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Auditors’ Reportswww.buec.udel.edu/jenkinsd/Powerpoint/Chp17.ppt

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Review of Audit Process

1. Obtain an understanding of internal control sufficient to plan the audit.

2. Determine the planned level of control risk.

3. Design and perform additional tests of controls.

4. Reassess control risk and modify planned substantive tests.

5. Perform substantive tests and complete the audit.

6. Form an opinion and issue the audit report.

Chapters 7-16

Chapter 17

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Types of Opinions

Unqualified opinions» Standard unqualified opinion» Unqualified opinion with explanatory

language– Part of the audit performed by other auditors– Questions concerning going concern status– GAAP not consistently applied– Emphasis of a matter– Justified departures from recognized accounting

principles

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Conditions Required for Issuance of an Unqualified Report

The financial statements are presented in conformity with GAAP, including adequate disclosure.

The audit was performed in accordance with GAAS, and there were no significant scope limitations.

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Types of Opinions

Qualified opinions» Departures from GAAP

– Material but not “substantially misleading”

» Scope limitations– Circumstance-imposed scope limitations

Material but not “substantially misleading”

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Types of Opinions

Adverse opinions» Very material departures from GAAP cause

financial statements taken as a whole to be substantially misleading.

Disclaimer of opinion» Substantial circumstance-imposed scope

restrictions.» Significant client-imposed scope restrictions.» Significant uncertainties» Lack of auditor independence

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Standard Unqualified Report

Introductory paragraph» Identifies the financial statements that were audited.» States that the financial statements are the responsibility of

management.» States that the auditors’ responsibility is to express an

opinion.

Scope paragraph» Describes the nature of an audit

Opinion paragraph» Presents the auditors’ opinion as to whether the financial

statements are in accordance with GAAP.

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We have audited the accompanying balance sheet of XYZ Company as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows 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 audit.

The Standard Auditors’ Report Introductory Paragraph

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We conducted our audit 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 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. We believe that our audit provides a reasonable basis for our opinion.

The Standard Auditors’ Report Scope Paragraph

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In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ Company as of December 31, 20XX, 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.

The Standard Auditors’ Report Opinion Paragraph

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SARBOX Perspective

As a result of the Sarbanes-Oxley Act of 2002, auditors are required to also provide assurance on internal control for public companies.» Report on internal controls may be

separate or combined with report on financial statements

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Modifications of the Auditors’ Report Unqualified Opinions

Type ofReport

Sharedresponsibility

Going concernuncertainty

GAAP notconsistent

Emphasis ofmatter

Justifieddeparture fromofficial GAAP

Introductory orScope

ParagraphDescribe work ofother auditors

None

None

None

None

ExplanatoryParagraph

None

Describeuncertainty

Describe changein principle

Describe matter

Describedeparture

OpinionParagraph

“...based onour audit andthe report ofotherauditors...”

None

None

None

None

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Shared Responsibility Report

IntroductoryIntroductory

ScopeScope

OpinionOpinion

We did not audit the financial statements of St. LawrenceCement, Inc., which statements reflect assets of constituting43% of the consolidated totals as of December 31, 2092 and2091, respectively, and revenues of constituting 42%, 47% and52% of the consolidated totals for the years ended December 31,2092, 2091, and 2090, respectively. Those statements wereaudited by other auditors whose reports have been furnished tous, and our opinion, insofar as it relates to the amountsincluded for that entity, is based solely on the reports of theother auditors.

We believe that our audits and the reports of other auditors...

