Reports on Audited

Financial
Statements

McGraw-Hill/Irwin
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Assurance Services

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Levels of Assurance
CPAs can provide services related to financial
statements with different levels of assurance:

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 Standards for Engagements
Audits of Audits of
Review or Other: Report
financial financial
Compilation on I/C,
statements statements
of Financial
(public (private
Financial projections
companies) companies)
Statements

“Old” GAAS
ASB Stds [Clarified SSAE(*)
Auditing SSARS
+
PCAOB Standards
Standards (SAS)]
(AS)

AS = Auditing Standards (issued by PCAOB)

SAS = Statements on Auditing Standards (issued by the ASB)
SSARS = Statements on Standards for Accounting and Review Services
SSAE = Statements on Standards for Attestation Engagements
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Reporting on the Financial Statement

Audit: The Standard Unqualified
Report (public company)
Eight Elements
The standard unqualified
1. Report title
report is issued when the
2. Addressee auditor has gathered sufficient
3. Introductory paragraph evidence, the audit has been
4. Scope paragraph performed in accordance with
5. Opinion paragraph PCAOB standards, and the
6. Explanatory paragraph financial statements conform
referring to the audit of to GAAP.
ICFR
7. Name of auditor (and
city and state of auditor)
8. Audit report date 18-5
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Standard Unqualified Audit Report

(PCAOB)

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Unqualified Reports with Explanatory

Paragraphs or Modified
Wording (public companies)
Modified Wording:
Opinion based in part on Explanatory Paragraph:
the report of another Going concern
auditor

Explanatory Paragraph: Explanatory Paragraph:

Lack of consistency Additional emphasis

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Reference to Other Auditors (public companies)

Opinion Based in Part on the Report of Another Auditor

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 Explanatory paragraphs for
audits of public companies
(PCAOB)
 Going concern
 Lack of consistent application of
GAAP
 Emphasis of other matter

 Note: Explanatory paragraph is

added after the opinion, without any
heading for the paragraph.
 Going Concern
 Must be evaluated for one year from
the balance sheet date.
 Standard intro, scope and opinion
paragraphs.
 Paragraph is added after the
auditor’s opinion paragraph (no
heading):
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Lack of Consistency
Changes Affecting Consistency

Change in
accounting Change in
principle reporting
entity
Correction
of an error Changes Not Affecting Consistency
in principle
Correction of
Change in anerror that does
accounting not involve an
estimate accounting
principle

Change
inclassification Change expected
and to have a material
reclassification future effect

18-11
 Lack of consistency
Unqualified Report with an Explanatory
Paragraph for a Lack of Consistency
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Additional Emphasis

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.

This information
should be presented
in an explanatory
paragraph.

18-13
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Impact of the Clarity Project

BIG CHANGES were made to the audit reports of private
companies.
• Changes became effective for audits of periods
ended after December 15, 2012
• Use of the word “unqualified” is being replaced with
“unmodified”
• Form of the auditors’ report will be quite different.

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Reporting on the Financial Statement Audit:

The Standard Unmodified Report
(private company)
Nine Elements
1. Report title The standard unmodified
2. Addressee report is issued when the
3. Introductory paragraph auditor has gathered sufficient
4. Management’s evidence, the audit has been
responsibility performed in accordance with
5. Auditor’s responsibility GAAS, and the financial
6. Scope paragraph statements conform to GAAP.
7. Opinion paragraph
8. Name of Auditor
9. Audit report date
18-15
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Standard Unmodified Audit Report (ASB)

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Standard, Unmodified Report

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Standard, Unmodified Report

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Standard, Unmodified Report

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Reports with Additional

Paragraphs or Modified
Wording (private companies)

Modified Wording:
Opinion based in part on Additional Paragraph:
the report of another Going concern
auditor

Additional Paragraph: Additional Paragraph:

Lack of consistency Additional emphasis

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Reference to Other Auditors (ASB LO# 2

– Private Companies)

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Emphasis-of-Matter and Other-

