18-1

Chapter Eighteen
Reports on Audited Financial Statements
and Internal Control
over Financial Reporting

Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

18-2

Reporting on the Financial Statement
Audit: The Standard Unqualified Report

The standard unqualified report is issued when the
auditor has gathered sufficient evidence, the audit was
performed in accordance with GAAS, and the financial
statements conform to GAAP.
Seven Elements
1. Report title
2. Addressee
3. Introductory paragraph
4. Scope paragraph
5. Opinion paragraph
6. Name of auditor
7. Audit report date.
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

18-3

Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

All rights reserved. Copyright © 2006 by The McGraw-Hill Companies. Lack of consistency. Inc. auditor. Emphasis of a matter. 18-4 Explanatory Language Added to the Standard Unqualified Financial Statement Audit Report Opinion based in part on the report of another Going concern. McGraw-Hill/Irwin . Agreement with a departure from GAAP.

Inc. All rights reserved. 18-5 Copyright © 2006 by The McGraw-Hill Companies. McGraw-Hill/Irwin .

Inc. All rights reserved. 18-6 Going Concern Copyright © 2006 by The McGraw-Hill Companies. McGraw-Hill/Irwin .

McGraw-Hill/Irwin . and the circumstances. Inc. Professional Conduct allows the approximate effects of the the auditor. An explanatory paragraph Rule 203 of the Code of should describe the departure. 18-7 Auditor Agrees with a Departure from Promulgated Accounting Principles In unusual circumstances financial statements may be misleading if a promulgated accounting principle was followed. if practicable. in such departure. Copyright © 2006 by The McGraw-Hill Companies. All rights reserved. to issue an reasons that compliance with the unqualified opinion. accounting principle results in misleading financial statements.

McGraw-Hill/Irwin . 18-8 Lack of Consistency Changes Affecting Consistency Change in accounting Change in principle reporting entity Correction of an error Changes Not Affecting in principle Consistency Correction of an Change in error that does accounting not involve an estimate accounting principle Change in Change classification expected to and have a material reclassification future effect Copyright © 2006 by The McGraw-Hill Companies. Inc. All rights reserved.

Inc. McGraw-Hill/Irwin . All rights reserved. 18-9 Lack of Consistency Copyright © 2006 by The McGraw-Hill Companies.

18-10 Emphasis of a Matter Under certain circumstances an auditor may want to emphasize a specific matter regarding the financial statements even though he or she intends to express an unqualified opinion. Copyright © 2006 by The McGraw-Hill Companies. This information should be presented in an explanatory paragraph. McGraw-Hill/Irwin . All rights reserved. Inc.

Inc. All rights reserved. 18-11 Departures from an Unqualified Financial Statement Audit Report Qualified Adverse Disclaimer Copyright © 2006 by The McGraw-Hill Companies. McGraw-Hill/Irwin .

All rights reserved. Inc. McGraw-Hill/Irwin . 18-12 Copyright © 2006 by The McGraw-Hill Companies.

Copyright © 2006 by The McGraw-Hill Companies. Not in Results when financial statements Conformity are materially affected by an with GAAP unacceptable departure from GAAP. Auditor Not Results when auditor is not Independent independent. McGraw-Hill/Irwin . Inc. 18-13 Discussion of Conditions Requiring Other Types of Financial Statement Audit Reports Results from an inability to obtain Scope sufficient competent evidence Limitation about some component of the financial statements. All rights reserved.

Not in Issue a qualified opinion or Conformity adverse opinion. McGraw-Hill/Irwin . All rights reserved. 18-14 Discussion of Conditions Requiring Other Types of Financial Statement Audit Reports Scope Issue a qualified opinion or a Limitation disclaimer. with GAAP Auditor Not Issue a disclaimer. Inc. Independent Copyright © 2006 by The McGraw-Hill Companies.

McGraw-Hill/Irwin . 18-15 Special Reporting Issues Reports on comparative financial statements. All rights reserved. Inc. Special reports. Copyright © 2006 by The McGraw-Hill Companies. Other information.

Copyright © 2006 by The McGraw-Hill Companies. Opinion. All rights reserved. McGraw-Hill/Irwin . Inc. 18-16 Different Reports on Comparative Financial Statements Prior Years Current Year Issued Standard Issues Qualified Unqualified Opinion.

