1. Penyelesaian Audit, Laporan Auditor & Management Letter PERTEMUAN XIII
Dr Rilla Gantino, SE., AK., MM
MM-FEB

2. KEMAMPUAN AKHIR YANG DIHARAPKAN
Mahasiswa mampu menjelaskan & menerapkan penyelesaian audit, laporan auditor & management letter

3. 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
Title should include the word independent (e.g., independent audit report)
Report is usually addressed to the company, its stockholders or board of directors.
The intro paragraph does 3 things:
1. States the CPA firm has done an audit
2. It lists the financial statements that were audited
3. It defines responsibilities between management and the auditor
The scope paragraph is a factual statement about what the auditor did in the audit and sets the expectation about reasonable assurance.
The opinion paragraph states the auditor’s conclusions.
The name identifies the CPA firm who performed the audit.
The report date indicates the last day audit procedures were performed in the field.

4. Parts of the Standard Unqualified Audit Report

5. Learning Objective 2
Specify the conditions required to issue the standard unqualified audit report.

6. Conditions for Standard Unqualified Audit Report
1. Includes all financial statements
2. Three general standards are met
All financial statements are included
The three general standards have been
followed in all respects on the engagement
Sufficient evidence has been accumulated
to conclude that the three standards of
field work have been met.
3. Complies with the three standards of field work

7. Conditions for Standard Unqualified Audit Report
4. Financial statements comply with GAAP
5. No circumstances require an explanatory
paragraph or report modification
The financial statements are presented in accordance with generally accepted accounting principles.
There are no circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report.

8. Four Categories of Audit Reports

9. Learning Objective 3
Understand reporting on financial statements and internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act.

10. 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.
As noted in chapter 1, non-accelerated filers have been exempt from this requirement and the passage by Congress of the 2010 financial reform legislation made that exemption permanent for non-accelerated filers.

11. Reporting on Internal Control over Financial Reporting
Sarbanes-
Oxley
Sec.404
ICFR
Effectiveness
Audits
Accelerated Filer
Auditors of public companies subject to Section 404 of the Sarbanes-Oxley Act must
report on the effectiveness of internal control over financial reporting.
Non-accelerated filers have been exempt from this requirement and the passage by Congress
of the 2010 financial reform legislation made that exemption permanent.
2010
Legislation
Permanent
Exemption
Non-accelerated
Filer

12. 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
The introductory scope and opinion paragraphs describe that the scope of the auditor’s work and opinion is on internal control over financial reporting .
The introductory and opinion paragraphs also refer to the framework used to evaluate internal control.
The report includes a paragraph after the scope paragraph defining internal control over financial reporting.
An additional paragraph addresses the inherent limitations of internal control.
The opinion about the effectiveness of internal control is as of the end of the most recent fiscal year.
The last paragraph includes a cross-reference to the auditor’s separate report on the financial statements.

13. Separate Report on ICFR
The introductory scope and opinion paragraphs describe that the scope of the auditor’s work and opinion is on internal control over financial reporting .
The introductory and opinion paragraphs also refer to the framework used to evaluate internal control.
The report includes a paragraph after the scope paragraph defining internal control over financial reporting.
An additional paragraph addresses the inherent limitations of internal control.
The opinion about the effectiveness of internal control is as of the end of the most recent fiscal year.
The last paragraph includes a cross-reference to the auditor’s separate report on the financial statements.

14. Learning Objective 4
Describe the five circumstances when an unqualified report with an explanatory paragraph or modified wording is appropriate.

15. Unqualified Report with Explanatory Paragraph
1. Lack of consistent application of generally
accepted accounting principles
2. Substantial doubt about going concern
3. Auditor agrees with a departure from
promulgated accounting principles
4. Emphasis of a matter
5. Reports involving other auditors

16. Lack of Consistent Application of GAAP
Auditors must note circumstances in which accounting principles are not consistently applied
Auditor should modify the report when a material change occurs by adding an explanatory paragraph in the report
Auditors are required to call attention to circumstances in which accounting principles have not been consistently observed in the current period in relation to the preceding period.
GAAP requires that changes in accounting principles or their method of application be to a preferable principle and that the nature and impact of the change be adequately disclosed. When a material change occurs, the auditor should modify the report by adding an explanatory paragraph after the opinion paragraph that discussed the nature of the change and points the reader to the footnote that discussed the change.