Matter Paragraphs
(ASB - Private companies)
The auditor may consider it necessary to add a
paragraph to the auditor’s report to:
• Draw users attention to a matter presented
or disclosed in the financial statements that
is fundamental to understanding the F/S
(emphasis-of-matter paragraph)
• Draw users attention to a matter other than
those presented or disclosed in the financial
statements (other-matter paragraph)
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Emphasis-of-Matter Paragraphs
When adding an emphasis of matter paragraph,
the auditor should:
• Include it immediately after the opinion
paragraph
• Use the heading “Emphasis of Matter” or
other appropriate heading
• Include in the paragraph a clear reference to
the matter being emphasized
• Indicate that the auditor’s opinion is not
modified with respect to the matter
emphasized
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Emphasis-of-Matter Paragraphs
Examples of when an emphasis-of-matter
paragraph may be necessary:
• Substantial doubt about going concern (required)
• The company has not consistently applied GAAP
(required)
• Uncertainty relating to unusually important litigation
• A major catastrophe has had or continues to have
an impact on the company
• Significant transactions with related parties
• Unusually important subsequent events
• The F/S include adjustments to correct a material
misstatement in previously issued financial
statements

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Going Concern

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Emphasis-of-Matter Paragraph Due to

a Change in Accounting Principle

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Emphasis-of-Matter Paragraph Due to

the Correction of an Error

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Emphasis-of-Matter Paragraph
Due to Pending Litigation

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Other-Matter Paragraphs
When adding an other-matter paragraph, the
auditor should:
• Include it immediately after the opinion
paragraph and any emphasis-of-matter
paragraphs
• Use the heading “Other Matter” or other
appropriate heading

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Other-Matter Paragraphs

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Conditions for Departure from

Unqualified/Unmodified Report
Scope
Limitation

Departure
from GAAP

Lack of Auditor
Independence
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Departures from an
Unqualified/Unmodified Financial
Statement Audit Report
Qualified
“except for”

Disclaimer

Adverse

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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.

Not in Results when financial statements

Conformity are materially affected by an
with GAAP unacceptable departure from GAAP.

Results when auditor has some

Auditor Not
form of prohibited relationship with
Independent the client (see Ch. 19).

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Discussion of Conditions Requiring

Other Types of Financial Statement
Audit Reports
Scope Issue a qualified opinion or a
Limitation disclaimer.

Not in
Issue a qualified opinion or
Conformity adverse opinion.
with GAAP

Auditor Not
Issue a disclaimer.
Independent

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Effect of Materiality

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Disclaimer of Opinion Due to

a Scope Restriction

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Disclaimer of Opinion Due to

a Scope Restriction

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Scope Limitation: Qualified

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Scope Limitation: Qualified

(another example)

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Not GAAP: Qualified

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Not GAAP: Qualified

(another example)

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Not GAAP: Adverse

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Not GAAP: Adverse

(another example)

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Special Reporting Issues

(private company reporting shown)

Different reports on
comparative
financial statements

Change in report on
prior-period
financial statements

Report by a
predecessor
auditor

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Different Reports on
Comparative Financial Statements

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Restated Prior-Period
(Other matter paragraph added)

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Report by a Predecessor Auditor

The predecessor auditor should
do the followingbeforereissuing
a report on prior-year financial
statements published for
comparative purposes:

1. Read the financial statements of the

current period.

2. Compare the prior-period financial

statements reported on with the
current-year financial statements.

3. Obtain a letter of representation from

the current-year or successor auditor.
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Other Information in
Documents Containing Audited
Financial Statements
The auditor has no responsibility beyond the financial
information contained in the report, and he or she has
no obligation to perform any audit procedures to
corroborate the other information. However, the auditor
is required to read the other information and consider
whether it is consistent with the information contained
in the audited financial statements.

Annual Registration
Reports Statements

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Special Reports

Financial statements
prepared using a
Specified elements,
special purpose
accounts, or items of a
framework
financial statement
( previously called
OCBOA)

Compliance with
aspects of contractual
agreements or
regulatory requirements

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Financial Statements Prepared

According to a Special Purpose
Framework (SPF)
(the was previously referred to as OCBOA)

Regulatory Basis

Tax Basis

Cash (or Modified Cash)

Contractual Basis
Basis
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Specific Elements, Accounts, or

Items of a Financial Statement

In some situations an auditor may be engaged to

audit only part (or specified elements, accounts,
or items) of the financial statements.

Rather than auditing specified elements,

accounts, or items, an auditor may be engaged to
apply only agreed-upon procedures.

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Compliance Reports Related to

Audited Financial Statements
The auditor provides negative assurance as to compliance
with the provisions of contractual agreements or regulatory
requirements.

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 End of Unit

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