Audit Reports and Communication Principles of Auditing: An Introduction to International Standards o

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Audit Reports and Communication Principles of
Auditing An Introduction to International
Standards on Auditing - - Ch. 12

• Rick Stephan Hayes,
• Roger Dassen, Arnold Schilder,
• Philip Wallage

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Management Responsibility for Audit Report - SOx

• Sox Requires that the principal executive officer
  or officers and the principal financial officer
  or officers, certify in each report filed with
  the SEC the following
• the signing officer has reviewed the report
• the report does not contain any untrue statement
  of a material fact or omit to state a material
  fact
• the financial statements, and other financial
  information, fairly present in all material
  respects the financial condition of the company 
• the signing officers
• are responsible for establishing and maintaining
  internal controls
• have evaluated the effectiveness of the companys
  internal controls and
• have presented in the report their conclusions
  about the effectiveness of their internal
  controls based on their evaluation

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Corporate Responsibility for Audit Report under
SOx (cont.)

• Requires that the principal executive officer or
  officers and the principal financial officer or
  officers, certify in each report filed with the
  SEC the following
• the signing officers have disclosed to the
  companys auditors and the audit committee of the
  board of directors
• all significant deficiencies in the design or
  operation of internal controls which could
  adversely affect the companys ability to record,
  process, summarize, and report financial data and
  have identified for the companys auditors any
  material weaknesses in internal controls and
• any fraud, whether or not material, that involves
  management or other employees who have a
  significant role in the companys internal
  controls

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ISA 700 Elements of Auditors Report Not in Text

• (a) Title
• (b) Addressee
• (c) Introductory paragraph
• (d) Managements responsibility for the financial
  statements
• (e) Auditors responsibility

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ISA 700 Elements of Auditors Report (cont.)

• (f) Auditors opinion
• (g) Other reporting responsibilities
• (h) Auditors signature
• (i) Date of the auditors report and
• (j) Auditors address.

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Contents of the Auditor's Report

• title,
• addressee,
• opening or introductory paragraph
• scope paragraph (describing the nature of an
  audit)
• opinion paragraph containing an expression of
  opinion on the financial statements,
• the date of the report
• the auditor's address, and
• auditors signature

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Example PCAOB Amgem Saple audit report from Audit
Standard No. 4 NEXT SLIDE
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• Report of Independent Registered Public
  Accounting Firm on the Financial Statements
• The Board of Directors and Stockholders of Amgen
  Inc.
• We have audited the accompanying
  Consolidated Balance Sheets of Amgen Inc. (the
  Company) as of December 31, 2005 and 2004, and
  the related Consolidated Statements of
  Operations, Stockholders Equity, and Cash Flows
  for each of the three years in the period ended
  December 31, 2005. Our audits also included the
  financial statement schedule listed in the Index
  at Item 15(a)2. These financial statements and
  schedule are the responsibility of the Companys
  management. Our responsibility is to express an
  opinion on these financial statements and
  schedule 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 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 Amgen Inc. at December 31, 2005 and
  2004, and the consolidated results of its
  operations and its cash flows for each of the
  three years in the period ended December 31,
  2005, in conformity with U.S. generally accepted
  accounting principles. Also, in our opinion, 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.
• We also have audited, in
  accordance with the standards of the Public
  Company Accounting Oversight Board (United
  States), the effectiveness of Amgen Inc.s
  internal control over financial reporting as of
  December 31, 2005, based on criteria established
  in Internal Control  Integrated Framework issued
  by the Committee of Sponsoring Organizations of
  the Treadway Commission and our report dated
  March 2, 2006 expressed an unqualified opinion
  thereon.
• Ernst  Young LLP
• Los Angeles, California
• March 2, 2006

