AUDITING CHAPTER 3

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AUDITINGCHAPTER 3ReportsByDavid N. Ricchiute

GBW 8th ed., Ch. 32

TOPICSReports on audited financial statementsAudit report opinionsModifications to audit reportsUpdated reports & reports for foreign countriesReports on attest & assurance services

GBW 8th ed., Ch. 33

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. 34

UNQUALIFIED OPINION DEFINED

Unqualified opinion in audit report means management’s assertions are fairly presented in the auditorApplies to quality of financial statements not to quality of entity as investment or credit risk

GBW 8th ed., Ch. 35

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. 36

SARBANES-OXLEYManagement’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. 37

ELEMENTS OF REPORTTitle: Independent Auditor’s ReportAddressee: shareholders, board of directorsIntroductory paragraphScope paragraphOpinion paragraphFirm signatureDate of report

GBW 8th ed., Ch. 38

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. 39

SCOPE PARAGRAPHStatement 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. 310

MEANING OF SCOPE PARAGRAPH

Reasonable not absolute assurance implies auditor may Overlook immaterial misstatements Test samples rather than all

transactions & events


USE OF STANDARD SCOPE PARAGRAPH-1

Implies auditor complied with all general standards Adequately trained & proficient Independent in mental attitude Exercised due professional care


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


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


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


SIGNIFICANCE OF AUDIT REPORT DATE

Last day of fieldworkLast day responsible for detecting subsequent eventsDual dating: financial statements revised for subsequent event after fieldwork date but before report releaseEvent date: date to which all responsibilities extended


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)


STANDARDS FOR INTERNATIONAL REPORTS

US reporting standards are GAAPJapanese auditors use private sector reporting standardsGerman auditors use commercial law as reporting standards


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


ADVERSE OPINIONManagement’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


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


STANDARD REPORT MODIFICATIONS : Summary

Based in part on report of another auditorEmphasize a matterDeparture from GAAPInconsistencyScope limitationsGoing concernLack of independence


MODIFICATIONS:Another Auditor

Principle auditor shares responsibility with another auditorModified wording in introductory & opinion paragraphs


MODIFICATIONS:Emphasis of a Matter

Auditor wishes to emphasize a matter & still issue an unqualified opinionExplanatory paragraph added after opinion paragraphExample: The accompanying financialstatements have been re-stated


MODIFICATIONS:Departure from GAAP With Agreement

Management’s financial statements depart from GAAP With auditor’s agreement

Unqualified opinion Explanatory paragraph after opinion

paragraph


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


MODIFICATIONS:Pervasive Departure from GAAP

Management’s financial statements depart from GAAP Pervasive departure from GAAP

Explanatory paragraph before opinion paragraph & adverse opinion

ExampleThe company carries property, plant, &

equipment at appraisal values but GAAP requires values not exceed cost.


MODIFICATIONS:Justifiable Inconsistency

Management changes accounting principle(s) and justifies change Explanatory paragraph after opinion

paragraphExample As discussed in Note 3, the company changed

its method of accounting for goodwill & other intangibles


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


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.


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


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


MODIFICATIONS:Lack of Independence

Auditor is not independent of clientSAS 26 requires a 1-paragraph explanation with disclaimer of opinionExampleWe 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.


REPORTS: COMPARATIVE STATEMENTS

When opinions differ Criteria for both opinions must be met

with explanatory paragraphsWhen opinion updated Update opinion paragraph & add

explanatory paragraph acknowledging change


REPORTS ON ATTESTATION SERVICES

Letter communicating Management’s & attester’s

responsibilities Attester's opinion Management’s assertions (if written)


UNQUALIFIED OPINION

Definition: unqualified opinion in attestation report means management’s assertions are fairly presented in the attester's opinion


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


REPORTS FOR ASSURANCE SERVICESNot required

Short history of offering assurance services

Traditionally, reports not required Oscars Tony awards National book awards

AUDITING CHAPTER 3

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