1. BA 427 – Assurance and Attestation Services
Lecture 25
The Audit Report

2. Generally Accepted Auditing Standards
The Reporting Standards
1st standard
2nd standard
3rd standard
4th standard

3. GAAS The Reporting Standards 1st standard 2nd standard 3rd standard
The report shall state whether the financial statements are presented in accordance with GAAP.
2nd standard
3rd standard
4th standard

4. GAAS The Reporting Standards 1st standard 2nd standard 3rd standard
The report shall identify those circum-stances in which accounting principles have not been consistently observed in the current period in relation to the preceding period.
3rd standard
4th standard

5. GAAS The Reporting Standards 1st standard 2nd standard 3rd standard
Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report.
4th standard

6. GAAS The Reporting Standards 1st standard 2nd standard 3rd standard
4th standard
The report shall either contain an expression of opinion regarding the F/S, taken as a whole, or an assertion to the effect that an opinion cannot be expressed.

7. Types of Audit Reports Standard Report
Also called an Unqualified Report or a Clean Opinion
Standard Report with explanatory language or modified wording
Qualified Opinion
Adverse Opinion
Disclaimer of Opinion

8. The Standard Report The seven elements of a Standard Report
Report title
Audit report address
Introductory paragraph
Scope paragraph
Opinion paragraph
Name of CPA firm
Audit report date

9. Certified Public Accountants
The Standard Report
Fox and Hound, P.C.
Certified Public Accountants
Suite 42
Corvallis, OR 97330
Independent Auditor’s Report
To the Stockholders
Ghostbusters, Inc.
Report Title
Must include the word “independent”
Report Address
The company, its board or shareholders

10. The Standard Report: Introductory Paragraph
We have audited the accompanying balance sheets of Ghostbusters, Inc. as of December 31, 2006 and 2005, and the related statements of income, retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We have done an audit. (This is the service we did.)
These are the statements we audited
We have responsibilities, and so does management

11. The Standard Report: Scope Paragraph
We conducted our audits in accordance with auditing standards generally accepted in the U.S.A. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the F/S are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the F/S. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall F/S presentation. We believe that our audits provide a reasonable basis for our opinion.
For public companies, PCAOB standards
Key words: “reasonable assurance” & “material”
More key words: “test basis”

12. The Standard Report: Opinion Paragraph
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ghostbusters, Inc. as of December 31, 2006 and 2005, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Fox and Hound, P.C.
March 7, 2007
Key words: “present fairly … in accordance”
Signed by “the firm”
Last day of fieldwork

13. The Standard Report Five conditions for an unqualified report:
All statements (balance sheet, income statement, etc.) are included.
The three general standards of GAAS are met.
The three standards of fieldwork are satisfied.
The financial statements are presented in accordance with U.S. GAAP.
No circumstances require an explanatory paragraph or modification of the standard wording.

14. The Standard Report
For public company audits, the auditor must also issue an opinion on the audit of internal controls.
This report can be combined with the report on the financial statement audit, or it can be separate.

15. The Standard Report
If combined, the auditor’s report contains two additional paragraphs:
A paragraph defining internal controls
A paragraph explaining the inherent limitations of any system of internal controls
And the three original paragraphs are all modified to refer to the audit over internal controls.

16. Unqualified opinion with explanatory paragraph
Examples of circumstances that might require an explanatory paragraph:
GAAP was not applied consistently, from one period to the next.
There is substantial doubt about the entity’s ability to continue as a going concern.
The auditor agrees with a departure from GAAP.
The auditor wishes to emphasize a matter.

17. Unqualified opinion with explanatory paragraph
In all of these examples, the first three paragraphs of the auditor’s report are unchanged from an unqualified opinion.
And a fourth, explanatory paragraph is added.

18. Unqualified opinion with explanatory paragraph
All of the following conditions must be satisfied before this type of report can be issued:
The audit was completed without scope limitation.
The results of the audit were satisfactory.
The financial statements are fairly presented.

19. Unqualified opinion with modified wording
When an auditor relies on the work of other auditors, the auditor has three options:
Make no reference to the other auditors;
Reference the other auditor in the auditor’s report (a “shared” opinion);
This results in an unqualified opinion with modified wording.
All three paragraphs of the standard report are modified.
Qualify the audit opinion or disclaim an opinion.

20. Audit reports that are not unqualified:
Each of the following three conditions precludes the auditor from issuing an unqualified opinion:
The scope of the audit has been restricted.
The financial statements do not conform to GAAP.
The auditor is not independent.

21. A Qualified Audit Report
Qualified Opinion
This is an “except for” opinion
Reasons for a qualified opinion:
Scope limitation
Can be caused by management
Or can be beyond management’s control
Departure from GAAP
But the auditor still must conclude that the statements are fairly presented, in order to be able to issue a qualified opinion.

