Reports By David N. Ricchiute AUDITING CHAPTER 3 Reports By David N. Ricchiute

TOPICS Reports on audited financial statements Audit report opinions Modifications to audit reports Updated reports & reports for foreign countries Reports on attest & assurance services GBW 8th ed., Ch. 3

AUDIT REPORT DEFINED Audit report is a letter communicating What was audited Management’s responsibilities Auditor’s responsibilities What an audit entails Auditor’s opinion GBW 8th ed., Ch. 3

UNQUALIFIED OPINION DEFINED Unqualified opinion in audit report means management’s assertions are fairly presented in the auditor Applies to quality of financial statements not to quality of entity as investment or credit risk GBW 8th ed., Ch. 3

STANDARD AUDIT REPORT OPINION Unqualified opinion Independent auditor’s opinion that management’s financial statements present fairly in all material respects the financial position, results of operations, & cash flows in conformity with GAAP GBW 8th ed., Ch. 3

SARBANES-OXLEY Management’s responsibilities Reviewed entire annual/quarterly report Report does not contain untrue statement of material fact or omit material fact Financial statements present fairly financial condition & results of operations Establish, maintain, evaluate effectiveness of internal controls Identified to auditors significant deficiencies, fraud GBW 8th ed., Ch. 3

ELEMENTS OF REPORT Title: Independent Auditor’s Report Addressee: shareholders, board of directors Introductory paragraph Scope paragraph Opinion paragraph Firm signature Date of report GBW 8th ed., Ch. 3

INTRODUCTORY PARAGRAPH Statement that Financial statements were audited Financial statements are management’s responsibility Auditor’s responsibility is to issue opinion GBW 8th ed., Ch. 3

SCOPE PARAGRAPH Statement that Audit conducted in accordance with U. S. GAAS GAAS requires planning, performing audit to obtain reasonable assurance financial statements free from material misstatements Audit includes Examining evidence on test basis Evaluating accounting principles & estimates Evaluating overall financial presentation GBW 8th ed., Ch. 3

MEANING OF SCOPE PARAGRAPH Reasonable not absolute assurance implies auditor may Overlook immaterial misstatements Test samples rather than all transactions & events GBW 8th ed., Ch. 3

USE OF STANDARD SCOPE PARAGRAPH-1 Implies auditor complied with all general standards Adequately trained & proficient Independent in mental attitude Exercised due professional care GBW 8th ed., Ch. 3

USE OF STANDARD SCOPE PARAGRAPH-2 Implies auditor complied with all fieldworks standards Planned engagement & supervised assistants Obtained understanding of internal control Obtained sufficient, competent evidential matter GBW 8th ed., Ch. 3

OPINION PARAGRAPH Statement of opinion Whether financial statements present fairly in all material respects Financial position Results of operations Cash flows In conformity with GAAP GBW 8th ed., Ch. 3

USE OF STANDARD OPINION PARAGRAPH Implies compliance with reporting standards Financial statements presented in accordance with U.S. GAAP Principles are applied consistently Disclosures are reasonably adequate Opinion applies to statements taken as a whole GBW 8th ed., Ch. 3

SIGNIFICANCE OF AUDIT REPORT DATE Last day of fieldwork Last day responsible for detecting subsequent events Dual dating: financial statements revised for subsequent event after fieldwork date but before report release Event date: date to which all responsibilities extended GBW 8th ed., Ch. 3

OTHER TYPES OF OPINIONS Departures from GAAP or scope limitation require other opinion Qualified: sufficient evidence or assertions fairly presented except for certain matter(s) Adverse: assertions are not fairly presented Disclaimer: auditor does not express an opinion usually due to insufficient evidence (scope limitation) GBW 8th ed., Ch. 3

STANDARDS FOR INTERNATIONAL REPORTS US reporting standards are GAAP Japanese auditors use private sector reporting standards German auditors use commercial law as reporting standards GBW 8th ed., Ch. 3

QUALIFIED OPINION Except for effects of a matter, financial statements present fairly in all other material respects Statements depart materially from GAAP Management unable to justify material change in accounting principle Scope of audit materially limited GBW 8th ed., Ch. 3

ADVERSE OPINION Management’s financial statements do not present fairly Financial statements depart from GAAP Management unable to justify change in accounting principle Effects of departure so highly material that qualified opinion unwarranted GBW 8th ed., Ch. 3

