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Audit Reports - Overview• Providing an independent and expert

opinion on the fairness of financial statements through an audit is the most frequent attestation service.

• When performing an audit, the auditors obtain reasonable assurance that the statements are in conformity with GAAP.

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Typical Coverage of Audit ReportsReports on the financial statements ordinarily include an opinion that is on both the:1.Financial Statements Themselves:

Balance sheet Income statement Statement of cash flows Statement of retained earnings (equity)

2.Financial Statement Disclosures: The notes to the financial statements are considered

an integral part of the financial statements

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Auditors’ Standard Report–Nonpublic• Title includes word independent. • Ordinarily addressed to the company itself,

the shareholders, the audit committee and/or the board of directors.

• Signed with name of CPA firm not individual partner unless sole practitioner.

• Dated as of the date on which the auditors obtained sufficient appropriate audit evidence to support their opinion, including review of audit documentation.

• Has 4 sections.

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We have audited the accompanying

consolidated balance sheets of ABC Company and its subsidiaries, as of December 31, 20X1 and 20X0, and the related consolidated statements of income, retained earnings, and cash flows for the years then ended.

The AICPA Standard Auditors’ Report--Introductory Paragraph

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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.

The AICPA Standard Auditors’ Report— Management’s Responsibility Paragraph

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The AICPA Standard Auditors’ Report-Auditors’ Responsibility Paragraphs

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 of material misstatement.

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The AICPA Standard Auditors’ Report-Auditors’ Responsibility Paragraphs (con’t)

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. 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.

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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, 20X1 and 20X0, 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.

AICPA Standard Auditors’ Report-Opinion Paragraph

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Auditors’ Standard Report – Public Clients - Differences

• Includes the words “Registered” and “Independent” in the title.

• References standards of the PCAOB rather than generally accepted auditing standards.

• Includes less detailed discussions of management and auditor responsibilities

• Includes an additional paragraph indicating that the auditors have also issued a report on the client’s internal control over financial reporting.o The report on internal control may either be presented separately or combined

with the report on the financial statements into one overall report

• Does not include section headings.

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Types of Audit Reports(Based on type of audit opinion)

• UnModified (Opinion): (PACOB: Unqualified)– Standard or Clean

– Unmodified, but with Explanation

• Modified (Opinion):– Qualified – Adverse– Disclaimer

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Reports with Unmodified Opinions1. Standard/Clean report

This report may be issued only when the auditors have obtained sufficient appropriate audit evidence to conclude the financial statements are not materially misstated and there is no need to alter the report for situations 2, 3 or 4 below.

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Reports with Unmodified Opinions1. Standard/Clean report. This report may be issued only when the auditors

have obtained sufficient appropriate audit evidence to conclude the financial statements are not materially misstated and there is no need to alter the report for situations 2, 3 or 4 below.

2. With an Emphasis of Matter paragraphTo emphasize a matter appropriately presented in the financial statements (e.g., going concern, a change in accounting principles/practices).

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Reports with Unmodified Opinions1. Standard/Clean report. This report may be issued only when the auditors

have obtained sufficient appropriate audit evidence to conclude the financial statements are not materially misstated and there is no need to alter the report for situations 2, 3 or 4 below.

2. With an Emphasis of Matter paragraph. To emphasize a matter appropriately presented in the financial statements (e.g., going concern, a change in accounting principles/practices).

3. With an Other Matter paragraphTo emphasize a matter other than those presented or disclosed in the financial statements (e.g., other information in documents containing audited financial statements).

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Reports with Unmodified Opinions1. Standard/Clean report. This report may be issued only when the auditors have

obtained sufficient appropriate audit evidence to conclude the financial statements are not materially misstated and there is no need to alter the report for situations 2, 3 or 4 below.

2. With an Emphasis of Matter paragraph. To emphasize a matter appropriately presented in the financial statements (e.g., going concern, a change in accounting principles/practices).

3. With an Other Matter paragraph. To emphasize a matter other than those presented or disclosed in the financial statements (e.g., other information in documents containing audited financial statements).

4. Opinion on Group Financial StatementsWhen two or more CPA firms are involved in an audit and the group auditor (firm that does most of the work) does not wish to take responsibility for the work of the component auditors.

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Going Concern Paragraph• Auditor not required to perform procedures specifically

designed to test going-concern assumption, but must ask management for any identified conditions or concerns that raise substantial doubt.

• Substantial doubt generally concluded from other procedures performed throughout the audit

• Indicators of Substantial Doubt:• Negative cash flows from operations• Defaults on loan agreements• Adverse financial ratios• Work stoppages• Legal proceedings

• Paragraph required when evaluation of management’s plans does not remove substantial doubt as of the audit report date.

