Chapter 17

Auditors’ Reports

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Audit Report

Providing an independent and expert opinion on the fairness of financial statements through an audit is the most frequent attestation service

When performing an audit, the auditors obtain reasonable assurance that the statements are in conformity with GAAP

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Typical Coverage of Audit Reports

Reports on the financial statements ordinarily include an opinion that is on both the:

Financial statements themselves: Balance sheet Income statement Statement of cash flows Statement of retained earnings (equity)

Financial statement disclosures The notes to the financial statements are considered an integral

part of the financial statements

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Auditors’ Standard Report – Nonpublic Clients

Details Title includes word independent Ordinarily addressed to the company itself,

the shareholders, the audit committee and/or the board of directors

Signed with name of CPA firm not individual partner unless sole practitioner

Dated as of the date on which the auditors obtained sufficient appropriate audit evidence to support their opinion

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We have audited the accompanying consolidated balance sheets of ABC Company and its subsidiaries, as of December 31, 20X1 and 20X0, and the related consolidated statements of income, retained earnings, and cash flows for the years then ended.

The AICPA Standard Auditors’ Report--Introductory Paragraph

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Management is responsible for the

preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

The AICPA Standard Auditors’ Report—Management’s Responsibility Paragraph

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The AICPA Standard Auditors’ Report:Auditors’ Responsibility Paragraphs

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

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In our opinion, the consolidated

financial statements referred to above present fairly, in all material respects, the financial position of ABC Company and its subsidiaries as of December 31, 20X1 and 20X0, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

The AICPA Standard Auditors’ Report--Opinion Paragraph

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Condition Required for Issuance of Unmodified Opinion

The auditors are able to obtain sufficient appropriate audit evidence to obtain reasonable assurance so as to be able to conclude that the financial statements as a whole are free from material misstatements.

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Auditors’ Standard Report – Public Clients

Differences from nonpublic Includes the words “Registered” and “Independent” in the title. References standards of the PCAOB rather than generally

accepted auditing standards. Includes less detailed discussions of management and auditor

responsibilities Includes an additional paragraph indicating that the auditors

have also issued a report on the client’s internal control over financial reporting.

• The report on internal control may either be presented separately or combined with the report on the financial statements into one overall report

Does not include section headings.

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Types of Reports with Unmodified Opinions

1. Unmodified opinion—standard report. This report may be issued only when the auditors have obtained sufficient appropriate audit evidence to conclude the financial statements are not misstated and there is no need to alter the report for situations 2, 3 or 4 below.

2. Unmodified opinion—with an emphasis of matter paragraph. To emphasize a matter appropriately presented in the financial statements (e.g., a change in accounting principles).

3. Unmodified opinion—with an other matter paragraph. To emphasize a matter other than those presented or disclosed in the financial statements (e.g., other information in documents containing audited financial statements).

4. Unmodified opinion on group financial statements. When two or more CPA firms are involved in an audit and the group auditor (firm that does most of the work) does not wish to take responsibility for the work of the component auditors.

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Types of Reports with Modified Opinions

1. A qualified opinion. A qualified opinion states that the financial statements are presented fairly in conformity with generally accepted accounting principles “except for” the effects of some matter.

2. An adverse opinion. An adverse opinion states that the financial statements are not presented fairly in conformity with generally accepted accounting principles.

3. A disclaimer of opinion. A disclaimer of opinion means that due to a significant scope limitation, the auditors were unable to form an opinion or did not form an opinion on the financial statements.

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Going Concern

Requirements Auditor not required to perform procedures

specifically designed to test going-concern assumption but must evaluate the assumption

Conditions• Negative cash flows from operations• Defaults on loan agreements• Adverse financial ratios• Work stoppages• Legal proceedings

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Emphasis of Matter Paragraph—Substantial Doubt as to Going Concern Status

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered negative cash flows from operations and has an accumulated deficient, conditions that raise substantial doubt about the Company's ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated fanatical statements n do not include any adjustments that might result from the outcome of this uncertainly. Our opinion is not modified with respect to this matter.

NOTE: Ordinarily an unmodified opinion with an emphasis of matter paragraph is issued. Alternatively, a disclaimer of opinion may be issued.

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Emphasis of Matter Paragraph—Lack of Consistency

A lack of consistent application of accounting principles results in an emphasis of matter paragraph, such as:

As discussed in Note 5 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards Update No. XXX (provide title) as of December 31, 20X8. Our opinion is not modified with respect to this matter.

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Additional Emphasis of Matter Situations—Auditor Discretionary

A risk or uncertainty. Significant related party transactions

described in a note to the financial statements.

The company is a component of a larger business enterprise.

Unusually important significant events. Accounting matters affecting comparability

(other than changes in accounting princi ples) of financial statements with those of the preceding year.

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Group Financial Statements 1/5

Consolidated ParentCompany (Audited by

Group Auditor)

Subsidiary A Subsidiary B Subsidiary C(Audited by (Audited by (Audited byGroup Auditor Group Auditor) Component

Auditor

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Group Financial Statements 2/5

Group engagement team should obtain understanding of

Whether component auditors are competent and understand and will comply with ethical requirements.

Extent of group engagement team involvement with component auditors.

Whether group engagement team will be able to obtain necessary information on the consolidation process.

Whether component auditors operate in a regulatory environment that actively overseas auditors.

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Group Financial Statements 3/5

Communicate with component auditors Inform component auditors how their work will

be used. Communicate ethical requirements. Provide list of related parties. Communicate significant risks of

misstatements. Group auditor alternatives

Make no reference to the component auditors Make reference to the component auditors.

