1. MODERN AUDITING 7th Edition Developed by: Dr. Raymond N. Johnson, CPA Gregory K. Lowry, MBA, CPA John Wiley & Sons, Inc. William C. Boynton California Polytechnic State University at San Luis Obispo Raymond N. Johnson Portland State University Walter G. Kell University of Michigan

2. CHAPTER 20 REPORTING ON AUDITED FINANCIAL STATEMENTS u Standards of Reporting u The Auditor’s Report u Effects of Circumstances Causing Departures from the Standard Report u Other Reporting Considerations

3. First Reporting Standard The first standard of reporting states: The report shall state whether the financial statements are presented in accordance with generally accepted accounting principles.

4. First Reporting Standard The auditor’s opinion as to conformity with GAAP should be based on his or her judgment as to whether: The accounting principles selected and applied have general acceptance The accounting principles are appropriate in the circumstances The financial statements, including the related notes, are informative of matters that may affect their use, understanding, and interpretation The information presented in the financial statements is classified and summarized in a reasonable manner The statements reflect the underlying events and transactions in a manner that presents the financial position, results of operations, and cash flows within reasonable and practicable limits

5. Second Reporting Standard The second standard of reporting states: The report shall identify those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period.

6. The objectives of this standard are: 1. to give assurance that the comparability of financial statements between accounting periods has not been materially affected by changes in accounting principles and 2. to require appropriate reporting by the auditor when comparability has been materially affected by such changes. Second Reporting Standard

7. The objectives of this standard are: To give assurance that the comparability of financial statements between accounting periods has not been materially affected by changes in accounting principles and To require appropriate reporting by the auditor when comparability has been materially affected by such changes.

8. Third Reporting Standard The third standard of reporting states: Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report.

9. Fourth Reporting Standard The fourth standard of reporting states: The report shall either contain an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. When an overall opinion cannot be expressed, the reasons therefor should be stated. In all cases where an auditor’s name is associated with financial statements, the report should contain a clear-cut indication of the character of the auditor’s work, if any, and the degree of responsibility the auditor is taking.

10. The Standard Report Title: Independent Auditor’s Report Introductory Paragraph Scope Paragraphs Opinion Paragraph Signature Date

11. The Auditor’s Report Departures from the standard report occur when the auditor concludes that: 1. explanatory language should be added to the report while expressing an unqualified opinion or 2. a different type of opinion should be expressed on the financial statements.

12. The Auditor’s Report Other Types of Opinions The auditor may conclude that an unqualified opinion cannot be expressed. In such a case, AU 508.10 indicates that the auditor may express on of the following other types of opinions: 1. A qualified opinion which states that, except for the effects of the matter(s) to which the qualification relates, the financial statements present fairly … in conformity with GAAP. 2. An adverse opinion which states that the financial statements do not present fairly … in conformity with GAAP. 3. A disclaimer of opinion which states that the auditor does not express an opinion on the financial statements.

13. Effects of Circumstances Causing Departures from the Standard Report Explanatory language and unqualified opinion –Nonconformity with GAAP necessary for fair presentation –Inconsistent application of GAAP –Going concern –Emphasis of a matter –Shared scope

14. Effects of Circumstances Causing Departures from the Standard Report Scope limitations - Material –Qualified Opinion Circumstance imposed Potential effects on few financial statement items –Disclaimer Client imposed (refusal to allow confirmation, sign a rep. letter, or allow access to board of director minutes) Potential effects on many financial statement items

15. Effects of Circumstances Causing Departures from the Standard Report Departures from GAAP –Use of an accounting principle not in conformity with GAAP –Change to an accounting principle not in conformity with GAAP –Inadequate disclosure –Disclosure of going concern not in conformity with GAAP

16. Effects of Circumstances Causing Departures from the Standard Report Departure from GAAP: Qualified vs. Adverse Opinion –Dollar magnitude of effects –Significance of item to client –Pervasiveness to the financial statements (number of items affected) –Effect of the misstatement taken as a whole

17. Effects of Circumstances Causing Departures from the Standard Report If it is practicable, the essential information should be provided in one or more explanatory paragraphs of the auditor’s report, unless its omission from the report is recognized in an AU 508 omissions have been recognized — the auditor is not required to present: 1. a statement of cash flows when that statement is omitted by a client or 2. omitted segment information. In both instances, however, the auditor should identify the omitted data in an explanatory paragraph and express either a qualified or an adverse opinion on the financial statements.

18. Other Reporting Considerations This section discusses reporting responsibilities relating to 4 additional situations: 1. reporting when the CPA is not independent, 2. circumstances concerning comparative financial statements, 3. information accompanying audited financial statements, and 4. financial statements prepared for use in other countries.

19. Auditor is Not Independent One paragraph report stating: –That the auditor is not independent, –The financial statements were not audited, and –The firm does not express an opinion on the financial statements.

20. Comparative Financial Statements Different Opinions Updating an opinion Change in auditors

21. Information Accompanying Audited Financial Statements Supplementary information is an essential part of an entity’s financial reporting. Limited procedures –Inquiry –Comparison of the information for consistency with other available data Standard report, except: –Required supplementary information is omitted –Material departure from prescribed guidelines –Auditor unable to complete prescribed procedures –Auditor is unable to remove substantial doubts about whether the information conforms to prescribed guidelines

22. Information Accompanying Audited Financial Statements Information in other documents –Material inconsistency Explanatory paragraph Withhold audit report Withdraw from engagement Additional information provided by the auditor –AU 551, regarding auditor submitted documents –Information is fairly stated in all material respects in relation to the financial statement taken as a whole.

23. Financial Statements Prepared for Use in Other Countries If for use in Other Country ONLY –U.S. Style Report –Report of the Other Country If for use in the U.S. –Qualified or Adverse Opinion, depending upon the departure from U.S. GAAP

24. CHAPTER 20 REPORTING ON AUDITED FINANCIAL STATEMENTS

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