Auditing - Ch. 18 Reports On Financial Stmts

Front 1

What is the general purpose of the AUDIT REPORT?

Back 1

An audit is an external review of a company's financial information. Shows the following:
1. Are FINANCIAL STATEMENTS in conformity with GAAP? If not, what would F/S be like if GAAP were followed?
2. Any unusual aspects of the audit examination? (Scope limitations, Division of responsibility)
3. Any unusual matters related to the entity? (Going-concern uncertainty, Consistency, Emphasis of a matter - subsequent events, related party transactions)

Front 2

What is the general language used in the standard UNQUALIFIED audit report?

Back 2

- TITLE includes the word "INDEPENDENT"
- Addressed to the CLIENT (normally, shareholders and board)
- Dated on the AUDIT COMPLETION DATE
- Signed by the ACCOUNTING FIRM
- Is issued when F/Ss are in conformity with GAAP in all material respects, no unusual issues relating to the conduct of the audit, and no need to highlight entity transactions or events.

Front 3

What are the important phrases in the Introductory Paragraph in the standard Unqualified report?

Back 3

- We have audited financial statement and Years examined
- Responsibility of Auditors and Management

Front 4

What are the important phrases in the Scope Paragraph in the Standard Unqualified report?

Back 4

- Audit conducted in accordance with PCAOB standards (or GAAS)
- DESCRIPTION of an audit (specific references to "test basis", "materiality", and "significant estimates")
- Audit provides REASONABLE ASSURANCE and REASONABLE BASIS FOR OPINION

Front 5

What are the important phrases in the Opinion Paragraph in the Standard Unqualified report?

Back 5

- Are financial statements "FAIRLY PRESENTED, IN ALL MATERIAL RESPECTS, IN ACCORDANCE WITH GAAP".

Front 6

What is the general purpose of the AUDIT REPORT?

Back 6

An audit is an external review of a company's financial information. Shows the following:
1. Are FINANCIAL STATEMENTS in conformity with GAAP? If not, what would F/S be like if GAAP were followed?
2. Any unusual aspects of the audit examination? (Scope limitations, Division of responsibility)
3. Any unusual matters related to the entity? (Going-concern uncertainty, Consistency, Emphasis of a matter - subsequent events, related party transactions)

Front 7

What is the general language used in the standard UNQUALIFIED audit report?

Back 7

Is issued when F/Ss are in conformity with GAAP in all material respects, no unusual issues relating to the conduct of the audit, and no need to highlight entity transactions or events.

Front 8

What are the important phrases in the Introductory Paragraph in the standard Unqualified report?

Back 8

- We have audited financial statement
- Years examined
- Responsibility of Auditors
- Responsibility of company's Management

Front 9

What are the important phrases in the Scope Paragraph in the Standard Unqualified report?

Back 9

- Audit conducted in accordance with PCAOB standards (or GAAS)
- DESCRIPTION of an audit (specific references to "test basis", "materiality", and "significant estimates")
- Audit provides REASONABLE ASSURANCE and REASONABLE BASIS FOR OPINION (free from misstatement)

Front 10

What are the important phrases in the Opinion Paragraph in the Standard Unqualified report?

Back 10

- In our opinion...
- Are financial statements "FAIRLY PRESENTED, IN ALL MATERIAL RESPECTS, IN ACCORDANCE WITH GAAP".

Front 11

What is an UNQUALIFIED OPINION STANDARD AUDIT REPORT?

Back 11

This report represents a "clean bill of health" and may be issued when there are NO MATERIAL DEPARTURES FROM GAAP, no significant scope limitations preventing the gathering of necessary evidence, and when no conditions requiring explanatory language exist.

Front 12

What is an UNQUALIFIED OPINION WITH EXPLANATORY LANGUAGE AUDIT REPORT?

Back 12

This is an audit report with an unqualified opinion, but with circumstances that result in the auditors adding certain explanatory language to the report.
-- Financial Statements are in conformity with GAAP.
-- Difference between this and standarad report is that additional matters are disclosed in report.