17. Substantial Doubt About Going Concern
Significant recurring operating
losses or working capital deficiencies.
Inability of the company to pay its
obligations as they come due.
Loss of major customers, the
occurrence of uninsured catastrophes.
Legal proceedings, legislation that
might jeopardize the entity’s ability to operate.

18. Auditor Agrees with a Departure from a Promulgated Principle
Departure may not require a qualified or
adverse opinion
The auditor must separately explain in the
audit report that adhering to the principle
would have produced a misleading result.
The auditor must be satisfied and must state and explain, in a separate paragraph or paragraphs in the audit report, that adhering to the principle would have produced a misleading result in that situation.
Circumstances are most unusual

19. Emphasis of a Matter Under certain circumstances, the CPA may
want to emphasize specific matters regarding
the financial statements, even though the
CPA intends to express an unqualified opinion.
Subsequent
Events
Related Party
Transactions
Significant related party transactions
Material subsequent events
Accounting matters affecting comparability of the financial statements
Material uncertainties disclosed in the footnotes
Financial
Statement
Comparability
Material
Uncertainties

20. Reports Involving Other Auditors
Make no reference in the audit report
2. Make reference in the report
(modified wording report)
3. Qualify the opinion
A shared unqualified report is appropriate when it is impractical to review the work of the other auditor or when the portion of the financial statements audited by the other CPA is material in relation to the whole.

21. Reports Involving Other Auditors

22. Learning Objective 5
Identify the types of audit reports that can be issued when an unqualified opinion is not justified.

23. Departures from an Unqualified Opinion
1. Scope limitation
2. GAAP departure
3. Auditor not independent
Scope limitations are when the auditor has not accumulated sufficient appropriate evidence to conclude whether the financial statements are stated in accordance with GAAP.
Client insists on using a method that is not consistent with GAAP.
Independence ordinarily is determined by Rule 101 of the rules of the Code of Professional Conduct.

24. Qualified Opinion A qualified opinion report can result from
a limitation on the scope of the audit or
failure to follow generally accepted
accounting principles.
A qualified report can take the form of a qualification of both the scope and the opinion or of the opinion alone.

25. Qualified Opinion

26. Adverse Opinion Auditor believes the financial statements are
not presented fairly in conformity with GAAP.
It is used only when the auditor believes that the overall financial statements are so materially misstated or misleading that they do not present fairly the financial position or results of operations and cash flows in conformity with GAAP.

27. Adverse Opinion

28. Disclaimer of Opinion It is issued when the auditor is unable
to be satisfied that the overall financial
statements are fairly presented.
It can arise only from a lack of
knowledge by the auditor.
The necessity for disclaiming an opinion may arise because of a severe limitation on the scope of the audit or a nonindependent relationship under the Code of Professional Conduct between the auditor and the client.

29. Disclaimer of Opinion

30. Learning Objective 6
Explain how materiality affects audit reporting decisions.

31. Materiality A misstatement in the financial statements
can be considered material if knowledge of
the misstatement would affect a decision
of a reasonable user of the statements.
Materiality is an essential consideration in determining the appropriate type of report for a given set of circumstances.

32. Levels of Materiality Amounts are immaterial.
Amounts are material but do not overshadow
the financial statements as a whole.
Immaterial is when a misstatement in the financial statements is unlikely to affect the decisions of a reasonable user.
A misstatement in the financial statements would affect a user’s decision, but the overall statements are still fairly stated and therefore useful.
The highest level of materiality exists when users are likely to make incorrect decisions if they rely on the overall financial statements.
Amounts are so material or so pervasive that
overall fairness of the statements is in question.

