1. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 18-1 Chapter Eighteen Reports on Audited Financial Statements and Internal Control over Financial Reporting Chapter Eighteen Reports on Audited Financial Statements and Internal Control over Financial Reporting

2. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 18-2 Reporting on the Financial Statement Audit: The Standard Unqualified Report The standard unqualified report is issued when the auditor has gathered sufficient evidence, the audit was performed in accordance with GAAS, and the financial statements conform to GAAP. Seven Elements 1.Report title 2.Addressee 3.Introductory paragraph 4.Scope paragraph 5.Opinion paragraph 6.Name of auditor 7.Audit report date. Seven Elements 1.Report title 2.Addressee 3.Introductory paragraph 4.Scope paragraph 5.Opinion paragraph 6.Name of auditor 7.Audit report date.

3. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 18-3

4. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 18-4 Explanatory Language Added to the Standard Unqualified Financial Statement Audit Report Opinion based in part on the report of another auditor. Going concern. Lack of consistency.Emphasis of a matter. Agreement with a departure from GAAP.

5. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 18-5

6. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 18-6 Going Concern

7. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 18-7 Auditor Agrees with a Departure from Promulgated Accounting Principles In unusual circumstances financial statements may be misleading if a promulgated accounting principle was followed. Rule 203 of the Code of Professional Conduct allows the auditor, in such circumstances, to issue an unqualified opinion. An explanatory paragraph should describe the departure, the approximate effects of the departure, if practicable, and the reasons that compliance with the accounting principle results in misleading financial statements.

8. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 18-8 Lack of Consistency Change in accounting principle Change in reporting entity Correction of an error in principle Changes Affecting Consistency Change in accounting estimate Correction of an error that does not involve an accounting principle Changes Not Affecting Consistency Change in classification and reclassification Change expected to have a material future effect

9. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 18-9 Lack of Consistency

10. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 18-10 Emphasis of a Matter Under certain circumstances an auditor may want to emphasize a specific matter regarding the financial statements even though he or she intends to express an unqualified opinion. This information should be presented in an explanatory paragraph.

11. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 18-11 Departures from an Unqualified Financial Statement Audit Report Qualified Adverse Disclaimer

12. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 18-12

13. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 18-13 Discussion of Conditions Requiring Other Types of Financial Statement Audit Reports Scope Limitation Not in Conformity with GAAP Auditor Not Independent Results from an inability to obtain sufficient competent evidence about some component of the financial statements. Results when financial statements are materially affected by an unacceptable departure from GAAP. Results when auditor is not independent.

14. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 18-14 Discussion of Conditions Requiring Other Types of Financial Statement Audit Reports Scope Limitation Not in Conformity with GAAP Auditor Not Independent Issue a qualified opinion or a disclaimer. Issue a qualified opinion or adverse opinion. Issue a disclaimer.

15. Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 18-15 Special Reporting Issues Reports on comparative financial statements. Other information. Special reports.