Front 13

What is a QUALIFIED OPINION AUDIT REPORT?

Back 13

A qualified opinion is issued when the auditors' examination is restricted as to its scope or the financial statements depart from generally accepted accounting principles. A qualified opinion is still a positive opinion; it asserts that the presentation in the financial statements, viewed as a whole, is fair.
-- Modify opinion paragraph by using "EXCEPT FOR" SOME MATTER, Fin Stmts are in conformity with GAAP
-- Material GAAP violation or SCOPE LIMITATION

Front 14

What is an ADVERSE OPINION AUDIT REPORT?

Back 14

This is a negative opinion, asserting that the financial statements are not a fair presentation. It is issued when the auditors' exceptions to the presentation in the financial statements are so significant that a qualified opinion would be an inadequate warning to users of those statements.

Front 15

What is a DISCLAIMER OF OPINION AUDIT REPORT?

Back 15

A disclaimer of opinion means that the auditors were unable to form an opinion. It is issued whenever there are such significant scope limitations that the auditors were unable to obtain sufficient evidence to form an opinion of the statements viewed as a whole, or a significant scope limitation imposed by the client.

Front 16

What are some examples of an UNQUALIFIED OPINION WITH EXPLANATORY LANGUAGE REPORT?

Back 16

Examples of such circumstances are those in which other auditors have performed a portion of the audit, or when a question concerning an entity’s ability to continue as a going concern exist.

Front 17

Under what circumstances might an auditor issue an Unqualified Report with Explanatory language?

Back 17

1. Opinion based in part on the report of another auditor
2. Going Concern
3. Lack of consistency in the financial statements due to accounting changes
4. Emphasis of a matter

Front 18

Where does the Explanatory paragraph go?

Back 18

It follows the Opinion paragraph.

Front 19

What is the difference in the 4 circumstances of Unqualified report with Explanatory langauge?

Back 19

1. The Opinion based on report of another auditor - this report is a modification of the wording for the introductory, scope, and opinion paragraphs in the standard unqualified audit report.
2 - 4. The other 3 situations lead to the addition of an explanatory paragraph following the opinion paragraph without any modification to the wording of the intro, scope, or opinion paragraphs.

Front 20

What are the other elements included in the Standard Report?

Back 20

1. Title includes the word "INDEPENDENT"
2. ADDRESSED TO THE CLIENT (normally, shareholders and board)
3. Dated on the AUDIT COMPLETION DATE
4. Signed by the ACCOUNTING FIRM

Front 21

What are the options for Reports on a Standard Unqualified Audit Report?

Back 21

1. Separate reports on Financial Statements and Internal Controls
(Each of the reports would reference other report)
2. COMBINED REPORT ON F/S and I/C
3. I/C opinion types: UNQUALIFIED, ADVERSE, DISCLAIMER

Front 22

What are the issues that auditors might want to bring to readers' attention Other than Standard Qualified report (with additional explanation)?

Back 22

1. Consistency
2. Going-Concern Uncertainty
3. Division of Responsibility
4. Emphasis of a Matter

Front 23

What are the reasons to issue an Other than Standard Qualified report?

Back 23

1. Auditors wish to bring matters to readers' attention (Unqualified with additional explanation)
2. Material Departure from GAAP
(usually Qualified or Adverse opinion, depending upon Materiality and Pervasiveness)
3. Unable to conduct the audit in accordance with GAAS (PCAOB Standards) [Scope limitation: QUALIFIED or DISCLAIMER OF OPINION, depending upon materiality and pervasiveness]

Front 24

What are the conditions for Departure (from an unqualified or clean opinion)?

Back 24

1. SCOPE LIMITATION: when you are unable to collect sufficient competent evidence, such as an auditor not being able to conduct an audit procedure that he considers necessary)
2. DEPARTURE FROM GAAP: when the F/Ss are prepared or presented in a way that conflicts with GAAP, whether due to error or fraud.
3. LACK OF INDEPENDENCE OF THE AUDITOR: when the auditor and client have any financial, business, or personal relationship prohibited by professional standards)

Front 25

What are the types of auditors' reports?

