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Checkpoint Contents
Accounting, Audit & Corporate Finance Library
Editorial Materials
Audit and Attest
Auditor's Reports
Chapter 1 The Auditor's Standard Report
100 Background Information
100
Background Information
Introduction
100.1 The AICPA's Auditing Standards Board is designated under Rules 201 and 202 of the AICPA Code of
Professional Conduct as the body to establish auditing, attestation, and quality control standards and
procedures for nonpublic entities (also referred to as nonissuers), whereas the Public Company Accounting
Oversight Board (PCAOB) is designated to establish auditing, attestation, and related professional practice
standards for audits of public companies. Accordingly, there are two separate sets of standards generally
accepted in the U.S. that apply to audits of financial statements—one for audits of public companies, and
another for audits of nonpublic entities.
100.2 PPC's Guide to Auditor's Reports only addresses reporting on the financial statements of nonpublic
entities. Reporting on matters required by the PCAOB is not addressed. 1 The authors will continue to monitor
the PCAOB's activities, however, and will provide guidance if its activities impact audits of nonpublic entities.
Further guidance on the impact of the Sarbanes-Oxley Act and the PCAOB on audits of nonpublic entities is
provided beginning at paragraph 100.9.
Authoritative Literature for Audits of Nonpublic Entities
100.3 As stated in the auditor's report, audits are performed in accordance with generally accepted auditing
standards (GAAS). Generally accepted auditing standards for audits of periods ending on or after December 15,
2012, are set forth the in clarified Statements on Auditing Standards, which are codified in AU-C sections. 2
(See the discussion of the Auditing Standards Board's clarity project beginning at paragraph 100.11.) Generally,
early adoption of the clarified auditing standards is not permitted. However, an auditor may implement aspects
of the clarified auditing standards before their effective date as long as the auditor continues to comply with
existing standards. The discussions throughout this Guide, references to authoritative literature, and illustrative
auditor's reports have been updated for the clarified standards. (Appendix 1C includes basic illustrative report
examples under pre-clarified auditing standards.) 3 Paragraph 100.14 discusses the effective date of the
clarified auditing standards and implementation in this Guide.
100.4 Form and Structure of the Clarified Auditing Standards
The clarified SASs are divided into the following topics:
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• Introduction . Includes matters such as the purpose and scope of the guidance, subject matter, effective
date, and other introductory material.
• Objectives . Establishes objectives that allow the auditor to understand what to achieve under the
standards. The auditor uses the objectives to determine whether additional procedures are necessary for
their achievement and to evaluate whether sufficient appropriate audit evidence has been obtained.
• Definitions . Provides key definitions that are relevant to the standard.
• Requirements . States the requirements that the auditor is to follow to achieve the objectives unless the
standard is not relevant or the requirement is conditional and the condition does not exist.
• Application and Other Explanatory Material . Provides further guidance to the auditor in applying or
understanding the requirements. While this material does not, in itself, impose a requirement, auditors
should understand this guidance. Its application will depend on professional judgment in the circumstances
considering the objectives of the standard. The requirements section references the applicable application
and explanatory material. Also, when appropriate, considerations relating to smaller and less complex
entities are included in this section.
A standard may also contain exhibits or appendices. Appendices to a standard are part of the application and
other explanatory material. The purpose and intended use of an appendix is explained in the standard or in the
title and introduction of the appendix. (As discussed in paragraph 100.6, exhibits to standards are interpretive
publications, which are not auditing standards but rather recommendations on applying the standards.)
100.5 Use of the Terms Must and Should
According to AU-C 200.20, Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance With Generally Accepted Auditing Standards, “the auditor should comply with all AU-C sections
relevant to the audit. An AU-C section is relevant to the audit when the AU-C section is in effect and the
circumstances addressed by the AU-C section exist.” The auditor's degree of responsibility in complying with
requirements in the AU-C sections is identified through two categories as follows:
• Unconditional Requirements . Unconditional requirements are those that an auditor must follow in all
cases if the circumstances apply to the requirement. The AU-C sections use the word must to indicate an
unconditional requirement.
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• Presumptively Mandatory Requirements . An auditor must comply with a presumptively mandatory
requirement in all cases in which such a requirement is relevant except in rare circumstances, which
according to AU-C 200.26, are expected to arise only when the requirement is for a specific procedure to be
performed and, in the specific circumstances of the audit, that procedure would be ineffective in achieving
the intent of the requirement. (AU-C 230.13 requires the auditor to document (1) the justification for any
necessary departure from a presumptively mandatory requirement of GAAS and (2) how alternative
procedures performed were sufficient to achieve the intent of the requirement.) Auditing standards use the
word should to indicate a presumptively mandatory requirement.
Throughout this Guide, the authors use the terms must and should in accordance with their use in the AU-C
sections as described above. The authors also use the term required interchangeably with should.
100.6 Interpretative Publications
In addition to the Statements on Auditing Standards as codified in the AU-C sections, auditing guidance is
provided through interpretive publications. Interpretive publications are not auditing standards, but rather
recommendations on applying the SASs. An interpretive publication is issued after ASB members have been
provided an opportunity to consider and comment on whether the proposed interpretive publication is consistent
with GAAS. Interpretive publications include Auditing Interpretations, exhibits to the AU-C sections, and auditing
guidance in AICPA Audit and Accounting Guides and AICPA Auditing Statements of Position. AU-C 200.7
requires auditors to consider applicable interpretive publications.
100.7 Auditing interpretations are included in the AU-C sections. (All auditing interpretations corresponding to a
pre-clarified SAS were considered in developing the clarified standards and incorporated as necessary.
Generally, the pre-clarity interpretations have been withdrawn, except for certain interpretations that were
retained and revised to reflect the issuance of the clarified standards.) Going forward, the ASB will continue to
issue interpretations of the auditing standards as necessary. AICPA Audit and Accounting Guides and auditing
SOPs are listed in AU-C appendix D, AICPA Audit and Accounting Guides and Statements of Position.
100.8 Other Auditing Publications
Other auditing publications have no authoritative status but may help auditors understand and apply the SASs.
Other auditing publications include AICPA publications other than interpretive publications; articles in
professional journals; continuing professional education programs; textbooks; guide books; audit programs and
checklists; and auditing literature published by state CPA societies and other organizations (for example, PPC
guides). 4 If auditors apply the guidance in other auditing publications, they need to be satisfied that the
guidance is both appropriate and relevant. Appropriateness refers to whether the guidance is technically sound.
Relevance refers to whether the guidance is applicable to the circumstances of a particular audit engagement.
There is a presumption that other auditing publications published by the AICPA and reviewed by the AICPA
Audit and Attest Standards staff are appropriate. Those publications are listed in AU-C appendix F, Other
Auditing Publications. Indicators of appropriateness of other auditing publications that have not been reviewed
by the AICPA Audit and Attest Standards staff include the extent to which the publication is recognized as being
helpful and the professional reputation of the author or issuer.
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Impact of the PCAOB on Auditing Standards for Nonpublic Entities
100.9 As discussed in paragraph 100.1, the PCAOB has authority to establish auditing standards for public
entities, while the Auditing Standards Board (ASB) of the AICPA has the authority to set standards governing
the audits of nonpublic entities. Recently, the ASB has adopted a strategy of convergence of its standard setting
process with the International Standards on Auditing (ISAs) by aligning its standard setting process with that of
the International Auditing and Assurance Standards Board (IAASB). In addition, the ASB continues to consider
standards developed by the PCAOB.
100.10 Both the ASB and the PCAOB have issued guidance to auditors for reporting when the audit of a
nonpublic entity is conducted in accordance with GAAS and in accordance with the PCAOB auditing standards.
(See a discussion of that guidance beginning at paragraph 104.13.) In addition, applying PCAOB standards to
audits of nonissuers is discussed in section 708.
Clarified Auditing Standards
100.11 In response to growing concerns regarding the complexity of auditing standards and to harmonize U.S.
generally accepted auditing standards with International Standards on Auditing (ISAs) issued by the
International Auditing and Assurance Standards Board (IAASB), the Auditing Standards Board has been
working on the Clarity Project to revise all existing auditing standards and to design a format under which all
new standards will be issued. In October 2011, the AICPA issued:
• SAS No.122, Statements on Auditing Standards: Clarification and Recodification, which represents a
completely new set of auditing standards revised in format, structure, style, and content from the existing
standards. (See the discussion beginning at paragraph 100.3.) It supersedes all existing SASs through SAS
No. 121, except:
•• SAS No. 51, Reporting on Financial Statements Prepared for Use in Other Countries.
(Subsequently superseded by SAS No.124.)
•• SAS No. 59, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern.
(Subsequently superseded by SAS No. 126) See discussion in Chapter 6.
•• SAS No. 65, The Auditor's Consideration of the Internal Audit Function in an Audit of Financial
Statements. (Currently being redrafted and will be superseded when the clarified version is
issued.) 5
•• SAS No. 87, Restricting the Use of an Auditor's Report. (Subsequently superseded by SAS
No.125.)
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•• SAS No. 117 on compliance audits and SAS Nos. 118-120 on supplementary information.
These standards were previously issued in clarified format and are already effective. 5
• SAS No. 123, Omnibus Statement on Auditing Standards—2011. Amends SAS Nos. 117, 118, and 122 to
address matters that arose after the clarified standards were finalized.
• SAS No. 124, Financial Statements Prepared in Accordance with a Financial Reporting Framework
Generally Accepted in Another Country. This is the clarified and recodified version of SAS No. 51.
100.12 In addition, in December 2011, the ASB issued SAS No. 125, Alert That Restricts the Use of the
Auditor's Written Communication. SAS No. 125 supersedes SAS No. 87 and amends, among other standards,
AU-C 260, The Auditor's Communication With Those Charged With Governance, and AU-C 265,
Communicating Internal Control Related Matters Identified in an Audit. SAS No. 125 is effective for the auditor's
written communications related to audits of financial statements for periods ending on or after December 15,
2012. In June 2012, the ASB issued SAS No. 126, The Auditor's Consideration of An Entity's Ability to Continue
as a Going Concern (Redrafted). SAS No. 126 supersedes SAS No. 59 and is effective for audits of financial
statements for periods ending on or after December 15, 2012.
100.13 An exhibit to SAS No. 122 contains a complete two-part cross-reference of AU-C and AU section
numbers. One part of the cross-reference shows which existing AU sections are encompassed by each new AU
-C section. The other part of the cross-reference shows, for each existing AU section, where the corresponding
guidance can be found in the new AU-C sections.
100.14 Effective Date of Clarified Standards and Implementation in This Guide
With a few exceptions, all of the clarified standards are effective for audits of financial statements for periods
ending on or after December 15, 2012. Generally early adoption of SAS Nos. 122-125 is not permitted.
However, an auditor may implement aspects of SAS Nos. 122-125 early as long as the auditor continues to
comply with existing standards. Due to the significant changes in the clarified standards related to auditor's
reports, the clarified reporting standards should not be adopted early. The discussions throughout this Guide,
references to authoritative literature, and illustrative auditor's reports have been updated for the clarified
standards. (Appendix 1C includes basic illustrative report examples under pre-clarified auditing standards.)
100.15 Clarified Auditing Standards Relating to Auditor's Reports
Exhibit 1-1 lists the clarified auditing standards that are most directly related to auditor's reports.
Exhibit 1-1
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Clarified Auditing Standards Relating to Auditor's Reports
AU-C
Title
Audit Conclusions and Reporting
700
Forming an Opinion and Reporting on Financial Statements
705
Modification to the Opinion in the Independent Auditor's Report
706
Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs in the Independent Auditor's
Report
708
Consistency of Financial Statements
720
Other Information in Documents Containing Audited Financial Statements
725
Supplementary Information in Relation to the Financial Statements as a Whole
730
Required Supplementary Information a
Special Considerations
800
Special Considerations—Audits of Financial Statements Prepared in Accordance with Special
Purpose Frameworks
805
Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts,
or Items of a Financial Statement
806
Reporting on Compliance with Aspects of Contractual Agreements or Regulatory Requirements
in Connection with Audited Financial Statements
810
Engagements to Report on Summary Financial Statements
Special Considerations in the United States
905
Alert That Restricts the Use of the Auditor's Written Communication
910
Financial Statements Prepared in Accordance with a Financial Reporting Framework Generally
Accepted in Another Country
915
Reports on Application of Requirements of an Applicable Financial Reporting Framework
930
Interim Financial Information
935
Compliance Audits
Notes:
a
AU-C 730 is beyond the scope of this Guide.
____________________
Changes in Reporting Requirements
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100.16 The most significant change in AU-C 700 is the form of the standard auditor's report. While the content is
substantively unchanged, AU-C 700 rearranges some requirements and adds required descriptions about
management's responsibility and the context of the auditor's work on internal control. Additionally, AU-C 700
adds three paragraphs in its example reports. To clearly distinguish parts of the report, identifying headings for
the various sections of the report and any additional items, such as the basis for a modified opinion or an
emphasis-of-matter paragraph, are required.
100.17 The clarified standards introduce new terminology for existing concepts, as described in Exhibit 1-2.
Exhibit 1-2
New Terminology in Clarified Reporting Standards
AU 508
Clarified Auditing Standards
Standard report a
The clarified auditing standards refer to
the auditor's opinion.