Opinion. Inc. Copyright © 2006 by The McGraw-Hill Companies. McGraw-Hill/Irwin . 18-17 Different Reports on Comparative Financial Statements Prior Years Current Year Issued Qualified Opinion Issues Unqualified or Disclaimer. All rights reserved.

McGraw-Hill/Irwin . 18-18 Copyright © 2006 by The McGraw-Hill Companies. Inc. All rights reserved.

Obtain a letter of representation from the current-year or successor auditor. All rights reserved. 2. 3. 18-19 Report by a Predecessor Auditor The predecessor auditor should do the following before reissuing the report: 1. Read the financial statements of the current period. Copyright © 2006 by The McGraw-Hill Companies. Compare the prior-period financial statements reported on with the current-year financial statements. McGraw-Hill/Irwin . Inc.

All rights reserved. 18-20 Other Information in Documents Containing Audited Financial Statements The auditor has no responsibility beyond the financial information contained in the report. Annual Registration Reports Statements Copyright © 2006 by The McGraw-Hill Companies. Inc. McGraw-Hill/Irwin . and he or she has no obligation to perform any audit procedures to corroborate the other information. the auditor is required to read the other information and consider whether it is consistent with the information contained in the audited financial statements. However.

or items comprehensive of a financial basis of accounting statement. prepared on a accounts. McGraw-Hill/Irwin . form of report. 18-21 Special Reports Financial statements Specified elements. Compliance with aspects of contractual agreements or regulatory Financial requirements. All rights reserved. Inc. Copyright © 2006 by The McGraw-Hill Companies. Financial presentations to information comply with presented in contractual prescribed forms or agreements or schedules that regulatory require a prescribed provisions. other than GAAP.

18-22 Financial Statements Prepared on a Comprehensive Basis of Accounting Other Than GAAP Regulatory Basis Tax Basis Cash (or Modified Cash) Basis A Definite Set of Criteria Having Substantial Support Copyright © 2006 by The McGraw-Hill Companies. All rights reserved. McGraw-Hill/Irwin . Inc.

Inc. All rights reserved. McGraw-Hill/Irwin . 18-23 Copyright © 2006 by The McGraw-Hill Companies.

or Items of a Financial Statement In some situations an auditor may be engaged to audit only part (or specified elements. McGraw-Hill/Irwin . Inc. All rights reserved. or items) of the financial statements. Other comprehensive GAAP Basis of basis of accounting Accounting (OCBOA) Basis of accounting prescribed by a contract or agreement Copyright © 2006 by The McGraw-Hill Companies. 18-24 Specific Elements. Accounts. accounts.

McGraw-Hill/Irwin . All rights reserved. 18-25 Copyright © 2006 by The McGraw-Hill Companies. Inc.

McGraw-Hill/Irwin . Inc. All rights reserved. Copyright © 2006 by The McGraw-Hill Companies. 18-26 Compliance Reports Related to Audited Financial Statements The auditor provides negative assurance as to compliance with the provisions of contractual agreements or regulatory requirements.

Management’s assessment of the effectiveness of internal control over financial reporting and 2. All rights reserved. The effectiveness of internal control (based on the auditor’s independent audit work. McGraw-Hill/Irwin .) Copyright © 2006 by The McGraw-Hill Companies. Inc. 18-27 Reporting on the Audit of Internal Control over Financial Reporting The auditor’s report on the audit of internal control contains opinions on 1.

Inc. 18-28 Copyright © 2006 by The McGraw-Hill Companies. McGraw-Hill/Irwin . All rights reserved.

There is a material weakness in the company’s internal control over financial reporting. 3. in part. 5. 4. McGraw-Hill/Irwin . Copyright © 2006 by The McGraw-Hill Companies. 1. The auditor decides to refer to the report of other auditors as the basis. for the auditor’s own report. A significant subsequent event has occurred since the date being reported on. There is a restriction on the scope of the engagement. There is other information contained in management’s report on internal control. All rights reserved. Inc. 18-29 Modifications to the Unqualified Report on the Effectiveness of Internal Control The auditor should modify the standard report if any of the following conditions exist. 2.

Inc. All rights reserved. 18-30 End of Chapter 18 Copyright © 2006 by The McGraw-Hill Companies. McGraw-Hill/Irwin .