Topic 17: Completing the Audit ? Reporting

1
Topic 17 Completing the Audit ? Reporting

• BMGT 422 - Auditing
• Arens 12e Ch. 3
• James J. McKinney
• jmckinney_at_rhsmith.umd.edu

2
Audit Topics
Through All Audit Phases
Topic 1 Overview Topic 2 Accounting Information
System Topic 18 Legal Liability
Fraud Detection IT Auditing Other
Engagements NOT AUDITING!
Planning
Fieldwork
Audit Completion
Topic 17 Reporting
(these topics affect fieldwork and completion) Top
ic 3 Cycles Topic 4 Management Assertions
and Audit Objectives Topic 5
Evidence Topic 6 Materiality Topic 7 Audit
Risk Topic 8 Test Types and
Audit Plan
Topic 9 Sampling in Tests of
Controls and Substantive Tests
of Transactions Topic 10 Tests of Controls Topic
11 Sampling in Tests of Details
of Balances Topic 12 Sales and Collections
Cycle Topic 13 Inventory and Warehousing
Cycle Topic 14 Acquisition and Payment
Cycle Topic 15 Cash
Topic 16 Audit Completion Topic 17 Reporting
3
!
Overview of an Audit
Planning
Fieldwork
Audit Completion

• Perform
• Pre-Acceptance Client Review
• Understand Business
• Initial Analytical Procedures
• Engagement Letter
• Make Preliminary Assessments
• Controls
• Risk
• Materiality
• Determine preliminary procedures based on
  previous assessments and
• Management Assertions
• Audit Objectives
• Evidence Availability, Persuasiveness, and Cost
• Prepare
• Audit Plan
• Audit Program

Test of Controls and Reassessment of Control Risk

• Substantive Testing
• Substantive Tests of Transactions
• Analytical Procedures
• Tests of Details of Balances

• Complete the Audit
• Contingent Liabilities
• Subsequent Events
• Final Analytical Procedures
• Make Reassessments
• Risk
• Materiality
• Evidence
• Issue
• Audit Report on Financial Statements
• Audit Report on Internal Controls (Public Cos)
• Management Letters

Sampling
4
Pre-AU-C Standard Unqualified Audit Report
!
Parts of the Standard Unqualified Audit Report
Report title

• Independent Auditor's Report
• To the Shareholders of ABC Company,
• We have audited the accompanying balance sheets
  of ABC Company as of December 31, 201X and 201W,
  and the related statements of income, retained
  earnings, and cash flows for the years 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 audits.
• We conducted our audits 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
  audits provide a reasonable basis for our
  opinion.
• In our opinion, the financial statements referred
  to in the preceding present fairly, in all
  material respects, the financial position of ABC
  Company as of December 31, 201X and 201W, and the
  results of its operations and its cash flows for
  the years then ended in conformity with
  accounting principles generally accepted in the
  United States of America.
• Mary, Land Terrapin, CPAs
• March 1, 201Y
• (modified version from AU 508.08)

Audit report address
Introductory paragraph
Scope paragraph
Opinion paragraph
Name of CPA firm
Audit report date (end of fieldwork)
5
New Post-AU-C Standard Unqualified Audit Report
!