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Emphasis of Matter Paragraph—Substantial Doubt as to Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered negative cash flows from operations and has an accumulated deficient, conditions that raise substantial doubt about the Company's ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainly. Our opinion is not modified with respect to this matter.NOTE: Ordinarily an unmodified opinion, with an emphasis of matter paragraph, is issued IF disclosures are adequate.

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Emphasis of Matter Paragraph—Lack of Consistency

A lack of consistent application of accounting principles/practices from prior period(s). Example:

As discussed in Note 5 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards Update No. XXX (provide title) as of December 31, 20X8. Our opinion is not modified with respect to this matter.

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Additional Emphasis of Matter Situations—Auditor Discretionary

• A significant risk or uncertainty.• Significant related party transactions described

in a note to the financial statements.• The company is a component of a larger

business enterprise.• Unusually important subsequent events.• Accounting matters affecting comparability

(other than changes in accounting principles) of financial statements with those of the preceding year.

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When Audits Performed byMultiple CPA Firms

Group Auditors (PACOB: Principal)

Component Auditors (PACOB: Other)

Usually when one or more subsidiaries is audited by another CPA firm selected by the client or CPA.

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Group Financial Statements When the group audit firm is different from one or more component audit firms, group engagement team should obtain an understanding of:•Whether component auditors are competent and understand and will comply with ethical requirements.•Extent of group engagement team involvement with component auditors.•Whether group engagement team will be able to obtain necessary information on the consolidation process.•Whether component auditors operate in a regulatory environment that actively oversees auditors.

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Group Financial Statements (con’t)

Group auditor communications with component auditors:•How their work will be used.•Discuss ethical requirements.•Provide list of related parties.•Share significant risks of misstatements.•Provide materiality threshold.

•Provide financial reporting framework and audit standards to be used.

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Group Auditor Reporting Options1. Make no reference to the component auditors

Group auditor assumes responsibility for the component auditor’s work and must perform added procedures to evaluate the component auditor’s work. (Both F.S. same reporting framework or component F.S. adjusted during consolidation.)

2. Make reference to the component auditors. Shared responsibility for the audit and is usually done when component auditor is selected by client or not well known. (Both F.S. same reporting framework or component F.S. adjusted during consolidation, GAAS or PCAOB standards (or determined met), report use unrestricted.)

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Group Audits: Key DefinitionsGroup. All the components whose financial information is included in the group financial statements. A group always has more than one component.

Group Engagement Team. Partners and staff who establish the overall group audit strategy, communicate with component auditors, perform work on the consolidation process, and forming an opinion on the group financial statements.

Component. An entity or business activity for which group or component management prepares financial information that is required by the applicable financial reporting framework to be included in the group financial statements.

Component Auditor. An auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit. A component auditor may be part of the group engagement partner’s firm, a network firm of the group engagement partner’s firm, or another firm.

Component Materiality. The materiality for a component determined by the group engagement team for the purposes of the group audit.

Significant Component. A component identified by the group engagement team (i) that is of individual financial significance to the group, or (ii) that, due to its specific nature or circumstances, is likely to include significant risks of material misstatement of the group financial statements.

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Group Auditor Assuming Responsibility

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Shared ResponsibilityReport Language: [Standard introductory paragraph language] We did not audit

the financial statements as and for the year ended December 31, 2011 of Glendo, Inc., which statements reflect total sales constituting 27 percent of total consolidated sales for 2011. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for Glendo, Inc. for 2011, is based solely on the report of the other auditors.

[Standard scope paragraph language] We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of other auditors, …

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Summary of Emphasis of Matter Paragraphs and Group Audits

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Modified Opinions1. A qualified opinion. A qualified opinion states that

the financial statements are presented fairly in conformity with generally accepted accounting principles “except for” the effects of a GAAP noncompliance or audit scope limitation.

2. An adverse opinion. An adverse opinion states that the financial statements are not presented fairly in conformity with generally accepted accounting principles.

3. A disclaimer of opinion. A disclaimer of opinion means that due to a significant scope limitation, the auditors were unable to form an opinion or did not form an opinion on the financial statements.

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Appropriate Modified Opinion

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Qualified Opinion—Departure from GAAP• Departure from GAAP– Immaterial – Unmodified– Material – Qualified– Material & Pervasive - Adverse

• Misstatements become pervasive when any one of the following applies:– Not confined to specific accounts.– If confined, they represent a substantial proportion

of the financial statements (very material).– In relation to disclosures, they are fundamental to

users’ understanding of the financial statements.

