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Chap

ter 1

8CHAPTER 18REPORTS ON AUDITED FINANCIAL STATEMENTS AND SPECIAL REPORTING ISSUES

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ELEMENTS OF THE STANDARD UNQUALIFIED REPORT

The report title The addressee The introductory paragraph The scope paragraph The opinion paragraph The audit report date The name of the auditor

Exhibit 18-1 – Page 625

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EXPLANATORY LANGUAGE ADDED TO THE STANDARDUNQUALIFIED

AUDIT REPORT

Opinion based in part on the report of another auditor.

Going concern. Agreement with a departure from GAAP. Lack of consistency. Emphasis of a matter.

Report is still a “Standard Unqualified Report” but an explanatory paragraph is included

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OPINION BASED IN PART ON ANOTHER AUDITOR

OPINION BASED IN PART ON ANOTHER AUDITOR

Sometimes, part of the audit may be completed by another firm (e.g. report on consolidated f/s – one subsidiary may be audited by a different firm)

Principal auditor needs to decide responsibility level:

Level of ResponsibilityEffect on Audit Report

Full Responsibility No reference to other auditor

Shared Responsibility Reference to other auditor

Exhibit 18-2 – Page 626

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REPORTING ON A GOING CONCERN

(1) The auditor could disclaim an opinion; or(2) The audit report should include an explanatory paragraph such as the following:

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 6 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 6. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

See Exhibits 18 – 3 and 18 – 4 – Page 628

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AGREES WITH GAAP DEPARTUREAGREES WITH GAAP DEPARTURE

Explanatory paragraph should describe:

Departure from GAAP

The approximate effects of the departure

The reasons why compliance with GAAP would be misleading

Situation is not common.

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LACK OF CONSISTENCYLACK OF CONSISTENCY Changes affecting consistency should be disclosed in an

explanatory paragraph:Change in accounting principleChange in reporting entityCorrection of an error in principle

Changes NOT affecting consistency should be disclosed in a footnote but do not require recognition in the report:Change in accounting estimateCorrection of an error not involving a principleChange in classificationsChange expected to have a material future effect

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EMPHASIS OF A MATTEREMPHASIS OF A MATTER

May emphasize a matter in an explanatory paragraph:

Examples:

Significant related-party transactionsSignificant subsequent events

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DEPARTURES FROM AN UNQUALIFIED REPORT

Conditions: Scope limitation. Statements not in conformity with GAAP. Auditor is not independent.

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OTHER AUDIT REPORTS (FIG 18-1)OTHER AUDIT REPORTS (FIG 18-1)

Qualified: Results from either a scope limitation or a departure from GAAP, but the overall financial statements are presented fairly.

Disclaimer: Results from either insufficient competent evidence to form an opinion on the overall financial statements or because there is a lack of independence.

Adverse: Financial statements do NOT present fairly in accordance with GAAP because the departure is pervasively material.

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SCOPE LIMITATION

A scope limitation results from an inability to obtain sufficient competent evidence about some part or parts of the financial statements.

Scope restrictions may be client-imposed or result from the circumstances of the engagement.

Exhibits 18 – 6 and 18 – 7 on Page 633

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SCOPE LIMITATION

Examples: Inability to observe inventory.

Inability to confirm accounts receivable.

Inability to obtain audited financial statements for a long-term investment that is accounted for using the equity method.

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STATEMENTS NOT IN CONFORMITY WITH GAAP

If the financial statements are materially affected by a departure from GAAP, the auditor should express a qualified or adverse opinion.

Qualified: Exhibit 18 – 8 – Page 634

Adverse: Exhibit 18 – 9 – Page 634

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STATEMENTS NOT IN CONFORMITY WITH GAAP

Examples: An accounting principle that is not acceptable.

Inadequate disclosure.

A lack of justification for a change in accounting principle.

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AUDITOR NOT INDEPENDENT

If an auditor is not independent, a disclaimer of opinion should be issued.

The auditor should not state the reasons for the lack of independence nor describe any audit procedures performed.

Exhibit 18 – 11 on Page 635

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SPECIAL REPORTING ISSUES

Reporting on comparative financial statements. Other information contained in audited financial

statements.

Special reports.

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REPORTS ON COMPARATIVE FINANCIAL STATEMENTS

Different reports on comparative financial statements (e.g. one year is unqualified, & the other is qualified or disclaimed) – Exhibits 18-12 & 18-13

A change in the report on the prior-period financial statements (e.g. company issued qualified report in PY but restated PY results in CY in accordance with GAAP) – Exhibit 18 – 14

Report by a predecessor auditor

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REPORTS ON COMPARATIVE FINANCIAL STATEMENTS

REPORTS ON COMPARATIVE FINANCIAL STATEMENTS

Predecessor Auditor (continued): Must perform the following before reissuing report:

Read the financial statements of the current periodCompare the prior period f/s with the current year f/sObtain letter of representation from successor auditor

indicating any material items affecting PY report

If you choose not to include the predecessor auditor’s report, should indicate in the Intro Paragraph that the financial statements for the PY were audited by other auditors and mention the date and type of report.

Exhibit 18 – 15 on Page 639

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OTHER INFORMATION

Auditing standards provide guidance for the auditor's consideration of other information included in documents contained in (1) annual reports of entities or (2) other documents to which the auditor devotes attention at the client's request.

The auditor the auditor should read the other information and consider whether such information is consistent with the information contained in the audited financial statements.

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SPECIAL REPORTS

Financial statements prepared on a comprehensive basis of accounting other than GAAP.

Specified elements, accounts, or items of a financial statement.

Compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements.

Financial presentations to comply with contractual agreements or regulatory provisions.

Financial information presented in prescribed forms or schedules that require a prescribed form of auditor's report.

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FINANCIAL STATEMENTS PREPARED ON A COMPREHENSIVE BASIS

OTHER THAN GAAP

Tax basis: Basis used to file income tax return

Cash (or modified cash) basis: Reports on revenues received and expenses paid

A definite set of criteria having substantial support (e.g. price level-adjusted basis)

Exhibit 18 – 16 on Page 641

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SPECIFIED ELEMENTS, ACCOUNTS, OR ITEMS

Situations where the auditor may be engaged to audit only part (specified accounts or items) of the financial statements

Example: A report on rentals, royalties, or profit participation

Auditor must consider materiality in relation to the individual item, as well as how this item relates to other parts of the financial statements

Exhibit 18 – 17 on Page 643

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COMPLIANCE REPORTS RELATED TO AUDITED FINANCIAL

STATEMENTS

An auditor may be asked to report on an entity's compliance with certain contractual agreements or regulatory requirements related to audited financial statements.

The auditor provides negative assurance (e.g. “nothing came to our attention that indicated noncompliance”)

Example: Report on compliance with covenants in loan agreement (Exhibit 18 – 19 on Page 645