33. Materiality Decisions
Failure to
follow GAAP
Audit report
Unqualified
Qualified
opinion only
Adverse

34. Relationship of Materiality to Type of Opinion
Level
Significance in Terms of
Reasonable Users’ Decisions
Type of
Opinion
Immaterial
Users’ decisions are unlikely
to be affected.
Unqualified
Material
Users’ decisions are likely
to be affected.
Qualified
Highly
material
Users’ decisions are likely
to be significantly affected.
Disclaimer
or adverse

35. Materiality Decisions
Dollar amount compared with a base
Measurability
Nature of the item
Common bases include net income, total assets, current assets, and working capital.
Some misstatements cannot be accurately measured (e.g., existing lawsuit, acquisition of a new company subsequent to the balance sheet date).
The decision of a user may also be affected by the kind of misstatement:
illegal or fraudulent transaction,
an item that may be material in some future period but immaterial in the current period,
an item changing a small loss to a small profit,
an item that may be important in terms of possible consequences arising from contractual obligations.

36. Materiality Decisions
Scope
limitation
Audit report
It is more difficult to evaluate the materiality of potential misstatements resulting form a scope limitation than for a failure to follow GAAP.
Unqualified
Qualified scope
and opinion
Disclaimer

37. Learning Objective 7
Draft appropriately modified audit reports under a variety of circumstances.

38. Discussion of Conditions Requiring Departure
Auditor’s scope has been restricted
Statements are not in conformity with GAAP
Auditor is not independent
Two major categories of scope restrictions:
those caused by a client
those caused by conditions beyond the control of either the client or the auditor

39. Learning Objective 8
Determine the appropriate audit report for a given audit situation.

40. Auditor’s Decision Process
Determine whether any condition exists
requiring a departure from a standard
unqualified report.
Decide
Materiality
Decide appropriate
type of report
Write
Audit
Report

41. More Than One Condition Requiring a Departure or Modification
The auditor is not independent.
There is a scope limitation.
Going concern uncertainty exists.
Report should be modified for each condition unless one has the effect of neutralizing others.
Statements are not prepared in
accordance with GAAP.

42. Number of Paragraphs in the Report
Type of Report

43. Learning Objective 9
Understand proposed use of international accounting and auditing standards by U.S. companies.

44. Proposed Use of International Accounting and Auditing Standards by U.S. companies
Globalization of world’s capital markets are leading to calls for a single set of accounting standards to be used around the world.
SEC
Developing
Workplan
2015
Implementation
of IFRS
into U.S.
When the auditor reports on financial statements prepared in conformity with IFRS, the auditor refers to those standards rather than U.S. GAAP.
If plan is approved?

46. Audit Report
Providing an independent and expert opinion on the fairness of financial statements through an audit is the most frequent attestation service
An audit provides users of financial statements reasonable assurance that the statements are in conformity with GAAP

47. Fourth Standard of Reporting
The auditor must either express an opinion regarding the financial statements, taken as a whole, or state that an opinion cannot be expressed, in the auditor's report. When the auditor cannot express an overall opinion, the auditor should state the reasons therefore in the auditor's report. In all cases where an auditor's name is associated with financial statements, the auditor should clearly indicate the character of the auditor's work, if any, and the degree of responsibility the auditor is taking, in the auditor's report.
The standard report meets the fourth standard by:
(1) stating that the audit was performed in conformity with generally accepted auditing standards and
(2) expressing an opinion that the client’s financial statements are presented fairly in conformity with generally accepted accounting principles.

48. Types of Reports
Reports on the financial statements ordinarily include:
The financial statements themselves:
Balance sheet
Income statement
Statement of cash flows
Statement of retained earnings (equity)
Financial Statement Disclosures
The notes to the financial statements are considered an integral part of the financial statements

49. Auditors’ Standard Report – Nonpublic Clients
Details
Title includes word independent
Addressed to person or audit committee who retained the auditors
Signed with name of CPA firm not individual partner unless sole practitioner
Dated last day of fieldwork or date on which the auditors obtained sufficient appropriate audit evidence to support their opinion

50. The AICPA Standard Auditors’ Report--Introductory Paragraph
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. 2 2 2 2

51. The AICPA Standard Auditors’ Report--Scope Paragraph
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. 3 3 3 3

52. The AICPA Standard Auditors’ Report--Opinion Paragraph
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. 4 4 4 4

53. Conditions Required for Issuance of an Unqualified Report
The financial statements are presented in conformity with GAAP, including adequate disclosure.
The audit was performed in accordance with GAAS, and there were no significant scope limitations. 5 5 5 5

