Principals of Auditing Ch 17 Powerpoint

7/30/2019 Principals of Auditing Ch 17 Powerpoint

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Audit Report

Providing an independent and expertopinion on the fairness of financialstatements through an audit is the most

frequent attestation service

An audit provides users of financialstatements reasonable assurance that the

statements are in conformity with GAAP


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Fourth Standard of Reporting

Fourth Standard of Reporting:The auditor must either express an opinion regarding the financial statements,taken as a whole, or state that an opinion cannot be expressed, in the auditor'sreport. When the auditor cannot express an overall opinion, the auditor shouldstate the reasons therefore in the auditor's report. In all cases where an auditor'sname is associated with financial statements, the auditor should clearly indicatethe character of the auditor's work, if any, and the degree of responsibility theauditor is taking, in the auditor's report.

The standard report meets the fourthstandard by:

(1) stating that the audit was performed in conformity with generallyaccepted auditing standards and

(2) expressing an opinion that the clients financial statements arepresented fairly in conformity with generally accepted accountingprinciples.


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Types of Reports

Reports on the financial statements ordinarilyinclude:

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

Addressed to person or audit committee whoretained the auditors

Signed with name of CPA firm not individualpartner unless sole practitioner

Dated last day of fieldwork or date on whichthe auditors obtained sufficient appropriateaudit evidence to support their opinion


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We have audited the accompanying balancesheet of XYZ Company as of December 31,20XX, and the related statements of income,retained earnings, and cash flows for the yearthen ended. These financial statements are the

responsibility of the Company's management.Our responsibility is to express an opinion onthese financial statements based on our audit.

The AICPA Standard AuditorsReport--Introductory Paragraph


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We conducted our audit in accordance with auditingstandards generally accepted in the United States of

America. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial

statements. An audit also includes assessing theaccounting principles used and significant estimates madeby management, as well as evaluating the overall financialstatement presentation. We believe that our audit providesa reasonable basis for our opinion.

The AICPA Standard AuditorsReport--Scope Paragraph


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In our opinion, the financial statementsreferred to above present fairly, in all materialrespects, the financial position of XYZCompany as of December 31, 20XX, and the

results of its operations and its cash flows forthe year then ended in conformity withaccounting principles generally accepted inthe United States of America.

The AICPA Standard AuditorsReport--Opinion Paragraph


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Conditions Required for Issuance ofan Unqualified Report

The financial statements are presented in

conformity with GAAP, including adequatedisclosure.

The audit was performed in accordance withGAAS, and there were no significant scopelimitations.


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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 generallyaccepted auditing standards.

Includes the city and stateor city and country in the case ofnonU.S. auditorswhere the auditors report has been issued.(Historically, auditors have included this information, although itwas not required.)

Includes an additional paragraph indicating that the auditors

have also issued a report on the clients internal control overfinancial reporting.

The report on internal control may either be presented separately orcombined with the report on the financial statements into one overallreport


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Types of Opinions

1.An unqualified opinionstandard report. This report expresses a cleanopinion and may be issued only when the two conditions listed in thepreceding section have been met, and when no conditions requiringexplanatory language exist.

2.An unqualified opinionwith explanatory language. In certain circumstances

explanatory language is added to the auditors report with no effect on theauditors opinion.

3.A qualified opinion.A qualified opinion states that the financial statementsare presented fairly in conformity with generally accepted accountingprinciples except for the effects of some matter.

4.An adverse opinion.An adverse opinion states that the financial statementsare not presented fairly in conformity with generally accepted accountingprinciples.

5.A disclaimer of opinion.A disclaimer of opinion means that due to asignificant scope limitation, the auditors were unable to form an opinion ordid not form an opinion on the financial statements.


