18-1
McGraw-Hill/Irwin
Chapter 18
CHAPTER 18
REPORTS ON AUDITED
FINANCIAL STATEMENTS
AND SPECIAL REPORTING
ISSUES
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18-2
ELEMENTS OF THE STANDARD
UNQUALIFIED REPORT

The report title
The addressee
The introductory paragraph
The scope paragraph
The opinion paragraph
The audit report date
The name of the auditor

Exhibit 18-1 – Page 625
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18-3
EXPLANATORY LANGUAGE ADDED
TO THE STANDARDUNQUALIFIED
AUDIT REPORT

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Opinion based in part on the report of another
auditor.
Going concern.
Agreement with a departure from GAAP.
Lack of consistency.
Emphasis of a matter.
Report is still a “Standard Unqualified Report”
but an explanatory paragraph is included
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18-4
OPINION BASED IN PART ON
ANOTHER AUDITOR

Sometimes, part of the audit may be completed by
another firm (e.g. report on consolidated f/s – one
subsidiary may be audited by a different firm)
Principal auditor needs to decide responsibility level:
Level of Responsibility
Effect on Audit Report
Full Responsibility
No reference to other auditor
Shared Responsibility
Reference to other auditor


Exhibit 18-2 – Page 626
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18-5
REPORTING ON A GOING CONCERN
(1) The auditor could disclaim an opinion; or
(2) The audit report should include an explanatory
paragraph such as the following:
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note
6 to the financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raise substantial
doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 6. The
financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
See Exhibits 18 – 3 and 18 – 4 – Page 628
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18-6
AGREES WITH GAAP DEPARTURE
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Explanatory paragraph should describe:

Departure from GAAP

The approximate effects of the departure

The reasons why compliance with GAAP would be
misleading
Situation is not common.
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18-7
LACK OF CONSISTENCY

Changes affecting consistency should be disclosed in an
explanatory paragraph:
 Change in accounting principle
 Change in reporting entity
 Correction of an error in principle

Changes NOT affecting consistency should be disclosed in
a footnote but do not require recognition in the report:
 Change in accounting estimate
 Correction of an error not involving a principle
 Change in classifications
 Change expected to have a material future effect
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18-8
EMPHASIS OF A MATTER

May emphasize a matter in an explanatory paragraph:

Examples:
Significant related-party transactions
 Significant subsequent events

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18-9
DEPARTURES FROM AN
UNQUALIFIED REPORT

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Conditions:
 Scope limitation.
 Statements not in conformity with GAAP.
 Auditor is not independent.
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18-10
OTHER AUDIT REPORTS (FIG 18-1)

Qualified: Results from either a scope limitation or a
departure from GAAP, but the overall financial
statements are presented fairly.

Disclaimer: Results from either insufficient competent
evidence to form an opinion on the overall financial
statements or because there is a lack of independence.

Adverse: Financial statements do NOT present fairly in
accordance with GAAP because the departure is
pervasively material.
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18-11
SCOPE LIMITATION
A
scope limitation results from an inability to
obtain sufficient competent evidence about some
part or parts of the financial statements.
Scope
restrictions may be client-imposed or result
from the circumstances of the engagement.
Exhibits
McGraw-Hill/Irwin
18 – 6 and 18 – 7 on Page 633
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18-12
SCOPE LIMITATION

McGraw-Hill/Irwin
Examples:
 Inability to observe inventory.

Inability to confirm accounts receivable.

Inability to obtain audited financial statements
for a long-term investment that is accounted for
using the equity method.
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18-13
STATEMENTS NOT IN CONFORMITY
WITH GAAP
If
the financial statements are materially affected
by a departure from GAAP, the auditor should
express a qualified or adverse opinion.
Qualified:
Adverse:
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Exhibit 18 – 8 – Page 634
Exhibit 18 – 9 – Page 634
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18-14
STATEMENTS NOT IN
CONFORMITY WITH GAAP

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Examples:
 An accounting principle that is not acceptable.

Inadequate disclosure.

A lack of justification for a change in accounting
principle.
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18-15
AUDITOR NOT INDEPENDENT

If an auditor is not independent, a disclaimer of
opinion should be issued.

The auditor should not state the reasons for the
lack of independence nor describe any audit
procedures performed.

Exhibit 18 – 11 on Page 635
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18-16
SPECIAL REPORTING ISSUES

Reporting on comparative financial statements.

Other information contained in audited financial
statements.

Special reports.
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18-17
REPORTS ON COMPARATIVE
FINANCIAL STATEMENTS

Different reports on comparative financial
statements (e.g. one year is unqualified, & the other
is qualified or disclaimed) – Exhibits 18-12 & 18-13

A change in the report on the prior-period financial
statements (e.g. company issued qualified report in
PY but restated PY results in CY in accordance
with GAAP) – Exhibit 18 – 14

Report by a predecessor auditor
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18-18
REPORTS ON COMPARATIVE
FINANCIAL STATEMENTS
Predecessor Auditor (continued):
 Must perform the following before reissuing report:
 Read the financial statements of the current period
 Compare the prior period f/s with the current year f/s
 Obtain letter of representation from successor auditor
indicating any material items affecting PY report

If you choose not to include the predecessor auditor’s
report, should indicate in the Intro Paragraph that the
financial statements for the PY were audited by other
auditors and mention the date and type of report.

Exhibit 18 – 15 on Page 639
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18-19
OTHER INFORMATION

Auditing standards provide guidance for the
auditor's consideration of other information
included in documents contained in (1) annual
reports of entities or (2) other documents to which
the auditor devotes attention at the client's request.

The auditor the auditor should read the other
information and consider whether such information
is consistent with the information contained in the
audited financial statements.
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18-20
SPECIAL REPORTS
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Financial statements prepared on a comprehensive
basis of accounting other than GAAP.
Specified elements, accounts, or items of a financial
statement.
Compliance with aspects of contractual agreements or
regulatory requirements related to audited financial
statements.
Financial presentations to comply with contractual
agreements or regulatory provisions.
Financial information presented in prescribed forms or
schedules that require a prescribed form of auditor's
report.
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18-21
FINANCIAL STATEMENTS PREPARED
ON A COMPREHENSIVE BASIS
OTHER THAN GAAP

Tax basis: Basis used to file income tax return

Cash (or modified cash) basis: Reports on revenues
received and expenses paid

A definite set of criteria having substantial support
(e.g. price level-adjusted basis)

Exhibit 18 – 16 on Page 641
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18-22
SPECIFIED ELEMENTS,
ACCOUNTS, OR ITEMS

Situations where the auditor may be engaged to
audit only part (specified accounts or items) of
the financial statements

Example: A report on rentals, royalties, or profit
participation

Auditor must consider materiality in relation to
the individual item, as well as how this item
relates to other parts of the financial statements

Exhibit 18 – 17 on Page 643
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18-23
COMPLIANCE REPORTS RELATED
TO AUDITED FINANCIAL
STATEMENTS

An auditor may be asked to report on an entity's
compliance with certain contractual agreements or
regulatory requirements related to audited financial
statements.

The auditor provides negative assurance (e.g.
“nothing came to our attention that indicated
noncompliance”)

Example: Report on compliance with covenants in
loan agreement (Exhibit 18 – 19 on Page 645
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