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©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 1
Audit ReportsAudit Reports
Chapter 3Chapter 3
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 22
Parts of the StandardParts of the StandardUnqualified Audit ReportUnqualified Audit Report
1. Report title
2. Audit report address
3. Introductory paragraph
4. Scope paragraph
5. Opinion paragraph
6. Name of CPA firm
7. Audit report date
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 3317-17-33
We have audited the accompanying balance We have audited the accompanying balance sheet of XYZ Company as of December 31, sheet of XYZ Company as of December 31, 20XX, and the related statements of income, 20XX, and the related statements of income, retained earnings, and cash flows for the year retained earnings, and cash flows for the year then ended. These financial statements are the then ended. These financial statements are the responsibility of the Company's management. responsibility of the Company's management. Our responsibility is to express an opinion on Our responsibility is to express an opinion on these financial statements based on our audit. these financial statements based on our audit.
The AICPA Standard Auditors’ Report--Introductory Paragraph
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 4417-17-44
We conducted our audit in accordance with auditing standards We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant assessing the accounting principles used and significant estimates made by management, as well as evaluating the estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. audit provides a reasonable basis for our opinion.
The AICPA Standard Auditors’ Report--Scope Paragraph
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 5517-17-55
In our opinion, the financial statements In our opinion, the financial statements referred to above present fairly, in all material referred to above present fairly, in all material respects, the financial position of XYZ respects, the financial position of XYZ Company as of December 31, 20XX, and the Company as of December 31, 20XX, and the results of its operations and its cash flows for results of its operations and its cash flows for the year then ended in conformity with the year then ended in conformity with accounting principles generally accepted in accounting principles generally accepted in the United States of America.the United States of America.
The AICPA Standard Auditors’ Report--Opinion Paragraph
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 66
Conditions for StandardConditions for StandardUnqualified Audit ReportUnqualified Audit Report
1. All financial statements are included.
2. The three general standards have beenfollowed in all respects on the engagement.
3. Sufficient evidence has been accumulatedto conclude that the three standards offield work have been met.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 77
Conditions for StandardConditions for StandardUnqualified Audit ReportUnqualified Audit Report
4. The financial statements are presented inaccordance with generally acceptedaccounting principles.
5. There are no circumstances requiring theaddition of an explanatory paragraph ormodification of the wording of the report.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 88
Five Categories of Audit Five Categories of Audit ReportsReports
1. Standard unqualified
3. Qualified
2. Unqualified with explanatory paragraphor modified wording
4. Adverse 5. Disclaimer
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 99
Reporting on Internal Control Reporting on Internal Control over Financial Reportingover Financial Reporting
Auditors of public companies subject to Section 404 of the Sarbanes-Oxley Act mustreport on the effectiveness of internalcontrol over financial reporting.
PCAOB Auditing Standard 5 requiresthe audit of internal control to be integratedwith the audit of the financial statements.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 1010
Sarbanes-Oxley ActSarbanes-Oxley Act
Separate Report on Financial Statements andInternal Control Over Financial Reporting
1. Introductory paragraph
2. Scope paragraph
3. Definition paragraph
4. Inherent limitations paragraph
5. Opinion paragraph
6. Cross Reference Paragraph
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 111117-17-1111
Unqualified opinions with Unqualified opinions with Explanatory LanguageExplanatory Language
Other auditorsOther auditorsGoing concern uncertaintyGoing concern uncertaintyGAAP not consistently appliedGAAP not consistently appliedEmphasis of a matterEmphasis of a matterJustified departure from GAAPJustified departure from GAAP
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 121217-17-1212
Shared Responsibility ReportShared Responsibility Report
[Standard introductory paragraph language] [Standard introductory paragraph language] We did not audit the We did not audit the financial statements as and for the year ended December 31, 2005 of financial statements as and for the year ended December 31, 2005 of Glendo, Inc., which statements reflect total sales constituting 27 Glendo, Inc., which statements reflect total sales constituting 27 percent of total consolidated sales for 2005. Those statements were percent of total consolidated sales for 2005. Those statements were audited by other auditors whose reports have been furnished to us, audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for Glendo, Inc. and our opinion, insofar as it relates to data included for Glendo, Inc. for 2005, is based solely on the report of the other auditors.for 2005, is based solely on the report of the other auditors.
[Standard scope paragraph language] We believe that our audits [Standard scope paragraph language] We believe that our audits and the and the reports of other auditors reports of other auditors provide a reasonable basis for our opinion.provide a reasonable basis for our opinion.
