Audit Reports

1
Audit Reports

• Chapter 3

2
What are we paid for?

• Our Opinion!

3
Types of Opinions

• Unqualified
• Qualified
• Adverse
• Disclaimer

4
Basic Report Structure

• Title
• Salutation
• Introductory paragraph
• Scope paragraph
• Opinion paragraph
• Signature
• Date

5
Unqualified Opinions

• Used when everything is okay
• Client has followed GAAP
• No scope limitations
• Disclosures are adequate
• Presentation has been consistent
• This is what the client wants

6
Introductory Paragraph

• Says auditor has done an audit
• Identify statements
• Clarifies responsibilities
• Management is responsible for statements
• Our responsibility is to render an opinion on
  them

7
Scope Paragraph

• Says what auditor did
• Followed GAAS or PCAOB standards
• Reasonable assurance
• Test basis / sampling
• See whether free of material misstatement

8
Opinion Paragraph

• In our opinion
• present fairly
• true and fair view.
• In all material respects
• conformity with U.S. GAAP

9
Qualified Opinions

• Does not mean Auditor is qualified.
• Most things are okay
• Departure from GAAP
• Material enough to mention
• Not material enough to be pervasive
• Scope limitation

10
Qualified Opinion Structure

• Intro paragraph unchanged
• Scope paragraph unchanged
• Third explanatory paragraph added before opinion
• Opinion modified except for

11
Adverse Opinion

• Statements do not conform with GAAP
• First two paragraphs unchanged
• Third paragraph is explanatory
• Opinion paragraph
• Because of
• do not present fairly
• Not allowed for scope limitation or independence
  problem

12
Disclaimer for Scope Limitation

• Issued for severe Scope limitation
• Different from that issued for Non-independence
• Standard first paragraph
• No scope paragraph
• Explanatory paragraph
• Because unable to form an opinion, therefore we
  dont

13
Disclaimer for Non-Independence

• Only one paragraph
• We are not independent
• Accordingly, we do not express an opinion

14
Unqualified yet Different!

• Sometimes the financials conform to GAAP, yet
  they need special wording
• Examples
• Change in GAAP
• Going concern
• Emphasis of a matter

15
Unqualified with Explanatory Paragraph

• First three paragraphs of unqualified opinion
  remain the same
• Fourth paragraph is added to discuss issue
• Unqualified with Modified Wording
• All paragraphs are modified, none is added
• Example use of another auditor

16
Auditing Internal Controls

• PCAOB AS 2
• Auditors report on internal controls
• Unqualified IFF no material weaknesses and no
  scope restrictions
• Whats a material weakness?
• Likelihood that it could results in misstated
  balance
• Magnitude of potential misstatement

17
Auditors Report on Managements Assessment

• Title Independent
• Identification of report criteria
• Responsibilities (like in audit)
• Scope paragraph
• PCAOB reference
• Definition of internal control from SOX
• Inherent limitations paragraph
• Explanatory paragraph
• Opinion
• Signature, with date and city

18
SOX definition of IC

• A process designed by, or under the supervision
  of, the company's principal executive and
  principal financial officers, or persons
  performing similar functions, and effected by the
  company's board of directors, management, and
  other personnel, 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 and 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.

19
Combined Report

• Internal controls report can be separate or
  combined with audit report.
• PCAOB has just assigned a task force to examine
  reporting issues