1. Auditing & Assurance Services, 6e

2. Chapter 12 Reports on Audited Financial Statements
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Enron Corp. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations, cash flows, and changes in shareholders’ equity for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
Opinion paragraph from Arthur Andersen’s final audit of Enron Corp. (dated February 23, 2001)

3. Chapter 12 Objectives
Understand the types of reports that accompany an entity’s financial statements and the content of the auditors’ standard (unmodified) report.
Identify situations in which the language in the standard (unmodified) report is modified and the type of opinion issued in those circumstances.
Identify situations in which auditors add explanatory language to an unmodified opinion.
Identify other circumstances affecting auditors’ reporting responsibilities and explain how they affect auditors’ reports on an entity’s financial statements.

4. Major Topics Overview of Reporting The Standard (Unmodified) Report
Reasons for Departing from Standard (Unmodified) Report
Departures from GAAP
Scope limitations
Audit of group financial statements
Other Matters Encountered During the Audit
Other Issues and Reporting

5. Reports Accompanying Financial Statements
Nonpublic entities
Public entities
Auditor
Fairness of financial statements and related disclosures
Effectiveness of internal control over financial reporting
Management

6. Major Topics Overview of Reporting The Standard (Unmodified) Report
Reasons for Departing from Standard (Unmodified) Report
Departures from GAAP
Scope limitations
Audit of group financial statements
Other Matters Encountered During the Audit
Other Issues and Reporting

7. Components of the Standard (Unmodified) Report
Introductory paragraph
F/S and years examined
Management’s Responsibility section
Management responsible for financial statements
Management responsible for internal control
Auditor’s Responsibility section
Auditor responsible for issuing opinion on financial statements
Audit conducted in accordance with GAAS
Audit provides reasonable assurance
Opinion
Are F/S presented in accordance with applicable financial reporting framework (GAAP)?

8. The Standard (Unmodified) Report (Other Elements)
Title includes the word “independent”
Addressed to the client (normally, shareholders and board)
Dated when auditors have obtained sufficient appropriate evidence (date of the auditors’ report)
Signed by the accounting firm

9. Types of Opinions Unmodified opinion Qualified opinion Adverse opinion
F/S are in accordance with GAAP
Standard report may be modified to disclose additional matters
Qualified opinion
“Except for” some matter, F/S are in accordance with GAAP
Adverse opinion
F/S are not in accordance with GAAP
Disclaimer of opinion
No opinion is issued by auditors

10. Major Topics Overview of Reporting The Standard (Unmodified) Report
Reasons for Departing from Standard (Unmodified) Report
Departures from GAAP
Scope limitations
Audit of group financial statements
Other Matters Encountered During the Audit
Other Issues and Reporting

11. Departures from GAAP NO YES NO Qualified Opinion YES Adverse Opinion
Is the Departure Material? NO
Standard Report (Unmodified Opinion)
YES NO
Is the Departure Pervasive?
Qualified Opinion
YES
Adverse
Opinion

12. Qualified Opinion Issued when departure is material, yet not pervasive
Report Modifications:
Add paragraph preceding the opinion paragraph explaining departure and detailing $ amounts involved
Modify opinion paragraph (“In our opinion, except for the matter discussed in the preceding paragraph,….”)
Report Example

13. Adverse Opinion
Issued when F/S do not present fairly according to GAAP (i.e., a serious, pervasive departure from GAAP).
Report Modifications:
Add paragraph preceding the opinion paragraph explaining the departure and detailing $ amounts involved
Change opinion paragraph (“financial statements do not present fairly”)
Report Example

14. Major Topics Overview of Reporting The Standard (Unmodified) Report
Reasons for Departing from Standard (Unmodified) Report
Departures from GAAP
Scope limitations
Audit of group financial statements
Other Matters Encountered During the Audit
Other Issues and Reporting

15. Scope Limitations NO YES YES NO NO Qualified Opinion YES
Is the Limitation Material? NO
Standard Report (Unmodified Opinion)
YES
Alternative Procedures Available?
YES
Standard Report (Unmodified Opinion) NO
Is the Limitation
Pervasive? NO
Qualified Opinion
YES
Disclaimer of Opinion

16. Type of Scope Limitations
Circumstance-Imposed
Situation in which matters beyond auditors’ and client’s control limit procedures performed by auditors
Example: inability to observe year-end inventory because of late appointment
Client-Imposed
Situation in which client specifically limits auditors’ procedures
Should be viewed as a significant restriction and a disclaimer is ordinarily issued

17. Scope Limitation: Qualified Opinion
Issued when scope limitations are material, but not pervasive
Report Modifications:
Add paragraph preceding the opinion paragraph describing the scope limitation
Modify opinion paragraph (“In our opinion, except for”)
Report Example