In our opinion, In our opinion, based on our audits and the reports of other auditors, based on our audits and the reports of other auditors, ……
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 131317-17-1313
Going Concern ProblemGoing Concern Problem
• Following the opinion paragraph• Standard introductory paragraph• Standard scope paragraph• Standard opinion paragraph
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 141417-17-1414
Explanatory Paragraph--Going Explanatory Paragraph--Going Concern ProblemConcern Problem
The accompanying financial statements have been prepared assuming that America West Airlines, Inc. will continue as a going concern. As discussed in note 1 to the financial statements, the Company filed a voluntary petition seeking to reorganize under chapter 11 of the federal bankruptcy laws. This event and circumstances relating to this event, including the Company’s significant losses, accumulated deficit, and highly leveraged capital structure, raise substantial doubt about its ability to continue as a going concern. The accompanying financial statements do not include and adjustments that might result from the outcome of these uncertainties.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 151517-17-1515
Consistency ProblemConsistency Problem
• Following the opinion paragraph• Standard introductory paragraph• Standard scope paragraph• Standard opinion paragraph
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 161617-17-1616
Explanatory Paragraphs--Explanatory Paragraphs--ConsistencyConsistency
As discussed in Note 15, effective January 1, 2002, the Company changed its method of accounting for goodwill and intangible assetsupon adoption of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.”
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 171717-17-1717
Emphasize a matterEmphasize a matter
• Following or preceding the opinion paragraph
• Standard introductory paragraph• Standard scope paragraph• Standard opinion paragraph
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 181817-17-1818
Justified Departure from GAAPJustified Departure from GAAP
• Following or preceding the opinion paragraph
• Standard introductory paragraph• Standard scope paragraph• Standard opinion paragraph
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 1919
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Modifications of the Auditors’ Modifications of the Auditors’ Report--Unqualified OpinionsReport--Unqualified Opinions
Type of Report Introductory or Scope Paragraph
Explanatory Paragraph
Opinion Paragraph
Shared responsibility
Describe work of other auditors
None “...based on our audit and the report of other auditors...”
Going concern uncertainty
None Describe uncertainty
None
GAAP not consistent
None Describe change in principle
None
Emphasis of matter
None Describe matter None
Justified departure from official GAAP
None Describe departure
None
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 202017-17-2020
Qualified reports due to Departure Qualified reports due to Departure from GAAPfrom GAAP
• Introductory and scope paragraphs are standard
• Add paragraph preceding the opinion paragraph
• Modify opinion paragraph: “except for”
Reasons:• No GAAP• Disclosure problems• Unjustified changes in GAAP• Unreasonable estimates
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 212117-17-2121
Example of a Qualified Report-- Example of a Qualified Report-- Departure from GAAP Departure from GAAP
(Introductory and Scope Paragraphs are Standard)(Introductory and Scope Paragraphs are Standard) The Company has excluded from property and debt in the accompanying The Company has excluded from property and debt in the accompanying
balance sheet certain lease obligations that, in our opinion, should be balance sheet certain lease obligations that, in our opinion, should be capitalized in order to conform with generally accepted accounting capitalized in order to conform with generally accepted accounting principles. If these lease obligations were capitalized, property would be principles. If these lease obligations were capitalized, property would be increased by $__________, long-term debt by $___________, and retained increased by $__________, long-term debt by $___________, and retained earnings by $__________ as of December 31, 20X5, and net income and earnings by $__________ as of December 31, 20X5, and net income and earnings per share would be increased (decreased) by $___________ and earnings per share would be increased (decreased) by $___________ and $_____, respectively, for the year then ended.$_____, respectively, for the year then ended.
In our opinion, In our opinion, except for the effects of not capitalizing lease except for the effects of not capitalizing lease
obligations, as discussed in the preceding paragraphobligations, as discussed in the preceding paragraph,, the financial the financial statements referred to above present fairly, in all material respects, the statements referred to above present fairly, in all material respects, the financial position of XYZ Company as of December 31, 20X5, and the financial position of XYZ Company as of December 31, 20X5, and the results of its operations and cash flows for the year then ended in conformity results of its operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of with accounting principles generally accepted in the United States of America. America.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 222217-17-2222
Qualified reports due to Scope Qualified reports due to Scope LimitationLimitation
• Introductory paragraph – standard• Modify scope paragraph• Modify opinion paragraph: “except for”
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 232317-17-2323
Example of a Qualified Report--Example of a Qualified Report--Scope LimitationScope Limitation
Standard Introductory ParagraphStandard Introductory Paragraph
Except as discussed in the following paragraphExcept as discussed in the following paragraph, we conducted our , we conducted our audit...audit...