54. Auditors’ Standard Report – Public Clients
Differences from nonpublic
Includes the words “Registered” and “Independent” in the title.
References standards of the PCAOB rather than generally accepted auditing standards.
Includes the city and state—or city and country in the case of non–U.S. auditors—where the auditors’ report has been issued. (Historically, auditors have included this information, although it was not required.)
Includes an additional paragraph indicating that the auditors have also issued a report on the client’s internal control over financial reporting.
The report on internal control may either be presented separately or combined with the report on the financial statements into one overall report

55. Types of Opinions
1. An unqualified opinion—standard report. This report expresses a “clean opinion” and may be issued only when the two conditions listed in the preceding section have been met, and when no conditions requiring explanatory language exist. 2. An unqualified opinion—with explanatory language. In certain circumstances explanatory language is added to the auditors’ report with no effect on the auditors’ opinion. 3. A qualified opinion. A qualified opinion states that the financial statements are presented fairly in conformity with generally accepted accounting principles “except for” the effects of some matter. 4. An adverse opinion. An adverse opinion states that the financial statements are not presented fairly in conformity with generally accepted accounting principles. 5. A disclaimer of opinion. A disclaimer of opinion means that due to a significant scope limitation, the auditors were unable to form an opinion or did not form an opinion on the financial statements.

56. Modifications of the Auditors’ Report--Unqualified Opinions
Type of Report
Introductory 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
Describe uncertainty
GAAP not consistent
Describe change in principle
Emphasis of a matter
Describe matter
Justified departure from GAAP
Describe departure

57. 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…”

58. Modifications of Auditors’ Report—Adverse Opinions and Disclaimers
Type of Report
Introductory or Scope Paragraph
Explanatory Paragraph
Opinion Paragraph
Adverse
None
Describe reason for opinion
"The financial statements do not present fairly"
Disclaimer of Opinion--Scope Limitation
"We were engaged"; Omit responsibility.
Omit scope paragraph
Describe scope restriction and any reservations
"we do not express an opinion on the financial statements."

59. Shared Responsibility Report
[Standard introductory paragraph language] We did not audit the financial statements as and for the year ended December 31, 2001 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 2001, 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.
In our opinion, based on our audits and the reports of other auditors, …

60. Going concern
SAS 59
Auditor not required to perform procedures specifically designed to test going-concern assumption but must evaluate the assumption
Conditions
Negative cash flows from operations
Defaults on loan agreements
Adverse financial ratios
Work stoppages
Legal proceedings

61. 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. Although the Company is currently operating as debtor-in-possession under the jurisdiction of the Bankruptcy Court, the continuation of the business as a going concern is contingent upon, among other things, the ability to (1) formulate a Plan of Reorganization which will gain approval of the creditors and stockholders and confirmation of the Bankruptcy Court, (2) maintain compliance with all debt covenants under the debtor-in-possession financing agreements, (3) achieve satisfactory levels of future operating results and cash flows, and (4) obtain additional debt and equity. The accompanying financial statements do not include and adjustments that might result from the outcome of these uncertainties. 10 10 10 10

62. Explanatory Paragraphs--Consistency
As discussed in the Notes to the consolidated financial statements,
effective January 1, 20X1, the Company changed its method for accounting for derivative financial instruments to conform with SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities.
____________________________________
As discussed in Note 15, effective January 1, 20X2, 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.” 11 11 11 11

63. Qualified Opinion Departure from GAAP Immaterial – unqualified
Material – qualified or adverse (if overall financial statements considered misleading)
Consider effects of departure(s):
Dollar magnitude of effects
Significance of item to particular client
Number of financial statement accounts and disclosures affected
Effect on financial statements taken as a whole
Consider inadequate disclosures

64. 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, 20X1, 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, 20X1, 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. 14 14 14 14

65. Qualified Opinion Scope limitations
Auditor unable to perform an essential audit procedure
Imposed by circumstances
Engaged too late in year to observe client’s beginning inventory
Imposed by client
Client refused to allow auditors to send confirmations to customers

66. Example of a Qualified Report--Scope Limitation
Standard Introductory Paragraph
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.
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,... 15 15 15 15

