Auditing Notes - Chapter 1

AUDITED FINANCIAL STATEMENTS—THE BASICS Company's Management: Financial Statements Auditors: Expression of Opinion (on financial statements and if publicly traded, management's assertion on internal control) Primary assertion: whether statements are "presented fairly" in accordance with GAAP. PROFESSIONAL STANDARDS Auditing Standards: GAAS: Generally Accepted Auditing Standards GAGAS: Generally Accepted Government Auditing Standards PCAOB: The Public Company Accounting Oversight Board Auditing Guidance: The GAAS Hierarchy 1. Statements on Auditing Standards (SASs) 2. Interpretive Publications 3. Other Auditing Publications (i.e. journals, textbooks) GAAS General Standards T - Training I - Independence (in appearance and fact) P - Professional Care Standards of Fieldwork P - Planning and Supervision I - Internal Control, Entity, and Environment E - Evidence Standards of Reporting A - Accounting = GAAP -- Must State (Explicit) C - Consistency -- Silence is OK (Implicit) D - Disclosure -- Silence is OK (Implicit) O - Express Opinion -- Must State (Explicit) Weak internal control does NOT equal adverse opinion Taken as a whole applies equally to a complete set of financial statements, and to an individual financial statement, such as a balance sheet. - Different opinions are okay - One statement opinions are okay REPORTS ON AUDITED FINANCIAL STATEMENTS Auditor's Standard Report (Unqualified Opinion) A. Title ("Independent" auditor's report) B. Addressee (To company, stockholders, board of directors, generally not addressed to management.) C. Introductory Paragraph 1. Statement that the financial statements were audited 2. RR - Responsibility of management is financial statements and Responsibility of auditor is to express an opinion. D. Scope Paragraph 1. AA - Audit was conducted in Accordance with US GAAS 2. PP - audit was Planned and Performed to obtain reasonable assurance MM - that the financial statements are free from Material Misstatement 3. EE - audit included Examining Evidence on test basis AA - Assessing the Accounting Principles used MM - significant estimates Made by Management 4. Statement that audit provides reasonable basis for opinion.

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E. Opinion Paragraph 1. Statement referring to financial statements identified in intro paragraph 2. Opinion to fair representation of financial statements (ACDO) 3. Statement regarding conformity with US GAAP (ACDO) F. Firm Name (signed or printed) G. Report Date (on or after the date when audit evidence was obtained.)

RR - Responsibility of management = financial statements, Responsibility of auditor = express opinion. AA - Audit was conducted in Accordance with US GAAS PP - audit was Planned and Performed to obtain reasonable assurance MM - that the financial statements are free from Material Misstatement EE - audit included Examining Evidence on test basis AA - Assessing the Accounting Principles used MM - significant estimates Made by Management

GAAS --- Scope Paragraph GAAP---Opinion Paragraph Types of Opinions: 1. Unqualified (Clean) Opinion a. Explanatory Language (Modified Unqualified Opinion) 2. Qualified Opinion (Except For) ----- Material GAAP or GAAS Problem 3. Adverse Opinion ----- Very material GAAP Problem 4. Disclaimer of Opinion ----- Significant GAAS Problem

Decision Tree Unqualified Opinion Qualified ``Except For`` GAAP 1. 2. 3. 4.

Qualified ``Except For`` GAAS

Non-GAAP Change Inadequate Disclosure Unjustified Departure from GAAP Unreasonable Accounting Estimate

1. Uncertainty 2. Scope Limitation

Adverse GAAP 1. 2. 3. 4.

Disclaimer GAAS

Non-GAAP Change Inadequate Disclosure Unjustified Departure from GAAP Unreasonable Accounting Estimate

1. 2. 3. 4.

Uncertainty Scope Limitation Lack of Independence Unaudited

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Unqualified Opinion Unqualified Opinion Uncertainty and GAAP requires: •

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Management`s Responsibility: a. Probable and reasonably estimable = record b. Only probable, and not estimable = disclose Auditor`s Responsibility a. If supported and properly recorded or disclosed, then issue unqualified opinion with no reference to uncertainty. b. If unable to obtain sufficient evidence, then scope limitation = GAAS problem. Issue qualified or disclaim opinion. c. If financial statement is materially misstated due to a departure from GAAP = GAAP problem. Issue qualified or adverse opinion.

