Reports on Audited Financial Statements Chapter 18 Reports on Audited Financial Statements McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

LO# 1 Reporting on the Financial Statement Audit: The 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. 18-2

Standard Unqualified Audit Report (PCAOB) LO# 1 Standard Unqualified Audit Report (PCAOB) 18-3

LO# 1 Reporting on the Financial Statement Audit: The 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. 18-4

Standard Unmodified Audit Report (ASB) LO# 1 Standard Unmodified Audit Report (ASB) 18-5

LO# 2 Adjustments to the Standard Unqualified/Unmodified Financial Statement Audit Report Explanatory Paragraph: Reference to report on audit of ICFR Explanatory Paragraph: Going concern Modified Wording: Opinion based in part on the report of another auditor Explanatory Paragraph: Lack of consistency Explanatory Paragraph: Additional emphasis 18-6

Reference to Other Auditors LO# 2 18-7

LO# 2 Going Concern 18-8

Lack of Consistency Changes Affecting Consistency LO# 2 Change in accounting principle Change in reporting entity Correction of an error in principle Changes Affecting Consistency Change in accounting estimate Correction of anerror that does not involve an accounting principle Changes Not Affecting Consistency Change inclassification and reclassification Change expected to have a material future effect 18-9

This information should be presented in an explanatory paragraph. LO# 2 Additional Emphasis Under certain circumstances (e.g. significant related-party transactions, subsequent event) 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. This information should be presented in an explanatory paragraph. 18-10

Conditions for Departure from Unqualified/Unmodified Report LO# 3 Scope Limitation Departure from GAAP Lack of Auditor Independence 18-11

LO# 4 Departures from an Unqualified/Unmodified Financial Statement Audit Report Qualified “except for” Disclaimer Adverse 18-12

LO# 5 Effect of Materiality 18-13

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 18-14

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 18-15

Scope Limitation: Disclaimer LO# 5 Scope Limitation: Disclaimer 18-16

Scope Limitation: Qualified LO# 5 Scope Limitation: Qualified 18-17

LO# 5 Not GAAP: Qualified 18-18

LO# 5 Not GAAP: Adverse 18-19

Special Reporting Issues LO# 6 Special Reporting Issues Different reports on comparative financial statements Change in report on prior-period financial statements Report by a predecessor auditor 18-20

Different Reports on Comparative Financial Statements LO# 6 Different Reports on Comparative Financial Statements Prior Years Issued Qualified Opinion or Disclaimer. Current Year Issues Unqualified Opinion. 18-21

Restated Prior-Period LO# 6 Restated Prior-Period 18-22

Report by a Predecessor Auditor LO# 6 Report by a Predecessor Auditor The predecessor auditor should do the followingbeforereissuing a report on prior-year financial statements published for comparative purposes: Read the financial statements of the current period. Compare the prior-period financial statements reported on with the current-year financial statements. Obtain a letter of representation from the current-year or successor auditor. 18-23

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 18-24

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 18-25

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 18-26

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. 18-27

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. 18-28

Big Changes Coming to Audit Reporting LO# 10 Big Changes Coming to Audit Reporting IAASB has adopted new standards that will increase the amount of subjective information conveyed by the auditor to financial statement users. The new standards are effective for periods ending after December 15, 2016. PCAOB and ASB standards have not been finalized, however, it appears that the substance of the US audit reporting standards under development likely will be very similar to those adopted by the IAASB. Big Changes Coming to Audit Reporting- IAASB has adopted new standards that will increase the amount of subjective information conveyed by the auditor to financial statement users. The new standards are effective for periods ending after December 15, 2016. PCAOB and ASB standards have not been finalized, however, it appears that the substance of the US audit reporting standards under development likely will be very similar to those adopted by the IAASB. 18-29

Big Changes Coming to Audit Reporting LO# 10 Big Changes Coming to Audit Reporting New IAASB requirements for “listed” (public) entities: A new section in the report to communicate key audit matters Disclosure of the name of the engagement partner in the audit report (highly controversial in the US) New IAASB requirements for all entities: Auditor reporting on going concern will be enhanced. The audit report will include a statement that the auditor is independent and has fulfilled all relevant ethical responsibilities. The audit report will include an enhanced description of the responsibilities of the auditor and the key features of an audit. Big Changes Coming to Audit Reporting- New IAASB requirements for “listed” (public) entities: A new section in the report to communicate key audit matters Disclosure of the name of the engagement partner in the audit report (highly controversial in the US) New IAASB requirements for all entities: Auditor reporting on going concern will be enhanced. The audit report will include a statement that the auditor is independent and has fulfilled all relevant ethical responsibilities. The audit report will include an enhanced description of the responsibilities of the auditor and the key features of an audit. 18-30