• Independent Auditor's Report
• To the Shareholders of ABC Company,
• Report on the Financial Statements
• We have audited the accompanying consolidated
  financial statements of ABC Company and its
  subsidiaries, which comprise the consolidated
  balance sheets as of December 31, 201X and 201W,
  and the related consolidated statements of
  income, changes in stockholders' equity, and cash
  flows for the years then ended, and the related
  notes to the financial statements.
• Management's Responsibility for the Financial
  Statements
• Management is responsible for the preparation and
  fair presentation of these consolidated financial
  statements in accordance with accounting
  principles generally accepted in the United
  States of America this includes the design,
  implementation, and maintenance of internal
  control relevant to the preparation and fair
  presentation of consolidated financial statements
  that are free from material misstatement, whether
  due to fraud or error.
• Auditor's Responsibility
• Our responsibility is to express an opinion on
  these consolidated financial statements based on
  our audits. We conducted our audits 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
  consolidated financial statements are free from
  material misstatement.
• An audit involves performing procedures to obtain
  audit evidence about the amounts and disclosures
  in the consolidated financial statements. The
  procedures selected depend on the auditor's
  judgment, including the assessment of the risks
  of material misstatement of the consolidated
  financial statements, whether due to fraud or
  error. In making those risk assessments, the
  auditor considers internal control relevant to
  the entity's preparation and fair presentation of
  the consolidated financial statements in order to
  design audit procedures that are appropriate in
  the circumstances, but not for the purpose of
  expressing an opinion on the effectiveness of the
  entity's internal control. Accordingly, we
  express no such opinion. An audit also includes
  evaluating the appropriateness of accounting
  policies used and the reasonableness of
  significant accounting estimates made by
  management, as well as evaluating the overall
  presentation of the consolidated financial
  statements.
• We believe that the audit evidence we have
  obtained is sufficient and appropriate to provide
  a basis for our audit opinion.
• Opinion
• In our opinion, the consolidated financial
  statements referred to above present fairly, in
  all material respects, the financial position of
  ABC Company and its subsidiaries as of December
  31, 201X and 201W, and the results of their
  operations and their cash flows for the years
  then ended in accordance with accounting
  principles generally accepted in the United
  States of America.
• Report on Other Legal and Regulatory Requirements

Report title
Audit report address
Name of CPA firm
Audit report date (end of fieldwork)
6
PCAOB Unqualified Audit Report Example
!
Report of Independent Registered Public
Accounting Firm To the Board of Directors and
Shareholders of Marriott International, Inc. We
have audited the accompanying consolidated
balance sheets of Marriott International, Inc. as
of December 30, 2011 and December 31, 2010, and
the related consolidated statements of income,
cash flows, comprehensive income and
shareholders equity for each of the three fiscal
years in the period ended December 30, 2011 .
These financial statements are the responsibility
of the Companys management. Our responsibility
is to express an opinion on these financial
statements 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 an 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 audits provide
a reasonable basis for our opinion. In our
opinion, the financial statements referred to
above present fairly, in all material respects,
the consolidated financial position of Marriott
International, Inc. as of December 30, 2011 and
December 31, 2010, and the consolidated results
of its operations and its cash flows for each of
the three fiscal years in the period ended
December 30, 2011, in conformity with U.S.
generally accepted accounting principles. Ommitte
d paragraph no need to memorize We also have
audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United
States), Marriott International, Inc.s internal
control over financial reporting as of December
30, 2011, based on criteria established in
Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February
16, 2012, expressed an unqualified opinion
thereon. Ernst Young LLP McLean,
Virginia February 16, 2012
F/S and dates audited Auditor's and management's
responsibility
Why auditing.
What Auditors did
Opinion
Internal Control Report Cross-Reference
7
PCAOB Separate Report on Internal Controls Example
!
Report of Independent Registered Public
Accounting Firm The Board of Directors and
Shareholders of Marriott International, Inc. We
have audited Marriott International, Inc.s
internal control over financial reporting as of
December 30, 2011 , based on criteria established
in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria).
Marriott International, Inc.s management is
responsible for maintaining effective internal
control over financial reporting and for its
assessment of the effectiveness of internal
control over financial reporting included in the
accompanying Managements Report on Internal
Control Over Financial Reporting. Our
responsibility is to express an opinion on the
companys internal control over financial
reporting based on our audit. We conducted our
audit 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
about whether effective internal control over
financial reporting was maintained in all
material respects. Our audit included obtaining
an understanding of internal control over
financial reporting, assessing the risk that a
material weakness exists, testing and evaluating
the design and operating effectiveness of
internal control based on the assessed risk, and
performing such other procedures as we considered
necessary in the circumstances. We believe that
our audit provides a reasonable basis for our
opinion. A companys internal control over
financial reporting is a process designed to
provide reasonable assurance regarding the
reliability of financial reporting and the
preparation of financial statements for external
purposes in accordance with generally accepted
accounting principles. A companys internal
control over financial reporting includes those
policies and procedures that (1) pertain to the
maintenance of records that, in reasonable
detail, accurately and fairly reflect the
transactions and dispositions of the assets of
the company (2) provide reasonable assurance
that transactions are recorded as necessary to
permit preparation of financial statements in
accordance with generally accepted accounting
principles, and that receipts and expenditures of
the company are being made only in accordance
with authorizations of management and directors
of the company and (3) provide reasonable
assurance regarding prevention or timely
detection of unauthorized acquisition, use or
disposition of the companys assets that could
have a material effect on the financial
statements. Because of its inherent limitations,
internal control over financial reporting may not
prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to
future periods are subject to the risk that
controls may become inadequate because of changes
in conditions, or that the degree of compliance
with the policies or procedures may
deteriorate. In our opinion, Marriott
International, Inc. maintained, in all material
respects, effective internal control over
financial reporting as of December 30, 2011 ,
based on the COSO criteria. We also have
audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of
Marriott International, Inc. as of December 30,
2011 and December 31, 2010, and the related
consolidated statements of income, cash flows,
comprehensive income and shareholders equity for
each of the three fiscal years in the period
ended December 30, 2011, of Marriott
International, Inc. and our report dated February
16, 2012 expressed an unqualified opinion
thereon. Ernst Young LLP McLean,
Virginia February 16, 2012
Introductory
Scope
Definition
Inherent Limitations
Opinion
Cross-Reference

