Chapter 18 Reports on Audited Financial Statements Note: This is an area that is evolving, as of April 2015. The PCAOB has recently issued proposals for

Chapter 18 Reports on Audited Financial Statements Note: This is an area that is evolving, as of April 2015. The PCAOB has recently issued proposals for new auditing standards which could result in: Increasing the scope of what the auditor reports on; Requiring the signature on the report of the audit engagement partner; Disclosing the names of other CPAs or CPA firms that perform a certain percentage of hours of work on the audit engagement; and/or Requiring the audit report to include discussion of critical audit matters.

Public Company Reporting on the Financial Statement Audit: 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. Also, there is no extra language added, other than (sometimes) a cross reference to the auditors report on ICFR. 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 Example of a Standard Unqualified Audit Report 18-3 The text authors call this last paragraph an explanatory paragraph, but others call it a cross reference paragraph, because it is trivial; there would be no cross reference if the auditor had issued 1 report containing the 2 (F.S. and ICFR) opinions. We discussed this in Ch. 7.

Private Company Reporting on the Financial Statement Audit: 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. Also, there is no extra language added. Nine Elements 1.Report title 2.Addressee 3.Introductory paragraph 4.Managements responsibility 5.Auditors 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.Managements responsibility 5.Auditors responsibility 6.Scope paragraph 7.Opinion paragraph 8.Name of Auditor 9.Audit report date LO# 1 18-4 This report is similar to that required by ISA. It came about via the convergence effort of the ASB and the IAASB.

LO# 1 Standard Unmodified Audit Report 18-5

Additional language added to Standard Unqualified (public company) / Unmodified (private company) Financial Statement Audit Report. Note that this is handled somewhat differently for public versus private companies, but the main topics are below. 1. Opinion based in part on the report of another auditor Cross reference to report on audit of ICFR (as noted earlier, this is not substantive; as it does not change the meaning of the opinion on the financial statements; also you would only have this for a large public company) 3. Lack of consistency 4. Additional emphasis LO# 2 2. Going concern 18-6

LO# 2 1. Example of Reference to Other Auditor shown below. Note that there are 2 major issues regarding other auditor. 1. Is there other auditor? 2. If yes, then decide to a) refer to the other auditor or b) not refer to other auditor. 18-7

2. Going Concern LO# 2 18-8

Lack of Consistency Change in accounting principle Change in reporting entity Correction of a mis- statement in F/S Changes Affecting Consistency Change in accounting estimate Changes Not Affecting Consistency Change in classification and reclassification Change expected to have a material future effect LO# 2 18-9

4. Additional Emphasis Under certain circumstances 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. Two common things: 1. Substantial related party transactions; or 2. Significant subsequent event, e.g. a potentially material lawsuit filing Under certain circumstances 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. Two common things: 1. Substantial related party transactions; or 2. Significant subsequent event, e.g. a potentially material lawsuit filing LO# 2 18-10

Conditions for Departure from Unqualified/Unmodified Report Scope Limitation Departure from GAAP Lack of Auditor Independence LO# 3 18-11

Departures from an Unqualified/Unmodified Financial Statement Audit Report Qualified except for Disclaimer Adverse LO# 4 18-12

LO# 5 Decision process for report 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

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 18-20

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 18-21

Financial Statements Prepared According to a Special Purpose Framework Regulatory Basis Tax Basis Cash (or Modified Cash) Basis Contractual Basis LO# 8 18-22

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. 18-23

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 18-24

End of Chapter 18 18-25