Transcript
Chapter 17 - Auditors’ Reports
CHAPTER 17
Auditors' Reports
Review Questions
17-1
The sectio sections ns of of the standard standard audit audit report report for a nonpubl nonpublic ic compa company ny are: are: (1) introd introducto uctory ry sectio section n (which does not hae a section title)! (") mana#ement’s responsibility for the financial statements! ($) auditor’s responsibility! and (%) opinion&
17-"
The function function of notes notes to to financial financial statement statementss is to to proide proide ade'uate disclosure disclosure when when information information in the financial statements is insufficient to attain this obectie&
17-$
The primary differences are that the CA*+ report ($ re'uired): ,ncludes the words Re#istered in the title& References standards of the CA*+ rather than #enerally accepted auditin# standards& ,ncludes less detailed discussions of mana#ement and auditor responsibilities& ,ncludes an additional para#raph indicatin# that the auditors hae also issued a report on the client.s internal control oer financial reportin#& /oes not include section titles&
• •
• •
•
17-%
/isa#ree /isa#ree&& 0hile 0hile AA AA is a fre'ue fre'uentl ntly y used used financ financial ial report reportin# in# framewo framewor2! r2! AA3 AA3 is a set of of auditin# standards! not a financial reportin# framewor2&
17-1
Chapter 17 - Auditors’ Reports
17-4
The typ types of unmodified and modified opinions include: (1) (1) (") ($) ($) (%) (4) (8) (7)
5nmodified op opinion 6st 6stan and dard ard& 5nmo 5nmodi difi fied ed opin opinio ion n with with an emph emphasi asiss of of matte matterr para# para#raph raph&& 5nmo 5nmodi difi fied ed opin opinio ion n wit with h an othe otherr mat matte terr para# para#rap raph& h& 5nmo 5nmodif dified ied opinio opinion n with with dii diide ded d respons responsibi ibilit lity y on on #roup #roup financi financial al statem statements ents&& ualified opinion& Aderse opinion& /isclaimer of of op opinion&
17-8
The report report should should be dated dated as of the date reen reen obtained obtained ssuffic ufficient ient appropriate audit audit eiden eidence ce to support the opinion! 9ebruary "& (The financial statements and the reiew of the audit both must be complete completed&) d&)
17-7
;o& Referen Reference ce to a compon component ent auditor auditor in in a #roup #roup audit audit report! report! in itself! itself! does does not represen representt a 'ualification& Rather! this form of opinion merely diides diides the auditors. oerall responsibility for the en#a#ement between two or more CA firms& ;ote! howeer! that factors other than the diision of responsibility may lead to a 'ualified report (i&e&! departures from AA and scope limitations)&
17-<
The wordin# wordin# of a report report with an unmodifi unmodified ed opinion opinion mi#ht mi#ht depart depart from the wordin# wordin# of the the standard standard report when 3ubstantial doubt about an entity’s ability to continue as a #oin# concern e=ists& rinciples of accountin# hae not been consistently applied in relation to the prior year& The auditors wish to emphasi>e some matter in the financial statements (e&! si#nificant related party transactions! si#nificant eents! uncertainties)& A #roup auditor ma2es reference to a component auditor& (only three re'uired) • • •
•
17-?
