Professional Documents
Culture Documents
Audited Financial Statements
Audited Financial Statements
as a balance sheet.
- Different opinions are okay
- One statement opinions are okay
REPORTS ON AUDITED FINANCIAL STATEMENTS
Auditor's Standard Report (Unqualified Opinion)
A. Title ("Independent" auditor's report)
B. Addressee (To company, stockholders, board of directors, generally not addressed to management.)
C. Introductory Paragraph
1. Statement that the financial statements were audited
2. RR - Responsibility of management is financial statements and Responsibility of auditor is
to express an opinion.
D. Scope Paragraph
1. AA - Audit was conducted in Accordance with US GAAS
2. PP - audit was Planned and Performed to obtain reasonable assurance
MM - that the financial statements are free from Material Misstatement
3. EE - audit included Examining Evidence on test basis
AA - Assessing the Accounting Principles used
MM - significant estimates Made by Management
4. Statement that audit provides reasonable basis for opinion.
E. Opinion Paragraph
1. Statement referring to financial statements identified in intro paragraph
2. Opinion to fair representation of financial statements (ACDO)
3. Statement regarding conformity with US GAAP (ACDO)
F. Firm Name (signed or printed)
G. Report Date (on or after the date when audit evidence was obtained.)
RR - Responsibility of management = financial statements, Responsibility of auditor = express opinion.
AA - Audit was conducted in Accordance with US GAAS
PP - audit was Planned and Performed to obtain reasonable assurance
MM - that the financial statements are free from Material Misstatement
EE - audit included Examining Evidence on test basis
AA - Assessing the Accounting Principles used
MM - significant estimates Made by Management
GAAS --- Scope Paragraph
GAAP---Opinion Paragraph
Types of Opinions:
1. Unqualified (Clean) Opinion
Management`s Responsibility:
c. To emphasize a matter
e. Required SEC regulation S-K quarterly financial data has been omitted or not reviewed
f. Supplementary information required by GAAP has been omitted
g. Other information in a document containing audited financial statements is materially inconsistent with
information appearing in the financial statements.
General Rule on Position of Explanatory Paragraph:
1. Unqualified Opinion:
a. Explanatory paragraph generally would follow the opinion paragraph
2. Qualified, adverse, and disclaimer of opinion:
a. Explanatory paragraph generally would precede the opinion paragraph
3. Exceptions:
a. The explanatory paragraphs can be either before or after the opinion paragraph, if:
2. Review the audit program, audit documentation, and evaluation of internal control
performed by the other auditor.
c. Treat the other CPA just like your staff:
R – Reputation
I – Independent
P – Professional Competency
P – Program Steps
2.Necessary or Justified Departure from GAAP (modified unqualified):
a. Explanatory paragraph should contain a description of the departure, its approximate effects, and the
reasons why adherence to GAAP would make financial statements misleading.
b. Unjustified departures = Qualified ``Except for`` or Adverse opinion
a. The going concern period should not exceed one year from date of statements being audited
b. The procedures to follow that is contrary to the basic principle of going concern:
A – Analytical procedures
D – Debt compliance: auditor should review terms of debt and loan agreements
M – Minutes: auditor should review minutes from stockholder and board of director meetings
I – Inquiry of client`s legal counsel
T – Third parties: the auditor should confirm the details of financial support arrangements
S – Subsequent events review
c. Conditions and Events that may be indicative of substantial doubt:
F – Financial difficulties: loan defaults, dividend arrearages, debt restructuring
I – Internal Matters: work stoppages, labor difficulties, significant revision of operations
N – Negative Trends: recurrent losses, working capital deficiencies, negative cash flows
E – External Matters: Legal proceedings, new legislation, loss of a franchise, license, or patent
d. Mitigating Factors:
i. Plans to borrow money, restructure debt, to sell assets, delay or reduce expenditures, to
increase ownership equity.
e. Alleviation of Doubt
i. If going concern is alleviated, auditor should still consider the need for disclosure of the
conditions and events that initially gave rise to the doubt.
f. Modified Unqualified vs. Disclaimer
i. The auditor can still choose to disclaim an opinion in cases involving uncertainties.
g. Sample report – Explanatory Paragraph AFTER Opinion Paragraph
i. Wording of explanatory paragraph must include the terms `Substantial Doubt`` and ``Going
Concern``
If, in the auditor`s judgement, the entity’s disclosures are inadequate, a departure from GAAP exists. This may
result in either a qualified or adverse opinion.
4.Emphasis of a Matter (modified unqualified): Professional Judgement
a. Items of emphasize:
b. If any of the 3 conditions is not met, the auditor would generally express a qualified opinion
c. If the change in GAAP is material, then the explanatory paragraph comes AFTER the opinion paragraph
b. Failure to disclose:
ii. If missing pertinent info, include in auditor`s report BEFORE the opinion paragraph = Middle
Paragraph
c. Reason for omission:
i. When the auditor believes the omitted items cause the statements to be deceptive, misleading,
or fraudulent, the auditor must insist that management correct the defect. If management
3. Middle Paragraph: When practical, the auditor is required to disclose the missing
information and related financial effects in the explanatory paragraph. However, the
auditor is not required to prepare a statement of cash flows in the event the client
b. Failure to disclose:
ii. If missing pertinent info, include in auditor`s report BEFORE the opinion paragraph = Middle
Paragraph
3.Unnecessary Departure from GAAP (GAAP Issue: Qualified or Adverse)
a. Auditor would include an explanatory paragraph describing the departure from GAAP and if practical,
the financial impact of the departure. This will be BEFORE the opinion paragraph = Middle paragraph
b. Depending on materiality, qualified or adverse.
4.Unreasonable Accounting Estimates (GAAP Issue: Qualified or Adverse)
a. Depending on materiality, qualified or adverse opinion
•
Format of the report: When the auditor expresses an adverse opinion, all reasons and financial impact should be
set forth in explanatory paragraph BEFORE the opinion paragraph. If financial impact is not determinable, the