Clean opinion or unqualified opinion
Unmodified opinion
Qualified opinion
Modified opinion
Explanatory paragraph
Emphasis-of-matter paragraph or othermatter paragraph (as applicable) or
additional communication
Explanatory paragraph
Basis for the qualified opinion (or
adverse opinion or disclaimer of opinion)
Scope limitation a
Auditor's inability to obtain sufficient
appropriate audit evidence
Notes:
a
Even though the clarified auditing standards changed this terminology, the existing terminology is used in
practice and interchangeably throughout this Guide.
____________________
100.18 In any modified opinion, the auditor's report should include a basis for modification paragraph. That
paragraph should appear immediately before the opinion paragraph, have an appropriate heading, and describe
the matter of concern. The modified opinion paragraph should also have an appropriate heading.
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100.19 AU-C 706 introduces the terms emphasis-of-matter and other-matter paragraphs. AU-C 706 requires
both the emphasis-of-matter and other-matter paragraphs to follow the opinion paragraph (with the emphasis-ofmatter paragraph placed before the other-matter paragraph) and include an appropriate heading.
100.20 These changes and other changes are noted throughout the Guide and in the example reports.
Scope of PPC's Guide to Auditor's Reports
100.21 Since audit reporting guidance is found in many locations, the authors have attempted to bring the
guidance together in a concise format. In so doing, they have concentrated on “how to” reporting issues rather
than on the concepts underlying the standards of reporting. Accordingly, the goal of PPC's Guide to Auditor's
Reports is to present as many report illustrations as possible, along with quick references explaining the
circumstances of each report and the authoritative source. The narrative in each chapter explains and
supplements the report illustrations.
100.22 As previously mentioned in paragraph 100.2, PPC's Guide to Auditor's Reports only addresses reporting
on the financial statements of nonpublic companies. PPC's Guide to PCAOB Audits provides guidance when
reporting on financial statements of public companies. Also absent from PPC's Guide to Auditor's Reports is a
detailed discussion of compilation and review reports. PPC's Guide to Compilation and Review Engagements 6
is a companion volume to PPC's Guide to Auditor's Reports and provides guidance when reporting on unaudited
financial statements.
100.23 The authors caution users of this Guide that it is not a substitute for authoritative literature and the
exercise of professional judgment. Users are encouraged to refer to the authoritative literature cited in PPC's
Guide to Auditor's Reports and to check their firms' reporting procedures when using this Guide.
Scope of Chapter 1
100.24 Chapter 1 discusses the auditor's standard report on GAAP financial statements of a corporate entity for
a single period. Chapter 1 discusses only unmodified opinions on audited financial statements for a single
period that conform with generally accepted accounting principles (commonly referred to as a “clean opinion”).
Later chapters discuss qualified opinions, disclaimers of opinion, adverse opinions, reporting on comparative
financial statements, special reports, other entities, and other reporting matters.
1
PPC's Guide to PCAOB Audits provides detailed guidance and practice aids for performing audits of public
companies.
2
The clarified auditing standards use “AU-C” section numbers instead of “AU” section numbers. “AU-C” is
being used temporarily to avoid confusion with references to existing “AU” sections, which are effective for
audits of periods ending before December 15, 2012. The “AU-C” identifier will revert to “AU” in 2014, when the
clarified standards are fully effective for all engagements.
3
All of the report examples from the 2011 edition of PPC's Guide to Auditor's Reports are available on the
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Thomson Reuters customer support website at support.rg.thomsonreuters.com.
4
AICPA Technical Practice Aids are considered other auditing publications. While not all of the Technical
Practice Aids have been revised for the clarified auditing standards, their guidance is still applicable with the
context of the clarified auditing standards.
5
SAS No. 122 does not supersede these SASs, but it does redesignate the previous AU sections as new AU-C
sections. The revised AU-C sections were also updated, if necessary, for conforming changes.
6
PPC's Guide to Compilation and Review Engagements may be ordered by visiting
ppc.thomsonreuters.com or by calling (800) 431-9025.
© 2012 Thomson Reuters/PPC. All rights reserved.
END OF DOCUMENT © 2013 Thomson Reuters/RIA. All rights reserved.
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Checkpoint Contents
Accounting, Audit & Corporate Finance Library
Editorial Materials
Audit and Attest
Auditor's Reports
Chapter 1 The Auditor's Standard Report
101 The Standard Report
101
The Standard Report
Reports on Audited Financial Statements
101.1 The standard report on audited financial statements for a single period that are prepared in accordance
with GAAP is addressed in AU-C 700, Forming an Opinion and Reporting on Financial Statements. According to
AU-C 700.10, the auditor's objectives are to (a) form an opinion on the financial statements based on an
evaluation of the audit evidence obtained, including evidence obtained about comparative financial statements
or comparative financial comparative information, and (b) express clearly that opinion on the financial
statements through a written report that also describes the basis for that opinion. The requirements that should
be followed to achieve those objectives are summarized in Exhibit 1-3.
Exhibit 1-3
Requirements for Forming an Opinion and Reporting on Financial Statements
Requirements
Form an opinion on whether the financial statements are presented fairly, in
all material respects, in accordance with GAAP, by concluding whether the
auditor has obtained reasonable assurance about whether the financial
statements as a whole are free of material misstatement. Take into
consideration whether (a) sufficient appropriate evidence has been obtained,
(b) uncorrected misstatements are material, individually or in the aggregate,
and (c) the following evaluations:
Clarified
Primary Guide
AU-C Reference
Reference
AU-C 700.13-.18
Paragraph 105.4
• Whether the financial statements are prepared, in all material respects,
in accordance with GAAP, considering the qualitative aspects of the
entity's accounting practices, including possible bias in management's
judgments.
• Whether (a) the financial statements adequately disclose the significant
accounting policies; (b) the accounting policies are consistent with GAAP
and are appropriate; (c) management's accounting estimates are
reasonable; (d) the information in the financial statements is relevant,
reliable, comparable, and understandable; (e) the financial statements
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Requirements
Clarified
Primary Guide
AU-C Reference
Reference
provide adequate disclosure; and (f) the terminology used in the financial
statements, including the title of each financial statement, is appropriate.
• Whether the financial statements achieve fair presentation by
considering the overall presentation, structure, and content of the financial
statements and whether the financial statements, including related notes,
represent the underlying transactions and events in a manner that
achieves fair presentation.
• Whether the financial statements adequately refer to or describe GAAP.
Express an unmodified opinion when the auditor concludes that the financial
statements are presented fairly, in all material respects, in accordance with
GAAP.
AU-C 700.19
Paragraph 105.4
Express a modified opinion if the auditor concludes that the financial
statements as a whole are materially misstated or if the auditor is unable to
obtain sufficient appropriate evidence to conclude that the financial
statements are free of material misstatement.
AU-C 700.20
Chapters
3 and 4
Discuss with management if the financial statements do not achieve fair
presentation, and determine whether it is necessary to modify the auditor's
opinion.
AU-C 700.21
Paragraph 105.5
Issue a written report that includes (a) a title that includes the word
“independent” and (b) an appropriate addressee.
AU-C 700.22-.24
Paragraphs
101.3 and 101.5.9
Include the following sections in the auditor's report:
AU-C 700.25-.36
Sections 102105
• An introductory paragraph that (a) identifies the entity whose financial
statements have been audited, (b) states the financial statements have
been audited, (c) identifies the title of each financial statement, and (d)
specifies the date or period covered by each financial statement.
• A section with the heading “Management's Responsibility for the
Financial Statements” that describes management's responsibility for the
preparation and fair presentation of the financial statements, including an
explanation that management is responsible for the preparation and fair
presentation of the financial statements in accordance with GAAP, which
includes the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of financial statements
that are free of material misstatement, whether due to error or fraud. Do
not include a reference to any separate statement by management about
such responsibilities if such a statement is included in a document
containing the auditor's report.
• A section with the heading “Auditor's Responsibility” that (a) states that
the auditor's responsibility is to express an opinion on the financial
statements based on the audit, (b) states that the audit was conducted in
accordance auditing standards generally accepted in the United States of
America and that those standards require the auditor to plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, and (c) describes the audit
by stating that:
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Requirements
Clarified
Primary Guide
AU-C Reference
Reference
•• An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the financial
statements.
•• The procedures selected depend on the auditor's judgment,
including the assessment of the risks of material misstatements.
In assessing those risks, the auditor considers internal control
relevant to the entity's preparation and fair presentation of the
financial statements in order to design audit procedures that are
appropriate in the circumstances but not for the purpose of
expressing an opinion on the effectiveness of the entity's internal
control, and, accordingly, no such opinion is expressed.
•• An audit also includes evaluating the appropriateness of the
accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as the
overall presentation of the financial statements.
• A statement about whether the auditor believes that the audit evidence
obtained is sufficient and appropriate to provide a basis for the auditor's
opinion.
• A section with the heading “Opinion” that states the auditor's opinion that
the financial statements present fairly, in all material respects, the financial
position, results of operations, and cash flows in accordance with U.S.
generally accepted accounting principles.
If the auditor addresses other reporting responsibilities in the auditor's report AU-C 700.37-.38 a
on the financial statements that are in addition to the auditor's responsibility
under GAAS to report on the financial statements, those other reporting
responsibilities should be addressed in a separate section in the auditor's
report that includes a heading should such as “Report on Other Legal and
Regulatory Requirements.” In those cases, items required by AU-C 700.25.36 should be under the subtitle “Report on the Financial Statements.”
Include the manual or printed signature of the auditor's firm and the city and
state where the auditor practices.
AU-C 700.39-.40
Section 106
Be dated no earlier than the date on which the auditor has obtained sufficient
appropriate audit evidence on which to base the auditor's opinion, including
evidence that the audit documentation has been reviewed, all the financial
statements and notes have been prepared, and management has taken
responsibility for the financial statements.
AU-C 700.41
Section 107
If an auditor conducts the audit in accordance with U.S. GAAS and in
accordance with another set of auditing standards, the auditor's report may so
indicate. In that type of engagement, the auditor's report should identify the
other set of auditing standards, including their country of origin.
AU-C 700.42-.43
Paragraphs
104.11-.12
Notes:
a
These requirements are not discussed in detail in this Guide. PPC's Guide to Audits of Nonprofit
Organizations and PPC's Guide to Audits of Local Governments cover these requirements.
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____________________
101.2 AU-C 700.22 requires the auditor's report to be in writing. AU-C 700.A16 clarifies that a written report may
be in hard copy format or in an electronic medium. The standard report generally consists of four sections: (a)
an introductory paragraph, (b) a section describing management's responsibility for the financial statements, (c)
a section describing the auditor's responsibility, and (d) the opinion paragraph. The standard report is illustrated
on the right side of Exhibit 1-4, while the left side of the exhibit presents the report elements discussed in further
detail in sections 101-107 of this chapter. A drafting copy of the standard report is presented in Appendix 1A-1.
Exhibit 1-4
The Standard Report
Report Elements
The Title
Addressing the Report
Report Text
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and
Stockholders of ABC Company
Statement That the Financial Statements
Were Audited
(introductory paragraph)
Name of Entity
Type of Legal Entity
Date of the Financial Statements
Identification of the Financial Statements
We have audited the accompanying financial statements of ABC
Company (a Texas corporation), which comprise the balance sheet as
of December 31, 20X1, and the related statements of income, retained
earnings, and cash flows for the year then ended, and the related
notes to the financial statements.
Management's Responsibility for the
Preparation of the Financial Statements,
including Internal Control
Management's Responsibility for the Financial Statements
Responsibility to Express an Opinion
Generally Accepted Auditing Standards
Statement about Reasonable Assurance
Description of the Audit Process
Reasonable Basis for Opinion
Auditor's Responsibility
Management is responsible for the preparation and fair presentation of
these financial statements in accordance with accounting principles
generally accepted in the United States of America; this includes the
design, implementation, and maintenance of internal control relevant to
the preparation and fair presentation of financial statements that are
free from material misstatement, whether due to fraud or error.
Our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit in accordance
with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about
the amounts and disclosures in the financial statements. The
procedures selected depend on the auditor's judgment, including the
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Report Elements
Report Text
assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the
entity's preparation and fair presentation of the financial statements in
order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity's internal control. Accordingly, we express no
such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the
overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Identification of the Financial Statements
Present Fairly
Opinion
In All Material Respects
Financial Position
Results of Operations
Cash Flows
Name of Entity
Dates
Generally Accepted Accounting Principles
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ABC Company as of
December 31, 20X1, and the results of its operations and its cash
flows for the year then ended in accordance with accounting principles
generally accepted in the United States of America.
Firm's Signature a
City, State a
Firm's signature
City, State
Date of the Auditor's Report a
February 15, 20X2
Notes:
a
These are required elements of the auditor's report. Note that the illustrations of reports included in the text of
this Guide may not include these elements. However, all of the report illustrations or report drafting forms
included in the Appendixes include these elements.
____________________
The Title
101.3 AU-C 700.23 requires the auditor's report to be titled and the title to include the word independent to
distinguish the report from representations of management (i.e., the financial statements) or internal auditors.
Including the word independent in the title also emphasizes a characteristic of the auditor's work that might not
otherwise be apparent.
