ppt chap012

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Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

8/2/2019 Ppt Chap012


Chapter 12

Reports on Audited

Financial Statements

The television industry doesn’t like to see the complexity of the

world. It prefers simple reporting, with simple ideas: this is white,that’s black; this is good, that’s bad.

Filmmaker Krisztof Kieslowski

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Reports on AuditedFinancial Statements

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of Enron Corp.and subsidiaries as of December 31, 2000 and 1999, and the resultsof their operations, cash flows, and changes in shareholders’ equityfor each of the three years in the period ended December 31, 2000,in conformity with accounting principles generally accepted in the

United States.

The opinion paragraph from Arthur Andersen’s final audit of Enron Corp. (dated February 23, 2001)

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Chapter 12 Objectives

1. Provide an overview of the types of reports thataccompany an entity's financial statements.

2. List three general functions of the auditors’

report on an entity’s financial statements.3. Explain the significance of each of the

paragraphs in the auditors’ standard report on anentity’s financial statements.

4. Describe the types of auditors’ reports that may be issued if an entity’s financial statementscontain a departure from GAAP.

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Chapter 12 Objectives

5. Describe the types of auditors’ reports that maybe issued if auditors are unable to comply withGAAS.

6. Describe how the standard report is modifiedwhen auditors issue unqualified opinions butreference other matters affecting the audit or theclient.

7. Identify other circumstances affecting auditors’reporting responsibilities and explain how theyaffect auditors’ reports on an entity’s financialstatements.

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Overview

1. Overview of Reporting

2. The Standard Report

3. Reasons for Departing from Standard Report – Departures from GAAP

– Scope limitations

– Other matters affecting the audit

4. Other Issues and Reporting

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Reports Accompanying

Financial Statements• Prepared by Auditor

– Opinion on financial statements and related

disclosures: Are F/S presented per applicablefinancial reporting framework (GAAP)?

– Opinion on internal control over financialreporting: Is I/C effective?

• Prepared by Management – Opinion on internal control over financial

reporting: Is I/C effective?

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The Purpose of the Auditors’

Report • Are F/S in conformity with GAAP?

– Provide indication of what the F/S would be like if GAAP werefollowed

– Provide any entity-omitted disclosures• Any unusual aspects of the audit examination?


– Division of responsibility

• Any unusual matters related to the entity? – Going-concern uncertainty

– Consistency

– Emphasis of a matter

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Types of Auditors’ Reports

1. Standard report• Expresses an unqualified opinion

2. Unqualified opinion with modified wording• F/S are in conformity with GAAP• Additional matters are disclosed in report

3. Qualified opinion• “Except for” some matter, F/S are in conformity with GAAP

4. Adverse opinion•

F/S are not in conformity with GAAP

5. Disclaimer of opinion• No opinion is issued by auditors

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Overview







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The Standard Report (Paragraphs)

• Introductory – F/S and years examined

– Responsibility of auditors and management

• Scope

– Audit conducted in accordance with PCAOB standards – Description of an audit (specific references to “ test basis,”

“ materiality,” and “ significant estimates”)

– Audit provides reasonable assurance

• Opinion

– Are F/S presented in conformity with applicable financial reportingframework (GAAP)?

• Internal Control – References examination, report, and opinion on internal control

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The Standard Report (Other Elements)

1. Title includes the word “independent”

2. Addressed to the client (normally,

shareholders and board)

3. Dated on the audit completion date

4. Signed by the accounting firm

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Independent Auditors’ Report ( AS 5 )

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

DUNDER-MIFFLIN, INC.

We have audited the accompanying balance sheets of DUNDER-MIFFLIN, INC. as of December 31, 2010 and2009, and the related statements of income, comprehensive income, shareholders’ equity, and cash flows for eachof the years in the three-year period ended December 31, 2010. These financial statements are the responsibilityof DUNDER-MIFFLIN, INC.'s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance aboutwhether 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 theaccounting principles used and significant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide a reasonable basis for our opinion .

In our opinion, the financial statements referred to above present fairly, in all material respects, the financialposition of DUNDER-MIFFLIN, INC. as of December 31, 2010 and 2009, and the results of its operations andits cash flows for each of the years in the three-year period ended December 31, 2010, in conformity withaccounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board(United States), DUNDER-MIFFLIN, INC.’S internal control over financial reporting as of December 31, 2010,based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 29, 2011 expressed anunqualified opinion thereon.