• Sarbanes-Oxley Act
• PCAOB Auditing standard 2 requires the audit of
  internal control to be integrated with the audit
  of the financial statements.

8
PCAOB Combined Report on Internal Controls Example
!
Report of Independent Registered Public
Accounting Firm The Stockholders and Board of
Directors, The Toro Company We have audited the
accompanying consolidated balance sheets of The
Toro Company and subsidiaries as of October 31,
2011 and 2010 and the related consolidated
statements of earnings, stockholders' equity and
comprehensive income, and cash flows for each of
the years in the three-year period ended October
31, 2011. In connection with our audits of the
consolidated financial statements, we also have
audited the financial statement schedule listed
in Item 15(a) 2. We also have audited The Toro
Company's internal control over financial
reporting as of October 31, 2011 based on
criteria established in Internal Control
Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway
Commission (COSO). The Toro Company's management
is responsible for these consolidated financial
statements and the identified financial statement
schedule, for maintaining effective internal
control over financial reporting, and for its
assessment of the effectiveness of internal
control over financial reporting, included in the
accompanying Management's Report on Internal
Control over Financial Reporting. Our
responsibility is to express an opinion on these
consolidated financial statements and financial
statement schedule and an opinion on the
Company's internal control over financial
reporting 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 audits to obtain reasonable
assurance about whether the financial statements
are free of material misstatement and whether
effective internal control over financial
reporting was maintained in all material
respects. Our audits of the consolidated
financial statements and financial statement
schedule included examining, on a test basis,
evidence supporting the amounts and disclosures
in the financial statements, assessing the
accounting principles used and significant
estimates made by management, and evaluating the
overall financial statement presentation. Our
audit of internal control over financial
reporting included obtaining an understanding of
internal control over financial reporting,
assessing the risk that a material weakness
exists, and testing and evaluating the design and
operating effectiveness of internal control based
on the assessed risk. Our audits also included
performing such other procedures as we considered
necessary in the circumstances. We believe that
our audits provide a reasonable basis for our
opinions. A company's internal control over
financial reporting is a process designed to
provide reasonable assurance regarding the
reliability of financial reporting and the
preparation of financial statements for external
purposes in accordance with generally accepted
accounting principles. A company's internal
control over financial reporting includes those
policies and procedures that (1) pertain to the
maintenance of records that, in reasonable
detail, accurately and fairly reflect the
transactions and dispositions of the assets of
the company (2) provide reasonable assurance
that transactions are recorded as necessary to
permit preparation of financial statements in
accordance with generally accepted accounting
principles, and that receipts and expenditures of
the company are being made only in accordance
with authorizations of management and directors
of the company and (3) provide reasonable
assurance regarding prevention or timely
detection of unauthorized acquisition, use, or
disposition of the company's assets that could
have a material effect on the financial
statements. Because of its inherent
limitations, internal control over financial
reporting may not prevent or detect
misstatements. Also, projections of any
evaluation of effectiveness to future periods are
subject to the risk that controls may become
inadequate because of changes in conditions or
that the degree of compliance with the policies
or procedures may deteriorate. In our
opinion, the consolidated financial statements
referred to above present fairly, in all material
respects, the financial position of The Toro
Company as of October 31, 2011 and 2010 and the
results of their operations and their cash flows
for each of the years in the three-year period
ended October 31, 2011, in conformity with U.S.
generally accepted accounting principles. Also in
our opinion, the identified financial statement
schedule, when considered in relation to the
basic consolidated financial statements taken as
a whole, presents fairly, in all material
respects, the information set forth therein. Also
in our opinion, The Toro Company maintained, in
all material respects, effective internal control
over financial reporting as of October 31, 2011
based on criteria established in Internal Control
Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway
Commission. KPMG, LLP Minneapolis,
Minnesota December 21, 2011
9
Types Of Audit Reports
!