67. Adverse
Financial statements do not present fairly the financial position, results of operations, and cash flows of client in conformity with GAAP
Very material departures from GAAP
Auditor believes departure causes financial statements taken as a whole to be misleading

68. 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. 16 16 16 16

69. Disclaimer of Opinion Auditor has no opinion
Issued whenever unable to form an opinion as to fairness of financial statements
Circumstances resulting in a disclaimer:
Substantial circumstance-imposed scope restrictions
Scope restrictions imposed by the client
Uncertainties
Not an alternative to adverse opinion

70. 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. 12 12 12 12

71. Placement of Explanatory Paragraphs
Before opinion paragraph
Qualified opinions
Disclaimers
Adverse opinions
Following opinion paragraph
Consistency
Substantial doubt about continued existence
Other types of paragraphs may precede or follow the opinion paragraph 17 17 17 17

73. Two or More Report Modifications
Qualified by two or more
Examples: Qualified because of both a scope limitation and separate departure from GAAP
Wording of report would include appropriate qualifying language and explanatory paragraphs for both types of qualifications
Auditor should consider cumulative effects – disclaimer of opinion may be appropriate

74. Different Opinions on Different Statements
Fourth standard: Auditor shall express an opinion on the financial statements “taken as a whole”
Can apply to individual financial statements
It is acceptable to express an unqualified opinion on one statement while expressing a qualified or adverse on the others
Example: Auditors retained after client has taken its beginning inventory. A disclaimer may be issue don the income statement (the auditor doesn't know if income is reasonably stated, but an unqualified opinion on the year-end balance sheet.

75. Reporting on Comparative Financial Statements
Report should cover current year as well as prior period audited by their firm.
Can express different opinions on different years
Auditor should update report for all prior periods presented for comparison
If prior period audited by another (predecessor) CPA firm
Current year opinion only covers years the CPA firm audited
For financial statements audited by predecessor auditors either:
Predecessor auditor reissues report with original date or
Current auditors refer to report of other auditors

76. Reports to SEC
Forms filed with SEC which include audited financial statements
Forms S-1 through S-11 (registration statements)
Forms SB-1 and SB-2 (registration for small businesses)
Form 8-K (current report)
Form 10-Q (quarterly report)
Form 19-K (annual report)
Auditors should be well versed on requirements of each form

77. AUDIT REPORTS ON FINANCIAL STATEMENTS
Auditing A Risk-Based Approach To Conducting A Quality Audit
10th edition
Karla M. Johnstone | Audrey A. Gramling | Larry E. Rittenberg
Chapter 15
AUDIT REPORTS ON FINANCIAL STATEMENTS

78. Learning Objectives
Identify and describe the principles underlying audit reporting on financial statements
Describe the information that is included in a standard unqualified audit report on financial statements and list the requirements for issuing a standard unqualified report on financial statements
Describe financial statement audits requiring an unqualified report with explanatory language and identify the appropriate audit report modifications
Describe financial statement audits requiring a qualified report and identify the appropriate audit report modifications

79. Learning Objectives
Describe financial statement audits requiring an adverse report and identify the appropriate audit report modifications
Describe financial statement audits requiring a disclaimer of opinion and identify the communication the auditor is required to provide
Assess various reporting situations requiring other than a standard unqualified report and determine the appropriate audit report that should be issued
Describe the information that is included in a standard unqualified audit report on internal control over financial reporting and identify the appropriate audit report modifications for situations requiring other than an unqualified report on internal control over financial reporting

80. THE AUDIT OPINION FORMULATION PROCESS

81. Learning objective 1
Identify and describe the principles underlying audit reporting on financial statements

82. Principles Underlying Audit Reporting
The American Institute of Certified Public Accountant’s (AICPA) first and seventh principles governing an audit conducted in accordance with generally accepted auditing standards (GAAS) describe the principles underlying audit reporting
These principles require auditors to either:
Express an unqualified opinion on the entire set of financial statements and related footnotes, or
State the reasons that such an opinion cannot be expressed

83. Learning objective 2
Describe the information that is included in a standard unqualified audit report on financial statements and list the requirements for issuing a standard unqualified report on financial statements

