A1.3 Reports On Audited Financial Statements

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Under US GAAP, a complete set of financial statements includes:

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-A balance sheet

-A statement of income or comprehensive income

-A statement of changes in equity

-A cash flow statement

-Related notes

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The auditor should express an unmodified opinion when the auditor concludes that:

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the financial statements are fairly presented in all material respects, in accordance with the applicable financial reporting framework.

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The title of an unmodified opinion should:

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include the phrase "Independent" auditors report.

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How/to whom should the unmodified opinion be addressed?

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as required by the circumstances of the engagement.

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The introductory paragraph of an unmodified opinion should:

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- identify the entity whose financial statements have been audited

-State that the financial statements have been audited

-Identify the title of each financial statement

-Specify the date(s) or period(s) covered by each financial statement

Front 6

The audit report should include a section with the heading "Management's Responsbility for the Financial Statements" that includes:

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-An explanation that management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework

-A statement that this responsibility includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

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The audit report should include a section with the heading "Auditor's Responsibility" that includes:

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-A statement that the responsibility of the auditor is to express an opinion on the financial statements based on the audit.

-A statement that the audit was conducted in accordance with auditing standards generally accepted in the United States of America

-A statement that those standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement

-A description of the audit

-A statement whether the auditor believes that the audit evidence obtained is sufficient and appropriate to provide a basis for the auditor's opinion.

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The description of the audit in the "Auditor's responsibility" section should state that:

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-An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements

-The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statement whether due to fraud or error.

-In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control, and accordingly, no such opinion is expressed.

-An audit includes evaluating the appropriateness of the accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

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The auditor's report should include a section with the title "Opinion" that includes:

(for an unmodified opinion)

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-A statement that the financial statements present fairly, in all material respects, the financial position of the entity as of the balance sheet date and the results of operations and its cash flows for the period then ended, in accordance with the applicable financial reporting framework.

-Identification of the applicable financial reporting framework and its origin.

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Other Reporting Responsibilities section of the audit report:

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-(if needed) these should be addressed in a separate section of the auditor's report subtitled "Report on Other Legal and Regulatory Responsibilities," or otherwise as appropriate

-If the audit report contains this separate section, the other sections of the audit report should be under the subtitle "Report on the Financial Statements"

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The signature of the auditor on the audit report should be ______________.

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Printed or manually signed.

Front 12

The auditor's address on the audit report should be:

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the city and state (or country) where the auditor practices.

Front 13

The date of the auditor's reports should be:

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no earlier than the date on which the auditor has obtained sufficient appropriate evidence on which to base the auditor's opinion on the financial statements, including evidence that the audit documentation has been reviewed, all the financial statements, including the related notes, have been prepared, and management has asserted that they have taken responsibility for those financial statements.

Front 14

The auditor's report date shows the_________.

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final date of auditor responsibility.

Front 15

For comparative financial statements, the audit report date for the ___________ should be used:

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most recent audit.

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PCAOB Auditing Standard No. 1 requires:

(for audits of issuers)

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that the auditor's report include a reference to the standards of the PCAOB (US)

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The auditor's report of a non issuer should include:

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-A reference to GAAS in the USA

-If the audit was conducted in accordance with 2 sets of auditing standards in their entirety, the auditor may indicate that the audit was conducted in accordance with another set of auditing standards and in this case, additional language should be added to the "auditor's responsibility" paragraph to describe this situation.

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Pass key: gaaS--->

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Scope paragraph (auditor's responsibility paragraph)

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Pass key: gaaP-->

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oPinion paragraph.

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Requirements in the ISAs and NOT in US GAAS

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-ISAs indicate that the description in the auditor's report can either refer to the preparation and fair presentation of the financial statements or the preparation of financial statements that give a true and fair view. US GAAS does not include any reference to "true and fair view".

-ISAs require the intro paragraph to refer to the summary of significant accounting policies and other explanatory information. GAAS does not include this requirement because the notes to the financial statements are already and integral part of the financial statements and don't need to be identified in the intro paragraph.

-ISAs require a statement in the Auditor's Responsibilities paragraph that the auditing standards require that the auditor comply with ethical requirements and GAAS does not have this requirement because by being "independent" as stated in the title of the report, the auditor has thus fulfilled the ethical requirements.