Back 25

1. UNQUALIFIED (Express and unqualified opinion)
2. UNQUALIFIED WITH EXPLANATORY LANGUAGE
-- F/Ss do conform to GAAP
-- Same as Standard report but has additional matters that are disclosed in report
3. QUALIFIED OPINION
-- "Except For" some matter, F/S are in conformity with GAAP
-- Material GAAP violation or scope limitation
4. ADVERSE OPINION
-- F/S are NOT in conformity with GAAP
-- Pervasive GAAP violation
5. DISCLAIMER OF OPINION
-- No opinion is issued by auditors
-- Pervasive scope limitation

Front 26

What is Scope Limitation?

Back 26

Auditors are UNABLE to OBTAIN SUFFICIENT appropriate evidence due to either:
1. MANAGEMENT'S DELIBERATE REFUSAL to let auditors perform auditing procedures (client-imposed scope limitation)
2. CIRCUMSTANCES (e.g., late appt of auditors) BEYONE THE AUDITOR'S AND CLIENT'S CONTROL (circumstance-imposed scope limitation)

Front 27

What is Materiality?

Back 27

Information important enough to change an investor's decision. Insignificant information has no effect on decisions, so there is no need to report it. Materiality includes the absolute value and relationship of an amount to other information.

Front 28

What is Reasonable Assurance?

Back 28

A term that implies some risk that a material misstatement could be present in the financial statements without the auditor detecting it, even when the auditor has exercised due care.

Front 29

What is a Representation letter?

Back 29

A letter that corroborates oral representations made to the auditor by management or by other auditors and documents that continued appropriateness of such representations.

Front 30

What is a Qualified Opinion used for?

Back 30

Issued as a report to an audit, when departure from GAAP is MATERIAL, yet not PERVASIVE.

Front 31

What does it mean to be Pervasive?

Back 31

Having the ability to permeate. An error is pervasive if it is material to more than one of the primary financial statements.

Front 32

What is required in the report with a Qualified Opinion?

Back 32

1. Introductory and Scope Paragraphs REMAIN THE SAME.
2. Add EXPLANATORY paragraphs BEFORE OPINION paragraph and detail DOLLAR amount involved.
3. MODIFY OPINION paragraph ("In our opinion, except for the matter discussed in the preceding paragraph...")

Front 33

In GAAP departures, if the GAAP departure is NOT material, what happens?

Back 33

Issue a STANDARD UNQUALIFIED OPINION REPORT.

Front 34

In GAAP departures, if the GAAP departure IS material, what happens?

Back 34

You determine is the departure is Pervasive. If NO, then ISSUE A QUALIFIED OPINION.

Front 35

In GAAP departures, if the GAAP departure IS material, and it IS pervasive, what happens?

Back 35

You issue an ADVERSE OPINION.

Front 36

In an UNQUALIFIED OPINION WITH EXPLANATORY LANGUAGE with a matter of CONSISTENCY, what does this mean?

Back 36

Relates to the changes in:
-- Accounting Principles (GAAP to GAAP)
-- Form of REPORTING ENTITY
-- Accounting principles (non-GAAP to GAAP)

Front 37

In an UNQUALIFIED OPINION WITH EXPLANATORY LANGUAGE with a matter of CONSISTENCY, where does the explanatory paragraph go in the report?

Back 37

Assuming the F/S are in conformity with GAAP, the opinion would be Unqualified with an Explanatory Paragraph FOLLOWING THE OPINION PARAGRAPH.

Front 38

What does it mean when GAAP are based on the going-concern principle?

Back 38

It means the entity is EXPECTED TO CONTINUE IN OPERATION and meets its obligations as they become due without substantially disposing of its assets outside of the normal course of business.

Front 39

What does it mean when an opinion states that Financial Statements are in conformity with GAAP?

