2 - 1 copyright 2003 pearson education canada inc. chapter 2 the auditor’s reports

2 - 1Copyright 2003 Pearson Education Canada Inc.

CHAPTER 2The Auditor’s

Reports


What is theWhat is thepurposepurpose

of theof theaudit report?audit report?

Ace Corp.Audit Report


What is the purpose of the audit report?What is the purpose of the audit report?

The audit report is an explanation of the audit process and conclusionsreached.

The report is the formal communica-tion between the auditor and the external users of the financial state-ments, primarily the shareholders.


Generally Accepted Auditing StandardsGenerally Accepted Auditing Standards

REPORTING STANDARDSREPORTING STANDARDS1. The report should identify the

financial statements & distinguish between the responsibilities of management and the auditor.

Footnotes

AceCompany

2004Financial

Statements


REPORTING STANDARDSREPORTING STANDARDS1. The report should identify the financial statements.

What financial statements are What financial statements are required by GAAP?required by GAAP?


What financial statements are What financial statements are required by GAAP?required by GAAP?

- balance sheet- income statement- statement of retained earnings- statement of changes in

financial position


Could an auditor accept anCould an auditor accept anengagement to audit engagement to audit only oneonly one(or more) financial statement?(or more) financial statement?

REPORTING STANDARDSREPORTING STANDARDS1. The report should identify the

financial statements.


Could an auditor accept anCould an auditor accept anengagement to audit engagement to audit only oneonly one(or more) financial statement?(or more) financial statement?

yes - however, the auditor’s report would have to be

qualified because of non-compliance with GAAP


- GAAS- plan & perform- reasonable assurance- examine evidence on test basis- assess accounting principles- assess significant estimates- evaluate overall statement

presentation

REPORTING STANDARDSREPORTING STANDARDS2. The report should describe the scope

of the auditor’s examination.


REPORTING STANDARDSREPORTING STANDARDS3. 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.

AceCompany

2004Financial

Statementsopinion?


AceCompany

2004Financial

Statements

G A A P?

REPORTING STANDARDSREPORTING STANDARDS4. 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.


Report title:Auditor’s Report

The Standard Unqualified Audit ReportThe Standard Unqualified Audit Report



Address:To the Shareholders of Ace Corporation:

report mayalso be addressed

to company orboard of directors,not management



Address:To the Shareholders of Ace Company:

Introductory paragraph:

What statements

were audited?

What time period?

What are clientand auditor

responsibilities?



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.


Scope paragraph:

Whatisan

audit?


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.


Opinion paragraph:

Whatopiniondid theauditorform?


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.


Opinion paragraph:


Name of firm:Taylor & Tower, CAs


Opinion paragraph:



City:Anywhere, any province


Opinion paragraph:In our opinion, these financial statements present fairly, in allmaterial respects, the financial position of Ace Company asat December 31, 2004 and the results of its operations and thechanges in its financial position for the years then ended inaccordance with generally accepted accounting principles.


City:Anywhere, any province

Audit report date:February 27, 2005

field work completion

date


Types of Audit ReportsTypes of Audit Reports


Types of Audit ReportsTypes of Audit Reports- unqualified - “statements present fairly”

client


Types of Audit ReportsTypes of Audit Reports- qualified - “except for one or more exceptions, statements present fairly”

client


Qualified Audit ReportQualified Audit Report(GAAP Departure)(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 presentfairly, in all material respects, the financial position of AceCompany as of December 31, 2004 and the results of itsoperations and the changes in its financial position for theyear then ended in accordance with generally acceptedaccounting principles.


Qualified Audit ReportQualified Audit Report(Scope Limitation)(Scope Limitation)


Except as explained in the following paragraph, I conductedmy 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.


Types of Audit ReportsTypes of Audit Reports- adverse - “statements do not present fairly”

client


Adverse Audit ReportAdverse Audit ReportSame introductory paragraph



In our opinion, because ... as explained in the precedingparagraph, the financial statements do not present fairly thefinancial position of Ace Company as at December 31, 2004and the results of its operations and the changes in itsfinancial position for the year then ended in accordance withgenerally accepted accounting principles.


Types of Audit ReportsTypes of Audit Reports- denial - “no opinion”

client


DenialDenial(Scope Restriction)(Scope Restriction)


Except as explained in the following paragraph, we conducted our audit in accordance with generally acceptedauditing standards...


In view of the possible material effects on the financialstatements 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.