• Unqualified or Clean
• Standard All basic F/S are a fair representation
  and are in accordance with GAAP in all material
  respects and GAAS was applied.
• There can be slight modifications to standard
  report and still be clean but NOT Standard
• Lack of consistency
• Going concern
• Justified departures from GAAP
• Emphasis on a matter
• Reference to other auditors
• Qualified or Except for
• Fair representation except for
• Material but not highly material departures from
  GAAP
• Material but not highly material scope
  limitations.

• Adverse
• Highly material departures from GAAP or not a
  fair representation of financial position.
• Rarely ever occurs.
• Disclaimer
• Unable to form an opinion because
• The auditor is not independent
• A highly material scope limitation
• A significant uncertainty

10
Unqualified Report With An Explanatory Paragraph
Or Modified Wording Lack of Consistency
!
Changes that affect comparability but
not consistency
Changes that affect consistency and require an
explanatory paragraph if they are material
1. Changes in accounting principles 2. Changes in
reporting entities 3. Corrections of errors
involving principles (PCAOB AS6.5 claims No.
3 is not a change)
1. Changes in an estimate 2. Error corrections
not involving principles 3. Variations in format
and presentation of financial information 4.
Changes because of substantially different
transactions or events
Example Explanatory Paragraph (additional to
standard paragraphs) Resulting from Lack of
Consistency (Same introductory, scope, and
opinion paragraphs as the standard report) As
discussed in Note 3 to the consolidated financial
statements, the Corporation (1) effective
January 1, 2008, adopted Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements, (2) effective January 1, 2007,
adopted the recognition and measurement
provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109, (3)
effective January 1, 2007, changed the
measurement date for defined benefit plan assets
and liabilities to coincide with its year end to
conform to Statement of Financial Accounting
Standards No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement
Plans an amendment of FASB Statements No. 87,
88, 106 and 132(R) (SFAS No. 158), and (4)
effective December 31, 2006, began to recognize
the funded status of its defined benefit plans in
its consolidated balance sheets to conform to
SFAS No. 158. (General Motors Corporation
December 31, 2008 10-K)
The Auditing Standards Board has issued a
proposal to the PCAOB to eliminate the
consistency explanatory paragraph.
11
Unqualified Report With An Explanatory Paragraph
Or Modified Wording Going Concern
!
1. Significant recurring operating
losses or working capital deficiencies 2.
Inability of the company to pay its obligations
as they come due 3. Loss of major customers, the
occurrence of uninsured catastrophes 4. Legal
proceedings, legislation that might jeopardize
the entitys ability to operate
Example Explanatory Paragraph (additional to
standard paragraphs) Resulting from Substantial
Doubt about Going Concern (Same introductory,
scope, and opinion paragraphs as the standard
report) The accompanying consolidated financial
statements for the year ended December 31, 2008,
have been prepared assuming that the Corporation
will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements,
the Corporations recurring losses from
operations, stockholders deficit, and inability
to generate sufficient cash flow to meet its
obligations and sustain its operations raise
substantial doubt about its ability to continue
as a going concern. Managements plans concerning
these matters are also discussed in Note 2 to the
consolidated financial statements. The
consolidated financial statements do not include
any adjustments that might result from the
outcome of this uncertainty. (General Motors
Corporation December 31, 2008 10-K)
12
Unqualified Report With An Explanatory Paragraph
Or Modified Wording Justified departures from
GAAP
!
Auditor Agrees with a Departure from a
Promulgated Principle The auditor must be
satisfied and must state and explain, in a
separate paragraph or paragraphs in the audit
report, that adhering to the principle would have
produced a misleading result in that situation.