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Group Financial Statements 4/5

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Group Financial Statements 5/5

Report: [Standard introductory paragraph language] We did not audit the

financial statements as and for the year ended December 31, 2011 of Glendo, Inc., which statements reflect total sales constituting 27 percent of total consolidated sales for 2011. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for Glendo, Inc. for 2011, is based solely on the report of the other auditors.

[Standard scope paragraph language] We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of other auditors, …

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Summary of Emphasis of Matter Paragraphs and Group Audits

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Issuance of Modified OpinionsIssuance of Modified Opinions

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Qualified Opinion—Departure from GAAP

Departure from GAAP Immaterial – unmodified Material – qualified Material and pervasive—Adverse

Misstatements become pervasive when any one of the following applies:

Not confined to specific accounts. If confined, they represent a substantial proportion of

the financial statements. In relation to disclosures, they are fundamental to

users’ understanding of the financial statements.

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Example of a Qualified Report-- Departure from GAAP

(Introductory and Scope Paragraphs are Standard) The Company has excluded from property and debt in the accompanying

balance sheet certain lease obligations that, in our opinion, should be capitalized in order to conform with generally accepted accounting principles. If these lease obligations were capitalized, property would be increased by $__________, long-term debt by $___________, and retained earnings by $__________ as of December 31, 20X1, and net income and earnings per share would be increased (decreased) by $___________ and $_____, respectively, for the year then ended.

In our opinion, except for the effects of not capitalizing lease

obligations as discussed in the Basis for Qualified Opinion Paragraph,, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ Company as of December 31, 20X1, and the results of its operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

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Adverse Opinion

Financial statements do not present fairly the financial position, results of operations, and cash flows of client in conformity with GAAP

Material and pervasive departures from GAAP

Auditor believes departure causes financial statements taken as a whole to be misleading

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Adverse Opinion

In our opinion, because of the effects of the matters discussed in the Basis for Adverse Opinion Paragraph, the financial statements referred to above do not present fairly, in conformity with accounting principles generally accepted in the United States of America, the financial position of XYZ Company as of December 31, 20X5, or the results of its operations or its cash flows for the year then ended.

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Qualified Opinion-Lack of Sufficient Appropriate

Audit Evidence (Scope Limitations)

Scope limitations Imposed by circumstances

• Important accounting records destroyed Due to nature of audit

• Engaged too late in year to observe client’s beginning inventory

Imposed by client• Client refused to allow auditors to send

confirmations to customers

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Example of a Qualified Report--Scope Limitation

Basis for Qualified Opinion

The company has excluded from property and debt in the accompanying balance sheets certain lease obligations that in our opinion, should be capitalized in order to conform with accounting principles generally accepted in the United States of America. If these lease obligations were capitalized, property would be increased by $15,000,000, long-term debt by $14,500,000, and retained earn ings by $500,000 as of December 31, 20X8. Additionally, net income would be increased by $500,000 and earnings per share would be increased by $1.22 for the year then ended.

 

Qualified Opinion

In our opinion, except for the possible effects of the matters described in the Basis for Qualified Opinion paragraph, the financial statements referred to above present fairly, in all mate rial respects, the financial position of Wend Company as of December 31,20X8, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

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Disclaimer of Opinion Auditor has no opinion Issued whenever unable to form an

opinion as to fairness of financial statements

Circumstances resulting in a disclaimer are those in which the possible misstatements are material and pervasive. Multiple uncertainties may also lead to a

disclaimer Not an alternative to adverse opinion

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Example of a Disclaimer of Opinion--Scope Limitation

Auditor’s ResponsibilityOur responsibility is to express an opinion on these financial statements based on conducting the audit in accordance with auditing standards generally accepted in the United States of America. Because of the matter described in the Basis for Disclaimer of opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.

  Basis for Disclaimer of Opinion

We were unable to obtain audited financial statements supporting the Company's investment in a foreign affiliate stated at $20,500,000, or its equity in earnings of that affiliate of $6,250,450, which is included in net income, as described in Note 8 to the financial statements; nor were we able to satisfy ourselves as to the carrying value of the investment in the foreign affiliate or the equity in earnings by other auditing procedures.

  Disclaimer of Opinion

Because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on these financial statements.

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Placement of Additional Paragraphs

Before opinion paragraph—Basis for Modification (Qualified, Adverse, Disclaimer) Paragraphs

Following opinion paragraph—Emphasis of matter and other matter paragraphs

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Summary of Appropriate Auditors’ Reports

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Two or More Report Modifications

Qualified by two or more Example: Qualified because of both a scope

limitation and separate departure from GAAP Wording of report would include appropriate

qualifying language and explanatory paragraphs for both types of qualifications

Auditor should consider cumulative effects – disclaimer of opinion may be appropriate

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Different Opinions on Different Statements

It is acceptable to express an unqualified opinion on one statement while expressing a qualified or adverse on the others

Example: Auditors retained after client has taken its beginning inventory. A disclaimer may be issue on the income statement (the auditor doesn't know if income is reasonably stated), but an unqualified opinion may be issued on the year-end balance sheet.

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Reporting on Comparative Financial Statements

Report should cover current year as well as prior period audited by their firm.

Can express different opinions on different years. Auditor should update report for all prior periods

presented for comparison. If prior period audited by another (predecessor) CPA firm

Current year opinion only covers years the CPA firm audited. For financial statements audited by predecessor auditors either:

• Predecessor auditor reissues report with original date, or• Current auditors refer to report of other auditors.

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Reports to SEC

Forms filed with SEC which include audited financial statements

Forms S-1 through S-11 (registration statements) Forms SB-1 and SB-2 (registration for small

businesses) Form 8-K (current report) Form 10-Q (quarterly report) Form 19-K (annual report)

Auditors should be well versed on requirements of each form

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