Unqualified Reports with Unqualified Reports with Explanatory Paragraphs or Explanatory Paragraphs or

Modified WordingModified Wording


In some circumstances, a In some circumstances, a change in the financial change in the financial

statements may result in a statements may result in a qualifiedqualified or or adverseadverse opinion: opinion:

client


In some circumstances, a In some circumstances, a change in the financial change in the financial

statements may result in a statements may result in a qualifiedqualified or or adverseadverse opinion: opinion:

client

- a change in accounting principle orapplication thereof not in accordancewith GAAP


Changes in accounting Changes in accounting principles or in their principles or in their application application excludesexcludes::

- change in an estimate

client



- change in an estimate- error corrections not involving principles

client



- change in an estimate- error corrections not involving principles- changes in format and presentation

client



- change in an estimate- error corrections not involving principles- changes in format and presentation- changes due to substantially different events

client


Treatment of an uncertainty about the client’s ability to continue to operate as a going concern depends on the accounting treatment used.

Unqualified Reports with Explanatory Unqualified Reports with Explanatory Paragraphs or Modified WordingParagraphs 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



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



Inclusion of a fourth paragraph in theauditor’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.



Opinion paragraph is revised if financial statements are prepared in accordance with an appropriate disclosed basis of accounting other than GAAP.



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.



Conditions Requiring a Conditions Requiring a Departure From the Unqualified Departure From the Unqualified

ReportReport



ReportReportScope limitation - the auditors were unableto perform some aspect of the audit thatthey considered necessary:

Client-imposed - the client will not allow theauditor to perform an audit procedure

Circumstance-imposed - because of somecircumstance other than a client-imposedrestriction, the auditor could not perform anaudit procedure


audit scopeis not

significantly limited

probablydeny

pursue alternativeprocedures

Client-Imposed Scope LimitationClient-Imposed Scope Limitation

audit scopeis

significantly limited


adequatealternativeprocedures

areavailable

qualify or deny

adequatealternativeprocedures

are notavailable

Circumstance-Imposed Scope Circumstance-Imposed Scope LimitationLimitation

no auditreport effect


Scope limitations may result in differentopinions on individual statements.

EXAMPLE: an auditor cannot adequately verify beginning inventory of a first-year client

balancesheetopinions?

incomestatement


Scope limitations may result in differentopinions on individual statements.

EXAMPLE: An auditor cannot adequately verify beginning inventory of a first-year client

incomestatement

denial

unqualifiedbalance

sheet


Scope Restriction DenialScope Restriction Denial

Introductory paragraph is the same

Except as explained in the following paragraph, I conductedmy audit in accordance with generally accepted auditingstandards...


In view of the possible material effects on the financialstatements of the matters described in the preceding paragraph, I am unable to express an opinion whether thesefinancial statements are presented fairly in accordance withgenerally accepted accounting principles.


Scope Restriction QualificationScope Restriction QualificationSame introductory paragraph

Except as explained in the following paragraph, we conducted our audit ...remainder of the scope paragraph is the same


In our opinion, except for the effects of adjustments, if any,which we might have been determined to be necessary hadwe been able to..., the financial statements present fairly,in all material respects, the financial position of Ace Companyas of December 31, 2004 and the results of its operations andthe changes in its financial position for the year then ended in accordance with generally accepted accounting principles.



ReportReportDepartures from GAAP result in a qualifiedor adverse opinion depending on materialityand pervasiveness.

AceCompany

2004Financial

Statements

G A A P



ReportReportDepartures from GAAP result in a qualifiedor adverse opinion depending on materialityand pervasiveness.

The correct information should be includedin an additional third paragraph. If thisinformation is not available, the report should state that fact.



ReportReportDepartures from GAAP result in a qualified or adverse opinion depending on materialityand pervasiveness.

The correct information should be includedin an additional third paragraph. If thisinformation is not available, the report should state that fact.

Inadequate disclosure is a GAAP departure.


GAAP Departure QualificationGAAP Departure QualificationSame introductory paragraph



In our opinion, except for the effects of ..., as discussed in the preceding paragraph, the financial statements presentfairly, in all material respects, the financial position of AceCompany as of December 31, 2004 and the results of itsoperations and the changes in its financial position for theyear then ended in accordance with generally acceptedaccounting principles.


The audit report should The audit report should notnot include any include anystatements that would statements that would counterbalancecounterbalance

the opinion:the opinion:




- negative assurance - “nothing came to our attention that would lead us to believe...”




- 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

2 - 1 copyright 2003 pearson education canada inc. chapter 2 the auditor’s reports

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