Lecture 4: Reports on Audited Financial Statements (Part 2) Flashcards
What does a standard unqualified audit report for public co. contains? (8 elements)
- report title
- addressee
- “opinion” section
- “basis for opinion” section
- “critical audit matters” section
- name / signature of the audit firm
- indication of how long auditor has served as the co.’s auditor
- audit report location & date
Note: sometimes audit report can also contain explanatory & emphasis paragraph.
When can an audit report be issued for a public co.?
When auditor has gathered sufficient appropriate evidence, the audit has performed in accordance w/ PCAOB standards, and the F.S. conform to GAAP.
Note: Sometimes, auditor’s opinion on the F.S. & the effectiveness of internal control can be presented together in the same report.
What are Critical Audit Matters?
aka Key Audit Matters
- any matters arising from the audit of F.S. that are communicated, or req. to be communicated to the audit committee & it relates to accounts / disclosures that are material to the F.S. and involved especially challenging, subjective, or complex auditor judgement.
When auditors do not determine any critical audit matters, should they mention in the auditor’s report.
Yes, no matter is there critical audit matters (CAM) or not, auditors must still mention it in the auditor’s report.
Factors to be taken into account when assessing critical audit matters (CAM):
- auditor’s assessment of risk of material misstatement (RMM)
- degree of auditor’s judgement / estimation including estimates w/ significant measurement uncertainty
- nature & timing of unusual significant transactions
- degree of auditor’s subjectivity in applying audit procedures to address matter & evaluate the results of those procedures
- extent of specialized skill needed
- nature of audit evidence obtained regarding the matter
PCAOB report aka unqualified report (clean)
- audit conducted in accordance w/ the standards of PCAOB
- addresses the audit of internal control over financial reporting
- Title: “Report of Independent Registered Public Accounting Firm” : relates to critical audit matters (CAM)
ASB report aka unmodified report (clean)
- audit conducted in accordance w/ generally accepted auditing standards (GAAS)
- no opinion is expressed on the effectiveness of internal control over financial reporting
- Title: “Independent Auditor’s Report” : relates to key audit matters (KAM)
Modified Working for Opinion Based in Part on the Report of Another Auditor
- on some audit engagements, parts of the audit may be completed by a separate, unaffiliated public accounting firm
- auditor may express an opinion w/o referring to the work of other auditors in the audit report. (Auditor accepts full responsibility of the other auditors)
- if principal auditor does reference to the other auditor, the principal auditor is sharing responsibility for the audit report w/ the other auditors
What happens when the other auditor’s report is not a standard unqualified (clean) report?
The principal auditor will then need to determine the nature of departure & its significance to the overall F.S.
If departure is material to the overall F.S., it’s necessary to refer to those issues giving rise to the other auditor’s qualified opinion.
When can auditors form an unqualified audit report?
When client can provide sufficient evidence for:
- mitigation factors / regularization plan & we’re satisfied w/ it
- willingness of client in disclosing all information in the financial report
When management has adequately disclosed the entity’s financial problem, can the auditor issue an unqualified report?
Yes, audit report can be expressed as an unqualified opinion but must include an additional explanatory para to emphasize the auditor’s doubt about the ability to continue as a going concern.
What if auditor wishes to emphasize matter?
If auditor wishes to draw special attention to a particular matter, he may choose to include an emphasis para in the auditor’s report.
Examples:
- significant transactions w/ related parties
- unusually important subsequent events
- accounting matters that affect comparability of F.S. w/ those preceding period
- uncertainty of a future outcome of significant litigation / regulatory actions
The presentation of “Going Concern” required by PCAOB and ASB standard
PCAOB: auditor’s discussion about substantial doubt about going concern is included in the explanatory para of the audit report
ASB: auditor’s substantial doubt about going concern is reported under a separate section in the auditor’s report of “substantial doubt about the entity’s ability to continue as a going concern”.
What are the conditions for departure from unqualified / unmodified report?
- Scope limitation: results from inability to collect sufficient appropriate evidence (ie: when management or some sets of circumstances prevent auditors from conducting an audit procedure that auditor considers necessary)
- Departure from GAAP: F.S. are prepared in a manner that conflicts w/ GAAP (either due to error / fraud)
- Lack of auditor’s independence: auditor & entity have any financial, business or personal relationship prohibited by professional standards
Types of F.S. Audit Reports other than unqualified/ unmodified
- Qualified: material but not pervasive, only certain part is lacking (F.S. is fairly presented except for: scope limitation or specific departure from GAAP)
- Disclaimer: unable to form an opinion if there’s a no. of errors / incompliance w/ standards, unable to obtain appropriate sufficient evidence (involves errors in many areas, thus auditor can’t form an opinion) (F.S. is not fairly presented due to insufficient appropriate evidence or a lack of auditor’s independence)
- Adverse: incompliance w/ standards & material (F.S. do not present fairly due to a GAAP departure that materially & pervasively affect the F.S. overall)