Modified Unqualified Opinion 1. Modified Wording: a. Division of responsibility (opinion based in part on another auditor`s report.) 2. Explanatory Paragraph: a. Necessary and justified departure from GAAP b. Going concern c. To emphasize a matter d. A justified lack of consistency e. Required SEC regulation S-K quarterly financial data has been omitted or not reviewed f. Supplementary information required by GAAP has been omitted g. Other information in a document containing audited financial statements is materially inconsistent with information appearing in the financial statements. General Rule on Position of Explanatory Paragraph: 1. Unqualified Opinion: a. Explanatory paragraph generally would follow the opinion paragraph 2. Qualified, adverse, and disclaimer of opinion: a. Explanatory paragraph generally would precede the opinion paragraph 3. Exceptions: a. The explanatory paragraphs can be either before or after the opinion paragraph, if: i. Justified GAAP departure ii. Emphasis of a matter 1. Division of responsibility (modified unqualified): opinion based in part on another auditor`s report. a. The principal auditor will mention this division in all three paragraphs. i. Name of the other auditor is not mentioned unless that auditor gives express permission and the report of the other auditor is presented. ii. The work done by other auditor is expressed in terms of percentage, total assets, or other appropriate criteria in the introduction paragraph. Becker Auditing – 2008 Edition Chapter 1 3

b. Assumption of responsibility (no reference of other CPA) i. The principal auditor should: 1. Visit the other auditor and discuss the procedure. 2. Review the audit program, audit documentation, and evaluation of internal control performed by the other auditor. c. Treat the other CPA just like your staff: R – Reputation I – Independent P – Professional Competency P – Program Steps 2. Necessary or Justified Departure from GAAP (modified unqualified): a. Explanatory paragraph should contain a description of the departure, its approximate effects, and the reasons why adherence to GAAP would make financial statements misleading. b. Unjustified departures = Qualified ``Except for`` or Adverse opinion 3. Going Concern (modified unqualified): a. The going concern period should not exceed one year from date of statements being audited b. The procedures to follow that is contrary to the basic principle of going concern: A – Analytical procedures D – Debt compliance: auditor should review terms of debt and loan agreements M – Minutes: auditor should review minutes from stockholder and board of director meetings I – Inquiry of client`s legal counsel T – Third parties: the auditor should confirm the details of financial support arrangements S – Subsequent events review c. Conditions and Events that may be indicative of substantial doubt: F – Financial difficulties: loan defaults, dividend arrearages, debt restructuring I – Internal Matters: work stoppages, labor difficulties, significant revision of operations N – Negative Trends: recurrent losses, working capital deficiencies, negative cash flows E – External Matters: Legal proceedings, new legislation, loss of a franchise, license, or patent d. Mitigating Factors: i. Plans to borrow money, restructure debt, to sell assets, delay or reduce expenditures, to increase ownership equity. e. Alleviation of Doubt: Becker Auditing – 2008 Edition

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i. If going concern is alleviated, auditor should still consider the need for disclosure of the conditions and events that initially gave rise to the doubt. f. Modified Unqualified vs. Disclaimer i. The auditor can still choose to disclaim an opinion in cases involving uncertainties. g. Sample report – Explanatory Paragraph AFTER Opinion Paragraph i. Wording of explanatory paragraph must include the terms `Substantial Doubt`` and ``Going Concern`` If, in the auditor`s judgement, the entity’s disclosures are inadequate, a departure from GAAP exists. This may result in either a qualified or adverse opinion. 4. Emphasis of a Matter (modified unqualified): Professional Judgement a. Items of emphasize: i. Related party transaction ii. A significant subsequent event iii. The entity is a component of a larger business enterprise iv. Accounting matters affect the comparability of the statements v. Always emphasize when the company is a ``RECC`` b. Not required, and can be put either before or after the opinion paragraph 5. Lack of Consistency (modified unqualified): Justified changes in accounting principle: ACDO a. The auditor would consider whether: i. The change is to an acceptable principle ii. The method of accounting for the change is acceptable iii. Management is justified in the change b. If any of the 3 conditions is not met, the auditor would generally express a qualified opinion c. If the change in GAAP is material, then the explanatory paragraph comes AFTER the opinion paragraph d. No revision to the report if: i. Effect of a change in GAAP is immaterial ii. Changes in accounting estimates or corrections of errors do not affect the consistency standard e. Modification required if: i. Corrections of an error in principle do affect consistency and would require a consistency modification. ii. If the year in which the change occurred is presented, the explanatory paragraph is required in subsequent years`reports. iii. Changes in deprecation method, not change in estimate, require addition of an explanatory paragraph Qualified ``Except For`` GAAP 1. 2. 3. 4.