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Modifications of the Auditors Report--Unqualified Opinions

Type of Report Introductory orScope paragraph

ExplanatoryParagraph

OpinionParagraph

Sharedresponsibility

Describe work ofother auditors

None "based on ouraudit and thereport of other

auditors"Going concernuncertainty

None Describeuncertainty

None

GAAP notconsistent

None Describe changein principle

None

Emphasis of amatter

None Describe matter None

Justifieddeparture fromGAAP

None Describedeparture

None


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Modifications of Auditors ReportQualified Opinions

Type of

Report

Introductory or

Scope

Paragraph

Explanatory

Paragraph

Opinion

Paragraph

QualifiedGAAPDeparture

None

Describe

departure andeffects

except for the

effects of thedeparture thefinancialstatements

QualifiedScopeLimitation

Except as

explained in thefollowingparagraph

Describe

scopelimitation

except for the

effects of suchadjustments, if any,as might have beendetermined to benecessary had webeen able to


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Modifications of Auditors ReportAdverse Opinions and Disclaimers

Type of Report Introductory or

Scope

Paragraph

Explanatory

Paragraph

Opinion

Paragraph

Adverse None Describe reason foropinion

"The financialstatements do notpresent fairly"

Disclaimer ofOpinion--ScopeLimitation

"We were engaged";Omit responsibility.

Omit scopeparagraph

Describe scoperestriction and anyreservations

"we do not expressan opinion on thefinancialstatements."


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Shared Responsibility Report

[Standard introductory paragraph language] We did not audi t thefinanc ial statements as and fo r the year ended December 31, 2001

of Glendo , Inc ., wh ich statements reflect total sales cons ti tut in g

27 percent of total cons ol idated sales for 2001. Those statements

were audi ted by other audi tors whose reports have been furnishedto u s, and our opinio n, insofar as i t relates to data included for

Glendo , Inc. for 2001, is based solely o n th e repo rt of the oth er

audi tors.

[Standard scope paragraph language] We believe that our audits andthe reports o f other audi torsprovide a reasonable basis for ouropinion.

In our opinion, based on our audi ts and th e reports of oth erauditors,


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Going concern

SAS 59

Auditor not required to perform proceduresspecifically designed to test going-concernassumption 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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Explanatory Paragraph--GoingConcern Problem

The accompanying financial statements have been prepared assuming that[America West Airlines, Inc..] will continue as a going concern. As discussedin note 1 to the financial statements, the Company filed a voluntary petitionseeking to reorganize under chapter 11 of the federal bankruptcy laws. Thisevent and circumstances relating to this event, including the Companys

significant losses, accumulated deficit, and highly leveraged capital structure,ra ise subs tant ial doub t about i ts abi l i ty to con t inue as a going conc ern.

Although the Company is currently operating as debtor-in-possession underthe jurisdiction of the Bankruptcy Court, the continuation of the business as agoing 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) maintaincompliance with all debt covenants under the debtor-in-possession financingagreements, (3) achieve satisfactory levels of future operating results andcash flows, and (4) obtain additional debt and equity. The accompanyingfinancial statements do not include and adjustments that might result from theoutcome of these uncertainties.


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Explanatory Paragraphs--Consistency

As discussed in the Notes to the consolidated financial statements,effective January 1, 20X1, the Company changed its method foraccounting for derivative financial instruments to conform with SFASNo. 133, Accounting for Derivative Instruments

and Hedging Activities.____________________________________

As discussed in Note 15, effective January 1, 20X2, the Companychanged its method of accounting for goodwill and intangible assetsupon adoption of Statement of Financial Accounting Standards (SFAS)No. 142, Goodwill and Other Intangible Assets.


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Qualified Opinion

Departure from GAAP

Immaterial unqualified Material qualified or adverse (if overall financial

statements considered misleading)

Consider effects of departure(s):

Dollar magnitude of effects

Significance of item to particular client

Number of financial statement accounts anddisclosures affected

Effect on financial statements taken as a whole

Consider inadequate disclosures


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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 becapitalized in order to conform with generally accepted accounting

principles. If these lease obligations were capitalized, property would beincreased by $__________, long-term debt by $___________, andretained earnings by $__________ as of December 31, 20X1, and netincome and earnings per share would be increased (decreased) by$___________ and $_____, respectively, for the year then ended.