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101.4 A minor point, but of interest to some, is the placement of the apostrophe in Auditor's. The authors have
elected to use singular possessive punctuation. They reserve the plural possessive title Auditors' for situations
when two different accounting firms (firm X and firm Y) each issue a separate opinion on the financial
statements, e.g., a successor and predecessor auditor. Other firms use the plural possessive Auditors'
regardless of the circumstances. You should use the punctuation preferred by your firm.
Addressing the Report
101.5 AU-C 700.24 requires the auditor's report to include an appropriate addressee as dictated by the
engagement. As noted in AU-C 700.A19, the auditor's report on a corporate entity's financial statements
generally is addressed to the company whose financial statements are being audited or to those charged with
governance, such as its board of directors or stockholders. The terms “shareholders” or “shareowners” may be
substituted for “stockholders.” (It is preferable to use the term that is consistent with the company's articles of
incorporation.) It also is common practice to include the city and state in the address (but not the street address
or post office box number). Report addresses for entities other than corporations are discussed in Chapter 12.
Examples of report addresses for corporations follow.
• To the Board of Directors
XYZ Corporation
Shreveport, Louisiana
• To the Stockholders
XYZ Corporation
Jackson, Mississippi
• To the Board of Directors and Stockholders
XYZ Corporation
Fort Worth, Texas
101.6 In the case of many closely held companies, it may be appropriate to address the report to a specific
individual; for example:
• Mr. T. Wise, President
Wise Manufacturing Company
New York, New York
101.7 Occasionally, auditors are retained to audit the financial statements of an entity that is not a client. In
those cases, the report may be addressed to the client and not to the board of directors or shareholders of the
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company whose financial statements are being audited. Alternatively, the authors believe that the report may be
addressed to both the client and a third party.
101.8 The auditor's report on the financial statements of a subsidiary is normally addressed to the parent
company rather than to the board of directors of the subsidiary. Chapter 9 discusses reporting on combined and
consolidated financial statements.
101.9 Auditors generally do not use any form of salutation, such as “Gentlemen” or “Dear Sir.”
Reference to the Auditor's Report in the Financial Statements
101.10 Unlike compiled or reviewed financial statements, audited financial statements are not required to refer
to the auditor's report. For example, a reference such as “The accompanying notes and auditor's report are an
integral part of these financial statements” would be inappropriate because financial statements are the
representations of management. As such, the independent auditor's report cannot be an integral part of the
financial statements, and it is inappropriate to include it by reference. A reference such as “See accompanying
notes and auditor's report,” although not required, would be acceptable.
Alternate Language for the Auditor's Report
101.11 AU-C 700 does not prescribe specific wording for the auditor's report. The auditor's report should be in
writing and satisfy the requirements of the auditing standards. The Exhibits to the auditing standards provide
illustrative language for the auditor's report, but they are not requirements. As discussed in section 100, those
exhibits are interpretive publications, which are recommendations on applying the SASs. AU-C 200.27 requires
auditors to consider applicable interpretive publications in performing the audit.
101.12 The authors believe that auditor's reports do not have to conform exactly to the illustrative language in
the Exhibits to the auditing standards as long as the report satisfies the standard's requirements. For example,
the introductory paragraph of the auditor's report may differ from the Exhibits to the auditing standards as long
as it (a) identifies the entity whose financial statements have been audited, (b) states that the financial
statements have been audited, (c) identifies the title of the financial statements audited, and (d) specifies the
date or period covered by each of the financial statements (AU-C 700.25). For example, auditors may continue
to use language in the introductory paragraph that is similar to language they have used prior to adopting the
clarity standards as follows:
We have audited the accompanying balance sheet of [Name of Company] (a [State of
Incorporation] corporation) as of [Date], the related statements of income, retained earnings, and
cash flows for the year then ended, and the related notes to the financial statements.
Auditors need to exercise caution when modifying the example language from the illustrative reports included in
the Exhibits to the auditing standards. Auditors should determine that all of the requirements of the standards
are included in their report. The illustrations in this Guide are based on AICPA illustrations unless otherwise
indicated.
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© 2012 Thomson Reuters/PPC. All rights reserved.
END OF DOCUMENT © 2013 Thomson Reuters/RIA. All rights reserved.
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Checkpoint Contents
Accounting, Audit & Corporate Finance Library
Editorial Materials
Audit and Attest
Auditor's Reports
Chapter 1 The Auditor's Standard Report
102 The Introductory Paragraph
102
The Introductory Paragraph
General Purpose
102.1 The introductory (or opening) paragraph 7 of the standard report includes four elements:
• A statement that the financial statements identified in the report were audited.
• Identification of the entity whose financial statements have been audited.
• Title of the financial statements audited.
• Date or period covered by the financial statements.
Statement That the Financial Statements Were Audited
102.2 The statement that the financial statements were audited identifies the statements covered by the report.
The report uses the word audited rather than examined because that word is considered more descriptive of the
audit process and is better understood by users.
Name of Entity
102.3 The introductory paragraph refers to the company's legal name. The name needs to be checked to the
articles of incorporation for proper spelling and punctuation. Chapter 9 discusses the presentation of the
company's name in reports on consolidated, combined, and subsidiary company financial statements.
Type of Legal Entity
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102.4 Although not required, some auditors indicate the type of entity, e.g., a corporation, in the introductory
paragraph after the company's name. That designation might not be used when the type of entity is indicated by
the company's legal name, e.g., XYZ Corporation or XYZ, Inc. A slightly different description also sometimes
used in practice is to indicate parenthetically the state of incorporation, e.g., (a Texas corporation). Chapter 12
discusses similar parenthetical disclosures for S corporations, partnerships, and proprietorships.
Date of the Financial Statements
102.5 The first sentence of the introductory paragraph should identify the balance sheet date and the period of
time covered by the statements of income, retained earnings, and cash flows. Dating of financial statements for
interim and initial accounting periods is discussed later in this chapter.
Identification of the Financial Statements
102.6 The introductory paragraph should specifically identify the financial statements audited. The examples of
auditor's reports in this Guide refer to the balance sheet or statement of financial position first, followed by the
income statement or statement of results of operations and the statement of cash flows. However, as discussed
in an AICPA Technical Practice Aid at TIS 9080.09, the order in which the financial statements are referred to in
the auditor's report need not follow any prescribed pattern or even the order in which the financial statements
are physically arranged. The standard report illustrated in Exhibit 1-4 may be used regardless of the order in
which the financial statements are presented. (Chapter 11 discusses reporting on supplementary information
accompanying the basic financial statements.) Identifying the financial statements audited may also be
accomplished by referencing the table of contents listing the individual financial statements.
102.7 AU-C 730.04 defines basic financial statements as “financial statements presented in accordance with an
applicable financial reporting framework as established by a designated accounting standard setter, excluding
required supplementary information.” The applicable financial reporting framework is the set of accounting
principles used by the entity to prepare its financial statements. Unless otherwise indicated, this Guide assumes
that entities are following U.S. generally accepted accounting principles (GAAP). FASB ASC 220 indicates that
a full set of financial statements includes:
• financial position at the end of the period,
• earnings for the period,
• changes in stockholders' equity for the period,
• comprehensive income for the period, and
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• cash flow for the period.
Notes to financial statements, including descriptions of accounting policies, are an integral part of financial
statements. In addition, supplementary schedules and explanatory material may be presented as part of the
basic financial statements or supplementary information accompanying the basic financial statements. (Chapter
11 discusses supplementary information in more detail.)
102.8 The standard report illustrated in Exhibit 1-4 refers to the balance sheet, related statements of income,
retained earnings, cash flows, and the notes of the financial statements in the first sentence of the introductory
paragraph. Such identification of the basic statements is appropriate unless there also have been changes
during the period in other components of stockholders' equity. In those situations, a statement of stockholders'
equity should be substituted for the statement of retained earnings, and the first sentence of the standard report
should be modified as follows:
. . . and the related statements of income, stockholders' equity, and cash flows . .
.
102.9 A combined statement of income and retained earnings is sometimes used to disclose changes in
retained earnings, in which case the first sentence of the standard report should be modified as follows:
. . . and the related statements of income and retained earnings and cash flows . .
.
102.10 If changes in retained earnings or stockholders' equity are disclosed on the face of the balance sheet or
in a note to the financial statements, rather than presented in a statement, the balance sheet and income
statement titles need not include any reference to retained earnings or stockholders' equity. In that situation, the
first sentence of the standard report would be modified accordingly.
102.11 The financial statements identified in the introductory paragraph should be identical to the titles
presented on the corresponding financial statements. A common deficiency is to refer to “statement of income”
in the introductory paragraph, while the title used on the actual statement is “statement of operations.” The term
“statement of operations” may be used when the company suffers a loss to avoid a negative title such as
“statement of loss,” although “statement of income” also is acceptable and is used by many companies.
Whatever titles are used, it is important that the titles are consistent in both the auditor's report and on the
corresponding financial statement. Chapter 13 discusses titles for financial statements presented on
comprehensive bases of accounting other than GAAP.
102.12 Comprehensive Income 8
FASB ASC 220 establishes standards for reporting and displaying comprehensive income and its components
in a set of basic financial statements. Comprehensive income includes two components: net income and other
comprehensive income. Other comprehensive income includes items such as:
• foreign currency translation adjustments, and gains and losses from certain foreign currency transactions;
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• adjustments in a company's minimum pension liability;
• unrealized gains and losses on available-for-sale securities; and
• changes in the fair value of certain derivatives that qualify as a cash flow hedge.
102.13 FASB ASC 220 is not applicable if a company has no items of other comprehensive income in any
period presented. FASB ASC 220 does not specify how to report other comprehensive income, except that is
should be reported in a financial statement that is displayed with the same prominence as other financial
statements. It allows two options. Comprehensive income may be displayed (a) in the income statement (after
net income) or (b) in a separate statement of comprehensive income (that also presents the components of net
income and total net income). As a result, the basic financial statements may include an additional financial
statement, or the title of one of the existing statements may refer to the presentation of other comprehensive
income. FASB ASC 220 does not specify the titles to be used for financial statements in which comprehensive
income is presented. The financial statement titles in the auditor's report should match the titles on the
corresponding financial statements.
102.14 For example, if a separate statement of comprehensive income is presented, the first sentence of the
standard report may read as follows:
. . . and the related statements of income, comprehensive income, retained earnings,
and cash flows . . .
102.15 A combined statement of income and comprehensive income may be presented, in which case the first
sentence of the standard report may read as follows:
. . . and the related statements of income and comprehensive income, retained
earnings, and cash flows . . .
102.16 PPC's Guide to Preparing Financial Statements provides extensive guidance on displaying
and disclosing comprehensive income in a company's basic financial statements. [To order, visit
ppc.thomsonreuters.com or call (800) 431-9025.]
Reference to the Notes to the Financial Statements
102.17 AU-C 700 does not specifically require reference in the introductory paragraph to the notes to the
financial statements. AU-C 700.12 indicates that financial statements include related notes and, accordingly,
would be encompassed by reference to the individual financial statements, i.e., balance sheet and statements of
income, retained earnings, and cash flows. Thus, the authors believe that auditors are not required to include a
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reference to the notes to the financial statements in the introductory paragraph. Nevertheless, the authors
recommend including a reference to the notes and Exhibit A to AU-C 700 contains a reference to the notes, to
the financial statements.
Audit Report of Sole Practitioner
102.18 The standard report in AU-C 700 begins, “We have audited . . .” (emphasis added). AU-C 700 does not
specify appropriate report wording when a sole practitioner performs the audit. Likewise, Rule 505 (“Form of
Organization and Name”) of the AICPA's Code of Professional Conduct at ET 505 and its related interpretations
and rulings do not discuss how sole practitioners should word their reports. The authors recommend that sole
practitioners word the report “I have audited . . .” and “In my opinion . . .” They believe that using the plural
pronoun “we” while expressing an opinion on financial statements might imply that there are partners or
shareholders in the CPA firm. Also, the signature on the report would be that of the individual practitioner.
7
Generally, the introductory paragraph does not include a heading. If the auditor addresses other reporting
responsibilities in the auditor's report on the financial statements that are in addition to the auditor's
responsibility under GAAS to report on the financial statements, those other reporting responsibilities should be
addressed in a separate section in the auditor's report that includes a heading such as “Report on Other Legal
and Regulatory Requirements.” In those cases, the headings, statements, and other explanations required by
AU-C 700.25-.36 should be under the subtitle “Report on the Financial Statements.”
8
FASB Accounting Standards Update 2011-05 amends the existing standards on comprehensive income by
requiring, among other things, comprehensive income to be presented either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. Thus, it eliminates the option to present
the components of other comprehensive income as part of the statement of changes in stockholders' equity. For
nonpublic entities, ASU 2011-05 is effective for fiscal years ending after December 15, 2012. FASB ASU 201112, Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of
Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update
No. 2011-05 (also effective for fiscal years ending after December 15, 2012), defers the provision in ASU 201105 to present reclassification adjustments by component in both the statement where net income is presented
and the statement where other comprehensive income is presented while the FASB is redeliberating that
requirement.
© 2012 Thomson Reuters/PPC. All rights reserved.
END OF DOCUMENT © 2013 Thomson Reuters/RIA. All rights reserved.
