Reports (1) Flashcards
Who is the auditor’s report addressed to?
To the Stockholder’s and Board of Directors of X Company
What is the title for an auditor’s report?
Independent Auditor’s Report
How does the introductory paragraph begin in an unqualified report?
We have audited
Unqualified report Scope paragraph:
We conducted our audits in accordance with…
US generally accepted auditing standards
Recite what a typical unqualified report introductory paragraph would say for X Company for 20X2 and 20X1?
We have audited the accompanying balance sheets of X Company as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years 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 audits.
Unqualified report Scope paragraph:
The standards require that we plan and perform the audit to obtain…
Reasonable assurance about whether the financial statements are free of material misstatement
Unqualified report Scope paragraph:
We believe that our audit provides a…
reasonable basis for our opinion
Unqualified report Scope paragraph:
An audit includes examining,…
On a test basis, evidence supporting amounts and disclosures in the financial statements
Unqualified report opinion paragraph:
How does the opinion paragraph start?
In our opinion
Recite the typical scope paragraph of an unqualified report.
We conducted our audits in accordance with US generally accepted auditing standards. 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 also 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 audits provides a reasonable basis for our opinion.
Unqualified report opinion paragraph:
In our opinion, the financial statements referred to above present
fairly,…
in all material respects
Unqualified report opinion paragraph:
in all material respects, the financial positions of X Company as
of December 31, 20X2 and 20X1, and the results of operations and
its cash flows for the years then ended in conformity with…
US generally accepted accounting principles
What are the 2 lines on the bottom of an audit report?
Name of CPA firm performing audit
Date of last day of fieldwork
Recite the typical opinion paragraph in an unqualified report for X company in 20X2 and 20X1
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial positions of X Company as of December 31, 20X2 and 20X1, and the results of operations and its cash flows for the years then ended in conformity with US generally accepted accounting principles.
An unqualified opinion is often referred to as…
A standard or clean opinion
An unqualified report is never addressed to…
2) who is it addressed to?
Management, SEC, banks, etc
2) stockholder’s and/or board of directors
Date of the last day of fieldwork on the report indicates…
The period through which the auditor is responsible for inquiring
About subsequent events
Dual dating is used if an event occurs…
After the last day of fieldwork but before report is issued
And event only affects the upcoming year and requires only footnote
Disclosure
Under dual dating the auditor is responsible through…
The last day of fieldwork
And only for the event disclosed after normal fieldwork
For comparative statements, use the completion of the most recent report since the auditor’s liability…
Backwards to the beginning of the earliest period presented
Unqualified statement Introductory paragraph includes 4 key things
1 we have audited
2 list the client’s statements audited and dates covered
3 financial statements are responsibility of management
4 auditor’s responsibility to express opinion
Unqualified report: scope paragraph
The audit was conducted in…
Accordance with GAAS
Unqualified report: scope paragraph
Audit involves 4 things
1 examining on, on test basis, evidence supporting amounts and Disclosures 2 assessment of accounting principles 3 assessment of significant estimates 4 evaluation of overall presentation
Unqualified report: scope paragraph
Audit provides a…
Reasonable basis for the opinion
Scope paragraph talks about…
What we did
Opinion paragraph talks about…
What we found
Unqualified report, 2 key things in opinion paragraph
1 in our opinion
2 statements (name them) are fairly presented in accordance with GAAP
Scope (GAAS) limitation
Failure to gather sufficient, competent evidential matter
The limitations can be client imposed or circumstantial
Qualified includes the words…
Except for
Qualified report consists of how many paragraphs?
4
How is a qualified report modified?
2nd and 3rd paragraphs modified
When there is a scope limitation, qualifying the report the paragraph between the scope and opinion explains the…
1 limitation and
2 that the auditor is unable to gather evidence by alternative
Procedures
How is the scope paragraph modified in a qualified report?
Paragraph begins with “Except as discussed in the following paragraph,”
How is the opinion paragraph altered in a qualified report from a scope limitation?
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 (name scope limitation),”
Scope limitation, 2 possible opinions issued?
1 qualified opinion
2 disclaimer of opinion
Scope limitation, when is disclaimer issued?
Limitation is both material and pervasive
Pervasive
Affects a lot of accounts
How is a disclaimer report intro paragraph modified, when there is a scope limitation?
Beginning of paragraph “we were engaged to audit”
How is the scope paragraph affected in a disclaimer report from a scope limitation?
Scope paragraph is omitted
What is the second paragraph in a disclaimer report?
Talks about scope limitation and why audit couldn’t be performed
In a disclaimer paragraph the opinion paragraph…
Gives reasons for scope limitation
And says “we do not express, an opinion on these financial
Statements”
Opinion (GAAP) Problems
Failure to follow GAAP. Scope is not limited
How is a qualified report the same when their are Opinion (GAAP) Problems?
intro and scope unchanged
How is a qualified report modified when their are Opinion (GAAP) Problems?
Add paragraph after scope paragraph to explain…3
1 the GAAP problem
2 state GAAP requires the proper treatment
3 what statements would have looked like if prepared properly
(If practicable)
SAS allows the omission of the cash flows statement and…
Still give a qualified opinion (not practical for auditor to present
Whole cash flow statement)
How would the opinion paragraph be altered in a qualified report from a GAAP problem “effects of not capitalizing certain lease obligations”?