Non-GAAP Change Inadequate Disclosure Unjustified Departure from GAAP Unreasonable Accounting Estimate

The Qualified Opinion – GAAP Problems Becker Auditing – 2008 Edition

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1. Non-GAAP Change in Accounting Principle (GAAP ISSUE: Qualified or Adverse): a. Issue is consistency (ACDO) b. The auditor would consider whether: i. The change is to an acceptable principle ii. The method of accounting for the change is acceptable iii. Management is justified in the change c. If any one of the 3 conditions is not met, the auditor would express a qualified or adverse opinion d. An explanatory paragraph should appear before the opinion paragraph to describe the non-GAAP accounting change and financial impact (is possible). e. In short, this all takes place if the auditor disagrees with the GAAP change. • GAAP = acceptable justified = Modified Unqualified • Not GAAP = unacceptable unjustified = Qualified ``except for`` or Adverse 2. Inadequate Disclosure (GAAP Issue: Qualified or Adverse) a. For statements to be in conformity with GAAP, they must include adequate disclosure of all material matters (i.e. form, content, notes). b. Failure to disclose: i. Qualified or Adverse opinion ii. If missing pertinent info, include in auditor`s report BEFORE the opinion paragraph = Middle Paragraph c. Reason for omission: i. When the auditor believes the omitted items cause the statements to be deceptive, misleading, or fraudulent, the auditor must insist that management correct the defect. If management refuses, auditor should withdraw from engagement. d. Special situation – No Statement of Cash Flows i. The explanatory paragraph should disclose the fact that management has not presented a statement of cash flows 1. Intro Paragraph: No mention 2. Scope Paragraph: No mention 3. Middle Paragraph: When practical, the auditor is required to disclose the missing information and related financial effects in the explanatory paragraph. However, the auditor is not required to prepare a statement of cash flows in the event the client chooses not to present one. 4. Opinion Paragraph: The ``except for`` terminology ii. Make sure the omission was not: false, fraudulent, deceptive, or misleading 3. Unnecessary Departure from GAAP (GAAP Issue: Qualified or Adverse) • GAAP = acceptable justified = Modified Unqualified • Not GAAP = unacceptable unjustified = Qualified ``except for`` or Adverse a. Auditor would include an explanatory paragraph describing the departure from GAAP and if practical, the financial impact of the departure. This will be BEFORE the opinion paragraph = Middle paragraph 4. Unreasonable Accounting Estimates (GAAP Issue: Qualified or Adverse) a. For example, no account for ``allowance of doubtful account``, because this makes their income look better Becker Auditing – 2008 Edition

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b. Depending on materiality, qualified or adverse opinion Adverse GAAP 1. 2. 3. 4.

Non-GAAP Change Inadequate Disclosure Unjustified Departure from GAAP Unreasonable Accounting Estimate

The Adverse Opinion – GAAP Problems 1. Non-GAAP Change in Accounting Principle (GAAP ISSUE: Qualified or Adverse): a. If any one of the 3 conditions are not met: i. The change is to an acceptable principle ii. The method of accounting for the change is acceptable iii. Management is justified in the change b. An explanatory paragraph should appear BEFORE the opinion paragraph to describe the non-GAAP accounting change and financial impact (is possible). c. Depending on materiality, qualified or adverse. 2. Inadequate Disclosure (GAAP Issue: Qualified or Adverse) a. For statements to be in conformity with GAAP, they must include adequate disclosure of all material matters (i.e. form, content, notes). b. Failure to disclose: i. Qualified or Adverse opinion ii. If missing pertinent info, include in auditor`s report BEFORE the opinion paragraph = Middle Paragraph 3. Unnecessary Departure from GAAP (GAAP Issue: Qualified or Adverse) a. Auditor would include an explanatory paragraph describing the departure from GAAP and if practical, the financial impact of the departure. This will be BEFORE the opinion paragraph = Middle paragraph b. Depending on materiality, qualified or adverse. 4. Unreasonable Accounting Estimates (GAAP Issue: Qualified or Adverse) a. Depending on materiality, qualified or adverse opinion •

