1

Writing Assignment 1: Audit Report

Auditing Report for Shareholders Mojisola A Gbadamosi-Okubule Strayer University

Professor John Ray ACC 576 (Auditing & the Business Environment) July 23rd 2011

Writing Assignment 1: Audit Report (Thesis)

Discuss how a companys stockholders (or potential stockholders) would use the information contained in an audit report produced from an independent accounting firm.

Assume that you are a CPA working in a public accounting firm. You need to discuss the going concern issue with your client and are uncertain of the reaction. Discuss how you would approach the conversation with your client, the information that you would discuss, and how you would make your final decision on what type of audit report to issue.

When issuing a qualified audit opinion, discuss what representations you would expect to receive from the companys Board of Directors and Senior Management.

Outline Discuss how a companys stockholders (or potential stockholders) would use the information contained in an audit report produced from an independent accounting firm. An auditors report is considered an essential tool when reporting financial information to users, particularly in business. Since many third-party users prefer, or even require financial information to be certified by an independent external auditor. The

Writing Assignment 1: Audit Report

Audit report is normal use to access the financial statement of a company and it is very important for the shareholders to understand the information presented in the report? The audit report relates to the concise financial report and it states the financial position of the company. The audit report includes the statement of financial performance of the company which includes statement of cash flows, balance sheet, income statement and the accompanying note to the financial statements for the consolidation of the company for the year ending. The auditor report could be based on an unqualified opinion, qualified opinion report, adverse opinion report and disclaimer of opinion report. The best form of auditor report is the unqualified Opinion which says the financial statement is clean and in accordance with the general accepted accounting principle and the general accepted auditing standard. The report is a formal opinion issued by an independent auditor regarding the performance of the company. It an opinion on whether the information presented is correct and free from material misstatement. The directors of the company are responsible for preparing a concise financial report that complies with Accounting Standard AASB 1039 "Concise Financial Reports", in accordance with the Corporations Act 2001. This includes responsibility for the maintenance of adequate accounting

Writing Assignment 1: Audit Report

Records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the concise financial report.

The report is issued for the benefit of internal and external user like the shareholder, government, financial institutions, other company or even the general public as an assurance service in order for the user to make a decision based on the result of the audit. The financial statement without the audit report is meaningless at times and it does make the company more credible to the public as a whole. The report is based on the situation the auditor finds within the organization.

When a shareholder is reading the financial statement of a company, they are looking for three important factors, the income statement, statement of cash flow and the balance sheet. The income statement states how good the company is doing financial in regard to making money. The statement of cash flow states how the company is paying for their operations and there future growth. The balance sheet state what the company owes. As a shareholder I need to analysis the following fact and translate it to whether the company is doing well. If you own stock in the company, the stock value is derived from the company long term ability to create cash

Writing Assignment 1: Audit Report

profit from investing capital. The financial statements are intended to give you a snap short of how successfully this creation of value is being accomplished. An average person does not understand this concept and they rely on there financial specialist or stock broker to tell them that the stock of the company is good. This financial statement is the base indicator of whether a company is doing well and you need to make sure the company is consistent in there performance for a couple of years? As a shareholder , I will ask me self it the auditor have examined the ledger, bank statement, payroll, tax information, internal financial report , official published reports, account payable and account receivable closely inspected for any discrepancies, and if an inaccuracy is uncovered, have they being did he addressed? If there is any and inaccuracy and discrepancies, has the company repaired it? Does the Audit report give accurate record of the company? As a shareholder of the company the audit report will help me figure out if I have made the right investment. It my share doing well and am I making money on my investment. The report will help me recommend the share of the company to friends and family. The audit report will help me decide on whom to vote for on the annual shareholder meeting every year. The report will help me to elect the Board of Director and vote for other key issue of the company.

Writing Assignment 1: Audit Report

As a potential stock holder I will used the information to make a decision on when to buy stock in the company. I will look at the audit report of the company for the previous five year to make sure the company is stable and consistent? I will ask myself if the report is accuracy and give a clear picture of the company as a whole. I will analysis the company strength and weakness. I will also use the auditor report to evaluate how the company is doing as a whole and if the CEO /CFO are doing a good job to maintain the company? I will look at how well the company is doing in the list of the Dow jone index and on the stock exchange index? I will also consider how the company stands in the list of the fortune 500. Have the company made the list consistently.

Assume that you are a CPA working in a public accounting firm. You need to discuss the going concern issue with your client and are uncertain of the reaction. Discuss how you would approach the conversation with your client, the information that you would discuss, and how you would make your final decision on what type of audit report to issue.

The going concern is the company ability to function probably as a business entity? It is the responsibility of the director to address this issue in the company financial statement. On the

Writing Assignment 1: Audit Report

financial statement, a company is required to disclose in the note to the Financial Statement whether there are any factors that may put the company's status as a going concern in doubt. The financial statement is prepared on the assumptions that the entity is a going concern. It means it will continue in operation for the foreseeable future and will be able to realize assets and discharge liabilities in the normal course of operations. Whenever going concern issues have been identified in an engagement to review an entity's interim financial information in accordance with AICPA standards, the accountant should not have to add an explanatory paragraph before the concluding paragraph of the review report to comment on those going concern issues. The auditor have to consider whether the use of the going concern assumption is appropriate, and whether there are material uncertainties about the entity's ability to continue to operate as a going concern that need to be disclosed in the financial statements. This all depend on what type of opinion was issued on the Audit report? As a CPA working in an accounting firm I will schedule a meeting with my client to discuss my finding in the audit.