In our opinion, “except for the effects of not capitalizing certain lease obligations as discussed in the preceding paragraph,”
Accounting changes must meet 3 criteria
1 newly adopted principle is in accordance with GAAP
2 method of accounting for effect of change is in conformity
w/GAAP
3 management’s justification for change is reasonable
If accounting change in GAAP doesn’t meet all three criteria the auditor has…
A GAAP problem
In a modified report for an accounting change obligation what paragraphs are not modified?
Opinion and scope remain unchanged
In an accounting change qualification report, the first paragraph…
Discusses how the any of the 3 criteria for the accounting change
Was not met
In a qualified report from failing to meet the 3 accounting change criteria, how is the opinion paragraph modified?
In our opinion, “except for the change in accounting principle discussed in the preceding paragraph,”
An adverse opinion states that the financial statements are…
Not fairly stated
Adverse opinion
Statements are misleading
Look for the pervasiveness, materiality and impact on statements
As a whole
How is an adverse opinion report the same?
Introductory and scope paragraphs are unchanged
What is different about an adverse opinion report?
Explanatory paragraph (same as GAAP Qualification) explaining The GAAP problem
Opinion paragraph modified
In an adverse report, how is the opinion paragraph modified?
In our opinion, “because of the effects of the matter discussed
In the proceeding paragraph, the financial statements referred
To above do not present fairly,”
Lack of independence report
Disclaimer is issued
Add paragraph stating you aren’t independent with no explanation
As to why
Circumstances resulting in departure from the standard report:
Opinion based, in part, on…
Report of another auditor
Circumstances resulting in departure from the standard report:
Unusual circumstances requiring…
Departure from promulgated GAAP
Circumstances resulting in departure from the standard report:
Uncertainties (may lead to…
Disclaimer)
Circumstances resulting in departure from the standard report:
Substantial doubt about…
Ability to continue as a going concern (may lead to disclaimer)
Circumstances resulting in departure from the standard report:
Inconsistency in application of…
GAAP between periods (GAAP change)
Circumstances resulting in departure from the standard report:
Certain circumstances affecting…
Comparative statements
Circumstances resulting in departure from the standard report:
Report would require…
Quarterly data from SEC reporting companies
Circumstances resulting in departure from the standard report:
Supplementary info required by…
FASB and GASB
Circumstances resulting in departure from the standard report:
Other information in a document containing…
Audited financial statements
Circumstances resulting in departure from the standard report:
Emphasis of…
A matter
Example report format 5
Introductory paragraph Scope paragraph (modified for Scope problem) Explanatory paragraph (describes Scope/GAAP problems) Opinion paragraph (modified for Scope/GAAP problems) Explanatory paragraph (info only paragraph, never changes opinion)
Report on condensed or selected financial data:
Statements must have been…
Audited by the auditor
Condensed report, report indicates 4 things
1 completed statements have been audited and auditor has
expressed opinion on them
2 date of auditor’s report on completed statements
3 type of opinion expressed on completed statements
4 whether info of condensed statements fairly presented in
Relation to completed statements
Selected financial information 2
1 report is limited to data derived from completed statements
2 selected financial data fairly presented in relation to complete
Statements
Reporting on statements prepared for use in other countries. Used when reporting on statements prepared…
In conformity with principles used in another country
Reporting on statements prepared for use in other countries. Modified report issued…4
1 identify financial statements audited
2 refer to note explaining basis used including nationality
3 state the audit followed US auditing standards and those
Of other country if appropriate
4 include paragraph on whether statements are presented fairly
In conformity with basis used
Reporting on statements prepared for use in other countries, reports are presented based primarily on…
Which countries users will look at the statements
What reports are issued under a Scope limitation or GAAS problem
Qualified- except for (4 paragraphs)
Disclaimer- we do not express
What reports can be presented under an opinion or GAAP Problem
Qualified- except for (4 paragraphs)
Adverse- not fairly presented
You never say “I don’t know what” with a GAAP problem because…
You have the yard stick of GAAP to measure with
If you don’t get evidence, then you can say you…
Don’t know and can’t measure it
A GAAS problem is a…
Scope problem
Probable
90% likely, accrue with footnote
Reasonably possible
Less than 90%,
Footnote only
Remote
90% chance won’t happen
Don’t disclose
Audit uncertainty is described in…
Paragraph at end of statement
Inconsistency in application of GAAP, when change from 1 GAAP principle to another and statements are misleading comparatively…
Write paragraph at end of report (don’t change opinion)
4 things to report if management corrects prior year statements you originally gave a qualified opinion to
1 date previous opinion on prior report
2 what it was
3 reason for change
4 changed it too
Basic financial statements consist of…4
1 balance sheet
2 income statement
3 statement of cash flows
4 notes
Supplementary info auditor’s must…
Report on it if associated with it, but don’t need to audit it
If management doesn’t report supplementary information, auditor
Is required to…
Add additional paragraph at end of report saying so
Emphasis of matter
Auditor can talk about anything
