Reports on Audited Financial

Statements

McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All

LO# 1

Reporting on the Financial Statement

Audit: The Standard Unqualified Report
The
Thestandard
standardunqualified
unqualified(unmodified)
(unmodified)report
report is
isissued
issued when
when
the
theauditor
auditoris
issatisfied
satisfiedregarding
regardingthe
thefactors
factorssummarized
summarizedin
in
AU
AU700.13-18
700.13-18related
relatedto
tothe
theaudit
auditevidence
evidencegathered
gathered
including
includingany
anymisstatements
misstatementsidentified,
identified,the
themethods
methods
employed
employedby
bymanagement
management in
in preparing
preparingthe
thefinancial
financial
statements,
statements, and
andthe
theform
formand
andcontent
contentof
ofthe
thefinancial
financial
statements
statementsincluding
including the
thenotes
notesthereto.
thereto.
See
See700.22-.41
700.22-.41for
for the
the
content
content of
of the
the
unqualified
unqualifiedopinion
opinion and
and
Illustration
Illustration22 of
of 700.A58
700.A58
for
foran
anexample
example

18-2

Reporting by the Auditor

Independent Auditors Report
[Appropriate Addressee]
Report on the Financial Statements
We have audited the accompanying financial statements of ABC
Company, which comprise the balance sheet as of December 31,
20X1, and the related statements of income, changes in stockholders
equity, and cash flows for the year then ended, and the related notes to
the financial statements.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of
these 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 financial statements that are
free from material misstatement, whether due to fraud or error.
18-3

Reporting by the Auditor

Auditors Responsibility
Our responsibility is to express an opinion on these financial statements based
on our audit. 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 from material misstatement.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the financial statements. The procedures selected
depend on the auditors judgment, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or error.
In making those risk assessments, the auditor considers internal control relevant
to the entitys preparation and fair presentation of the 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 entitys
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 financial statements.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
18-4

Reporting by the Auditor

Opinion
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of ABC Company as of December 31, 20X1, and the
results of its operations and its cash flows for the year then
ended in accordance with accounting principles generally
accepted in the United States of America.
[Auditors signature]
[Auditors city and state]
[Date of the auditors report]

18-5

Reporting by the Auditor

I. Dating and addressing the audit report
(700.41, 560.12 -.18 and 700.A19)
II. Changes in the Auditors Opinion (705)
(Modified Opinions)
A. Scope limitation (circumstantial or
management imposed) (705.A8-.A12)
- Qualified (material but not
pervasive) See 705.A32 Illustration 4
- Disclaimer (material and pervasive) See
705.A32 Illustration 5 and 705.11-.14
18-6

Reporting by the Auditor

II. Changes in the Auditors Opinion (705)
(Modified Opinions) (Continued)
B. GAAP Departures
- Qualified (material but not
pervasive)
See 705.A32 Illustration 1
- Adverse (material and pervasive)
See 705.A32 Illustration 3 and
705.15
18-7

Reporting by the Auditor

III. Changes in the wording of the audit report without
changing the opinion
1. Group Audits-What is a group audit (600)
- Who is in charge and what does that mean .to
reference or not reference (.08)
- Group auditor must always approve overall strategy
and audit plan (.18 -.19)
- Communications with the component auditors (.41-.42)
- Additional control over performance materiality and the
type of work to be performed when not referencing the
component auditor (.50-.64)
- Reference to the work of a component
auditor (.24 - .30 and .A97 Illustration 2)
18-8

Reporting by the Auditor

2. Emphasis of- a-Matter paragraph versus
Other-Matter Paragraph (706.05)
3. Emphasis-of- a-Matter Paragraphs
- General format issues (706.06 -.07)
- Subsequently discovered facts (560.16c)
- Going concern issues (570.A6)
- Consistency issues (708.07 - .14)
- Special purpose framework (800.07 and
forward)
- Other circumstances (800.22-.23 and
706.A2)

18-9

Reporting by the Auditor

4. Other-Matter Paragraphs
- General (706.08 and .A11)
- When the auditor is unable to withdraw
(706.A6)
- When required by law (706.A7)
- Reporting on multiple sets of financial
statements using a different basis (706.A9)
- Change in previously issued opinion
(706.A13, Illus. #2, pages 2123-2124)
18-10

