Download Opinion paragraph - Pearson Higher Education

CHAPTER 2
The Auditor’s
Reports
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What is the
purpose
of the
audit report?
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What is the purpose of the audit report?
The audit report is an explanation of
the audit process and conclusions
reached.
The report is the formal communication between the auditor and the
external users of the financial statements, primarily the shareholders.
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Generally Accepted Auditing Standards
REPORTING STANDARDS
1. The report should identify the
financial statements & distinguish
between the responsibilities
of management
Footnotes
and the auditor.
Ace
Company
2004
Financial
Statements
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REPORTING STANDARDS
1. The report should identify the
financial statements.
What financial statements are
required by GAAP?
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What financial statements are
required by GAAP?
- balance sheet
- income statement
- statement of retained earnings
- statement of changes in
financial position
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REPORTING STANDARDS
1. The report should identify the
financial statements.
Could an auditor accept an
engagement to audit only one
(or more) financial statement?
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Could an auditor accept an
engagement to audit only one
(or more) financial statement?
yes - however, the auditor’s
report would have to be
qualified because of noncompliance with GAAP
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REPORTING STANDARDS
2. The report should describe the scope
of the auditor’s examination.
-
GAAS
plan & perform
reasonable assurance
examine evidence on test basis
assess accounting principles
assess significant estimates
evaluate overall statement
presentation
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REPORTING STANDARDS
3. The report should contain either an
expression of opinion on the
financial statements or an assertion
that an opinion cannot be expressed.
In the latter case, the reasons
therefor should be stated.
Ace
Company
opinion?
2004
Financial
Statements
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REPORTING STANDARDS
4. Where an opinion is expressed, it should indicate
whether the financial statements, present fairly,
in all material respects, the financial position,
results of operations and changes in financial
position in accordance with an appropriate
disclosed basis of accounting, which except in
special circumstances should be GAAP. The
report should provide adequate explanation with
respect to any reservation contained in such
opinion.
Ace
Company
2004
Financial
Statements
?
G AAP
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The Standard Unqualified Audit Report
Report title:
Auditor’s Report
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Report title:
Auditor’s Report
Address:
To the Shareholders of Ace Corporation:
report may
also be addressed
to company or
board of directors,
not management
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Report title:
Auditor’s Report
Address:
To the Shareholders of Ace Company:
Introductory paragraph:
What
statements
were audited?
What time period?
What are client
and auditor
responsibilities?
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Report title:
Auditor’s Report
Address:
To the Shareholders of Ace Company:
Introductory paragraph:
We have audited the balance sheets of Ace Company as at
December 31, 2004 and the statements of income, retained
earnings, and changes in financial position for the year 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.
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Scope paragraph:
What
is
an
audit?
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Scope paragraph:
We conducted our audits in accordance with
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 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.
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Opinion paragraph:
What
opinion
did the
auditor
form?
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Opinion paragraph:
In our opinion, these financial statements present
fairly, in all material respects, the financial position
of Ace Company as at December 31, 2004 and the
results of its operations and the changes in its
financial position for the year then ended in
accordance with generally accepted accounting
principles.
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Opinion paragraph:
In our opinion, these financial statements present
fairly, in all material respects, the financial position
of Ace Company as at December 31, 2004 and the
results of its operations and the changes in its
financial position for the year then ended in
accordance with generally accepted accounting
principles.
Name of firm:
Taylor & Tower, CAs
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Opinion paragraph:
In our opinion, these financial statements present
fairly, in all material respects, the financial position
of Ace Company as at December 31, 2004 and the
results of its operations and the changes in its
financial position for the year then ended in
accordance with generally accepted accounting
principles.
Name of firm:
Taylor & Tower, CAs
City:
Anywhere, any province
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Opinion paragraph:
In our opinion, these financial statements present fairly, in all
material respects, the financial position of Ace Company as
at December 31, 2004 and the results of its operations and the
changes in its financial position for the years then ended in
accordance with generally accepted accounting principles.