In our opinion, except for the effects of not capital izing leaseobl igat ions, as d iscuss ed in the preceding p aragraph, the financialstatements referred to above present fairly, in all material respects, thefinancial position of XYZ Company as of December 31, 20X1, and theresults of its operations and cash flows for the year then ended inconformity with accounting principles generally accepted in the UnitedStates of America.


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Qualified Opinion

Scope limitations

Auditor unable to perform an essential auditprocedure

Imposed by circumstances Engaged too late in year to observe clients

beginning inventory

Imposed by client Client refused to allow auditors to sendconfirmations to customers


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Example of a Qualified Report--Scope Limitation

Standard Introductory Paragraph

Except as discuss ed in the fol lowin g paragraph, we conducted ouraudit...

We were unable to obtain audited financial statements supporting theCompanys investment in a foreign affiliate stated at $_______, or itsequity in earnings of that affiliate of $_______, which is included in netincome, as described in Note 8 to the financial statements; nor were weable 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 adjus tments, if any, asm igh t have been determin ed to be necessary had we been able toexamine evidence regardin g the foreign aff i l iate investment andearnings, the financial statements referred to above present fairly,...


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Adverse

Financial statements do notpresent fairlythe financial position, results of operations,and cash flows of client in conformity with

GAAP

Very material departures from GAAP

Auditor believes departure causesfinancial statements taken as a whole tobe misleading


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Adverse Opinion

In our o pin ion , because o f the effects of the

matters disc uss ed in the preceding

paragraph, the f inanc ial statements referred

to above do not p resent fa ir ly, in conformitywith accounting principles generally accepted inthe United States of America, the financial

position of XYZ Company as of December 31,20X5, or the results of its operations or its cashflows for the year then ended.


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Disclaimer of Opinion

Auditor has no opinion

Issued whenever unable to form anopinion as to fairness of financialstatements

Circumstances resulting in a disclaimer:

Substantial circumstance-imposed scoperestrictions

Scope restrictions imposed by the client Uncertainties

Not an alternative to adverse opinion


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Disclaimer of Opinion

We were engaged ...

The Comp any did not make a count of i ts phys ical

inventory, stated in the accompanying f inancia l

statem ents at $_____ as of Decem ber 31, 20X2.

Further, evidence sup port ing the cost o f property and

equipment acqu ired prio r to December 31, 20X1, is no

longer available. The Companys records do not permit

the appl icat ion of o ther audi t ing p rocedures to

inventor ies or property and equipm ent.

Since the Company did not take phys ical inventor ies

and we were not able to apply other audi t ingproc edures to sat is fy ourselves as to inventory

quant i t ies and the cos t of property and equipm ent, the

sco pe of our work w as not suf f ic ient to enable us to

express, and we do no t express, an opinion on these

f inancia l 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

Other types of paragraphs may precede orfollow the opinion paragraph


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Two or More Report Modifications

Qualified by two or more

Examples: Qualified because of both a scopelimitation and separate departure from GAAP

Wording of report would include appropriatequalifying language and explanatory paragraphsfor both types of qualifications

Auditor should consider cumulative effectsdisclaimer of opinion may be appropriate


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Different Opinions on Different Statements

Fourth standard: Auditor shall express anopinion on the financial statements taken as awhole

Can apply to individual financial statements

It is acceptable to express an unqualified opinion onone statement while expressing a qualified or adverseon the others

Example: Auditors retained after client has taken its

beginning inventory. A disclaimer may be issue donthe income statement (the auditor doesn't know ifincome is reasonably stated, but an unqualifiedopinion on the year-end balance sheet.


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Reporting on ComparativeFinancial Statements

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

Can express different opinions on different years

Auditor should update report for all prior periodspresented 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 financialstatements

Forms S-1 through S-11 (registration statements)

Forms SB-1 and SB-2 (registration for smallbusinesses)

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

Documents

Principals of Auditing Ch 17 Powerpoint