• Rule 203 ET section 203.01 was adopted to
  require compliance with accounting principles
  promulgated by the body designated by Council to
  establish such principles. There is a strong
  presumption that adherence to officially
  established accounting principles would in nearly
  all instances result in financial statements that
  are not misleading.
• However, in the establishment of accounting
  principles it is difficult to anticipate all of
  the circumstances to which such principles might
  be applied. This rule therefore recognizes that
  upon occasion there may be unusual circumstances
  where the literal application of pronouncements
  on accounting principles would have the effect of
  rendering financial statements misleading. In
  such cases, the proper accounting treatment is
  that which will render the financial statements
  not misleading.
• The question of what constitutes unusual
  circumstances as referred to in rule 203 ET
  section 203.01 is a matter of professional
  judgment involving the ability to support the
  position that adherence to a promulgated
  principle would be regarded generally by
  reasonable persons as producing a misleading
  result.
• Examples of events which may justify departures
  from a principle are new legislation or the
  evolution of a new form of business transaction.
  An unusual degree of materiality or the existence
  of conflicting industry practices are examples of
  circumstances which would not ordinarily be
  regarded as unusual in the context of rule 203 .

13
Unqualified Report With An Explanatory Paragraph
Or Modified Wording Emphasis on a Matter
!
Emphasis of a Matter Under certain circumstances,
the CPA may want to emphasize specific matters
regarding the financial statements, even though
the CPA intends to express an unqualified opinion.
Example Explanatory Paragraph (additional to
standard paragraphs) Resulting from Substantial
Doubt about Going Concern (Same introductory,
scope, and opinion paragraphs as the standard
report) As discussed in Note 4 to the
consolidated financial statements, on November
30, 2006, the Corporation sold a 51 controlling
interest in GMAC LLC, its former wholly-owned
finance subsidiary. The Corporations remaining
interest in GMAC LLC is accounted for as an
equity method investment. (General Motors
Corporation December 31, 2008 10-K)
14
Unqualified Report With An Explanatory Paragraph
Or Modified Wording Other Auditors
!

• Reports Involving
• Other Auditors
• Make no reference
• in the audit report.
• Make reference
• in the report
• (modified wording
• report).
• 3. Qualify the opinion.

• REFERENCE TO OTHER AUDITORS (shared opinions,
  multi-location corporations)
• Must reference other auditors if (indicates
  division of responsibility).
• Material AND
• Not taking responsibility
• Only requires primary auditors signature.
• Extended introduction
• Do not mention others name unless including their
  report.
• Modified scope and opinion paragraphs.

15
Unqualified Report With An Explanatory Paragraph
Or Modified Wording Other Auditors
!

• Comparative Financial Statements (2 or more
  prior years).
• When same CPA does all years
• If current year unqualified, pluralize, refer to
  prior years and include all dates.
• If prior years were other than unqualified, add
  explanatory paragraph.
• Change to new CPA
• Reference other auditors
• If current year unqualified, pluralize, refer to
  prior years and include all dates.
• Make clear that you are not responsible for prior
  years.
• Opinions from prior years can be changed if new
  information becomes available, add explanatory
  paragraph.
• Other Auditors Whose Work Cannot Be Relied Upon
• If some what material, address reasons and
  qualify.
• If material, disclaim.
• Preceding two should happen rarely, since it
  signifies a lack of coordination.

16
Types Of Audit Reports
!

• Adverse
• Highly material departures from GAAP or not a
  fair representation of financial position.
• Rarely ever occurs.
• Disclaimer
• Unable to form an opinion because
• The auditor is not independent
• A highly material scope limitation
• A significant uncertainty

• Unqualified or Clean
• Standard All basic F/S are a fair representation
  and are in accordance with GAAP in all material
  respects and GAAS was applied.
• There can be slight modifications to standard
  report and still be clean but NOT Standard
• Lack of consistency
• Going concern
• Justified departures from GAAP
• Emphasis on a matter
• Reference to other auditors
• Qualified or Except for
• Fair representation except for
• Material but not highly material departures from
  GAAP
• Material but not highly material scope
  limitations.