18. Scope Limitation: Disclaimer of Opinion
Pervasive scope limitation, usually client-imposed
Significance of the limitation is such that auditors cannot gather sufficient appropriate evidence to form an opinion
Report Modifications:
Introductory paragraph: (“We were engaged to audit ….”)
Modify Auditor’s Responsibility section:
Note that auditors were not able to obtain sufficient appropriate evidence
Delete paragraphs describing an audit and indicating that the audit provides a basis for the opinion
Add paragraph preceding the opinion paragraph describing the scope limitation
Modify opinion paragraph (“…we do not express an opinion….”)
Report Example

19. Major Topics Overview of Reporting The Standard (Unmodified) Report
Reasons for Departing from Standard (Unmodified) Report
Departures from GAAP
Scope limitations
Audit of group financial statements
Other Matters Encountered During the Audit
Other Issues and Reporting

20. Audit of Group Financial Statements
Group financial statements: Financial statements comprised of more than one division/subsidiary/segment/component
Group auditors: Conduct audit of material portion of the entity
Component auditors: May be engaged by group auditors to audit divisions, subsidiaries, or components

21. Audit of Group F/S Standard Report (Unmodified Opinion) YES NO
Take Responsibility for Component Auditors’ Work?
Standard Report (Unmodified Opinion)
YES NO
Obtain permission and present component auditors’ report
Refer to Component Auditors by Name?
YES NO
Indicate Division of Responsibility in Unmodified Opinion

22. Effect on Report Report Example Group auditors should Options
Verify component auditors’ reputation and independence
Communicate and coordinate with component auditors
Options
Take responsibility for work: Standard (unmodified) report
Name component auditors
Present report of component auditors, only with their permission
Refer to component auditors
Modify Auditor’s Responsibility section
Modify opinion paragraph
Still express unmodified opinion, if appropriate
Report Example

23. Summary Standard Report Unmodified Opinion Qualified Opinion
Adverse Opinion
Disclaimer of Opinion
Departures from GAAP
Not Material
Material, but Not Pervasive
Material and Pervasive
Scope Limitations
Material but Not Pervasive
Audit of Group Financial Statements
Assume Responsibility for Work of Component Auditors
Do Not Assume Responsibility for Work of Component Auditors

24. Major Topics Overview of Reporting The Standard (Unmodified) Report
Reasons for Departing from Standard (Unmodified) Report
Departures from GAAP
Scope limitations
Audit of group financial statements
Other Matters Encountered During the Audit
Other Issues and Reporting

25. General Approach for Other Matters
Issue unmodified opinion but add paragraph to report to discuss the matter
Emphasis-of-matter paragraphs provide information related to users’ understanding of F/S
Other-matter paragraphs provide information related to users’ understanding of audit, auditors’ responsibility, or auditors’ report
Situations
Consistency
Going-concern
Other Information
Required Supplementary Information
Emphasis of a matter

26. Consistency Relates to: Type of changes in accounting principles:
Change in accounting principles
Adjustments to correct misstatements in previously issued F/S
Type of changes in accounting principles:
Accounting principles (GAAP to GAAP)
Form of reporting entity
Accounting principles (non-GAAP to GAAP)
Accounting principle inseparable from changes in estimates

27. Consistency: Effect on Report
Add emphasis-of-matter paragraph following the opinion paragraph
May issue a qualified opinion (GAAP departure) if:
Change is not justified
Change is not accounted for in accordance with GAAP

28. Going-Concern Uncertainties
Auditors are responsible to evaluate whether substantial doubt exists about ability of entity to continue in existence for one year beyond date of F/S
Options
Add emphasis-of-matter paragraph following opinion paragraph (still unmodified opinion)
If serious uncertainty, may issue disclaimer of opinion
Modified language must include the words substantial doubt and going concern

29. Non-F/S Information Other Information Accompanying F/S
Auditors required to ensure information consistent with F/S
If not consistent, either revise opinion on F/S or add emphasis-of-matter paragraph
Required Supplementary Information
Auditors required to perform limited procedures and expand report on F/S to address
Add other-matter paragraph to identify information, describe procedures performed, and identify any issues

30. Emphasis of a matter Call user attention to important matters
Add emphasis-of-matter paragraph after opinion paragraph discussing the matter

31. Major Topics Overview of Reporting The Standard (Unmodified) Report
Reasons for Departing from Standard (Unmodified) Report
Departures from GAAP
Scope limitations
Audit of group financial statements
Other Matters Encountered During the Audit
Other Issues and Reporting

32. Comparative F/S Continuing auditors Predecessor auditors
Report should address all years presented in comparative form
Update opinion by considering if previously issued opinions still appropriate
If previously issued opinions not appropriate, revise opinion in current report (other-matter paragraph)
Predecessor auditors
With permission, auditors may present reissued report from predecessor on prior- years’ F/S along with successor’s report on current F/S
If predecessors’ report not presented, successor auditors’ report must reference predecessors’ report and opinion on prior-years’ F/S (other-matter paragraph)

33. Summary Financial Statements
Derived from the full set of financial statements
Auditor can only examine and report if audited full financial statements
Report
Refers to auditors’ report on full financial statements
Indicates whether information in summary financial statements is consistent in relation to the full financial statements

