1. Audit Reports Chapter 3

2. Audit Reports What is an audit report? Different reporting guidelines exist depending on the type of company upon which the auditor is reporting. – Non-public entity—audit is conducted in accordance with GAAS. Reporting standards are issued by the Auditing Standards Board (ASB) of the AICPA – Publicly traded company—Audit is conducted in accordance with Auditing standards of the PCAOB. For large public entities, the audit includes an audit of internal control. The auditor can issue a separate report on internal control or a combined report.

3. Audit Reports—Non-public Standard Report – Title and address – Content--5 paragraphs (names of paragraphs) Introductory Management’s responsibility Auditor’s responsibility Scope Opinion – Signature and Date

4. Standard Report—Non-public Key words and Phrases – Introductory paragraph Audited List of financial statements (has to be all required financial statements. If not the auditor cannot give standard report)

5. Standard Report—Non-public Key Words and Phrases – Management’s responsibility paragraph Preparation and fair presentation of financial statements Design, implementation, and maintenance of internal controls – Free from material misstatement due to fraud or error.

6. Standard Report—Non-public Key Words and Phrases – Auditor’s responsibility paragraph Responsibility to express an opinion based on our audits Conducted our audits in accordance with GAAS – Plan and perform – Reasonable assurance – Free of material misstatement

7. Standard Report Key Words and Phrases – Scope paragraph (still auditor’s responsibility) An audit involves… – Procedures to obtain evidence about amounts and disclosures – judgment of risk of material misstatement whether due to fraud or error in selecting procedures – consideration of internal control for designing audit procedures but no opinion on internal control – Evaluation of appropriateness of accounting policies, significant estimates, and overall financial statement presentation. We believe the audit evidence provides sufficient, appropriate basis for opinion.

8. Standard Report—Non-public Key Words and Phrases – Opinion paragraph—always an unqualified opinion in standard report In our opinion List of financial statements In accordance with GAAP

9. SOX 404—Implications for Reports Audit of ICS and management’s assessment of ICS is required for large publicly traded companies under 404. Report on ICS and management’s assessment may be separate or combined. Separate reports—reference to the report on internal controls Combined report – Intro, Scope, and Opinion are all modified – Paragraphs added to Define IC over financial reporting Discuss inherent limitations of IC

10. Standard Report--Public Elements of a standard report – Heading and Title – Content--3 paragraphs Introductory Scope Opinion – Signature and Date

11. Standard Report--Public Key words and Phrases – Introductory paragraph “Audited” List of F/S and dates Responsibility statements

12. Standard Report--Public Key Words and Phrases – Scope paragraph We have conducted our audits in accordance with auditing standards of the PCAOB Description of those standards. – plan and perform, reasonable assurance, material misstatement – test basis, supporting evidence – accounting principles used, significant estimates made, overall financial statement presentation.

13. Standard Report--Public Key Words and Phrases – Opinion paragraph—always an unqualified opinion in standard report “In our opinion” “present fairly, in all material respects,” “in conformity with GAAP”

14. What type of opinion does the client want? Qualified or unqualified? Main Entry: – qual·i·fied Pronunciation: – \ˈkwä-lə-ˌfīd\ Function: – adjective 1 a: fitted (as by training or experience) for a given purpose : competent b: having complied with the specific requirements or precedent conditions (as for an office or employment) : eligiblecompetenteligible 2: limited or modified in some way Source: http://www.m-w.com/dictionary/qualified

15. SOX 404 and PCAOB AS # 5 —Implications for Reports Audit of internal control over financial reporting (ICFR) is required under SOX 404 and PCAOB AS # 5. Report on ICFR may be separate or combined. Separate reports—reference to the report on internal controls Combined report – Intro, Scope, and Opinion are all modified – Paragraphs added to Define ICFR over financial reporting Discuss inherent limitations of ICFR

16. Types of Reports Standard Report Report Expressing an Unqualified Opinion with Explanatory Paragraph or Modification Report Expressing a Qualified Opinion – Due to a Departure from GAAP – Due to a Scope Limitation Report Expressing an Adverse Opinion Report Expressing a Disclaimer of Opinion – Due to a Highly Material Scope Limitation – Due to a Lack of Independence

17. Report Expressing an Unqualified Opinion with Explanatory Paragraph or Modification Inconsistency Situations – Intro—Same – Management Responsibility—Same – Auditor Responsibility » Auditor Responsibility—Same » Scope--Same – Opinion--Same – Explanatory paragraph added