Back 39

It means a company will go on into the future (continued existence may be presumed for a reasonable time)

Front 40

In an UNQUALIFIED OPINION WITH EXPLANATORY LANGUAGE with a matter of GOING-CONCERN, what are auditors responsible for?

Back 40

To evaluate whether substantial doubt exists about the ABILITY of the entity to CONTINUE IN EXISTENCE FOR ONE YEAR BEYOND THE DATE OF THE FINANCIAL STATEMENTS.

Front 41

What are the indicators of Going Concern uncertainties?

Back 41

1. Financial Difficulties
2. Labor Problems
3. Loss of Key Personnel
4. Litigation Exposure

Front 42

What are the procedures that auditors perform to make the evaluation in a Going Concern matter?

Back 42

Auditors should consider CLIENT SURVIVAL OPTIONS in their evaluation
-- Extension of credit line
-- Elimination of dividend payments

Front 43

If the Client Survival Options evaluation fails, what does an auditor do in a Going Concern matter?

Back 43

Change the Reporting to:
1. Add EXPLANATORY PARAGRAPH FOLLOWING OPINION PARAGRAPH (still Unqualified Opinion)
2. If SERIOUS UNCERTAINTY, may issue DISCLAIMER OF OPINION - auditors unable to value business assets at liquidation value
3. Modified language must include the words SUBSTANTIAL DOUBT and GOING CONCERN !!

Front 44

What is the typical opinion type in response to a Going Concern matter in an audit?

Back 44

Unqualified Opinion with Explanatory Paragraph (with modified language which includes the words SUBSTANTIAL DOUBT and GOING CONCERN)
** If serious UNCERTAINTY, may issue DISCLAIMER OF OPINION (auditors unable to value business assets at liquidation value)

Front 45

What does it mean to have a Consistency issue in an audit?

Back 45

Financial statements should be consistent and comparable across periods. So an Unqualified audit report with a lack of consistency would show that the financial statements were affected by changes in accounting principles or that some such change was material.

Front 46

What does it mean when there is a Division of Responsibility issue in an audit?

Back 46

If there are other independent auditors that are engaged to audit subsidiaries, divisions, branches, components, or investments that are part of the consolidated Financial Statements, the PRINCIPAL AUDITORS perform the audit of a MATERIAL PORTION of an entity's assets, liabilities, revenues and expenses.

Front 47

What must auditors do when there is a division of responsibility?

Back 47

Auditors must first EVALUATE INFORMATION ABOUT THE INDEPENDENCE AND COMPETENCE OF THE OTHER FIRM.

Front 48

When does a principle auditor evaluate other firms in a division of responsibility?

Back 48

- In remote subsidiaries
- In merger activity
- In investments in another entity accounted for using the equity method

Front 49

In Division of Responsibility issue, what type of report is issued if the Principal auditors take responsibility for the work of other auditors?

Back 49

Standard Unqualified Opinion report

Front 50

In Division of Responsibility issue, what is done if the Principal auditors DO NOT take responsibility for the work of other auditors and they NAME the Other Auditors?

Back 50

-- CLEARLY EXPLAIN DIVISION OF RESPONSIBILITY
-- They must PRESENT REPORT OF OTHER AUDITORS, ONLY WITH THEIR PERMISSION

Front 51

In Division of Responsibility issue, what is done if the Principal auditors REFER to other auditors?

Back 51

-- CLEARLY EXPLAIN DIVISION OF RESPONSIBILITY
-- MODIFY INTRODUCTORY, SCOPE AND OPINION paragraphs of report (Unqualified Report)

Front 52

What should the Principal auditor do in regards to the independence of other auditors in an audit?

Back 52

1. VERIFY other auditors' reputation and independence
2. COMMUNICATE and COORDINATE with other auditors

Front 53

What is the Emphasis of a Matter issue in an audit?

Back 53

This allows auditors to emphasize something they believe Financial statement users should consider important or useful

Front 54

What is done to a report in an Emphasis of a Matter issue?

