The very existence of the accounting profession depends on public confidence in the determination of certified public accountants to safeguard the public interest.
J.L Carey (Professional Ethics of Public Accounting)

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Enron Corp. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations, cash flows, and changes in shareholders’ equity for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the
United States.
The opinion paragraph from Arthur Andersen’s final audit of Enron Corp. (dated February 23, 2001)
12-2

Providing an independent and expert opinion on the fairness of financial statements
When performing an audit, the auditors obtain reasonable assurance that the statements are in conformity with
GAAP

Financial Statements




Balance Sheet
Income Statement
Statement of Cash Flows
Statement of Retained Earnings (equity)
Financial Statement Disclosures
 The notes to the financial statements are considered an integral part of the financial statements

Report on financial statements and related disclosures (prepared by auditor)
 Are financial statements and disclosures according to GAAP?
Report on internal control over financial reporting (prepared by management)
 Has company maintained effective internal control over financial reporting?
Report on internal control over financial reporting (prepared by auditor)

Is management’s assessment of its internal control appropriate?
 Has company maintained effective internal control over financial reporting?

Unqualified Report
• Expresses an unqualified opinion
Unqualified Opinion with Modified Wording
•
• F/S are in conformity with GAAP
Additional matters are disclosed in report
Qualified Opinion
•
“Except for” some matter, F/S are in conformity with
GAAP
Adverse Opinion
• F/S are not in conformity with GAAP
Disclaimer of Opinion
• No opinion is issued by auditors
12-6

STANDARD (“CLEAN”) Audit Report
Introductory Paragraph



F/S included and years examined
Responsibility of auditor
Management responsibility
Scope Paragraph



Audit conducted in accordance with PCAOB standards
Description of an audit --- specific references to “test basis,”
“materiality,” and “significant estimates”
Audit provides reasonable basis for opinion
Opinion Paragraph – “fairly presented, in all material respects, in accordance with U.S. generally accepting accounting principles.”
Internal Control
 References examination, report, and opinion on internal control

Conditions Required for Issuance of an
Unqualified Report
Independence of Mental Attitude
Evidence Available, No Scope Limitations
Followed GAAP
Consistent Application of GAAP
Disclosures are Adequate and Complete
Expression of Opinion
No Going Concern Problem

Independent Auditors’ Report ( AS 5 )
Report Title
Report Address
Introductory Paragraph
Scope Paragraph
Opinion Paragraph
Internal Control
Paragraph
Signature
Report Date
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
DUNDER-MIFFLIN, INC.
We have audited the accompanying balance sheets of DUNDER-MIFFLIN, INC. as of December 31, 2012 and
2011, and the related statements of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012. These financial statements are the responsibility of DUNDER-
MIFFLIN, INC.'s management . Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement . An audit includes examining, on a test basis , evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion .
In our opinion, the financial statements referred to above present fairly, in all material respects , the financial position of DUNDER-MIFFLIN, INC. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), DUNDER-MIFFLIN, INC.’S internal control over financial reporting as of December 31,
2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated January 29, 2012 expressed an unqualified opinion thereon.
Michael Scarn, LLP
Scranton, PA
January 29, 2013
12-9

 Separate reports on F/S and I/C, with each reports referencing the other
 Combined report on F/S and I/C
12-10








Identification of management's conclusion about effectiveness of company's internal control over financial reporting.
Responsibilities of auditor and management for internal control
Definition of the scope of the engagement.
Definition of internal control over financial reporting.
Identification of inherent limitations of internal control
Opinions on:

Whether management’s assessment is fairly stated.
 Whether company has maintained effective internal control over financial reporting.
Reference to auditor's report on financial statements, including the type of opinion expressed.

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.