Michael Scarn, LLP

Scranton, PA

January 29, 2011

Report Title

Report Address

Introductory Paragraph

Scope Paragraph

Opinion Paragraph

Signature

Report Date

Internal Control

Paragraph

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Reporting Options

• Separate reports on F/S and I/C

– Each of the reports references other report

• Combined report on F/S and I/C

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Overview







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GAAP Departures

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Qualified (“Except for ...”) Opinion

• Issued when departure is material, yet not

pervasive

• Report Modifications:

– Introductory and scope paragraphs remain the same – Add explanatory paragraph preceding the opinion

paragraph explaining departure and detailing $ amounts

involved

– Modify opinion paragraph (“In our opinion, except for the matter discussed in the preceding paragraph,….”)

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Adverse Opinion

• Issued when statements are “so lacking infairness” that a qualified opinion would bemisleading (i.e., a serious, pervasive departure

from GAAP).• Report Modifications:

– Introductory and scope paragraphs remain the same

– Add explanatory paragraph preceding the opinionparagraph explaining the departure and detailing $amounts involved

– Change opinion paragraph (“financial statements do not present fairly”)

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Overview







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Scope Limitations

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Type of Scope Limitations

• Circumstance-Imposed – Situation in which matters beyond auditors’ and

client’s control limit procedures performed by

auditor – Example: inability to observe year-end inventory

because of late appointment

• Client-Imposed

– Situation in which client specifically limitsauditors’ procedures

– Should be viewed as a significant restriction and adisclaimer is ordinarily issued

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Scope Limitation: Qualified (“Except for ...”) Opinion

• Issued when scope limitations are material, but notpervasive

• Report Modifications:

– Introductory paragraph remains the same

– Scope paragraph: “ Except as discussed in the following paragraph [the scope limitation], weconducted our audit…”

– Add explanatory paragraph preceding the opinionparagraph describing the scope limitation

– Modify opinion paragraph (“In our opinion, except for”)

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Scope Limitation: Disclaimer of

Opinion

• Pervasive scope limitation, usually client-imposed – Significance of the limitation is such that auditors cannot gather

sufficient appropriate evidence to form an opinion

• Report Modifications: – Introductory paragraph: (“We were engaged to audit ….”; omit

auditors’ responsibility)

– Omit scope paragraph

– Add explanatory paragraph describing scope limitation

– Change opinion paragraph (“…we do not express an opinion….”) • May still issue opinion on internal control if no scope limitation on that

examination

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Lack of Independence

• Scenario: Auditors begin engagement but

independence subsequently compromised

• Report – Single paragraph

– Indicates auditors are not independent

– Does not indicate why independence lacking

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Overview







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Consistency

• Relates to: – Change in accounting principles – Adjustments to correct misstatements in

previously-issued F/S• Type of changes in accounting principles:

– Accounting principles (GAAP to GAAP) – Form of reporting entity

– Accounting principles (non-GAAP to GAAP) – Accounting principle inseparable from

changes in estimates

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Consistency: Effect on Report

• Add explanatory paragraph following theopinion paragraph

• May issue a qualified opinion (GAAPdeparture) if:

– Change is not justified

– Change is not accounted for inconformity with GAAP

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Item Type of Change Should Auditors’

Report Be

Modified?

1. An accounting change involving a change from one generally

accepted accounting principle to another generally accepted

accounting principle.

Yes

2. An accounting change involving a change in an accounting

estimate.

No

3. An error correction not involving an accounting principle. No

4. An accounting change involving a correction of an error in

principle which is accounted for as a correction of an error.

Yes

5. An accounting change involving a change in the reporting

entity which is a special type of change in accounting

principle.

Yes

6. An accounting change involving both a change in accounting

principle and a change in accounting estimate. Although the

effect of the change in each may be inseparable and the

accounting for such a change is the same as that accorded achange in estimate only, an accounting principle is involved.

Yes

7. Not an accounting change but rather a change in classification. No

8. An accounting change from one generally accepted accounting

principle to another generally accepted accounting principle.