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Checkpoint Contents
Accounting, Audit & Corporate Finance Library
Editorial Materials
Audit and Attest
Auditor's Reports
Chapter 1 The Auditor's Standard Report
103 Management's Responsibility for the Financial Statements
103
Management's Responsibility for the Financial Statements
103.1 AU-C 700.26-.27 requires the auditor's report to include a section with the heading “Management's
Responsibility for the Financial Statements” that indicates that management is responsible for (a) the
preparation and fair presentation of the financial statements in accordance with GAAP and (b) the design,
implementation, and maintenance of internal control over the preparation and presentation of financial
statements that are free from material misstatement, whether due to fraud or error. The statement of
management's responsibility gives users clear notice of management's overall responsibility for the financial
statements. That statement is not, however, intended to change either management's present responsibility for
the information presented or the relationship between management and the independent auditor. The statement
is required even if auditors provide accounting services or otherwise assist management in preparing the
financial statements.
Reference to Management Reports
103.2 Occasionally, a company's management will include a report that contains a statement acknowledging its
responsibility for the presentation of the financial statements in a document containing the audited financial
statements. AU-C 700.28 states that such statements should not be referred to in the auditor's standard report.
Thus, it is not acceptable to include a reference to the management report either in place of or in addition to the
required statement about management's responsibility in the auditor's report. Any such modification might lead
readers to believe that the auditors are providing assurances about other matters usually addressed in
management reports, such as management's responsibility for internal controls and other matters relating to
financial reporting.
© 2012 Thomson Reuters/PPC. All rights reserved.
END OF DOCUMENT © 2013 Thomson Reuters/RIA. All rights reserved.
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Checkpoint Contents
Accounting, Audit & Corporate Finance Library
Editorial Materials
Audit and Attest
Auditor's Reports
Chapter 1 The Auditor's Standard Report
104 Auditor's Responsibility
104
Auditor's Responsibility
104.1 AU-C 700.29 requires the auditor's report to include a section with the heading “Auditor's Responsibility”
to describe the auditor's responsibility under GAAS to report on the financial statements. The required elements
of the section are summarized in the following paragraphs.
Responsibility to Express an Opinion
104.2 The first sentence of the section of the auditor's report that describes the auditor's responsibility states
that the auditors' responsibility is to express an opinion on the financial statements based on their audit. That
statement emphasizes the limited nature of their function and differentiates the auditors' responsibility from that
of management.
Reference to a Component Auditor
104.3 In a group audit, the introductory paragraph describing the auditor's responsibility will need modification
when part of the audit is performed by a component auditor and the group auditor decides to rely on such
component auditor and make reference to their audit in the report on the group financial statements. A common
example of such a situation is when consolidated statements are presented where the parent is audited by firm
X and one or more subsidiaries are audited by firm Y. Reporting responsibilities that apply to the audit of group
financial statements are discussed in Chapter 10.
Generally Accepted Auditing Standards
104.4 The second sentence of the auditor's responsibility paragraph contains a statement that the audit was
conducted in accordance with generally accepted auditing standards and identifies the United States of America
as the country of origin of those standards (for example, “auditing standards generally accepted in the United
States of America” or “U.S. generally accepted auditing standards”). Simply stated, the auditors state that they
complied with the standards established by the auditing profession for the performance of an audit.
104.5 Overall Objectives and Requirements
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AU-C 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With
Generally Accepted Auditing Standards, supersedes the 10 general, fieldwork, and reporting standards and
contains the auditor's overall responsibilities in accordance with GAAS. The overall objectives of the auditor in
conducting an audit of financial statements are as follows:
• Obtain reasonable assurance about whether the financial statements are free from material misstatement.
• Report on the financial statements, and communicate as required by GAAS, in accordance with the
auditor's findings.
The requirements the auditor should follow to achieve those objectives are summarized in Exhibit 1-5:
Exhibit 1-5
Requirements for Overall Objectives and the Conduct of an Audit in Accordance with Generally
Accepted Auditing Standards
Requirements
Clarified
AU-C
Reference
Be independent of the entity when performing an audit in accordance AU-C 200.15
with GAAS unless (1) GAAS provides otherwise or (2) law or
regulation requires accepting the engagement and reporting on the
financial statements (“must” statement). If not independent and
neither (1) nor (2) apply, do not issue a report under GAAS.
Follow relevant ethical requirements relating to financial statement AU-C 200.16
audit engagements.
Maintain professional skepticism throughout the audit, recognizing AU-C 200.17
the possibility that a material misstatement of the financial statements
may exist.
Exercise professional judgment in planning and performing the audit.
AU-C 200.18
To obtain reasonable assurance, obtain sufficient appropriate audit AU-C 200.19
evidence to reduce audit risk to an acceptably low level.
Comply with all AU-C sections when the AU-C section is effective and AU-C 200.20
the circumstances addressed by the AU-C section exist.
Understand the entire text of an AU-C section, including its AU-C 200.21
application and other explanatory material, to understand its
objectives and to apply its requirements properly.
Do not represent compliance with GAAS in the auditor's report unless AU-C 200.22
the requirements of AU-C 220 and all other relevant AU-C sections
have been followed.
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Requirements
Clarified
AU-C
Reference
In planning and performing the audit, use the objectives stated in the AU-C 200.23
individual AU-C sections to achieve the overall objectives of the
auditor and to:
• Determine whether any audit procedures in addition to those
required by individual AU-C sections are necessary.
• Evaluate whether sufficient appropriate audit evidence has been
obtained.
Subject to AU-C 220.26, comply with each requirement of an AU-C AU-C 200.24
section unless (1) the entire AU-C section is not relevant or (2) the
requirement is not relevant because it is conditional and the condition
does not exist.
Identify the auditor's degree of responsibility in complying with AU-C 200.25
professional requirements according to the following categories: a
• Unconditional requirements. Requirements an auditor must
follow in all cases if the circumstances apply to the requirement.
Auditing standards use the word “must” to indicate an
unconditional requirement.
• Presumptively mandatory requirements. Requirements an
auditor must follow in all cases if the circumstances apply to the
requirement, except in rare circumstances discussed in AU-C
220.26. Auditing standards use the word “should” to indicate a
presumptively mandatory requirement.
In rare situations, when the auditor determines it is necessary to AU-C 200.26
depart from a relevant presumptively mandatory requirement, perform
alternative audit procedures to achieve the intent of that requirement.
It is expected that departure from a relevant presumptively mandatory
requirement will only occur when the requirement is for a specific
procedure to be performed and, in the specific circumstances of the
audit, that procedure would be ineffective in achieving the intent of
the requirement.
In planning and performing the audit, consider applicable interpretive AU-C 200.27
publications.
In applying the auditing guidance included in other auditing AU-C 200.28
publications, use professional judgment and assess the relevance
and appropriateness of such guidance.
Evaluate whether not achieving an objective in a relevant AU-C AU-C 200.29
section prevents achievement of the overall objectives of the
engagement. If the overall objective of the engagement is not
achieved, modify the opinion or withdraw from the engagement (when
withdrawal is possible under applicable law or regulation). Document
the failure to achieve an objective as a significant finding or issue in
accordance with AU-C 230.
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Notes:
a
See discussion of the terms must and should at paragraph 100.5.
____________________
104.6 Reference to Auditing Standards Board
As noted in paragraph 104.16, when an audit of a nonpublic company is conducted in accordance with both
GAAS and PCAOB auditing standards, the section describing the auditor's responsibility may include a
reference to both “auditing standards as established by the Auditing Standards Board (United States) and in
accordance with the auditing standards of the Public Company Accounting Oversight Board (United States).”
While a reference to the Auditing Standards Board is not required in reports issued in connection with audits
conducted in accordance with GAAS alone, the authors believe that such a reference may be included if the
auditor wishes to do so.
Statement about Reasonable Assurance
104.7 The auditor's responsibility section of the report includes a statement that GAAS require audits to be
planned and performed to obtain reasonable assurance about whether the financial statements are free of
material misstatement. AU-C 200.06 clarifies that reasonable assurance is a high, but not absolute, level of
assurance. That statement introduces the concept of materiality to the audit report and the auditors'
responsibility for detecting errors or fraud. (Chapter 2 discusses materiality.)
Description of the Audit Process
104.8 The auditor's responsibility section of the report also describes, in general terms, the steps auditors take
to achieve reasonable assurance that the financial statements are free of material misstatement. According to
AU-C 700.32, the steps the report describes are as follows:
• An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the financial statements.
• The procedures selected depend on the auditor's judgment, including the assessment of the risks of
material misstatements. In assessing those risks, the auditor considers internal control relevant to the
entity's preparation and fair presentation of the financial statements in order to design audit procedures that
are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness
of the entity's internal control, and, accordingly, no such opinion is expressed. 9
• An audit also includes evaluating the appropriateness of the accounting policies used and the
reasonableness of significant accounting estimates made by management, as well as the overall
presentation of the financial statements.
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The auditor's responsibility section informs users that an audit is designed to provide reasonable assurance that
financial statements are free of material misstatement. It also informs users about certain aspects of audits that
may affect their understanding and interpretation of the auditor's report.
Reasonable Basis for Opinion
104.9 The auditor's responsibility section closes with a statement that the auditors believe the audit evidence
obtained is sufficient and appropriate to provide a basis for the opinion presented. In the context of the
sentences preceding it, that statement informs users that even though an audit has certain inherent limitations,
the auditors have formed a positive conclusion about the scope of the audit work performed.
Departure from GAAS
104.10 Departures from GAAS are commonly referred to as “scope limitations” and occur when auditors are
unable to obtain sufficient appropriate audit evidence on which to base the opinion (for example, they are unable
to apply customary auditing procedures or alternative auditing procedures). Scope limitations and their effect on
the auditor's report are discussed in Chapter 4.
International Standards on Auditing
104.11 AU-C 700.42 states that an auditor may indicate that the audit was also conducted in accordance with
another set of auditing standards in addition to GAAS. Accordingly, if an auditor conducts the audit in
accordance with U.S. GAAS and in accordance with the International Standards on Auditing promulgated by the
International Auditing and Assurance Standards Board in their entirety, the auditor's report may so indicate. In
that type of engagement, auditors should comply with U.S. reporting standards. When that is done, the first
paragraph of the section describing the auditor's responsibility would be worded as follows:
Our responsibility is to express an opinion on these financial statements based on our
audit. We conducted our audit in accordance with auditing standards generally accepted in the
United States of America and in accordance with International Standards on Auditing. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free from material misstatement.
Appendix 1A-8 provides a report drafting illustration.
104.12 Chapter 10 provides guidance when work performed by component auditors included in group financial
statements is conducted in accordance with International Standards on Auditing or another country's auditing
standards rather than U.S. generally accepted auditing standards.
PCAOB Auditing Standards
104.13 PCAOB Auditing Standard No. 1, References in Auditors' Reports to the Standards of the Public
Company Accounting Oversight Board, requires audit reports on issuers (public companies) to state that the
audit was conducted “in accordance with the standards of the Public Company Accounting Oversight Board
(United States).” The PCAOB standards referred to in the audit report on an issuer include not just audit
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standards, but also attestation, quality control, ethics, independence, and other PCAOB standards. PCAOB
standards also require an audit of internal control over financial reporting in conjunction with the financial
statement audit of an issuer.
104.14 As noted in paragraph 100.1, the AICPA's Auditing Standards Board is the body authorized to establish
performance and reporting standards for audits of the financial statements of nonpublic entities. On occasion,
however, a nonpublic entity may request an auditor to perform an audit in accordance with PCAOB standards.
When firms that are not required to follow PCAOB standards but do so voluntarily, for example, at a client's
request, Rules 201 and 202 of the AICPA Code of Professional Conduct require a member who performs an
audit of a nonpublic entity to comply with the standards promulgated by the Auditing Standards Board. In those
circumstances, audits of nonpublic entities performed in accordance with the PCAOB standards also need to be
performed in accordance with GAAS. (However, section 708 discusses the required application of PCAOB
standards to audits of nonissuers.)
104.15 As indicated in paragraph 104.11, AU-C 700.42 states that an auditor may indicate that the audit was
also conducted in accordance with another set of auditing standards in addition to GAAS. Accordingly, if an
auditor performs an audit of a nonissuer in accordance with PCAOB auditing standards, the report should
indicate that the audit was performed in accordance with both the AICPA Auditing Standards Board's generally
accepted auditing standards and PCAOB auditing standards. In addition, an audit performed in accordance with
GAAS does not require an audit of internal control over financial reporting as does an audit performed in
accordance with PCAOB standards, and the authors believe that the audit report for a nonpublic entity may
include language to indicate that fact.
104.16 When an audit of a nonpublic company is conducted in accordance with GAAS and PCAOB auditing
standards, the section describing the auditor's responsibility might be worded as follows (new language
italicized):
Our responsibility is to express an opinion on these financial statements based on our
audit. We conducted our audit in accordance with auditing standards generally accepted in the
United States of America as established by the Auditing Standards Board (United States) and in
accordance with the auditing 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 from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditor's
judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity's preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity's internal control. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of significant
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accounting estimates made by management, as well as evaluating the overall presentation of the
financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
Appendix 1A-9 provides a report drafting illustration.
104.17 PCAOB Staff Q&A
The PCAOB Staff Questions and Answers on audits of nonissuer financial statements notes that an auditor that
is not registered with the PCAOB may state in the audit report on a nonissuer that the audit was performed in
accordance with only the auditing standards of the PCAOB when that is the case. In that case, the report
reference to the auditing standards of the Public Company Accounting Oversight Board (United States) does not
imply that:
• The audit included an audit of the issuer's internal control over financial reporting.