Name of firm:
Taylor & Tower, CAs
City:
Anywhere, any province
Audit report date:
February 27, 2005
field work
completion
date
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Types of Audit Reports
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Types of Audit Reports
- unqualified - “statements present fairly”
client
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Types of Audit Reports
- qualified - “except for one or more
exceptions, statements present fairly”
client
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Qualified Audit Report
(GAAP Departure)
Same introductory paragraph
Same scope paragraph
Explanatory third paragraph including $-effect
In our opinion, except for the effects of ..., as discussed in
the preceding paragraph, the financial statements present
fairly, in all material respects, the financial position of Ace
Company as of December 31, 2004 and the results of its
operations and the changes in its financial position for the
year then ended in accordance with generally accepted
accounting principles.
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Qualified Audit Report
(Scope Limitation)
Same introductory paragraph
Except as explained in the following paragraph, I conducted
my audit in accordance with generally accepted auditing
standards...
Explanatory third paragraph
In our opinion, except for the effects of adjustments, if any,
which I might have determined to be necessary had I been
able to ... as discussed in the preceding paragraph, the
financial statements present fairly, in all material respects,
the financial position of Ace Company as of December 31,
2004 and the results of its operations and the changes in its
financial position for the year then ended in accordance with
generally accepted accounting principles.
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Types of Audit Reports
- adverse - “statements do not present fairly”
client
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Adverse Audit Report
Same introductory paragraph
Same scope paragraph
Explanatory third paragraph including $-effect
In our opinion, because ... as explained in the preceding
paragraph, the financial statements do not present fairly the
financial position of Ace Company as at December 31, 2004
and the results of its operations and the changes in its
financial position for the year then ended in accordance with
generally accepted accounting principles.
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Types of Audit Reports
- denial - “no opinion”
client
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Denial
(Scope Restriction)
Same introductory paragraph
Except as explained in the following paragraph, we
conducted our audit in accordance with generally accepted
auditing standards...
Explanatory third paragraph including $-effect
In view of the possible material effects on the financial
statements of the matters described in the preceding
paragraph, we are unable to express an opinion whether
these financial statements are presented fairly in accordance
with generally accepted accounting principles.
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Unqualified Reports with
Explanatory Paragraphs or
Modified Wording
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In some circumstances, a
change in the financial
statements may result in a
qualified or adverse opinion:
client
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In some circumstances, a
change in the financial
statements may result in a
qualified or adverse opinion:
- a change in accounting principle or
application thereof not in accordance
with GAAP
client
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Changes in accounting
principles or in their
application excludes:
- change in an estimate
client
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Changes in accounting
principles or in their
application excludes:
- change in an estimate
- error corrections not involving principles
client
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Changes in accounting
principles or in their
application excludes:
- change in an estimate
- error corrections not involving principles
- changes in format and presentation
client
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Changes in accounting
principles or in their
application excludes:
- change in an estimate
- error corrections not involving principles
- changes in format and presentation
- changes due to substantially different
events
client
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Unqualified Reports with Explanatory
Paragraphs or Modified Wording
Treatment of an uncertainty about the
client’s ability to continue to operate as a
going concern depends on the accounting
treatment used.
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Unqualified Reports with Explanatory
Paragraphs or Modified Wording
Treatment of an uncertainty about the
client’s ability to continue to operate as a
going concern depends on the accounting
treatment used.
- if accounting treatment, disclosure and
presentation comply with GAAP, no
impact on auditor’s report
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Unqualified Reports with Explanatory
Paragraphs or Modified Wording
Treatment of an uncertainty about the
client’s ability to continue to operate as a
going concern depends on the accounting
treatment used.
- if accounting treatment, disclosure and
presentation comply with GAAP, no
impact on auditor’s report
- if do not comply with GAAP, a qualified
or adverse report would be issued
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Unqualified Reports with Explanatory
Paragraphs or Modified Wording
Inclusion of a fourth paragraph in the
auditor’s report is necessary if prior financial
statements were unaudited or were audited
by another auditor, and these conditions are
not disclosed in the notes to the financial
statements.