18. Report Expressing an Unqualified Opinion with Explanatory Paragraph or Modification Going Concern Why is this a part of the auditor’s responsibilities? How should an auditor handle this situation? Report – Intro--Same – Management Responsibility—Same – Auditor Responsibility » Auditor Responsibility—Same » Scope--Same – Opinion--Same – Explanatory paragraph added

19. Report Expressing an Unqualified Opinion with Explanatory Paragraph or Modification Emphasis of a matter – Related parties – Subsequent events – Comparability – Footnote uncertainties – Report Intro--Same Management Responsibility—Same Auditor Responsibility – Auditor Responsibility—Same – Scope--Same Opinion--Same Explanatory paragraph added

20. Report Expressing an Unqualified Opinion with Explanatory Paragraph or Modification Another Auditor--Shared responsibility Report – Intro--Modified significantly – Scope--Modified slightly (end) – Opinion--Modified slightly: “In our opinion, based on our audits and the report of other auditors…”

21. Report Expressing a Qualified Opinion Due to a Departure from GAAP – Materiality? – Report – Intro--Same – Management Responsibility—Same – Auditor Responsibility » Auditor Responsibility—Same » Scope—Same (very slight modification at end) – Basis for Qualified Opinion (Explanatory) paragraph added – Opinion--Modified: “In our opinion, except for the effects of the matter discussed in the basis for qualified opinion paragraph, the financial statements present fairly, in all material respects…in conformity with GAAP”

22. Report Expressing a Qualified Opinion Due to a Scope Limitation Materiality? Report – Intro--Same – Management Responsibility—Same – Auditor Responsibility » Auditor Responsibility—Same » Scope—Same (slight modification at end) – Basis for qualified opinion (Explanatory) paragraph added – Opinion--Modified: “In our opinion, except for the effects of the matter discussed in the basis for qualified opinion paragraph, the financial statements present fairly, in all material respects…in conformity with GAAP”

23. Report Expressing an Adverse Opinion Due to a highly material departure from GAAP Report – Intro--Same – Management Responsibility—Same – Auditor Responsibility » Auditor Responsibility—Same » Scope—Same (very slight modification at end) – Basis for adverse opinion (Explanatory) paragraph added – Opinion--modified: “In our opinion, because of the effects of the matters discussed in the basis for adverse opinion paragraph, the financial statements do not present fairly, in conformity with GAAP,…”

24. Report Expressing a Disclaimer of Opinion Due to a Highly Material Scope Limitation Report – Intro--Modified: “We were engaged to audit…” – Management Responsibility—Same – Auditor Responsibility » Auditor Responsibility—modified » Scope--omit – Basis for disclaimer of opinion (Explanatory) paragraph added – Opinion--Modified: “Because of the significance of the item discussed in the basis for disclaimer paragraph, we have been unable to obtain sufficient appropriate evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the financial statements.”

25. Report Expressing a Disclaimer of Opinion Due to a Lack of Independence Report – One paragraph disclaimer

26. Summary of Reports when a Standard Report May Not Be Issued Reasons why you might not provide a standard report If MATERIAL the auditor would issue a(n) If HIGHLY MATERIAL the auditor would issue a(n)

27. Summary of Reports when a Standard Report May Not Be Issued Reasons why you might not provide a standard report If MATERIAL the auditor would issue a(n) If HIGHLY MATERIAL the auditor would issue a(n) Inconsistency Going concern Emphasis of a matter Another auditor Departure from GAAP Scope limitation Lack of independence

28. Summary of Reports when a Standard Report May Not Be Issued Reasons why you might not provide a standard report If MATERIAL the auditor would issue a(n) If HIGHLY MATERIAL the auditor would issue a(n) Inconsistency Unqualified opinion with explanatory P Going concern Unqualified opinion with explanatory P* Emphasis of a matter Unqualified opinion with explanatory P Another auditor Unqualified opinion with modified wording Departure from GAAP Report expressing a qualified opinion Adverse opinion Scope limitation Report expressing a qualified opinion Disclaimer opinion Lack of independenceDisclaimer opinion

29. IFRS and ISAs When the client has prepared financial statements in accordance with IFRS instead of U.S. GAAP, IFRS is used in place of the reference to GAAP. When the auditor has conducted the audit in accordance with ISAs instead of GAAS, the scope paragraph would refer to ISAs instead of GAAS (as is the case with the audit of a public company when Auditing standards of the PCAOB are used). In either case, the report would still be considered a standard report.