DISCLAIMER OF OPINION Auditor does not express opinion Scope limitation so material auditor does not have reasonable basis to reach opinion Auditor is not independent of management GBW 8th ed., Ch. 3

STANDARD REPORT MODIFICATIONS : Summary Based in part on report of another auditor Emphasize a matter Departure from GAAP Inconsistency Scope limitations Going concern Lack of independence GBW 8th ed., Ch. 3

MODIFICATIONS: Another Auditor Principle auditor shares responsibility with another auditor Modified wording in introductory & opinion paragraphs GBW 8th ed., Ch. 3

MODIFICATIONS: Emphasis of a Matter Auditor wishes to emphasize a matter & still issue an unqualified opinion Explanatory paragraph added after opinion paragraph Example: The accompanying financial statements have been re- stated GBW 8th ed., Ch. 3

MODIFICATIONS: Departure from GAAP With Agreement Management’s financial statements depart from GAAP With auditor’s agreement Unqualified opinion Explanatory paragraph after opinion paragraph GBW 8th ed., Ch. 3

MODIFICATIONS: Limited Departure from GAAP Management’s financial statements depart from GAAP Material departure from GAAP in limited area Explanatory paragraph before opinion paragraph & qualified opinion Example As discussed in Note 2, the Bank has charged goodwill to shareholders’ equity but GAAP requires an asset GBW 8th ed., Ch. 3

MODIFICATIONS: Pervasive Departure from GAAP Management’s financial statements depart from GAAP Pervasive departure from GAAP Explanatory paragraph before opinion paragraph & adverse opinion Example The company carries property, plant, & equipment at appraisal values but GAAP requires values not exceed cost. GBW 8th ed., Ch. 3

MODIFICATIONS: Justifiable Inconsistency Management changes accounting principle(s) and justifies change Explanatory paragraph after opinion paragraph Example As discussed in Note 3, the company changed its method of accounting for goodwill & other intangibles GBW 8th ed., Ch. 3

MODIFICATIONS: Inconsistency not Justified Management changes accounting principle(s) but fails to justify change Limited area Explanatory paragraph before qualified opinion Pervasive Explanatory paragraph before adverse opinion GBW 8th ed., Ch. 3

MODIFICATIONS: Scope Limitation Limited Area Prevent auditor from performing 1 or more necessary auditing procedures Limited area: Modify scope paragraph Explanatory paragraph before qualified opinion Example We were unable to obtain evidential matter supporting the Company’s representations regarding the contingent liability as discussed in Note 8. GBW 8th ed., Ch. 3

MODIFICATIONS: Pervasive Scope Limitation Prevent auditor from performing 1 or more necessary auditing procedures Pervasive limitation Modify introductory paragraph Omit scope paragraph Explanatory paragraph before disclaimer of opinion Example The Company did not give effect to all adjustments to the carrying value of assets & classification of liabilities resulting from bankruptcy proceedings GBW 8th ed., Ch. 3

MODIFICATIONS: Going Concern When auditor retains substantial doubt as to ability of client to continue as a going concern (SAS 59) Explanatory paragraph after opinion paragraph GBW 8th ed., Ch. 3

MODIFICATIONS: Lack of Independence Auditor is not independent of client SAS 26 requires a 1-paragraph explanation with disclaimer of opinion Example We are not independent with respect to the Trailways Company. . . .the balance sheet, statements of income, retained earnings, & cash flows were not audited by us. We do not express an opinion on them. GBW 8th ed., Ch. 3

REPORTS: COMPARATIVE STATEMENTS When opinions differ Criteria for both opinions must be met with explanatory paragraphs When opinion updated Update opinion paragraph & add explanatory paragraph acknowledging change GBW 8th ed., Ch. 3

REPORTS ON ATTESTATION SERVICES Letter communicating Management’s & attester’s responsibilities Attester's opinion Management’s assertions (if written) GBW 8th ed., Ch. 3

UNQUALIFIED OPINION Definition: unqualified opinion in attestation report means management’s assertions are fairly presented in the attester's opinion GBW 8th ed., Ch. 3

OTHER TYPES OF OPINIONS Departures from attestation standards or measurement criteria require other opinion Qualified: assertions fairly presented except for certain matter(s) Adverse: assertions are not fairly presented Disclaimer: attester does not express an opinion usually due to insufficient evidence GBW 8th ed., Ch. 3

REPORTS FOR ASSURANCE SERVICES Not required Short history of offering assurance services Traditionally, reports not required Oscars Tony awards National book awards GBW 8th ed., Ch. 3