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Example PCAOB sample audit report from Audit
Standard No. 5 NEXT SLIDES
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Report of Independent Registered Public
Accounting Firm Introductory paragraph We have
audited the accompanying balance sheets of W
Company as of December 31, 20X8 and 20X7, and the
related statements of income, stockholders'
equity and comprehensive income, and cash flows
for each of the years in the three-year period
ended December 31, 20X8. We also have
audited management's assessment, included in the
accompanying title of management's report, that
W Company maintained effective internal control
over financial reporting as of December 31, 20X8,
based on Identify control criteria, for example,
"criteria established in Internal
ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the
Treadway Commission (COSO)." . W Company's
management is responsible for these
financial statements, for maintaining effective
internal control over financial reporting, and
for its assessment of the effectiveness of
internal control over financial reporting. Our
responsibility is to express an opinion on these
financial statements and an opinion on the
company's internal control over financial
reporting based on our audits.
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Scope paragraph 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 financial statements 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, 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 audits provide a reasonable basis for our
opinions.
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Definition paragraph 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.
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Inherent limitations paragraph 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. Opinion
paragraph In our opinion, the financial
statements referred to above present fairly, in
all material respects, the financial position of
W Company as of December 31, 20X8 and 20X7, and
the results of its operations and its cash flows
for each of the years in the three-year period
ended December 31, 20X8 in conformity with
accounting principles generally accepted in the
United States of America. Also in our opinion, W
Company maintained, in all material respects,
effective internal control over financial
reporting as of December 31, 20X8, based on
Identify control criteria, for example,
"criteria established in Internal
ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the
Treadway Commission (COSO)." . Signature City
and State or Country Date
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The opinion expressed in the auditor's report may
be one of four types

• unqualified,
• qualified,
• adverse, or
• disclaimer of opinion

Q
U
A
D
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Unqualified Audit Opinion

• Most common type of audit report
• Called clean opinion
• Used for more than 90 per cent of all audit
  reports
• Other audit reports are referred to as 'other
  than unqualified reports (adverse opinion,
  disclaimer of opinion, and qualified opinion).

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An Unqualified Opinion should be expressed
when the auditor concludes that the
financial statements give a true and fair
view or are presented fairly,
in all material respects, in accordance
with the applicable financial reporting
framework.
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Modifications To The Opinion ISA 705 (not in
text)

• ISA 705 uses the term modifications to the
  opinion to describe qualified opinions (except
  for opinions), adverse opinions, and disclaimers
  of opinion.
• ISA 705 establishes standards and provides
  guidance on (a) circumstances that may result in
  a modification to the opinion in the auditors
  report, (b) the type of opinion appropriate in
  the circumstances, and (c) the form and content
  of the auditors report when the auditors
  opinion is modified.

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The auditor should modify the opinion in the
auditors report when (not in text)

• (a) The auditor concludes that, based on the
  audit evidence obtained, the financial statements
  are not free from material misstatement and
  accordingly are not prepared, in all material
  respects, in accordance with an applicable
  financial reporting framework or
• (b) The auditor is unable to obtain sufficient
  appropriate audit evidence to conclude that the
  financial statements are free from material
  misstatement.

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Auditors Report Containing a Qualified Opinion

• An auditors report containing a qualified
  opinion is issued when the auditor concludes that
  an unqualified opinion cannot be expressed but
  that the effect of any disagreement with
  management, or limitation on scope is not so
  material as to require an adverse opinion or a
  disclaimer of opinion.

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Auditors Report Containing an Adverse Opinion

• An adverse opinion is issued when the effect
  of a disagreement is so material and pervasive to
  the financial statements that the auditor
  concludes that a qualification of her report is
  not adequate to disclose the misleading or
  incomplete nature of the financial statements.

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Auditors Report Containing a Disclaimer of
Opinion

• An auditors report containing a disclaimer of
  opinion should be expressed when the possible
  effect of a limitation on scope is so material
  and pervasive that the auditor has not been
  able to obtain sufficient appropriate audit
  evidence and therefore is
  unable to express
  an opinion on the
  financial statements.

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In addition to the, specific elements discussed,
whenever the auditor expresses a modified opinion
on the financial statements, the auditor should
include a paragraph that provides

• (a) A clear description of all the substantive
  reasons for the modification
• (b) In the event of a disagreement with
  management about disclosures, a description of
  the omitted disclosures, unless impracticable or
  prohibited by law or regulation.
• (c) In the event of a disagreement with
  management, a description and quantification of
  the principal effects on the financial statements
  of the matter giving rise to the modification
• (d) In the event of an inability to obtain
  sufficient appropriate audit evidence, a
  description of the reason for the inability.