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Requirements in US GAAS and NOT in the ISAs

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-A requirement that the description of management's responsibilities for the financial statements in the auditor's report should not be referenced to a separate statement by management about such responsibilities if such a statement is included in a document containing the auditor's report.

-A requirement that sufficient appropriate audit evidence includes evidence that the audit documentation has been reviewed.

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Differences between the requirements of US GAAS and ISAs

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ISAs require the description of management's responsibilities to include an explanation that management is responsible for such internal control as it determine is necessary to enable the preparation of financial statements that are free from misstatement, whether due to fraud or error. GAAS requires the auditor's report to state that this responsibility includes the design, implementation, and maintenance (DIM) of internal control relevant to the preparation and fair presentation of the financial statements.

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Component

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an entity or business activity that prepares financial information that is included in the group financial statements

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Component auditor

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An auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit.

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Group Engagement Partner

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the partner or other person in the firm who is responsible for the group audit engagement and for the auditor's report on the group financial statements.

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Group Engagement Team

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includes the group engagement partner, other partners, and staff who establish the overall audit strategy, communicate with component auditors, perform work on the consolidation process, and evaluate the conclusions drawn from the audit evidence as the basis for forming an opinion on the group financial statements.

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Group Financial Statements

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Financial statements that include the financial information of more than one component.

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The group engagement team must understand the following for each component auditor:

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-Whether the component auditor is independent and will comply with all relevant ethical requirements.

-The professional competence of the component auditor

-The extent to which the group engagement team will be involved in the work of the component auditor

-Whether the group engagement team will be able to get information needed for the consolidation process from the component auditor.

-Whether the component auditor operates in a regulatory environment that actively oversees auditors.

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Reference to the component auditor should not be made unless the following 2 requirements are met:

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1.) the component auditor has performed an audit in accordance with the relevant requirements of GAAS, or when required, the PCAOB.

2.) The component auditor's report is not restricted use.

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The auditor's report on the group financial statements should clearly indicate:

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1.) That the component was not audited by the auditor of the group statements but was audited by the component auditor.

2.) The magnitude of the portion of the financial statements audited by the component auditor

3.) When the component's financial statements are prepared using a different financial reporting framework from the group financial statements: the financial reporting framework used by the component and that the auditor of the group financial statements is taking responsibility for evaluating the appropriateness of the adjustments to convert the component's financial statements to the group's financial reporting framework.

4.) When the component auditor's report on the component's financial statements does not state that the audit was performed in accordance with GAAS or PCAOB standards and the group engagement partner has determined that the component auditor performed additional procedures to meet the relevant requirements of GAAS: the set of auditing standards used by the component auditor and that additional audit procedures were performed by the component auditor to meet the relevant requirements of GAAS.

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When the group engagement partner decides to assume responsibility for the work of a component auditor,_______________ should be made in the auditor's report.

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no reference to the component auditor

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Significant component

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a component that is of individual financial significance to the group or that is likely to include significant risks of material misstatement of the group financial statements.

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The group engagement team should perform _________________for components that are not significant components.

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analytical procedures

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Unmodified opinion

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states that the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the entity in conformity with the applicable financial reporting framework.

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The auditor's report should be modified when:

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1.) The auditor concludes that het financial statements as a whole are materially misstated (GAAP issue)

2.)The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements was a whole are free from material misstatement (GAAS issue)

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3 types of modified opinions:

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1.) Qualified opinion

2.) Adverse opinion

3.) Disclaimer of opinion

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Qualified opinion

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states that except for the effects of the matter(s) to which the qualification relates, the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the entity in conformity with the applicable financial reporting framework.

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Adverse opinion

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states that he financial statements do NOT present fairly the financial position, results of operations, or cash flows of the entity in conformity with the applicable financial reporting framework

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Disclaimer of opinion

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states that the auditor does NOT express an opinion on the financial statements because the auditor was not able to obtain sufficient appropriate audit evidence to provide a basis for an opinion.

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Pervasive effects on the financial statements are those that in the auditor's professional judgment:

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-are not confined to specific elements, accounts, or items of the financial statements

-if so confined, represent a substantial proportion of the financial statements

-are disclosures fundamentals to the users' understanding of the financial statements.