• The auditor complied with PCAOB or SEC independence rules.
• The auditor is subject to any laws to which the auditor would not otherwise be subject.
• The audit is subject to a concurring partner review.
• The audit is subject to PCAOB inspection.
9
If the auditor's engagement includes an audit of internal control over financial reporting in conjunction with the
audit of financial statements, the auditor should omit the language that “the auditor considers internal control
relevant to the entity's preparation and fair presentation of the financial statements in order to design audit
procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the
effectiveness of the entity's internal control. Accordingly, we express no such opinion.”
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Checkpoint Contents
Accounting, Audit & Corporate Finance Library
Editorial Materials
Audit and Attest
Auditor's Reports
Chapter 1 The Auditor's Standard Report
105 The Opinion Paragraph
105
The Opinion Paragraph
105.1 AU-C 700.34 requires the auditor's report to include a section with the heading “Opinion” to describe the
auditor's opinion on the financial statements. The purpose of the opinion paragraph is to express an opinion on
whether the financial statements are presented fairly in accordance with generally accepted accounting
principles. The expression of opinion should take into account whether—
• The auditor has obtained sufficient appropriate audit evidence in accordance with AU-C 330, Performing
Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained
• Uncorrected misstatements are material in accordance with AU-C 450, Evaluation of Misstatements
Identified During the Audit
• The financial statements are prepared, in all material respects, in accordance with GAAP, including
consideration of the qualitative aspects of the entity's accounting practices and possible bias in
management's judgments. (See paragraph 105.4.)
105.2 The following paragraphs discuss the “unmodified opinion.” Qualified opinions, disclaimers of opinion, and
adverse opinions are discussed in later chapters.
Identification of the Financial Statements
105.3 The phrase “the financial statements referred to above” makes it clear that the statements covered by the
opinion paragraph are those identified in the introductory paragraph. An alternative some auditors prefer is to
repeat the statement titles that are referred to in the introductory paragraph. When that is done, the opinion
paragraph would be worded as follows:
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In our opinion, the accompanying balance sheet and statements of income, retained
earnings, and cash flows present fairly, in all material respects, the financial position of . .
.
Present Fairly
105.4 The opinion paragraph of the standard report should state whether the financial statements are presented
fairly, in all material respects, in accordance with accounting principles generally accepted in the United States
of America. (See discussion at paragraph 105.17.) Auditors generally make that judgment after considering
whether:
a. The financial statements adequately disclose the significant accounting policies selected and applied;
b. The accounting policies selected and applied are consistent with GAAP and are appropriate;
c. Management's estimates are reasonable;
d. The information presented in the financial statements is relevant, reliable, comparable, and
understandable;
e. Financial statement disclosures are adequate to enable intended users to understand the effect of
material transactions and events reflected in the statements;
f. Terminology used in the financial statements, including the title of the financial statements, is appropriate;
g. The overall presentation, structure, and content of the financial statements is appropriate; and
h. The financial statements, including the related notes, reflect the underlying transactions in a manner that
achieves fair presentation.
105.5 Fair presentation is not a separate standard. It always is related to the basis of presentation, either GAAP
or an OCBOA (or other applicable framework). AU-C 700.A9 indicates that the auditors' judgment concerning
the fairness of the presentation of the financial statements is applied within the context of the financial reporting
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framework. Without that framework, auditors would have no consistent standard for evaluating the presentation
of the financial statements. If the auditor concludes that the financial statements do not achieve fair
presentation, the auditor should discuss the matter with management and determine whether it is necessary to
modify the auditor's opinion. In some cases, management may be able to include additional disclosures in the
financial statements beyond those specifically required to achieve fair presentation. In extremely rare
circumstances, management may believe it is necessary to depart from a requirement to achieve fair
presentation of the financial statements. (Rule 203 of the AICPA Code of Professional Conduct provides
guidance to auditors in those circumstances.)
In All Material Respects
105.6 The phrase “in all material respects” is intended to inform users that the auditors' opinion does not attest
to the absolute accuracy of the financial statements.
Financial Position
105.7 In the opinion paragraph, the auditors state whether the financial statements present fairly the “financial
position . . . and the results of operations and cash flows. . . .” Financial position refers to the resources and
obligations of a company at a point in time, e.g., as of or at December 31, 20X1. Financial position of a company
is communicated by the balance sheet, which occasionally is referred to as the “statement of financial position.”
For a balance sheet to present fairly the financial position of a company in accordance with GAAP, it presents
three basic categories: (a) assets, (b) liabilities, and (c) owners' equity.
105.8 Occasionally, in certain industries such as banks, mutual funds, and similar financial enterprises, the title
“statement of financial condition” is substituted for “balance sheet” in the introductory paragraph, and “financial
condition” is substituted for “financial position” in the opinion paragraph.
Results of Operations
105.9 Paragraph 105.7 points out that financial position refers to a measurement at a point in time. That
contrasts with the results of operations, which is a measurement over a period of time, i.e., for the year or other
period. For the financial statements to present fairly results of operations, they generally contain both a
statement of income and a statement of retained earnings (presented separately or combined).
105.10 Accountants may question how detailed a statement of income needs to be to conform with GAAP.
While authoritative literature discusses the presentation of certain items, such as extraordinary items,
discontinued operations, and income taxes, there is no specific guidance on how much detail needs to be
shown for items such as sales, cost of sales, or operating expenses. As a general rule, an abbreviated
statement that starts with gross profit or operating income is not, in the authors' opinion, detailed enough. Also,
a statement that only summarizes income for the period without compensating detail in notes would not be
acceptable. As a general rule, the income statement needs to disclose, on the face of the statement or in the
notes, significant elements of revenue, costs, and expenses for the period in addition to items required by
GAAP, such as depreciation and interest expense.
105.11 While it is customary to reflect changes in retained earnings on the face of the statement of income or in
a separate statement of retained earnings or stockholders' equity, it also is acceptable to make that disclosure
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on the face of the balance sheet or in a note to the financial statements. Failure to disclose the changes in
retained earnings is a departure from GAAP. Reporting on departures from GAAP is discussed in Chapter 3.
105.12 According to AU-C 700.A20, if the financial statements include a separate statement of retained
earnings, statement of changes in stockholders' equity, or statement of comprehensive income, it should be
identified in the introductory paragraph but need not be reported on separately in the opinion paragraph.
Changes in stockholders' equity and comprehensive income are considered to be part of the presentation of
financial position, results of operations, and cash flows.
105.13 FASB ASC 220 discussed beginning at paragraph 102.12, requires a company to report comprehensive
income either in a separate financial statement or in combination with the income statement. 10 Whether a
separate statement of comprehensive income or a combined statement is presented, the financial statement
titles identified in the introductory paragraph may require modification. However, as explained in the preceding
paragraph, comprehensive income does not need to be reported on separately in the opinion paragraph as it is
considered to be part of results of operations.
Cash Flows
105.14 FASB ASC 230 requires a statement of cash flows whenever financial statements purport to present
both financial position (balance sheet) and results of operations (statement of income and retained earnings). If
both financial position and results of operations are presented, FASB ASC 230 requires a statement of cash
flows for each period for which an income statement is presented.
Name of Entity
105.15 The company name is repeated in the opinion paragraph. However, it is not necessary to repeat any
parenthetical disclosure of the type of entity or state of incorporation.
Dates
105.16 The date of the financial statements referred to in the opinion paragraph should be consistent with the
dates indicated in the introductory paragraph. (See the discussion in paragraph 102.5.)
Generally Accepted Accounting Principles
105.17 AU-C 700.35 requires auditors who have audited financial statements in accordance with generally
accepted auditing standards to state in their report whether the statements are presented in accordance with
generally accepted accounting principles. (Unless otherwise indicated, this Guide assumes that entities are
following U.S. generally accepted accounting principles.) AU-C 700.36 also requires the report to include an
identification that the United States of America is the country of origin of those accounting principles (for
example, “accounting principles generally accepted in the United States of America” or “U.S. generally accepted
accounting principles”). 11 Section 300 discusses the sources of U.S. generally accepted accounting principles
(GAAP) and section 201 discusses the effect of a departure from GAAP on the auditor's report.
Consistency
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105.18 AU-C 708, Consistency of Financial Statements, addresses the auditor's evaluation of the consistency of
financial statements between periods. The objective of AU-C 708 is for auditors to evaluate the consistency of
the financial statements for the periods presented and to identify the circumstances in which accounting
principles have not been consistently observed. According to AU-C 708.08, a reference to consistency in the
auditor's report, through the addition of an emphasis-of-matter paragraph following the opinion paragraph, is
required only when accounting principles have not been consistently applied.
105.19 Auditors should consider whether accounting principles have been consistently applied in relation to the
preceding period, regardless of whether financial statements of the preceding period are presented (AU-C
708.06). The only situation in which auditors do not address consistency is a company's initial accounting
period. (See section 109.) Reporting on exceptions to the consistency standard is discussed in Chapter 5.
10
FASB Accounting Standards Update 2011-05 amends the existing standards on comprehensive income by
requiring, among other things, comprehensive income to be presented either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. Thus, it eliminates the option to present
the components of other comprehensive income as part of the statement of changes in stockholders' equity. For
nonpublic entities, ASU 2011-05 is effective for fiscal years ending after December 15, 2012. FASB ASU 201112, Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of
Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update
No. 2011-05 (also effective for fiscal years ending after December 15, 2012), defers the provision in ASU 201105 to present reclassification adjustments by component in both the statement where net income is presented
and the statement where other comprehensive income is presented while the FASB is redeliberating that
requirement.
11
AICPA Code of Professional Ethics designates the International Accounting Standards Board (IASB) as the
body to establish international financial reporting standards for both private and public companies. The
amendment gives AICPA members the option to use International Financial Reporting Standards (IFRS) as an
alternative to U.S. generally accepted accounting principles. Accordingly, an auditor may report on general
purpose financial statements prepared in accordance with International Financial Reporting Standards as issued
by the IASB. See the discussion in section 709.
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Checkpoint Contents
Accounting, Audit & Corporate Finance Library
Editorial Materials
Audit and Attest
Auditor's Reports
Chapter 1 The Auditor's Standard Report
106 Firm's Signature And Auditor's Address
106
Firm's Signature And Auditor's Address
106.1 AU-C 700.39 requires the auditor's report to include the manual or printed signature of the auditor's firm.
Normally, when the auditor's report is typed on the firm's letterhead, the firm's signature is manually signed.
However, a printed signature also is acceptable. 12 When the auditor's report is printed on plain paper or
included in a client's annual report, some firms print “Certified Public Accountants” below their firm's signature.
(Use of the CPA designation may be restricted by state regulations.)
106.2 AU-C 700.40 requires the auditor's report to identify the city and state of the office where the auditor
practices. Generally, the auditor's address is located below the signature.
12
Although auditing standards permit a printed signature, certain regulatory agencies may require reports to be
manually signed.
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Checkpoint Contents
Accounting, Audit & Corporate Finance Library
Editorial Materials
Audit and Attest
Auditor's Reports
Chapter 1 The Auditor's Standard Report
107 The Date of the Auditor's Report
107
The Date of the Auditor's Report
107.1 The audit report date represents the date that the auditors have obtained sufficient appropriate audit
evidence to support the opinion on the financial statements. Among other things, such evidence includes
evidence that: (AU-C 700.41)
a. The audit work has been reviewed.
b. The financial statements, including disclosures, have been prepared.
c. Management has taken responsibility for the financial statements.
The auditor cannot simply use the date that the audit team left the field unless the auditor has sufficient
appropriate audit evidence at that date. In addition, AU-C 580.20 requires management representations to be
made as of the date of the auditor's report. (See paragraph 107.6.)
107.2 Auditors need to coordinate the following dates:
• Audit report date.
• Management representation letter date. (See paragraph 107.6.)
• Subsequent events evaluation note disclosure date. 13
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107.3 An AICPA Technical Practice Aid, Auditor Responsibilities for Subsequent Events (TIS 8700.02) suggests
discussing the dating requirements with management in advance of starting the audit. In addition, it notes that
auditors may want to include in the engagement letter a provision that management will not date the subsequent
event note earlier than the date of their management representation letter and the date of the auditor's report.
That process will generally result in the date management discloses as the date through which they have
evaluated subsequent events being the same date as the auditor's report.
107.4 Some practical guidelines for dating the auditor's report are as follows:
a. The date of the auditor's report generally will be close to the report release date; that is, the date that the
auditor grants the entity permission to use the auditor's report in connection with the financial statements.