The audit audit report should include include an emphasis emphasis of matter matter section section that describes describes the chan#e and ma2es ma2es reference to the financial statement note e=plainin# the nature of and ustification for the chan#e in the method of aluin# the inentories and the effect of such chan#e upon the financial statements&
17-1 The two circumstan circumstances ces resultin# resultin# in mod modified ified opinions opinions are (a) materially materially misstated misstated financial financial statements (a @departure from AA) and (b) inability to obtain sufficient appropriate audit eidence (a @scope limitation)& 17-11 The statement statement is incorrect& incorrect& ,f the misstatem misstatement ent is immaterial! immaterial! an unmodifi unmodified ed opinion opinion may be issued& ,f it is material! the auditors issue either a 'ualified opinion or an aderse opinion dependin# upon whether they beliee the misstatement is perasie&
17-"
Chapter 17 - Auditors’ Reports
17-1" Bffects of misstatements become perasie when! in the auditor’s ud#ment! they meet one or more of the followin# three criteria: They are not confined to specific elements! accounts! or items of the financial statements ,f confined! they represent or could represent a substantial proportion of the financial statements or ,n relation to disclosures! they are fundamental to users’ understandin# of the financial statements& • •
•
17-1$ A client can aoid an opinion 'ualified because of inade'uate disclosure merely by ma2in# the appropriate disclosure in the financial statements& 17-1% ,n such a circumstance a +asis for ualified *pinion section is added to the report and the opinion para#raph is modified& 17-14 3ince the auditors hae not been able to form an opinion on the financial statements ta2en as a whole! they must disclaim an opinion& Doweer! they should set forth their reserations about the accountin# treatment of the deferred income ta=es in an e=planatory para#raph to their disclaimer& 17-18 *rdinarily! aderse opinions do the client no #ood& resumably! creditors and stoc2holders would not proide debt or e'uity capital and! if the client is under 3BC urisdiction! the 3BC mi#ht launch an inesti#ation of mana#ement for iolations of the federal securities acts& Thus! the client usually will ma2e whateer chan#es in the financial statements that the auditors re'uire in order to aoid receiin# an aderse opinion& ,n fact! in the few cases in which the client and its auditors cannot a#ree! the client would probably dischar#e the auditors instead of hain# them complete an audit that culminates in an aderse opinion& 17-17 The statement is not correct& A basis for modification para#raph is of three possible types: (1) basis for 'ualified opinion para#raph! (") basis for aderse opinion para#raph! and ($) basis for disclaimer of opinion para#raph& 0hile AA3 (and international standards) refer to a basis for modification para#raph! that term is not used in an audit report6one of the three more descriptie terms is used when an audit opinion is modified& 17-1< Ees& Bach year’s financial statements stand alone& Thus! the CAs may issue different types of opinions on the financial statements of successie years when reportin# on comparatie statements& 17-1? Ees& 0hen reportin# on comparatie statements! CAs should update their report on the prior year.s statements to determine whether it is still the proper type of report to accompany those statements& 9or e=ample! a departure from AA that e=isted last year! resultin# in a report 'ualification! mi#ht hae been corrected& ,n this case! it is appropriate for the auditors to reise their report on the prior year.s statements to a standard un'ualified report&
17-$
Chapter 17 - Auditors’ Reports
17-" The reports containin# audited financial statements filed by a company subect to the reportin# re'uirements of the 3BC may include: Forms S-l throu#h S-11& These are the re#istration statements for clients plannin# to issue securities to the public they are accompanied by comparatie audited financial statements& Forms SB-1 and SB-2. These forms are more simplified re#istration forms for small businesses& Form 8-K & A report filed upon the occurrence of a specified si#nificant eent& ,f the eent is a si#nificant ac'uisition or disposal of assets! Form 8-K will be accompanied with pro forma financial information& An <-F report is used to report a chan#e in auditors& Form 10-Q. This form includes 'uarterly financial statements reiewed by the company’s auditors& Form 10-K & This report is filed annually by publicly owned companies and includes audited financial statements! reports on internal control oer financial reportin#! and other detailed financial information& Questions Requiring Analysis
17-"1
(")
($)
(b)
(") ($)
(%)
(a) (1) The first sentence of the statement is partially true& ,t is important to read the notes to financial statements because they proide important supplementary information& ;otes often pertain to comple= matters and are presented in technical lan#ua#e& Certainly it must be ac2nowled#ed that sometimes they could be presented in a clearer form& To the e=tent the notes supplement disclosures in the body of the financial statements! they could reduce the auditors. e=posure to third-party liability& The disclosure must be supplementary! not contradictory& (1) The second statement is wron# in assertin# that the notes can be used to correct or contradict financial statement presentation& ;otes are an inte#ral part of the financial statements& ,f there is contradiction or if the presentation is incomprehensible! this constitutes inade'uate reportin# and re'uires 'ualification of the audit report& The statement fails to reco#ni>e that while there is a need for accuracy and completeness! those notes should also be comprehensible& The statement incorrectly assi#ns mana#ement.s primary responsibility for the financial statements and notes to the auditors& The auditors. relationship to the notes is the same as their relationship to the balance sheet and other financial statements their actions are #oerned by the same reportin# responsibilities and liabilities to interested parties& +ecause notes are prepared by mana#ement! the auditors cannot control their content& *ther adisers! e&! le#al counsel! will influence the wordin# of notes& The auditors properly should recommend improements in presentation! but they will modify their report’s opinion only if disclosure is inade'uate or so unclear as to be misleadin#&
17-%