1. Chapter 17 Auditors’ Reports McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Auditors’ Standard Report – Nonpublic Clients  Details Title includes word independent Ordinarily addressed to the company itself, the shareholders, the audit committee and/or the board of directors Signed with name of CPA firm not individual partner unless sole practitioner Dated as of the date on which the auditors obtained sufficient appropriate audit evidence to support their opinion 17-2

3. We have audited the accompanying consolidated balance sheets of ABC Company and its subsidiaries, as of December 31, 20X1 and 20X0, and the related consolidated statements of income, retained earnings, and cash flows for the years then ended. The AICPA Standard Auditors’ Report-- Introductory Paragraph 17-3

4. Nonpublic Company Audit Report-- Sections  Introductory paragraph  Management’s responsibity paragraph  Auditors’ responsibility paragrpahs  Opinion paragraph 17-4

5. Auditors’ Standard Report – Public Clients  Differences from nonpublic Includes the words “Registered” and “Independent” in the title. References standards of the PCAOB rather than generally accepted auditing standards. Includes less detailed discussions of management and auditor responsibilities Includes an additional paragraph indicating that the auditors have also issued a report on the client’s internal control over financial reporting. The report on internal control may either be presented separately or combined with the report on the financial statements into one overall report Does not include section headings. 17-5

6. Types of Reports with Unmodified Opinions 1. Unmodified opinion—standard report. This report may be issued only when the auditors have obtained sufficient appropriate audit evidence to conclude the financial statements are not misstated and there is no need to alter the report for situations 2, 3 or 4 below. 2. Unmodified opinion—with an emphasis of matter paragraph. To emphasize a matter appropriately presented in the financial statements (e.g., a change in accounting principles). 3. Unmodified opinion—with an other matter paragraph. To emphasize a matter other than those presented or disclosed in the financial statements (e.g., other information in documents containing audited financial statements). 4. Unmodified opinion on group financial statements. When two or more CPA firms are involved in an audit and the group auditor (firm that does most of the work) does not wish to take responsibility for the work of the component auditors. 17-6

7. Types of Reports with Modified Opinions 1. A qualified opinion. A qualified opinion states that the financial statements are presented fairly in conformity with generally accepted accounting principles “except for” the effects of some matter. 2. An adverse opinion. An adverse opinion states that the financial statements are not presented fairly in conformity with generally accepted accounting principles. 3. A disclaimer of opinion. A disclaimer of opinion means that due to a significant scope limitation, the auditors were unable to form an opinion or did not form an opinion on the financial statements. 17-7

8. Going Concern  Requirements Auditor not required to perform procedures specifically designed to test going-concern assumption but must evaluate the assumption Conditions Negative cash flows from operations Defaults on loan agreements Adverse financial ratios Work stoppages Legal proceedings 17-8

9. Emphasis of Matter Paragraph—Substantial Doubt as to Going Concern Status The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered negative cash flows from operations and has an accumulated deficient, conditions that raise substantial doubt about the Company's ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated fanatical statements n do not include any adjustments that might result from the outcome of this uncertainly. Our opinion is not modified with respect to this matter. NOTE: Ordinarily an unmodified opinion with an emphasis of matter paragraph is issued. Alternatively, a disclaimer of opinion may be issued. 17-9

10. Emphasis of Matter Paragraph—Lack of Consistency A lack of consistent application of accounting principles results in an emphasis of matter paragraph, such as: As discussed in Note 5 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards Update No. XXX (provide title) as of December 31, 20X8. Our opinion is not modified with respect to this matter. 17-10

11. Additional Emphasis of Matter Situations— Auditor Discretionary  A risk or uncertainty.  Significant related party transactions described in a note to the financial statements.  The company is a component of a larger business enterprise.  Unusually important significant events.  Accounting matters affecting comparability (other than changes in accounting princi­ples) of financial statements with those of the preceding year. 17-11

12. Group Financial Statements 17-12

13. Summary of Emphasis of Matter Paragraphs and Group Audits 17-13

14. Issuance of Modified Opinions 17-14

15. Qualified Opinion—Departure from GAAP  Departure from GAAP Immaterial – unmodified Material – qualified Material and pervasive—Adverse  Misstatements become pervasive when any one of the following applies: Not confined to specific accounts. If confined, they represent a substantial proportion of the financial statements. In relation to disclosures, they are fundamental to users’ understanding of the financial statements. 17-15

16. Adverse Opinion  Financial statements do not present fairly the financial position, results of operations, and cash flows of client in conformity with GAAP  Material and pervasive departures from GAAP  Auditor believes departure causes financial statements taken as a whole to be misleading 17-16

17. Qualified Opinion-Lack of Sufficient Appropriate Audit Evidence (Scope Limitations )  Scope limitations Imposed by circumstances Important accounting records destroyed Due to nature of audit Engaged too late in year to observe client’s beginning inventory Imposed by client Client refused to allow auditors to send confirmations to customers 17-17

18. Disclaimer of Opinion  Auditor has no opinion  Issued whenever unable to form an opinion as to fairness of financial statements  Circumstances resulting in a disclaimer are those in which the possible misstatements are material and pervasive. Multiple uncertainties may also lead to a disclaimer  Not an alternative to adverse opinion 17-18

19. Summary of Appropriate Auditors’ Reports 17-19

20. Reporting on Comparative Financial Statements  Report should cover current year as well as prior period audited by their firm.  Can express different opinions on different years.  Auditor should update report for all prior periods presented for comparison.  If prior period audited by another (predecessor) CPA firm Current year opinion only covers years the CPA firm audited. For financial statements audited by predecessor auditors either: Predecessor auditor reissues report with original date, or Current auditors refer to report of other auditors. 17-20