84. Standard Unqualified Audit Reports - U.S. Public Companies
Designed to promote clear communication between auditor and financial statement user by delineating:
Introductory paragraph
Scope paragraph
Opinion paragraph

85. Standard Unqualified Audit Reports - U.S. Public Companies
If a combined report on the financial statements and internal controls, two additional paragraphs are included
Definition paragraph - Defines what is meant by internal control over financial reporting
Inherent limitations paragraph - Discusses why internal control may not prevent or detect misstatements

86. Other important components of an audit report
Includes the word ‘independent’
Title
Board of directors or shareholders of the organization for public companies
Varies depending on the circumstances of the engagement
Addressee
No earlier than the date on which the auditor has obtained sufficient appropriate evidence to support the opinion
Audit report date
Signature of audit firm
City/state from which the auditor’s report has been issued

87. Requirements for a Standard Unqualified Audit Report on the Financial Statements for U.S. Public Companies
There should be no material violations of GAAP
Disclosures should be adequate
Auditor should be able to perform all of the necessary procedures
There should be no change in accounting principles that had a material effect on the financial statements
The auditor should not have significant doubt about the client remaining a going concern
The auditor should be independent
Watch for new standard where “critical audit matters” will be discussed

88. Modification of the standard unqualified report
When the conditions are not present, auditor should modify the standard unqualified report
Options include:
Issue an unqualified opinion with explanatory language
Qualify the audit opinion
Issue an adverse opinion
Issue a disclaimer

89. Standard Unqualified Audit Reports - U.S. Nonpublic Companies
Introductory paragraph - What was audited
Management’s responsibility paragraph - Responsibilities of client management
Scope paragraph - Responsibilities of the auditor and the nature of the audit process
Opinion paragraph – Auditor’s opinion on the fairness of the financial statements
For some engagements, financial statements might be audited in accordance with multiple auditing standards

90. Non-U.S. Companies Auditors refer to ISA 700 for guidance
Consistent with the AICPA’s AU-C 700 with a few terminology differences
True and fair view - Used in ISA 700; is not used in the United States auditing standards
Present fairly, in all material respects - GAAS continues to require the use of the term
Watch for new standard where “key audit matters” will be discussed

91. Learning objective 3
Describe financial statement audits requiring an unqualified report with explanatory language and identify the appropriate audit report modifications

92. Unqualified Audit Reports with Explanatory Language
Used to explain:
Justified departure from GAAP
Inconsistent application of GAAP
Substantial doubt about client being a going concern
Emphasis of some matter, such as unusually important subsequent events, risks, or uncertainties associated with contingencies or significant estimates
Reference to other auditors (group audits and component auditors)

93. Learning objective 4
Describe financial statement audits requiring a qualified report and identify the appropriate audit report modifications

94. Qualified Reports, Adverse Reports, and Disclaimers
When the auditor alters the wording of the standard unqualified report in a manner that affects the type of opinion expressed, the report cannot be issued as an unqualified opinion
Auditor will provide a modified opinion which includes:
A qualified opinion
An adverse opinion, or
A disclaimer of opinion

95. Qualified Audit Reports
Situations in which an auditor will issue a qualified report
A material unjustified departure from GAAP that is not pervasive
Inadequate disclosure that is not pervasive
A scope limitation such that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive

96. Qualified Report - Material Unjustified Departure from GAAP That is Not Pervasive
Qualified opinion will be expressed if a client has a departure from GAAP that can be isolated to one item
Pervasive GAAP departures, affecting more than one item, would result in an adverse opinion
Pervasive: Describes the effects or the possible effects on the financial statements of misstatements that are undetected due to an inability to obtain sufficient appropriate audit evidence

97. Qualified Report - Inadequate Disclosure
If client refuses to make appropriate disclosures, auditor should:
Express a qualified or adverse opinion, depending on pervasiveness of omitted disclosures
Provide the omitted information in the audit report, if practicable
Explanatory paragraph - Should describe the nature of the omitted disclosures
Opinion paragraph - Should be modified to describe nature of qualification