34. Association with Unaudited F/S
Auditors permit use of name in communication including F/S
Issue disclaimer of opinion (one paragraph)
Do not mention auditing procedures performed
Must identify any known departures from GAAP in the report
Should cover all unaudited prior-years’ financial statements

35. Lack of Independence
Scenario: Auditors begin engagement but independence subsequently compromised
Report
Single paragraph
Indicates auditors are not independent
Does not indicate why independence lacking

36. Components modified/added
Reporting Summary
Opinion
Components modified/added
Material
Pervasive
Intro
Auditor’s Respons
Add’l
Departure from GAAP
Qualified
Adverse X
Scope Limitation
Disclaimer
X (Disclaimer)
Audit of Group F/S
Unmodified
Other matters (Consistency, Going-concern, Required Supplementary, Emphasis of Matter, etc.)
May issue disclaimer if:
Lack of independence
Associated with financial statements
Material and pervasive going-concern uncertainty

37. Report Examples

38. We have audited the accompanying financial statements of Dunder-Mifflin, Inc., which comprise the balance sheet as of December 31, 2014, and the related statements of income, changes in shareholders’ equity, and cash flows for the year then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Auditor’s Responsibility Opinion Paragraph
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39. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this 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. Auditor’s Responsibility Opinion Paragraph
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40. Management’s Responsibility for the Financial Statements Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. 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 statements, 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 in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion Opinion Paragraph
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41. Management’s Responsibility for the Financial Statements Auditor’s Responsibility Opinion Paragraph In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Dunder-Mifflin, Inc. as of December 31, 2014, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
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42. Management’s Responsibility for the Financial Statements
Auditor’s Responsibility
Basis for Qualified Opinion
As discussed in Note 16, an additional provision In the amount of $30,000,000 for possible uncollectible receivables at December 31, 2013, was charged to operations during the year ended December 31, 2014, which, in our opinion, should have been reflected In the financial statements for Had this provision been properly recorded in the 2013 financial statements, Dunder-Mifflin, Inc. would have reported net earnings of $700,000 for the year ended December 31, 2014, rather than the net loss of $29,300,000 as reflected in the statements of income, changes in shareholders’ equity, and cash flows for that period.
Qualified Opinion
In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of Dunder-Mifflin, Inc. as of December 31, 2014, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
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43. Management’s Responsibility for the Financial Statements
Auditor’s Responsibility
Basis for Adverse Opinion
As discussed in Note 16, an additional provision In the amount of $30,000,000 for possible uncollectible receivables at December 31, 2013, was charged to operations during the year ended December 31, 2014, which, in our opinion, should have been reflected In the financial statements for Had this provision been properly recorded in the 2013 financial statements, Dunder-Mifflin, Inc. would have reported net earnings of $700,000 for the year ended December 31, 2014, rather than the net loss of $29,300,000 as reflected in the statements of income, changes in shareholders’ equity, and cash flows for that period.
Adverse Opinion
In our opinion, because of the significance of the matter discussed In the Basis for Adverse Opinion paragraph, the financial statements referred to above do not present fairly the financial position of Dunder-Mifflin, Inc. as of December 31, 2014, or the results of its operations or its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
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44. Introductory Paragraph
Management’s Responsibility for the Financial Statements
Auditor’s Responsibility
Basis for Qualified Opinion
Dunder-Mifflin, Inc. did not make a count of their physical inventory in 2014, stated in the accompanying financial statements at $10,000,000 at December 31, 2014, and we were unable to observe the physical quantities on hand. Dunder-Mifflin, Inc.'s records do not permit the application of other auditing procedures to the audit of inventories.
Qualified Opinion
In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of Dunder-Mifflin, Inc. as of December 31, 2014, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
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45. We were engaged to audit the accompanying financial statements of Dunder-Mifflin, Inc., which comprise the balance sheet as of December 31, 2014, and the related statements of income, stockholders' equity, and cash flows for the year then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on conducting the audit in accordance with auditing standards generally accepted In the United States of America. Because of the matter described in the Basis for Disclaimer of Opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. [Remainder of section deleted] Basis for Disclaimer of Opinion Dunder-Mifflin, Inc. did not make a count of their physical inventory in 2014 , stated in the accompanying financial statements at $10,000,000 at December 31, 2014, and we were unable to observe the physical quantities on hand. Dunder-Mifflin, Inc.'s records do not permit the application of other auditing procedures to the audit of inventories. Disclaimer of Opinion Because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on these financial statements.
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46. Management's Responsibility for the Financial Statements
Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the financial statements of B Company, a wholly-owned subsidiary, which statements reflect total assets constituting 20 percent of total assets at December 31, 2014 and total revenues constituting 18 percent of total revenues for the year then ended. Those statements were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for B Company, is based solely on the report of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
(No revisions to remainder of the section)
Opinion
In our opinion, based on our audit and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Dunder-Mifflin, Inc. as of December 31, 2014 and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
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