In our opinion, based on our audits and the reports of otherauditors,

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Explanatory Paragraph Going Concern Problem

The accompanying financial statements have been prepared assuming that [America West Airlines, Inc..] will continue as a going concern. As discussed in note 1 to the financial statements, the Company filed a voluntary petition seeking to reorganize under chapter 11 of the federal bankruptcy laws. This event and circumstances relating to this event, including the Company’s significant losses, accumulated deficit, and highly leveraged capital structure, raise substantial doubt about its ability to continue as a going concern. Although the Company is currently operating as debtor-in-possession under the jurisdiction of the Bankruptcy Court, the continuation of the business as a going concern is contingent upon, among other things, the ability to (1) formulate a Plan of Reorganization which will gain approval of the creditors and stockholders and confirmation of the Bankruptcy Court, (2) maintain compliance with all debt covenants under the debtor-in-possession financing agreements, (3) achieve satisfactory levels of future operating results and cash flows, and (4) obtain additional debt and equity. The accompanying financial statements do not include and adjustments that might result from the outcome of these uncertainties.

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Explanatory Paragraphs Consistency

As discussed in notes four and eleven to the combined financial statements, [General Mills, Inc..] adopted in fiscal 1994 the provisions of the Financial Accounting Standards Board’s Statements of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” and No. 112, “Employers’ Accounting for Postemployment Benefits.”

____________________________________

As discussed in Note 9 to the consolidated financial statements, effective January 1, 1995 [American Airlines] changed its method of accounting for the impairment of long-term assets to conform with Statement of Financial Accounting Standards No. 121.

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Modifications of the Auditors’ Report Qualified Opinions

Type ofReport

Qualified--GAAPDeparture

Qualified--ScopeLimitation

Introductory orScope Paragraph

None

“Except as explainedin the followingparagraph”

ExplanatoryParagraph

Describedeparture

Describe scoperestriction

OpinionParagraph

“except for theproblem) thefinancialstatementspresent fairly

“except for theeffects of suchadjustments asmight have beendetermined to benecessary

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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 except for the effects of not capitalizing lease obligations, as discussed in the preceding paragraphdiscussed in the preceding 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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Example of a Qualified ReportScope Limitation

Standard Introductory Paragraph

Except as discussed in the following paragraph, we conducted our audit...

We were unable to obtain audited financial statements supporting the Company’s investment in a foreign affiliate stated at $_______, or its equity in earnings of that affiliate of $_______, 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.

In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to examine evidence regarding the foreign affiliate investment and earnings, the financial statements referred to above present fairly,...

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Modifications of the Auditors’ Report Adverse & Disclaimer

Type of Report

Adverse

Disclaimer ofOpinion--ScopeLimitation

Introductory orScope

Paragraph

None

“We were engaged”

Omit “Ourresponsibility...”

Omit scopeparagraph

ExplanatoryParagraph

Describe reason foropinion

Describe scoperestriction and anyreservations

OpinionParagraph

“the financialstatements do notpresent fairly”

“we do not expressan opinion on thefinancialstatements”

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Example Adverse Opinion

Standard introductory

Standard Scope

Explanatory

In our opinion, because of the effects of the matters discussed in the preceding 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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Example Disclaimer of Opinion

Introductory

AdditionalParagraph

Opinion

We were engaged...

The Company did not make a count of its physicalinventory, stated in the accompanying financialstatements at $_____ as of December 31, 20X2.Further, evidence supporting the cost of property andequipment acquired prior to December 31, 20X1, is nolonger available. The Company’s records do not permitthe application of other auditing procedures toinventories or property and equipment.

Since the Company did not take physical inventoriesand we were not able to apply other auditingprocedures to satisfy ourselves as to inventoryquantities and the cost of property and equipment, thescope of our work was not sufficient to enable us toexpress, and we do not express, an opinion on thesefinancial statements.

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Placement of Explanatory Paragraphs

Before opinion paragraph» Qualified opinions» Disclaimers» Adverse opinions

Following opinion paragraph» Consistency» Substantial doubt about continued existence

Either before or after opinion paragraph» Justified departure from GAAP» Emphasis of a matter

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Comparative Financial Statements

Comparative statements supported by profession» Public companies – SEC requires 2 years B/S and 3

years I/S, R/E and C/F.» Private companies – generally follow SEC requirement

Report should cover all financial statements presented.

Factors affecting nature of report:» Predecessor auditor – reissue report or reference.» Updating of opinion – re-expressed or revised.» Prior year statements – audited or unaudited.