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Qualified Report - Departure from GAAP(Introductory and Scope Paragraphs are Standard)

The Company has excluded from property and debt in the accompanying balance sheet certain lease obligations that, in our opinion, should be capitalized in order to conform with generally accepted accounting principles. If these lease obligations were capitalized, property would be increased by $__________, long-term debt by $___________, and retained earnings by $__________ as of December 31, 20X1, and net income and earnings per share would be increased (decreased) by $___________ and $_____, respectively, for the year then ended.

In our opinion, except for the effects of not capitalizing lease obligations as discussed in the Basis for Qualified Opinion Paragraph,, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ Company as of December 31, 20X1, and the results of its operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

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Adverse Opinion• Financial statements do not present fairly

the financial position, results of operations, and cash flows of client in conformity with GAAP.

• Material & pervasive departures from GAAP.

• Auditor believes departure causes financial statements taken as a whole to be misleading.

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Adverse Opinion In our opinion, because of the effects of the matters discussed in the Basis for Adverse Opinion Paragraph, 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 XYZ Company as of December 31, 20X5, or the results of its operations or its cash flows for the year then ended.

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Qualified Opinion-Lack of Sufficient Appropriate Audit Evidence (Scope Limitations)

• Imposed by circumstances – Important accounting records destroyed

• Due to nature of audit– Engaged too late in year to observe client’s

beginning inventory (First consider alternative procedures.)

• Imposed by client– Client refused to allow auditors to send

confirmations to customers (Auditor should first elevate to those charged with governance and then consider alternative procedures.)

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Qualified Report--Scope Limitation ExampleBasis for Qualified Opinion We were unable to obtain audited financial statements supporting the company’s investment in a foreign affiliate stated at $20,500,000, or its equity in earnings of that affiliate of $6,250,450, which is included in net 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 foreign affiliate or the equity in earnings by other auditing procedures.Qualified Opinion In our opinion, except for the possible effects of the matters described in the Basis for Qualified Opinion paragraph, the financial statements referred to above present fairly, in all mate rial respects, the financial position of Wend Company as of December 31,20X8, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

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Disclaimer of Opinion• Auditor has no opinion.• Issued whenever auditor is unable to

form an opinion as to fairness of the F.S.• Circumstances resulting in a disclaimer are

those in which the possible misstatements in the F.S. aspects with insufficient evidence could be material & pervasive. (Multiple or very significant uncertainties may also lead to a disclaimer.)

• Not an alternative to adverse opinion.

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Disclaimer of Opinion Example Auditor’s ResponsibilityOur responsibility is to express an opinion on these financial statements based on conducting the audit in accordance with auditing standards generally accepted in the United States of America. Because of the matter described in the Basis for Disclaimer of opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.

Basis for Disclaimer of OpinionWe were unable to obtain audited financial statements supporting the Company's investment in a foreign affiliate stated at $20,500,000, or its equity in earnings of that affiliate of $6,250,450, which is included in net 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 foreign affiliate or the equity in earnings by other auditing procedures.

Disclaimer of OpinionBecause of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on these financial statements.

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Placement of Additional Paragraphs

• Before opinion paragraph—Basis for Modification (Qualified, Adverse, Disclaimer) paragraphs

• Following opinion paragraph—Emphasis of matter and other matter paragraphs

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Summary of Appropriate Auditors’ Reports

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Two or More Report Modifications• Qualified by two or more situations.– Example: Qualified because of both a scope

limitation and separate departure from GAAP.

• Wording of report would include appropriate qualifying language and explanatory paragraphs for both types of qualifications.

• Auditor should consider cumulative effects – disclaimer of opinion may be appropriate.

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Financial Statementswith Different Opinions

It is acceptable to express an unqualified opinion on one statement while expressing a qualified or adverse on the others.Example: Auditors retained after client has taken its beginning inventory. A disclaimer may be issued on the income statement (the auditor doesn't know if income is reasonably stated), but an unqualified opinion may be issued on the year-end balance sheet.

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Comparative Financial Statements• Audit report should cover current year as well as prior

period audited by their firm.

• Can express different opinions on different years.

• Auditor should update report for all prior periods presented for comparison.

• If prior period audited by another (predecessor) CPA: – Current year opinion only covers years the CPA firm audited.– For financial statements audited by predecessor auditors either:

• Predecessor auditor reissues report with original date or• Current auditors refer to report of other auditors.

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Reference to Predecessor Auditor ReportOther MatterThe financial statements of XYZ Company for the

year ended December 31, 20X7, were audited by a predecessor auditing firm whose opinion, dated March 1, 20X8, on those statements was qualified as being presented fairly except for the effects on the 20X7 statements of the adjustments pertaining to the valuation of inventory, as discussed in Note X to the financial statements.