98. Qualified Report - Scope Limitation
Restrictions on scope of audit, whether imposed by client or by circumstances beyond the auditor’s or client’s control, may require auditor to qualify an opinion
In some situations circumstances may be such that a disclaimer would be more appropriate
Circumstances that may limit the audit scope
Timing of the fieldwork
Inability to gather sufficient appropriate evidence
Inadequacy in the accounting records

99. Learning objective 5
Describe financial statement audits requiring an adverse report and identify the appropriate audit report modifications

100. Adverse Audit Reports
Adverse report is appropriate when financial statements contain:
Pervasive and material unjustified departure from GAAP
Lack of important disclosures that is pervasive
When a significant number of items in the financial statements violate GAAP

101. Adverse Report - Lack of Important Disclosures That Is Pervasive
Auditor can issue an adverse opinion if:
Client’s financial statements have omitted disclosures, such that
Financial statements taken as a whole are not presented fairly in conformity with GAAP

102. Learning objective 6
Describe financial statement audits requiring a disclaimer of opinion and identify the communication the auditor is required to provide

103. Audit Reports with a Disclaimer of Opinion
An auditor issues a disclaimer of opinion report when:
Scope limitation exists
Substantial doubt exists about the client being a going concern
There is lack of independence

104. Disclaimer - Scope Limitation
Scope limitations caused by circumstances are such that it is not possible to form an opinion
Introductory paragraph’s wording modified for a scope limitation
Scope paragraph is omitted
Additional paragraph is inserted to describe the scope limitation(s)
Last paragraph states that no opinion can be expressed

105. Disclaimer - Scope Limitation for Non-U.S. Companies
ISA 705 requires auditor to withdraw from audit when auditor is unable to obtain sufficient appropriate audit evidence because of a management-imposed limitation, and
Auditor concludes that possible effects on financial statements of undetected misstatements could be both material and pervasive

106. Disclaimer - Scope Limitation for Non-U.S. Companies
ISA 705
Auditors required to withdraw from audit
If auditor concludes that possible effects of undetected misstatements could be both material and pervasive
U.S. Standards
Auditors required to consider withdrawal from the engagement
Auditor should consider whether to withdraw or disclaim an opinion on the financial statements

107. Disclaimer - Substantial Doubt About the Client Being a Going Concern
Auditor may issue a disclaimer of opinion if there is a substantial doubt about the client continuing as a going concern
In such cases, auditor would believe that an additional paragraph to an unqualified opinion is not appropriate

108. Disclaimer - Auditor Lacking Independence
When auditors lack independence with respect to a client:
They cannot perform an audit in accordance with professional auditing standards
They are precluded from expressing an opinion on the financial statements
In such cases, a one-paragraph disclaimer should be issued stating the lack of independence
Auditor omits the reasons for lack of independence

109. Disclaimer - Auditor Lacking Independence
Report would have no title or salutation
Such a situation should rarely occur
It could happen when it is discovered late in the audit that one of the auditors on the engagement had a financial interest in the client

110. Learning objective 7
Assess various reporting situations requiring other than a standard unqualified report and determine the appropriate audit report that should be issued

111. Comparisons of Modifications to the Standard Unqualified Audit Report
Deciding on the type of opinion is important
This is particularly true of the decisions based on:
Materiality level and pervasiveness of GAAP violations
Significance of scope limitations
Likelihood of the entity being a going concern
Issuing an inappropriate opinion can lead to legal problems
Report decision often involves consultation

112. EXHIBIT 15. 11 - Summary of Audit Report Modifications for U. S
EXHIBIT Summary of Audit Report Modifications for U.S. Public Companies

113. Learning objective 8
DESCRIBE THE INFORMATION THAT IS INCLUDED IN A STANDARD UNQUALIFIED AUDIT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND IDENTIFY THE APPROPRIATE AUDIT REPORT MODIFICATIONS FOR SITUATIONS REQUIRING OTHER THAN AN UNQUALIFIED REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

114. Audit Reports on Internal Control Over Financial Reporting (ICFR)
Auditor evaluates identified control deficiencies individually, and in aggregate, to assess material weakness in ICFR
Auditor issues an:
Unqualified opinion when it is determined that there are no material weaknesses in ICFR
Adverse opinion when it is determined that there is one or more material weaknesses in ICFR