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Format of the report: When the auditor expresses an adverse opinion, all reasons and financial impact should be set forth in explanatory paragraph BEFORE the opinion paragraph. If financial impact is not determinable, the auditor should state in report. Not ``except for`` in opinion paragraph, but instead it is ``because of the effects of the matters discussed in preceding paragraphs`` Qualified ``Except For`` GAAS

1. Uncertainty 2. Scope Limitation Becker Auditing – 2008 Edition

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The Qualified Opinion – GAAS Problems 1. Uncertainty (GAAS ISSUE: Qualified or Disclaimer) a. If auditor is unable to obtain sufficient evidential matter to support managements assertions = scope limitation. b. Qualified or disclaimer opinion c. This also implies if the evidence does or did exist but was not available to the auditor for reasons such as management`s record retention policies. d. Note: Remember to determine if there is evidence supporting management`s reporting of the uncertainty. When an uncertainty is properly reported according to GAAP and the auditor has evidence to support such disclosure, an unqualified opinion is issued. 2. Scope limitation (GAAS Issue: Qualified or Disclaimer) a. Common reasons: i. Time Constraints ii. Inability to obtain sufficient appropriate evidential matter, such as: 1. Inability to observe inventory (because auditor was hired at year end) 2. Inability to confirm receivables (client does not give permission to contact client) 3. Inability to obtain audited statements of a consolidated investee (i.e. foreign countries) 4. Restrictions on the use of auditing procedures (client won`t allow to talk to employees) 5. Inadequacy of accounts records (computer crashed) iii. Refusal of management to provide written representation letter. Management letter is required iv. Refusal of client`s attorney to respond to inquiry b. Restrictions of scope may be imposed by: i. Circumstances: Auditor was not engaged at the beginning of the year to observe opening inventory. 1. If the auditor wasn`t able to satisfy himself regarding opening inventory, but was otherwise satisfied. He could issue an unqualified opinion on the year-end balance sheet and a disclaimer of opinion on the statements of income, retained earnings, and cash flows. 2. If the auditor was able to become satisfied to inventories by applying alternative procedures, the auditor may issue an unqualified opinion and not refer to the omission or use of alternative procedure. ii. Client: A client doesn`t want to pay for the extra cost of observing inventory or auditing a foreign subsidiary. Issue qualified or disclaimer. c. When qualifying opinion, the nature of scope limitation should be in the explanatory paragraph BEFORE the opinion paragraph = the middle paragraph. It should be mentioned in the scope and opinion paragraph. NOT use wording with ``except for the limitation on the scope of audit`` The word ``Except`` will be used in scope and opinion paragraphs! == Double whammy

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Disclaimer GAAS 1. 2. 3. 4.

Uncertainty Scope Limitation Lack of Independence Unaudited

The Disclaimer Opinion – GAAS Problems 1. Reasons for disclaimer of opinion: a. Uncertainty b. Scope limitation c. Lack of independence d. Unaudited financial statements 2. The report when auditor disclaims an opinion a. Introductory paragraph i. Modification to the intro includes: 1. Use of the words ``were engaged to audit`` instead of ``have audited`` 2. Deletion of the reference to the auditor`s responsibility b. Scope paragraph – OMITTED c. Explanatory (Middle) Paragraph i. Reasons for disclaimer should be stated in a separate paragraph(s). Auditor should state that scope of the audit was not sufficient to warrant the expression of an opinion. 1. Example: Auditor was not independent or significant client-imposed restrictions ii. Statements not in accordance with GAAP 1. Auditor should also disclose any reservations regarding fair presentation in conformity with GAAP. d. Opinion Paragraph i. Disclaimer of opinion is given on the financials taken as a whole. 3. Unaudited financial statements a. Association with Financial Statements. It occurs when an accountant either: i. Consents to the use of his name in connection with the financial statements ii. Has prepared the financial statements, even if the accountant`s name is not used b. Disclaim opinion due to lack of independence i. No title or addressee ii. No introductory paragraph iii. No scope paragraph iv. Only an opinion paragraph saying we don`t express an opinion c. Disclaimer on unaudited financial statements of a publicly held company i. If accountant is associated with statements, he should disclaim opinion without auditing or reviewing them. Becker Auditing – 2008 Edition Chapter 1