Yes

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Going-Concern Uncertainties

• Auditors are responsible to evaluate whethersubstantial doubt exists about ability of entity tocontinue in existence for one year beyond date of

F/S

• Options – Add explanatory paragraph following opinion

paragraph (still unqualified opinion)

– If serious uncertainty, may issue disclaimer of opinion

– Modified language must include the words substantial doubt and going concern

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Rule 203 Report

• Rule 203 allows for unqualified opinions on

F/S that are not in conformity with GAAP if

GAAP would be misleading• Add explanatory paragraph either preceding

or following the opinion paragraph

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Division of Responsibility

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Reference to Other Auditors

• Principal auditors should – Verify other auditors’ reputation and independence

– Communicate and coordinate with other auditors

• Options – Take responsibility for work: Standard report

– Name other auditors• Present report of other auditors, only with their permission

– Refer to other auditors• Modify introductory, scope, and opinion paragraphs of report

• Still express unqualified opinion, if appropriate

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Emphasis of a matter

• Call user attention to important matters

• Add explanatory paragraph after opinion

paragraph discussing the matter

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Overview







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Association with Unaudited F/S

• Auditors permit use of name in communication

• Issue disclaimer of opinion (one paragraph)

– Do not mention auditing procedures performed – Must identify any known departures from GAAP in the

report

– Should cover all unaudited prior-years’ financial

statements

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Comparative F/S

• Continuing Auditors – Update opinion by considering if previously-issued

opinions still appropriate

– If previously-issued opinions not appropriate, reviseopinion in current report

• Predecessor auditors – With permission, auditors may present reissued report

from predecessor on prior-years’ F/S along with their

report on current F/S – If predecessors’ report not presented, auditors’ report must

reference predecessors’ report and opinion on prior -years’F/S

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Information Accompanying F/S

• Types – Condensed F/S

– “Other information” presented by management

– Quarterly and Supplementary• Determine whether:

– Material inconsistencies exist between information and F/S

– Information is misstated

– Information is omitted

• Reporting – Issues with information do not affect opinion on F/S

– Expand auditors’ report to discuss information and issues

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Reporting Summary

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12.441. a. Either a qualified opinion or a disclaimer of opinion, depending upon the

reason for the scope limitation (client-imposed versus circumstance-imposed) and the

degree of materiality and pervasiveness.

b. If a qualified opinion is issued, the scope paragraph would be modified, an

explanatory paragraph would be added, and the opinion paragraph would be modified to

indicate that “except for the effects of such adjustments, if any...”

If a disclaimer of opinion is issued, the introductory paragraph would be modified, the

scope paragraph would be omitted, an explanatory paragraph would be added, and the

opinion paragraph would be modified to indicate an opinion cannot be expressed.

2. a. Either a qualified opinion or adverse opinion, depending upon degree of

materiality and pervasiveness of the GAAP departure

b. Explain the departure from GAAP in an explanatory paragraph before the

opinion paragraph and modify the opinion paragraph to express the appropriate opinion.

3. a. Either a qualified opinion or adverse opinion, depending upon degree of

materiality and pervasiveness of the GAAP departure.

b. Explain the departure from GAAP in an explanatory paragraph before the

opinion paragraph and modify the opinion paragraph to express the appropriate opinion.

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4. a. Either a qualified opinion or a

disclaimer of opinion, depending upon thedegree of materiality and pervasiveness.

5. Unqualified opinion.

6. a. Unqualified opinion.b. Describe the other auditors’ work in the introductory paragraph; modify the

concluding sentence of the scope paragraph to indicate “[w]e believe that our audit and

the reports of other auditors provide a reasonable basis for our opinion”; modify the

opinion paragraph to indicate “In our opinion, based upon our audit and the reports of

other auditors, the financial statements...” Do not add a separate explanatoryparagraph.

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7. a. Unqualified opinion.

b. Without modifying the paragraphs of the standard

report, identify the change in accounting principle andrefer to the financial statement note discussing this change

in principle in a paragraph following the opinion

paragraph.

8. a. Unqualified opinion.

b. Without modifying the paragraphs of the standard

report, identify the going-concern uncertainty and refer to

the financial statement note discussing the going-concernuncertainty in a separate paragraph following the opinion

paragraph.

ppt chap012

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