objective 3 Write a detailed description of the meaning of the scope paragraph and opinion paragraph in a standard unqualified audit report.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 9 Standard Unqualified Report Introductory paragraph: –indicates that an audit was conducted –identifies the financial statements audited –indicates management's responsibility for the financial statements –indicates the auditor’s responsibility for the audit report

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 10 Standard Unqualified Report and Variations Scope paragraph: –Report that the audit was conducted in accordance with generally accepted auditing standards. Auditors are trained and proficient. Auditors were independent. Due professional care was exercised. The work was planned and supervised. Sufficient understanding of internal control was obtained. Sufficient appropriate evidential matter was obtained.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 11 Standard Unqualified Report and Variations Opinion paragraph: –Financial statements are presented in accordance with GAAP. –Disclosure is adequate (implicit assertion). –Provide an expression of opinion. No reasons for giving the opinion need to be expressed. –The scope paragraph gives the nature of the audit and the degree of responsibility is unqualified positive assurance.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 12 Reservation in the Standard Unqualified Report Two reasons for qualifications in reports: –Financial statements contain a departure from GAAP including inadequate disclosure. –Scope limitation (extent of audit work has been limited) inability to obtain sufficient evidence. Qualified Opinion Adverse Opinion Materiality Denial of Opinion Qualified Opinion Materiality

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 13 Learning Objective 4 Write a qualified, an adverse, and a denial report for a given description of accounting facts and audit circumstances.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 14 GAAP Departure Reports Qualified report –A departure from GAAP in the statements is material to users, and can be isolated. –A reservation paragraph is added after the scope paragraph to describe the departure from GAAP. –“Except for” opinion with reference to reservation paragraph. –Introductory and scope paragraphs are unchanged.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 15 GAAP Departure Reports Adverse report: –Departures from GAAP in the statements are “super-material” or “so significant that they overshadow the financial statements” or pervasive, affecting numerous accounts and financial statement relationships. –Reservation paragraph added following scope paragraph. –Adverse opinion “…statements do not present fairly...”

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 16 Scope Limitation Reports A reservation paragraph is added following the scope paragraph to explain the limitations in scope of audit procedures. –Scope paragraph will be modified. –Qualified opinion “except for…” or –Denial of opinion “I am unable to express an opinion….”. –Departures from GAAP should be explained in the denial and comparative years should be covered.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 17 Audit Report Reservations Effects of lack of independence: –An audit in accordance with GAAS is impossible. –Auditor should resign, or not accept the engagement. Code of Professional Conduct 204.1

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 18 Learning Objective 5 Write an audit report with an unqualified opinion but containing additional explanation or modified wording for specific issues allowed by auditing standards.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 19 Unqualified Opinion with Explanation or Modification Consistency –For adjustments that are made according to GAAP there is no need to qualify the report, provided statements make adequate disclosure. Handbook, paragraph report –An unqualified audit report will be issued where there is a departure from GAAP, provided that disclosure is adequate, and following GAAP would be misleading.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 20 Emphasis of a Matter Paragraph Auditors may opt to add additional information to the auditor’s report. –Prohibited from doing this for contingencies or going-concern issues. –But may include other information: information required by statute unaudited comparative figures comparative figures reported on by other auditors

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 21 Reporting on Uncertainties Auditing “uncertainty” is similar to an accounting “contingency.” –“When a contingency is accounted for and disclosed in accordance with GAAP, it is not appropriate to draw attention to the contingency by expressing a reservation of opinion or by mentioning it in a separate paragraph following the auditor’s report.” CICA Handbook, paragraph –US treatment is different.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 22 Reporting on “Going-Concern” GAAP assumes continued existence of the enterprise for at least one year. –Auditors must evaluate matters of financial analysis, business strategy, and financial forecasting. –Evidence of financial difficulties or mitigating factors should be observed. –Handle going-concern issues in the same manner as contingencies.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 23 Going-Concern Reports The CICA research study, “The Going-Concern Assumption” recommends five types of reports –Standard: Going-concern issues are properly disclosed. –Standard with additional explanatory paragraph: Going-concern substantial issues are disclosed. –Adverse: There is a failure to disclose substantial doubts, and GAAP no longer applies. –Qualification: Disclosure of going-concern issues is inadequate. –Qualification: The auditor encounters a scope limitation with respect to going-concern issues.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 24 Learning Objective 6 Explain why auditors have standards for reporting on the “application of accounting principles.”

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 25 Reporting on the Application of Accounting Principles Handbook, Section 7600 arose from “opinion shopping.” Applies to: –Written report or oral advice: on specific transactions on the type of audit opinion to be given regarding hypothetical transactions –The standards list elements to be included in the report.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 26 Learning Objective 7 List and explain the effects of materiality on audit report choices.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 27 Influence of Materiality Unqualified ** Uncertainty Denial of opinion QualifiedScope limitation AdverseQualified *Departure from GAAP Greater materiality Lesser materiality Circumstance Report type required

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 28 Learning Objective 8 Write an audit report in which a principal auditor refers to the work of another independent auditor. (Appendix 3A)

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 29 Using the Work of Other Auditors The primary auditor needs reasonable assurance that the secondary auditor conducted examination in accordance with GAAS. –A number of factors will be considered. –The primary auditor will not refer to the secondary auditor in an unqualified opinion.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 30 Learning Objective 9 Write the required modifications when a report on prior-year comparative financial statements is changed.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 31 Reporting on Comparative Statements Financial statements often present comparative information from prior periods. Balance sheet: 2 years Income statement: 3 years Footnotes: comparative 2 or 3 years –Auditor’s opinion is for the current period only except when specifically stated in the audit report. –For a change in auditors, the audit report is for the current year only. –Auditor may change his/her opinion on comparative information.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 32 Learning Objective 10 Describe the type of report issued when an audit engagement is limited.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 33 Reporting on Limited Engagements Auditors may be engaged to report on only one of the financial statements, usually, the balance sheet. –There is not a scope limitation, the auditors may issue an unqualified report on an “incomplete set of financial statements” –Introductory paragraph: One statement is declared to be audited. –Opinion paragraph: Opinion is limited to one statement.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 34 Learning Objective 11 Explain auditors’ reporting responsibilities in connection with “other information” and supplementary information.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 35 Other Information and Supplementary Information Auditor has an obligation to read supplementary information and determine whether it is inconsistent with the audited financial statements. –Inconsistent information may require some action on the part of the auditor. –Auditor is not required to review press releases, analysts’ interviews, or other forms of irregular financial news releases unless specifically engaged by client.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 36 Quarterly and Supplementary Information Not required by GAAP but may be required by provincial securities commissions. –When presented: should conform to GAAP –Problems arise when required information is omitted there are material GAAP departures auditors review procedures are incomplete management does not indicate that the auditors are not issuing an opinion information is not labelled “unaudited”

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 37 Learning Objective 12 Describe the reporting requirements involved in auditors’ association with condensed financial information.

Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 3 38 Reporting on Condensed Financial Statements Companies may occasionally present the condensed financial statements. –This is not a fair presentation in conformity with GAAP. Auditors cannot render the standard unqualified report, even if this report was given on the full-scale financial statements The auditors may give a special report on condensed financial statements derived from the audited full-scale statements.