Chapter 17
Communicating Audit and
Attestation Results
Chapter Outline
a. The audit is designed to allow the auditor to render an opinion. The auditor may have no reservations about the fairness of presentation and thus render an unqualified opinion, or the auditor may have reservations that lead to a modification of the report. The auditor's report delineates:
1. what was audited,
2. the division of responsibility for the financial statements between the reporting entity's management and the auditor,
3. the nature of the audit process,
4. the auditor's opinion on the fairness of the financial statements, and
5. the reason(s) why a standard three-paragraph unqualified opinion cannot be expressed, when appropriate.
ii. There are five types of audit opinions that may be included in reports to express the auditor's judgment about the fairness of the overall financial statements.
b. Expression Of An Opinion
i. The fourth reporting standard requires auditors to express either an unqualified opinion on the entire set of financial statements or state the reasons such an opinion cannot be expressed. If the auditor has reservations about the fairness of presentation, the reason(s) must be stated in the auditor’s report.
c. Association With Financial Statements
i. Public accounting firms must provide the client with a report to accompany financial statements whenever the firm's name is associated with those statements. This requirement also conveys an obligation to report the auditor’s findings: an auditor cannot withdraw simply because the auditor’s opinion is not what the client wanted.
d. Types Of Audit Reports
i. There are five types of audit opinions that may be included in reports to express the auditor's judgment about the fairness of the overall financial statements. The standard unqualified audit report can be issued only if:
1. there are no material violations of GAAP,
2. disclosures are adequate,
3. the auditor was able to perform all of the necessary procedures,
4. there has been no change in accounting principles that had a material affect on the financial statements,
5. the auditor is independent, and
6.
the auditor does not
have significant doubt about the client remaining a going concern.
e. Modifications
Of The Standard Unqualified Report
i. There are several situations in which the auditor wishes, or is required, to alter the wording of the standard report. Some of the alterations are informational only; others affect the type of opinion expressed. These require changed wording and many require an additional paragraph.
f. Modifications
Not Affecting The Opinion
i.
Justified Departure from GAAP
1.
These are permissible if the client can
demonstrate, and the auditor concurs, that the financial statements would have
been misleading if GAAP had been followed.
ii.
Inconsistent Application of GAAP
1.
If the client has changed an accounting
principle, has reasonable
justification for the change, and has followed GAAP in accounting for
and disclosing this change, the explanatory paragraph serves as a flag in
directing the reader's attention to the relevant footnote disclosure.
iii.
Going Concern Doubt
1. If there is substantial doubt about the client's ability to continue as a going concern and the auditor feels comfortable issuing an unqualified opinion, the audit report should contain an explanatory paragraph following the opinion paragraph.
iv. Emphasis of a Matter
1. The auditor may wish to emphasize a particular event, transaction or subsequent occurrence that does not affect the opinion on the fair presentation of the financial statements.
v. Other Auditors—Shared Report
1. If the auditor is going to share responsibility with another auditor, the wording of all three paragraphs of the standard report is modified, but no additional paragraph is needed. If the other auditor’s report is qualified, the principle auditor must consider whether the subject of the qualification is of such nature and significance in relation to the overall financial statements that it would affect the overall opinion.
g. Modifications Affecting the Opinion
i. Occasionally, circumstances are such that the auditor cannot issue an unqualified opinion.
ii. Unjustified Departure from GAAP
1. Material GAAP departures that the client will not correct result in either a qualified or an adverse opinion, depending on the materiality of the misstatement and its pervasiveness in the financial statements.
1. If the client refuses to make required disclosures, the auditor should express a qualified or adverse opinion, depending on the significance of the omitted disclosures.
iv. Scope Limitation
1. Restrictions on the scope of the audit, whether imposed by the client or by circumstances, may require the auditor to qualify the opinion or disclaim an opinion. When the client imposes substantial restrictions of the scope of the audit, there is a significant risk that the client is trying to hide some important evidence and the auditor should ordinarily disclaim an opinion.
v. Disclaimer Due to Going Concern Doubt
1. The auditor may issue a disclaimer of opinion when the magnitude of uncertainties about the client's ability to continue as a going concern is such that the auditor is uncomfortable issuing any opinion.
vi.
Auditor Lacks
1. If the auditor is not independent, a one paragraph disclaimer should be issued specifically stating their lack of independence, but omitting the reasons for the lack of independence. Such a situation should rarely occur.
vii. Opinions on Internal Controls of Public Companies
2. The existence of a material weakness in internal control does not automatically lead to a material misstatement in the financial statements. It does lead to doing more audit work to ensure the fairness of the statements. Therefore, an unqualified opinion on the financial statements may be issued even if there are material weaknesses in the internal controls.
h. Reports On Comparative Statements
i.
If comparative financial statements are
presented, the continuing auditors should update their report on the financial
statements of the prior year(s) that they had previously audited. Updating the report involves considering
information that comes to the auditor's attention during the current year's
audit but that is related to any prior year's statements presented. When another audit firm audited one or more
of the prior year statements, the client may ask the other firm to reissue the
report so that all financial statements presented are covered by auditors’
reports.
i.