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Unqualified Reports with Explanatory
Paragraphs or Modified Wording
Opinion paragraph is revised if financial
statements are prepared in accordance with
an appropriate disclosed basis of accounting
other than GAAP.
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Unqualified Reports with Explanatory
Paragraphs or Modified Wording
Opinion paragraph is revised if financial
statements are prepared in accordance with
an appropriate disclosed basis of accounting
other than GAAP.
In my opinion, these financial statements
present fairly … in accordance with the basis
of accounting required by … as disclosed in
note … to the financial statements.
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Conditions Requiring a
Departure From the Unqualified
Report
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Conditions Requiring a
Departure From the Unqualified
Report
Scope limitation - the auditors were unable
to perform some aspect of the audit that
they considered necessary:
Client-imposed - the client will not allow the
auditor to perform an audit procedure
Circumstance-imposed - because of some
circumstance other than a client-imposed
restriction, the auditor could not perform an
audit procedure
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Client-Imposed Scope Limitation
audit scope
is
significantly
limited
probably
deny
audit scope
is not
significantly
limited
pursue alternative
procedures
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Circumstance-Imposed Scope
Limitation
adequate
alternative
procedures
are
available
adequate
alternative
procedures
are not
available
no audit
report effect
qualify or
deny
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Scope limitations may result in different
opinions on individual statements.
EXAMPLE: an auditor cannot adequately
verify beginning inventory of a first-year client
income
statement
opinions?
balance
sheet
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Scope limitations may result in different
opinions on individual statements.
EXAMPLE: An auditor cannot adequately
verify beginning inventory of a first-year client
income
statement
unqualified
balance
sheet
denial
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Scope Restriction Denial
Introductory paragraph is the same
Except as explained in the following paragraph, I conducted
my audit in accordance with generally accepted auditing
standards...
Explanatory third paragraph
In view of the possible material effects on the financial
statements of the matters described in the preceding
paragraph, I am unable to express an opinion whether these
financial statements are presented fairly in accordance with
generally accepted accounting principles.
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Scope Restriction Qualification
Same introductory paragraph
Except as explained in the following paragraph, we
conducted our audit ...remainder of the scope paragraph is
the same
Explanatory third paragraph
In our opinion, except for the effects of adjustments, if any,
which we might have been determined to be necessary had
we been able to..., the financial statements present fairly,
in all material respects, the financial position of Ace Company
as of December 31, 2004 and the results of its operations and
the changes in its financial position for the year then ended
in accordance with generally accepted accounting principles.
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Conditions Requiring a
Departure From the Unqualified
Report
Departures from GAAP result in a qualified
or adverse opinion depending on materiality
and pervasiveness.
Ace
Company
2004
Financial
Statements
G AAP
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Conditions Requiring a
Departure From the Unqualified
Report
Departures from GAAP result in a qualified
or adverse opinion depending on materiality
and pervasiveness.
The correct information should be included
in an additional third paragraph. If this
information is not available, the report
should state that fact.
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Conditions Requiring a
Departure From the Unqualified
Report
Departures from GAAP result in a qualified
or adverse opinion depending on materiality
and pervasiveness.
The correct information should be included
in an additional third paragraph. If this
information is not available, the report
should state that fact.
Inadequate disclosure is a GAAP departure.
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GAAP Departure Qualification
Same introductory paragraph
Same scope paragraph
Explanatory third paragraph including $-effect
In our opinion, except for the effects of ..., as discussed in
the preceding paragraph, the financial statements present
fairly, in all material respects, the financial position of Ace
Company as of December 31, 2004 and the results of its
operations and the changes in its financial position for the
year then ended in accordance with generally accepted
accounting principles.
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The audit report should not include any
statements that would counterbalance
the opinion:
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The audit report should not include any
statements that would counterbalance
the opinion:
- negative assurance - “nothing came to
our attention that would lead us to
believe...”
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The audit report should not include any
statements that would counterbalance
the opinion:
- negative assurance - “nothing came to
our attention that would lead us to
believe...”
- piecemeal opinion - positive comments
on some components of the financial
statements when a denied or
adverse opinion is issued
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