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1. The accountant must read the statements for obvious errors. 2. ``Unaudited`` should be marked on each page of the statements 3. If client refuses to correct obvious error, the auditor should add a paragraph modifying the disclaimer to describe in separate explanatory paragraph the nature and effect of the departure from GAAP. If client refuses to accept the modified disclaimer, the auditor should withdraw. REPORTS ON COMPARATIVE FINANCIAL STATEMENTS 1. Reporting with different opinions: When comparing current year with preceding year, they both have different opinions a. Unqualified Prior Year with Current Year Qualified i. Same Intro Paragraph ii. Same Scope Paragraph iii. Middle Paragraph – may be required, depending on the issue if it is qualified or disclaimed iv. Opinion Paragraph – ``except for`` and specifically state which year the problem originated from in the prior paragraph b. Unqualified Current Year with Disclaimer on Prior Year`s Statements i. Same Intro Paragraph ii. Scope Paragraph – ``Except For`` iii. Middle Paragraph – may be required depending on the issue iv. Opinion Paragraph – state all the types of statements you are rendering opinions for along with the year they represent (current or preceding) v. Prior year`s statements were not audited and the current year`s statements are being audited, the auditor is in essence facing a scope limitation 2. Updating (Changing) Prior Opinions a. While auditing current year, the auditor becomes aware of evidence affecting prior statements and the opinion that was expressed, the auditor should update the opinion in the current year`s report. b. If the updated option differs from the previous opinion, the auditors should disclose the reasons in a separate explanatory paragraph preceding the opinion paragraph. c. Explanatory paragraph should disclose: • D – Date of the auditor`s previous report • O – Opinion type previously issued • R – Reason for the prior opinion • C – Changes that have occurred • S – Statement that the ``opinion...is different`` d. Only ``DORCS`` change their mind e. Updated or changed opinion when now in conformity with GAAP f. Amended opinion due to restatement of prior financials i. Same Intro ii. Same Scope iii. Middle Paragraph: Includes ``DORCS`` iv. Same Opinion 3. Report of a Predecessor Auditor – Presented a. In deciding whether to reissue their report, the predecessor auditors should: i. Read the statements for the current period ii. Compare the statements audited with the current period statements iii. Obtain a letter of representation from the successor auditor iv. Obtain a letter of representation from management b. Date of Report: i. Unrevised: Use the original report date in any reissue of a previous report ii. Revised: Dual date (covered later) 4. Report of a Predecessor Auditor – Not Presented a. When the successor auditor does not present the predecessor auditor`s report, the successor auditor should indicate in the introductory paragraph:

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i. That the statements were examined by other auditors in prior periods. The old auditor should not be named unless the practice of the predecessors was acquired by or merged with the new auditor`s company ii. The date of the predecessor auditor`s report iii. The type of opinion expressed by the predecessor auditor iv. The substantive reasons for other than an unqualified report b. If the prior period statements were restated, the successor auditor should mention in the introductory paragraph that the predecessor auditor reported on the financial statements of the prior period before restatement c. If the successor auditor audits the restatement adjustment, a paragraph indicating approval of the restatement may be added.

Events Occurring After Year-End 1. Subsequent Events: Events or transactions that occur after the balance sheet date, but before the issuance of the financial statements. This may require adjustment to the statements or disclosure of the event. a. Type I Events: Conditions Existing On or Before the Balance Sheet Date i. Looking back for $$$ ii. Usually requires an adjustment to the statements if the condition existed at the date of statements b. Type II Events – Conditions Existing After The Balance Sheet Date i. Footnotes looking forward ii. Sale or purchase of significant holdings may require disclosures, but no adjustments. iii. They rarely require an actual adjustment to the financial statement for the period. • • • c.