International Reporting
i. Because different countries may have different accounting and auditing standards, it may be difficult for investors in the international securities market to compare financial statements and understand the significance of the auditor's opinion.
ii. General and Fieldwork Standards
1. When a public accounting firm audits financial statements of a U.S. client that are prepared in conformity with the accounting standards of another country, the audit should be performed in accordance with the general and fieldwork standards of GAAS. Procedures may need to be modified to accommodate the different accounting standards.
iii.
Reporting Standards
1.
For Use Solely Outside the
a.
The auditor may report using either (1) a U.S.
style report modified to report on the accounting principles of another country
and follow the reporting standards under GAAS, or (2) the report form of the
other country and follow the reporting standards of that country.
2.
For Use Both Inside and Outside the
a.
The auditor may report on dual sets of
statements for the client—one prepared in conformity with GAAP and the other in
conformity with the accounting standards of the other country.
iv.
Summary Of Audit Report Modification
1. Issuing an inappropriate audit report can lead to legal problems. Because of its importance, the decision is often made after consultation with other professionals within the firm and other firms.
II. REVIEWS AND COMPILATIONS
a. There are often situations in which a client does not need a full audit. In such cases, the public accounting firm can perform fewer procedures and report a lower level of, or no, assurance on the fairness of the financial statements. The standards for compilations and reviews of the financial statements of nonpublic entities are call Statements on Standards for Accounting and Review Services.
b. Public/Non-Public Companies
i. Note that these standards apply only to compilations and reviews of financial statements of non-public companies. Reporting on reviews of interim financial statements of public companies is covered later in this chapter. The standards for compilations and reviews of the financial statements of non-public entities are called Statements on Standards for Accounting and Review Services (SSARSs). The Accounting and Review Services Committee of the AICPA issues these standards, which is separate from the Auditing Standards Board (ASB) that develops auditing standards.
c. Procedures Common to All Levels of Service
i.
An engagement letter should establish an
understanding with the entity regarding the services to be performed. The accountant should have an appropriate
level of knowledge of the accounting principles and practices of the industry in which the entity operates.
d. Reviews
i. A review is an accounting service that involves performing inquiry and analytical procedures to provide a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with GAAP.
ii. Review Procedures
1. A review requires more knowledge and evidence than does a compilation, but is significantly smaller in scope than an audit. The accountant should obtain a general understanding of the entity's organization, operating characteristics, types of transactions, liabilities and assets, compensation methods, types of products and services, operating locations, and related parties. The CPA should also obtain a management representation letter from the client.
iii. Standard Review Report
1. A standard three-paragraph review report has three paragraphs. The first paragraph identifies what was reviewed. It states that the AICPA’s review standards (SSARSs) were followed, and that the financial statements are the representations of the company’s management. The second paragraph describes a review, states that it is less in scope than an audit, and disclaims an opinion. The third paragraph expresses what is referred to as limited assurance.
e. Compilations
i. These can be performed only for nonpublic entities and involve presenting, in the form of financial statements, information that is the representation of management without undertaking to express any assurance on the statements.
ii. Procedures
1. The accountant should have a general knowledge of the client's industry and accounting records, the accounting basis to be used, and the form and content of the financial statements. The accountant is not required to make inquiries or perform procedures to verify, corroborate, or review information provided by the client, but if the accountant believes that such information may be incorrect, incomplete, or otherwise unsatisfactory, additional or revised information should be obtained. The financial statements should be read to be sure they are free from obvious errors or violations of GAAP.
iii. Standard Compilation Report
1. The CPA is taking no responsibility for the fairness of the financial statements, but should be alert to obvious misstatements.
iv. Omission of Disclosures for Compilations
1. Compiled financial statements may omit substantially all of the required disclosures if the accountant believes that such omission is not made with the intention of misleading the users and the omission is noted in the compilation report.
v. Compilation Report Not Required
1. CPAs may prepare the financial statements without a compilation report when they are intended for use by the client only. In such cases, the auditor should include in a written engagement letter a statement that the financial statements are intended solely for the use of specified members of management and should not be used by any other party.
vi.
CPA Lacks
1.
If the public accounting firm is not independent
with respect to the client, a separate paragraph should be added to the
compilation report stating that fact.
III.
REPORTS
ON OTHER FINANCIAL INFORMATION
a. CPAs issue a wide variety of reports in addition to those described in the preceding sections. We do not cover all such reports in this section, but provide an overview of the major reports.
b. Special Reports
i.
Comprehensive Basis Of Accounting Other Than GAAP
1.
Auditing standards permit the auditor to issue
opinions on non-GAAP financial statements as long as the accounting basis used
is one of these:
a.
a cash or modified cash basis,
b.
the basis of accounting used for preparing the
income tax return,
c.
the basis of accounting used for reporting to a
governmental regulatory agency, or
d. a basis with a definite set of criteria, substantial support, and applicability to all material items appearing in the financial statements.
2. Applicability of GAAS
a. The 10 GAAS apply to audits of OCBOA financial statements. The major difference is that the auditor first must determine that the client’s OCBOA has authoritative support, and then determine whether the financial statements are fairly presented in accordance with that basis of accounting.
