1. Teaching Students About Audit Reports: An Interactive Approach
Rebecca Fay, East Carolina University
Sarah Stein, Virginia Tech

2. Summary
This instructional case provides an interactive approach to teach students about various components of the audit report as well as different types of reports. The materials in this case provide instructors with a diverse set of publicly available audit reports that can be used to illustrate several reporting issues in an undergraduate or graduate class. After gaining an appreciation for the existing structure of audit reports, students are asked to apply critical thinking skills to determine whether the information communicated in these reports is informative to various interest groups. To facilitate classroom discussion on the topic, the case incorporates information from recent regulatory proposals that would significantly change existing audit report disclosures.
find several publicly available audit reports, analyze the components of the report, determine the type of report issued (e.g., standard unqualified, unqualified with explanatory paragraph or modified wording, qualified, adverse, or disclaimer), and identify the facts and circumstances that may exist for the issuance of various types of reports

3. Objectives
To describe the purpose of the various components of the standard unqualified audit report under AICPA, PCAOB, and international standards
To recognize the different types of audit reports, including the circumstances in which the auditor decides to issue each type of report
To critically evaluate proposed changes to the audit report from the perspectives of various stakeholders

4. Content
Part 1 – Locate, read, and analyze publicly available audit reports
Further research and analysis questions require students to identify the auditing standards reflected in each of the audit reports from Part 1
Part 2 – 1 class period to consider alternative formats including current UK report and newly proposed format from PCAOB

5. Question
Company
Type of Opinion
Part 1 1
Coca-Cola Co. 2014
Unqualified; Unqualified (ICFR) 2
Coca-Cola Co. 2012
Unqualified with Explanatory paragraph 3
Borders Group Inc. 2011
Unqualified with Explanatory paragraph (going concern) 4
Majestic Capital Ltd. 2010
Disclaimer (going concern) 5
Canon Inc. 2008
Qualified – foreign issuer 6
Barnes & Noble 2013
Unqualified; Adverse (ICFR) 7
Anheuser-Busch Inbev 2014
International Standards on Auditing 8
Northwestern Mutual 2014
Special purpose framework (statutory basis) 9a
Tribune Company 2012
Disclaimer (scope limitation)
9b&c
Tribune Company 2013
Unqualified with modified wording (work of other auditor) & Emphasis of matter (emerge from bankruptcy) 10
U.S. Government 2014
Governmental entity
Part 2
Rolls Royce Holdings plc 2014
International Standards on Auditing (UK & Ireland)

6. The Activity – Part 1
Find Coca-Cola Company’s K filing on the SEC website. The financial statement date is December 31, For this question, you will want to search for “Coca Cola Co” to find the correct entity.
List the purpose of each of the first three paragraphs.
Why is the final paragraph included?
What is the date on which the auditor obtained sufficient appropriate evidence to support the auditor’s opinion?
What type of audit opinion was issued on the financial statements – standard unqualified, unqualified with explanatory paragraph or modified wording, qualified, adverse, disclaimer?
What type of opinion was issued on the internal controls over financial reporting?
What criteria was used to evaluate internal controls over financial reporting?
What is the date of the auditor’s report on internal controls over financial reporting? What does this date match?
Research & further analysis:
What conditions were likely present to warrant the type of opinion on the financial statements discussed in item d) above?
Would you expect the opinion on internal controls over financial reporting to always be the same as the opinion on the financial statements? Why or why not?

7. The Activity – Part 1
Find the 2014 Annual Report for Anheuser-Busch Inbev from the company’s website. What standards did the auditor follow when performing this audit?
Does this audit report appear more like the audit report for public companies based on PCAOB standards or the audit report for private companies based on the AICPA standards? Why?
What type of opinion was issued on the financial statements – standard unqualified, unqualified with explanatory paragraph or modified wording, qualified, adverse, disclaimer?
Who signed the audit report? How does this differ from auditing standards used in the U.S.?
Research & further analysis:
The PCAOB has issued a proposal addressing the difference noted in item d) above. Read the factsheet at How would this proposal change audit reports and disclosures for U.S. companies regarding the signature on the audit report?
Read the rational provided by the PCAOB for the change discussed in item e) above as well as feedback from two constituents…. If you were a member of the PCAOB, which option would you choose (the existing standards, the reproposed rule, or the alternate solution you just read)? What factors did you find most relevant in making your decision?

8. The Activity – Part 2
With more complex and dynamic companies that exist in today’s environment, should we expect accounting firms to communicate more to investors than currently provided in audit reports? Why or why not?
Regardless of your answer in question 1, identify two specific items that you would like to see included in the auditor’s report if you are an investor.
… if you an executive of a public company.
… external auditor. Discuss at least two pros and two cons.
The Public Company Accounting Oversight Board (PCAOB) issued a proposed standard in 2013 that considers several changes to the existing format of the audit report…. Do you agree with this proposed changes?
Regulators in other countries are beginning to propose and adopt similar changes to audit reports…. Find the 2014 Annual Report for Rolls-Royce Holdings plc. As an investor, would you feel more or less comfort with the underlying financial statements after reading the auditor’s opinion? Why?

9. Evidence of Efficacy
Completed by 192 students in undergraduate auditing courses from two state universities
97% of students agreed or strongly agreed that the case improved their understanding of different types of audit reports
80% improved their understanding of current PCAOB proposals to change the existing format
98% recommended us in other classrooms

11. Time Commitment
Two class periods required to complete the entire case, including an out-of-class assignment.
The case is designed to be divided into components, so instructors may modify the assignment to their desired depth and breadth
Part 1 – 1 class period to locate, read, and analyze publicly available audit reports
Further research and analysis questions for Part 1 to be assigned out of class for students to research the auditing standards reflected in each report from Part 1
Part 2 – 1 class period to consider alternative formats including current UK report and newly proposed format from PCAOB

12. Contributions
The first case, to our knowledge, to require students to consider proposed changes to the audit report
Requires students to apply critical thinking when learning audit reports rather than merely relying on rote memorization
Allows students firsthand experience with examples of various types of audit reports
Uses real-world data, requiring students to obtain audit reports from the EDGAR database or auditee websites

13. Thank You!