17
Qualified Opinion GAAP Departure
!
Example Departure from GAAP Qualified Opinion
(Modified opinion standard report paragraph -
same introductory and scope paragraphs as the
standard report) The Company has excluded, from
property and debt in the accompanying balance
sheets, certain lease obligations that, in our
opinion, should be capitalized in order to
conform with accounting principles generally
accepted in the United States of America. If
these lease obligations were capitalized,
property would be increased by _______ and
_______, long-term debt by _______ and
_______, and retained earnings by _______ and
_______ as of December 31, 201X and 201W,
respectively. Additionally, net income would be
increased (decreased) by _______ and _______
and earnings per share would be increased
(decreased) by _______ and _______,
respectively, for the years then ended. In our
opinion, except for the effects of not
capitalizing certain lease obligations as
discussed in the preceding paragraph, the
financial statements referred to above present
fairly, in all material respects, the financial
position of X Company as of December 31, 201X and
201W, and the results of its operations and its
cash flows for the years then ended in conformity
with accounting principles generally accepted in
the United States of America. (modified version
of AU 508.39)

• If immaterial departure from GAAP then
  unqualified opinion

18
Qualified Opinions Disclosure
!
Example Lack of Disclosure Qualified Opinion
(Modified opinion standard report paragraph -
same introductory and scope paragraphs as the
standard report) The Companys consolidated
financial statements as of March 31, 2008 and for
the year then ended do not disclose segment
reporting information required by ASC 280. In our
opinion, disclosure of segment reporting
information is required by U.S. generally
accepted accounting principles. In our opinion,
except for the omission of segment reporting
information discussed in the preceding paragraph,
the financial statements referred to above
present fairly, in all material respects, the
consolidated financial position of Hitachi, Ltd.
and subsidiaries at March 31, 2010 and 2009, and
the consolidated results of their operations and
their cash flows for each of the three years in
the period ended March 31, 2010, in conformity
with U.S. generally accepted accounting
principles. Also, the related financial statement
schedule, when considered in relation to the
basic financial statements taken as a whole,
presents fairly in all material respects the
information set forth therein. (Hitachi, Ltd.
March 31, 2010 20-F)
19
Qualified Opinion Scope Limitation
!
Example Scope Limitation Qualified Opinion
(Modified scope and opinion standard report
paragraphs) REPORT OF INDEPENDENT REGISTERED
ACCOUNTING FIRM To the Shareholders of Fresh Made
Dairy, Inc. We have audited the accompanying
balance sheet of Fresh Made Dairy, Inc as of
December 31, 2008 and the related statements of
income, stockholders equity, and cash flows for
the year then ended. These financial statements
are the responsibility of the Companys
management. Our responsibility is to express an
opinion on these financial statements based on
our audit. Except as discussed in the following
paragraph, 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. We were not able to make, or
observe, physical inventory counts at December
31, 2008 and 2007 because we were not engaged as
auditors until after December 31, 2008, and we
have not been able to otherwise satisfy ourselves
as to the inventory balances at those dates by
other auditing procedures. The reported
inventory balance was 471,477 and 590,464 at
December 31, 2008 and 2007, respectively. 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 inventory, the
financial statements referred to in the first
paragraph above present fairly, in all material
respects, the financial position of Fresh Made
Dairy, Inc. as of December 31, 2008, and the
results of operations and its cash flows for the
year then ended in conformity with accounting
principles generally accepted in the United
States of America. Plante Moran, PLLC Grand
Rapids, MI April 29, 2009 (Fresh Made Dairy
December 31, 2008 10-K)
20
Types Of Audit Reports
!

• Unqualified or Clean
• Standard All basic F/S are a fair representation
  and are in accordance with GAAP in all material
  respects and GAAS was applied.
• There can be slight modifications to standard
  report and still be clean but NOT Standard
• Lack of consistency
• Going concern
• Justified departures from GAAP
• Emphasis on a matter
• Reference to other auditors
• Qualified or Except for
• Fair representation except for
• Material but not highly material departures from
  GAAP
• Material but not highly material scope
  limitations.