Reporting by the Auditor

4. Other-Matter Paragraphs (Continued)
- Predecessor auditor s report not
presented (700.54 - .55)
- Prior period financial statements not
audited (700.56 - .57)
- Other information in documents
containing the audited financial
statements (720.06 - .18)

18-11

Reporting by the Auditor

4. Other-Matter Paragraphs (Continued)
- Supplemental information (725.09 -.13)
- When auditor is not engaged to report
- Presented with or separately from the
financial statements(.09 - .10)
- Opinion on the F/S is qualified (.09f)
- Opinion on the F/S is an adverse or
disclaimer of opinion (.11)
- When the auditor has issues with the
supplemental data (.13)
18-12

Reporting by the Auditor

4. Other-Matter Paragraphs (Continued)
- Required supplemental information
(730.04 and forward)
- Some limited procedures must be
applied (.05)
- The auditor must report (see
illustrations in 730.A3 for examples
including for issues discussed in .07)
- The auditor could be engaged to do
an AU 725.07 type of engagement
18-13

Reporting by the Auditor

4. Other-Matter Paragraphs (Continued)
- Restricting the use of the auditors report
(just know that it is appropriate or
required in some situations where the
measurement or disclose criteria is
understood by or available to a limited
number of parties. See 905)

18-14

Reporting by the Auditor

IV. Other reporting issues we will not address
1. AU 805
9. AU 935
2. AU 806
3. AU 810
4. AU 910
5. AU 915
6. AU 920
7. AU 925
8. AU 930
18-15

Which of the following is a true

statement regarding the auditors
report?
1. It must include at
least 6 paragraphs
2. It must include
titles for each of
the major sections
3. It must include the
auditors address
4. All of the above
5. Both 1 and 2
18-16

Generally the auditors report is dated

1. As of the end of
audit field work
2. As of the end of
the fiscal year end
3. As of the report
release date
4. Between the end
of field work and
the report release
date
18-17

In a group audit, if the group auditor decides

to reference the component auditor in a
report that is otherwise unqualified
1. The opinion would be
other than unqualified
2. The opinion would still
be unqualified
3. Either of the above
could be true
depending on the
readers interpretation
18-18

When a group auditors report

references a component auditor
1. The items audited by
the component auditor
should be quantified
2. The component auditor
is referenced in the
auditors responsibility
paragraph only
3. Both of the above are
true
18-19

If referenced in the group auditors

report, the component auditor should
be named
1. In all such reports
2. Only with the
permission of the
component auditor
3. Only if the report of
the component
auditor is also
presented
4. Only if both 2 and 3
are true

18-20

If the clients financial statements include a

departure from GAAP, the auditor should
issue
1. A qualified opinion
2. A disclaimer
3. An adverse
opinion
4. Any of the above
depending on the
GAAP issue
5. Either 1 or 3
18-21

If the scope of the auditors work has

been restricted, the auditor should
issue
1. A qualified opinion
2. A disclaimer
3. An adverse
opinion
4. Either 1 or 2
5. Either 2 or 3

18-22

If a predecessor auditor is asked to

reissue a previously issued audit
report, he should
1. Normally refuse
2. Do so only after
consulting with the
successor auditor
and management
3. Do so, but change
the date of the
report to the
reissue date
18-23

If a predecessor auditors report on

statements presented in comparative format
is not presented, the successor auditor
should
1. Qualify her opinion
2. Reference the
predecessors report in
the introductory
paragraph
3. Reference the
predecessors report in
a paragraph after the
opinion paragraph
18-24

If the financial statements and the auditors report

thereon are included in a document containing
other information , the auditor should

1. Report on the other

information
2. Withhold the use of
the audit report
3. Read the other
information and
report on it only if the
information does not
agree with the
financial statements

18-25

If a client has included information in the

financial statements that is not required by
GAAP the auditor should
1. Issue a qualified opinion
on the financial
statements
2. Add a paragraph after
the opinion paragraph
that references such
information
3. Do nothing unless the
client engages the
auditor to audit the info
18-26

If financial statements include supplementary

information required by an authoritative body,
the auditor should
1. Audit the information
and opine on it
2. Apply limited
procedures to the
information but disclaim
an opinion on it
3. Not apply any
procedures or report on
the information unless
engaged to do so by the
client
18-27