©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Audit Reports Chapter 3

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Parts of the Standard Unqualified Audit Report 1. Report title 2. Audit report address 3. Introductory paragraph 4. Scope paragraph 5. Opinion paragraph 6. Name of CPA firm 7. Audit report date

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley We have audited the accompanying balance sheet of XYZ Company as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows for the year 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 audit. We have audited the accompanying balance sheet of XYZ Company as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows for the year 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 audit. The AICPA Standard Auditors’ Report--Introductory Paragraph

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 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 of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. 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 of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The AICPA Standard Auditors’ Report--Scope Paragraph

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ Company as of December 31, 20XX, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ Company as of December 31, 20XX, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. The AICPA Standard Auditors’ Report--Opinion Paragraph

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Conditions for Standard Unqualified Audit Report 1. All financial statements are included. 2. The three general standards have been followed in all respects on the engagement. 3. Sufficient evidence has been accumulated to conclude that the three standards of field work have been met.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Conditions for Standard Unqualified Audit Report 4. The financial statements are presented in accordance with generally accepted accounting principles. 5. There are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Five Categories of Audit Reports 1.Standard unqualified 3.Qualified 2.Unqualified with explanatory paragraph or modified wording 4.Adverse 5. Disclaimer

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Reporting on Internal Control over Financial Reporting Auditors of public companies subject to Section 404 of the Sarbanes-Oxley Act must report on the effectiveness of internal control over financial reporting. PCAOB Auditing Standard 5 requires the audit of internal control to be integrated with the audit of the financial statements.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Sarbanes-Oxley Act Separate Report on Financial Statements and Internal Control Over Financial Reporting 1. Introductory paragraph 2. Scope paragraph 3. Definition paragraph 4. Inherent limitations paragraph 5. Opinion paragraph 6. Cross Reference Paragraph

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Unqualified opinions with Explanatory Language Other auditors Going concern uncertainty GAAP not consistently applied Emphasis of a matter Justified departure from GAAP

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Shared Responsibility Report [Standard introductory paragraph language] We did not audit the financial statements as and for the year ended December 31, 2005 of Glendo, Inc., which statements reflect total sales constituting 27 percent of total consolidated sales for Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for Glendo, Inc. for 2005, is based solely on the report of the other auditors. [Standard introductory paragraph language] We did not audit the financial statements as and for the year ended December 31, 2005 of Glendo, Inc., which statements reflect total sales constituting 27 percent of total consolidated sales for Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for Glendo, Inc. for 2005, is based solely on the report of the other auditors. [Standard scope paragraph language] We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. [Standard scope paragraph language] We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, … In our opinion, based on our audits and the reports of other auditors, …

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Going Concern Problem Following the opinion paragraph Standard introductory paragraph Standard scope paragraph Standard opinion paragraph

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Explanatory Paragraph--Going Concern Problem The accompanying financial statements have been prepared assuming that America West Airlines, Inc. will continue as a going concern. As discussed in note 1 to the financial statements, the Company filed a voluntary petition seeking to reorganize under chapter 11 of the federal bankruptcy laws. This event and circumstances relating to this event, including the Company’s significant losses, accumulated deficit, and highly leveraged capital structure, raise substantial doubt about its ability to continue as a going concern. The accompanying financial statements do not include and adjustments that might result from the outcome of these uncertainties.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Consistency Problem Following the opinion paragraph Standard introductory paragraph Standard scope paragraph Standard opinion paragraph

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Explanatory Paragraphs-- Consistency As discussed in Note 15, effective January 1, 2002, the Company changed its method of accounting for goodwill and intangible assets upon adoption of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.”

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Emphasize a matter Following or preceding the opinion paragraph Standard introductory paragraph Standard scope paragraph Standard opinion paragraph

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Justified Departure from GAAP Following or preceding the opinion paragraph Standard introductory paragraph Standard scope paragraph Standard opinion paragraph

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Modifications of the Auditors’ Report--Unqualified Opinions Type of ReportIntroductory or Scope Paragraph Explanatory Paragraph Opinion Paragraph Shared responsibility Describe work of other auditors None“...based on our audit and the report of other auditors...” Going concern uncertainty NoneDescribe uncertainty None GAAP not consistent NoneDescribe change in principle None Emphasis of matter NoneDescribe matterNone Justified departure from official GAAP NoneDescribe departure None