Accordingly, delays in releasing the report may require the auditor to perform additional procedures to
comply with the auditor's responsibility with respect to subsequent events as required by AU-C 560.
b. If the auditor would not issue the auditor's report on financial statements without (1) resolution of a matter
such as receipt of a confirmation, an attorney letter, written waivers from financial institutions related to
violations of loan covenants, or information regarding related party transactions, (2) certain audit
procedures being performed, or (3) completion of a review, the auditor's report should not be dated until the
pending matter is completed. (See also the discussion of dual dating in paragraph 107.8.)
c. To minimize the possibility that the receipt of an attorney letter as discussed in AU-C 501 will delay the
completion of the audit, the auditor may decide to make an initial request of attorneys early in the audit
process and then request an update of the attorney's response close to the audit report date.
d. The requirement to date the auditor's report no earlier than the date on which the auditors have obtained
sufficient appropriate audit evidence to support their opinion on the financial statements extends the
“subsequent event period” to that date. Accordingly, the auditor is required to perform certain cut-off
procedures, such as reading available interim financial statements, making inquiries of management having
responsibility for financial and accounting matters, and reading minutes of meetings at or near the date of
the auditor's report date. The impact of the change on the nature and extent of cut-off procedures depends
on the auditor's assessment of the risk of material misstatements associated with the relevant financial
statement assertions.
e. The results of engagement quality review, such as a second or concurring review, may require
modification of the financial statements and, thus, could affect the date of the auditor's report.
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107.5 The authors believe that both the detailed and supervisory review should be performed and evidenced
prior to the date of the auditor's report. Additionally, an independent review (engagement quality reviews may
also be a second review or a concurring review) that is required as part of the firm's quality control policies and
procedures could impact the date of the auditor's report if the results of the review require modification of the
financial statements or the performance of additional procedures.
107.6 Management's representation letter should be dated as of the date of the auditor's report on the financial
statements. AU-C 580.A27 indicates that the requirement does not mean that the auditor needs to physically
possess management's representation letter on the date of the auditor's report. However, on or before the date
of the auditor's report, management will need to have reviewed the final representation letter and confirmed to
the auditor that they will sign the letter without exception. The auditor will need to have the signed management
representation letter prior to releasing the auditor's report since management's refusal to furnish written
representations constitutes a limitation on the scope of the audit often sufficient to preclude an unmodified
opinion.
Dual Dating
107.7 As discussed in paragraph 107.1, the date of the auditor's report is the date that the auditors have
obtained sufficient appropriate audit evidence to support the opinion on the financial statements. Under AU-C
560, Subsequent Events and Subsequently Discovered Facts, dual dating is appropriate only in the
circumstances discussed in paragraphs 107.8 and 107.9.
107.8 Dual dating the auditor's report is appropriate when management discloses an unrecognized subsequent
event (for example, new debt incurred, business or property acquired, or loss of property due to fire) that arose
after the original date of the auditor's report (but before the report release date) to keep the financial statement
from being misleading. Generally, in those circumstances, the subsequent event is disclosed in a separate note
to the financial statements, and the auditor's report would be dual dated as follows:
February 14, 20X1, except for Note X, as to which the date is February 21,
20X1
In some circumstances, the note may be labeled as unaudited, in which case the auditor is not required to
perform any audit procedures with respect to the information disclosed in the note, and the auditor's report
would not be dual dated.
107.9 Dual dating also is appropriate when the auditor becomes aware of a matter after the date of the auditor's
report but before the report release date that requires revision of the financial statements. AU-C 560.13 is the
authoritative literature that addresses the effect of subsequently discovered facts (that is, facts that become
known to the auditor after the date of the auditor's report that, had they been known to the auditor at that date,
may have caused the auditor to revise the auditor's report). That paragraph states that if the auditor becomes
aware of subsequently discovered facts that require revision of the financial statements before the audit report
release date and management revises the financial statements, the auditor has two options for dating the
auditor's report:
a. Dual date the auditor's report; in this circumstance the effects of the revision are disclosed in the notes to
the financial statements, and dual dating the auditor's report indicates that the auditor's responsibility
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extends only to the revision that is disclosed in the notes. (In this case, the auditor also should obtain
updated representations from management about whether any of management's previous representations
need to be revised and whether other events have occurred after the financial statement date that should
be reflected in the financial statements.) The format for dual dating the auditor's report would be the same
as described in paragraph 107.8.
b. Date the auditor's report as of a later date; that is, a date as of which the auditor has (a) obtained
sufficient appropriate audit evidence about the matter giving rise to the revision of the financial statements
and (b) completed an extension of subsequent events procedures and obtained updated management
representations as of the later date.
107.10 If the auditors have already released their report and subsequently are asked to reissue it, the rules for
dual dating are as follows:
a. Absent the occurrence of a subsequent event, additional copies of the original report may be released
with the original report date. Dual dating is not appropriate.
b. When predecessor auditors (see Chapter 8 for a definition of predecessor auditor) reissue their report on
prior-period financial statements, the predecessors should use the date of their previous report to avoid any
implication that they have examined records, transactions, or events after that date. If the predecessor
auditors revise their report or if the financial statements are restated, they should dual date their report
[unless the situation in alternative (c) below occurs]. The revised reissued report, however, would not be the
one illustrated in Appendix 1A-4 of this chapter. Instead, the report should be drafted as discussed in
section 803. See Chapter 8 for a discussion of a predecessor auditor's reissuance of a report with a
different opinion.
c. When auditors are asked to reissue their report on prior-period financial statements and they become
aware of a subsequent event of the type that only requires disclosure, the authors believe that the event
may be disclosed in a separate note to the financial statements captioned as follows:
NOTE X—Event Subsequent to the Date of the Independent Auditor's Report (Unaudited)
In those circumstances, the auditor's report would carry the same date as the original report.
d. When financial statements are adjusted because of a subsequently discovered fact, either the date of the
reissued report should be brought forward to the date of the matter causing the adjustment, or the report
should be dual dated as of the date of the subsequently discovered fact.
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13
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FASB ASC 855-10-50-1 requires reporting entities to disclose the date through which subsequent events
have been evaluated and whether that date is the date the financial statements either were issued or were
available to be issued. That disclosure is required regardless of whether the reporting entity recognizes or
discloses a subsequent event in the financial statements. Generally nonpublic entities will evaluate subsequent
events through the date that the financial statements are available to be issued (FASB ASC 855-10-25), i.e.,
when they are complete in a form and format that complies with GAAP and all approvals necessary for issuance
have been obtained. Often, that will be the date of the auditors' final conference with the client when proposed
adjustments to the financial statements are agreed upon.
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Checkpoint Contents
Accounting, Audit & Corporate Finance Library
Editorial Materials
Audit and Attest
Auditor's Reports
Chapter 1 The Auditor's Standard Report
108 Auditor's Reports on Financial Statements for Interim Periods
108
Auditor's Reports on Financial Statements for Interim
Periods 14
Standard Report
108.1 Auditors may be engaged to audit financial statements at an interim date, i.e., a date other than the fiscal
year end of the company. The standard report on financial statements for interim periods follows. See Appendix
1A-2 for a report drafting form.
INDEPENDENT AUDITOR'S REPORT
To ABC Company
We have audited the accompanying financial statements of ABC Company (a Texas corporation),
which comprise the balance sheet as of March 31, 20X1, a and the related statements of income,
retained earnings, and cash flows for the three months then ended, and the related notes to the
financial statements. b
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements
in accordance with accounting principles generally accepted in the United States of America; this
includes the design, implementation, and maintenance of internal control relevant to the
preparation and fair presentation of financial statements that are free from material misstatement,
whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We
conducted our audit in accordance with auditing standards generally accepted in the United States
of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material misstatement.
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An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditor's
judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity's preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity's internal control.
Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of ABC Company as of March 31, 20X1, a and the results of its operations and
its cash flows for the three months then ended b in accordance with accounting principles
generally accepted in the United States of America.
Notes:
a
The preceding interim report illustration differs from the standard report in Exhibit 1-4 because
the balance sheet date in the introductory and opinion paragraphs is the interim date.
b
The preceding interim report illustration differs from the standard report in Exhibit 1-4 because
the statements of income, retained earnings, and cash flows are no longer “for the year then
ended” but instead for the period that ends at the interim date, e.g., “for the three months then
ended.”
Different Interim Accounting Principles
108.2 Consistency is not affected when the accounting principles used in preparing the annual financial
statements have been modified in the interim period statements in accordance with FASB ASC 270.
Modifications permitted by FASB ASC 270 are related to a change in reporting requirements (i.e., presenting
financial information for only part of a year rather than an entire year), and they are intended to enhance, not
impair, comparability between data for an interim and annual period.
14
Reports on reviews of interim financial information are discussed in section 711.
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END OF DOCUMENT © 2013 Thomson Reuters/RIA. All rights reserved.
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Checkpoint Contents
Accounting, Audit & Corporate Finance Library
Editorial Materials
Audit and Attest
Auditor's Reports
Chapter 1 The Auditor's Standard Report
109 Initial Accounting Period
109
Initial Accounting Period
109.1 The previous section on reporting on financial statements of interim periods should not be confused with
reporting on initial accounting periods. In the former circumstance, the period covered by the financial
statements was not the first year of a company's operations. In the latter circumstance, the auditors are
reporting on the first year of operations, which may be for a 12-month or shorter period.
Standard Report
109.2 The auditor's standard report on the financial statements for an initial accounting period follows. See
Appendix 1A-3 for a report drafting form.
INDEPENDENT AUDITOR'S REPORT
To ABC Company
We have audited the accompanying financial statements of ABC Company (a Texas corporation),
which comprise the balance sheet as of December 31, 20X2, and the related statements of
income, stockholders' equity, and cash flows for the period from inception (May 8, 20X2) to
December 31, 20X2, and the related notes to the financial statements. a
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements
in accordance with accounting principles generally accepted in the United States of America; this
includes the design, implementation, and maintenance of internal control relevant to the
preparation and fair presentation of financial statements that are free from material misstatement,
whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We
conducted our audit in accordance with auditing standards generally accepted in the United States
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of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditor's
judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity's preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity's internal control.
Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of ABC Company as of December 31, 20X2, and the results of its operations and
its cash flows for the initial period then ended b in accordance with accounting principles
generally accepted in the United States of America.
Notes:
a
The auditor's standard report for an initial accounting period differs from the standard report in
Exhibit 1-4 because the introductory paragraph indicates that the statements of income,
stockholders' equity, and cash flows are for the initial period, e.g., “for the period from inception
(May 8, 20X2) to December 31, 20X2.” The financial statements normally would include a
statement of stockholders' equity rather than a statement of retained earnings, because, in the
initial period, there would be changes in the other components of stockholders' equity as well, e.g.,
the initial issue of stock and any additional paid-in capital.
b
The auditor's standard report for an initial accounting period differs from the standard report in
Exhibit 1-4 because the opinion paragraph now uses the phrase “for the initial period then ended.”
109.3 The auditor's report for an initial accounting period should not be confused with a report on the first audit
of an established company. If auditors are able to extend auditing procedures sufficiently to the opening balance
sheet of an established company, they should issue the auditor's standard report illustrated in Exhibit 1-4.
Section 404 discusses the reporting issues when auditors are faced with a scope limitation because they are
unable to satisfy themselves about opening balances in a first audit of an established company. Also, Chapter 8
discusses reporting issues related to comparative financial statements of an established company when a
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predecessor audited the prior-year statements (section 804) or when a predecessor compiled or reviewed them
(section 805). In addition, section 804 discusses reporting issues if a successor reaudits financial statements
that were previously audited.
© 2012 Thomson Reuters/PPC. All rights reserved.
END OF DOCUMENT © 2013 Thomson Reuters/RIA. All rights reserved.
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Checkpoint Contents
Accounting, Audit & Corporate Finance Library
Editorial Materials
Audit and Attest
Auditor's Reports
Chapter 1 The Auditor's Standard Report
110 Balance Sheet Only
110
Balance Sheet Only
110.1 Auditors are not precluded from issuing an unmodified opinion on a balance sheet presented alone. AU-C
805, Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts or Items
of a Financial Statement, addresses applying GAAS to audits of a single financial statement. According to AU-C
805, the auditor's objective when applying generally accepted auditing standards in an audit of a single financial
statement is to address appropriately the special considerations that are relevant to (a) accepting the
engagement, (b) planning and performing the engagement, and (c) forming an opinion and reporting on the
single financial statement. The requirements that should be followed to achieve that objective are summarized in
Exhibit 1-6.
Exhibit 1-6
Requirements for Audits of Single Financial Statements
Requirements
Clarified
Primary Guide
AU-C Reference
Reference
Accepting the Engagement and Planning and Performing the Audit
Adapt and apply all AU sections relevant to the audit.
AU-C 805.12
Paragraph 110.2
If the auditor is not engaged to audit the entity's complete financial
statements, determine whether the audit of a single financial statement is
practicable, including whether the auditor will be able to perform procedures
on interrelated items.
AU-C 805.09
Paragraphs
110.4 and 111.2.3
Obtain an understanding of the (a) purpose for which the single financial
statement is being prepared, (b) intended users, and (c) steps taken by
management to determine that the application of GAAP (or another basis of
accounting) is acceptable in the circumstances.
AU-C 805.10
Paragraph 110.3
Determine the acceptability of GAAP (or another basis of accounting),
including whether it will result in a preparation that provides adequate
disclosures to enable intended users to understand the information conveyed
and the effect of material transactions and events on the information
conveyed in the single financial statement.
AU-C 805.11
Paragraph 110.3
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Requirements
Clarified
Primary Guide
AU-C Reference
Reference
Perform procedures on interrelated items as necessary to meet to the
objective of the audit.
AU-C 805.13
Paragraph 110.5
Determine materiality for the single financial statement reported on rather than
the complete set of financial statements.