Reference to Other Auditors
Circumstances Concerning Comparative
Financial Statements


Previous year audited by other auditors
First year audit
Reporting on Other Information accompanying the financial statements

Group Financial Statements: Financial statements comprised of more than one division/subsidiary/segment/component
Group Auditors: Conduct audit of material portion of the entity
Component Auditors: May be engaged by group auditors to audit divisions, subsidiaries, or components
12-14

Take
Responsibility for
Component
Auditors’
Work?
NO
Refer to
Component
Auditors by
Name?
NO
Indicate Division of Responsibility in Unqualified
Opinion
YES
YES
Standard Report
(Unqualified
Opinion)
Obtain permission and present component auditors’ report
12-15

Group auditors should

Verify component auditors’ reputation and independence
 Communicate and coordinate with component auditors
Options
 Take responsibility for work: Standard report


Name component auditors
 Present report of component auditors, only with their permission
Refer to component auditors
 Modify introductory, scope, and opinion paragraphs of report
 Still express unqualified opinion, if appropriate
12-16

Continuing Auditors
 Update opinion by considering if previously-issued opinions still appropriate
 If previously-issued opinions not appropriate, revise opinion in current report
Predecessor Auditors
 With permission, auditors may present reissued report from predecessor on prior-years’ F/S along with their report on current F/S

If predecessors’ report not presented, auditors’ report must reference predecessors’ report and opinion on prior-years’
F/S
12-17

Before reissuing the report: predecessor auditor should:
1. Read the financial statements of the current period.
2. Compare the prior-period financial statements reported on with the currentyear financial statements.
3. Obtain a letter of representation from the current-year or successor auditor.

Other Information Accompanying The
Financial Statements
Provided by the Company --- Review, make sure that it is consistent with F/S
Supplemental information required by FASB/GASB
 Exception based (similar to consistency)
Information contained in an AUDITOR SUBMITTED document



Typing or reproducing Financial Statements
Presenting Financial Statements to third parties
Attach report stating relationship with the submitted document

Emphasis of Matter Paragraph—Substantial
Doubt as to Going Concern Status
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has suffered negative cash flows from operations and has an accumulated deficient, conditions that raise substantial doubt about the Company's ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated fanatical statements n do not include any adjustments that might result from the outcome of this uncertainly. Our opinion is not modified with respect to this matter.
NOTE: Ordinarily an unmodified opinion with an emphasis of matter paragraph is issued. Alternatively, a disclaimer of opinion may be issued.

Changes Affecting Consistency
Change in
Accounting
Principle
Correction of an Error in Principle
Change in
Reporting
Entity
Changes Not Affecting
Consistency
Change in
Accounting
Estimate
Correction of an error that does not involve an accounting principle
Change in
Classification and
Reclassificatio n
Change expected to have a material future effect

Relates to:


Change in accounting principles
Adjustments to correct misstatements in previously-issued
F/S
Type of changes in accounting principles:
 Accounting principles (GAAP to GAAP)


Form of reporting entity
Accounting principles (non-GAAP to GAAP)
 Accounting principle inseparable from changes in estimates
12-22

Add explanatory paragraph following the opinion paragraph
May issue a qualified opinion (GAAP departure) if:


Change is not justified
Change is not accounted for in conformity with GAAP
12-23

Emphasis of Matter Paragraph
Lack of Consistency
A lack of consistent application of accounting principles results in an emphasis of matter paragraph, such as:
As discussed in Note 5 to the consolidated financial statements, the Company adopted Statement of Financial
Accounting Standards Update No. XXX (p rovide title) as of
December 31, 20X8. Our opinion is not modified with respect to this matter.

Explanatory paragraph after opinion paragraph discussing the matter (e.g., a subsequent event not affecting year-end F/S's)
Usually items that are difficult to disclose in the financial statements
 Non-Quantitative Matters
 Subsequent Events






A risk or uncertainty.
Significant related party transactions described in a note to the financial statements.
The company is a component of a larger business enterprise.
Unusually important significant events.
Accounting matters affecting comparability
(other than changes in accounting principles) of financial statements with those of the preceding year.

Allows for non-GAAP solutions to fairly present the company's financial situation.
Rule 203 of the AICPA Code of Professional Conduct --recognizes that adherence to certain accounting principles may create situations in which a company's financial condition may not be fairly presented.
Solution: Insert an additional middle paragraph (between scope and opinion paragraphs) stating the deviation from GAAP, but still issue an unqualified report.