Type I Events = Requires a financial statement adjustment Type II Events = May require footnote disclosure CPA has the responsibility up to the date of the audit report

Auditor’s Responsibility For Subsequent Events = DURING FIELDWORK i. The period between the date of the financial statements and the date of the auditor’s report = subsequent period ii. During the subsequent period, the auditor should perform one or more of the following procedures to determine the existence of subsequent events that have a material effect on financials. iii. Then the auditor evaluates to see if an adjustment and/or a disclosure is required. • • •

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P – Post balance sheet transactions. Review for proper cut-off and to better evaluate year-end balances R – Representation letter should be obtained from management regarding whether any events occurred during the subsequent period that require adjustments to or disclosure I – Inquiry: o Inquire and discuss with management:
Any material contingent liabilities or commitments exist
Significant change in capital stock, long term debt, or working capital
Any material unusual adjustments
Changes in items that had been accounted for on an indefinite basis o Inquire of client’s legal counsel concerning litigation, claims, assessments M – Minutes of stockholders, directors, or committee meetings E – Examine latest available interim financial statements and compare with current

d. Auditor’s Responsibility After the Original Date of the Auditor’s Report i. Report Date 1. If adjustments or disclosure are made after the original date of auditor’s report, then auditor may dual date the report to extend responsibility only for the particular subsequent event. The original date of report is retained for the rest of the statements 2. Alternatively, a later date may be used for the report, but this extends the auditor’s responsibility for all subsequent events to this date. 3. If adjustments are made without any footnote disclosure, the original date is kept

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2. Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report (Discovered After Report is Issued) a. The auditor should advise the client to immediately disclose the new information and its impact on the statements to persons currently relying or likely to rely on them. This may be done by: i. Advising the client to issue revised financial statements with new audit report with the reasons ii. Advising the client to make the necessary disclosures and revisions to any imminent statements iii. If the effect on the statements cannot be determined on a timely basis, provide notification that the financial statements and report should not be relied upon. b. If Client Refuses to Follow Procedures i. The auditor should notify each member of the board of directors of such refusal and that the auditor will take additional steps to prevent further reliance on the auditor’s report and statements 1. Additional Steps to Prevent Further Reliance = “DAR” them a. Notify the client that the auditor’s report must no longer be associated with statements b. Notify any regulatory agencies having jurisdiction over client that report should no longer be relied upon c. Notify persons known to be relying or likely to rely to not rely on the statements or report • • •

D – Disassociate A – Alert Agencies R – Relying Parties

2. Notification a. Notification to parties other than client should be precise and factual, and include description of the effect on the financial statements b. If client refused to cooperation and thus the auditor could not investigate, then notification should only include that the information has come to their attention, and if it is true, then their reports should no longer be relied on. 3. Omitted Audit Procedures Discovered After Submission of the Audit Report a. Auditor Action i. The auditor should determine whether other audit procedures tended to compensate for the omitted audit procedures. If so, no further action is necessary ii. If the omitted procedures impair the auditor’s ability to support the opinion, and there are parties relying on it, then the auditor should undertake to apply the omitted procedures or alternative procedures. Better late than never!

Reporting on Other Information 1. Information Accompanying the Basic Financial Statements in a Client-Prepared Document a. Auditor’s Responsibility: The audited financial statements are incorporated into other documents, such as annual reports to shareholders or charitable organizations. i. Material Inconsistency. If the document contains other information that is materially inconsistent with the financial statements, the auditor should: 1. Double check the statements and/or the report. 2. If the report is correct, then ask management that the other information be revised. If management refuses, the auditor should: a. Revise the report to include discussion of the material inconsistency b. Withholding the use of the report c. Withdraw from the engagement and consult legal counsel ii. Material misstatement of fact. 1. If there is a material misstatement of fact, then auditor should ask client to correct it. 2. If client refuses, the auditor should use professional judgement and discuss the matter with client and client’s legal counsel. 3. If these discussions do not resolve the situation, then auditor should notify the client in writing and consult legal counsel. b. Reporting is Permitted (but not required) 2. Required Supplementary Information