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Emphasis-of-Matter Paragraphs

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-paragraph included in the auditor's report when required by GAAS or at the auditor's discretion.

-used when referring to a matter that is appropriately presented or disclosed in the financial statements and is of such importance that it is fundamental to the users' understanding of the financial statements.

-The inclusion of this paragraph does not affect the auditor's opinion.

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When an emphasis-of-matter paragraph is included in the auditor's report, the auditor should:

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1.) Place the emphasis-of-matter paragraph immediately after the opinion paragraph

2.) Use the heading "Emphasis-of-Matter" or other appropriate heading

3.) Describe the matter being emphasized and the location of relevant disclosures about the matter in the financial statements.

4.) Indicate that the auditor's opinion is not modified with respect to the matter emphasized.

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An emphasis-of-matter paragraph is required in the following circumstances:

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1.) The auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time.

2.)To describe a justified change in accounting principle that has a material effect on the entity's financial statements

3.) Subsequently discovered facts lead to a change in audit opinion (the auditor may use an emphasis-of-matter or other-matter paragraph, as appropriate)

4.) The financial statements are prepared in accordance with an applicable special purpose framework (other than regulatory basis financial statements intended for general use).

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An other-matter Paragraph

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-a paragraph included int he auditor's report when required by GAAS or at the auditor's discretion.

-refers to matters other than those presented or disclosed in the financial statement that are relevant to the user's understanding of the audit, auditor's responsibilities, or the auditor's report.

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An Other-matter paragraph is REQUIRED when:

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1.) Anytime the auditor includes an alert in the audit report that restrict the use of the auditor's report

2.) Subsequently discovered facts lead to a change in audit opinion.

3.) The financial statements of the prior period were audited by a predecessor auditor and the predecessor's audit report is not reissued.

4.) Current period financial statements are audited and presented in comparative form with compiled or reviewed financial statements of the prior period, or in comparative form with prior period financial statements that were not audited, reviewed, or compiled.

5.) Prior to the audit report date, the auditor identifies a material inconsistency in other information that is included in a document containing audited financial statements that requires revision of the other information and management refuses to make the revision.

6.) When the auditor chooses to report on supplementary information presented with the financial statements in the auditor's report, rather than in a separate report.

7.) To refer to required supplementary information that a designated accounting standards setter requires to accompany an entity's basic financial statements.

8.) To restrict the use of the auditor's report when special purpose financial statement are prepared in accordance with a contractual or regulatory basis of accounting (except when regulatory basis financial statements are intended for general use)

9.) A report on compliance is included in the auditor's report on the financial statements.

Front 46

The auditor should examine the evidence obtained form the following procedures:

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1.) Analytical Procedures

2.) Debt Compliance-the auditor should review the terms of debt and loan agreements

3.) Minutes-the auditor should review the minutes from board of director meetings

4.) Inquiry of client's legal counsel

5.) Third Parties-the auditor should confirm the details of financial support arrangements

6.) Subsequent events review

Mnemonic: ADMITS

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Conditions and events that may be indicative of substantial doubt:

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1.) Financial difficulties

2.) Internal Matters

3.) Negative Trends

4.) External Matters

Mnemonic: FINE

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The wording of the emphasis-of-matter paragraph must include the terms ________ and_________.

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"Substantial doubt"; "going concern"

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The wording of the emphasis-of-matter paragraph under the ISAs includes the term__________ instead of "substantial doubt"

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"Significant doubt"

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When the auditor believes there is substantial doubt about the ability of the entity to continue as a going concern for a reasonable period of time, the following items:

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1.) The conditions or events that gave rise to the substantial doubt

2.) Any mitigating factors that he auditor considers significant

3.) Audit work performed to evaluate management's plans

4.) The auditor's conclusion about whether substantial doubt remains or is alleviated

5.) The effect of the auditor's conclusion on the valuation of the financial statements and related disclosures, and on the resulting auditor's report.

Front 51

The auditor should communicate going concern issues to:

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those charged with governance.

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When evaluating the acceptability of an accounting change, the auditor should consider whether:

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1.) the newly adopted accounting principle is in accordance with the applicable financial reporting framework

2.) The method of accounting for the change is acceptable

3.) The disclosures related to the accounting change are appropriate and adequate

4.) The entity has justified that the alternative accounting principle is preferable.