In unusual circumstances financial statements may be misleading if a promulgated accounting principle was followed.
Rule 203 of the Code of
Professional Conduct allows the auditor, in such circumstances, to issue an unqualified opinion.
An explanatory paragraph should describe the departure, the approximate effects of the departure, if practicable, and the reasons that compliance with the accounting principle results in misleading financial statements.

Modifications of the Auditors’ Report--
Unqualified Opinions
Type of Report
Shared responsibility
Introductory or
Scope Paragraph
Describe work of other auditors
Explanatory
Paragraph
None
Opinion
Paragraph
“...based on our audit and the report of other auditors...”
None Going concern uncertainty
GAAP not consistent
Emphasis of matter
Justified departure from official
GAAP
None
None
None
None
Describe uncertainty
Describe change in principle
Describe matter
Describe departure
None
None
None

Qualified
“except for”
Adverse
Disclaimer

Issued when departure is material, yet not pervasive
Report Modifications:
 Introductory and scope paragraphs remain the same
 Add paragraph preceding the opinion paragraph explaining departure and detailing $ amounts involved

Modify opinion paragraph (“In our opinion, except for the matter discussed in the preceding paragraph ,….”)
12-31

Scope
Limitation
Departure from GAAP
Lack of Auditor
Independence

Scope
Limitation
Results from an inability to obtain sufficient competent evidence about some component of the financial statements.
Not in
Conformity with GAAP
Results when financial statements are materially affected by an unacceptable departure from GAAP.
Auditor Not
Independent
Results when auditor is not independent.

Is the
Limitation
Material?
YES
Alternative
Procedures
Available?
NO
Is the
Limitation
Pervasive?
YES
Disclaimer of
Opinion
NO Standard Report
(Unqualified
Opinion)
YES
NO
Standard Report
(Unqualified
Opinion)
Qualified
Opinion
12-34

Circumstance-Imposed

Situation in which matters beyond auditors’ and client’s control limit procedures performed by auditor
 Example: inability to observe year-end inventory because of late appointment
Client-Imposed
 Situation in which client specifically limits auditors’ procedures
 Should be viewed as a significant restriction and a disclaimer is ordinarily issued
12-35

Issued when scope limitations are material, but not pervasive
Report Modifications:


Introductory paragraph remains the same
Scope paragraph: “
Except as discussed in the following paragraph [the scope limitation], we conducted our audit…”


Add paragraph preceding the opinion paragraph describing the scope limitation
Modify opinion paragraph (“In our opinion, except for ” )
12-36

Scope limitations can cause disclaimers or qualified opinions depending upon severity and materiality.


Key question: Is the scope limitation limited, or does it permeate the financial statements?
If alternative procedures are available, the auditor may still be able to issue an unqualified opinion.
Report Modifications:




Intro paragraph remain the same
Scope paragraph: “ Except for the problem noted, the audit was conducted in accordance with auditing standards generally accepted in the United States”.
Add middle paragraph explaining problem
Change opinion paragraph (“In our opinion, except for the matter discussed in the preceding paragraph,….”)

Modifications of Auditors’ Report—
Qualified Opinions
Type of Report Introductory or
Scope Paragraph
Qualified—GAAP
Departure
Qualified—Scope
Limitation
None
“Except as explained in the following paragraph…”
Explanatory
Paragraph
Describe
Departure and
Effects
Describe Scope
Limitation
Opinion Paragraph
“except for the effects of the departure the financial statements…”
“except for the effects of such adjustments, if any, as might have been determined to be necessary had we been able to…”

Issued when F/S do not present fairly according to
GAAP (i.e., a serious, pervasive departure from
GAAP).
Report Modifications:



Introductory and scope paragraphs remain the same
Add paragraph preceding the opinion paragraph explaining the departure and detailing $ amounts involved
Change opinion paragraph (“financial statements do not present fairly”)
12-41

Issued when the auditor is unable to be satisfied that the overall financial statements are fairly presented.