We were unable to obtain audited financial statements supporting the We were unable to obtain audited financial statements supporting the Company’s investment in a foreign affiliate stated at $_______, or its Company’s investment in a foreign affiliate stated at $_______, or its equity in earnings of that affiliate of $_______, which is included in net equity in earnings of that affiliate of $_______, which is included in net income, as described in Note 8 to the financial statements; nor were we income, as described in Note 8 to the financial statements; nor were we able to satisfy ourselves as to the carrying value of the investment in the able to satisfy ourselves as to the carrying value of the investment in the foreign affiliate or the equity in earnings by other auditing procedures.foreign affiliate or the equity in earnings by other auditing procedures.
In our opinion, In our opinion, except for the effects of such adjustments, if any, as except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to might have been determined to be necessary had we been able to examine evidence regarding the foreign affiliate investment and examine evidence regarding the foreign affiliate investment and earnings,earnings, the financial statements referred to above present fairly,... the financial statements referred to above present fairly,...
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 2424
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Modifications of Auditors’ Report—Modifications of Auditors’ Report—Qualified OpinionsQualified Opinions
Type of Report
Introductory or Scope
Paragraph
Explanatory Paragraph
Opinion Paragraph
Qualified—GAAP Departure
None
Describe departure and
effects
“except for the effects of the departure the financial statements…”
Qualified—Scope Limitation
“Except as explained in the following paragraph…”
Describe scope
limitation
“except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to…”
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 252517-17-2525
Adverse OpinionsAdverse Opinions
• Introductory paragraph – standard• Scope paragraph - standard• Add explanatory paragraphs preceding the
opinion paragraph• Modify opinion paragraph
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 262617-17-2626
Adverse OpinionAdverse Opinion
In our opinion, because of the effects of the In our opinion, because of the effects of the matters discussed in the preceding paragraph, matters discussed in the preceding paragraph, the financial statements referred to above do the financial statements referred to above do not present fairlynot present fairly, in conformity with accounting , in conformity with accounting principles generally accepted in the United States of principles generally accepted in the United States of America, the financial position of XYZ Company as America, the financial position of XYZ Company as of December 31, 20X5, or the results of its of December 31, 20X5, or the results of its operations or its cash flows for the year then ended.operations or its cash flows for the year then ended.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 272717-17-2727
Disclaimer of OpinionDisclaimer of Opinion
• Introductory paragraph – “we were engaged to”
• Scope paragraph - omitted• Add explanatory paragraphs preceding the
disclaimer paragraph• Modify opinion paragraph
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 2828
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Disclaimer of OpinionDisclaimer of Opinion
We were engaged...
The Company did not make a count of its physicalinventory, stated in the accompanying financialstatements at $_____ as of December 31, 20X2.Further, evidence supporting the cost of property andequipment acquired prior to December 31, 20X1, is nolonger available. The Company’s records do not permitthe application of other auditing procedures toinventories or property and equipment.
Since the Company did not take physical inventoriesand we were not able to apply other auditingprocedures to satisfy ourselves as to inventoryquantities and the cost of property and equipment, thescope of our work was not sufficient to enable us toexpress, and we do not express, an opinion on thesefinancial statements.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 2929
17-17-2929
Modifications of the Auditors’ Modifications of the Auditors’ Report--Adverse & DisclaimerReport--Adverse & Disclaimer
Type of Report
Adverse
Disclaimer of Opinion--Scope Limitation
Introductory or Scope
Paragraph
None
“We were engaged”
Omit “Our responsibility...”
Omit scope paragraph
Explanatory Paragraph
Describe reason for opinion
Describe scope restriction and any reservations
Opinion Paragraph
“the financial statements do not present fairly”
“we do not express an opinion on the financial statements”
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 303017-17-3030
Placement of Explanatory ParagraphsPlacement of Explanatory Paragraphs
Before opinion paragraphBefore opinion paragraphQualified opinionsQualified opinionsDisclaimersDisclaimersAdverse opinionsAdverse opinions
Following opinion paragraphFollowing opinion paragraphConsistencyConsistencyGoing concernGoing concern
No additional paragraphNo additional paragraphOther auditorsOther auditors
Before or afterBefore or afterEmphasize a matterEmphasize a matterJustified departure from GAAPJustified departure from GAAP
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 313117-17-3131
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 3 - 3 - 323217-17-3232
Other issuesOther issues
Comparative financial statementsComparative financial statements
Different opinionsDifferent opinions
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