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a. Limited Procedures: Auditor should perform the following on supplementary info accompanying the financial statements: i. Inquire of management on how the info was prepared, including changes from prior years and significant assumptions ii. Determine if the supplementary information is consistent with management’s responses, audited financial statements, and other knowledge iii. Consider whether the client representation letter should refer to the supplementary information b. Reporting on Supplementary Information i. Opinion Not Required: auditor is not required to audit supplementary info and the report should not refer to such either. However, the report should be expanded in situations in which: 1. Required supplementary information is omitted 2. The information is not in compliance with GAAP requirements for proper measurement or presentation 3. The auditor is not able to complete required procedures 4. There is substantial doubt about conformance of required supplementary information 5. If the required info is not presented as prescribed and management refuses to revise, the auditor should disclose the departure in the report on the financials in an explanatory paragraph. • Report Deficiencies and Omissions ii. Opinion Permitted 1. The auditor may apply certain auditing procedures to the supplementary information 2. If so, then the auditor is permitted to express an opinion if it is presented fairly 3. Report would also include auditor’s work and degree of responsibility c. Possible Need for Disclaimer i. Disclaimer on the supplementary info should be included in the auditor’s report on financials when either: 1. Supplementary info that is not clearly distinguished from financials is not marked “unaudited” OR 2. OR entity indicates the procedures were perform without indicating that the auditor does not express opinion 3. Segment Information = Required by GAAP a. Financial statements of public companies include 1. Products and services, 2. Geographic areas, 3. Major customers b. Reporting: The auditor is responsible for reporting fairness on the info presented. The auditor’s standard report implies that the segment info is presented fairly, and there would be no reference in the report to the segment info. i. Material misstatement = GAAP Problem 1. If auditor finds material misstatement or omission and management does not correct it, then the auditor should issue either qualified or adverse ii. Scope limitation = GAAS Problem 1. If auditor is unable to apply necessary procedures, a qualified or adverse opinion would be issued 4. Auditor-Submitted Documents (ASD) a. Auditor has responsibility to report on all financial statement documents: i. Additional details or explanations ii. Consolidating information iii. Historical summaries iv. Statistical data b. Auditor must indicate in the report whether the accompanying info is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Report should describe auditor’s examination and degree of responsibility. c. Supplementary Information Required by GAAP i. If ASD includes supplementary info required by GAAP, the auditor may: 1. Express an opinion 2. Report on whether the information is fairly stated in all material respects 3. Disclaim an opinion on the information ii. Auditor’s report need to be expanded if: 1. The required supplementary information is omitted or departs materially from GAAP 2. The auditor is unable to perform required procedures

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3. The auditor is unable to determine whether the info conforms to GAAP 5. Condensed Financial Statements a. Condensed financial statements do not include all disclosures necessary for complete financial statements, the auditor’s report on condensed financial statements will differ from the standard auditor’s report. The auditor must indicate: i. That the auditor audited and expressed an opinion on the complete financial statements ii. The date of the auditor’s report on the complete financial statements iii. The type of opinion expressed iv. Whether the information in the condensed financial statements is fairly stated, in all material respects, in relation to the financial statements from which it has been derived 6. Selected Financial Data (SFD) a. SFD is not a required part of basic financial statements and are management’s responsibility b. If auditor is engaged to report on SFD, the report should be limited to data that are derived from financials c. The auditor must indicate whether the selected financial data is fairly stated in relation to the financial statements from which it has been derived. 7. Reports on the Application of Accounting Principles a. Reporting Accountant’s Report: Accountant’s report should include: i. A brief description of the nature of the engagement ii. A statement that the engagement was performed in accordance with AICPA standards iii. An identification of the specific entity, a description of the transaction, including relevant facts, circumstances, and assumptions, and a statement about the source of the information iv. A statement describing the appropriate accounting principle to be applied or type of opinion that may be rendered, and the reasons for conclusion v. A statement that the preparers of the financial statements, who should consult with their continuing accountants, are responsible for proper accounting treatment. Management is responsible! vi. A statement that any difference in the facts, circumstances, or assumptions presented may change the report vii. A separate paragraph at the end of the report restricting its use to specified parties viii. Restrict use to: management, board of directors, and other specific parties (i.e. prior auditors) 8. Reporting on Financial Statements Prepared for Use in other Countries a. Distribution OUTSIDE U.S. Only. The auditor may use either: i. The report of the other country ii. A U.S.-style report modified to report on the accounting principles of another country 1. Intro Paragraph Modified 2. Possible Scope Paragraph Modified 3. Opinion Paragraph Modified b. More Than Limited Distribution WITHIN the U.S. i. The auditor’s report should be the U.S. standard report modified as appropriate for a departure from U.S. GAAP.

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