Uncertainities
Scope Limitation
Going Concern
Unaudited
Review
Compliation
Agreed Upon Other Procedures
Not Independent

Scope Limitation: Disclaimer of
Opinion
Pervasive scope limitation, usually client-imposed
 Significance of the limitation is such that auditors cannot gather sufficient appropriate evidence to form an opinion
Report Modifications:

Introductory paragraph: (“We were engaged to audit
….”; omit auditors’ responsibility)



Omit scope paragraph
Add paragraph preceding the opinion paragraph describing the scope limitation
Modify opinion paragraph (“… we do not express an opinion ….”)
May still issue opinion on internal control if no scope limitation on the examination of internal control
12-44

Scenario: Auditors begin engagement but independence subsequently compromised
Report



Single paragraph
Indicates auditors are not independent
Does not indicate why independence lacking
12-45

Should state that CPA is not independent but need not state the reason why
I am (We are) not independent with respect to the XYZ Company and the accompanying balance sheet as of December 31, 20XX, and the related statements of income retained earnings, and cash flows for the year then ended were not audited by me (us) and, accordingly, I (we) do not express and opinion on them.
No heading on report
Do not describe procedures performed
Must describe material departures from GAAP

Modifications of the Auditors’ Report--
Adverse & Disclaimer
Type of Report Introductory or
Scope
Paragraph
Explanatory
Paragraph
Adverse
None
Opinion
Paragraph
Describe reason for opinion
“the financial statements do not present fairly”
Disclaimer of
Opinion--
Scope
Limitation
“We were engaged”
Omit “Our responsibility...”
Omit scope paragraph
Describe scope restriction and any reservations
“we do not express an opinion on the financial statements”

Before Opinion Paragraph



Qualified opinions
Disclaimers
Adverse opinions
Following Opinion Paragraph
 Consistency
 Substantial doubt about continued existence
Other types of paragraphs may precede or follow the opinion paragraph

Financial Statements prepared on a
Comprehensive
Basis of Accounting other than GAAP
Specified Elements,
Accounts, or Items of Financial
Statement
Compliance with
Contractual
Agreements or
Regulatory
Requirements

Regulatory Basis
Tax Basis
Cash (or Modified Cash)
Basis
A Definite Set of Criteria
Having Substantial
Support

In some situations an auditor may be engaged to audit only part (or specified elements, accounts, or items) of the financial statements.
GAAP
Basis of
Accounting
Basis of accounting prescribed by a contract or agreement
Other comprehensive basis of accounting
(OCBOA)

Forecasts and Projections
Use of Prospective Financial Statements
Types of Engagements
Examination of Prospective Financial Statements

Audit is limited to certain specific audit procedures.
Referred to as procedures and findings engagements.
The SASs deal with financial statement items, whereas the SSAEs deal with nonfinancial statement subject matter.

Standards for compilations and reviews of financial statements are called...

Auditors permit use of name in communication including F/S
Issue disclaimer of opinion (one paragraph)
 Do not mention auditing procedures performed
 Must identify any known departures from GAAP in the report
 Should cover all unaudited prior-years’ financial statements
12-56

Type of
Engagement
Amount of
Evidence
Level of
Assurance
Form of
Conclusion Distribution
Examination Extensive High Positive General
Review Significant
Agreed-Upon
Procedures
Varying
Moderate Negative
Varying Findings
General
Limited

Material
Opinion
Pervasive
Departure from GAAP
Scope Limitation
Qualified
Qualified
Adverse
Disclaimer
Other matters (Consistency,
Going-concern, Rule 203,
Emphasis of a matter)
Unqualified Unqualified
Other matters (Division of responsibility when referencing work of component auditors)
Unqualified Unqualified
Paragraphs modified/added
Intro Scope Opinion Add’l
X
X
X
X
X
X
X X X
May issue disclaimer if:
• Lack of independence
• Associated with financial statements
• Material and pervasive going-concern uncertainty
12-58