AU-C 805.14
Paragraph 110.4
Apply the requirements in AU-C 700, Forming an Opinion and Reporting on
Financial Statements, and when a modification to the auditor's opinion on the
financial statements is necessary, apply the requirements in AU-C 705,
Modifications to the Opinion in the Independent Auditor's Report.
AU-C 805.15
Paragraphs
110.6 and 111.3
If the audit of a single financial statement is performed in conjunction with an
audit of the complete financial statements—
AU-C 805.16-.19
and 805.22-.23
Paragraphs
110.7-.9 and
111.6-.7
Forming an Opinion and Reporting Considerations
• Issue a separate report and express a separate opinion for each
engagement, differentiating the report on the single financial statement
from the report on the complete financial statements. If the presentation of
the audited single financial statement is not sufficiently differentiated from
the complete financial statements, ask management to remedy the
situation and do not release the auditor's report on the single financial
statement until satisfied with the differentiation.
• If the auditor's opinion on the complete financial statements is modified,
determine the effect on the auditor's opinion on the single financial
statement.
• If the auditor expresses an adverse opinion or disclaims an opinion on
the complete financial statements, do not express an unmodified opinion
on a single financial statement that is part of the complete financial
statements.
• If the auditor's report on the complete financial statements includes an
emphasis-of-matter or other-matter paragraph that is relevant to the single
financial statement, include a similar emphasis-of-matter or other-matter
paragraph in the auditor's report on the single financial statement.
____________________
110.2 Auditors may be engaged to audit a single financial statement as either a separate engagement for that
purpose or in conjunction with an audit of the complete financial statements. In either circumstance, AU-C
805.12 requires auditors to adapt and apply all AU-C sections that that are relevant to the audit of the single
financial statement in the circumstances. For example, AU-C 240, Consideration of Fraud in a Financial
Statement Audit, AU-C 550, Related Parties, and AU-C 580, Written Representations, among others, generally
would be relevant to the audit of a single financial statement.
110.3 Auditors also should determine whether the financial reporting framework (e.g., GAAP or another basis of
accounting) on which the single financial statement is prepared is acceptable. In making that determination, AUC 805.10-.11 require auditors to understand (a) the purpose for which the single financial statement is prepared;
(b) the intended users; (c) the steps management has taken to determine the acceptability of the framework;
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and (d) whether presentation in accordance with the framework, including disclosures, will enable intended
users to understand the information conveyed and the effect of material transactions and events conveyed in
the single financial statement.
110.4 Generally, auditors may express an opinion on a single financial statement regardless of whether they
have audited the complete financial statements. However, if the auditor does not also audit the complete
financial statements, AU-C 805.09 requires the auditor to determine whether an audit of a single financial
statement is practicable. In general, an audit of a single financial statement would not be practicable if the
auditor does not have a similar understanding of the entity and its environment, including its internal control, or
similar audit evidence about the quality of the entity's accounting records, as would an auditor of the complete
financial statements. An audit of a single financial statement also would not be practicable if the auditor is not
able to perform procedures on interrelated items as required by AU-C 805.13. (See paragraph 110.5.) In
addition, auditors should determine materiality for the single financial statement being reported on rather than
for the complete financial statements, which will affect the nature, timing, and extent of the auditor's procedures
and the evaluation of uncorrected misstatements.
110.5 Individual financial statements that are a part of complete financial statements are interrelated. AU-C
805.13 requires the auditor to perform procedures on items that are related to the single financial statement on
which the auditor is reporting, i.e., interrelated items sufficient to meet the objectives of the audit. Examples of
interrelated items are sales and receivables, inventory and payables, and buildings and equipment and
depreciation. (See also the discussion in paragraph 110.11.)
Standard Report
110.6 The standard report on a balance sheet, which complies with the relevant requirements of AU-C 700,
follows. See also the report example in Appendix 1A-5.
INDEPENDENT AUDITOR'S REPORT
To ABC Company
We have audited the accompanying balance sheet a of ABC Company (a Texas corporation) as
of December 31, 20X1, and the related notes.
Management's Responsibility for the Financial Statement
Management is responsible for the preparation and fair presentation of this financial statement in
accordance with accounting principles generally accepted in the United States of America; this
includes the design, implementation, and maintenance of internal control relevant to the
preparation and fair presentation of the financial statement that is free from material misstatement,
whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on this financial statement based on our audit. We
conducted our audit in accordance with auditing standards generally accepted in the United States
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of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statement. The procedures selected depend on the auditor's judgment,
including the assessment of the risks of material misstatement of the financial statement, whether
due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity's preparation and fair presentation of the financial statement in order to
design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express
no such opinion. An audit also includes evaluating the appropriateness of accounting policies
used and the reasonableness of significant accounting estimates made by management, as well
as evaluating the overall presentation of the financial statement.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the balance sheet referred to above b presents fairly, in all material respects, the
financial position c of ABC Company as of December 31, 20X1, in accordance with accounting
principles generally accepted in the United States of America.
Notes:
a
The only financial statement identified is the balance sheet.
b
The title of the statement usually is repeated again in the opinion paragraph instead of saying
“the financial statement referred to above,” although either reference is acceptable.
c
The auditor expresses an opinion only on financial position. No reference is made to results of
operations or to cash flows. If a modification of the opinion on the balance sheet is appropriate,
auditors should comply with AU-C 705, as discussed in Chapters 3 and 4.
110.7 Accountants may have audited and reported on a complete set of financial statements for the same
period for which they are asked to issue a report on a balance sheet presented alone. That might occur, for
example, when the client requests a report on only a balance sheet to give to vendors for credit purposes. In
those circumstances, the auditor should issue a separate report on each engagement, differentiating each
report. In addition, the report on the balance sheet should not refer to the audit of related financial statements
that are not being presented. The only information relevant to the readers of such a report concerns the audit of
the balance sheet.
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110.8 If the audit of the balance sheet is conducted in conjunction with an audit of the complete financial
statements and the auditor's report on the complete financial statements is modified, the auditor should
determine if the modification affects the auditor's report on the balance sheet. If the modification on the complete
financial statements is relevant to the audit of the balance sheet, the auditor's report on the balance sheet
should be appropriately modified. Similarly, if the auditor's report on the complete financial statements includes
an emphasis-of-matter or other-matter paragraph that is relevant to the balance sheet, the auditor's report on
the balance sheet should include a similar emphasis-of-matter or other-matter paragraph (AU-C 805.19 and AUC 805.23).
110.9 If the audit of the balance sheet is conducted in conjunction with an audit of the complete financial
statements and the auditor expresses an adverse opinion or disclaims an opinion on the complete financial
statements, the auditors are precluded from issuing an unmodified opinion on the balance sheet even if the
auditor's report on the balance is neither published with nor otherwise accompanies the report on the complete
financial statements. Doing so would contradict the auditor's adverse opinion or disclaimer on the complete
financial statements and would be tantamount to expressing a piecemeal opinion (AU-C 805.21).
110.10 AU-C 805.06 states that a single financial statement includes the related notes, which ordinarily include
a summary of significant accounting policies and other explanatory information relevant to the single financial
statement. If the auditors attach some of the notes from the complete financial statements to the balance sheet,
an AICPA Technical Practice Aid at TIS 9080.03 warns that the notes to the complete financial statements that
do not pertain to the balance sheet need to be omitted. In that case, however, certain income statement
disclosures may be considered to pertain to the balance sheet. For example, if depreciable property is a
significant portion of assets, the disclosures prescribed by FASB ASC 360-10-50-1 (depreciation expense for
the period, balances of major classes of depreciable assets at the balance sheet date, accumulated
depreciation, and a general description of the methods used in computing depreciation) may be necessary for a
fair presentation of the balance sheet. In addition, information about pension plans (other than expense for the
period) also may need to be disclosed. The discussion in paragraph 111.5 also is generally relevant to a
balance sheet presented alone.
Disclosing Net Income or Loss
110.11 When only a balance sheet is presented, some auditors consider it desirable to disclose a loss that is
sustained in the period ending with the date of the balance sheet. (Such disclosure is not required.) However, if
the amount of loss (or income) is disclosed in the equity section on the face of the balance sheet or in a note,
the audit should be sufficient in scope to enable them to form an opinion on such loss (or net income) even
though the opinion in the report is limited to the balance sheet. Normally, the auditors would be in a position to
take that responsibility for such a disclosure if the prior-year balance sheet had been audited because the
current year's income (or loss) would be the difference between the two audited balance sheets. If the scope of
the work is not sufficient to permit the expression of an opinion on net income (loss) in relation to the balance
sheet as a whole, the auditor's report should include an appropriate modification.
© 2012 Thomson Reuters/PPC. All rights reserved.
END OF DOCUMENT -
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Checkpoint Contents
Accounting, Audit & Corporate Finance Library
Editorial Materials
Audit and Attest
Auditor's Reports
Chapter 1 The Auditor's Standard Report
111 Statement of Income Only
111
Statement of Income Only
111.1 The discussion beginning at paragraph 110.1 summarizes the objectives and requirements of AU-C 805,
Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts or Items of a
Financial Statement, regarding the auditor's responsibilities when applying generally accepted auditing
standards in an audit of a single financial statement and the form and content of the auditor's report. This
section focuses on issues that are unique to an engagement to audit a statement of income and illustrates an
auditor's report that is appropriate in those circumstances.
111.2 Several reporting subtleties are often overlooked in an engagement to audit only a statement of income.
First, it seems difficult, in most circumstances, for auditors to appropriately apply GAAS to the audit of a
statement of income without performing substantial auditing procedures on both the opening and closing
balance sheets for the accounting period. Some argue that auditors could not express an unmodified opinion on
the statement of income unless they had audited both balance sheets. AU-C 805, however, generally permits
auditors to express an opinion on a single financial statement regardless of whether they have audited the
complete financial statements. However, if the auditor does not also audit the complete financial statements, AU
-C 805.09 requires the auditor to determine whether an audit of a single financial statement is practicable. (See
paragraph 110.4.) In addition, AU-C 805.13 requires the auditor to perform procedures on items that are related
to the single financial statement on which the auditor is reporting, i.e. interrelated items, sufficient to meet the
objectives of the audit. Examples of interrelated items are sales and receivables, inventory and payables, and
buildings and equipment and depreciation.
111.3 Even after resolving the question of whether to audit both balance sheets to meet the objectives of the
audit of a statement of income, auditors still need to determine whether statements of retained earnings, cash
flows, and comprehensive income also need to be presented. Many accountants believe that to express an
opinion on the results of a company's operations, a combined statement of income and retained earnings is
required, at a minimum. However, when a single financial statement is presented, e.g., either a balance sheet or
a statement of income, neither a statement of cash flows nor a statement of comprehensive income is required
to be presented. 15 A standard report on a statement of income and retained earnings follows. (See Appendix
1A-7 for a report drafting form.)
INDEPENDENT AUDITOR'S REPORT
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To ABC Company
We have audited the accompanying statement of income and retained earnings a of ABC
Company (a Texas corporation) for the year ended December 31, 20X1, and the related notes. b
Management's Responsibility for the Financial Statement
Management is responsible for the preparation and fair presentation of this financial statement in
accordance with accounting principles generally accepted in the United States of America; this
includes the design, implementation, and maintenance of internal control relevant to the
preparation and fair presentation of the financial statement that is free from material misstatement,
whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on this financial statement based on our audit. We
conducted our audit in accordance with auditing standards generally accepted in the United States
of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statement. The procedures selected depend on the auditor's judgment,
including the assessment of the risks of material misstatement of the financial statement, whether
due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity's preparation and fair presentation of the financial statement in order to
design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express
no such opinion. An audit also includes evaluating the appropriateness of accounting policies
used and the reasonableness of significant accounting estimates made by management, as well
as evaluating the overall presentation of the financial statement.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the statement of income and retained earnings referred to above c presents fairly,
in all material respects, the results of the operations d of ABC Company for the year ended
December 31, 20X1, b in accordance with accounting principles generally accepted in the United
States of America.
Notes:
a
Both a statement of income and retained earnings are necessary to fairly present results of
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operations in accordance with GAAP.
b
The description of the period presented is “for the year ended” (or other period such as “for the
six months ended June 30, 20XX”) instead of “as of” or “at” a particular date.
c
The opinion paragraph normally repeats the title of the statement instead of stating “the
financial statement referred to above,” although either reference is acceptable.
d
The auditor expresses an opinion only about the presentation of results of operations. No
reference is made to financial position or to cash flows.
111.4 The authors generally prefer a statement that presents both income and retained earnings. However,
statements of income without changes in retained earnings are seen in practice and are not necessarily
misleading.
111.5 AU-C 805.06 states that a single financial statement includes the related notes, which ordinarily include a
summary of significant accounting policies and other explanatory information relevant to the single financial
statement. No single authoritative pronouncement addresses the issue of the specific matters that should be
disclosed when an income statement is presented separately, but the authors offer the following advice based
on various sources of guidance.
• AU-C 805 requires auditors to consider whether the financial reporting framework (for example, GAAP or
an OCBOA) will result in a presentation that provides adequate disclosures to enable the intended users to
understand the information conveyed in the financial statement and the effect of material transactions and
events on the information conveyed in the financial statement. In determining disclosures that may be
necessary, the authors believe that auditors need to read the income statement from the viewpoint of a
business person with a basic knowledge of accounting and consider whether disclosures have been made
that would affect that type of reader's use, understanding, and conclusions about the statement.