Back 54

An EXPLANATORY PARAGRAPH is added AFTER OPINION PARAGRAPH discussing the matter
-- Discussion of related party transactions
-- Issues relating to financial health (going concern)
-- Discussion of Subsequent events

Front 55

When is an ADVERSE OPINION issued?

Back 55

When Financial statements are "so lacking in fairness" that a Qualified opinion would be MISLEADING (i.e., a serious, PERVASIVE DEPARTURE from GAAP)

Front 56

How is the report modified in an Adverse Opinion?

Back 56

1. Introductory and Scope paragraphs remain the same
2. ADD EXPLANATORY paragraph BEFORE THE OPINION PARAGRAPH explaining the Departure and Detailing dollar amounts involved
3. CHANGE OPINION PARAGRAPH ("financial statements DO NOT present fairly")

Front 57

If a Scope Limitation (GAAS Departures) has been identified and the Scope limitation is NOT material, what type of report is issued?

Back 57

STANDARD UNQUALIFIED OPINION REPORT

Front 58

If a Scope Limitation (GAAS Departures) has been identified and the Scope limitation IS MATERIAL, what happens?

Back 58

Try to find alternative procedures and if they do find procedures, issue Standard Report.

Front 59

If a Scope Limitation (GAAS Departures) has been identified and the Scope limitation IS MATERIAL, and NO alternative is available, what needs to be asked then?

Back 59

Is the Scope Limitation Pervasive?

Front 60

If a Scope Limitation (GAAS Departures) has been identified and the Scope limitation IS MATERIAL and is NOT PERVASIVE, and there are NO alternative procedures available, what type of report is issued?

Back 60

QUALIFIED OPINION

Front 61

If a Scope Limitation (GAAS Departures) has been identified and the Scope limitation IS MATERIAL and IS PERVASIVE, what type of report is issued?

Back 61

DISCLAIMER OF OPINION

Front 62

In a Qualified Opinion report where Scope of Limitation is found, what are the report modifications? (SL ARE Material, Not pervasive and Alt procedures are NOT available)

Back 62

1. Intro paragraph remains the same
2. Scope paragraph says "Except as discussed in the following paragraph (the scope limitation), we conducted our audit..."
3. ADD EXPLANATORY paragraph preceding the opinion paragraph describing the scope limitation
4. MODIFY OPINION paragraph ("In our opinion, EXCEPT FOR")
-- Key is the inability of auditors to identify potential misstatements because of the scope of limitation, not the limitation itself)

Front 63

In a Disclaimer of Opinion report where Scope of Limitation is found, what are the report modifications?

Back 63

1. Intro paragraph ("We were engaged to audit ..." OMIT AUDITORS' RESPONSIBILITY)
2. OMIT SCOPE PARAGRAPH
3. ADD EXPLANATORY PARAGRAPH describing scope limitation
4. CHANGE OPINION PARAGRAPH ("... we do not express an opinion ...")
*** May still issue opinion on I/C if NO scope limitation on that examination***

Front 64

What does an auditor do if INDEPENDENCE is questioned after the start of the engagement?

Back 64

1. If auditors lack independence, (an audit in accordance with PCAOB stnds is not possible) -- Auditors should issue a DISCLAIMER.
2. REPORT -
-- Single paragraph
-- Indicates auditors who are not independent
-- If auditors learn that F/S are not in accordance with GAAP, departures should be described in the report

Front 65

What information accompanying financial statements are auditors responsible for?

Back 65

1. Condensed financial statements
2. Other information presented by management (MD&A)
3. Segment results

Front 66

What are the responsibilities of auditors regarding information accompanying financial statements?

Back 66

1. This info is NOT covered by AUDITOR'S OPINION
2. Auditors have OBLIGATION TO READ THIS INFO to determine whether it is consistent with audited financial statements or if important info has been Omitted
3. If INCONSISTENCIES or OMISSIONS NOTED, auditors should NOTIFY THE CLIENT, CONSULT LEGAL ADVISE ON WHAT TO DO, and CONSIDER THE EFFECT of the inconsistency on the opinion.