Audit Reports: an Introduction Dr. Donald McConnell Jr. 12/6/2018

Why Discuss Audit Reports This Early in the Course? Everything you’ll study in this course concerning evidence accumulation has an impact on the type of audit report we issue Various client circumstances impact upon the nature of the audit report, e.g.: Scope restrictions Going concern issues 12/6/2018

There Are Four Fundamental Types of Audit Reports Unqualified (the standard report) Qualified, due to material: Improper GAAP (the numbers or notes) Scope restriction: Imposed by circumstances Client imposed Adverse: extremely material GAAP impropriety Disclaimer: technically not an opinion 12/6/2018

The Unqualified Report (AU 508.08) The standard report (clean opinion) Issued when: Full and fair disclosure of all material facts No material scope restrictions Auditor is independent Has three paragraphs: Introductory paragraph Scope paragraph Opinion paragraph Analysis of the report: AU 508.08 12/6/2018

Very Common Types of CPA Exam Questions: identify the deficiencies in a presented audit report Less commonly, write an audit report based on a given set of circumstances Multiple-choice questions on reports tend to be extremely “picky” What does this suggest? 12/6/2018

Departures from Unqualified Opinions: Qualified, Adverse, and Disclaimer Know how they differ from one another and the standard report Know the conditions for issuing each type of report 12/6/2018

Qualified Opinions (AU 508.20) Expressed when there is a material GAAP departure Scope restrictions imposed by client or circumstances These are the “except for” opinions Must include a separate explanatory paragraph (s) preceding opinion paragraph: Explaining all substantive reasons for qualification Financial statement effects, if practicably determinable 12/6/2018

GAAP Departure Qualifications (AU 508.39) Note explanatory paragraph indicating reasons for qualification and effects Explanatory paragraph must precede the opinion paragraph “except for…” stated only once: in opinion paragraph Cover AU 508.39 12/6/2018

Scope Restriction Qualifications (AU 508.26) “except for…” stated twice: once in scope paragraph and once in opinion paragraph “except for” wording in opinion paragraph should base qualification on possible effects to the F.S.’s, and not to the scope limitation itself Example: “in our opinion, except for the above mentioned limitation on scope…” is unacceptable Cover AU 508.26 12/6/2018

What Is the Difference between Material and Extremely Material What Is the Difference between Material and Extremely Material? Some Examples: Assume client has $10 million total assets Client has capitalized $1 million of R & D expenditures. What opinion would auditor render? Material: qualified for GAAP departure $5 million? Extremely material: adverse opinion What if R & D expenditures are $10,000? Immaterial: unqualified opinion 12/6/2018

Adverse Opinions (AU 508.60) Only used for extremely material GAAP departures: F.S.’s rendered meaningless Extremely rare: SEC will not accept State that the financial statements do not present fairly Characterized by knowledge of F.S. effect Substantive reasons and effects (if determinable) must be in a paragraph(s) preceding opinion paragraph Cover AU 508.60 12/6/2018

Disclaimer of Opinion (AU 508.63) Required for: Extremely material scope limitation, whether imposed by client or circumstances Auditor lacking independence Optional for extremely material uncertainty (AU 341.13, fn 4) Scope issues: Have not obtained sufficient competent evidential matter Substantive reasons for disclaimer must be in a paragraph preceding opinion paragraph 12/6/2018

Disclaimer of Opinion (AU 508.63) (con.) Report must disclose any other reservations concerning fair presentation in accordance with GAAP AU 508.63: note many significant differences from standard report A common “real world” cause for disclaimers: new audit client with material inventories (AU 508.67) 12/6/2018

Various Audit Report Issues What happens if there is an immaterial GAAP problem and/or immaterial scope problem? Unqualified report is issued In “real world,”nonstandard opinions are unusual. Why? Client imposed scope: what if F.S. effects potentially borderline between material and extremely material? Disclaimer. What’s a piecemeal opinion? (AU 508.64) 12/6/2018

Modified Unqualified Opinions (AU 508.11) A subset of unqualified opinions “Clean opinions” with modifying language or, more typically, modifying paragraph(s) Modifying paragraph(s) can precede or follow opinion paragraph except in case of: Substantial doubt about going concern status [must follow opinion paragraph] Material change in accounting principles (fn 8) [must follow opinion paragraph] Discussion of examples in AU 508.11 12/6/2018