Chapter 18Reports on

Audited Financial

Statements

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Reporting on the Financial Statement Audit: The Standard Unqualified Report

The standard unqualified report is issued when the

auditor has gathered sufficient evidence, the audit has been

performed in accordance with PCAOB standards, and the

financial statements conform to GAAP.

The standard unqualified report is issued when the

auditor has gathered sufficient evidence, the audit has been

performed in accordance with PCAOB standards, and the

financial statements conform to GAAP.

Eight Elements

1. Report title

2. Addressee

3. Introductory paragraph

4. Scope paragraph

5. Opinion paragraph

6. Explanatory paragraph referring to the audit of ICFR

7. Name of auditor

8. Audit report date

Eight Elements

1. Report title

2. Addressee

3. Introductory paragraph

4. Scope paragraph

5. Opinion paragraph

6. Explanatory paragraph referring to the audit of ICFR

7. Name of auditor

8. Audit report date

LO# 1

18-2

LO# 1

Standard Unqualified Audit Report(PCAOB)

18-3

Reporting on the Financial Statement Audit: The Standard Unmodified Report

The standard unmodified report is issued when the

auditor has gathered sufficient evidence, the audit has been

performed in accordance with GAAS, and the financial

statements conform to GAAP.

The standard unmodified report is issued when the

auditor has gathered sufficient evidence, the audit has been

performed in accordance with GAAS, and the financial

statements conform to GAAP.

Nine Elements

1. Report title

2. Addressee

3. Introductory paragraph

4. Management’s responsibility

5. Auditor’s responsibility

6. Scope paragraph

7. Opinion paragraph

8. Name of Auditor

9. Audit report date

Nine Elements

1. Report title

2. Addressee

3. Introductory paragraph

4. Management’s responsibility

5. Auditor’s responsibility

6. Scope paragraph

7. Opinion paragraph

8. Name of Auditor

9. Audit report date

LO# 1

18-4

LO# 1

Standard Unmodified Audit Report(ASB)

18-5

Adjustments to the Standard Unqualified/Unmodified Financial

Statement Audit Report

Modified Wording: Opinion based in part on

the report of another auditor

Explanatory Paragraph: Reference to report on

audit of ICFR

Explanatory Paragraph: Lack of consistency

Explanatory Paragraph: Additional emphasis

LO# 2

Explanatory Paragraph:Going concern

18-6

LO# 2

Reference to Other Auditors

18-7

Going Concern

LO# 2

18-8

Lack of Consistency

Change in accounting

principle

Change in accounting

principle Change in reporting

entity

Change in reporting

entityCorrection of an error in principle

Correction of an error in principle

Changes Affecting Consistency

Change in accounting

estimate

Change in accounting

estimate

Correction of anerror that does

not involve an accounting

principle

Correction of anerror that does

not involve an accounting

principle

Changes Not Affecting Consistency

Change inclassification

and reclassification

Change inclassification

and reclassification

Change expected to have a material

future effect

Change expected to have a material

future effect

LO# 2

18-9

Additional Emphasis

Under certain circumstances (e.g. significant related-party transactions, subsequent event) an auditor may

want to emphasize a specific matter regarding the financial statements even though he or she intends to

express an unqualified/unmodified opinion.

Under certain circumstances (e.g. significant related-party transactions, subsequent event) an auditor may

want to emphasize a specific matter regarding the financial statements even though he or she intends to

express an unqualified/unmodified opinion.

This information should be presented

in an explanatory paragraph.

LO# 2

18-10

Conditions for Departure from Unqualified/Unmodified Report

ScopeLimitation

Departurefrom GAAP

Lack of AuditorIndependence

LO# 3

18-11

Departures from an Unqualified/Unmodified Financial

Statement Audit ReportQualified“except for”

Disclaimer

Adverse

LO# 4

18-12

LO# 5

Effect of Materiality

18-13

Discussion of Conditions Requiring Other Types of Financial Statement

Audit Reports

Scope Limitation

Not in Conformity with GAAP

Auditor Not Independent

Results from an inability to obtain sufficient competent evidence about some component of the

financial statements.

Results when financial statements are materially affected by an

unacceptable departure from GAAP.

Results when auditor has some form of prohibited relationship with

the client (see Ch. 19).

LO# 5

18-14

Scope Limitation

Not in Conformity with GAAP

Auditor Not Independent

Issue a qualified opinion or a disclaimer.

Issue a qualified opinion or adverse opinion.

Issue a disclaimer.

LO# 5

Discussion of Conditions Requiring Other Types of Financial Statement

Audit Reports

18-15

Scope Limitation: Disclaimer

LO# 5

18-16

Scope Limitation: Qualified

LO# 5

18-17

Not GAAP: Qualified

LO# 5

18-18

Not GAAP: Adverse

LO# 5

18-19

Special Reporting Issues

Different reports on comparative

financial statements

Change in report on prior-period

financial statements

Report by a predecessor

auditor

LO# 6

18-20

Different Reports onComparative Financial Statements

Prior Years

Issued Qualified Opinion or Disclaimer.

Current Year

Issues Unqualified Opinion.

LO# 6

18-21

Restated Prior-PeriodLO# 6

18-22

Report by a Predecessor AuditorThe predecessor auditor should

do the followingbeforereissuing a report on prior-year financial

statements published for comparative purposes:

1. Read the financial statements of the current period.

2. Compare the prior-period financial statements reported on with the current-year financial statements.

3. Obtain a letter of representation from the current-year or successor auditor.

LO# 6

18-23

Other Information in Documents Containing Audited

Financial Statements

Annual Reports

Registration Statements

The auditor has no responsibility beyond the financial information contained in the report, and he or she has

no obligation to perform any audit procedures to corroborate the other information. However, the auditor is required to read the other information and consider whether it is consistent with the information contained

in the audited financial statements.

LO# 7

18-24

Special Reports

Financial statements prepared on a

comprehensive basis of accounting other

than GAAP

Specified elements, accounts, or items of a

financial statement

Compliance with aspects of contractual

agreements or regulatory requirements

LO# 7

18-25

Financial StatementsPrepared According to a Special

Purpose Framework

Regulatory Basis

Tax Basis

Cash (or Modified Cash) Basis

Contractual Basis

LO# 8

18-26

In some situations an auditor may be engaged to audit only part (or specified elements, accounts,

or items) of the financial statements.

In some situations an auditor may be engaged to audit only part (or specified elements, accounts,

or items) of the financial statements.

Specific Elements, Accounts, or Items of a Financial Statement

LO# 9

Rather than auditing specified elements, accounts, or items, an auditor may be engaged to

apply only agreed-upon procedures.

Rather than auditing specified elements, accounts, or items, an auditor may be engaged to

apply only agreed-upon procedures.

18-27

Compliance Reports Related to Audited Financial Statements

The auditor provides negative assurance as to compliance with the provisions of contractual agreements or regulatory

requirements.

LO# 10

18-28