3. Report Requirements
a. It is important that the titles of the financial statements clearly indicate that they are not GAAP based statements. In evaluating the adequacy of the disclosures in OCBOA statements, the auditor should apply essentially the same criteria as for GAAP basis statements.
ii. Specified Elements, Accounts, Or Items
1.
These may be presented in the auditor's report
or in a document accompanying the report.
For example, a lease agreement may base the rent on the tenant's
revenues and require that an independent auditor provide a report expressing an
opinion on whether revenue is reported to the lessor in accordance with the
lease agreement.
2.
Applicability of GAAS
a. With the exception of the first standard of reporting, all of the auditing standards are applicable to audits of specified elements.
3. Report Requirements
a. The audit report should identify the specific elements, accounts, or items of a financial statement and, if applicable, indicate that the audit was made in conjunction with an audit of the company's financial statements.
iii. Compliance With Contractual Agreements Or Regulatory Requirements
1. Auditors may issue reports on the client's compliance with specific regulations as long as the covenants of the agreement or regulatory requirement are based on information from the audited financial statements.
2. Report Requirements
a. A compliance report contains negative assurance and may be given in a separate report or with the auditor's report accompanying the financial statements.
iv. Circumstances Requiring Explanatory Language in a Special Report
1. Explanatory language should be added to any of the special reports when:
a. there has been a change in accounting principles that materially affected the subject of the report,
b. the auditor has "going concern" doubts,
c. the auditor makes reference to the report of another auditor, or
d. the auditor expresses an opinion on prior-period information
that is different from the opinion previously expressed on that same
information.
c. Interim
Financial Information
i. The SEC requires publicly owned corporations to have their quarterly financial information reviewed by their independent auditors before it is issued.
1. The auditor should perform basically the same review procedures required by the SSARS on the quarterly information contained in the annual report to shareholders and when engaged to review the quarterly information issued at the end of each of the first three quarters of the fiscal year. In addition, the auditor should obtain written representations from management concerning such things as its responsibility for the financial information, the completeness of the minutes, and subsequent events.
iii. Reporting On Interim Statements Presented Separately
1. The disclosure and reporting requirements for interim financial statements are different than for annual statements. The negative assurance should be modified when there is a material departure from GAAP or inadequate disclosure.
iv. Reporting On Interim Financial Information That Accompanies Audited Annual Financial Statements
1.
The SEC requires public companies to present
selected quarterly financial information in their annual reports; the auditor's
report on the financial statements ordinarily does not need to be modified to
refer to the review of the interim information unless there is some problem
with the information or it is omitted.
d. Financial
Reports on the Internet
i.
Auditors are not yet required to read or
consider the consistency of information provided by a company on its Internet
home page with audited information.
IV.
THE WORLD
OF ATTESTATION SERVICES
a. The world of assurance services provided by CPAs is constantly growing. The public accounting profession continues to develop criteria and standards to meet the changing needs of the business community.
1. AT 100 provides standards for attestation engagements for which there is a commonality in reporting and evidence-gathering procedures.
V. REPORTS ON OTHER FINANCIAL AND NON-FINANCIAL INFORMATION
a.
CPAs also provide assurance on other historical
and prospective financial information as well as non-financial information.
i.
Reports On Prospective Financial Statements
1.
Prospective financial statements are of two types-forecasts and
projections. Forecasts are based on
management’s expected financial position, results of operations, and cash
flows. Projections are “what if”
statements; ”if we get the loan to expand, this the
expected financial position, results of operations, and cash flows.” CPAs may compile or examine prospective financial
statements.
2.
Compilations involve assembling the prospective statements based on
management’s assumptions. The
compilation report provides no assurance about the financial statements
or the reasonableness of the assumptions
3.
Examinations (the highest level of service) involve evaluating the preparation
of the statements, the support underlying the assumptions, and the presentation
of the statements. The examination
report includes an opinion on the statements and underlying assumptions.
ii.
Reports On Pro Forma Financial Information
1.
Pro forma financial information is historical “what if”
information. The pro forma information
shows what the significant effects might have been had a consummated or
proposed transaction (or event) occurred at an earlier date. CPAs may review or examine pro forma
information.
2. Review reports provide negative assurance and examination reports include an opinion about management’s assumptions, related adjustments, and application of those adjustments to the historical financial statements.
iii. Reports On Compliance
1. During the course of a normal audit, the auditor tests compliance with laws and regulations that could have a direct, material effect on the financial statements, such as those related to income taxes. A CPA also may be engaged to specifically report on either:
a. an entity’s compliance with requirements of specified laws, regulations, rules, contracts, or grants or
b. the effectiveness of an entity’s internal control over compliance with specified requirements.
2. Compliance requirements may be either financial or non-financial in nature.
iv. Reports On Agreed-Upon Procedures
1. CPAs may be engaged by clients to issue a report of findings based on procedures specified by the client and CPA that are believed to be appropriate to the client’s needs. Such an engagement is less in scope than an audit or review. Reports on agreed-upon procedures include a list of the procedures performed, related findings, and a restriction on the use of the report to specified parties. No assurance is provided in these engagements.