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Qualified reports due to Departure from GAAP Introductory and scope paragraphs are standard Add paragraph preceding the opinion paragraph Modify opinion paragraph: “except for” Reasons: No GAAP Disclosure problems Unjustified changes in GAAP Unreasonable estimates

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Example of a Qualified Report-- Departure from GAAP Example of a Qualified Report-- Departure from GAAP (Introductory and Scope Paragraphs are Standard) The Company has excluded from property and debt in the accompanying balance sheet certain lease obligations that, in our opinion, should be capitalized in order to conform with generally accepted accounting principles. If these lease obligations were capitalized, property would be increased by $__________, long-term debt by $___________, and retained earnings by $__________ as of December 31, 20X5, and net income and earnings per share would be increased (decreased) by $___________ and $_____, respectively, for the year then ended. The Company has excluded from property and debt in the accompanying balance sheet certain lease obligations that, in our opinion, should be capitalized in order to conform with generally accepted accounting principles. If these lease obligations were capitalized, property would be increased by $__________, long-term debt by $___________, and retained earnings by $__________ as of December 31, 20X5, and net income and earnings per share would be increased (decreased) by $___________ and $_____, respectively, for the year then ended. 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, the financial position of XYZ Company as of December 31, 20X5, and the results of its operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. 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, the financial position of XYZ Company as of December 31, 20X5, and the results of its operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Qualified reports due to Scope Limitation Introductory paragraph – standard Modify scope paragraph Modify opinion paragraph: “except for”

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Example of a Qualified Report-- Scope Limitation Standard Introductory Paragraph Except as discussed in the following paragraph, we conducted our audit... Except as discussed in the following paragraph, we conducted our audit... We were unable to obtain audited financial statements supporting the Company’s investment in a foreign affiliate stated at $_______, or its equity in earnings of that affiliate of $_______, which is included in net income, as described in Note 8 to the financial statements; nor were we able to satisfy ourselves as to the carrying value of the investment in the foreign affiliate or the equity in earnings by other auditing procedures. We were unable to obtain audited financial statements supporting the Company’s investment in a foreign affiliate stated at $_______, or its equity in earnings of that affiliate of $_______, which is included in net income, as described in Note 8 to the financial statements; nor were we able to satisfy ourselves as to the carrying value of the investment in the foreign affiliate or the equity in earnings by other auditing procedures. 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,... 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,...

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Modifications of Auditors’ Report— Qualified Opinions Type of Report Introductory or Scope Paragraph Explanatory Paragraph Opinion Paragraph Qualified— GAAP Departure None Describe departure and effects “except for the effects of the departure the financial statements…” Qualified— Scope Limitation “Except as explained in the following paragraph…” Describe scope limitation “except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to…”

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Adverse Opinions Introductory paragraph – standard Scope paragraph - standard Add explanatory paragraphs preceding the opinion paragraph Modify opinion paragraph

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Adverse Opinion 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 United States of America, the financial position of XYZ Company as of December 31, 20X5, or the results of its operations or its cash flows for the year then ended. 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 United States of America, the financial position of XYZ Company as of December 31, 20X5, or the results of its operations or its cash flows for the year then ended.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Disclaimer of Opinion Introductory paragraph – “we were engaged to” Scope paragraph - omitted Add explanatory paragraphs preceding the disclaimer paragraph Modify opinion paragraph

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Disclaimer of Opinion We were engaged... The Company did not make a count of its physical inventory, stated in the accompanying financial statements at $_____ as of December 31, 20X2. Further, evidence supporting the cost of property and equipment acquired prior to December 31, 20X1, is no longer available. The Company’s records do not permit the application of other auditing procedures to inventories or property and equipment. Since the Company did not take physical inventories and we were not able to apply other auditing procedures to satisfy ourselves as to inventory quantities and the cost of property and equipment, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on these financial statements.

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Modifications of the Auditors’ Report- -Adverse & Disclaimer

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Placement of Explanatory Paragraphs Before opinion paragraph Qualified opinions Disclaimers Adverse opinions Following opinion paragraph Consistency Going concern No additional paragraph Other auditors Before or after Emphasize a matter Justified departure from GAAP

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Other issues Comparative financial statements Different opinions

©2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley Questions?