Ch.18 - Ross Fuerman

Report
Chapter 18
Reports on Audited Financial
Statements
Note: This is an area that would be easier but for the recent changes by the ASB.
These changes are motivated by the desire to converge, to the extent possible,
with the standards of the IAASB. This is part of what the Clarity Project is all about.
This makes certain topics of this chapter more different for private companies
versus public companies, compared to the past. Also, the PCAOB made proposals
in 2011 that will have an impact on this area, but we don’t know the extent and
nature of the impact as of January 2012. The PCAOB proposals include :
Increasing the scope of what the auditor reports on;
Requiring the signature of the audit engagement partner; and
Disclosing the names of other CPA’s or CPA firms that perform a certain
percentage of hours of work on the audit engagement.
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
LO# 1
Public Company Reporting on the Financial
Statement Audit: Standard Unqualified Report
Eight Elements
1. Report title
2. Addressee
3. Introductory paragraph
4. Scope paragraph
5. Opinion paragraph
6. Explanatory paragraph
referring to the audit of
ICFR
7. Name of auditor
8. Audit report date
The standard unqualified
report is issued when the
auditor has gathered sufficient
evidence, the audit has been
performed in accordance with
PCAOB standards, and the
financial statements conform
to GAAP. Also, there is no
extra language added, other
than (sometimes) a cross
reference to the auditor’s
report on ICFR.
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LO# 1
Example of a Standard Unqualified Audit Report
Note: the text authors call this last paragraph an explanatory paragraph,
but I like to call it a cross reference paragraph, because it is so trivial.
For example, the company could easily have had its auditor eliminate
the cross reference paragraph by issuing both of its two opinions in one
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combined audit report.
LO# 1
Private Company Reporting on the Financial
Statement Audit: Standard Unmodified Report
Nine Elements
1. Report title
2. Addressee
3. Introductory paragraph
4. Management’s
responsibility
5. Auditor’s responsibility
6. Scope paragraph
7. Opinion paragraph
8. Name of Auditor
9. Audit report date
The standard unmodified
report is issued when the
auditor has gathered sufficient
evidence, the audit has been
performed in accordance with
GAAS, and the financial
statements conform to GAAP.
Also, there is no extra
language added.
If you have an older edition of the text you can
see some changes have occurred, motivated
by the desire to make this report more similar
to that required by ISA.
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LO# 1
Standard Unmodified Audit Report
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LO# 2
Additional language added to Standard Unqualified
(public company) / Unmodified (private company)
Financial Statement Audit Report. Note that this is
handled somewhat differently for public versus
private companies, but the main topics are below.
Cross reference to report on audit of ICFR (as noted earlier, this is
not really substantive, as it does not change the meaning of the
opinion on the financial statements)
1. Opinion based in part
on the report of another
auditor
2. Going concern
3. Lack of consistency
4. Additional emphasis
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1. Example of Reference to Other Auditor shown below.
Note that there are 2 major issues regarding “other
auditor.”
1. Is there “other auditor”?
2. If yes, then decide to a) refer to the other auditor or b)
not refer to “other auditor.”
LO# 2
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LO# 2
2. Going Concern
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LO# 2
3. Lack of Consistency
Changes Affecting Consistency
Change in
accounting
principle
Correction
of an error
in principle
Change in
reporting
entity
Changes Not Affecting Consistency
Change in
accounting
estimate
Correction of an
error that does
not involve an
accounting
principle
Change
inclassification
and
reclassification
Change expected
to have a material
future effect
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LO# 2
4. Additional Emphasis
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/unmodified opinion. Two common things:
1. Substantial related party transactions; or
2. Significant subsequent event, e.g. a potentially
material lawsuit filing
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Conditions for Departure from
Unqualified/Unmodified Report
LO# 3
Scope
Limitation
Departure
from GAAP
Lack of Auditor
Independence
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LO# 4
Departures from an
Unqualified/Unmodified Financial
Statement Audit Report
Qualified
“except for”
Disclaimer
Adverse
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Decision process for report
LO# 5
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LO# 5
Discussion of Conditions Requiring
Other Types of Financial Statement
Audit Reports
Scope
Limitation
Results from an inability to obtain
sufficient competent evidence
about some component of the
financial statements.
Not in
Conformity
with GAAP
Results when financial statements
are materially affected by an
unacceptable departure from GAAP.
Auditor Not
Independent
Results when auditor has some
form of prohibited relationship with
the client (see Ch. 19).
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LO# 5
Discussion of Conditions Requiring
Other Types of Financial Statement
Audit Reports
Scope
Limitation
Issue a qualified opinion or a
disclaimer.
Not in
Conformity
with GAAP
Issue a qualified opinion or
adverse opinion.
Auditor Not
Independent
Issue a disclaimer.
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LO# 5
Scope Limitation: Disclaimer
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LO# 5
Scope Limitation: Qualified
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LO# 5
Not GAAP: Qualified
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LO# 5
Not GAAP: Adverse
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LO# 7
Other Information in
Documents Containing Audited Financial Statements
The auditor has limited responsibility beyond the
financial statements (including the footnotes). However,
if the financials are in a broader document (e.g. an
Annual Report), the auditor is required to read the other
information in the document. If it is inconsistent with
the information contained in the audited financial
statements, then, at a minimum, additional language
must be added to the audit report.
Annual
Reports
Registration
Statements
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LO# 7
Special Reports
Financial statements
prepared on a
comprehensive basis
of accounting other
than GAAP
Specified elements,
accounts, or items of a
financial statement
Compliance with
aspects of contractual
agreements or
regulatory requirements
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LO# 8
Financial Statements
Prepared According to a Special
Purpose Framework
Regulatory Basis
Tax Basis
Cash (or Modified Cash)
Basis
Contractual Basis
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LO# 9
Specific Elements, Accounts, or
Items of a Financial Statement
In some situations an auditor may be engaged to
audit only part (or specified elements, accounts,
or items) of the financial statements.
Rather than auditing specified elements,
accounts, or items, an auditor may be engaged to
apply only agreed-upon procedures.
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LO# 10
Compliance Reports Related to
Audited Financial Statements
The auditor provides negative assurance as to compliance
with the provisions of contractual agreements or regulatory
requirements.
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End of Chapter 18
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