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An Emphasis of a Matter Paragraph with an
Unqualified Opinion

• An auditors unqualified report is sometimes
  expanded upon to explain matters that do
  not affect the auditors opinion, but should be
  emphasized to the financial statement user.
• In certain circumstances an auditors report may
  be modified by adding a fourth paragraph to
  highlight a material going concern problem or
  when there is significant uncertainties in the
  future which may affect the financial statements.

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ISA 706, Emphasis of Matter Paragraphs and Other
Matters Paragraphs in the Independent Auditors
Report (Not in text)

• The auditors report should emphasize a matter
  presented or disclosed in the financial
  statements or the notes when
• (a) the matter is both unusual and
• (b) of fundamental importance to the users
  understanding of the financial statements.

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An auditor might write an Emphasis of a Matter
paragraph

• If there is a significant uncertainty which may
  affect the financial statements, the resolution
  of which is dependent upon future events
• Examples of uncertainties that might be
  emphasized include
• the existence of related party transactions,
• important accounting matters occurring subsequent
  to the balance sheet date
• matters affecting the comparability of financial
  statements with those of previous years (e.g.
  change in accounting methods)
• Litigation, long-term contracts, recoverability
  of asset values, losses on discontinued
  operations
• To highlight a material matter regarding a going
  concern problem.

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Going Concern

• The going concern assumption is that the
  enterprise is normally viewed as a going concern,
  that is, as continuing in operation for the
  foreseeable future.
• When a question arises regarding the
  appropriateness of the going concern assumption,
  the auditor should gather sufficient appropriate
  audit evidence to attempt to determine the
  entity's ability to continue in operation for the
  foreseeable future.

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Going Concern Disclosure

• If the going concern questions are not resolved,
  the auditor must adequately disclose in her
  report the principal conditions that raise doubt
  about the entity's ability to continue in
  operation in the foreseeable future.
• The disclosure should
• describe the principal conditions that raise
  doubt
• state that there are doubts about going concern,
  therefore the entity may be unable to realize its
  assets and discharge its liabilities in the
  normal course of business
• state that the financial statements do not
  include any adjustments relating to the
  recoverability and classification of recorded
  asset amounts or to amounts and classification of
  libilities.

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Circumstances That May Result in Modifications to
the Audit Report

• According to ISA 705. there are at least two
  circumstances where the auditor may not be able
  to express an unqualified opinion
• a limitation in scope and
• a disagreement with management

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Limitation on Scope

• Scope limitations arise when the auditors are
  unable for any reason to obtain sufficient
  appropriate audit evidence to conclude that the
  financial statements are free from material
  misstatement

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Disagreement with Management

• The auditor may disagree with management as to
• a) The acceptability of the accounting policies
  selected
• b) The method of policy application, including
  the adequacy of valuations and disclosures
  in the financial statements or
• c) The compliance of the
  financial statements with relevant
  regulations and
  statutory requirements.
• If any of these disagreements are material, but
  not
• pervasive, the auditor should express a qualified
  opinion.
• If the effect of the disagreement is so material
  and pervasive to the financial statements that a
  qualification would not be adequate , an adverse
  opinion should be expressed.

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• In determining the pervasiveness of the effect of
  a disagreement with management or the inability
  to obtain sufficient appropriate audit evidence,
  the auditor considers
• (a) The extent to which the disagreement with
  management or inability to obtain sufficient
  appropriate audit evidence can be (i) related to
  specific items in the financial statements and
  (ii) quantified.
• (b) Whether the effect of the disagreement with
  management on the financial statements can be
  clearly described in the auditors report so that
  the modification can address the incomplete or
  misleading nature of the financial statements.

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Uncertainties Leading to Qualification of Opinions

• Although ISAs specify qualification of opinions
  based on either limitation of scope or
  disagreement with management, certain
  uncertainties such as material uncertainties,
  lack of consistency of application of accounting
  principles, independence of auditor, reports in
  reference to experts or fraud may lead to an
  auditors report containing a qualification of
  opinion in many countries.

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Accounting Principles Not Consistently Applied

• Lack of consistency in the application of
  accounting principles in the current period in
  relation to the preceding period may require a
  modification to an unqualified opinion in many
  countries based on local standards.

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Auditor is Not Independent

• IFAC's Guideline on Ethics for Professional
  Accountants stresses the great importance to
  auditing of independence both in fact and
  appearance. However, the ISA Auditing standards
  do not require a qualified opinion or a
  disclaimer of opinion if the auditor is not
  independent, although this is the case in most
  countries.

