1. Reports on Audited Financial Statements
Chapter 18
Reports on Audited Financial
Statements
Note: This is an area that is evolving, as of April The PCAOB has recently issued proposals for new auditing standards which could result in:
Increasing the scope of what the auditor reports on;
Requiring the signature on the report of the audit engagement partner;
Disclosing the names of other CPA’s or CPA firms that perform a certain percentage of hours of work on the audit engagement; and/or
Requiring the audit report to include discussion of “critical audit matters.”

2. LO# 1
Public Company Reporting on the Financial Statement Audit: Standard Unqualified Report
Eight Elements
Report title
Addressee
Introductory paragraph
Scope paragraph
Opinion paragraph
Explanatory paragraph referring to the audit of ICFR
Name of auditor
Audit report date
The standard unqualified report is issued when the auditor has gathered sufficient evidence, the audit has been performed in accordance with PCAOB standards, and the financial statements conform to GAAP. Also, there is no extra language added, other than (sometimes) a cross reference to the auditor’s report on ICFR.
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3. Example of a Standard Unqualified Audit Report
LO# 1
Example of a Standard Unqualified Audit Report
The text authors call this last paragraph an “explanatory paragraph”, but others call it a cross reference paragraph, because it is trivial; there would be no cross reference if the auditor had issued 1 report containing the 2 (F.S. and ICFR) opinions. We discussed this in Ch. 7.
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4. LO# 1
Private Company Reporting on the Financial Statement Audit: Standard Unmodified Report
Nine Elements
Report title
Addressee
Introductory paragraph
Management’s responsibility
Auditor’s responsibility
Scope paragraph
Opinion paragraph
Name of Auditor
Audit report date
The standard unmodified report is issued when the auditor has gathered sufficient evidence, the audit has been performed in accordance with GAAS, and the financial statements conform to GAAP. Also, there is no extra language added.
This report is similar to that required by ISA. It came about via the convergence effort of the ASB and the IAASB.
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5. Standard Unmodified Audit Report
LO# 1
Standard Unmodified Audit Report
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6. 1. Opinion based in part on the report of another auditor
LO# 2
Additional language added to Standard Unqualified (public company) / Unmodified (private company) Financial Statement Audit Report. Note that this is handled somewhat differently for public versus private companies, but the main topics are below.
Cross reference to report on audit of ICFR (as noted earlier, this is not substantive; as it does not change the meaning of the opinion on the financial statements; also you would only have this for a large public company)
1. Opinion based in part on the report of another auditor
2. Going concern
3. Lack of consistency
4. Additional emphasis
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7. 1. Example of Reference to Other Auditor shown below
1. Example of Reference to Other Auditor shown below. Note that there are 2 major issues regarding “other auditor.” 1. Is there “other auditor”? 2. If yes, then decide to a) refer to the other auditor or b) not refer to “other auditor.”
LO# 2
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8. LO# 2
2. Going Concern
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9. Lack of Consistency Changes Affecting Consistency
LO# 2
Change in accounting principle
Change in reporting entity
Correction of a mis- statement in F/S
Changes Affecting Consistency
Change in accounting estimate
Changes Not Affecting Consistency
Change in classification and reclassification
Change expected to have a material future effect
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10. LO# 2
4. Additional Emphasis
Under certain circumstances an auditor may want to emphasize a specific matter regarding the financial statements even though he or she intends to express an unqualified/unmodified opinion. Two common things:
1. Substantial related party transactions; or
2. Significant subsequent event, e.g. a potentially material lawsuit filing
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11. Conditions for Departure from Unqualified/Unmodified Report
LO# 3
Scope
Limitation
Departure
from GAAP
Lack of Auditor
Independence
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12. LO# 4
Departures from an Unqualified/Unmodified Financial Statement Audit Report
Qualified
“except for”
Disclaimer
Adverse
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13. Decision process for report
LO# 5
Decision process for report
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14. Not in Conformity with GAAP Auditor Not Independent
LO# 5
Discussion of Conditions Requiring Other Types of Financial Statement Audit Reports
Results from an inability to obtain sufficient competent evidence about some component of the financial statements.
Scope Limitation
Results when financial statements are materially affected by an unacceptable departure from GAAP.
Not in Conformity with GAAP
Results when auditor has some form of prohibited relationship with the client (see Ch. 19).
Auditor Not Independent
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15. LO# 5
Discussion of Conditions Requiring Other Types of Financial Statement Audit Reports
Issue a qualified opinion or a disclaimer.
Scope Limitation
Issue a qualified opinion or adverse opinion.
Not in Conformity with GAAP
Issue a disclaimer.
Auditor Not Independent
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16. Scope Limitation: Disclaimer
LO# 5
Scope Limitation: Disclaimer
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17. Scope Limitation: Qualified
LO# 5
Scope Limitation: Qualified
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18. LO# 5
Not GAAP: Qualified
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19. LO# 5
Not GAAP: Adverse
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20. Other Information in Documents Containing Audited Financial Statements
LO# 7
Other Information in Documents Containing Audited Financial Statements
The auditor has no responsibility beyond the financial information contained in the report, and he or she has no obligation to perform any audit procedures to corroborate the other information. However, the auditor is required to read the other information and consider whether it is consistent with the information contained in the audited financial statements.
Annual Reports
Registration Statements
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21. Specified elements, accounts, or items of a financial statement
LO# 7
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
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22. Financial Statements Prepared According to a Special Purpose Framework
LO# 8
Financial Statements Prepared According to a Special Purpose Framework
Regulatory Basis
Tax Basis
Cash (or Modified Cash) Basis
Contractual Basis
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23. Specific Elements, Accounts, or Items of a Financial Statement
LO# 9
Specific Elements, Accounts, or Items of a Financial Statement
In some situations an auditor may be engaged to audit only part (or specified elements, accounts, or items) of the financial statements.
Rather than auditing specified elements, accounts, or items, an auditor may be engaged to apply only agreed-upon procedures.
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24. Compliance Reports Related to Audited Financial Statements
LO# 10
Compliance Reports Related to Audited Financial Statements
The auditor provides negative assurance as to compliance with the provisions of contractual agreements or regulatory requirements.
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25. End of Chapter 18
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