At the meeting

1. I will explain the implication of my finds? This will include detail explanations of going concern, good or bad? 2. I will offer solution to the problem by giving them suggestion on how to fix it and area where the company can make improvements.

Writing Assignment 1: Audit Report

3. I will have an open mind and listen to the client explanation on the situation. 4. I will not be afraid to disagree with my client and let them know the reasons why I disagree? 5. I will address the going concern" opinions by explain to my client how I arrived at my conclusions? 6. I will stick to my principles. I will tell the client Ill get back to them on their ideas then talk it over with your manager, but dont compromise on your principles.

This discussion is usually a negative trend and I must approach the situation very sensitively? Potentially, auditors may be able to reduce their exposure to litigation when auditing a financially stressed client by issuing a going concern report. The information that I would discuss with the company include there business operation, financial reportings, loan defaults, credit denial from supplier in deciding if there is a substantial going concern issue. If

I discover there is not substantial going concern issue, great? Then my financial report opinion will be an unqualified one, and then my report will be a clean bill of health for the company. If I concludes that substantial doubt exists with regard to the appropriateness of the going concern assumption I am required to

Writing Assignment 1: Audit Report

issue an opinion reflecting this; a modified opinion if the company has appropriately disclosed the doubt and risks; and a qualified opinion if the company has not made appropriate disclosures. This is going to be a difficult meeting and I will use the following approach. At the meeting, I will address my find by first stating the strength of the company. I will address the areas of opportunity for improvement and make suggestion on what thee company can do to correct and fix the error. This will be my going concern opinions.

At the meeting I will explain why I issue a modified report for the company if they remain viable or not. It is assumed that modified reports prior to bankruptcy protect auditors from litigation. Managers prepare their companys financial statements based on the going concern assumption. In the absence of this assumption (e.g., the company is not a going concern), managers would need to prepare financial statements adopting a liquidation

10

approach. I will issue a report if the company may go bankrupt before the next audit is performed. By the term viable, I mean if the company is capable of surviving, living, developing under favorable conditions? If an Auditor has doubts about its ability to continue as a going concern, investor may take that as a sign of increase risk and panic. An emphasis of matter paragraph in an

Writing Assignment 1: Audit Report

audit report does not necessarily indicate that a company is on the verge of insolvency. Auditors are at risk of being sued by financial statement users if a company that did not receive a modified opinion becomes bankrupt. The litigation reform in the 1990s lowered the risk of being sued and the liability if such a suit is successful. When issuing a qualified audit opinion, discuss what representations you would expect to receive from the companys Board of Directors and Senior Management.

This type of opinion is usually giving if any auditor disagrees with the treatment or disclosure of information in the financial statement of the company. It could also be the case where the auditor feels that the audit has been too limited in it scope. Except for the qualification of a particular issue, the rest of the financial

11

statement will be given a true and fair view. In most cases, the account of listed companies is rarely qualified and it would have a serious undermine confidence in the management of the company. Company that receive qualified opinion on there auditor report are viewed negatively by shareholders, lenders and other business. If I issued a

Writing Assignment 1: Audit Report Qualified audit opinion; I would accept a hostile reception from the broad of direction.

The board of direction will want an explanation for why I disagree with one or more items in there financial statement. What may have caused them to have a misstatement on there financial report? Note qualifications occur when the item(s) is/are material to the financial statements. The broad of direction may want a second opinion from another auditor. They may believe I made an error in judgment? In other words, an item is material if its omission or error from the financial statements would influence the decisions of the user(s) of the financial statements. I will try to understand there frustration and why they react negatively? The most common case of why an auditor gives a Qualified audit opinion

12

is where an audit client refuses to write off a material bad debt which, in the auditors opinion, should be written off. The broad of direction will want me to fix the problem and probably issues an unqualified audit opinion instead. The directors are there to exercise control and management over the organization. In theory organization are run for the benefit of the shareholder, the law imposes strict duties on directors in relation to the exercise of their duties. The duties imposed on directors are fiduciary duties. In

Writing Assignment 1: Audit Report most case when an auditor issues a Qualified audit opinion, this mean the company is not in compliance with GAAP.

The Senior Management will believe a qualified audit report indicates there are internal control problems in financial reporting mechanisms. If the Senior leaders establish corrective measures and ensure that employees follow new measures when performing their duties then the auditor can change there opinions. . Once issues are resolved to my satisfaction as an auditor, I will issue an unqualified opinion at the end of the following audit. The reaction of the board will be negative in the beginning but I will work with then to make sure all corrective measure are taken to ratify the situations. In the end I will make it a win win situation if possible

13

but as mention early I will not compromise my principles as an auditor regardless of there reaction.

Conclusion In will remain calm and detach myself from there reaction. I will smile and tell my client something positive at the end to reassure then and gain there confident in me as an auditor.

Writing Assignment 1: Audit Report

References http://www.moneychimp.com/ http://www.ehow.com/about_6540395_define-audit-report.html http://en.allexperts.com/q/Auditing-1810/2010/3/Auditopinion.htm Auditing and attention CPA Excel review (www.cpaexcel.com) http://business.fortunecity.com/discount/29/goingconc.htm

14