22. A Qualified Audit Report
Example of a Qualified Opinion for a scope limitation:
Scope paragraph: “Except as discussed in the following paragraph, we conducted our audit …”
Additional paragraph: “We were unable to obtain audited financial statements supporting the Company’s investment in a foreign affiliate …”
Opinion paragraph: “In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to examine evidence regarding the foreign affiliate investment and earnings, the financial statements referred to above present fairly …”

23. A Qualified Audit Report
Example of a Qualified Opinion for a departure from GAAP
Scope paragraph: No departure from the Standard Report
Additional paragraph: “The Company has excluded from property and debt in the accompanying balance sheet certain leases that, in our opinion, should be capitalized to conform with U.S. GAAP. If these lease obligations were capitalized …”
Opinion paragraph: “In our opinion, except for the effects of not capitalizing lease obligations, as discussed in the preceding paragraph, the financial statements referred to above present fairly, in all material respects …”

24. An Adverse Opinion
In the judgment of the auditor, the financial statements taken as a whole are not presented fairly in conformity with GAAP. There is a material departure from GAAP.
Why do we almost never see adverse opinions?

25. An Adverse Opinion Example of an Adverse Opinion:
Opinion paragraph: “In our opinion, because of the effects of the matters discussed in the preceding paragraph, the financial statements referred to above do not present fairly, in conformity with accounting principles generally accepted in the U.S., the financial position of XYZ Company as of December 31, 2006, or the results of its operations and its cash flows for the year then ended.

26. Disclaimer of Opinion Reasons for a disclaimer:
A severe scope limitation
A going concern problem
No attestation services have been provided, but the auditor is otherwise associated with the statements in some way.
The auditor is not independent
Piecemeal opinions are not allowed!

27. Disclaimer of Opinion
Example of a disclaimer due to scope restriction:
Opinion paragraph: “Because we were unable to obtain audited financial statements supporting the Company’s investment in a foreign affiliate and we were unable to satisfy ourselves as to the carrying value of the investment or the equity in its earnings by means of other auditing procedures, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on these financial statements.”

28. The Auditor’s Report Our organization has been by type of report:
Standard Report
Unqualified Report with explanatory paragraph or modified wording
Qualified Report
Adverse Opinion
Disclaimer of Opinion

29. The Auditor’s Report
We can also organization our discussion by the nature of the issue, such as
Materiality
Scope restriction

30. The Auditor’s Report Materiality Immaterial: Unqualified
Material: Qualified
Highly material: Disclaimer or Adverse
Interpretation of “material”: Amounts are material but do not overshadow the financial statements as a whole. Users decisions are likely to be affected only if the information is important to the specific decisions being made. The overall F/S are presented fairly.

31. The Auditor’s Report Scope restriction Caused by client, such as
Confirmation of receivables
Observation of inventory
Beyond the client’s control
Auditor was engaged after the balance sheet date
In either case, materiality determines the nature of the auditors report.

32. The Auditor’s Report Scope restriction
Depending on the materiality of the scope restriction, the auditor can issue:
An Unqualified Report,
A Qualified Report, qualified for both scope and opinion
A Disclaimer
Client-imposed scope restrictions are more likely to result in a disclaimer.

33. The auditor’s responsibilities beyond the financial statements
Additional information contained in the annual report or similar publications:
SAS 8 and SAS 29 (AU 550 and 551)
For example: The CEO’s letter to shareholders; or supplementary schedule showing details of cost of goods sold.

34. The auditor’s responsibilities beyond the financial statements
SAS 8: The auditor must read other information included in the annual report that pertains directly to the financial statements, and verify that the information is not inconsistent with the financial statements.
An example would be financial information contained in the president’s letter to shareholders.

35. The auditor’s responsibilities beyond the financial statements
SAS 29: Additional information accompanying the basic financial statements in auditor-submitted documents (formerly referred to as a long-form report).
Examples include
supplementary information required by the FASB or the SEC
Schedule of insurance coverage
Statistical data of ratios and trends over time

36. The auditor’s responsibilities beyond the financial statements
SAS 29: The auditor must make a clear statement about the degree of responsibility taken for the additional information. Two possibilities:
A clean opinion, with reference to the additional information
A disclaimer with respect to the additional information

37. The auditor’s responsibilities beyond the financial statements
Required Supplementary Information (RSI) included in a document that contains audited financial statements:
If the auditor does not audit the RSI, then the auditor should apply “limited procedures,” including
Inquiries of management
Comparing information in RSI with audited financial statements for consistency

38. The auditor’s responsibilities beyond the financial statements
Condensed financial statements
Could be annual or quarterly information.
Applies when the complete financial statements have been audited.
The auditor can issue a report on the condensed statements, but it must:
Reference the complete financial statements and the auditor’s report on them.
Express an opinion on the condensed statements in relation to the complete statements.