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Reports involving other auditors and experts

• ISA 620 suggests that when expressing an
  unqualified opinion the auditor should not refer
  to the work of an expert in her report as such a
  reference might be misunderstood to be a
  qualification of the auditor's opinion or a
  division of responsibility. If the auditor as a
  result of the other auditor's or expert's work
  issues an auditors report containing other than
  an unqualified opinion, she may in some
  circumstances describe the work of the expert.

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Communications With Those Charged With Governance

• ISA 260 states The auditor should communicate
  audit matters of governance interest arising from
  the audit of financial statements with those
  charged with governance of an entity.
• Governance is the term used to describe the
  role of persons entrusted with the supervision,
  control and direction of an entity, usually the
  board of directors or supervisory board or the
  audit committee.

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Governance Structures

• The structures of governance vary from country to
  country reflecting cultural and legal
  backgrounds.
• In some countries, the supervision function, and
  the management function are legally separated
  into different bodies, such as a supervisory
  (wholly or mainly non-executive) board and a
  management (executive) board.
• In other countries, like the U.S., both functions
  are the legal responsibility of a single, unitary
  board.

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Auditor Communications to Governance Entity

• Audit matters of governance interest to be
  communicated by the auditor to the board or audit
  committee ordinarily include
• Material weaknesses in internal control
• Non-compliance with laws and regulations.
• Fraud involving management
• Questions regarding management integrity
• The general approach and overall scope of the
  audit
• The selection of, or changes in, significant
  accounting policies and practices that have a
  material effect on the financial statements

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Auditor Communications to Governance Entity (cont)

• Audit matters of governance interest to be
  communicated by the auditor to the board or audit
  committee ordinarily include
• The potential effect on the financial statements
  of any significant risks and exposures, such as
  pending litigation, that requires disclosure in
  the financial statements
• Significant audit adjustments to the accounting
  records
• Material uncertainties related to the entitys
  ability to continue as a going concern
• Disagreements with management about matters that
  could be significant to the entitys financial
  statement.
• Expected modifications to the auditors report

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Fraud and Error

• ISA 240 says the auditor should communicate to
  management any material weaknesses in internal
  control related to the prevention or detection of
  fraud and error, which have come to the auditors
  attention.
• If the auditor concludes that it is not possible
  to continue performing the audit as a result of a
  misstatement resulting from fraud or suspected
  fraud, withdrawal from the engagement must then
  be seriously considered.

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Reporting of Non-compliance with Laws

• If the auditor concludes that the noncompliance
  has a material effect on the financial
  statements, and has not been properly reflected
  in the financial statements, the auditor should
  express a qualified or an adverse opinion.
• The auditors duty of confidentiality would
  ordinarily preclude reporting noncompliance to a
  third party. However, in certain circumstances,
  that duty of confidentiality is overridden by
  statute, law or by courts of law (for example, in
  some countries the auditor is required to report
  noncompliance by financial institutions to the
  supervisory authorities).

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Long-Form Audit Report

• In many countries it is customary for the auditor
  to prepare a long-form report to the Audit
  Committee of an entitys board of directors in
  addition to the publicly published short-form
  report discussed in this chapter.
• A long- form report ordinarily includes
• Overview of the Audit Engagement
• Analysis of Financial Statements
• Risk Management and Internal Control
• Optional Topics
• Auditor independence and quality control
• Fees

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• XBRL is a freely licensed, open technology
  standard that makes it possible to store and/or
  transfer data along with the complex hierarchies,
  data-processing rules and descriptions.
• Permits the automatic exchange and reliable
  extraction of financial information across all
  software formats and technologies, including the
  Internet
• Reduces the need to enter financial information
  more than one time, reducing the risk of data
  entry error and eliminating the need to manually
  key information for various formats

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Continuous Reporting and Auditing

• Continuous reporting is the real-time disclosure
  of transaction data.
• Embedded audit modules (EAM) are database
  software routines that are placed at
  predetermined points to gather information about
  transactions or events within the system that
  auditors deem to be material. EAMs allow
  auditors to proactively monitor auditable
  conditions.

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Thank You for Your Attention

• Any Questions?