• A technical practice aid (TIS 9080.03) states that if a balance sheet is presented separately, only
disclosures relevant to the balance sheet need to be made. The authors believe that likewise, if a standalone income statement is presented, only disclosures relevant to the income statement need to be made.
Thus, for example, interest rates related to interest expense in the income statement need to be disclosed.
The authors do not believe, however, that pledged assets, maturities, or sinking fund requirements related
to long-term debt need to be disclosed in notes to a stand-alone income statement.
• FASB ASC 235-10-50-1 requires disclosure of accounting policies pertinent to a stand-alone basic
financial statement. FASB ASC 235-10-50-4 lists some common accounting policy disclosures. The authors
recommend that the following policies be disclosed (assuming the stand-alone income statement includes
transactions related to those matters):
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•• Basis of consolidation
•• Depreciation methods
•• Amortization of intangibles
•• Inventory pricing
•• Recognition of profit on long-term construction-type contracts
• AU-C 800.17 and 800.A19-A23 discuss evaluating the adequacy of disclosure in financial statements
prepared in accordance with bases of accounting other than GAAP. Although the discussion relates to
financial statements presented on a basis other than GAAP, the authors believe the following disclosures
(in addition to accounting policies as required by FASB ASC 235-10-50-1) also would be appropriate for a
stand-alone income statement presented in accordance with GAAP:
•• Uncertainties
•• Related party transactions
•• Subsequent events
•• Restrictions on assets and owners' equity
AU-C 800.17 indicates that auditors should consider disclosing other matters required by GAAP in OCBOA
financial statements, such as contingent liabilities and going concern considerations. Likewise, the authors
believe auditors of a stand-alone income statement ought to consider the need for such disclosures.
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• AU-C 800.17 indicates that auditors should evaluate whether additional disclosures, beyond those
specifically required by the framework, related to matters that are not specifically identified on the face of
the financial statements or other disclosures are necessary for the financial statements to achieve fair
presentation.
• FASB ASC 275 requires the following disclosures. The authors believe that the disclosures would be
appropriate for a stand-alone income statement:
•• Nature of operations
•• Use of estimates
•• Certain significant estimates (when specified criteria are met)
•• Current vulnerability due to certain concentrations (when specified criteria are met)
Exhibit 1-7 lists some disclosures typically relevant to a stand-alone income statement. The list (not necessarily
all-inclusive) is based on the preceding discussion and on the disclosure checklist ASB-CX-13 in PPC's Guide to
Audits of Nonpublic Companies, a companion guide that may be ordered by visiting ppc.thomsonreuters.com
or by calling (800) 431-9025.
Exhibit 1-7
Disclosures Relevant to a Stand-alone Income Statement a
• The nature of the company's operations
• Accounting policies:
•• Basis of consolidation
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•• Revenue recognition method if other than the point of sale
•• Basis of valuing inventory and method of determining cost
•• Depreciation methods
•• Method of accounting for trade receivables and for estimating and charging off uncollectible
accounts
•• Other important or unusual accounting policies
• Depreciation and amortization expense, including estimated aggregate amortization expense for
intangibles for each of the five succeeding fiscal years
• Interest incurred, expensed, and capitalized
• Research and development costs
• Realized and unrealized gain or loss on marketable securities, basis for determining cost in computing
gain, and the amount included in the income statement for a change in valuation allowance
• Lease expense, including minimum rentals, contingent rentals, and sublease income, and general
description of lease arrangements (terms, renewal or purchase options, escalation clauses, and basis for
determining contingent rentals)
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• Pension or profit sharing provision and other information about pension plans required by FASB ASC 715
• Postretirement benefits other than pensions as required by FASB ASC 715
• Information about impaired long-lived assets and intangibles and impairment losses charged to income
• Disclosures about derivative instruments and hedging activities required by FASB ASC 815
• Information about investments accounted for by the equity method
• Related party transactions
• Common control relationships that could result in operating results different from those that would have
been obtained if the companies were autonomous, even if there have been no transactions between the
companies
• Disclosures about income taxes required by FASB ASC 740
• Contingencies
• Use of estimates and certain significant estimates
• Current vulnerability due to certain concentrations
• Information about discontinued operations and any related gains or losses
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• Nature and financial effects of material unusual or infrequent events or transactions not qualifying as
extraordinary items
• Information about extraordinary gains or losses and applicable income taxes
• Accounting changes that affect the income statement:
•• Change in principle or estimate
•• Change in reporting entity
•• Adoption of new principle
•• Correction of error
• Subsequent events
• Going concern considerations
Notes:
a
This list is intended to indicate some of the more common matters about which disclosures may be necessary
in a stand-alone income statement. It is not intended to be all-inclusive or to specify details of the
disclosures. For a comprehensive detailed checklist covering those matters and other specialized or less
common disclosures that may be relevant in specific circumstances, see PPC's Guide to Audits of Nonpublic
Companies, PPC's Guide to Preparing Financial Statements, or PPC's Guide to Compilation and Review
Engagements. Call (800) 431-9025 or visit ppc.thomsonreuters.com for order information.
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____________________
111.6 If the audit of the income statement is conducted in conjunction with an audit of the complete financial
statements and the auditor's report on the complete financial statements is modified, the auditor should
determine whether the modification affects the auditor's report on the income statement. If the modification on
the complete financial statements is relevant to the audit of the income statement, the auditor's report on the
income statement should be appropriately modified. Similarly, if the auditor's report on the complete financial
statements includes an emphasis-of-matter or other-matter paragraph that is relevant to the income statement,
the auditor's report on the income statement should include a similar emphasis-of-matter or other-matter
paragraph.
111.7 If the audit of the income statement is conducted in conjunction with an audit of the complete financial
statements and the auditor expresses an adverse opinion or disclaims an opinion on the complete financial
statements, the auditors are precluded from issuing an unmodified opinion on the income statement even if the
auditor's report on the income statement is neither published with nor otherwise accompanies the report on the
complete financial statements. Doing so would contradict the auditor's adverse opinion or disclaimer on the
complete financial statements and would be tantamount to expressing a piecemeal opinion.
15
FASB ASC 230-10-15-3 states that a statement of cash flows is required when entities present a set of
financial statements that reports both financial position and results of operations, and FASB ASC 220-10-15-2
states that a statement of comprehensive income is required when entities present a full set of financial
statements that reports financial position, results of operations, and cash flows.
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Checkpoint Contents
Accounting, Audit & Corporate Finance Library
Editorial Materials
Audit and Attest
Auditor's Reports
Chapter 1 The Auditor's Standard Report
112 Auditor's Report on Financial Statements Covering Periods Less Than 12 Months (Change in Fiscal
Year-end)
112
Auditor's Report on Financial Statements Covering
Periods Less Than 12 Months (Change in Fiscal Year-end)
112.1 Section 109 discusses one situation in which an auditor might be requested to report on financial
statements covering a period of time shorter than 12 months (i.e., the first year of a company's operations).
Another situation in which an auditor might be asked to report on financial statements for a shorter period is
when there has been a change in the entity's fiscal year. That might happen, for example, when a corporation
has elected S corporation status and is required to change to a December 31 year end unless it can show that
the fiscal year is its natural business year. In such circumstances, companies also typically change their fiscal
year for financial reporting purposes. Thus, the financial statements of the year of the change would cover less
than 12 months.
112.2 A technical practice aid at TIS 1800.03 indicates that, generally, the change needs to be disclosed in the
current period financial statements to make the statements more meaningful. The authors interpret the TPA to
suggest that in disclosing the change in fiscal year, the notes to the statements need to state whether the effect
was to increase or decrease net income (for example, if as a result of seasonal differences, the company
normally experiences losses during the months excluded). In addition, if the effect is measurable, (i.e., net
income for the excluded months is known), that amount needs to be disclosed.
112.3 When comparative financial statements are presented, the authors believe the short-year financial
statements may be presented in comparative form with the financial statements of complete years as long as
the change in fiscal year is adequately disclosed and the financial statements are appropriately captioned, such
as illustrated below:
• ABC COMPANY
BALANCE SHEETS
December 31, 20X2 and June 30, 20X2
December 31,
20X2
June 30,
20X2
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• ABC COMPANY
STATEMENTS OF INCOME
Six Months Ended December 31, 20X2,
And Year Ended June 30, 20X2
Six Months
Ended December 31,
20X2
Year Ended
June 30,
20X2
Standard Report in Year of Change
112.4 The auditor's standard report on the financial statements in the year of the change would be similar to the
report on an initial accounting period illustrated in paragraph 109.2, except as follows:
a. The phrase “for the period from inception (May 8, 20X2) to December 31, 20X2” in the introductory
paragraph would be replaced with “for the six-month period then ended.”
b. The phrase “for the initial period” in the opinion paragraph would be replaced with “for the six-month
period.”
Standard Report When Prior-period Statements Are Presented in Comparative Form
112.5 When comparative financial statements are presented, however, the following report illustrates the
appropriate form of report.
INDEPENDENT AUDITOR'S REPORT
To ABC Company
We have audited the accompanying financial statements of ABC Company (a Texas corporation),
which comprise the balance sheets as of December 31, 20X2, and June 30, 20X2, the related
statements of income, retained earnings, and cash flows for the six-month and twelve-month
periods then ended, and the related notes to the financial statements. a
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Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements
in accordance with accounting principles generally accepted in the United States of America; this
includes the design, implementation, and maintenance of internal control relevant to the
preparation and fair presentation of financial statements that are free from material misstatement,
whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audits in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditor's
judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity's preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity's internal control.
Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of ABC Company as of December 31, 20X2 and June 30, 20X2, and the results
of its operations and its cash flows for the six-month and twelve-month periods then ended b in
accordance with accounting principles generally accepted in the United States of America.
Notes:
a
The introductory paragraph indicates that the statements of income, retained earnings, and
cash flows are for the six-month period ended December 31, 20X2 (e.g., for the period since the
company's period fiscal year end) and the twelve-month period ended June 30, 20X2.
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b
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The opinion paragraph now uses the phrase “for the six-month and twelve-month periods
ended.”
112.6 The authors believe an emphasis-of-matter paragraph describing the change in fiscal year is not required
in the auditor's report. However, if the auditors believe the financial statements do not adequately disclose the
change in fiscal year, they should consider modifying their opinion.
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Checkpoint Contents
Accounting, Audit & Corporate Finance Library
Editorial Materials
Audit and Attest
Auditor's Reports
Chapter 1 The Auditor's Standard Report
113 Auditor's Report on Financial Statements Covering Periods Longer Than 12 Months
113
Auditor's Report on Financial Statements Covering
Periods Longer Than 12 Months
113.1 Auditors sometimes report on financial statements covering a period longer than 12 months. The period
may or may not end on the company's fiscal year end, but the report wording would be the same in either case.
A Technical Practice Aid (TIS 9160.07) states that the auditor's report, as well as the title of the financial
statements, needs to clearly indicate the period covered. A report covering more than 12 months may relate to
the initial audit of a new business. For example, a company may begin operations on November 1, 20X1, and
have its first audit cover the period from November 1, 20X1, through December 31, 20X2, a period of 14
months. In that case, the report illustrated in paragraph 109.2 and Appendix 1A-3 would be appropriate. If a
company that is not a new business requests a report covering more than 12 months, the report for an interim
period illustrated in paragraph 108.1 and Appendix 1A-2 would be appropriate, except that the number of
months indicated would be more than 12, rather than less.
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Checkpoint Contents
Accounting, Audit & Corporate Finance Library
Editorial Materials
Audit and Attest
Auditor's Reports
Chapter 1 The Auditor's Standard Report
114 Common Audit Report Deficiencies
114
Common Audit Report Deficiencies
114.1 Peer review findings include the following common deficiencies related to auditors' reports:
Minor Report Deficiencies
• Omission of phrases or the use of phrases not in accordance with the appropriate standards for the
type of report issued.
• Isolated instances of reports incorrectly dated, issued without a date, or without appropriate reference
to all time periods covered by the financial statements.
• Isolated instances in which reports reflected financial statement titles and terminology not in
accordance with professional standards.
• Financial statements prepared on a basis of accounting other than generally accepted accounting
principles (OCBOA) that were properly reported on but contained inconsistencies between the report
and the financial statements.
• Financial statement titles that were inconsistent with the report.
Significant Report Deficiencies
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• Issuance of an audit report when the auditor is not independent.
• Auditor's report did not cover all periods presented by the financial statements.
• Failure to disclose an omission of the statement of cash flows in financial statements prepared in
accordance with GAAP.
• Omission of the statement of income and retained earnings when referred to in the audit report.
• Failure to appropriately qualify an auditor's report for a scope limitation or departure from the basis of
accounting used for the financial statements.
• Failure to disclose in the auditor's report a material departure from professional standards, such as
omission of significant income tax provision on interim financial statements.
• Departures from the standard report wording such that the audit report does not contain the critical
elements of applicable standards.
• Inappropriate references to GAAP in the auditor's report on financial statements in accordance with
an OCBOA.
114.2 Peer review findings also include report deficiencies unique to entities in specialized industries and
deficiencies related to financial statement presentation, auditor's procedures, audit documentation, and
functional areas, such as personnel management and monitoring.
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