• Adverse
• Highly material departures from GAAP or not a
  fair representation of financial position.
• Rarely ever occurs.
• Disclaimer
• Unable to form an opinion because
• The auditor is not independent
• A highly material scope limitation
• A significant uncertainty

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Adverse Opinion GAAP Departure
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Example Departure from GAAP Adverse Opinion
(Modified opinion standard report paragraph -
same introductory and scope paragraphs as the
standard report) As discussed in Note X to the
financial statements, the Company carries its
property, plant and equipment accounts at
appraisal values, and provides depreciation on
the basis of such values. Further, the Company
does not provide for income taxes with respect to
differences between financial income and taxable
income arising because of the use, for income tax
purposes, of the installment method of reporting
gross profit from certain types of sales.
Accounting principles generally accepted in the
United States of America require that property,
plant and equipment be stated at an amount not in
excess of cost, reduced by depreciation based on
such amount, and that deferred income taxes be
provided. Because of the departures from
accounting principles generally accepted in the
United States of America identified above, as of
December 31, 201X and 201W, inventories have been
increased _______and _______by inclusion in
manufacturing overhead of depreciation in excess
of that based on cost property, plant and
equipment, less accumulated depreciation, is
carried at _______ and _______ in excess of an
amount based on the cost to the Company and
deferred income taxes of _______ and _______
have not been recorded resulting in an increase
of _______ and _______ in retained earnings and
in appraisal surplus of _______ and _______,
respectively. For the years ended December 31,
201X and 201W, cost of goods sold has been
increased _______ and _______, respectively,
because of the effects of the depreciation
accounting referred to above and deferred income
taxes of _______ and _______ have not been
provided, resulting in an increase in net income
of _______ and _______, respectively. In our
opinion, because of the effects of the matters
discussed in the preceding paragraphs, 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 X
Company as of December 31, 201X and 201W, or the
results of its operations or its cash flows for
the years then ended. (modified version of AU
508.60)
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Types Of Audit Reports
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• Unqualified or Clean
• Standard All basic F/S are a fair representation
  and are in accordance with GAAP in all material
  respects and GAAS was applied.
• There can be slight modifications to standard
  report and still be clean but NOT Standard
• Lack of consistency
• Going concern
• Justified departures from GAAP
• Emphasis on a matter
• Reference to other auditors
• Qualified or Except for
• Fair representation except for
• Material but not highly material departures from
  GAAP
• Material but not highly material scope
  limitations.

• Adverse
• Highly material departures from GAAP or not a
  fair representation of financial position.
• Rarely ever occurs.
• Disclaimer
• Unable to form an opinion because
• The auditor is not independent
• A highly material scope limitation
• A significant uncertainty

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Disclaimer Report Independence
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Disclaimer Report Scope Limitation
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• Scope Limitation
• Not granted full access or unsatisfactory access
  to financial records
• May be client imposed - withholding information
  or not allowing you to confirm.
• May be circumstance imposed - hired in middle of
  year and cannot verify beginning inventory or
  flood or hurricane (e.g. Hugo) destroyed records.
• Alternative measures may be used and need not
  lead to disclosure.
• If some what material, issue qualified opinion
  discuss amounts potential effects
• If highly material, disclaim no scope paragraph

Example Disclaimer Report (Modified
introductory and opinion standard report
paragraphs no scope paragraph) We were engaged
. . . (rest of introductory paragraph is the
same) Second paragraph of standard report
should be omitted The Company did not make a
count of its physical inventory in 201X or 201W,
stated in the accompanying financial statements
at _______ as of December 31, 201X, and at
________ as of December 31, 201W. Further,
evidence supporting the cost of property and
equipment acquired prior to December 31, 201W, is
no longer available. The Company's records do not
permit the application of other auditing
procedures to inventories or property and
equipment. Since the Company did not take
physical inventories and we were not able to
apply other auditing procedures to satisfy
ourselves as to inventory quantities and the cost
of property and equipment, the scope of our work
was not sufficient to enable us to express, and
we do not express, an opinion on these financial
statements. (modified version of AU 508.63)
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Additional Resources

• RIA Checkpoint AT Section 101Attest Engagements
  Professional Standards (AICPA) 101.84 101.87
  and 101.14
• SAS 58
• PCAOB AS 1 and AS 5